HORTON D R INC quarterly report, Q2 FY2011

Abrir documento

D.R. Horton, Inc. — Form 10-Q Summary

Business context and reporting period

Quarterly report for the three and six months ended March 31, 2011 (fiscal 2011 second quarter), compared with the corresponding 2010 periods. D.R. Horton builds and sells homes in 72 markets across 26 states and provides mortgage and title services, primarily to its homebuyers.

Financial and operating results

  • Revenue: Second-quarter consolidated revenue was $751.1 million, down 18% from $913.5 million. Six-month revenue was $1.539 billion, down 25% from $2.046 billion. Homebuilding accounted for 97% of six-month revenue.
  • Profit: Second-quarter net income was $27.8 million ($0.09 diluted EPS), versus $11.4 million ($0.04) a year earlier. Six-month net income fell to $7.4 million ($0.02 diluted EPS), from $203.4 million ($0.61). The 2011 periods included a $58.6 million quarterly and $58.1 million six-month tax benefit, largely from an IRS ruling; the 2010 six-month result included a $148.6 million tax benefit. Pre-tax results were losses of $30.8 million for the quarter and $50.7 million for six months.
  • Homebuilding: Second-quarter closings declined 17% to 3,516; home sales revenue declined 18% to $733.0 million. Six-month closings fell 27% to 7,153 and home sales revenue declined 25% to $1.494 billion. Average closing prices were $208,500 for the quarter (down 1%) and $208,900 for six months (up 2%). Home-sales gross margin was 16.2% for the quarter and 15.9% for six months, down 180 and 160 basis points, respectively.
  • Orders and backlog: Net sales orders fell 23% to 4,943 homes in the quarter and 21% to 8,306 for six months. The cancellation rate rose to 25% for the quarter and 26% for six months, from 21% and 23%. March 31 backlog was 5,281 homes valued at $1.089 billion, down 16% in homes and 17% in value year over year.
  • Cash flow: Six-month operating cash flow was negative $21.1 million, versus positive $427.8 million in 2010. Investing activities provided $2.3 million and financing activities used $209.4 million. Cash and cash equivalents declined $228.2 million over the six months to $1.081 billion. Management separately reported second-quarter operating cash use of $70.6 million, versus $207.8 million provided in the prior-year quarter.
  • Margins and expenses: Homebuilding pre-tax loss was $32.4 million for the quarter and $56.6 million for six months, compared with income of $11.1 million and $47.2 million, respectively, in 2010. Homebuilding SG&A was $123.2 million for the quarter and $242.0 million for six months; as a share of homebuilding revenue, it increased to 16.8% and 16.1%.
  • Debt and liquidity: Homebuilding notes payable were $1.959 billion at March 31, down from $2.085 billion at September 30, 2010. Homebuilding cash and marketable securities totaled about $1.357 billion; net homebuilding debt to total capital was 18.7%, versus 16.1% at September 30. Total assets were $5.621 billion and total equity $2.610 billion. The mortgage repurchase facility had $44.9 million outstanding against $100 million capacity.
  • Inventory: Homebuilding inventory was $3.474 billion. The company recorded $19.4 million of inventory impairments and $3.3 million of land-option cost write-offs for six months, compared with $4.1 million of impairments and $0.5 million of recoveries in 2010.

Changes, outlook, risks and unusual items

  • Management described housing demand as weak amid unemployment, low consumer confidence, foreclosures, limited mortgage credit and high competing home inventory. The 2010 comparison benefited from the federal homebuyer tax credit, which had expired before the 2011 periods. The 47% sequential increase in quarterly orders was attributed primarily to normal spring seasonality.
  • Management expected fiscal 2011 home sales, closings and profitability to be below fiscal 2010, but expected closings and profitability in the second half of fiscal 2011 to exceed the first half. It cautioned that the timing of a sustainable housing recovery was uncertain.
  • Management cited pricing and incentives, sales pace, construction and development costs, foreclosures and market conditions as drivers of possible additional inventory impairments. Communities with $491.4 million of carrying value had impairment indicators; $59.4 million of carrying value was determined impaired.
  • A $59.2 million reduction in unrecognized tax benefits and related interest followed a favorable IRS ruling. Deferred tax assets of $856.4 million remained fully offset by a valuation allowance; realization depends on sufficient future taxable income.
  • Legal and construction-defect liabilities were $516.4 million, with related insurance receivables of $206.7 million. The company noted that claim outcomes are uncertain and additional charges could be significant. Chinese-drywall matters included $1.8 million reserved for remaining repairs and several lawsuits; potential recoveries were not recorded.
  • A $5.9 million out-of-period adjustment increased home-sales gross margin and net income and reduced accrued expenses, relating to an error in captive-insurance loss reserves. Management considered prior-period unadjusted amounts immaterial and did not expect the adjustment to be material to the fiscal year.
  • After quarter-end, the company redeemed $112.3 million principal of 5.375% notes for $120.5 million, recording a $6.3 million loss, and repaid $70.1 million of 6% notes. It also repurchased $2.6 million principal of 6.875% notes in April.
  • Other risks include elevated cancellations, mortgage repurchase and reinsurance exposure, reliance on mortgage purchasers, debt and covenant obligations, and uncertainty in land values and deferred-tax-asset realization. Management reported effective disclosure controls and no material quarter-end change in internal control over financial reporting.

Most important facts for investors to verify

  • Whether orders, cancellations, backlog and closings improve beyond seasonal patterns, and whether management’s second-half outlook is achieved.
  • Whether homebuilding margins stabilize and whether further inventory impairments or land-option write-offs are needed.
  • How much of reported net income reflects the IRS tax benefit, and whether deferred tax assets can ultimately be realized.
  • Operating cash generation, cash balances and debt repayments after the reported period; distinguish six-month cash flow from the separate quarterly figure.
  • Adequacy of construction-defect, Chinese-drywall, mortgage-repurchase and reinsurance reserves, including collectability of insurance receivables.