D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2018; filed April 30, 2018. Financial statements are unaudited. D.R. Horton is a national homebuilder operating in 79 markets across 26 states, with land development and mortgage/title services. Comparisons below are year over year unless noted.
Financial performance and position
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Revenue | $3.795 billion, up 17% | $7.128 billion, up 16% |
| Income before taxes | $444.8 million, up 26%; 11.7% of revenue versus 10.9% | $836.1 million, up 24%; 11.7% of revenue versus 10.9% |
| Net income attributable to D.R. Horton | $351.0 million versus $229.2 million | $540.3 million versus $436.1 million |
| Diluted earnings per share | $0.91 versus $0.60 | $1.41 versus $1.15 |
| Home sales gross margin | 20.8%, up 1.0 percentage point | 20.8%, up 1.0 percentage point |
- Homebuilding: Quarterly homes closed rose 15% to 12,281; home sales revenue rose 16% to $3.672 billion. Net orders increased 13% to 15,828 homes, and backlog grew 8% to 15,841 homes, valued at $4.834 billion. Average closing price was $299,000.
- Cash flow: Operating cash used was $98.8 million for the six months, versus $135.7 million used in the prior-year period. Homebuilding generated $90.7 million of operating cash, while Forestar used $150.2 million on the segment reporting basis. Inventory investment was a significant cash use.
- Balance sheet at March 31: Cash and cash equivalents were $1.011 billion, with $55.4 million of restricted cash; inventory was $10.144 billion; total assets were $13.218 billion; notes payable were $3.234 billion; and total equity was $8.372 billion.
- Debt and liquidity: Total debt-to-capital was 28.3%; homebuilding debt-to-capital was 24.2%. The $1.275 billion homebuilding revolver had $175 million outstanding and about $1.0 billion available after letters of credit. The company reported compliance with debt covenants. Mortgage repurchase facility borrowings were $489.8 million, at 3.7%, with maturity extended to February 22, 2019.
- Capital returns: The company repurchased 1.0 million shares for $47.9 million during the six months and declared quarterly dividends of $0.125 per share.
Material changes and unusual items
- D.R. Horton acquired a 75% controlling interest in Forestar on October 5, 2017, for $558.3 million in cash. Forestar is consolidated; the acquisition added $29.2 million of goodwill and noncontrolling interests. Management expects the relationship to increase access to optioned land and finished lots.
- Second-quarter homebuilding inventory and land-option charges totaled $30.1 million, including a $24.5 million settlement of a land-transaction dispute. Six-month charges were $33.8 million, versus $14.5 million a year earlier.
- Forestar sold assets in February for $232 million; net proceeds were $217.5 million and the consolidated gain was $0.7 million. Consolidated investing cash flow also included acquisition payments, partly offset by asset-sale proceeds.
- The Tax Cuts and Jobs Act remeasurement resulted in a $108.7 million tax charge in the quarter ended December 31, 2017. The six-month effective tax rate was 35.5%; management estimated approximately 25% for fiscal 2018 excluding that charge. The second-quarter effective rate was 21.1%.
- Financial-services pretax income declined to $31.4 million for the quarter and $53.7 million for six months, despite revenue growth. Management cited competitive mortgage pricing and lower gains relative to origination volume.
Outlook, commentary, and risks
- Management described housing demand as stable to moderately improved in most markets, with variation by local economic conditions. It cited particularly strong demand for affordable entry-level homes and intends to expand offerings across buyer segments.
- The company aims to grow revenue and profitability, generate positive annual operating cash flow, manage inventory returns, and keep homebuilding debt-to-capital below 35%; it expected the ratio to remain significantly below that level through fiscal 2018. No specific revenue or earnings guidance was provided.
- Management cautioned that results depend on local and national housing conditions, employment, affordability, mortgage rates and lending standards. Other stated risks include land and inventory exposure, construction costs and labor availability, financing access, competition, regulation, warranty and construction-defect claims, and debt covenant compliance. Results are seasonal, and quarterly performance may not indicate full-year results.
- At March 31, land and lot option contracts represented approximately $5.1 billion of remaining purchase price, supported by $282.4 million of deposits; $44.9 million of the remaining purchase price was subject to specific-performance provisions. Unsold completed homes numbered approximately 3,800.
- Reserves for legal claims were $443.6 million, mostly related to construction defects; management said losses beyond recorded reserves cannot be reasonably estimated and could adversely affect earnings and liquidity. The company also disclosed ongoing DOJ communications concerning FHA loan underwriting and quality controls; no formal claim amount, penalty or fine had been asserted.
Important facts for investors to verify
- Whether sales orders and backlog convert to closings, including the 19% quarterly cancellation rate and buyer financing contingencies.
- Inventory growth, cash conversion, unsold completed homes, and the economics of the $5.1 billion optioned-land purchase pipeline.
- Whether Forestar delivers the expected lot-supply and operating benefits, and the impact of its noncontrolling interests and debt.
- Mortgage repurchase facility renewal and capacity, as well as concentration among mortgage-loan purchasers.
- Potential changes to construction-defect and other legal reserves, the DOJ FHA inquiry, and any further tax-accounting adjustments.