D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2013; comparative periods ended June 30, 2012. Amounts are in U.S. dollars unless stated otherwise.
Business context
D.R. Horton is a U.S. homebuilder operating in 78 markets across 27 states, with mortgage and title services primarily supporting its homebuyers. The filing describes improved demand and limited for-sale supply in most markets, alongside investment in land, lots, and homes to expand operations.
Financial and operating performance
| Metric | Quarter ended June 30, 2013 | Nine months ended June 30, 2013 | Prior-year comparison |
|---|---|---|---|
| Consolidated revenue | $1.693 billion | $4.399 billion | Up 47% and 46%, respectively |
| Income before taxes | $205.1 million | $455.1 million | Versus $72.2 million and $143.7 million |
| Net income | $146.0 million | $323.2 million | Versus $787.8 million and $856.2 million |
| Diluted EPS | $0.42 | $0.93 | Versus $2.22 and $2.47 |
| Homebuilding gross margin on home sales | 21.4% | 20.3% | Up 340 and 280 basis points |
| Operating cash flow | Not separately provided for the quarter | $(1.136) billion | $(174.0) million in prior-year nine-month period |
- Home sales revenue rose 46% for the quarter and 44% for the nine-month period. Closings increased 30% in both periods; average closing prices rose 12% and 11%, respectively.
- Net sales orders increased 12% in the quarter and 27% year to date. Quarter-end backlog was 9,911 homes valued at $2.584 billion, up 36% by units and 56% by value year over year.
- Homebuilding pre-tax income was $185.4 million for the quarter and $403.0 million year to date. Financial services pre-tax income was $19.7 million and $52.1 million, respectively.
- The lower net income versus 2012 primarily reflects the prior-year tax benefit: 2012 included a substantial deferred-tax valuation allowance reversal. 2013 income tax expense was $59.1 million for the quarter and $131.9 million year to date, versus tax benefits of $715.6 million and $712.5 million in the comparable 2012 periods.
- Nine-month cash used in operations mainly reflected increased inventory: $692.1 million for construction in progress and finished homes and $1.047 billion for residential land and lots. Investing activities provided $209.0 million, including net proceeds of $296.5 million from marketable securities; financing activities provided $517.6 million.
Balance sheet, debt, and liquidity
- At June 30, cash and cash equivalents totaled $638.0 million, including $607.8 million in homebuilding and $30.2 million in financial services. Total assets were $8.287 billion; total liabilities were $4.380 billion; total equity was $3.908 billion.
- Homebuilding notes payable were $2.864 billion, up from $2.305 billion at September 30, 2012. Financial services had $219.7 million outstanding under its mortgage repurchase facility. Homebuilding debt to total capital was 42.3%; net homebuilding debt to total capital was 36.6%, compared with 39.1% and 21.4%, respectively, at September 30, 2012.
- The $600 million unsecured revolving credit facility had no borrowings outstanding and $51.2 million of letters of credit issued at quarter-end. The company reported compliance with debt covenants. Management stated that available cash and credit facilities were sufficient for near-term needs.
- The mortgage repurchase facility was expanded to $300 million and matures February 28, 2014; $219.7 million was outstanding at 2.8%. Management noted that financial-services liquidity depends on renewing or extending this facility or obtaining other financing.
- The company issued $700 million of senior notes in February 2013 and repaid $171.7 million of 6.875% notes in May. A $2.0 billion-plus debt principal schedule and maturities are detailed in the filing.
Changes, outlook, risks, and unusual items
- Management attributed stronger results to higher closings and prices, improved margins, and operating leverage. It said recent sales-order growth moderated in the quarter, partly reflecting higher mortgage rates and efforts to align sales pace with construction and raise prices.
- Management expected profitability to grow in fiscal 2013 and 2014 if market conditions remained stable or improved, while emphasizing uncertainty about the duration and consistency of the recovery. No specific numerical earnings or revenue guidance was provided.
- Owned and controlled lots increased to approximately 189,800 from 152,700 at September 30, 2012; homes in inventory rose to approximately 17,500 from 13,000. Management reported $1.7 billion-plus of increased land, lot, and home inventory investment during the first nine months.
- Key risks include higher mortgage rates, tighter mortgage availability, weaker economic or local housing conditions, land and construction cost or supply pressures, debt covenant and refinancing risks, and the possibility that housing recovery slows. Management also noted that seasonal activity usually increases closings and working-capital needs in the third and fourth fiscal quarters.
- Legal-claim reserves were $508.3 million, predominantly for construction-defect matters, with $192.8 million of related insurance receivables. Management said estimates are judgmental and actual claims or recoveries could differ materially; excess losses could adversely affect earnings and liquidity.
- Land and lot option contracts carried $39.4 million of deposits against approximately $2.1 billion of remaining purchase price; a limited subset representing $25.3 million of purchase price had specific-performance provisions. The company also had $671.0 million of surety bonds and $59.1 million of letters of credit.
- No homebuilding inventory impairment charges were recorded in the nine months, compared with $2.6 million in the prior-year period. Land-option deposit and cost write-offs were $4.0 million, versus $2.1 million.
- The company’s $753.2 million deferred-tax valuation allowance reversal in 2012 materially distorts year-over-year net income comparisons. Management also cited a possible further $2.4 million reduction in unrecognized tax benefits during fiscal 2013.
Important facts for investors to verify
- Whether order growth, backlog conversion, selling prices, and homebuilding gross margins persist as mortgage rates and affordability change.
- Whether inventory growth and land commitments generate adequate returns without increasing impairment exposure or weakening liquidity.
- Cash generation and the company’s ability to fund operating needs while managing rising homebuilding debt and near-term maturities.
- The sufficiency of construction-defect reserves and insurance recoveries, including outcomes on claims relating to homes closed during peak years.
- Mortgage repurchase-facility renewal, mortgage-loan purchaser concentration, and changes in repurchase or recourse losses.
- State deferred-tax asset realization and the timing and impact of remaining valuation allowances and tax-benefit changes.