D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2013 (fiscal 2013 second quarter). Unaudited results are compared with the corresponding 2012 periods. D.R. Horton builds and sells homes in 77 markets across 26 states and also provides mortgage and title services.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Consolidated revenue | $1.432 billion, up 49% from $961.2 million | $2.707 billion, up 45% from $1.868 billion |
| Income before taxes | $142.1 million, versus $42.3 million | $250.0 million, versus $71.5 million |
| Net income | $111.0 million, versus $40.6 million | $177.3 million, versus $68.3 million |
| Diluted EPS | $0.32, versus $0.13 | $0.52, versus $0.21 |
| Homebuilding gross margin on home sales | 20.4%, up 280 basis points | 19.6%, up 240 basis points |
Quarterly homebuilding revenue was $1.390 billion; financial-services revenue was $41.2 million. Homebuilding pre-tax income was $127.4 million, and financial-services pre-tax income was $14.7 million. Six-month home closings rose 30% to 10,825, while average closing price increased 10% to $239,400. Net sales orders rose 36% by unit count and 55% by value; quarter-end backlog increased 54% to 9,553 homes, valued at $2.386 billion.
Cash flow and liquidity: Operating activities used $840.3 million in the six months, versus $79.4 million used in 2012, primarily as the company invested in inventory: construction-in-progress and finished homes increased by $433.5 million, and land and lot inventory by $717.1 million. Investing activities provided $238.0 million, including proceeds from securities sales and maturities; financing activities provided $705.1 million. Cash and cash equivalents ended at $1.151 billion, including $1.128 billion in homebuilding and $22.8 million in financial services.
Debt and capital: Homebuilding notes payable were $3.027 billion, up from $2.305 billion at September 30, 2012; the financial-services mortgage repurchase facility had $245.8 million outstanding. Gross homebuilding debt to total capital was 44.7%, and net homebuilding debt to total capital was 33.7%, up from 39.1% and 21.4%, respectively, at fiscal year-end. The $600 million revolving credit facility had no borrowings outstanding, with $41.2 million of letters of credit issued; the company reported covenant compliance. It issued $700 million of senior notes in February 2013. A $171.7 million balance of 6.875% senior notes was due in May 2013.
Changes, outlook and risk factors
- Management attributed improved results to stronger home demand, higher selling prices, fewer sales incentives, increased closings and improved operating leverage. Homebuilding SG&A fell to 11.2% of revenue for the quarter from 13.6% a year earlier.
- Management said demand had improved in most markets, but expected recovery to remain uneven and new-home sales below historical levels until a stronger U.S. economic recovery. If market conditions remain stable or improve, it expected its strategy to support profitable growth while maintaining strong liquidity in fiscal 2013 and 2014; no numerical earnings or revenue guidance was provided.
- The company increased land, lot and home inventory investments by more than $1.1 billion in the first half. Owned and controlled lots rose to 175,300 from 152,700 at September 30, 2012; homes in inventory increased to 15,800 from 13,000. This expansion supports growth but increases capital and execution exposure.
- Key risks include weaker economic or housing conditions, reduced affordability, higher mortgage rates or tighter lending standards, land and construction-cost risks, and difficulty selling mortgage loans on attractive terms. Approximately 56% of mortgage loans sold in the first half went to one major financial institution.
- Construction-defect and other legal reserves were $519.7 million at March 31, 2013, predominantly for construction-defect matters; estimated insurance receivables were $195.8 million. Management said actual claims, costs or recoveries could differ significantly from estimates. A Department of Labor investigation remained unresolved; the company had not recorded a liability because potential costs could not be reasonably estimated.
- The $18.7 million reduction in the state deferred-tax-asset valuation allowance benefited the tax outlook; management expected about $4.0 million of the remaining $23.2 million allowance to reverse in the second half of fiscal 2013. Approximately $13.0 million related to state tax losses expected to expire at fiscal year-end.
- No community impairment charges were recorded in the first half, compared with $0.8 million in the prior-year period. Land-option deposits and costs written off were $3.2 million in the first half, versus $1.4 million. Results are seasonal, and management cautioned that first-half performance is not necessarily indicative of the full year.
Important facts for investors to verify
- Whether sales orders and backlog convert to closings at expected prices, margins and cancellation rates; backlog contracts remain subject to contingencies.
- Whether cash generation improves as the enlarged inventory is sold, and how inventory growth and debt affect the company’s stated net-debt-to-capital range of 40%–45%.
- Repayment or refinancing of the May 2013 senior-note maturity and ongoing access to credit facilities and mortgage-loan purchasers.
- Adequacy of construction-defect, warranty, mortgage-repurchase and tax estimates, including the timing and collectability of insurance recoveries.
- Whether market conditions, mortgage availability and the concentration of mortgage-loan sales with one purchaser affect future demand and financial-services profitability.