D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013; comparisons are with the three months ended December 31, 2012, unless otherwise noted. D.R. Horton is a homebuilder operating in 77 markets across 27 states and also provides mortgage and title services. Financial statements are unaudited.
Financial and operating performance
- Revenue: Consolidated revenue rose 31% to $1.671 billion. Homebuilding revenue increased 33% to $1.636 billion; financial-services revenue declined 16% to $35.0 million.
- Profit: Pre-tax income increased 76% to $189.7 million; net income rose 86% to $123.2 million. Diluted EPS was $0.36, up from $0.20.
- Margins: Home sales gross margin improved 350 basis points to 22.3%; total homebuilding gross margin was 22.1%, versus 18.7%. Homebuilding pre-tax margin increased to 11.1% from 7.3%. Financial-services pre-tax income fell 56% to $7.8 million.
- Homebuilding activity: Homes closed increased 19% to 6,188, and average closing price rose 12% to $263,500. Net sales orders increased 4% in units and 14% in value to $1.503 billion. Backlog rose 5% to 7,684 homes, valued at $2.114 billion. The cancellation rate increased to 23% from 22%.
- Cash flow: Operating activities used $7.5 million, compared with $656.5 million used in the prior-year quarter, when inventory investment was much higher. Investing activities used $57.3 million, including $34.5 million for the Regent Homes acquisition. Financing activities used $51.6 million. Cash and cash equivalents were $820.1 million at quarter-end; restricted cash was $81.1 million.
- Liquidity and debt: Homebuilding notes payable were $3.276 billion. Homebuilding debt to total capital was 43.8%; net homebuilding debt to total capital was 37.1%. The $725 million revolving credit facility had no borrowings outstanding, with $68.9 million of letters of credit issued; the company reported covenant compliance.
- Balance sheet: Total assets were $8.927 billion, total liabilities $4.727 billion, and total equity $4.200 billion. Homebuilding inventories increased to $6.496 billion from $6.197 billion at September 30, 2013.
Material changes and notable items
- Improved homebuilding results reflected more closings, higher average prices, reduced sales incentives, and lower warranty and construction-defect costs as a percentage of revenue. Management attributed about 200 basis points of the home-sales margin improvement to pricing and incentives and about 110 basis points to lower warranty and construction-defect costs.
- Financial-services earnings weakened: mortgage capture rate declined to 49% from 59%, and gains from mortgage sales and servicing rights fell 25% net of recourse expense, partly due to pricing pressure and unusually strong prior-year loan-sale execution.
- In October 2013, D.R. Horton acquired Regent Homes’ North Carolina homebuilding operations for $34.5 million cash. The acquisition added inventory, lots, optioned lots, and a 213-home backlog.
- The company repaid $145.9 million of 6.125% senior notes on January 15, 2014. A further $637.8 million of senior notes were scheduled to mature during the remainder of fiscal 2014, including $499.9 million of convertible notes due May 15, 2014. Management intended to satisfy conversion obligations with shares, though it retained the option to use cash or a combination.
- The mortgage subsidiary’s $300 million repurchase facility, with $185.8 million outstanding, was due to mature February 28, 2014. Management said it was discussing renewal and expected an extension on similar terms.
- Legal-claims reserves were $469.6 million, mostly for construction-defect matters, and related insurance receivables were $148.1 million. Management cautioned that actual claims and insurance recoveries could differ significantly from estimates and said it could not reasonably estimate losses beyond recorded reserves.
Outlook, risks, and contingencies
- Management described demand as improved in many markets but said sales-volume growth had moderated, citing higher mortgage rates, higher home prices, and efforts to align sales with construction. It expected slow-to-moderate housing-demand growth where employment is growing, with outcomes varying by market.
- The company expected average home-price increases in fiscal 2014 to be more limited than in fiscal 2013. It warned that rising construction costs, slower price growth, or higher borrowing costs could reduce gross margins during the remainder of fiscal 2014.
- Management said inventory investment should grow more slowly than in fiscal 2013, while continuing to adjust investments to market conditions. It expected its strategy to support profitable growth and a strong balance sheet and liquidity position in fiscal 2014; this is forward-looking, not a quantified earnings forecast.
- Principal risks include housing and economic weakness, affordability and mortgage-rate changes, tighter mortgage lending, land and inventory exposure, construction costs and labor or material availability, substantial debt and covenant requirements, construction-defect claims, and the ability to renew mortgage financing. Results are seasonal, and the first quarter is not necessarily indicative of the full year.
- Land and lot option contracts carried approximately $1.9 billion of remaining purchase price, backed by $43.8 million of deposits and other instruments. A limited number, representing $13.1 million of remaining purchase price, had specific-performance provisions.
- No community impairment charges were recorded in the quarter, though $2.6 million of deposits and pre-acquisition costs on expected-to-be-terminated land options were written off.
Important facts for investors to verify
- Whether home closings, sales orders, and backlog convert to revenue, especially given the 23% cancellation rate and market-level variation.
- Whether the 22.3% home-sales gross margin is sustainable as pricing gains moderate and construction or financing costs change.
- Completion of the mortgage repurchase facility renewal and funding or conversion of the fiscal 2014 note maturities.
- Trends in legal-claims reserves, construction-defect costs, and the recoverability of related insurance receivables.
- Inventory growth, unsold completed homes, land-option commitments, and operating cash generation as investment levels evolve.