D.R. Horton, Inc. — Q1 FY2011 Form 10-Q
Business context and period: National homebuilder operating in 72 markets across 26 states, with mortgage and title services. The unaudited quarter covered the three months ended December 31, 2010; comparisons are with the three months ended December 31, 2009 unless noted.
Key financial metrics
| Metric | Q1 FY2011 | Prior-year quarter / comparison |
|---|---|---|
| Consolidated revenue | $788.2 million | $1,132.2 million; down 30% |
| Net income (loss) | $(20.4) million; $(0.06) per diluted share | $192.0 million; $0.56 per diluted share, including a $149.2 million income-tax benefit |
| Pre-tax income (loss) | $(19.9) million | $42.8 million |
| Homebuilding revenue | $767.0 million | $1,108.9 million; down 31% |
| Home sales and closings | $761.1 million; 3,637 homes closed; average price $209,300 | $1,108.2 million; 5,529 homes; average price $200,400 |
| Home sales gross margin | 15.6% | 17.1%; down 150 basis points |
| Homebuilding SG&A | $118.9 million; 15.5% of revenue | $128.4 million; 11.6% of revenue |
| Operating cash flow | $49.5 million | $220.0 million |
| Cash and marketable securities | $1.497 billion in homebuilding; consolidated cash was $1.221 billion | Homebuilding cash and securities were $1.6 billion at September 30, 2010 |
| Homebuilding notes payable | $2.029 billion | $2.085 billion at September 30, 2010 |
| Net homebuilding debt / total capital | 17.0% | 16.1% at September 30, 2010; 28.0% a year earlier |
| Total assets / liabilities / equity | $5.727 billion / $3.136 billion / $2.591 billion | At September 30, 2010: $5.939 billion / $3.316 billion / $2.623 billion |
Material changes versus prior period
- Net sales orders fell 17% to 3,363 homes ($705.6 million); the cancellation rate rose to 28% from 26%. Backlog was 3,854 homes valued at $795.4 million, down 7% in homes and 10% in value year over year.
- Home closings declined 34%. Higher average closing prices partly offset lower volume, but homebuilding gross profit fell and the business recorded a $24.1 million pre-tax loss versus $36.1 million income.
- Inventory impairment charges were $6.4 million versus $1.7 million; land-option deposit and pre-acquisition cost write-offs were $2.0 million versus a $0.5 million recovery. Combined, these items reduced homebuilding gross margin by about 110 basis points.
- Financial services revenue declined 9% to $21.2 million and pre-tax income fell 37% to $4.2 million, mainly reflecting lower loan volumes and related revenues.
- Cash from operations decreased to $49.5 million. The current quarter benefited notably from a $65.3 million decrease in mortgage loans held for sale; the prior-year quarter included a federal tax refund and stronger operating results.
- Homebuilding debt declined $56.3 million during the quarter. The company repurchased $62.5 million principal amount of notes for $63.8 million, recording a $1.5 million early-retirement loss.
Outlook, risks and unusual items
- Management described housing demand as very weak and the timing of a sustainable recovery as uncertain. It expected fiscal 2011 home sales, closings and profitability to be below fiscal 2010; it also anticipated lower operating cash generation than in recent years. Management expected possible seasonal improvement in spring and summer sales but maintained a cautious outlook.
- Stated strategy includes preserving liquidity, managing prices and incentives, emphasizing affordable products and finished-lot options, limiting land-development spending, controlling inventory and aligning SG&A with production.
- Principal market risks include weak economic conditions, unemployment, foreclosures, competition from existing homes, mortgage-credit availability and rates, and cancellation rates. These factors may affect sales, pricing, inventory values and impairment assumptions.
- Communities with $434.3 million of carrying value showed impairment indicators; $26.2 million of community inventory was impaired. Management warned that further deterioration or changes in prices, sales pace and costs could require additional impairments.
- Homebuilding senior notes due in 2011 included $177.0 million carrying value at quarter-end. DHI Mortgage’s $100 million repurchase facility, with permitted temporary capacity up to $125 million, matured March 4, 2011; the company reported covenant compliance and said liquidity depends on renewal, extension or replacement financing.
- Net deferred tax assets of $905.6 million were fully offset by a valuation allowance. Unrecognized tax benefits and related interest totaled $82.9 million; a favorable IRS ruling could reduce these amounts by up to $59.2 million and produce a tax benefit.
- Construction-defect and other litigation liabilities were $561.8 million, with related insurance receivables of $246.5 million. The company stated outcomes could exceed estimates. Chinese-drywall remediation had $2.0 million accrued; approximately 90 homes were identified, $5.5 million had been spent, and related lawsuits were in early stages.
- Other commitments included $818.7 million of surety bonds, $44.2 million of letters of credit, and land/lot options with $994.7 million remaining purchase price. Only a limited subset of options, representing $6.8 million, had specific-performance clauses.
Important facts for investors to verify
- Whether demand, cancellations, backlog and home closings tracked management’s cautious FY2011 expectations after quarter-end.
- Whether the mortgage repurchase facility was renewed, extended or replaced before maturity, and on what terms.
- Subsequent impairment testing and the sensitivity of inventory values to selling prices, incentives, absorption and development costs.
- Developments in construction-defect, Chinese-drywall, mortgage-recourse and reinsurance claims relative to recorded reserves and insurance recoveries.
- The IRS ruling outcome, tax examinations and whether deferred tax assets remain subject to a full valuation allowance.
- Cash generation, debt maturities and liquidity needs, including the effect of using cash to rebuild inventory or fund operations.