D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2016. The filing is unaudited. D.R. Horton builds homes in 79 markets across 26 states and also provides mortgage and title services.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total revenue | $2.768 billion, up 15% | $5.184 billion, up 10% |
| Net income | $195.1 million, up 32% | $352.8 million, up 21% |
| Diluted EPS | $0.52, versus $0.40 | $0.94, versus $0.79 |
| Homebuilding pre-tax income | $283.1 million, up 36% | $512.1 million, up 23% |
| Financial services pre-tax income | $17.4 million, down 19% | $29.7 million, down 18% |
| Operating cash flow | $28.4 million provided, per MD&A | $26.9 million provided, versus $168.8 million used |
Quarterly homebuilding revenue was $2.701 billion; 9,262 homes closed, up 12%, at an average price of $290,000, up 3%. Net sales orders increased 10% by units and 13% by value; backlog was 13,695 homes worth $4.064 billion, up 12% and 14%, respectively. Home-sales gross margin was 19.9%, up 20 basis points, and homebuilding pre-tax margin was 10.5%, versus 8.9%. For the six-month period, home-sales gross margin was also 19.9%, up 20 basis points.
Financial services revenue rose 12% in both periods, but expenses grew faster: quarterly G&A increased 25%, contributing to lower segment pre-tax income. Mortgage capture rate rose to 53% for the quarter and 52% for six months.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $1.224 billion, including $1.195 billion in homebuilding and $28.9 million in financial services. Total assets were $11.300 billion; total equity was $6.249 billion.
- Homebuilding notes payable were $3.167 billion, down from $3.334 billion at September 30, 2015. Homebuilding debt to total capital was 33.6%, versus 36.1% at September 30 and 39.4% a year earlier. Management’s long-term objective is to remain at or below 40%, while allowing possible short-term departures.
- The $975 million revolving credit facility had no borrowings and $91.1 million of letters of credit outstanding, leaving $883.9 million of stated availability. The company reported compliance with debt covenants.
- The financial-services mortgage repurchase facility had $495.4 million outstanding at 2.6%; it was extended to February 24, 2017. Its capacity was $475 million, with specified mechanisms to increase it. DHI Mortgage reported covenant compliance.
- Six-month cash flow included $652.8 million used to increase construction-in-progress and finished-home inventory. Financing activities used $179.9 million, primarily for debt repayment and dividends. Cash declined $159.7 million from the beginning of the period.
Changes, outlook and key commentary
- Growth was led by homebuilding, particularly the Southeast, where Florida volume strengthened. Management described demand across most markets as stable to moderately improved, with regional variation; the Midwest’s six-month order weakness was attributed largely to Chicago.
- Fiscal 2016 revenue and profit were expected to increase, but at a lower growth rate than in fiscal 2015. Management expected land and lot inventories to remain relatively consistent to slightly above fiscal 2015 average levels and anticipated stable gross margins under current conditions. These are expectations, not guarantees.
- Owned and controlled lots increased to 188,500 from 173,900 at September 30, 2015; homes in inventory rose to 24,600 from 19,800. Land and lot option contracts carried approximately $3.0 billion of remaining purchase price, supported by $108.7 million of deposits. A limited group of contracts, with $33.0 million remaining purchase price, had specific-performance provisions.
- Unusual items included a $4.5 million gain on sale of residential real-estate-backed debt securities and $3.7 million of inventory impairment charges for the six months. Land-option deposits and pre-acquisition costs written off totaled $4.2 million for the period.
- Legal-claim reserves were $426.2 million, primarily for construction defects; related insurance receivables were $100.5 million. Management warns that claim frequency and resolution costs could exceed estimates and negatively affect earnings and liquidity. The filing says excess losses beyond recorded reserves cannot reasonably be estimated.
- Other risks include economic and housing-market weakness, affordability or mortgage-rate changes, tighter mortgage credit, land and labor/material availability, regulation, debt covenant compliance, and mortgage-loan repurchase obligations. An EPA stormwater matter at certain Southeast sites had no recorded liability because potential costs could not be reasonably estimated; management did not expect monetary sanctions to be material.
Most important facts for investors to verify
- Whether order growth and backlog convert into closings without a material rise in cancellations; backlog contracts remain subject to contingencies.
- Whether inventory growth, especially homes under construction and completed unsold homes, supports demand and cash generation without increased impairments.
- Whether homebuilding margins remain stable and financial-services profitability recovers as compliance and staffing costs rise.
- Whether construction-defect reserves and expected insurance recoveries prove adequate, given the substantial judgment involved in estimates.
- Debt maturities, revolving-facility availability and the mortgage repurchase facility’s renewal/capacity, as well as the effect of the April 15, 2016 repayment of $372.7 million of senior notes.
- Reconcile the quarter’s $28.4 million operating cash provided in MD&A with the six-month cash-flow statement’s $26.9 million provided; the filing presents different period figures.