D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2012. The company is a homebuilder operating in 25 states and 73 markets, with mortgage and title services primarily supporting its home sales. Amounts are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Three months ended March 31, 2012 | Six months ended March 31, 2012 |
|---|---|---|
| Consolidated revenue | $961.2, versus $751.1 in 2011 | $1,867.8, versus $1,539.3 |
| Pre-tax income | $42.3, versus a $30.8 loss | $71.5, versus a $50.7 loss |
| Net income | $40.6, versus $27.8 | $68.3, versus $7.4 |
| Diluted earnings per share | $0.13, versus $0.09 | $0.21, versus $0.02 |
| Home sales gross margin | 17.6%, versus 16.2% | 17.2%, versus 15.9% |
- Quarterly homebuilding revenue was $935.6, up 28%; home sales revenue rose 27%. Homes closed increased 21% to 4,240 and average closing price rose 5% to $219,500.
- Net sales orders increased 19% to 5,899 homes in the quarter; backlog was 6,189 homes valued at $1.358 billion, up 17% by homes and 25% by value year over year. Cancellation rate improved to 22% from 25%.
- Homebuilding SG&A was $127.5, up 3%, but declined to 13.6% of homebuilding revenue from 16.8%. Inventory impairment and land-option write-offs fell to $0.8 from $14.3 in the quarter.
- Financial services revenue increased 42% to $25.6 and pre-tax income increased to $7.7 from $1.6. Approximately 74% of mortgage loans sold in the six-month period went to one major financial institution.
- Six-month operating cash flow was negative $82.6, compared with negative $21.1 a year earlier; the filing attributes the use principally to land and lot investment and higher construction activity. Cash and cash equivalents ended at $679.8, down from $732.6 at fiscal year-end.
- Homebuilding cash and marketable securities totaled approximately $961 million. Homebuilding notes payable were $1.593 billion; net homebuilding debt to total capital was 18.9%, versus 18.0% at September 30, 2011. Total liabilities were $2.782 billion and total equity was $2.703 billion.
Changes versus prior comparable periods
- Revenue, closings, orders and homebuilding margins improved, and consolidated results shifted from pre-tax losses to pre-tax income in both the quarter and six-month period.
- Lower impairment charges, improved SG&A leverage and lower interest expense contributed to the turnaround. Six-month homebuilding interest expense was $12.5, down from $31.0.
- Six-month net income comparisons were also affected by the prior-year $58.1 tax benefit, primarily related to a favorable IRS ruling; current-period income tax expense was $3.2.
- Inventory increased to $3.637 billion from $3.450 billion at September 30, 2011; owned and controlled lots increased to 121,200 from 112,700.
Outlook, risks and unusual items
- Management described new-home demand as modestly improving but still low, with uneven conditions across markets. Based on backlog and current sales pace, it expected more closings in the second half of fiscal 2012 than in the first half and expected to continue generating pre-tax income. The filing cautions that industry seasonality makes interim results an unreliable guide to the full year.
- The company reported $816.4 of deferred tax assets fully offset by a valuation allowance. Management said sustained stable conditions and further positive evidence could support a significant allowance reduction in coming quarters; realization depends on future taxable income and is uncertain.
- Risks include a weak economy and housing market, unemployment, higher mortgage rates, tighter lending standards, substantial debt, inventory valuation and land commitments, and construction-defect and warranty claims. A deterioration in markets could require further inventory impairments; $383.2 of communities were evaluated for impairment during the quarter.
- Construction-defect and other litigation reserves were $534.7, with related insurance receivables of $217.4. The company said estimates are judgmental and actual costs could differ materially. It also faced Chinese drywall lawsuits and a Department of Labor investigation for which potential costs could not be estimated.
- A February 2012 security breach affected the Internet Loan Prequalification System. The company reported no evidence that customer data had been accessed or exported, but acknowledged potential financial, reputational and legal consequences.
- The mortgage repurchase facility was extended to March 3, 2013, with $180 committed capacity and possible uncommitted capacity up to $225; $163.8 was outstanding at quarter-end. Management said the company and mortgage subsidiary were in covenant compliance.
- The board authorized a quarterly dividend of $0.0375 per share, also approved for payment in May 2012. Debt repurchase authorization remaining at quarter-end was $412.1; the full $100 million common-stock repurchase authorization remained unused.
Key facts for investors to verify
- Whether backlog growth converts to closings while cancellations, pricing incentives and margins remain favorable.
- Whether operating cash use continues as inventory and land investment rise, and how that affects liquidity and leverage.
- Evidence supporting any deferred-tax-valuation-allowance release, including future taxable income and the timing of the expected federal tax refund.
- Adequacy of construction-defect, warranty, mortgage-repurchase and reinsurance reserves, and any developments in the labor investigation or lawsuits.
- Mortgage-loan sale capacity and terms, given the concentration of sales with one purchaser and the facility’s 2013 maturity.