D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014; unaudited. D.R. Horton builds and sells homes across 79 markets in 27 states and provides mortgage and title services. Comparisons below are with the corresponding 2013 periods unless noted.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Total revenue | $2.147 billion, up 27% | $5.553 billion, up 26% |
| Pre-tax income | $171.8 million, down 16% | $563.4 million, up 24% |
| Net income | $113.1 million, down 23% | $367.3 million, up 14% |
| Diluted EPS | $0.32, down from $0.42 | $1.05, up from $0.93 |
| Home sales gross margin | 20.7%, down 0.7 percentage points | 21.7%, up 1.4 percentage points |
Quarterly homebuilding revenue rose 28% to $2.103 billion; 7,676 homes closed, up 19%, at an average price of $272,300, up 8%. Net orders rose 25% to 8,551 homes, and backlog grew 15% to 11,365 homes. For the nine months, home closings rose 16% to 20,058 and the average closing price increased 10% to $269,300.
Quarterly homebuilding pre-tax income fell to $158.6 million from $185.4 million, principally reflecting $56.8 million of inventory and land-option charges versus $0.8 million a year earlier. Financial-services revenue fell 9% to $44.1 million and pre-tax income fell 33% to $13.2 million. For the nine months, financial-services revenue and pre-tax income declined 11% and 40%, respectively.
Cash flow, balance sheet and debt
- Operating cash flow was negative $575.1 million for the nine months, compared with negative $1.136 billion a year earlier; homebuilding inventory investment remained a major cash use. Investing cash flow was negative $217.7 million, including business acquisitions. Financing cash flow was positive $431.3 million.
- Cash and cash equivalents totaled $575.0 million at June 30 ($538.5 million in homebuilding), down from $936.5 million at fiscal year-end. Homebuilding inventory increased to $7.376 billion from $6.197 billion.
- Homebuilding notes payable were $3.142 billion, down from $3.270 billion at September 30, 2013. Gross homebuilding debt to total capital was 38.7%, versus 44.6%; net debt to total capital was 34.4%, versus 36.7%. The company attributed the improvement largely to conversion of its 2% convertible notes into equity.
- The $725 million unsecured revolving credit facility had no borrowings outstanding and $68.0 million of letters of credit issued; the company reported compliance with debt covenants. DHI Mortgage had $302.9 million outstanding under its mortgage repurchase facility at 2.6% interest; the facility matures February 2015.
- Total equity was $4.970 billion, up from $4.061 billion at September 30, 2013. The conversion of $498.6 million of convertible notes issued 38.6 million common shares.
Material changes, outlook and risks
- Acquisitions expanded operations: Regent Homes was acquired for $34.5 million in October 2013; Crown Communities was acquired for $209.6 million in May 2014, with $21.4 million paid after quarter-end. Crown contributed 254 closings and $65.8 million in home sales revenue during the period after acquisition.
- Inventory impairment charges totaled $57.0 million year to date, including $48.8 million in the Midwest, mainly Chicago communities where sales pace and returns remained below management expectations. Midwest reported a quarterly pre-tax loss of $37.2 million.
- Management described demand as relatively stable overall but uneven by market, and expected slow-to-moderate housing-demand growth, concentrated in markets with job growth. It expects selling-price increases to moderate and construction costs to rise; these factors could pressure future gross margins. No specific earnings or revenue guidance was provided.
- Management said its operating strategy is intended to increase profitability while maintaining balance-sheet strength and liquidity through the remainder of fiscal 2014, but gave no assurance of success. Seasonal activity typically increases closings, revenues and working-capital needs in the third and fourth fiscal quarters.
- Risks include weaker housing or economic conditions, rising mortgage rates or tighter lending, land and inventory exposure, construction-cost and labor availability, substantial debt and refinancing needs, and warranty and construction-defect claims. Legal-claim reserves were $457.6 million, primarily for construction defects; related insurance receivables were $135.8 million. Actual claims, costs or insurance recoveries could differ materially from estimates.
- The board renewed authorizations on July 22, 2014, for up to $500 million of debt repurchases and $100 million of share repurchases through July 31, 2015. A quarterly dividend of $0.0625 per share was approved in July. The company reported effective disclosure controls and no material internal-control changes during the quarter.
Most important facts for investors to verify
- Whether sales orders and backlog convert to closings, particularly given buyer contingencies and a 24% quarterly cancellation rate.
- Whether Chicago and other pressured communities require further impairments, and whether homebuilding margins withstand moderating prices and higher costs.
- How inventory investment and acquisition spending affect cash balances and operating cash flow.
- Whether the $457.6 million legal reserve and related insurance recoveries prove adequate as construction-defect claims develop.
- Debt maturities, covenant headroom and renewal or replacement of DHI Mortgage’s repurchase facility before its February 2015 maturity.
- Acquisition integration, the associated share dilution from convertible-note conversion, and the terms and use of the renewed repurchase authorizations.