Business Context and Reporting Period
Company: D.R. Horton, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: D.R. Horton is a national homebuilder operating in 77 markets across 27 states, primarily constructing and selling single-family detached homes. The company also operates a financial services segment providing mortgage financing and title agency services. The reporting period reflects a severe downturn in the homebuilding industry characterized by high inventory levels, elevated cancellation rates, weak consumer confidence, and credit tightening.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2009 | Six Months Ended Mar 31, 2009 |
|---|---|---|
| Consolidated Revenues | $778.0 million | $1,696.0 million |
| Net Loss | $(108.6) million | $(171.1) million |
| Net Loss Per Share (Basic/Diluted) | $(0.34) | $(0.54) |
| Homebuilding Gross Profit Margin | 13.3% (Home Sales) | 14.5% (Home Sales) |
| Inventory Impairments & Write-offs | $48.1 million | $104.4 million |
| Cash and Cash Equivalents | $1,515.2 million | $1,515.2 million (Ending Balance) |
| Notes Payable (Total Debt) | $2,912.0 million | $2,912.0 million (Ending Balance) |
| Net Cash Provided by Operating Activities | N/A | $978.6 million |
Material Changes Versus Prior Period
- Revenue Decline: Consolidated revenues decreased 53% for the three months and 50% for the six months ended March 31, 2009, compared to the prior year periods. Home sales revenue dropped 52% (quarterly) and 48% (six-month) due to a 47% and 42% decline in homes closed, respectively.
- Improved Loss Profile: While the company reported a net loss, the magnitude decreased significantly compared to the prior year. Net loss for the three months ended March 31, 2009, was $108.6 million, a substantial improvement from the $1.3 billion loss in the same period of 2008. This improvement was driven primarily by significantly lower inventory impairment charges ($48.1 million vs. $834.1 million in the prior year quarter).
- Inventory Reduction: The company aggressively reduced inventory levels. Homes in inventory declined by 4,800 to 10,300, and owned lots declined by 46,000 to 95,000 compared to the prior year.
- Debt Reduction: Homebuilding debt decreased by $713.2 million to $2.9 billion. The company repaid $452.9 million in senior notes due in early 2009 and repurchased an additional $220.5 million of senior notes prior to maturity, realizing an $8.4 million gain.
- Financial Services Deterioration: Financial services revenues plummeted 92% to $2.7 million for the quarter, turning a pre-tax profit of $11.9 million in the prior year into a loss of $12.4 million. This was driven by increased recourse expenses ($16.1 million) related to loan repurchase obligations.
Guidance, Outlook, and Risks
Management Commentary and Strategy: Management maintains a cautious outlook, believing housing market conditions may continue to deteriorate. The company's strategy focuses on maintaining a strong cash balance, managing sales prices and incentives to optimize volume, and aggressively reducing land and lot inventory. The company has restricted land purchases and development spending to match expected sales demand.
Subsequent Events: On May 4, 2009, the company notified lenders of its intention to voluntarily terminate its $1.65 billion unsecured revolving credit facility, effective May 11, 2009. This decision was made to avoid restrictive covenants and fees associated with the facility, given the company's strong cash position. The termination will result in a $7.6 million loss on early retirement of debt in the next quarter.
Risks and Contingencies:
- Market Conditions: Continued weakness in the housing market, high unemployment, and credit tightening pose significant risks to sales volume and pricing.
- Asset Impairments: The company identified $1.4 billion in inventory with impairment indicators. While only $143 million was impaired in the current quarter, further deterioration could lead to additional significant charges.
- Debt Covenants: Although currently in compliance, the company's debt ratings are below investment grade, subjecting it to borrowing base limitations. The termination of the revolving credit facility removes these specific covenants but eliminates a source of liquidity.
- Legal Proceedings: The company is involved in class action lawsuits regarding mortgage practices and construction defects (e.g., imported drywall in South Florida), though management believes liabilities will not be material.
Investor Verification Checklist
- Cash Position vs. Debt Maturities: Verify the sufficiency of the $1.5 billion cash balance to cover upcoming debt maturities ($241.2 million in the next 12 months) and operational needs without the revolving credit facility.
- Inventory Impairment Reserves: Review the $1.4 billion in inventory flagged with impairment indicators to assess the risk of future write-downs if market conditions worsen.
- Financial Services Recourse Reserves: Monitor the adequacy of reserves for mortgage loan repurchase obligations, which increased significantly in the current period.
- Deferred Tax Asset Realization: Assess the likelihood of realizing the $213.5 million net deferred tax asset, which depends on the company's ability to sell previously impaired homes to generate taxable income.
- Sales Order Backlog: Track the sales order backlog, which decreased 54% to $963.0 million, as a leading indicator of future revenue.