Fort Worth, Texas-based D.R. Horton (DHI), the largest U.S. homebuilder, said fiscal third-quarter earnings declined as sales margin shrank and it incurred $54.7 million in pretax costs.

Net income was $113.1 million, or $0.32 a share, for the third quarter ending June 30, compared with $146 million in third quarter 2013, the company said.

The company reported that its net sales orders for the third quarter ended June 30, 2014 increased 25% to 8,551 homes and 32% in value to $2.4 billion, compared to 6,822 homes and $1.8 billion in the prior year quarter.

New home construction starts dropped 9.3% from May with losses in the South being the driver, which is where D.R. Horton has been focusing its growth efforts.

The company’s sales order backlog of homes under contract at June 30, 2014 increased 15% to 11,365 homes from 9,911 homes at June 30, 2013. The value of the backlog increased 26% to $3.3 billion at June 30, 2014 from $2.6 billion a year ago.

“For the 12th consecutive year, Builder Magazine ranked D.R. Horton as the largest homebuilder in the United States. Our position as the largest and most geographically diverse homebuilder provides a strong platform for us to compete for new home sales, evidenced by the 32% increase in the value of our net sales orders, 28% increase in our home sales revenue and the 26% increase in the value of our sales order backlog this quarter as compared to the prior year quarter,” said Chairman Donald R. Horton.

Homebuilding revenue for the third quarter of fiscal 2014 increased 28% to $2.1 billion from $1.6 billion in the same quarter of 2013. Homes closed in the quarter increased 19% to 7,676, compared to 6,464 homes in the year ago quarter. Net income for the third fiscal quarter ended June 30, 2014 was $113.1 million, or $0.32 per diluted share, compared to $146.0 million, or $0.42 per diluted share in the same quarter of fiscal 2013.

The third quarter results included $54.7 million in pre-tax charges to cost of sales for inventory impairments, primarily related to active communities in the Midwest region in Chicago that were purchased from 2004 to 2007 and had been previously impaired.

The Chicago housing market remains weak, with sales absorptions and returns in these communities performing below management's expectations. During the quarter, the company took actions to increase sales pace, reduce inventories and improve cash flows and returns in these communities which resulted in these impairment charges. The quarterly results also included $2.1 million of land option charges for write-offs of earnest money deposits and pre-acquisition costs for projects that the company does not intend to pursue.

The company's home sales gross margin in the third quarter was 20.7%, compared to 21.4% in the prior year quarter. The third quarter gross margin included the impact of purchase accounting adjustments related to the company's acquisitions of Crown Communities and Regent Homes and higher relative costs for warranty and construction defect claims as a percentage of home sales revenue, as well as actions the company has taken to improve sales pace, returns and cash flows in many communities across its operating markets.

During the quarter, the company acquired the homebuilding operations of Crown Communities for approximately$210 million in cash. Crown operates in Georgia, South Carolina and eastern Alabama. The company acquired approximately 640 homes in inventory, 2,350 lots and control of an additional 3,400 lots through option contracts. The company also acquired a sales order backlog of 431 homes valued at $113.6 million. All of the assets acquired were recorded at their estimated fair values and $53.6 million of goodwill was recorded as a result of the transaction.

Subsequent to the acquisition date in May, the company's third quarter results include 290 net sales and 254 closings from the Crown operations.

The company ended the quarter with $538.5 million of homebuilding unrestricted cash and net homebuilding debt to total capital of 34.4%. Net homebuilding debt to total capital consists of homebuilding notes payable net of cash divided by total equity plus homebuilding notes payable net of cash.

For the first nine months of fiscal 2014, net sales orders increased 13% to 22,574 homes from 19,960 homes in the first nine months of fiscal 2013 and the value of net sales orders increased 23% to $6.3 billion from $5.1 billion.

Homebuilding revenue for the nine months ended June 30, 2014 increased 27% to $5.4 billion from $4.3 billion in the same period of fiscal 2013. Homes closed in the nine-month period increased 16% to 20,058, compared to 17,289 homes in the prior year period. Net income for the nine months ended June 30, 2014 increased 14% to $367.3 million, or $1.05 per diluted share, from $323.2 million, or $0.93 per diluted share in the same period of fiscal 2013.