D.R. Horton, the nation's largest home builder by volume, has slashed prices and reigned in construction in hopes of aligning its inventory with weak demand. But in the company's fiscal fourth quarter results released today, executives announced a loss of $50.1 million, or $0.16 per share for the period ending Sept. 30, compared to a year-ago gain of $277.7 million, or $0.88 per share.
The reason is familiar: Pre-tax charges of $278.3 million for inventory impairments applied to the plummeting value of undeveloped land (55% of which was in California) and $40.3 million of write-offs of deposits and pre-acquisition costs related to land option contracts that the company won't pursue. Also included was a pre-tax goodwill impairment charge of $48.5 million
The results are nothing to brag about, but they did exceed the expectations of Wall Street (which predicted losses near $1 billion) and improved significantly over the company's fiscal third quarter where losses totaled $2.62 per share. Horton's results were anomalous among the five largest home builders as Lennar, Pulte, Centex, and KB Home all reported much larger-than-forecasted losses. Even revenues, which were down 35% to $ 3.1 billion, exceeded expectations of $2.9 billion.
"There's a motto written across all our heads as we walk into this room: The builder with the strongest balance sheet wins," said D.R. Horton CEO Don Tomnitz. Vehement in his declaration to continue proactive efforts, Tomnitz stated that the company was determined to reduce lot, land, and spec inventory and generate cash to de-lever its debt load.
For the fiscal year, Horton exceeded its goal of generating $1 billion in operating cash flow by tallying $1.36 billion. The goal for fiscal '08 is to generate an additional $1 billion in operating cash flow.
Positioning itself as the low-cost provider, Horton's model has typically included more spec building than many of the largest home builders. However, an aggressive reduction in construction has parlayed into an $800 million cash flow for the quarter, which the company applied toward its revolver. During the reporting period, it whittled the balance from $750 million to $150 million, taking its net debt-to-cap to 40.2%.
"Our first effort will be to pay off the revolver balance. Next, we have $215 million in senior notes due in December. After that, we'll be looking at opportunistic ways to repurchase debt," said executive vice president Stacy Dwyer.
During the year, the company reduced its land supply to 230,000 lots--a 5.6-year supply based on TTM closings. Of those holdings, 27% are optioned and 74% are owned. Factor in an impressive sale of 23,000 lots in Phoenix on an entitled project that closed for $70 million in November, and the land supply falls to 5.1 years.
Where the '07 effort has been focused on reducing spec inventory, the plan for '08 is to start and close homes on owned and developed lots in order to move through the land inventory. "We are going to pull our development dollars out of the ground. Our goal is to take care of Horton first and the third party developers later," Tomnitz said. "The vast majority of lots we'll be closing homes on in '08 will be finished lots. We'll be spending very little on developing."
The company projects land acquisition and development costs between $500 million and $1 billion for 2008. Comparatively, the fiscal '07 figure was $2.5 billion, and in fiscal '06, the company spent $5.2 billion.
On a low note, executives reported that the cancellation rate for each of the months in the quarter increased sequentially, which led to the company's can rate of 48%. "A lot of that was a function of cans in our backlog," said Tomnitz. "We have reviewed division by division and scrubbed our backlog the best we ever had as to the mortgage projects available today."
Predicting that next year will be more difficult than 2007, Tomnitz discussed the ways that the company has proactively prepared for the challenges. "I believe '08 will be more competitive in terms of pricing and volume," he said. "The continued tightening of mortgage products will also have a continued impact. Gross margins will continue to come under pressure, and it will be difficult to undercut that with continued reductions in SG&A."
Today, the company claims to be the leanest builder in the industry with an SG&A of 10.3%. "We are not holding excess SG&A relative to our internal projections for '08," Tomnitz said. However, he added that if the spring selling season doesn't align with internal projections, the company is prepared to make further adjustments to meet the market.
The company announced that it will no longer report its quarterly net new sales orders in advance of earnings. It also said it has realigned its regional structure with the creation of a new Midwest region, including operations in Colorado, Illinois, Minnesota, and Wisconsin. Previously, Colorado was in the Southwest region, and Illinois, Minnesota, and Wisconsin were included in the Northeast.
On Friday, Nov. 16, Horton appointed Bob G. Scott to its board of directors as an independent director. He is currently retired from his most recent position as CFO and COO of Summit Bancshares Inc. of Fort Worth, Texas, a position he held from 1994 to 2006. Scott has also been appointed as a member of the audit, compensation, and nominating and governance committees.
The company's stock hit a 52-week low of $8.23 two weeks ago. It was as high as $31.13 in February.