Business Context and Reporting Period
Company: D.R. Horton, Inc. (D.R. Horton)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: D.R. Horton is a national homebuilder operating in 76 markets across 27 states, primarily constructing and selling single-family detached homes. The company also operates a financial services segment providing mortgage financing and title agency services. The reporting period reflects continued challenging conditions in the homebuilding industry, characterized by weak consumer confidence, high inventory levels, tight credit markets, and a recessionary economy.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Nine Months Ended June 30, 2009 |
|---|---|---|
| Consolidated Revenues | $932.9 million | $2,628.8 million |
| Net Loss | $(142.3) million | $(313.4) million |
| Net Loss Per Share (Basic & Diluted) | $(0.45) | $(0.99) |
| Homebuilding Revenues | $914.1 million | $2,589.7 million |
| Home Sales Gross Margin | 11.3% | 13.4% |
| Inventory Impairments & Write-offs | $110.8 million | $215.2 million |
| Cash and Cash Equivalents (Total) | $2,002.3 million | $2,002.3 million (Balance Sheet) |
| Notes Payable (Total Debt) | $3,357.6 million | $3,357.6 million (Balance Sheet) |
| Net Cash Provided by Operating Activities | N/A | $1,102.0 million |
Material Changes vs. Prior Comparable Period
- Revenue Decline: Consolidated revenues decreased 36% for the three months and 46% for the nine months ended June 30, 2009, compared to the prior year periods. Home sales revenue dropped 37% (quarterly) and 45% (year-to-date) due to a 31% and 39% decline in homes closed, respectively.
- Improved Loss Profile: While the company reported a net loss, the magnitude decreased significantly. The quarterly net loss improved from $(399.3) million to $(142.3) million, and the nine-month net loss improved from $(1,833.8) million to $(313.4) million.
- Reduced Impairments: Inventory impairments and land option cost write-offs decreased substantially to $110.8 million (quarterly) and $215.2 million (nine-month) compared to $330.4 million and $1,410.0 million in the prior year periods.
- Margin Expansion: Home sales gross margins improved by 120 basis points quarterly and 210 basis points year-to-date, driven by lower costs of homes sold relative to selling prices and reduced amortization of capitalized interest.
- Balance Sheet Strengthening: Cash and cash equivalents increased to $2.0 billion (from $1.4 billion at Sept 30, 2008), while total debt decreased to $3.36 billion. The net homebuilding debt to total capital ratio decreased to 34.5%.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management maintains a cautious outlook, expecting challenging housing market conditions to persist for some time. Key factors influencing the outlook include continued margin pressure from price reductions, high levels of available homes, weak demand, and the scheduled expiration of the first-time homebuyer federal tax credit in November 2009. The company is focusing on maintaining liquidity, managing inventory levels, and optimizing sales volumes and returns.
Unusual Items and Contingencies
- Chinese Drywall: The company recorded warranty charges of $4.0 million (quarterly) and $6.0 million (nine-month) related to homes in South Florida and Louisiana suspected of containing defective drywall manufactured in China. The company is investigating the extent of the issue and may incur additional costs.
- Debt Restructuring: The company voluntarily terminated its $1.65 billion unsecured revolving credit facility in May 2009, recognizing a $7.6 million loss on early retirement of debt. Concurrently, it issued $500 million of 2% convertible senior notes due 2014.
- Tax Refund: A significant portion of operating cash flow ($621.7 million) was generated from a federal income tax refund related to a net operating loss carryback from fiscal 2008.
Risk Factors
- Market Deterioration: Continued downturn in the homebuilding industry and broader economic conditions could lead to further asset impairments and reduced sales.
- Debt Obligations: Substantial debt levels could limit flexibility and increase vulnerability to economic downturns. Scheduled principal maturities for the next 12 months total $244.3 million.
- Financing Availability: Disruptions in credit markets could limit access to capital and increase borrowing costs.
- Legal Proceedings: Ongoing class action lawsuits regarding mortgage practices and construction defects pose potential financial risks, though management believes current reserves are adequate.
Investor Verification Checklist
- Inventory Valuation: Verify the assumptions used in the quarterly inventory impairment analysis, specifically the discount rates (14% to 20%) and projected sales prices, given the potential for further write-downs.
- Chinese Drywall Exposure: Monitor updates on the investigation of defective drywall in Florida and Louisiana markets to assess potential increases in warranty reserves.
- Liquidity Position: Confirm the company's ability to meet debt maturities ($244.3 million in the next 12 months) without accessing capital markets, given the termination of the revolving credit facility.
- Tax Asset Recovery: Assess the likelihood of realizing the $165.4 million net deferred tax asset, which depends on the sale of previously impaired inventory in fiscal 2009.
- Sales Order Backlog: Track the sales order backlog, which decreased 41% year-over-year to $1.1 billion, as a leading indicator of future revenue.