This summary is based on the first quarter fiscal 2007 earnings call conducted by D.R. Horton Inc. (DHI) on January 23, 2007.
Management:
Key Investor Issues:
- Q1 gross profit margin dropped sequentially from 20.9% to 18.6%.
- The Q1 EPS dropped to 35 cents from 98 cents in the year ago quarter.
- The company generated $1.2 billion in free cash flow in the last six months.
First-Quarter Financial Highlights:
The quarter net sales ordered decreased 23% to 8,771 homes sold for $2.3 billion.
- In the year ago quarter, 11,463 homes were sold for $3.2 billion.
- The cancellation rate for the quarter was 33% versus 40% in Q4 of 2006.
- The company experienced sequential improvement in the cancellation rate each month throughout the quarter.
- The monthly cancellation rates were 38%, 33% and 30% for October, November and December respectively.
- Despite the improved cancellation rate when compared with Q4, the rate remains well above the historical range of 16% to 20%.
- The company’s homes and contracts as at December 31, 2006 was 16,694 homes at $4.7 billion compared with 20,816 homes at $6.2 billion in the year ago quarter.
The company was profitable in all of its reporting regions during the quarter even after impairments of earnest money write-offs.
- The percentage of assets as at December 31, 2006 was 15%, 17% and 13% in Northeast, Southeast and South-central respectively.
- As at the same date, the percentage of assets in Southwest, California and West was 17%, 22% and 16% respectively.
The home building revenue totaled $2.8 billion in Q1 of both 2006 and 2007.
- Homes closed during the quarter were 10,202 compared with 9,891 homes in the year ago period.
- The average closing price for the quarter dropped 4% to $270,600 versus $282,000 in the previous year quarter reflecting the softer pricing environment in the past year.
The Q1 financial services revenue increased 8% to $66.5 million from $61.3 million in the year ago quarter.
- The financial services pre-tax income for the quarter rose 36% to $27.1 million from $20 million in the year ago quarter.
- About 94% of mortgage company revenue was captive during the quarter reflecting the continued focus on supporting homebuilder business.
- The company-wide capture rate during the quarter improved to about 70% from 64% a year ago.
The gross profit margin on home sales revenue during the quarter before inventory impairs land write-offs was 18.6%.
- This was a decrease of 920 basis points on home sales margin of 27.8%.
- Sequentially, the decrease was 230 basis points on Q4 margin of 20.9%.
- The declines were due to core margin compression resulting from lack of pricing power and increased use of sales incentive relative to the previous year.
- During the quarter, the management reported inventory impairments of $40.9 million as a charge to cost of sales and about 150 basis point gross profit margin impact.
- The impairment charges are associated with projects that had a pre-impairment carrying value of $168 million and much of the charges related to projects located in Colorado and California.
The management continues to adjust the land option contracts relative to current demand.
- This led to the cancellation of several of option contracts during the quarter.
- The activity resulted in $36.8 million of write-offs of earnest money deposit and acquisition cost related to land option contracts. The approximate quarterly gross profit impact was 130 basis points.
- The write-offs related to contracts across all six of the reporting regions with more than 50% in the California and West regions.
The company has reduced its supply of land and lots as at December 31, 2006.
- The reduction was about 297,000 lots owned and controlled down 100,000 lots or 25% from the March 31 peak.
- An estimated 63% of these lots are owned and 37% are under option contracts.
- As at December 31, 2006, the total remaining purchase price of land and lots controlled under option contracts was $3.2 billion, a 45% decrease from the peak of $5.8 billion as at March 31, 2007.
- The management will continue to review option contracts each quarter to ensure that the company is controlling the appropriate level of land and lots to meet future needs.
The SG&A expense for the quarter was 10.5% of total homebuilding revenue.
