D.R. Horton, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. Although the request identifies 2013 Q4, this filing is an annual report; selected fourth-quarter details are noted below. D.R. Horton builds homes across 27 states and 78 markets, with mortgage and title services. Homebuilding generated about 97% of revenue.
Financial performance and condition
- Revenue: $6.259 billion, up 44% year over year; homebuilding revenue was $6.086 billion and financial services revenue was $173.4 million.
- Profit: Pretax income was $657.8 million versus $242.9 million. Net income was $462.7 million, down from $956.3 million, and diluted EPS was $1.33 versus $2.77. The prior year included a $713.4 million tax benefit, principally from a $753.2 million reduction in the deferred-tax valuation allowance; FY2013 tax expense was $195.1 million.
- Margins: Home-sales gross margin improved to 20.8% from 17.7%; total homebuilding gross margin was 20.3%, and homebuilding pretax margin was 9.7%. Consolidated pretax margin was approximately 10.5%.
- Operating activity: Homes closed increased 28% to 24,155; average closing price rose 12% to $249,400. Net orders rose 19% to 25,120. Backlog increased 13% in homes to 8,205 and 33% in value to $2.21 billion.
- Cash flow: Operating activities used $1.231 billion, compared with $293.4 million used in FY2012, principally reflecting investment in construction, land and lots. Investing activities provided $180.9 million; financing activities provided $939.0 million.
- Liquidity and debt: Cash and marketable securities totaled $936.5 million at year-end (including $913.3 million of homebuilding cash); total notes payable were $3.509 billion. Homebuilding debt-to-capital was 44.6%, up from 39.1%; net homebuilding debt-to-capital was 36.7%, up from 21.4%. The $725 million revolving credit facility had no borrowings outstanding, with $61.6 million of letters of credit issued.
Material changes versus FY2012
- Improved housing demand, higher prices and reduced sales incentives lifted closings, revenue and gross margins. Homebuilding pretax income rose to $592.3 million from $203.7 million; financial services pretax income rose to $65.5 million from $39.2 million.
- Inventory increased to $6.197 billion from $4.165 billion; homes in inventory rose to 17,000 from 13,000. Owned and controlled lots increased to 180,900 from 152,700.
- Debt increased, while cash and marketable securities declined from $1.346 billion to $936.5 million, reflecting inventory investment and financing activity.
- Homebuilding inventory and land-option charges were $31.1 million, including $21.3 million of impairment charges and $9.8 million of option deposit and cost write-offs, versus $6.2 million in FY2012.
Outlook, risks and unusual items
- Management expected slow-to-moderate housing-demand growth in markets with job growth, but anticipated uneven recovery and slower home-price increases in FY2014. It cautioned that construction costs or borrowing costs could rise and margins could decline from recent levels.
- Sales growth moderated in FY2013’s second half; cancellations were 24% for the year and 31% in the fourth quarter. Management cited higher mortgage rates and home prices, alongside efforts to match sales pace with construction.
- Key risks include housing-cycle and affordability shifts, mortgage-credit availability and interest rates, land and inventory impairment, labor and materials shortages, warranty and construction-defect claims, regulation, and access to financing. Approximately $1.031 billion of consolidated debt was scheduled to mature in FY2014, including $500 million of convertible notes due May 2014. The mortgage repurchase facility, with $238.6 million outstanding, matured February 28, 2014; management expected renewal.
- Construction-defect and other legal reserves totaled $482.0 million, with $162.1 million of related insurance receivables. Management cautioned actual costs and recoveries could differ materially from estimates. A Department of Labor investigation remained unresolved; the company had not recorded a liability because costs could not be reasonably estimated.
- In October 2013, after year-end, the company acquired Regent Homes for approximately $35 million in cash. A $23.9 million out-of-period deferred-tax adjustment increased both deferred tax assets and valuation allowance, with no FY2013 income-statement effect.
- Management stated existing cash and credit facilities were sufficient for near-term needs. The filing reported an unqualified audit opinion and effective internal control over financial reporting.
Important facts for investors to verify
- Whether the mortgage repurchase facility was renewed and how the May 2014 convertible-note maturity was funded, repaid or converted.
- Whether backlog converts to closings as expected, given contract contingencies and the elevated fourth-quarter cancellation rate.
- Whether inventory growth, unsold completed homes and land positions generate acceptable returns or lead to further impairments.
- Whether homebuilding margins withstand slower price appreciation and potential increases in construction and financing costs.
- Whether construction-defect reserves and insurance recoveries prove adequate, and whether the unresolved labor investigation or tax matters result in liabilities.