This summary is based on the second quarter fiscal 2007 earnings call conducted by D.R. Horton, Inc. (DHI) on April 19, 2007.
Management:
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Vice Chairman, President, and Chief Executive Officer: Donald J. Tomnitz
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Executive VP, Treasurer and Head of Investor Relations: Stacey H. Dwyer
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Executive Vice President, Chief Financial Officer, and Director: Bill W. Wheat
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Senior Executive Vice President of Finance: Samuel R. Fuller
Key Investors Issues
- Net income dropped 85.3% to $51.7 million or 16 cents a share, from $352.8 million or $1.11 a share in 2006.
- Revenue totaled $2.6 billion, down 25.7% from $3.5 billion in the prior year.
- Homes closed in the current quarter totaled 9,792, compared to 12,570 homes closed in the year ago quarter.
Half Year Highlights:
- Net income was $161.4 million, or 51 cents a share, down 75.7% from $662.9 million, or $2.09 per share in the prior year.
- Revenue decreased by 15.6% to $5.4 billion compared to $6.4 billion for the same period of fiscal 2006.
- Homes closed in the six-month period totaled 19,994, compared to 22,461 homes closed in the same period of fiscal 2006.
Second Quarter Highlights
Revenue totaled $2.6 billion, down 25.7% from $3.5 billion in the prior year as homes closed dropped to 9,792, compared to 12,570 homes in the prior year.
- Inventory levels of both new and existing homes remain high, and increases in the use of sales incentives continue to put pressure on profit margins.
- Gross profit margin on home sales revenues was down 90 basis points sequentially from the first quarter margin of 18.6%.
- The firm recorded inventory impairments of $67.3 million as a charge to cost of sales, impacting gross profit by approximately 215 basis points.
- The impairment charges were associated with projects that had a pre-impairment carrying value of approximately $256 million and over 80% of the charges related to projects located in California.
Net income was $52 million or 16 cents a share, down 85.3% from $353 million, or $1.11 a share prior year period due to challenging market conditions.
- Income included pre-tax charges to cost of sales of $67.3 million or 13 cents a share for inventory impairments and $13.9 million or 3 cents a share for write-offs of deposits and pre-acquisition costs related to land option contracts.
- The company adjusted its land option contracts relative to current demand which resulted in a $13.9 million of write-offs of earnest money deposits in pre-acquisition costs related to land option contracts.
- The firm’s supply of land and lots was down 33% to approximately 266,000 lots owned and controlled, from the peak of 96,000 lots in 2006.
Home building SG&A expense for the quarter was 11.3% of total home building revenues compared to 10.3% prior year.
- The company’s SG&A run rate was on track to exceed the stated $220 million SG&A savings goal which included the reduction from approximately 10,000 employees previous spring to the current level of approximately 7,300.
- Based on conditions in the mortgage industry, the company increased its loan loss reserve by approximately $14 million.
- About 95% of the mortgage company revenue was captive, and the company wide capture rate improved to 68% from 67% in the prior year.
- The average cumulative loan to value was 90% compared to 89% in the year ago quarter.
The company reported that it started only about half as many homes as compared to the prior year.
- The total number of homes under construction were approximately 26,000 homes, and total speculative homes declined slightly to 46% of total homes under construction compared to 48% at December 31st.
- The firm reduced its completed spec count by 14% to approximately 4,300 homes at the end of the first half year period.
- The home building leverage ratio, net of unrestricted cash improved 300 basis points to 40.9% from 43.9% in the prior year.
- The company had $1.9 billion available on its home building revolving credit facility and it called $250 million of 8.5% senior notes which would result in charges related to the early retirement of debt of $12 million during the third quarter.
- The positive operating cash flows were $175 million.
Fiscal 2007 Outlook
- The company’s ongoing SG&A goal for each fiscal year is to be at or below 10% of home building revenue.
- The continued goal for fiscal 2007 is to generate an excess of $1 billion in free cash flow.
Key questions and answers from the second quarter earnings call conducted by D.R. Horton, Inc. on April. 19, 2007.
Michael Rehaut (J.P. Morgan):
Could you give us insight on inventory reduction?
Answer: We are trying to get our specs down to that mid 30% level, and our sales were slower than what we had expected, as a result our pricing is more competitive going forward and we will clearly make a bigger dent in those 4,300 spec homes that are currently completed and available for sale.
