D.R. Horton, Inc. — Form 10-Q Summary
Business context and reporting period
National homebuilder operating in 72 markets across 26 states, with mortgage and title services primarily supporting its homebuyers. This filing covers the quarter and nine months ended June 30, 2010, in fiscal 2010; prior-period comparisons are to the corresponding 2009 periods. Dollar amounts are in millions unless stated otherwise.
Financial results and key metrics
- Quarter revenue: Consolidated revenue was $1,406.1, up 51% year over year. Homebuilding revenue was $1,378.3; financial-services revenue was $27.8.
- Quarter earnings and margins: Net income was $50.5 ($0.16 diluted per share), versus a net loss of $143.8 ($0.45 per share). Homebuilding home-sales gross margin rose to 17.2% from 11.3%; total homebuilding gross margin was 15.0%, compared with a 0.9% loss. Pretax income was $46.3.
- Nine-month results: Consolidated revenue was $3,451.7, up 31%; net income was $253.9 ($0.78 diluted per share), versus a net loss of $314.9. Home-sales gross margin was 17.4%, up from 13.4%.
- Drivers: Quarter home closings increased 60% to 6,805, while average selling price fell 4% to $202,500. Nine-month closings increased 40% to 16,594, with average price down 5% to $203,800. Lower construction costs, improved volume, lower impairments, and SG&A leverage supported results.
- Cash flow: Operating cash flow for nine months was $587.1, down from $1,102.0. Investing used $318.6, including $299.4 of marketable-security purchases; financing used $833.3, principally reflecting debt repayments. Cash and equivalents declined $564.8 to $1,392.5.
- Liquidity and debt: Homebuilding cash and marketable securities totaled about $1.7 billion. Homebuilding notes payable were $2,214.7, down from $3,076.6 at September 30, 2009; the separate mortgage repurchase facility had $152.5 outstanding. Net homebuilding debt to total capital was 17.5%; gross was 45.6%. The company reported compliance with public-debt restrictions and mortgage-facility covenants.
- Other balance-sheet items: Total assets were $6,211.4 and total equity $2,636.8 at June 30. Inventory was $3,565.0. The company had $298.2 in available-for-sale securities, mostly maturing within 12 months.
Material changes versus prior comparable periods
- Quarter and nine-month results turned profitable from prior-year losses; homebuilding pretax income was $37.4 and $84.6, respectively, versus losses of $166.2 and $315.1.
- Inventory impairments and land-option write-offs fell to $30.3 for the quarter and $33.9 for nine months, from $110.8 and $215.2, respectively.
- Net sales orders fell 3% to 4,921 homes in the quarter, despite increasing 28% to 15,396 homes for nine months. Quarter-end backlog was 4,430 homes worth $954.4, down 18% in units and 15% in value year over year. Quarter cancellation rate rose to 28% from 26%.
- Financial-services pretax income was $8.9 for the quarter and $16.6 for nine months, compared with $2.8 and a $12.6 loss. Nine-month operating cash flow was lower, partly because prior-year cash generation included larger inventory reductions and tax refunds.
Outlook, risks, contingencies and unusual items
- Management described the housing outlook as cautious and uncertain. Sales demand dropped sharply after the federal homebuyer tax credit expired April 30 and remained weak in July. If weak demand persisted, management expected fourth-quarter fiscal 2010 sales volume, closings, and revenue to be below the prior-year quarter; it also expected significantly fewer closings than in the June quarter. No quantified earnings or revenue guidance was provided.
- Management planned to preserve liquidity, control land and development spending, manage pricing and incentives, selectively build unsold homes, and emphasize finished-lot options. It expected less cash generation from asset reductions than in recent years.
- The nine-month tax benefit included a $208.0 benefit from a law allowing extended carrybacks of net operating losses. Deferred tax assets of $879.2 were fully offset by a valuation allowance. Unrecognized tax benefits were $76.3; up to $49.7 could potentially reverse within 12 months depending on an IRS ruling.
- Impairment estimates depend on pricing, sales pace, construction costs, and market conditions; further charges remain possible. Communities with $435.7 of carrying value had impairment indicators, and $29.1 of quarter charges were recorded.
- Contingencies include $553.4 of construction-defect and other litigation liabilities, partly offset by $240.2 of insurance receivables. Chinese drywall remediation involved about 90 identified or suspected homes, $3.3 accrued for remaining repairs, and several lawsuits; potential recoveries had not been recorded. Management said outcomes could differ materially from reserves.
- Land and lot options had $921.3 of remaining purchase price against $10.6 of deposits; $4.0 of purchase price was subject to limited specific-performance clauses. Surety bonds totaled $907.9; $56.1 of letters of credit were cash-collateralized.
- After quarter-end, the mortgage facility capacity was reduced to $100, with temporary increases permitted to $125. In July, the company repurchased $53.3 principal amount of notes. The board also authorized up to $500 of debt repurchases and $100 of share repurchases through July 31, 2011.
Important facts for investors to verify
- Whether post-tax-credit sales weakness persisted, especially against the reduced backlog and elevated cancellation rate.
- How much reported nine-month profit depended on the $208.0 tax-law benefit, and whether deferred tax assets or unrecognized tax benefits change.
- Whether home-sales margins and lower impairment charges hold up amid pricing pressure and potential additional inventory impairments.
- Debt maturities, subsequent repurchases, mortgage-facility capacity and renewal, and liquidity available after debt repayments.
- Actual exposure from construction-defect, Chinese drywall, mortgage-recourse, and land-option matters compared with recorded reserves and insurance recoveries.