D.R. Horton eyes $1 billion debt repayment by fiscal year-end, plans 'opportunistic' reductions

By Paul Deckleman

New York, Aug. 3 - Homebuilder D.R. Horton Inc. reported its third consecutive quarterly profit on Tuesday, on the way toward its stated goal of returning to profitability in fiscal 2010 - although company executives took a more cautious tone for the next year or two, warning that conditions would be more challenging as the overall building industry tries to regain its feet without the help of now-expired homebuyer tax incentives.

However, the executives pointed out the company's strong cash flow generation and continued debt-cutting progress, expecting to have chopped at least $1 billion of debt off Horton's books by the time the current fiscal year ends on Sept. 30 - with authorization from the company board of directors to keep buying back more debt in the coming year.

On the company's conference call after the release of the numbers, the Fort Worth, Texas-based builder's president, vice-chairman and chief executive officer, Donald J. Tomnitz - who has been with Horton for 28 years, nearly the full time it has been in existence - declared that with the year-to-date redemptions and repayment of some $883.6 million of debt, the current balance sheet is "the strongest balance sheet in our history."

$1 billion target - and then some

The company's executive vice president and treasurer, Stacey H. Dwyer, told analysts on the call that as of the end of the 2010 fiscal third quarter on June 30, the balance of outstanding public notes was $2.2 billion, following the repurchase during the quarter of $345.2 million of Horton's paper on the open market through reverse inquiries.

The early retirement of that debt resulted in a loss of $8.3 million on the income statement.

Dwyer said that after the quarter ended, Horton had repurchased an additional $53.3 million of notes. She said that subsequent to those repurchases, the board approved a $500 million debt repurchase authorization, effective through next July 31.

"With these repurchases, and the scheduled maturities in September, our retirement of debt for the fiscal year will total at least $1 billion," she said.

Dwyer said that remaining note maturities for 2010 total only $63 million. The company has some leftover outstanding 9¾% senior guaranteed notes issued in June 2008, which come due on Sept. 15. Beyond that, she said Horton has $205 million of notes coming due in the 2011 fiscal year that begins on Oct. 1 and a total of $400 million of maturities over the next three years.

When an analyst asked whether the company has any kind of specific debt-balance target in mind - after first prefacing his question with the opinion that Horton has done "a great job in buying back your debt, I wish other homebuilders would do the same" - Tomnitz joked that the debt level the company's founder and chairman, Donald R. Horton, would like to see, "is nada [Spanish for 'nothing'] - we have a little ways to go to get to nada."

Dwyer declared "I would not say that we have a specific goal - we're going to opportunistically continue to reduce our debt, as long as that seems to be one of our best investment alternatives." However, she added that "if we see a sharp recovery in the homebuilding industry," which would then encourage the homebuilder to spend excess cash on buying more property and building more houses, "that may change our plans in terms of future debt reductions."

A strong cash position

Dwyer said that the company's cash flow from operations for the quarter was $159.3 million and for the year to date totaled $587.1 million.

She said Horton ended the quarter with approximately $1.7 billion of cash and marketable securities, even after the repurchase of the $345.2 million of outstanding notes.

The company's executive vice president and chief financial officer, Bill W. Wheat, said that Horton's leverage ratio, net of cash and marketable securities, stood at 17.5% - a 13.2 percentage-point improvement versus a year ago, due primarily to the company's strong cash generation and its reductions of outstanding debt.

For the quarter, D.R. Horton posed net earnings of $50.5 million, or 16 cents per diluted share, versus a year-earlier net loss of $143.8 million, or 45 cents per diluted share. Homebuilding revenue for the third quarter increased 51% to $1.4 billion, from $914.1 million. The results were in line with market expectations.

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