D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017. Figures are unaudited. D.R. Horton is a homebuilder operating in 78 markets across 26 states, with mortgage, title and other businesses.
Financial performance and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total revenue | $3.251 billion, up 17% | $6.156 billion, up 19% |
| Net income | $229.2 million, up 17% | $436.1 million, up 24% |
| Diluted EPS | $0.60, versus $0.52 | $1.15, versus $0.94 |
| Consolidated pre-tax margin | 10.9%, unchanged | 10.9%, versus 10.5% |
| Home sales gross margin | 19.8%, down 0.1 percentage point | 19.8%, down 0.1 percentage point |
- Quarterly homebuilding revenue was $3.164 billion, up 17%; 10,685 homes closed, up 15%, at an average price of $295,600, up 2%. Net orders rose 14% to 13,991 homes; backlog was 14,618 homes valued at $4.435 billion, up 7% and 9%, respectively.
- Financial services and other revenue rose 30% to $86.9 million in the quarter; pre-tax income increased to $31.5 million from $18.6 million. Higher mortgage capture and improved loan-sale execution contributed.
- Six-month operating cash flow was negative $140.8 million, versus positive $26.9 million a year earlier, principally reflecting investment in homes under construction and land. Investing cash outflow was $73.4 million; financing cash outflow was $95.8 million. Cash and equivalents ended at $993.2 million.
- At March 31, total assets were $11.921 billion, liabilities $4.701 billion and equity $7.220 billion. Homebuilding notes payable were $2.803 billion; the mortgage repurchase facility had $419 million outstanding. Homebuilding debt to total capital was 28.0%, versus 29.2% at September 30, 2016.
- The $975 million homebuilding revolver had no borrowings and $899.6 million available after letters of credit. The company expected to repay $350 million of notes maturing in May 2017 with existing cash. Total homebuilding and financial-services cash are reported separately.
Changes, outlook and risks
- Management reported stable to moderately improving demand in most markets, with variation by local economy. It expects slow to moderate housing-demand growth if the U.S. economy continues to improve; no quantified full-year revenue or earnings guidance was provided.
- Management expects home gross margins to remain relatively stable under current conditions and fiscal 2017 SG&A as a percentage of homebuilding revenue to be below fiscal 2016. Results are seasonal, with more closings and revenue generally in the third and fourth fiscal quarters.
- Inventory and land option charges rose to $12.2 million for the quarter from $6.0 million; six-month charges were $14.5 million versus $7.9 million. The company also wrote off $5.1 million of land-option deposits and pre-acquisition costs over six months.
- Legal-claims reserves were $441.5 million, including approximately 95% related to construction defects; six-month legal-contingency expense was $52.5 million versus $19.9 million. Management warns that actual claim frequency, settlement costs and insurance recoveries may differ materially from estimates and could adversely affect earnings and liquidity.
- Land and lot options carried approximately $4.2 billion of remaining purchase price, secured by $188.6 million of deposits; $29.5 million of purchase price related to contracts subject to specific performance. Mortgage loans sold were concentrated: three financial entities bought about 89% of six-month sales, with one buying 47%.
- Key risks include weaker housing or economic conditions, higher mortgage rates or tighter lending, land and inventory impairment, construction-defect and warranty claims, labor or materials shortages, regulatory changes, access to credit and compliance with debt covenants. The company disclosed ongoing DOJ communications concerning prior FHA loan underwriting and quality-control processes; no formal claim amount, penalty or fine had been asserted. It considered an EPA stormwater matter not reasonably likely to have a material effect.
- IRS consent agreements received for two of three tax-accounting-method requests were still under review; any approved changes were expected to be reflected likely as of June 30, 2017, with no significant effective-tax-rate impact expected.
Important facts for investors to verify
- Whether home orders and backlog convert to closings, given cancellations and buyer contingencies; quarterly cancellation rate was 20% versus 19% a year earlier.
- Whether cash use from building inventory reverses into operating cash generation, and the effect of the planned May 2017 debt repayment on liquidity and leverage.
- Trends in home gross margins, particularly warranty and construction-defect costs, and performance in the Midwest, where quarterly pre-tax income fell to $0.7 million from $8.9 million.
- Developments in construction-defect reserves, insurance recoveries, mortgage repurchase exposure and the DOJ inquiry.
- Execution and renewal of the mortgage repurchase facility, which matures February 23, 2018, and continued compliance with both homebuilding and mortgage-facility covenants.