D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2015. Unaudited results are compared with the corresponding 2014 periods. D.R. Horton is a U.S. homebuilder operating in 79 markets across 27 states, with mortgage and title services primarily supporting its homebuyers.
Financial and operating results
| Metric | Q2 FY2015 | Six months FY2015 | Comparable prior-period change |
|---|---|---|---|
| Total revenue | $2.398 billion | $4.701 billion | +38% for the quarter; +38% for six months |
| Pre-tax income | $230.1 million | $450.8 million | +14%; +15% |
| Net income | $147.9 million | $290.4 million | +13%; +14% |
| Diluted EPS | $0.40 | $0.79 | +5%; +8% |
| Homebuilding revenue | $2.339 billion | $4.592 billion | +38% in both periods |
| Financial services revenue | $59.5 million | $109.2 million | +55%; +49% |
- Quarterly home closings increased 33% to 8,243; the average closing price rose 4% to $281,300. Six-month closings rose 31% to 16,216, with an average price of $281,200, up 5%.
- Quarterly net sales orders increased 30% to 11,135 homes, and backlog at March 31 rose 21% to 12,177 homes, valued at $3.574 billion, up 27%. The quarterly cancellation rate was 20%, compared with 19% a year earlier.
- Home-sales gross margin fell 280 basis points to 19.7% for the quarter and 270 basis points to 19.7% for six months. Management cited home costs rising faster than selling prices and higher warranty and construction-defect expenses. Homebuilding pre-tax margin was 8.9% for the quarter versus 11.3% a year earlier.
- Homebuilding SG&A increased in dollars but declined as a share of revenue to 10.4% for the quarter from 11.1%, reflecting operating leverage. Financial-services pre-tax income more than doubled to $21.5 million for the quarter, supported by improved mortgage loan sale execution and higher average loan amounts.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $697.7 million at March 31, 2015, including $665.8 million in homebuilding and $31.9 million in financial services. Total assets were $10.713 billion, total liabilities $5.292 billion and total equity $5.421 billion.
- Homebuilding notes payable were $3.548 billion, up from $3.324 billion at September 30, 2014. Homebuilding debt to total capital was 39.6%; net homebuilding debt to total capital was 34.7%, versus 39.4% and 34.5%, respectively, at September 30, 2014.
- The company reported $168.8 million of operating cash used in the six months, improving from $265.8 million used in the prior-year period. Inventory investment remained a major use of cash: $375.6 million for construction in progress and finished homes and $71.2 million for land and lots. Investing activities used $29.3 million; financing activities provided $234.0 million. Ending cash increased by $35.9 million.
- The $975 million homebuilding revolving credit facility had $175.0 million drawn and $90.3 million of letters of credit, leaving $709.7 million of available capacity. The company said it was in compliance with applicable debt covenants.
- DHI Mortgage had $397.5 million outstanding on its repurchase facility, at a 2.4% annual rate; the facility was amended and extended to February 2016. Its capacity was $400 million, with specified options to increase it. Mortgage loans held for sale were $517.6 million.
Material changes, outlook and risks
- Growth reflected higher closings, expanded operations and market share gains; the May 2014 Crown Communities acquisition also contributed to East and Southeast results. The company issued $500 million of 4.0% senior notes due 2020 and repaid $157.7 million of 5.25% notes at maturity.
- Management described demand as stable to moderately improved across most markets, but uneven by local economic conditions. It expected slow-to-moderate overall housing-demand growth and stated that inventories should grow more moderately over the rest of fiscal 2015, improving operating cash flow compared with recent periods. It gave no specific numerical earnings or revenue guidance.
- Management’s strategy emphasizes liquidity, controlling debt, managing inventory and pricing, using land options to limit land-ownership risk, and broadening products for entry-level through luxury buyers. It expects the strategy to support profitable growth while maintaining balance-sheet strength, but cautioned that outcomes depend on market conditions and execution.
- Key risks include weaker economic or housing conditions, reduced affordability, higher mortgage rates or tighter lending, land and construction-cost pressures, labor or material shortages, debt and refinancing needs, and mortgage-financing availability. Homebuilding is seasonal; management generally expects more closings and revenue in the third and fourth fiscal quarters, with higher working-capital needs.
- Inventory and land-option charges were $12.5 million in the quarter and $18.6 million for six months, above the prior-year amounts. The quarter’s $8.1 million of inventory impairments was primarily associated with a strategic decision to sell Southeast land. Deposits and pre-acquisition costs written off for expected land-option terminations were $6.6 million for six months.
- Legal-claims reserves were $449.4 million, predominantly for construction-defect matters, with related insurance-recovery receivables of $134.1 million. Management warned that claim frequency, settlement costs and insurance recoveries are uncertain and actual costs could exceed estimates. The company also disclosed early-stage EPA stormwater notices at certain Southeast sites; potential sanctions were not expected to be material, but costs could not be reasonably estimated and no liability was recorded.
- After quarter-end, the company acquired Pacific Ridge Homes in Seattle for approximately $72 million in cash, adding inventory, lots, optioned lots and a 41-home backlog. A quarterly dividend of $0.0625 per share was approved in April. The full $500 million debt-repurchase and $100 million share-repurchase authorizations remained unused at March 31.
Most important facts for investors to verify
- Whether homebuilding gross-margin pressure continues as construction costs rise faster than selling prices, and whether results differ materially by region.
- Whether sales orders and backlog convert to closings, particularly given the 20% quarterly cancellation rate and buyer financing contingencies.
- Whether inventory growth moderates and operating cash flow improves as management expects; six-month operating cash flow remained negative.
- Whether construction-defect reserves and estimated insurance recoveries adequately reflect future claims and costs.
- Availability and cost of refinancing or mortgage-facility funding, compliance with debt covenants, and the company’s leverage and liquidity position.
- Integration and financial contribution of the Pacific Ridge Homes acquisition, as well as the effects of the Crown Communities acquisition on comparisons.