D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2012; comparisons are with the three months ended December 31, 2011 unless otherwise noted. D.R. Horton builds homes in 26 states and 77 markets and also operates mortgage and title businesses. Figures below are unaudited.
Financial and operating results
| Metric | Quarter ended Dec. 31, 2012 | Prior-year quarter |
|---|---|---|
| Consolidated revenue | $1,275.1 million | $906.6 million |
| Pre-tax income | $107.9 million | $29.2 million |
| Net income | $66.3 million | $27.7 million |
| Diluted EPS | $0.20 | $0.09 |
| Net cash used in operating activities | $656.5 million | $1.7 million |
- Homebuilding revenue was $1,233.2 million, up 39%; financial services revenue was $41.9 million, up 100%. Homebuilding generated 97% of consolidated revenue.
- Home closings rose 26% to 5,182; average closing price increased 10% to $236,100. Net sales orders rose 39% to 5,259 homes, and their value rose 60% to $1.314 billion. Backlog value increased 80% to $1.759 billion across 7,317 homes.
- Home sales gross margin improved to 18.8% from 16.8%; total homebuilding gross margin was 18.7% versus 16.8%. Homebuilding SG&A fell to 11.4% of revenue from 13.4%. Homebuilding pre-tax income was $90.2 million versus $25.0 million; financial services pre-tax income was $17.7 million versus $4.2 million.
- At December 31, homebuilding cash and marketable securities totaled $643.1 million; consolidated cash and cash equivalents were $566.9 million, including $20.5 million in financial services. The company sold its remaining marketable securities in January 2013 for a minimal gain.
- Homebuilding notes payable were $2.424 billion, including $100 million drawn on the revolving credit facility; financial services had $169.4 million outstanding on its mortgage repurchase facility. Homebuilding debt to total capital was 40.2%; net homebuilding debt to total capital was 33.0%, up from 21.4% at September 30, 2012.
- Total assets were $7.347 billion, total liabilities $3.734 billion, and total equity $3.613 billion at quarter end. Homebuilding inventory rose to $5.015 billion from $4.165 billion at September 30.
Changes, outlook and notable items
- Management reported improving new-home demand in most markets, with higher order volumes, selling prices and margins. It attributed the improvement to market conditions and investment in operations, while noting that recovery remains uneven and sales remain below historical levels.
- Inventory investment increased substantially: the company used $226.8 million for construction-in-progress and finished homes and $612.8 million for land and lots. Management expected land and lot purchases and development spending to decrease in the second fiscal quarter.
- Management said existing cash, credit facilities and other resources were sufficient for near-term needs, including the May 2013 maturity of $171.7 million of 6.875% senior notes. It expected to renew and extend the mortgage repurchase facility before its March 3, 2013 maturity. The company was in compliance with its debt covenants at December 31.
- No specific earnings or revenue guidance was provided. Management expected the strategy to support profitable growth and liquidity during fiscal 2013 if market conditions did not deteriorate, but cautioned that economic weakness, employment declines, higher mortgage rates or tighter lending could hurt results.
- The $656.5 million operating cash outflow primarily reflected planned inventory investment. Investing activities provided $152.2 million, including $226.7 million from securities sales or maturities; financing activities provided $23.5 million. A $0.15-per-share dividend was paid in December in addition to the regular $0.0375 dividend, accelerating all quarterly dividends otherwise expected in calendar 2013.
- Homebuilding legal-claim reserves were $529.8 million, primarily for construction defects, with related insurance receivables of $202.0 million. The company warned that actual claim frequency, settlement costs and insurance recoveries could differ materially from estimates. It stated that excess losses beyond reserves could significantly affect future earnings and liquidity.
- The quarter included $1.3 million of inventory impairment and land-option write-off charges; management reported no impairment of the communities evaluated. Prior-year net income comparability is affected by the prior period’s deferred-tax valuation allowance; the current quarter’s tax expense was $41.6 million, or a 38.5% effective rate. A $41.9 million valuation allowance remained against state deferred tax assets.
Important facts for investors to verify
- Whether order and backlog growth converts to completed sales, given backlog cancellation contingencies and the 22% cancellation rate.
- Whether gross-margin improvements and lower SG&A as a share of revenue persist as demand and pricing change.
- Cash usage, inventory growth and the increase in net leverage, including the company’s stated 40%–45% target range for net homebuilding debt to total capital.
- Renewal and capacity of the mortgage repurchase facility, and refinancing or repayment of near-term debt maturities.
- Adequacy of construction-defect reserves and insurance recoverables, and developments in the Department of Labor investigation, for which no liability was recorded.
- Realizability of deferred tax assets, particularly state net operating losses, which depends on future taxable income and estimates.