Falling short of analysts expectations, D.R. Horton today announced a loss of $823.8 million, or $2.62 a share, plummeting from net income of $292.8 million, or 93 cents a share in the year-ago quarter. The company said its fiscal third-quarter results for the period ended June 30 included pre-tax charges of $835.8 million for inventory impairments and $16.2 million related to write-offs on land options it's abandoning. In addition, the company is taking a goodwill impairment charge of $425.6 million.
Before impairments however, the company produced an operating profit for the quarter and generated positive cash flow from operations.
Revenue from home building fell to $2.5 billion from $3.6 billion, as the number of homes closed dropped to 9,643 from 13,377. Backlog of homes under contract also shrank by roughly 40% to 15,801 homes valued at $4.4 billion.
Net sales orders for the quarter totaled 8,559 homes ($2.0 billion), compared to 14,316 homes ($3.8 billion) for the same quarter of fiscal 2006. Net sales orders for the first nine months of fiscal 2007 were 27,313 homes ($6.9 billion), compared to 41,550 homes ($11.4 billion) for the same period of fiscal 2006. The company's cancellation rate rose to 38% from 32% in its fiscal second quarter.
Predicting continued volatility for the industry, Donald Horton, chairman of the board noted that the impairment charges are a reflection the company's cautious outlook. "For the remainder of fiscal 2007, we will focus on generating cash, reducing inventory balances and paying down outstanding debt to maintain a strong balance sheet," he said.
During a conference call with analysts, Horton CEO Don Tomnitz pushed any hope of a recovery in the housing market beyond 2008. "Based on where we see our sales today, and where we see the mortgage industry, we aren't seeing a housing recovery on the horizon," he said. "I'd say it's going to be another couple of years."
Though the company implemented an expansion strategy that includes core and satellite operations to develop a broad and deep national presence, Tomnitz said that conditions in some areas of California have the builder pulling back its footprint. "We are shrinking back in some areas of California. To date we have not collapsed more than two or three of those [satellite operations] and we are evaluating all markets one at a time."
During the quarter, the company impaired 121 communities, 120 of which have been previously impaired. 75% of the land charges taken during the quarter are considered "dollars in development," related to vacant land or projects where the company is not yet delivering homes. The remaining 25% is related to communities that are currently delivering homes.
The company has an internal goal to turn capital quickly by getting in and out of a community within a two-to-three-year timeframe. As a result, increasing emphasis continues to be placed on lowering prices in order to bring absorptions in line with Horton's goals. "We don't see strength in any of our markets right now," said Tomnitz. "We are adjusting our pricing accordingly on a project-by project basis to try and drive absorptions we'd like to see. I believe as we move into the full fourth quarter we will see a bigger benefit to the pricing adjustments that were made in mid-May."
Because of weak sales and the inability to see when the housing correction will begin, the company has adapted a conservative outlook for next year as well. "We are currently staffing the company anticipating a lower rate of sales in 2008," said Tomnitz.
Though the company posted a cancellation rate of 38%, the highest in many quarters, Tomnitz remained unfazed. "I'm not concerned about our can-rates being as high as they are, because I think we are writing as many buyers as we can. There is no question the can-rates reflect the troubles in the mortgage industry. In some markets, we are writing the same buyer three times as reflection of the changes in the mortgage environment."
Regarding standing inventory, the overall number of units in standing inventory increased this quarter to 27,000 and spec inventory levels reached 48%, still well above the company's target of 35%. Executives expect to see a dramatic decrease in specs during the next quarter and estimate it will reach that goal over the next 4 to 5 quarters.
Regarding cost control, Tomnitz said, "We are seeing substantial decreases from vendor and subcontractor partners as well as some results from cost reduction measures we have taken in the past two or three quarters. Our goal is to be positive cash flow in '07 and also in '08."