Business Context and Reporting Period
Company: D.R. Horton, Inc. (DHI)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2009
Business Overview: D.R. Horton is one of the largest homebuilding companies in the United States, operating in 27 states and 75 metropolitan markets. The company constructs and sells single-family detached homes, attached homes, and provides mortgage financing and title services through its financial services segment. The fiscal year was characterized by a severe, ongoing downturn in the homebuilding industry, marked by weak demand, high inventory levels, and tight credit markets.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Total Revenues | $3,657.6 million | $6,646.1 million |
| Homebuilding Revenues | $3,603.9 million | $6,518.6 million |
| Financial Services Revenues | $53.7 million | $127.5 million |
| Net Loss | $(545.3) million | $(2,633.6) million |
| Net Loss Per Share (Basic/Diluted) | $(1.72) | $(8.34) |
| Operating Cash Flow | $1,141.2 million | $1,876.5 million |
| Total Assets | $6,756.6 million | $7,950.6 million |
| Total Debt (Notes Payable) | $3,277.3 million | $3,748.4 million |
| Cash and Cash Equivalents | $1,957.3 million | $1,387.3 million |
| Stockholders' Equity | $2,259.6 million | $2,834.3 million |
Material Changes Versus Prior Period
- Revenue Decline: Total revenues decreased 45% year-over-year, driven by a 45% drop in homebuilding revenues. This was caused by a 37% decrease in homes closed (16,703 homes in 2009 vs. 26,396 in 2008) and a 9% decrease in average selling price ($213,400 vs. $233,500).
- Improved Profitability: While the company remained unprofitable, the net loss improved significantly from $2.6 billion in 2008 to $545.3 million in 2009. This improvement was primarily due to a drastic reduction in inventory impairment charges and land option cost write-offs, which fell from $2.5 billion in 2008 to $407.7 million in 2009.
- Margin Expansion: Home sales gross margins increased 190 basis points to 13.1% in 2009, compared to 11.2% in 2008. This was largely due to the effects of prior inventory impairments lowering the cost basis of homes closed in the current year.
- Liquidity Position: Cash and cash equivalents increased by approximately $570 million to $1.96 billion, bolstered by operating cash flows and a $621.7 million federal income tax refund received in late 2008/early 2009.
- Debt Reduction: Total debt decreased by approximately $471 million. The company voluntarily terminated its $1.65 billion unsecured revolving credit facility in May 2009 and repurchased $380.3 million of senior notes.
Guidance, Outlook, and Risks
Management Commentary: Management maintains a cautious outlook, noting that challenging housing market conditions are expected to persist for some time. While net sales orders in the fourth quarter of 2009 showed improvement (up 26% vs. the prior year), overall demand remains at historically low levels. The company is focusing on maintaining a strong balance sheet, managing inventory levels, and optimizing sales prices and incentives.
Key Risks and Contingencies:
- Market Downturn: The duration and severity of the homebuilding downturn remain uncertain. Continued weakness could lead to further asset impairments and losses.
- Credit Constriction: Tight credit markets limit access to capital and increase borrowing costs. The company no longer has a revolving credit facility, relying instead on cash resources and public debt markets.
- Inventory Impairment: Significant inventory impairment charges ($377.8 million) were recorded in 2009. Management noted that $963.1 million of inventory had indicators of potential impairment, and further charges may be necessary if market conditions worsen.
- Chinese Drywall: The company identified approximately 90 homes in South Florida and Louisiana containing allegedly defective drywall manufactured in China. A charge of $6.7 million was recorded, but further costs may be incurred if additional homes are identified.
- Tax Attributes: The company has significant net operating loss carryforwards. An ownership change (as defined by IRC Section 382) could limit the ability to utilize these tax benefits. A rights agreement was adopted in August 2009 to deter such a change.
Important Facts for Investor Verification
- Inventory Valuation: Verify the assumptions used in the impairment analysis for the $963.1 million of inventory with impairment indicators, particularly regarding future sales prices and absorption rates.
- Cash Flow Sustainability: Assess the sustainability of operating cash flows, noting that a significant portion ($621.7 million) in the prior year was a one-time tax refund. Future cash generation will rely heavily on inventory liquidation and sales volume.
- Debt Maturities: Review the schedule of debt maturities, with $308.4 million due in the next 12 months, and the company's ability to refinance or repay without a revolving credit facility.
- Backlog Quality: Analyze the sales order backlog of $1.14 billion (5,628 homes), noting the 30% cancellation rate and the impact of the expiring first-time homebuyer tax credit on future closings.
- Legal Contingencies: Monitor the status of the "Chinese Drywall" issue and ongoing class action lawsuits regarding mortgage financing practices, which could result in additional liabilities.