Business Context and Reporting Period
Company: D.R. Horton, Inc. (D.R. Horton, America's Builder)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007 (Second Quarter of Fiscal 2007)
Business Overview: The largest homebuilder in the U.S. by domestic homes closed, operating in 85 markets across 27 states. The company engages in the construction and sale of single-family homes and provides mortgage banking and title agency services through its financial services segment.
Key Financial Metrics
| Metric (in millions, except per share) | Three Months Ended Mar 31, 2007 | Six Months Ended Mar 31, 2007 |
|---|---|---|
| Total Revenues | $2,658.1 | $5,526.1 |
| Net Income | $51.7 | $161.4 |
| Diluted EPS | $0.16 | $0.51 |
| Operating Cash Flow | $178.3 (Quarterly estimate) | $473.8 |
| Homebuilding Debt | $4,592.4 | $4,592.4 |
| Cash & Equivalents (Homebuilding) | $68.2 | $68.2 |
| Net Debt to Total Capital | 40.9% | 40.9% |
Material Changes vs. Prior Period
- Revenue Decline: Homebuilding revenues decreased 26% for the quarter and 15% for the six-month period compared to the prior year, driven by a 22% and 11% drop in homes closed, respectively.
- Profitability Compression: Net income plummeted 85% for the quarter and 76% for the six-month period. Home sales gross margins (excluding impairments) dropped 780 basis points to 17.7% for the quarter and 830 basis points to 18.2% for the six months.
- Impairment Charges: Significant inventory impairments and land option cost write-offs totaled $81.2 million for the quarter and $158.8 million for the six months, compared to $7.1 million and $10.9 million in the prior year periods. The majority of impairments were concentrated in the California region.
- Sales Volume: Net sales orders decreased 37% for the quarter and 31% for the six months. Sales order backlog declined 33% to $4.8 billion.
- Debt Reduction: Homebuilding debt decreased by $256.3 million compared to the prior year period, aided by the redemption of 8.5% senior notes due 2012.
Outlook, Risks, and Management Commentary
- Market Conditions: Management cites an industry-wide softening of demand, increased inventory of existing homes, tighter mortgage lending standards, and reduced consumer confidence as primary headwinds.
- Strategic Response: The company is executing a strategy to reduce SG&A infrastructure, lower costs, restrict land purchases, reduce inventory of homes under construction, and offer price incentives to maximize cash flow.
- Liquidity: The company maintains a strong balance sheet with a net homebuilding debt to total capital ratio of 40.9%, within its target range of below 45%. It has $1.9 billion of borrowing capacity remaining on its revolving credit facility.
- Risks: Continued deterioration in market conditions could lead to further asset impairment charges, goodwill impairment, and reduced profitability. High cancellation rates (32-33%) remain a concern.
- Dividends: A quarterly cash dividend of $0.15 per share was declared for the quarter ended March 31, 2007, and another $0.15 per share was declared in April 2007.
Investor Verification Checklist
- Impairment Sustainability: Verify if the $158.8 million in impairment charges for the six-month period is a one-time event or indicative of ongoing asset devaluation, particularly in California and Florida.
- Cancellation Rates: Monitor the sales order cancellation rate, which is currently 32-33% (historically 16-20%), to assess the reliability of the $4.8 billion backlog.
- Margin Recovery: Assess whether the 17.7% home sales gross margin can stabilize given the aggressive use of price concessions and incentives.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the leverage and interest coverage ratios, as earnings volatility increases.
- Land Inventory: Review the composition of the $2.6 billion in land under option contracts and the $137 million in net earnest money deposits to gauge exposure to non-performing land assets.