D.R. Horton, Inc. — Form 10-Q Summary
Business context and reporting period
Reports the unaudited fiscal first quarter ended December 31, 2015, compared with the quarter ended December 31, 2014. D.R. Horton is a U.S. homebuilder operating in 79 markets across 27 states, with mortgage and title services primarily supporting its homebuyers. Results are seasonal and the quarter is not necessarily indicative of the full fiscal year.
Financial and operating results
| Metric | Quarter ended December 31, 2015 | Prior-year quarter |
|---|---|---|
| Total revenue | $2.416 billion | $2.303 billion |
| Homebuilding revenue | $2.361 billion | $2.253 billion |
| Financial services revenue | $55.3 million | $49.6 million |
| Income before taxes | $241.3 million | $220.7 million |
| Net income | $157.7 million | $142.5 million |
| Diluted EPS | $0.42 | $0.39 |
| Net cash used in operating activities | $1.5 million | $129.0 million |
- Home sales revenue rose 4% to $2.341 billion; 8,061 homes closed, up 1%, at an average price of $290,400, up 3%.
- Net sales orders increased 9% to 8,064 homes, with order value up 12% to $2.368 billion. Backlog rose 15% to 10,665 homes, valued at $3.174 billion. The cancellation rate was 23%, versus 24%.
- Home sales gross margin improved 10 basis points to 19.9%; total homebuilding gross margin was 19.9%, and homebuilding pre-tax margin was 9.7%, versus 9.1%.
- Financial services pre-tax income declined 16% to $12.3 million despite revenue growth; G&A expense increased 22% to $46.1 million.
- Cash and cash equivalents totaled $1.269 billion at quarter-end ($1.246 billion in homebuilding and $23.0 million in financial services). Homebuilding notes payable were $3.337 billion; financial services mortgage repurchase debt was $397.1 million. Total liabilities were $5.119 billion and equity was $6.061 billion.
- Homebuilding debt to total capital was 35.5%; net homebuilding debt to total capital was 25.7%. The company reported $871.1 million of available capacity on its $975 million revolving facility, with no borrowings outstanding and $103.9 million of letters of credit issued.
- Investing cash outflow was $22.2 million and financing cash outflow was $91.4 million. Cash dividends declared were $0.08 per share, up from $0.0625 in the comparable quarter.
Material changes versus the prior comparable period
- Consolidated pre-tax income increased 9%, net income increased 11%, and diluted EPS increased 8%.
- Homebuilding pre-tax income grew 11%; the Southeast was a leading contributor, with revenue up 15% and pre-tax income rising to $76.9 million. Midwest homebuilding revenue fell 5%, while West pre-tax income declined to $50.0 million from $53.9 million.
- Homebuilding SG&A declined to 10.3% of homebuilding revenue from 10.6%, helping support profitability. Warranty and construction-defect expense partly offset the benefit of higher selling prices in the overall home sales margin.
- Operating cash use improved substantially from $129.0 million to $1.5 million, but construction-in-progress and finished-home inventory used $290.3 million of cash, compared with $179.5 million a year earlier.
- Homebuilding inventory was $8.088 billion, up from $7.807 billion at September 30, 2015. Homes in inventory rose to 21,500 from 19,800; unsold homes increased to approximately 11,300, including 3,600 completed homes.
- Inventory impairment charges were $0.5 million, down from $3.8 million. Legal-claim reserves increased to $458.9 million from $451.0 million at September 30, 2015.
Outlook, risks, contingencies and unusual items
- Management expects fiscal 2016 revenue and profitability to grow at a lower rate than in fiscal 2015. It expects land and lot inventories to remain relatively consistent with, or slightly above, fiscal 2015 average levels and anticipates broadly stable gross margins under current conditions. No specific full-year revenue or EPS forecast is provided.
- Management described housing demand as stable to moderately improved across most markets, but uneven by region. It cited local economic conditions, employment, affordability, mortgage rates and lending standards as important influences, and said weaker conditions could reduce demand and results.
- The company expects to repay debt maturities using cash, operating cash generation and available facilities. It repaid $170.2 million of 5.625% senior notes on January 15, 2016; a further $372.7 million of senior notes was due before fiscal year-end. The $400 million mortgage repurchase facility was due to mature February 26, 2016; management expected renewal and extension on similar terms, but this was not yet completed in the filing.
- Land and lot option contracts had approximately $2.5 billion of remaining purchase price, supported by $88.7 million of deposits; most were expected to be purchased within three years. A limited group with $37.0 million of remaining purchase price had specific-performance provisions that may require purchase if sellers fulfill their obligations.
- Construction-defect and other legal reserves were $458.9 million; approximately 99% related to construction-defect matters. The company says estimates are subject to substantial uncertainty and that losses exceeding reserves could significantly harm future earnings and liquidity. Related estimated insurance receivables were $127.8 million; actual recoveries may differ from estimates.
- Mortgage loan repurchase and settlement reserves were $9.3 million for known and expected obligations. Management noted that actual repurchase activity and losses could differ from estimates. Three major financial entities bought approximately 72% of mortgage loans sold in the quarter, including one buyer that purchased 27%.
- The company had $1.0 billion of surety bonds and $107.1 million of letters of credit securing performance obligations. It also disclosed EPA stormwater notices concerning certain Southeast sites; the matter was at an early stage, potential costs could not be reasonably estimated, and no liability was recorded. The company did not expect any resulting sanction to be material.
- Management reported compliance with debt covenants and effective disclosure controls as of December 31, 2015. Key broader risks include housing and credit-market cycles, interest rates, land and labor costs, regulation, debt obligations, warranty and construction-defect claims, and mortgage financing availability.
Important facts for investors to verify
- Whether the mortgage repurchase facility was renewed or extended before its February 26, 2016 maturity, and on what terms.
- Repayment and funding of the remaining fiscal 2016 senior-note maturities, and the company’s subsequent cash, debt and leverage levels.
- Whether order growth converts into closings, given backlog contingencies, cancellations and the rise in unsold completed homes.
- Developments in construction-defect claims, reserve adequacy and insurance recoveries, including any changes to the $458.9 million legal reserve.
- Actual full-year revenue, profitability, margin and inventory performance versus management’s lower-growth outlook, including regional differences and operating cash flow.
- Progress on land-option purchases and any exposure under the contracts with specific-performance provisions.