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DHI > SEC Filings for DHI > Form 10-K on 16-Nov-2012All Recent SEC Filings

Show all filings for HORTON D R INC /DE/

Form 10-K for HORTON D R INC /DE/


16-Nov-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Fiscal Year 2012 Overview

In fiscal 2012, demand for new homes improved in most of our operating markets, as evidenced by the number and value of our net sales orders increasing 21% and 29% compared to the prior year. Revenues from home sales increased 19% to $4.2 billion in fiscal 2012 compared to $3.5 billion in fiscal 2011. The average selling prices of our homes closed increased 5% and our gross margins on homes closed increased by 160 basis points in fiscal 2012 as compared to fiscal 2011. Pre-tax income was $242.9 million in the current year compared to $12.1 million in the prior year. Our sales order backlog of $1.7 billion at September 30, 2012 is up 61% from a year ago, which positions us for a strong start in fiscal 2013. These results reflect our ability to operate profitably and grow in the current environment through our strategy of investing capital to expand and improve the profitability of our operations, managing inventory levels efficiently and controlling SG&A and interest costs.

Our recent results and other national data indicate that the overall demand for new homes has improved from the prior year. However, both national new home sales and our company's home sales remain below historical levels due to the current weak U.S. economic conditions, the restrictive mortgage lending environment and variations in local housing market conditions. Until there is a more robust U.S. economic recovery, we expect national demand for new homes to remain at historically low levels, with uneven improvement across our operating markets.

We believe our business is well-positioned to benefit from a housing recovery due to our strong balance sheet and liquidity, our finished lot position, our inventory of available homes and our broad geographic operating base, which have allowed us to profitably grow our business in the current market conditions. We have begun increasing our investments in land, lot and home inventories in response to increased demand for our homes and we will continue to adjust our business strategies based on housing demand in each of our markets. Nevertheless, our future results could be negatively impacted by weakening economic conditions, decreases in the level of employment, a significant increase in mortgage interest rates or further tightening of mortgage lending standards.


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Strategy

While we are encouraged by the recent improvement in new home demand, we are uncertain whether homebuilding industry conditions will continue to improve at the pace we experienced in fiscal 2012. We expect that further improvement in individual markets will be uneven, and will be largely dependent on local economic conditions. However, we believe our strategy through the downturn of generating significant cash flow from operations, increasing our cash balances, reducing our outstanding debt and controlling attractive land and lot positions through option contracts has positioned us to capitalize on improving demand across our markets. In response to increasing new home demand, we are using our liquidity and strong balance sheet to provide the capital and capacity to increase our investments in housing and land inventory, geographically expand our operations, opportunistically pursue business acquisitions and grow our profitability. Our operating strategy includes the following initiatives:

Maintaining a strong cash balance and overall liquidity position.

         Managing the sales prices and level of sales incentives on our homes to
          optimize the balance of sales volumes, profits, returns on inventory
          investments and cash flows.

Entering into lot option contracts to purchase finished lots, where possible, which mitigates many of the risks of land ownership.

         Investing in land acquisition, land development and housing inventory
          opportunities to meet housing demand and expand our operations in
          desirable markets.



         Managing our inventory of homes under construction relative to demand
          in each of our markets, including starting construction on unsold homes
          to capture new home demand, monitoring the number and aging of unsold
          homes and aggressively marketing unsold, completed homes in inventory.

Controlling the cost of goods purchased from both vendors and subcontractors.

Modifying product offerings and pricing to meet consumer demand in each of our markets.

Controlling our SG&A infrastructure to match production levels.

Our operating strategy produced positive results in fiscal 2012. However, we cannot provide any assurances that the initiatives listed above will continue to be successful, and we may need to adjust components of our strategy to meet future market conditions. If market conditions do not deteriorate from current levels, we expect that our operating strategy will allow us to grow our profitability while maintaining a strong balance sheet and liquidity position in fiscal 2013.


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Key Results

Key financial results as of and for our fiscal year ended September 30, 2012, as compared to fiscal 2011, were as follows:

Homebuilding Operations:
 Homebuilding revenues increased 19% to $4.2 billion.


         Homes closed increased 13% to 18,890 homes, and the average selling
          price of those homes increased 5% to $223,300.


         Net sales orders increased 21% to 21,048 homes, and the value of net
          sales orders increased 29% to $4.8 billion.

Sales order backlog increased 61% to $1.7 billion.

Home sales gross margins increased 160 basis points to 17.7%.

         Inventory impairments and land option cost write-offs were $6.2
          million, compared to $45.4 million.


         Homebuilding SG&A expenses decreased as a percentage of homebuilding
          revenues by 100 basis points to 12.5%.

Interest expensed directly decreased 53% to $23.6 million.

         Interest amortized to cost of sales declined to 2.7% of total home and
          land/lot cost of sales, from 3.0%.


         Homebuilding pre-tax income was $203.7 million, compared to a pre-tax
          loss of $7.0 million.

Homes in inventory totaled 13,000, compared to 10,500.

Owned and optioned lots totaled 152,700, compared to 112,700.

Homebuilding debt was $2.3 billion, compared to $1.6 billion.

         Net homebuilding debt to total capital was 21.4%, up 340 basis points,
          and gross homebuilding debt to total capital was 39.1%, up 140 basis
          points.


         Homebuilding cash and marketable securities totaled $1.3 billion,
          compared to $1.0 billion.

Homebuilding inventory totaled $4.2 billion, compared to $3.4 billion.

Financial Services Operations:
Total financial services revenues, net of recourse and reinsurance expenses, increased 35% to $117.8 million.

Financial services pre-tax income increased 105% to $39.2 million.

Consolidated Results:
 Consolidated pre-tax income was $242.9 million, compared to $12.1 million.


         Income tax benefit was $713.4 million, primarily due to the reduction
          in the valuation allowance on our deferred tax asset in the third
          quarter of fiscal 2012.

Net income was $956.3 million, compared to $71.8 million.

Diluted earnings per share was $2.77, compared to $0.23.

Total equity was $3.6 billion, compared to $2.6 billion.

Net cash used in operations was $298.1 million, compared to $14.9 million provided by operations.


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Results of Operations - Homebuilding

Our operating segments are our 32 homebuilding operating divisions, which we
aggregate into six reporting segments. 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 and Minnesota
    Southeast:       Alabama, Florida, Georgia and Mississippi
    South Central:   Louisiana, New Mexico (Las Cruces only), Oklahoma and Texas
    Southwest:       Arizona and New Mexico
    West:            California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington

Fiscal Year Ended September 30, 2012 Compared to Fiscal Year Ended September 30, 2011

The following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the fiscal years ended 2012 and 2011.

                                                           Net Sales Orders (1)
                                                     Fiscal Year Ended September 30,
                       Net Homes Sold                  Value (In millions)                   Average Selling Price
                                       %                                      %                                      %
                 2012      2011      Change       2012          2011        Change       2012          2011        Change
East              2,244     2,066       9 %    $   565.3     $   482.6        17 %    $ 251,900     $ 233,600         8 %
Midwest           1,301     1,005      29 %        386.2         272.0        42 %      296,800       270,600        10 %
Southeast         5,378     4,019      34 %      1,101.9         776.1        42 %      204,900       193,100         6 %
South Central     6,822     6,169      11 %      1,282.3       1,092.2        17 %      188,000       177,000         6 %
Southwest         1,715     1,284      34 %        327.7         239.6        37 %      191,100       186,600         2 %
West              3,588     2,878      25 %      1,139.9         865.1        32 %      317,700       300,600         6 %
                 21,048    17,421      21 %    $ 4,803.3     $ 3,727.6        29 %    $ 228,200     $ 214,000         7 %



                                           Sales Order Cancellations
                                        Fiscal Year Ended September 30,
                Cancelled Sales Orders        Value (In millions)        Cancellation Rate (2)
                   2012          2011          2012          2011         2012           2011
East                   655           689   $     147.7    $   146.7        23 %           25 %
Midwest                192           177          53.9         45.9        13 %           15 %
Southeast            1,851         1,531         351.6        275.1        26 %           28 %
South Central        2,426         2,763         436.4        470.3        26 %           31 %
Southwest              705           639         120.0        109.9        29 %           33 %
West                   828           769         256.3        233.5        19 %           21 %
                     6,657         6,568   $   1,365.9    $ 1,281.4        24 %           27 %


______________


(1) Net sales orders represent the number and dollar value of new sales contracts executed with customers (gross sales orders), net of cancelled sales orders.

(2) Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.


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Net Sales Orders

The value of net sales orders increased 29%, to $4,803.3 million (21,048 homes) in 2012 from $3,727.6 million (17,421 homes) in 2011. The number of net sales orders increased 21% in fiscal 2012 compared to fiscal 2011, reflecting an increase in sales demand for our homes. While the improvement in our sales as compared to the prior year reflects improvement in new home demand and market conditions, overall demand for new homes remains at a historically low level.

In comparing fiscal 2012 to fiscal 2011, the volume of net sales orders increased in all six of our market regions. The largest percentage increases occurred in our Southeast and Southwest regions as a result of improved market conditions in the majority of our Florida markets and in our Phoenix market. Sales orders in our Southeast region were also positively impacted by our acquisition of the homebuilding operations of Breland Homes during the fourth quarter of fiscal 2012, which added 118 homes and $24.3 million to our net sales in fiscal 2012 subsequent to the acquisition date. Changes in the value of net sales orders were generally due to the change in the number of homes sold in each respective region and, to a lesser extent, to increases in the average selling price of those homes, reflective of improving market conditions. Our future sales volumes will depend on the strength of the overall economy, employment levels and our ability to successfully implement our operating strategies in each of our markets.

The average price of our net sales orders increased 7% to $228,200 in 2012, from $214,000 in 2011. The increase reflects slight increases in the average size and amenity levels of our homes sold, as well as small price increases we have been able to implement recently in some of our communities as demand for new homes has improved.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 24% in fiscal 2012, compared to 27% in fiscal 2011. While our cancellation rates have improved, they remain slightly higher than they were prior to the recent housing downturn, and are mainly reflective of tight mortgage lending standards.

                                                           Sales Order Backlog
                                                           As of September 30,
                      Homes in Backlog                 Value (In millions)                   Average Selling Price
                                       %                                      %                                      %
                 2012      2011      Change       2012          2011        Change       2012          2011        Change
East                663       606       9 %    $   170.5     $   147.6        16 %    $ 257,200     $ 243,600         6 %
Midwest             425       288      48 %        127.4          80.6        58 %      299,800       279,900         7 %
Southeast         2,209     1,285      72 %        465.0         246.9        88 %      210,500       192,100        10 %
South Central     2,232     1,710      31 %        433.5         309.5        40 %      194,200       181,000         7 %
Southwest           699       426      64 %        134.9          76.6        76 %      193,000       179,800         7 %
West              1,012       539      88 %        336.6         175.0        92 %      332,600       324,700         2 %
                  7,240     4,854      49 %    $ 1,667.9     $ 1,036.2        61 %    $ 230,400     $ 213,500         8 %

Sales Order Backlog

Sales order backlog represents homes under contract but not yet closed at the end of the period. Many of the contracts in our sales order backlog are subject to contingencies, including mortgage loan approval and buyers selling their existing homes, which can result in cancellations. A portion of the contracts in backlog will not result in closings due to cancellations. Our homes in backlog at September 30, 2012 increased 49% from the prior year, with significant increases in most regions due to increases in net sales orders as compared with the prior year. The sales order backlog in the Southeast region at September 30, 2012 included the impact of our acquisition of the homebuilding operations of Breland Homes during the fourth quarter of fiscal 2012.


Table of Contents

                                                    Homes Closed and Home Sales Revenue
                                                      Fiscal Year Ended September 30,
                        Homes Closed                   Value (In millions)                    Average Selling Price
                                       %                                      %                                        %
                 2012      2011      Change       2012          2011        Change        2012          2011        Change
East              2,187     1,932      13 %    $   542.4     $   438.4        24 %    $  248,000     $ 226,900         9 %
Midwest           1,164       964      21 %        339.3         261.5        30 %       291,500       271,300         7 %
Southeast         4,682     3,546      32 %        930.7         691.8        35 %       198,800       195,100         2 %
South Central     6,300     6,150       2 %      1,158.4       1,080.0         7 %       183,900       175,600         5 %
Southwest         1,442     1,263      14 %        269.4         234.8        15 %       186,800       185,900         - %
West              3,115     2,840      10 %        978.2         835.8        17 %       314,000       294,300         7 %
                 18,890    16,695      13 %    $ 4,218.4     $ 3,542.3        19 %    $  223,300     $ 212,200         5 %

Home Sales Revenue

Revenues from home sales increased 19%, to $4,218.4 million (18,890 homes closed) in 2012 from $3,542.3 million (16,695 homes closed) in 2011. The average selling price of homes closed during 2012 was $223,300, up 5% from the $212,200 average in 2011, reflecting slight increases in the average size and amenity levels of our homes closed, as well as small price increases we have been able to implement recently in some of our communities as demand for new homes has improved. During fiscal 2012, home sales revenues increased in all of our market regions, resulting from increases in the number of homes closed and increases in average selling prices.

The number of homes closed in fiscal 2012 increased 13% from 2011 due to increases in all of our market regions. The most significant percentage increase in the current year occurred in our Southeast region, with the Florida markets contributing the most to the increase. Home closings in the Southeast region also benefited from our acquisition of the homebuilding operations of Breland Homes during the fourth quarter of fiscal 2012, which added 114 home closings and $22.4 million to our home sales revenue in fiscal 2012 subsequent to the acquisition date.

                     Homebuilding Operating Margin Analysis
                                                                        Percentages of
                                                                       Related Revenues
                                                                       Fiscal Year Ended
                                                                         September 30,
                                                                      2012           2011
Gross profit - Home sales                                             17.7  %         16.1  %
Gross profit - Land/lot sales and other                               25.3  %          5.5  %
Effect of inventory impairments and land option cost write-offs
on total homebuilding gross profit                                    (0.1 )%         (1.3 )%
Gross profit - Total homebuilding                                     17.6  %         14.8  %
Selling, general and administrative expense                           12.5  %         13.5  %
Interest expense                                                       0.6  %          1.4  %
Loss on early retirement of debt, net                                    -  %          0.3  %
Other (income)                                                        (0.3 )%         (0.2 )%
Income (loss) before income taxes                                      4.8  %         (0.2 )%


Table of Contents

Home Sales Gross Profit

Gross profit from home sales increased by 30%, to $745.5 million in 2012, from $571.3 million in 2011, and, as a percentage of home sales revenues, increased 160 basis points, to 17.7%. Approximately 130 basis points of the increase in the home sales gross profit percentage was a result of the average selling price of our homes increasing by more than the average cost, reflecting improved market conditions from the prior year. Approximately 40 basis points of the increase was due to a decrease in the amortization of capitalized interest and property taxes as a percentage of homes sales revenues, resulting from reductions in our interest and property taxes incurred and capitalized and more closings occurring on recently acquired finished lots. These increases were partially offset by a 10 basis point decrease due to a $5.3 million out-of-period adjustment in the prior year period related to an error in recording the loss reserves of our 100% owned captive insurance subsidiary that increased gross profit in 2011.

Land Sales and Other Revenues

Land sales and other revenues increased to $17.8 million in 2012, from $7.3 million in 2011. Fluctuations in revenues from land sales are a function of how we manage our inventory levels in various markets. We generally purchase land and lots with the intent to build and sell homes on them; however, we occasionally purchase land that includes commercially zoned parcels which we typically sell to commercial developers, and we also sell residential lots or land parcels to manage our land and lot supply. Land and lot sales occur at unpredictable intervals and varying degrees of profitability. Therefore, the revenues and gross profit from land sales fluctuate from period to period. As of September 30, 2012, we had $32.6 million of land held for sale that we expect to sell in the next twelve months.

Included in land sales and other revenues, is revenue from a single long-term construction project in which we serve as the general contractor. Revenue is recognized on a percentage-of-completion basis as the construction is completed. In fiscal 2012, the revenue and gross profit related to this project was $6.5 million and $1.2 million, respectively.

Inventory Impairments and Land Option Cost Write-offs

During fiscal 2012, we performed our quarterly inventory impairment analyses by reviewing the performance and outlook for all of our land inventories and communities under development for indicators of potential impairment. Based on this review as of September 30, 2012, we then performed impairment evaluations of communities with a combined carrying value of $216.9 million. Through these evaluations, we determined that communities with a carrying value of $1.8 million as of September 30, 2012, were impaired. As a result, during the three months ended September 30, 2012, we recorded impairment charges of $0.6 million to reduce the carrying value of the impaired communities to their estimated fair value, as compared to $10.2 million of impairment charges in the same period of 2011. During fiscal 2012 and 2011, impairment charges totaled $3.2 million and $37.3 million, respectively. The decrease in the amount of impairment charges in fiscal 2012 reflects the overall improvement of housing industry conditions and our increased profitability compared to the prior year, which has significantly reduced the number of our communities and carrying value of inventories that have indicators of potential impairment.

It is possible that our estimate of undiscounted cash flows from these communities may change and could result in a future need to record impairment charges to adjust the carrying value of these assets to their estimated fair value. If conditions in the broader economy, homebuilding industry or specific markets in which we operate worsen, and as we re-evaluate specific community pricing and incentives, construction and development plans, and our overall land sale strategies, we may be required to evaluate additional communities or re-evaluate previously impaired communities for potential impairment. These evaluations may result in additional impairment charges.

During fiscal 2012 and 2011, we wrote off $3.0 million and $8.1 million, respectively, of earnest money deposits and land option costs related to land option contracts which are not expected to be acquired. At September 30, 2012, outstanding earnest money deposits associated with our portfolio of land and lot option purchase contracts totaled $35.0 million.

The inventory impairment charges and write-offs of earnest money deposits and land option costs reduced total homebuilding gross profit as a percentage of homebuilding revenues by approximately 10 basis points in fiscal 2012, compared to 130 basis points in fiscal 2011.


Table of Contents

Selling, General and Administrative (SG&A) Expense

SG&A expense from homebuilding activities increased 10% to $528.7 million in 2012 from $480.0 million in 2011. As a percentage of homebuilding revenues, SG&A expense decreased 100 basis points, to 12.5% in 2012 from 13.5% in 2011. The largest component of our homebuilding SG&A expense is employee compensation and related costs, which represented 63% and 60% of SG&A costs in 2012 and 2011, respectively. These costs increased by 17%, to $335.6 million in 2012 from $286.5 million in 2011, primarily due to an increase in the level of incentive compensation related to the significant increases in revenues, profitability and the price of our common stock in the current year as compared to the prior year. Our homebuilding operations employed approximately 2,740 and 2,380 employees at September 30, 2012 and 2011, respectively.

Interest Incurred

Homebuilding interest costs are incurred on our homebuilding debt outstanding during the period. Comparing fiscal 2012 with fiscal 2011, interest incurred related to homebuilding debt decreased 7% to $120.8 million, corresponding to a 7% decrease in our average homebuilding debt.

We capitalize homebuilding interest to inventory during active development and construction. Our inventory under active development and construction is currently lower than our debt level; therefore, a portion of our interest incurred is expensed. We expensed $23.6 million of homebuilding interest during fiscal 2012, compared to $50.5 million of interest during 2011. The reduction in interest expensed during the current year is a result of an increase in our inventory under active development and construction as well as the decline in interest incurred. Interest amortized to cost of sales, excluding interest written off with inventory impairment charges, declined to 2.7% of total home and land/lot cost of sales in fiscal 2012 from 3.0% in fiscal 2011 as a result . . .

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