D.R. Horton, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the fiscal third quarter and nine months ended June 30, 2016, compared with the corresponding 2015 periods. D.R. Horton builds and sells homes across 78 markets in 26 states and also provides mortgage and title services.
Financial and operating results
| Metric | Three months ended June 30, 2016 | Nine months ended June 30, 2016 |
|---|---|---|
| Total revenue | $3.232 billion, up 10% | $8.416 billion, up 10% |
| Net income | $249.8 million, up 13% | $602.6 million, up 18% |
| Diluted EPS | $0.66, up 10% | $1.61, up 16% |
| Homebuilding pre-tax income | $349.2 million, up 16% | $861.3 million, up 20% |
| Financial services pre-tax income | $29.4 million, down 7% | $59.1 million, down 13% |
| Operating cash flow | $61.7 million, versus $357.4 million | $88.6 million, versus $188.6 million |
- Quarterly homebuilding revenue was $3.149 billion; 10,739 homes closed, up 9%, at an average price of $290,400. Nine-month closings were 28,062, up 8%, at an average price of $290,300.
- Home sales gross margin improved to 20.3% for the quarter and 20.1% for nine months, gains of 40 and 30 basis points. Homebuilding pre-tax margin was 11.1% and 10.5%, respectively.
- Quarterly net sales orders rose 13% to 11,714 homes; backlog increased 15% to 14,670 homes, valued at $4.380 billion. Cancellation rates were 21% for both the quarter and nine-month period.
- At June 30, cash was $906.8 million ($862.9 million homebuilding; $43.9 million financial services), versus $1.384 billion at September 30, 2015. Inventory rose to $8.504 billion from $7.807 billion, including construction in progress and finished homes of $4.371 billion.
- Homebuilding notes payable were $2.797 billion, down from $3.334 billion at September 30, 2015; homebuilding debt-to-total-capital was 30.0%, versus 36.1%. The company repaid $543.9 million of notes during the nine months, including two maturities. The $975 million revolving facility had no borrowings and $881.8 million available after letters of credit. Financial-services mortgage facility borrowings were $504.2 million.
- Quarterly dividends declared were $0.08 per share, versus $0.0625 in the prior-year quarter. Total equity was $6.513 billion at June 30, 2016.
Changes, outlook and commentary
- Management described demand as stable to moderately improved in most markets, while noting regional variation. Sales growth was particularly strong in the Southeast, including Florida; Midwest closings and profitability weakened.
- Homebuilding results improved on higher closings and revenues, modestly higher home prices, improved gross margins, and lower SG&A as a percentage of revenue. Financial-services revenue grew, but expense growth—partly due to staffing for new federal regulations—reduced segment pre-tax income.
- Management expects slow to moderate housing-demand growth if the U.S. economy continues to improve and expects gross margins to remain relatively stable under current conditions. These are conditional expectations, not quantified guidance. The company prioritizes profitability, annual positive operating cash flow, inventory returns, liquidity and debt control.
- Operating cash flow fell year over year, mainly as construction-in-progress and finished-home inventory absorbed $879.1 million, versus $252.1 million in the prior-year period. Management attributed the buildup to homes under construction to support future closings.
- Inventory and land-option charges were $8.1 million for the quarter and $16.0 million for nine months, below prior-year amounts of $15.4 million and $34.0 million. The nine-month period also included a $4.5 million gain on sale of debt securities.
- Land and lot option contracts covered approximately $3.4 billion of remaining purchase price, backed by $136.8 million in deposits; $34.6 million of purchase price was subject to specific-performance provisions. Unsold homes in inventory were approximately 11,300, including about 3,100 completed.
Risks and contingencies
- Housing cyclicality, weakening employment or demand, reduced affordability, higher mortgage rates, tighter lending, credit-market constraints, land and labor costs, regulation, competition, substantial debt, and execution of growth plans could affect results.
- Legal-claim reserves were $426.4 million, approximately 99% related to construction defects, with $97.5 million of related estimated insurance receivables. Management cautioned that claim frequency, settlement costs and insurance recoveries are uncertain; losses beyond reserves could materially affect future earnings and liquidity. Warranty liability was $93.7 million.
- The company had $929.6 million of surety bonds and $96.1 million of letters of credit supporting contractual performance. An EPA stormwater compliance matter could result in sanctions management did not expect to be material; no liability was recorded because the cost could not be reasonably estimated.
- Mortgage repurchase obligations and the mortgage facility’s renewal or extension create financial-services risks. The company disclosed concentration among loan purchasers: four entities bought approximately 92% of loans sold in the nine-month period, with one purchasing 27%.
- Management reported compliance with debt and facility covenants and effective disclosure controls as of June 30, 2016. The filing notes that actual results may differ materially from forward-looking expectations.
Important facts for investors to verify
- Whether inventory growth and unsold-home levels convert into closings and operating cash flow without margin pressure.
- Whether sales growth, backlog and pricing trends remain durable across regions, especially in weaker Midwest and Southwest markets.
- Whether legal, construction-defect and warranty claims—and related insurance recoveries—remain consistent with recorded estimates.
- Debt maturities, covenant headroom, revolving-credit availability and renewal capacity of the mortgage repurchase facility.
- Whether mortgage-related expenses, purchaser concentration and regulatory compliance costs continue to weigh on financial-services profitability.