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TMHC > SEC Filings for TMHC > Form 10-K on 24-Feb-2014All Recent SEC Filings

Show all filings for TAYLOR MORRISON HOME CORP

Form 10-K for TAYLOR MORRISON HOME CORP


24-Feb-2014

Annual Report


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

Overview

We generate revenue primarily through sales of detached and attached homes and condominium units as well as through sales of land and the operations of our mortgage subsidiary, TMHF. We recognize revenue on detached and attached homes when the homes are completed and delivered to the buyers. We recognize revenue on the majority of our high-rise condominiums at the time of occupancy. We also recognize revenue when buyer deposits are forfeited. Revenues from loan origination are recognized at the time the related real estate transactions are completed, usually upon the close of escrow.

Our primary costs are the acquisition of land in various stages of development and the construction costs of the homes and condominiums we sell (including capitalized interest, real estate taxes and related development costs). Home construction costs are accumulated and charged to cost of sales based on the construction cost of the home being sold. Land acquisition, development, interest, taxes, overhead and condominium construction costs are allocated to homes and units using methods that approximate the relative sales value.

Our business is organized into four segments - East, West, Canada and Mortgage Operations. Our East, West and Canada segments are based on geographic regions:

East: Houston (which includes a Taylor Morrison division and a Darling Homes division), Austin, Dallas (which includes a Darling Homes division only), North Florida and West Florida.

West: Phoenix, Northern California, Southern California and Denver.

Canada: Kitchener-Waterloo, Ottawa, Toronto.

In all of our markets, we build and sell a broad and innovative mix of homes across a wide range of price points. Our emphasis is on designing, building and selling homes to first and second-time move-up buyers.

All of the divisions in our East and West segments offer single-family attached and/or detached homes and generally operate as merchant builders. Merchant builders generally acquire fully planned and entitled lots and may construct on-site improvements but normally do not construct significant off-site utility or infrastructure improvements. In certain markets we also operate as community developers. Community development includes the acquisition and development of large-scale communities that may include significant planning and entitlement approvals and construction of off-site and on-site utilities and infrastructure. Our Canada segment consists of our operations within the province of Ontario, primarily in the GTA and also in Ottawa and Kitchener-Waterloo, and offers both single-family and high-rise communities.

Mortgage Operations is also a separate reportable segment of our business. Our Mortgage Operations reportable segment provides financial services to customers in the U.S. through its wholly owned mortgage brokerage subsidiary, operating as TMHF, and title examination services in some U.S. locations through various joint ventures.

Strategy

Because the housing market is cyclical, and home price movement between the peak and trough of the cycle can be significant, we seek to adhere to our core operating principles through these cycles to drive consistent long-term performance.

Based on our current land position, we expect to drive revenue by opening new communities from our existing land supply. We believe land supply provides us with the opportunity to increase our community count on a net basis by approximately 25-30% in 2014. We also currently own or have an option to purchase over 98% of the land on which we expect to close homes during 2014. We expect that most of the communities we will open during the next twelve months will be in our Phoenix, West Florida and Houston markets in response to increased demand by consumers in those markets.


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Because a significant portion of our land supply was purchased at low price points during the recent downturn in the housing cycle and because our entire land inventory was adjusted to fair market value at the time of the Acquisition, we expect to continue our revenue growth and strong gross margin performance in our U.S. communities. Our approach to land supply management in our East and West regions has historically been to acquire land that has attractive characteristics, including good access to schools, shopping, recreation and transportation facilities. In connection with our overall land inventory management process, our management team reviews these considerations, as well as other financial metrics, in order to decide the highest and best use of our land assets. Historically, land dispositions have not had a material effect on our overall results of operations, but may impact overall margins.

We intend to maintain a consistent approach to land positioning within our regions, markets and communities in the foreseeable future in an effort to concentrate a greater amount of our land inventory in areas that have the attractive characteristics referred to above. We also intend to continue to combine our land development expertise with our homebuilding operations to increase the flexibility of our business, to enhance our margin performance and to control the timing of delivery of lots.

Over the next twelve months our goal is to further focus our offerings on targeted customer groups. We aim to identify the preferences of our target customer and demographic groups and offer them innovative, high-quality homes that are efficient and profitable to build. To achieve this goal, we intend to continue our market research to determine preferences of our customer groups.

We will also seek to grow through selective acquisitions in both existing markets and new markets that exhibit positive long-term fundamentals. For example, on December 31, 2012 we acquired Darling, a Texas- based homebuilder, which gives us a presence in the Dallas market and expands our presence in the Houston market.

Factors Affecting Comparability of Results

You should read this Management's Discussion and Analysis of our Financial Condition and Results of Operations in conjunction with our historical consolidated financial statements included elsewhere in this Annual Report. Below are the period-to-period comparisons of our historical results and the analysis of our financial condition. In addition to the impact of the matters discussed in the Risk Factors listed in Item 1A of this Annual Report, our future results could differ materially from our historical results due to a variety of factors, including the following:

Liquidity and Interest Expense

We rely on our ability to finance our operations by generating operating cash flows, borrowing under our Restated Revolving Credit Facility and our existing Canadian credit facilities or accessing the debt and equity capital markets. We also rely on our independent ability to obtain performance, payment and completion surety bonds, and letters of credit to finance our projects. We believe that we can fund our current and foreseeable liquidity needs from the cash generated from operations and borrowings under our Restated Revolving Credit Facility and our existing Canadian letter of credit facilities.

The Predecessor Parent Company no longer provides financing support for our operations, so our current liquidity profile is significantly different from that of our predecessor. For the same reason, the historical interest expense (including capitalized interest) for predecessor periods ending prior to the July 2011 Acquisition will not be comparable to that for successor periods ending after the Acquisition.

The Acquisition and Financing Transactions and Basis of Presentation

The July 2011 Acquisition has been accounted for as a purchase under ASC Topic 805, Business Combinations. As a result of the change in ownership, our historical financial data for periods prior to the July 13, 2011 Acquisition (the predecessor periods) are derived from the historical financial statements of our predecessor, the North American business of Taylor Wimpey plc, which financial statements have been prepared using the historical cost basis of accounting that existed prior to the Acquisition. Our financial statements for periods from and after the July 13, 2011 Acquisition (the successor period) are derived from the financial statements of TMM Holdings, which already reflect adjustments made as a result of the application of purchase accounting in connection with the Acquisition. Therefore, the financial information for the predecessor period is not comparable with that for the successor periods.


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In connection with the Acquisition, we incurred indebtedness, including $625.0 million of borrowings under the Sponsor Loan, $125.0 million of which was repaid through working capital in August 2011 pursuant to our recapitalization plan, $350.0 million of which was refinanced by the offering of the senior notes and $150.0 million of which was contributed or transferred to a subsidiary of TMM Holdings. We also have the ability to borrow under our Restated Revolving Credit Facility and Canadian letter of credit facilities from time to time as warranted by business needs. Since we operated largely as a stand-alone company prior to the Acquisition, we have not incurred significant incremental general and administrative expenses as a result of the separation from Taylor Wimpey plc. Additional cost savings within the organization may be achieved in the future. However, we cannot accurately predict, and there can be no assurances as to, the extent of any such savings.

Certain results for 2011 are presented to reflect the arithmetically combined historical results from the predecessor period from January 1, 2011 to July 12, 2011 and the successor period from July 13, 2011 to December 31, 2011. This presentation may yield results that are not directly comparable on a period-to-period basis with those in predecessor periods because of differences in accounting basis due to the change of ownership resulting from the Acquisition. The cost of home closings and the cost of land closings were the only line items directly impacted in any material respect by the purchase accounting adjustments described below (although the effects of such adjustments are carried through to the items below such line items in our statement of operations). For purposes of this Annual Report, however, we believe that it is most meaningful to present our results of operations for 2011 in this manner. The combined historical results for 2011 are not necessarily indicative of what the results for the period would have been had the Acquisition actually occurred as of January 1, 2011.

Home closings and land sales that occurred during the predecessor period do not reflect any purchase accounting adjustments to costs of home closings and costs of land closings, while home closings and land sales occurring during the successor period do reflect such purchase accounting adjustments to the cost of home closings and cost of land closings. The carrying values of home and land inventory were both increased and decreased in adjusting their carrying values to fair market value as of the closing of the Acquisition through the application of purchase accounting. Such adjustments may result in higher or lower costs of home and land closings in the successor period and future periods as compared to the predecessor period. For the successor period from July 13, 2011 to December 31, 2011, such adjustments increased our cost of home closings by $38.9 million and our cost of land closings by $0.9 million. For the successor years ended December 31, 2012, such adjustments increased our cost of home closings by $6.9 million and decreased our cost of land closings by $1.6 million and in 2013 by an immaterial amount.

Non-GAAP Measures

In addition to the results reported in accordance with U.S. GAAP, we have provided information in this Annual Report relating to "adjusted gross margins," and the results of "unconsolidated joint ventures."

Results of unconsolidated joint ventures

References to the information or results of "unconsolidated joint ventures" refer to our proportionate share of unconsolidated joint ventures in Canada and are included as non-GAAP measures because they are accounted for under the equity method. We believe that such results are useful to investors as an indication of the level of business activity of our joint ventures in Canada as well as the potential for cash and revenue generation from those joint ventures.

Adjusted gross margins

We calculate adjusted gross margin from U.S. GAAP gross margin by adding impairment charges attributable to the write-down of operating communities, and the amortization of capitalized interest through cost of home closings. We also discuss adjusted home closings gross margin, which is calculated by adding back to home closings gross margin the capitalized interest amortization and impairment charges related to the homes closed. Adjusted land closings gross margin is calculated similarly. Adjusted mortgage operations gross margin is calculated by adding back impairment charges attributable to the write-down of loans receivable. Management uses our adjusted gross margin measures to evaluate our performance on a consolidated basis as well as the performance of our segments. We believe these adjusted gross margins are relevant and useful to investors for evaluating our performance. These measures are considered non-GAAP financial measures and should be considered in addition to, rather than as a substitute for, the comparable U.S.


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GAAP financial measures as measures of our operating performance. Although other companies in the homebuilding industry report similar information, the methods used may differ. We urge investors to understand the methods used by other companies in the homebuilding industry to calculate gross margins and any adjustments to such amounts before comparing our measures to those of such other companies.

Results of Operations

The following table sets forth our results of operations (Dollars in thousands):

                                                                              Arithmetically
                                                                                 Combined
                                                                              (Predeccessor/
                                                    TMHC                          TMHC)                 TMHC                Predecessor
                                       Year Ended          Year Ended           Year Ended           July 13 to            January 1 to
                                      December 31,        December 31,         December 31,         December 31,             July 12,
                                          2013                2012                 2011                 2011                   2011
Statements of Operations Data:
Home closings revenue                $    2,264,985      $    1,369,452      $      1,331,285      $      731,216          $     600,069
Land closings revenue                        27,881              44,408                24,296              10,657                 13,639
Mortgage operations revenue                  30,371              21,861                14,606               8,579                  6,027

Total revenues                       $    2,323,237      $    1,435,721      $      1,370,187      $      750,452          $     619,735
Cost of home closings                     1,774,761           1,077,525             1,066,425             591,891                474,534
Cost of land closings                        26,741              35,884                15,716               8,583                  7,133
Mortgage operations expenses                 16,446              11,266                 8,313               4,495                  3,818

Gross margin                         $      505,289      $      311,046      $        279,733      $      145,483          $     134,250
Sales, commissions and other
marketing costs                             142,848              80,907                76,442              36,316                 40,126
General and administrative
expenses                                     90,743              60,444                68,626              32,883                 35,743
Equity in income of unconsolidated
entities                                    (37,563 )           (22,964 )              (8,050 )            (5,247 )               (2,803 )
Interest (income) expense, net                 (476 )            (2,446 )              (2,926 )            (3,867 )                  941
Loss on extinguishment of debt               10,141               7,953                    -                   -                      -
Other expense (income), net                   2,541               3,567                (8,350 )             2,308                (10,658 )
Indemnification and transaction
expenses                                    199,119              13,034                52,292              52,292                     -

Income before income taxes           $       97,936      $      170,551      $        101,699      $       30,798          $      70,901
Income tax provision (benefit)                3,068            (260,297 )              24,912               4,031                 20,881

Income before non-controlling
interests, net of tax                $       94,868      $      430,848      $         76,787      $       26,767          $      50,020
Loss (income) attributable to
non-controlling interests - joint
ventures                                        131                 (28 )              (5,300 )            (1,178 )               (4,122 )

Net income                           $       94,999      $      430,820      $         71,487      $       25,589          $      45,898
Income attributable to
non-controlling interests -
Principal Equityholders                     (49,579 )                -                     -                   -                      -
Net income available to Taylor
Morrison Home Corporation            $       45,420      $      430,820      $         71,487      $       25,589          $      45,898

Gross margin as a % of revenue
from home closings                             22.3 %              22.7 %                21.0 %              19.9 %                 22.4 %
Sales, commissions and other
marketing costs as a % of revenue
from home closings                              6.3 %               5.9 %                 5.7 %               5.0 %                  6.7 %
General and administrative
expenses as a % of revenue from
home closings                                   4.0 %               4.4 %                 5.2 %               4.5 %                  6.0 %
Average sales price per home
closed                               $          382      $          364      $            347      $          366          $         326


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Key Results

Key financial results as of and for the year ended December 31, 2013, as compared to the same period in 2012, are as follows:

Net sales orders increased 17.7% from 4,842 homes (including 360 homes in unconsolidated joint ventures) to 5,697 homes (including 83 homes in unconsolidated joint ventures). Orders in our East segment increased from 2,077 homes to 3,255 homes, while orders in our West segment increased from 1,661 homes to 1,763 homes. Orders in our Canada segment, including our share of joint ventures, decreased from 1,104 to 679 homes.

Homes closed increased 56.2% from 4,014 homes (including 232 homes in unconsolidated joint ventures) to 6,270 homes (including 441 homes in unconsolidated joint ventures), with an increase in the average selling price of those homes closed of 5.0% to $382,000. Homes closed in our East segment increased from 1,661 homes to 2,913 homes, while home closings in the West segment increased from 1,272 homes to 1,803 homes. Closings in Canada, including our share of joint ventures, increased from 1,081 homes to 1,554 homes.

Homebuilding revenues increased 65.4%, from $1.4 billion to $2.3 billion.

Gross margin remained constant at 21.7%.

Selling, commissions and marketing costs increased 76.6% from $80.9 million to $142.8 million, and as a percentage of total revenues increased slightly from 5.6% to 6.1%.

General and administrative expenses increased 50.1% from $60.4 million to $90.7 million, and as a percentage of total revenues decreased slightly from 4.2% to 4.0%.

In 2013 we incurred a charge of $88.5 million related to the tax indemnity item, and in connection with, the following IPO-related Reorganization Transactions, we incurred one time charges of: $80.2 million for the modification of the TMM Holdings Class J Units, $29.8 million to terminate the management services agreement and $10.1 million related to early extinguishment of debt.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Average Active Selling Communities



                                                  Year Ended December 31,
                                                2013        2012       Change
          East                                   120.7        74.6        61.8 %
          West                                    37.6        33.2        13.3

          Subtotal U.S.                          158.3       107.8        46.8 %

          Canada                                  14.8        14.0         5.7

          Subtotal North America                 173.1       121.8        42.1 %
          Unconsolidated joint ventures (1)        4.0         6.9       (42.0 )

          Total                                  177.1       128.7        37.6 %

(1) Represents the average number of total communities in which our joint ventures were actively selling during the period.

Average active selling communities increased 37.6% from the year ended December 31, 2012 to the year ended December 31, 2013 with the largest increase in the East segment, primarily due to the addition of 43 Darling Homes communities. We opened new communities and completed existing communities throughout all of our markets during 2013, with the largest number of additions in our West Florida, Phoenix and Houston divisions, where demand and our land positions afforded us the opportunity. We open communities when we believe we have the greatest probability of capitalizing on favorable market conditions in which the community is located.


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Net Sales Orders



                                                                               Year Ended December 31, (1)
(Dollars in thousands )                     Net Homes Sold                             Sales Value                         Average Selling Price
                                     2013        2012       Change          2013            2012         Change        2013         2012      Change
East                                  3,255       2,077        56.7 %    $ 1,266,461     $   692,287        82.9 %    $   389       $ 333        16.7 %
West                                  1,763       1,661         6.1          839,764         612,428        37.1          476         369        29.2

Subtotal U.S.                         5,018       3,738        34.2 %    $ 2,106,225     $ 1,304,715        61.4 %    $   420       $ 349        20.3 %
Canada                                  596         744       (19.9 )        265,367         309,584       (14.3 )        445         416         7.0

Subtotal North America                5,614       4,482        25.3 %    $ 2,371,592     $ 1,614,299        46.9 %    $   422       $ 360        17.3 %
Unconsolidated joint ventures (2)        83         360       (76.9 )         30,812          82,845        62.8          371         230        61.1

Total                                 5,697       4,842        17.7 %    $ 2,402,404     $ 1,697,144        41.6 %    $   422       $ 351        20.3 %

(1) Net sales orders represent the number and dollar value of new sales contracts executed with customers. High-rise sales are generally not recognized until a building is approved for construction. High-rise sales typically do not close in the year sold. Other sales are recognized after a contract is signed and the rescission period has ended.

(2) Includes only proportionate share of unconsolidated joint ventures.

The value of net sales orders, including those of unconsolidated joint ventures, increased by 41.6% to $2.4 billion in the year ended December 31, 2013, from $1.7 billion in the year ended December 31, 2012. The number of net homes sold, including those of unconsolidated joint ventures, increased 17.7% to 5,697 homes (including 83 homes in unconsolidated joint ventures) in the year ended December 31, 2013 from 4,842 homes (including 360 in unconsolidated joint ventures) in the year December 31, 2012. These results were driven by the continued strong demand in the U.S. spring selling season in 2013, during which we benefited from higher selling prices as consumers in the market gained confidence in the values present in the marketplace, historically low interest rates and improved macro economic conditions. The improved homebuilding market significantly impacted areas such as Phoenix, West Florida and Northern California resulting in an increase in the number of units sold and related revenue for the year ended December 31, 2013 over the prior year comparable period. The Canada segment experienced a decline of 425 units (including units in joint ventures) in net new homes sold in the year ended December 31, 2013 when compared to the same period last year. The decrease is attributable to the lower availability of saleable product in the segment in the year ended December 31, 2013 and moderating local economic conditions.

We expect that, to the extent economic and housing conditions improve in the markets in which we operate, net homes sold and aggregate sales value will increase. Average selling price is dependent to a large degree on product type, which communities are being actively sold and consumer demand.

Sales Order Cancellations-Units



                                                               Year Ended December 31,
                                              Cancelled Sales Orders             Cancellation Rate (1)
                                               2013              2012            2013              2012
East                                                533             363             14.1 %           14.9 %
West                                                306             243             14.8             12.8

Subtotal U.S./weighted average                      839             606             14.3 %           14.0 %
Canada                                               10              19              1.7              2.5

Subtotal North America/weighted average             849             625             13.1 %           12.2 %
Unconsolidated joint ventures (2)                     1               6              1.2              1.8

Total/weighted average                              850             631             13.0 %           11.5 %

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

(2) Includes only proportionate share of unconsolidated joint ventures.


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