Lennar Corporation — FY2011 Form 10-K Summary
Reporting period: Fiscal year ended November 30, 2011; comparisons are primarily with fiscal 2010. This is an annual filing, not a standalone fourth-quarter report. Lennar is a homebuilder with Financial Services and Rialto distressed-real-estate investment operations.
Financial performance and liquidity
- Revenue: $3.095 billion, up 0.7% from $3.074 billion. Homebuilding revenue was $2.675 billion, down 1.1%; Financial Services revenue was $255.5 million, down 7.3%; Rialto revenue rose to $164.7 million from $92.6 million.
- Earnings: Net earnings attributable to Lennar were $92.2 million, or $0.48 diluted per share, versus $95.3 million, or $0.51, in 2010. Earnings before taxes were $98.0 million versus $94.7 million.
- Homebuilding: Operating earnings were $109.0 million versus $100.1 million. Home-sale gross margin was 19.9% versus 19.7%; excluding valuation adjustments, a non-GAAP measure, it was 21.3% versus 21.4%. Selling, general and administrative expense was 14.7% of home-sale revenue versus 14.3%.
- Other segments: Financial Services operating earnings fell to $20.7 million from $31.3 million, mainly on lower mortgage volume. Rialto operating earnings rose to $63.5 million from $57.3 million; 2011 included $28.9 million attributable to noncontrolling interests.
- Home sales and demand: Lennar delivered 10,845 homes versus 10,955; average selling price was $244,000 versus $243,000. New orders rose 4% to 11,412. Year-end backlog increased to 2,171 homes worth $560.7 million, from 1,604 homes worth $407.3 million. The cancellation rate was 19%, versus 17%.
- Cash flow: Operating activities used $259.1 million, versus providing $274.2 million in 2010. Investing activities used $136.2 million and financing activities provided $164.8 million. The company cited strategic land purchases, working-capital movements and higher receivables among the operating cash-flow factors; 2010 cash flow benefited from $343.0 million of tax refunds.
- Liquidity and balance sheet: Cash and cash equivalents totaled $1.164 billion, down from $1.394 billion; Homebuilding held $1.024 billion. Total assets were $9.155 billion and total equity was $3.304 billion. The filing does not present one consolidated debt figure on the same basis as its segment disclosures: Homebuilding debt was $3.363 billion, Rialto notes payable $765.5 million, and Financial Services debt $410.1 million. Rialto debt includes non-recourse obligations, including FDIC-related financing.
- Leverage: Homebuilding debt-to-total-capital was 55.5%, up from 54.5%; net Homebuilding debt-to-total-capital rose to 46.4% from 42.4%. Homebuilding debt increased to $3.363 billion from $3.128 billion. Lennar issued $350 million of 3.25% convertible notes due 2021 in November; a further $50 million was issued after year-end. The company also retired $249 million of senior notes and other debt during 2011.
Changes, outlook and notable items
- Management described the housing market as beginning to stabilize, citing low home prices and interest rates, increased community traffic and steadier sales. Fourth-quarter 2011 new orders rose 20% year over year and backlog rose 35%, as stated in the filing.
- Management said Homebuilding was on track to achieve profitability in fiscal 2012 and prioritized maintaining and improving margins, cost control, value-focused products and carefully underwritten land investment. No numerical earnings or revenue guidance was provided.
- Homebuilding inventory impairments and related write-offs were $38.0 million, down from $51.3 million in 2010 and $359.9 million in 2009. Valuation adjustments remain sensitive to market prices, sales pace, costs and management assumptions.
- Reported 2011 results included a $37.5 million cash litigation settlement; $29.5 million was recorded in Homebuilding other income. A linked unconsolidated-entity asset distribution produced a $62.3 million gain and a $57.6 million valuation adjustment, for a reported net pretax gain of $4.7 million.
- The deferred-tax-asset valuation allowance was $576.9 million at year-end, and Lennar reported no net deferred tax assets. A $32.6 million allowance reversal was recorded in 2011. Realization of tax assets depends on sufficient future taxable income.
- Homebuilding joint-venture exposure declined: maximum recourse exposure was $108.7 million and net recourse exposure after partner reimbursement agreements was $74.9 million, versus $172.9 million and $114.0 million, respectively, in 2010. Partner defaults or weak collateral values could still increase Lennar’s obligations.
- Financial Services warehouse facilities of $150 million and $175 million matured in February and July 2012, respectively; Lennar expected renewal or replacement. The company had no corporate revolving credit facility and was not investment grade, which could constrain or increase the cost of future financing.
- Warranty reserve was $88.1 million, including $9.1 million remaining for defective Chinese drywall. The reserve for mortgage-loan repurchase liabilities was $6.1 million, down from $9.9 million. Both remain subject to claims and estimation uncertainty.
- Management reported compliance with debt covenants. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Ordinary-course litigation was disclosed; management did not expect its resolution to materially affect the company.
Important facts for investors to verify
- Whether order and backlog gains translated into completed sales, given 19% cancellations and financing qualification risks.
- Whether cash generation improves after 2011’s operating cash outflow and strategic land investment.
- Debt maturities, refinancing terms and renewal or replacement of the 2012 Financial Services warehouse facilities.
- Rialto portfolio valuations, collections, nonaccrual loans and the extent of non-recourse debt and noncontrolling interests.
- Potential additional inventory impairments, joint-venture guarantee calls, warranty costs and mortgage repurchase claims.
- Evidence supporting future use of the $576.9 million deferred-tax-asset valuation allowance and the company’s fiscal 2012 profitability outlook.