D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2012; comparison is with the corresponding 2011 periods. The company is a U.S. homebuilder operating in 25 states and 73 markets, with mortgage and title services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Consolidated revenue | $1,150.0; prior year $999.2 | $3,017.8; prior year $2,538.5 |
| Income before taxes | $72.2; prior year $28.9 | $143.7; prior-year loss $21.8 |
| Income tax benefit | $715.6 | $712.5 |
| Net income | $787.8; prior year $28.7 | $856.2; prior year $36.0 |
| Diluted EPS | $2.22; prior year $0.09 | $2.47; prior year $0.11 |
- Homebuilding revenue was $1,116.2 million for the quarter and $2,937.4 million year to date. Quarterly homes closed rose 9% to 4,957; nine-month closings rose 14% to 13,315.
- Home sales gross margin was 18.0% for the quarter and 17.5% for the nine months, up 150 and 130 basis points, respectively. Homebuilding pre-tax income was $58.3 million for the quarter and $118.0 million year to date. Financial services pre-tax income was $13.9 million and $25.7 million, respectively.
- Tax item materially boosts reported earnings: the company reduced its deferred-tax-asset valuation allowance by $716.7 million, recognizing that the substantial majority of deferred tax assets were more likely than not to be realized. The large net income and EPS figures therefore are not representative of pre-tax operating earnings alone.
- Nine-month operating cash flow was negative $177.2 million, compared with negative $75.3 million in 2011; management attributed the outflow mainly to investment in land/lots and homes under construction. Investing cash flow was negative $8.1 million and financing cash flow was positive $357.6 million.
- At June 30, cash and cash equivalents totaled $904.9 million, including $884.3 million in homebuilding and $20.6 million in financial services; marketable securities were $283.7 million. Homebuilding notes payable were $1,948.6 million and the mortgage repurchase facility balance was $146.7 million. Net homebuilding debt to total capital was 18.3%; gross homebuilding debt to total capital was 35.8%.
- Total assets were $6,657.0 million and total equity was $3,491.6 million. Homebuilding inventory was $3,861.6 million, up from $3,449.7 million at September 30, 2011.
Material changes versus the prior comparable period
- Quarterly net sales orders increased 25% by homes and 32% by value; nine-month orders increased 20% and 27%, respectively. Backlog at June 30 was 7,311 homes, valued at $1,654.8 million, up 31% by homes and 40% by value year over year.
- Quarterly home sales revenue rose 14%; the average closing price increased 5% to $225,000. Nine-month home sales revenue rose 19%; the average closing price increased 4% to $220,100.
- Inventory impairments and land-option cost write-offs declined to $2.5 million for the quarter and $4.7 million year to date, from $9.9 million and $32.6 million, respectively.
- Homebuilding interest expense recognized directly in earnings declined to $6.2 million for the quarter and $18.7 million year to date, from $10.1 million and $41.0 million. Homebuilding debt increased from $1,588.1 million at September 30, 2011, partly reflecting a $350 million note issuance in May 2012.
- Financial services revenue rose 42% for the quarter and 28% year to date; pre-tax income rose 107% and 104%, respectively.
Outlook, risks and unusual items
- Management expected to close more homes and generate more pre-tax income in fiscal fourth quarter 2012 than in the June quarter, based on the backlog and current sales pace. This is management’s expectation, not formal quantified annual guidance.
- Management said demand remained low by historical standards and expected near-term improvement to be uneven across markets. It said that, if conditions did not deteriorate, its strategy could support profitable growth while maintaining liquidity through the rest of fiscal 2012 and into fiscal 2013.
- Key risks include economic or housing-market weakness, unemployment, higher mortgage rates or tighter lending, land/material/labor costs, inventory impairments, substantial debt and refinancing/covenant risks, and uncertainty in warranty and construction-defect claims.
- Legal-claim reserves were $539.9 million, primarily for construction defects, with estimated insurance receivables of $220.8 million. Management said actual claims and insurance recoveries could differ significantly from estimates and it could not reasonably estimate potential losses above recorded reserves. Chinese-drywall liabilities were $0.6 million; the company was also involved in related lawsuits. A Department of Labor investigation was pending, with outcome and potential cost not estimable.
- A February 2012 software security breach in the Internet Loan Prequalification System could have exposed customer data; the company reported no evidence that data had been accessed or exported. It cautioned that future breaches or system disruptions could harm its business.
- About 73% of mortgage loans sold in the nine-month period went to one major financial institution, creating purchaser-concentration risk. The mortgage repurchase facility was renewed through March 3, 2013; its capacity was $180 million committed, with increases to $225 million available on an uncommitted basis.
- Other notable items: the board authorized new repurchase programs of up to $500 million of debt and $100 million of common stock through July 31, 2013. No common shares had been repurchased under the prior authorization as of June 30. The quarterly dividend was $0.0375 per share.
Important facts for investors to verify
- How much future taxable income supports realization of the deferred tax assets, and how earnings look excluding the $716.7 million valuation-allowance release.
- Whether sales, backlog conversion, pricing and gross-margin improvements continue, especially given backlog contracts can be cancelled and mortgage lending remains restrictive.
- Cash generation as investment in land, lots and construction grows, and the evolution of homebuilding debt and leverage.
- Changes in construction-defect reserves, insurance recoveries and the unresolved Department of Labor investigation.
- Mortgage-loan purchaser diversification, repurchase exposure and renewal or replacement of the mortgage repurchase facility.