D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter, three months ended December 31, 2014. Unaudited results are compared with the three months ended December 31, 2013 unless otherwise noted. The company builds and sells homes in 79 markets across 27 states and also provides mortgage and title services.
Financial results and key metrics
| Metric | Q1 FY2015 | Prior-year quarter |
|---|---|---|
| Total revenue | $2.303 billion | $1.671 billion |
| Homebuilding revenue | $2.253 billion | $1.636 billion |
| Financial services revenue | $49.6 million | $35.0 million |
| Pre-tax income | $220.7 million | $189.7 million |
| Net income | $142.5 million | $123.2 million |
| Diluted EPS | $0.39 | $0.36 |
| Operating cash flow | $(129.0) million | $(7.7) million |
- Home closings rose 29% to 7,973; average closing price increased 7% to $281,000. Home sales revenue grew 37%.
- Net sales orders increased 35% to 7,370 homes, valued at $2.108 billion; cancellation rate was 24%, up from 23%. Backlog rose 21% to 9,285 homes, valued at $2.726 billion.
- Home sales gross margin fell 250 basis points to 19.8%; total homebuilding gross margin was 19.5%, and homebuilding pre-tax margin was 9.1%. Homebuilding SG&A declined to 10.6% of revenue from 11.2%.
- Financial services pre-tax income increased 87% to $14.6 million. Mortgage capture rate remained 49%.
- Cash and cash equivalents totaled $541.0 million, including $517.7 million in homebuilding and $23.3 million in financial services. Homebuilding inventory was $7.989 billion, up from $7.701 billion at September 30, 2014.
- Homebuilding notes payable were $3.403 billion; the financial services mortgage repurchase facility had $323.7 million outstanding. Gross and net homebuilding debt-to-total-capital ratios were 39.3% and 35.4%, respectively.
- Stockholders’ equity was $5.261 billion; total equity, including noncontrolling interests, was $5.264 billion. A quarterly dividend of $0.0625 per share was paid.
Changes versus the prior comparable period
- Revenue increased 38% overall, with growth driven mainly by more homes closed and the expansion of operations; the May 2014 Crown Communities acquisition contributed to East and Southeast results.
- Pre-tax income rose 16% and net income rose 16%. Financial services benefited from higher loan-sale gains and improved secondary-market execution.
- Despite higher home sales gross profit dollars, home sales gross margin contracted as average home costs rose faster than selling prices. Management said moderating price increases and rising land and construction costs could pressure future margins.
- Operating cash use widened, principally reflecting investment in homes and land/lots and lower accounts payable and accrued liabilities. Investing cash use decreased to $13.9 million from $57.3 million, which included the prior-year Regent Homes acquisition payment.
- Homebuilding cash declined from $632.5 million at fiscal year-end; homebuilding debt increased from $3.324 billion. Gross leverage was broadly stable versus September 2014, while net leverage increased from 34.5% to 35.4%.
Outlook, risks and notable items
- Management described demand as stable to moderately improved across most markets and expects slow to moderate overall housing-demand growth, with variation by local economic conditions. It said the company is positioned for profitable growth in fiscal 2015 but provided no specific earnings or revenue guidance.
- Management’s long-term target is to keep net homebuilding debt to total capital within or below 40%–45%, while noting it may exceed that range temporarily. It expects existing cash and credit facilities to cover near-term needs.
- The $975 million revolving credit facility had $375 million drawn and $94 million of letters of credit outstanding, leaving $506 million available. The company reported compliance with debt covenants.
- The mortgage repurchase facility had a February 27, 2015 maturity; management expected to renew and extend it on similar terms. Its continued availability is important to financial services liquidity. The company also had $157.7 million of senior notes maturing during the remainder of fiscal 2015.
- Legal-claims reserves were $457.6 million, approximately 99% related to construction defects; related insurance receivables were $137.7 million. Management cautioned that actual claim frequency, settlement costs, and insurance recoveries could differ significantly, and it could not reasonably estimate possible losses above reserves. Warranty liabilities were $65.9 million.
- Land and lot option contracts represented approximately $2.2 billion of remaining purchase commitments, secured by $64.2 million of deposits. A limited set of contracts, covering $28.0 million of purchase price, had specific-performance provisions. Surety bonds totaled $922.5 million.
- The quarter included $3.8 million of inventory impairment charges, all in the West region, and $2.2 million of write-offs for land-option deposits and pre-acquisition costs. The filing also disclosed a prior-period cash-flow classification correction related to the Regent Homes acquisition, which management determined was not material and which did not affect the consolidated financial statements.
- Principal risks include weaker economic or housing conditions, reduced affordability or mortgage availability, higher interest rates, land and construction-cost pressures, construction-defect claims, access to capital, debt covenant compliance, and realization of deferred tax assets. Results are seasonal and the quarter is not necessarily indicative of the full year.
Important facts for investors to verify
- Whether order and backlog growth converts to closings, and whether the 24% cancellation rate changes.
- Whether home sales margins stabilize or continue to decline as costs, pricing, and incentives evolve.
- Renewal and terms of the mortgage repurchase facility before its February 27, 2015 maturity, and repayment or refinancing of near-term senior notes.
- Cash generation as inventory expands, together with land commitments, available revolver capacity, and debt leverage.
- Developments in construction-defect claims, reserve adequacy, and recoveries from insurers and subcontractors.