D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended December 31, 2017. Comparisons are with the three months ended December 31, 2016 unless stated otherwise. Amounts are in U.S. dollars.
Business context
D.R. Horton is a U.S. homebuilder operating in 79 markets across 26 states, with homebuilding, land development, mortgage and title services, and other activities. On October 5, 2017, the company acquired a 75% controlling interest in land developer Forestar and began consolidating its results.
Financial performance and liquidity
| Metric | Quarter | Prior-year quarter | Change or context |
|---|---|---|---|
| Revenue | $3,332.7 million | $2,904.2 million | Up 15% |
| Income before taxes | $391.2 million | $318.1 million | Up 23%; pretax margin was 11.7%, versus 11.0% |
| Income tax expense | $202.4 million | $111.2 million | Includes a $108.7 million charge from remeasuring deferred taxes after the Tax Cuts and Jobs Act |
| Effective tax rate | 51.7% | 35.0% | Elevated by the Tax Act-related charge |
| Net income attributable to D.R. Horton | $189.3 million | $206.9 million | Down 9% |
| Diluted EPS | $0.49 | $0.55 | Down 11% |
| Operating cash flow | $(75.0) million | $(28.2) million | Greater cash use, mainly reflecting investment in homes and land |
| Cash and cash equivalents | $920.3 million | $1,007.8 million at September 30, 2017 | Restricted cash was an additional $53.7 million |
| Notes payable | $3,258.1 million | $2,871.6 million at September 30, 2017 | Debt to total capital was 29.2%, versus 27.0% |
Home sales gross margin improved to 20.8% from 19.8%; homebuilding pretax income rose 27% to $373.8 million. Consolidated equity was $8.1 billion. The company reported $877 million of available capacity under its $1.275 billion homebuilding revolver at quarter-end and said it was in compliance with debt covenants.
Operating trends and material changes
- Home closings increased 15% to 10,788 and home sales revenue rose 14% to $3.185 billion. The average closing price declined 1% to $295,200.
- Net sales orders increased 16% to 10,753 homes; backlog rose 9% to 12,294 homes, valued at $3.764 billion. The cancellation rate was 22%, unchanged year over year.
- Homebuilding revenue rose across all six regions. Management cited Phoenix and Carolina markets as major contributors to higher sales and closings.
- Financial services revenue grew 4% to $81.0 million, while pretax income fell 16% to $22.2 million. Management attributed the weaker margin partly to mortgage pricing pressure and higher employee costs.
- Forestar contributed $30.8 million of revenue and $4.0 million of pretax income from the acquisition date through quarter-end. Acquisition-related costs included $5.3 million expensed by D.R. Horton in the quarter.
- Homebuilding lots controlled under option contracts reached 133,500, or 51% of owned and controlled lots. Total homebuilding inventory was $9.7 billion.
Outlook, risks and unusual items
- Management described demand as stable to moderately improved across most markets, while noting that conditions vary by market. It expects housing demand to depend on local economic conditions and stated a strategic focus on growth, profitability, positive annual operating cash flow, and managing inventory and pricing. The filing provides no specific revenue or earnings guidance.
- Management expected the fiscal 2018 effective tax rate to be approximately 26% excluding the $108.7 million Tax Act charge. The rate and deferred-tax estimates could change as additional information becomes available.
- The company expects to renew or extend DHI Mortgage’s $600 million repurchase facility before its February 23, 2018 maturity. Financial-services liquidity depends on renewal or other financing being available in sufficient capacity.
- Key risks include housing-market and affordability changes, higher mortgage rates or tighter lending, access to credit, land and construction costs, labor and supply availability, acquisition execution, and debt covenant compliance.
- Legal claims reserves were $419.7 million, approximately 98% related to construction defects; warranty liabilities were $149.4 million. Management cautioned that actual claims, costs, or insurance recoveries could differ materially from estimates.
- Land and lot option contracts carried approximately $5.0 billion of remaining purchase price, supported by $269.7 million of deposits; $35.4 million of remaining purchase price was subject to specific-performance provisions. Outstanding surety bonds were $1.2 billion and letters of credit were $114.9 million.
- On February 8, 2018, Forestar sold certain legacy assets for $232 million; the company said the sale would not materially affect fiscal 2018 earnings. The quarter also included a $13.4 million gain on sale of rental properties.
- The company noted homebuilding seasonality: it generally closes more homes and generates greater revenue and operating income in the third and fourth fiscal quarters, so first-quarter results may not represent the full year.
Important facts for investors to verify
- Whether home order growth and backlog convert into closings while the 22% cancellation rate and slightly lower average closing price are sustained.
- Whether homebuilding margin improvement persists and financial-services margins recover amid mortgage pricing competition and rising costs.
- How the Tax Act-related deferred-tax remeasurement and management’s approximately 26% fiscal 2018 tax-rate expectation develop.
- Whether the mortgage repurchase facility is renewed on suitable terms before maturity and whether liquidity and covenant headroom remain adequate.
- Forestar’s integration, land-development performance, purchase-accounting revisions, and execution of the master supply relationship.
- Changes in construction-defect reserves, warranty costs, option commitments, and other contingent exposures.