Lennar Corporation — Q2 2012 Form 10-Q
Business context and reporting period. This quarterly report covers the three and six months ended May 31, 2012. Lennar’s operations comprise homebuilding, mortgage/title and closing services (Lennar Financial Services), and real estate investment and distressed-asset management (Rialto Investments).
Financial results and position
| Metric | Three months ended May 31, 2012 | Comparable 2011 period |
|---|---|---|
| Total revenue | $930.2 million | $764.5 million |
| Earnings before income taxes | $52.1 million | $25.8 million |
| Net earnings attributable to Lennar | $452.7 million | $13.8 million |
| Diluted EPS | $2.06 | $0.07 |
| Homebuilding gross margin on home sales | 22.5% | 19.4% |
- The Q2 2012 net result included a $402.3 million tax benefit from a partial reversal of the deferred-tax-asset valuation allowance, equal to about $1.85 per diluted share. Management attributed $0.21 per diluted share to improving business fundamentals.
- For the six months, revenue was $1.655 billion versus $1.323 billion; earnings before taxes were $58.6 million versus $62.1 million; Lennar-attributable earnings were $467.7 million versus $41.2 million. The 2011 six-month comparison included a $37.5 million nonrecurring litigation settlement.
- Q2 home deliveries increased 20% to 3,192 (excluding unconsolidated entities); average delivered price rose 2% to $250,000. New orders rose 40% to 4,481 and period-end backlog increased 61% to 3,970 homes, worth $1.061 billion.
- Q2 homebuilding operating earnings were $55.8 million versus $21.2 million; Financial Services earned $18.0 million versus $2.5 million; Rialto operating earnings were $7.5 million versus $22.7 million. Total operating earnings were $81.3 million versus $46.4 million, before corporate general and administrative expense.
- For the first six months, operating cash flow was negative $213.8 million, compared with positive $4.6 million in 2011. The primary cash use included a $329.9 million inventory increase, associated with strategic land purchases. Investing activities provided $178.2 million; financing activities used $298.6 million.
- Cash and cash equivalents totaled $829.4 million at May 31, 2012, down from $1.164 billion at November 30, 2011. Total assets were $9.351 billion, total liabilities $5.571 billion, and total equity $3.780 billion.
- Homebuilding senior notes and other debt were $3.470 billion, up from $3.363 billion at November 30, 2011. Homebuilding debt-to-total-capital was 52.2%; net debt-to-total-capital was 46.9%. The company reported covenant leverage of 49.3% against a 67% maximum and liquidity of 3.33 times the required 1.00 times.
Material changes versus the prior period
- Homebuilding revenue and margins improved, supported by more deliveries, higher average selling prices, lower buyer incentives, and a higher share of deliveries from newer, higher-margin communities. Q2 incentives fell to $29,800 per delivered home from $33,900.
- Financial Services earnings increased with higher mortgage and title activity. Mortgage originations were $976 million in Q2 versus $652 million, while the mortgage capture rate was 77% versus 79%.
- Rialto earnings declined year over year. Q2 2011 included gains from foreclosures and a securities sale; Q2 2012 included REO ownership costs and impairments, partly offset by REO sales and equity-method earnings.
- Homebuilding equity-method results were negative $9.4 million in Q2, including $5.4 million of valuation adjustments at unconsolidated ventures. In the first six months of 2011, those results included a $15.4 million share of a venture debt-extinguishment gain.
Outlook, risks, and unusual items
- Management cited nine consecutive quarters of earnings, improving demand and pricing in most markets, lower incentives, and the highest operating margins since Q2 2006. It expected Lennar to achieve a third consecutive profitable year in 2012, but provided no specific numerical revenue or EPS guidance.
- Management said it intended to pursue carefully underwritten strategic acquisitions in well-positioned markets; it also expected Financial Services to support homebuilding and Rialto to generate cash and potential land opportunities.
- The valuation-allowance reversal depended on management’s judgment that future taxable income would likely support realization of deferred tax assets. A remaining $177.3 million valuation allowance was reported; management expected most of it to reverse between Q3 2012 and Q4 2013 if sufficient positive evidence emerged.
- Risks include housing-market and local-market volatility, mortgage availability and challenging appraisals, inventory valuation assumptions, and possible further impairments or option-deposit write-offs. The filing says actual results may differ from management’s estimates and forward-looking statements.
- Homebuilding joint ventures had $868.7 million of debt and Lennar’s net recourse exposure was $48.7 million; no obligation-guarantee liability was accrued. Performance and surety bonds totaled $601.9 million, with $343.6 million of anticipated costs to complete related improvements.
- Warranty exposure includes confirmed defective Chinese drywall in about 1,000 Florida homes. The company had accrued $82.2 million in total for confirmed and estimated cases; the related reserve, net of payments, was $5.4 million at May 31, 2012. Further inspections could result in additional expense.
- A new three-year unsecured revolving facility was entered into in May 2012, with a $410 million committed amount and a further $115 million accordion subject to additional commitments; there were no borrowings at quarter-end. A $175 million Financial Services warehouse facility matured in July 2012, and the segment added a $75 million committed warehouse facility after quarter-end.
Important facts for investors to verify
- Separate recurring operating performance from the $402.3 million tax benefit when assessing Q2 earnings and EPS.
- Track whether order and backlog growth convert into deliveries, pricing gains, and sustained homebuilding margins, while monitoring cancellations and incentives.
- Assess cash generation against inventory investment, debt levels, maturities, and continued access to revolving and warehouse facilities.
- Review deferred-tax-asset realizability and the assumptions behind management’s expected further valuation-allowance reversals.
- Monitor Rialto loan collections, REO values and sales, venture exposures, and homebuilding joint-venture guarantees.
- Check subsequent developments in warranty claims, especially Chinese drywall, and the adequacy of reserves and third-party recoveries.