D.R. Horton, Inc. — Form 10-Q Summary
Business context and reporting period: This filing covers the first quarter of fiscal 2017, the three months ended December 31, 2016. D.R. Horton is a U.S. homebuilder operating in 78 markets across 26 states, with mortgage, title and other businesses. Financial statements are unaudited.
Financial and operating results
- Revenue: Consolidated revenue was $2.904 billion, up 20% from $2.416 billion. Homebuilding revenue rose 20% to $2.826 billion; financial services and other revenue increased 41% to $78.1 million.
- Profit and margins: Pre-tax income increased 32% to $318.1 million; net income rose 31% to $206.9 million. Diluted EPS was $0.55, versus $0.42. Consolidated pre-tax margin improved to 11.0% from 10.0%. Homebuilding pre-tax margin was 10.4%, versus 9.7%; home sales gross margin edged down 10 basis points to 19.8%.
- Homebuilding activity: Homes closed increased 17% to 9,404, with average closing price up 2% to $297,500. Net orders rose 15% to 9,241 homes; backlog increased 6% to 11,312 homes, valued at $3.4 billion. Order cancellation rate improved to 22% from 23%.
- Cash flow: Operating cash use was $33.3 million, compared with $1.5 million in the prior-year quarter, mainly reflecting increased investment in homes under construction and land/lots. Investing cash use was $31.3 million and financing cash use was $88.3 million. Cash and cash equivalents ended the quarter at $1.150 billion, down from $1.303 billion at the start.
- Liquidity and debt: Homebuilding notes payable were $2.799 billion, broadly unchanged from September 30, 2016. Homebuilding debt-to-total-capital was 28.6%, compared with 29.2% at fiscal year-end and 35.5% a year earlier. The company had $1.1 billion of homebuilding cash and $888.1 million available under its $975 million revolving facility, with no revolver borrowings. A $350 million senior note maturity in May 2017 was expected to be repaid with cash. DHI Mortgage had $419.0 million outstanding under its mortgage repurchase facility.
- Balance sheet and capital: Total assets were $11.712 billion and total equity was $6.982 billion at December 31, 2016. Homebuilding inventory was $8.742 billion, up from $8.341 billion at September 30. The quarterly dividend was $0.10 per share, up from $0.08 in the comparable prior-year quarter.
Material changes and management commentary
- Management described housing demand as stable to moderately improved in most markets, with differences by local economic conditions. Entry-level homes continued to see strong demand; the company planned to broaden offerings during fiscal 2017.
- Growth in closings and revenue drove higher earnings, while lower SG&A as a share of homebuilding revenue reflected fixed-cost leverage. Management expected fiscal 2017 SG&A as a percentage of homebuilding revenue to be lower than in fiscal 2016, but the full-year improvement to be less than the quarter’s 70-basis-point decline.
- Management expected homebuilding gross margins to remain relatively stable based on current conditions, while noting that pricing, incentives and sales pace may cause future fluctuations. It also anticipated slow to moderate housing-demand growth if the U.S. economy continued to improve. No specific full-year revenue or earnings guidance was provided.
- Inventory and lot commitments expanded: owned and controlled lots totaled 212,600, versus 204,500 at September 30, 2016; homes in inventory rose to 24,500 from 23,100. Approximately 3,700 unsold homes were completed at quarter-end.
Risks, contingencies and unusual items
- Housing demand and results are exposed to economic and market cycles, affordability, mortgage rates and lending standards, credit availability, competition, and availability and cost of land, materials and skilled labor. The business is seasonal, and first-quarter results may not indicate full-year performance.
- Construction-defect and other legal reserves were $435.6 million, up from $423.5 million at September 30, 2016; about 95% related to construction-defect matters. Legal-contingency expense was $27.0 million, compared with $17.3 million in the prior-year quarter. Management said actual claims and insurance recoveries could differ significantly from estimates, with potential adverse effects on earnings and liquidity.
- Land and lot option contracts had approximately $3.8 billion of remaining purchase price, supported by $173.9 million of deposits. A limited set of contracts, representing $34.8 million of remaining purchase price, had specific-performance provisions that could require purchases if sellers meet their obligations.
- The mortgage repurchase facility was due to mature February 24, 2017; management expected renewal and extension on similar terms, but continued liquidity depends on obtaining adequate financing. The facility was not guaranteed by the parent or homebuilding debt guarantors.
- The company disclosed an ongoing Department of Justice inquiry into FHA loan underwriting and quality-control processes; no formal claim amount, penalty or fine had been asserted. An EPA stormwater matter could result in monetary sanctions, which the company did not believe were reasonably likely to be material.
- No inventory impairment charges were recorded in the quarter after detailed reviews of communities and land with a combined carrying value of $123.2 million. The company did write off $2.3 million of land-option deposits and pre-acquisition costs for terminated or expected-to-be-terminated contracts.
Important facts for investors to verify
- Whether home orders, backlog conversion and closings continue to support revenue growth, and whether backlog cancellations remain controlled.
- Whether home sales gross margins remain stable as costs, pricing and incentives change across regions.
- Whether operating cash flow improves as the company invests in construction, land and lots, and whether inventory growth produces targeted returns.
- Whether the $350 million May 2017 note maturity is repaid as planned and the mortgage repurchase facility is renewed or replaced before maturity.
- How construction-defect claims, legal reserves, insurance recoveries and the DOJ inquiry evolve, including any resulting cash or earnings exposure.
- Whether land-option commitments, unsold completed homes and related deposits remain consistent with local demand and the company’s risk-management objectives.