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| DHI > SEC Filings for DHI > Form 10-K on 26-Nov-2008 | All Recent SEC Filings |
26-Nov-2008
Annual Report
Results of Operations - Fiscal Year 2008 Overview
Our fiscal 2008 results reflect the challenges that the homebuilding industry faced during the year. During fiscal 2008 the factors hurting demand for new homes became more intense and pervasive across the United States. As a result, the already difficult conditions within the industry became progressively more challenging. High inventory levels of both new and existing homes, elevated cancellation rates, low sales absorption rates and overall weak consumer confidence persisted throughout the year. The effects of these factors were further magnified by credit tightening in the mortgage markets, increasing home foreclosures and severe shortages of liquidity in the financial markets. The liquidity shortage has caused concern about the viability of many financial institutions and has negatively impacted the already weakening economy, which has created fears of a prolonged recession. These factors, combined with our continued elevated sales cancellation rate, caused our sales volume to be significantly reduced. Also, our gross profit from home sales revenues continued to decline as we offered higher levels of incentives and price concessions in attempts to stimulate demand in our communities.
As we progressed though fiscal 2008, our disappointing sales results, further declines in our sales order prices, continued declines in our gross profit from home sales revenues and the more challenging market conditions caused our outlook for the homebuilding industry to remain cautious. We believe that housing market conditions may continue to deteriorate, and that the timing of a recovery in the housing market remains unclear. Our outlook incorporates several factors, including continued margin pressure from sales price reductions and incentives; continued high levels of new and existing homes available for sale; weak demand from new home consumers; continued high sales cancellations; significant restrictions on the availability of certain mortgage products and an overall increase in the underwriting requirements for home financing as a result of the recent credit tightening in the mortgage markets.
During fiscal 2008, particularly in the fourth quarter, we sold a significant amount of land and lots through numerous transactions to generate cash flows, reduce our future carrying costs and land development obligations, and lower our inventory supply in certain markets to match our expectations of future demand. Consummating these transactions during the current fiscal year allowed us to monetize a larger portion of our deferred tax assets through a loss carryback to fiscal 2006 resulting in an increase in our expected tax refund.
Due to the declining market conditions discussed above, we evaluated a significant portion of our inventory in our quarterly impairment analyses during fiscal 2008. Additionally, we evaluated the recoverability of our goodwill. Our goodwill and inventory impairment evaluations reflected our expectation of continued and increasing challenges in the homebuilding industry, and our belief that these challenging conditions will persist for some time. Based on our evaluations and as a result of our fourth quarter land and lot sales, we recorded significant impairment charges to our inventory and goodwill balances during the year, which materially affected our operating results during fiscal 2008.
Strategy
We believe the long-term fundamentals which support housing demand, namely population growth and household formation, remain solid. We also believe the negative effects of the current market conditions, although unyielding in the near term, will moderate over the long term. In the interim, we remain committed to the following initiatives related to our operating strategy in the current homebuilding business environment:
• Reducing our land and lot inventory from current levels by:
- selling and constructing homes;
- opportunistically selling excess land and lots;
- significantly restricting our spending for land and lot purchases;
- decreasing our land development spending or suspending development in many communities until market conditions improve; and
- renegotiating or canceling land option purchase contracts.
• Controlling our inventory of homes under construction by limiting the construction of unsold homes and aggressively marketing our unsold, completed homes in inventory.
• Managing the sales prices and level of sales incentives on our homes as necessary to optimize the balance of sales volumes, returns and cash flows.
• Decreasing our cost of goods purchased from both vendors and subcontractors.
• Continuing to modify our product offerings to provide more affordable homes.
• Decreasing our SG&A infrastructure to be in line with our reduced expectations of production levels.
• Reducing our level of debt by utilizing cash balances and cash flows from operations.
• Maintaining a strong cash balance and overall liquidity position.
These initiatives allowed us to generate significant cash flows from operations during fiscal 2007 and 2008, which we utilized to reduce our outstanding debt and increase our liquidity. Although we cannot provide any assurances that these initiatives will be successful, we expect that our operating strategy will allow us to continue to maintain a strong balance sheet and liquidity position in fiscal 2009.
Key Results
Key financial results as of and for our fiscal year ended September 30, 2008, as compared to fiscal 2007, were as follows:
Homebuilding Operations:
• Homebuilding revenues decreased 41% to $6.5 billion.
• Homes closed decreased 36% to 26,396 homes and the average selling price of those homes decreased 10% to $233,500.
• Net sales orders decreased 37% to 21,251 homes.
• Sales order backlog decreased 55% to $1.2 billion.
• Home sales gross margins decreased 600 basis points to 11.2%.
• Inventory impairments and land option cost write-offs were $2.5 billion, compared to $1.3 billion.
• Homebuilding SG&A expense decreased by $349.7 million, or 31%, to $791.8 million, but increased as a percentage of homebuilding revenues by 180 basis points to 12.1%.
• Homebuilding pre-tax loss was $2.7 billion, compared to a pre-tax loss of $1.0 billion.
• Homes in inventory declined by 7,500 to 12,400.
• Owned lots declined by 68,000 to 99,000.
• Homebuilding debt decreased by $444.1 million to $3,544.9 million.
• Net homebuilding debt to total capital increased 340 basis points to 43.6%, and gross homebuilding debt to total capital increased 1,390 basis points to 55.6%.
• Homebuilding cash was $1.4 billion, compared to $228.3 million.
Financial Services Operations:
• Total financial services revenues decreased by 39% to $127.5 million.
• Financial services pre-tax income decreased by 49% to $35.1 million.
• Financial services debt decreased by $184.3 million to $203.5 million.
Consolidated Results:
• Recorded a valuation allowance against deferred tax assets of $961.3 million.
• Net loss per share was $8.34, compared to net loss per share of $2.27.
• Net loss was $2.6 billion, compared to net loss of $712.5 million.
• Stockholders' equity decreased 49% to $2.8 billion.
• Net cash provided by operations was $1.9 billion, compared to $1.4 billion.
Results of Operations - Homebuilding
Our operating segments are our 34 homebuilding operating divisions, which we aggregate into six reporting segments. Previously, we presented seven homebuilding reporting segments, based on our seven operating regions which had been determined to be our operating segments. During the fourth quarter of fiscal 2008, we reassessed the level at which the Statement of Financial Accounting Standards (SFAS) No. 131 operating segment criteria is met, and as a result, changed our operating segments from the operating regions to the operating divisions. As a result of this change, the composition of our reporting segments was also revised. The California markets, which were previously presented as a separate reporting segment are now included in our West reporting segment. Additionally, the Salt Lake City, Utah market, which was previously included in our Southwest reporting segment, is now included in our West reporting segment. Furthermore, the name of our Northeast reporting segment has been changed to our East reporting segment, although the markets comprising it remain the same. All prior year segment information has been restated to conform to the fiscal 2008 presentation. These reporting segments, which we also refer to as reporting regions, have homebuilding operations located in the following states:
East: Delaware, Georgia (Savannah only), Maryland, New Jersey, North
Carolina, Pennsylvania, South Carolina and Virginia
Midwest: Colorado, Illinois, Minnesota and Wisconsin
Southeast: Alabama, Florida and Georgia
South Central: Louisiana, Mississippi, Oklahoma and Texas
Southwest: Arizona and New Mexico
West: California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington
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Fiscal Year Ended September 30, 2008 Compared to Fiscal Year Ended September 30, 2007
The following tables set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the fiscal years ended September 30, 2008 and 2007. We have restated the 2007 amounts between reporting segments to conform to the 2008 presentation.
Net Sales Orders
Fiscal Year Ended September 30,
Homes Sold Value (In millions) Average Selling Price Cancellation
% % % Rate
2008 2007 Change 2008 2007 Change 2008 2007 Change 2008 2007
East 1,602 3,085 (48 )% $ 396.3 $ 792.3 (50 )% $ 247,400 $ 256,800 (4 ) % 42 % 34 %
Midwest 1,633 3,065 (47 )% 425.3 887.0 (52 )% 260,400 289,400 (10 ) % 22 % 25 %
Southeast 3,235 5,206 (38 )% 637.6 1,130.4 (44 )% 197,100 217,100 (9 ) % 39 % 37 %
South Central 7,266 9,740 (25 )% 1,293.3 1,723.5 (25 )% 178,000 177,000 1 % 38 % 34 %
Southwest 2,982 6,017 (50 )% 551.6 1,140.7 (52 )% 185,000 189,600 (2 ) % 56 % 47 %
West 4,533 6,574 (31 )% 1,373.1 2,556.7 (46 )% 302,900 388,900 (22 ) % 34 % 39 %
21,251 33,687 (37 )% $ 4,677.2 $ 8,230.6 (43 )% $ 220,100 $ 244,300 (10 ) % 40 % 38 %
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Sales Order Backlog
As of September 30,
Homes in Backlog Value (In millions) Average Selling Price
% % %
2008 2007 Change 2008 2007 Change 2008 2007 Change
East 487 1,194 (59 )% $ 118.2 $ 306.6 (61 )% $ 242,700 $ 256,800 (5 )%
Midwest 328 600 (45 )% 91.6 192.1 (52 )% 279,300 320,200 (13 )%
Southeast 783 1,198 (35 )% 165.7 309.6 (46 )% 211,600 258,400 (18 )%
South Central 1,999 2,693 (26 )% 359.4 496.2 (28 )% 179,800 184,300 (2 )%
Southwest 812 3,139 (74 )% 170.6 685.5 (75 )% 210,100 218,400 (4 )%
West 888 1,618 (45 )% 301.9 704.4 (57 )% 340,000 435,400 (22 )%
5,297 10,442 (49 )% $ 1,207.4 $ 2,694.4 (55 )% $ 227,900 $ 258,000 (12 )%
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Homes Closed
Fiscal Year Ended September 30,
Homes Closed Value (In millions) Average Selling Price
% % %
2008 2007 Change 2008 2007 Change 2008 2007 Change
East 2,309 4,119 (44 )% $ 584.8 $ 1,072.9 (45 )% $ 253,300 $ 260,500 (3 ) %
Midwest 1,905 3,502 (46 )% 525.8 1,037.1 (49 )% 276,000 296,100 (7 ) %
Southeast 3,650 6,156 (41 )% 781.6 1,454.6 (46 )% 214,100 236,300 (9 ) %
South Central 7,960 11,260 (29 )% 1,430.1 2,005.2 (29 )% 179,700 178,100 1 %
Southwest 5,309 8,149 (35 )% 1,066.5 1,839.2 (42 )% 200,900 225,700 (11 ) %
West 5,263 8,184 (36 )% 1,775.5 3,312.2 (46 )% 337,400 404,700 (17 ) %
26,396 41,370 (36 )% $ 6,164.3 $ 10,721.2 (43 )% $ 233,500 $ 259,200 (10 ) %
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Total Homebuilding Revenues
Fiscal Year Ended September 30,
2008 2007 % Change
(In millions)
East $ 589.9 $ 1,092.0 (46 )%
Midwest 546.7 1,111.5 (51 )%
Southeast 820.8 1,478.3 (44 )%
South Central 1,452.2 2,009.9 (28 )%
Southwest 1,170.9 1,882.0 (38 )%
West 1,938.1 3,515.1 (45 )%
$ 6,518.6 $ 11,088.8 (41 )%
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Inventory Impairments and Land Option Cost Write-offs
Fiscal Year Ended September 30,
2008 2007
Land Option Land Option
Inventory Cost Inventory Cost
Impairments Write-Offs Total Impairments Write-Offs Total
(In millions)
East $ 256.2 $ 32.2 $ 288.4 $ 72.3 $ 9.2 $ 81.5
Midwest 161.8 1.5 163.3 152.8 14.5 167.3
Southeast 448.4 9.1 457.5 181.6 28.6 210.2
South Central 67.2 5.2 72.4 10.4 14.2 24.6
Southwest 264.9 65.8 330.7 25.6 1.2 26.8
West 1,174.1 (1.9 ) 1,172.2 779.5 39.6 819.1
$ 2,372.6 $ 111.9 $ 2,484.5 $ 1,222.2 $ 107.3 $ 1,329.5
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Carrying Values of Potentially Impaired and Impaired Communities
September 30, 2008 September 30, 2007
Carrying Value Carrying Value
of Inventory of of Inventory of
Carrying Value Impaired Carrying Value Impaired
of Inventory Communities Fair Value of Inventory Communities Fair Value
with Impairment Prior to of Impaired with Impairment Prior to of Impaired
Indicators Impairment Communities Indicators Impairment Communities
(In millions)
East $ 436.9 $ 163.8 $ 79.0 $ 210.0 $ 27.9 $ 21.7
Midwest 204.8 93.6 58.4 101.0 41.7 34.2
Southeast 485.5 241.7 153.7 573.1 152.6 110.0
South Central 207.1 38.1 30.5 219.0 35.4 25.3
Southwest 237.1 158.7 105.7 278.6 11.9 9.7
West 614.8 271.9 175.8 1,240.7 671.0 461.3
$ 2,186.2 $ 967.8 $ 603.1 $ 2,622.4 $ 940.5 $ 662.2
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Goodwill Impairments
Fiscal Year Ended September 30,
2008 2007
(In millions)
East $ - $ 39.4
Midwest - 48.5
Southeast - 11.5
South Central - -
Southwest 79.4 -
West - 374.7
$ 79.4 $ 474.1
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Homebuilding Income (Loss) Before Income Taxes (1)
Fiscal Year Ended September 30,
2008 2007
% of % of
Region Region
$'s Revenues $'s Revenues
(In millions)
East $ (332.5 ) (56.4 )% $ (66.1 ) (6.1 ) %
Midwest (184.3 ) (33.7 )% (205.3 ) (18.5 ) %
Southeast (507.7 ) (61.9 )% (131.6 ) (8.9 ) %
South Central (9.0 ) (0.6 )% 122.2 6.1 %
Southwest (366.7 ) (31.3 )% 192.9 10.2 %
West (1,266.7 ) (65.4 )% (932.1 ) (26.5 ) %
$ (2,666.9 ) (40.9 )% $ (1,020.0 ) (9.2 ) %
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(1) Expenses maintained at the corporate level are allocated to each segment based on the segment's average inventory. These expenses consist primarily of capitalized interest and property taxes, which are amortized to cost of sales, and the expenses related to the operations of our corporate office.
Homebuilding Operating Margin Analysis
Percentages of
Related Revenues
Fiscal Year Ended September 30,
2008 2007
Gross profit - Home sales 11.2 % 17.2 %
Gross profit - Land/lot sales 8.5 % 22.9 %
Effect of inventory impairments and land option cost write-offs on
total homebuilding gross profit (38.1 ) % (12.0 ) %
Gross profit (loss) - Total homebuilding (27.0 ) % 5.4 %
Selling, general and administrative expense 12.1 % 10.3 %
Goodwill impairment 1.2 % 4.3 %
Interest expense 0.6 % - %
Loss on early retirement of debt - % 0.1 %
Other (income) (0.1 ) % - %
Loss before income taxes (40.9 ) % (9.2 ) %
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Net Sales Orders and Backlog
Net sales orders represent the number and dollar value of new sales contracts executed with customers, net of sales contract cancellations. The value of net sales orders decreased 43%, to $4,677.2 million (21,251 homes) in 2008 from $8,230.6 million (33,687 homes) in 2007. The value of net sales orders decreased 35%, to $852.3 million (3,977 homes) in the fourth quarter of fiscal 2008 from $1,309.5 million (6,374 homes) in the same period of fiscal 2007. The decreases in our net sales orders reflect the continued reduction of demand for new homes in most homebuilding markets. We believe the most significant factors contributing to the slowing of demand for new homes in most of our markets include a continued high level of new and existing homes for sale, which includes foreclosed homes for sale, a decrease in the availability of mortgage financing for many potential homebuyers which has been further impacted by the recent uncertainty in the financial markets and a decline in homebuyer consumer confidence. Many prospective homebuyers continue to approach the purchase decision more tentatively due to continued increases in price concessions and sales incentives offered on both new and existing homes, concern over their ability to sell an existing home or obtain mortgage financing and the general uncertainty surrounding the housing market and weakness in the overall economy. We have attempted to increase sales by providing increased sales incentives and lowering prices, but the factors above, combined with the continued pricing responses of our competitors, have limited the impact of our pricing efforts.
Reflecting the recent significant erosion of consumer confidence, our sales results during the fourth quarter worsened at the end of the quarter. The elimination of seller-funded down payment assistance on FHA loans as of October 1, 2008 will likely have a negative effect on future sales trends as further discussed below. Subsequent to fiscal year 2008, the volume of our net sales orders for the month ended October 31, 2008 continued the weakness experienced at the end of the fourth quarter and decreased 23% compared to the month ended October 31, 2007.
In comparing fiscal 2008 to fiscal 2007, the value of net sales orders decreased significantly in all six of our market regions. These decreases were primarily due to substantially similar decreases in the number of homes sold in the respective region. Particularly in our West region, the decline in average selling price also contributed to the decline in the value of net sales orders.
The average price of our net sales orders decreased 10%, to $220,100 in 2008 from $244,300 in 2007. The average price of our net sales orders decreased significantly in our West region, and to a lesser extent in our Midwest and Southeast regions, due primarily to price reductions and increased incentives in our California, Las Vegas, Denver and Florida markets. In general, our pricing is dependent on the demand for our homes, and declines in our average selling prices during fiscal 2008 were due in large part to increases in the use of price reductions and sales incentives in order to attempt to achieve an appropriate sales absorption pace. Further, as the inventory of existing homes for sale, which includes an increasing number of foreclosed homes, has continued to be high, it has led to the need to ensure our pricing is competitive with comparable existing home sales prices. We monitor and may adjust our product mix, geographic mix and pricing within our homebuilding markets in an effort to keep our core product offerings affordable for our target customer base, typically first-time and move-up homebuyers. To a lesser extent than the competitive factors discussed above, this has also contributed to decreases in the average selling price.
Our annual cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 40% in fiscal 2008, compared to 38% in fiscal 2007. Our cancellation rate in the fourth quarter of fiscal 2008 was 47% and in the month ended October 31, 2008 was 41%. The higher cancellation rate during the fourth quarter of fiscal 2008, was primarily attributable to cancellations in our Southwest region, particularly in our Arizona markets. These elevated cancellation rates reflect the ongoing challenges in most of our homebuilding markets, including the inability of many prospective homebuyers to sell their . . .
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