D.R. Horton, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2021. All financial amounts are in U.S. dollars; balance-sheet comparisons are with September 30, 2020 unless noted. The company is a national homebuilder operating in 91 markets across 29 states, with homebuilding, lot development through 64%-owned Forestar, mortgage and title services, and rental property activities.
Financial and operating performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $6.447 billion, up 43% year over year | $12.380 billion, up 45% |
| Income before taxes | $1.180 billion, up 90%; 18.3% of revenue versus 13.8% | $2.214 billion, up 93%; 17.9% of revenue versus 13.4% |
| Net income attributable to D.R. Horton | $929.5 million versus $482.7 million | $1.721 billion versus $914.0 million |
| Diluted earnings per share | $2.53 versus $1.30 | $4.67 versus $2.46 |
| Homebuilding revenue | $6.188 billion, up 41% | $11.906 billion, up 44% |
| Homebuilding gross margin on home sales | 24.6% versus 21.3% | 24.4% versus 21.1% |
| Homebuilding pre-tax margin | 17.0% versus 12.9% | 16.7% versus 12.4% |
| Financial services revenue / pre-tax income | $225.1 million / $107.7 million | $412.3 million / $191.8 million |
Quarterly home closings rose 36% to 19,701; the average closing price was $313,200. Net sales orders increased 35% to 27,059, and backlog grew 85% to 35,845 homes, valued at $11.613 billion. For the six months, closings increased 40% to 38,440 and net orders rose 43% to 47,477. Management attributed demand to historically low mortgage rates and limited supply of affordable homes. The quarterly cancellation rate was 15%, down from 19%.
Cash flow and liquidity: Operating cash flow was negative $154.9 million for the six months, improving from negative $395.1 million a year earlier. Homebuilding operations provided $138.0 million, while Forestar and financial services used $249.5 million and $32.3 million, respectively. Inventory investment absorbed substantial cash. Investing cash flow was negative $196.1 million and financing cash flow negative $457.2 million. Cash, cash equivalents and restricted cash totaled $2.232 billion, down from $3.040 billion at September 30, 2020.
Debt and capital: Notes payable totaled $4.472 billion, compared with $4.283 billion at September 30. Consolidated debt to total capital was 25.7%, down from 26.6%; homebuilding debt to total capital was 16.8%, down from 17.5%. The company had no homebuilding revolver borrowings and reported $1.45 billion available capacity at quarter-end. Its mortgage repurchase facility had $1.2 billion outstanding. Management said it expected cash, facilities and capital-market access to cover near-term needs and expected homebuilding debt to total capital to remain well below its long-term 35% target during fiscal 2021.
Changes, outlook and notable items
- Year-over-year improvement: Stronger closings and higher selling prices relative to home costs expanded homebuilding margins. SG&A declined as a share of homebuilding revenue to 7.6% for the quarter and 7.7% for the six months.
- Land and inventory: Homebuilding inventory increased to $12.896 billion from $11.015 billion. Lots controlled under purchase contracts rose to 365,200 from 264,300 at fiscal year-end; 75% of owned and controlled lots were under contract, versus 70%.
- Unusual items: A single-family rental community sale generated a $14.0 million gain in the six-month period. In the prior-year six-month period, asset-sale gains were $59.5 million, including gains from two multifamily property sales. Approximately $215 million of estimated tax payments was deferred to June 15, 2021 following the Texas winter storm, temporarily supporting operating cash flow.
- Capital actions and subsequent events: The company repurchased 5.5 million shares for $420.2 million and paid $145.6 million in dividends during the six months. In April, it renewed a $1.0 billion share repurchase authorization and extended and increased the capacity of its homebuilding and Forestar revolving facilities. Forestar also issued $400 million of 3.85% notes and announced redemption of its $350 million 8.0% notes.
- Management outlook: No specific full-year revenue or earnings guidance is provided in the filing. Management reported demand remained strong, planned continued investment in homebuilding and rental inventories, and said it would adjust pricing, incentives, construction pace and inventory to local conditions. Results are seasonal; management generally expects more closings and revenue in the third and fourth fiscal quarters.
- Risks and contingencies: The company cites pandemic and economic uncertainty, mortgage-rate changes, affordability, construction-material and skilled-labor availability, inflation, land risks, and access to financing. Backlog contracts may be cancelled. Legal-claim reserves were $524.4 million, primarily for construction defects, and warranty liabilities were $340.7 million. Management says it cannot reasonably estimate losses above legal reserves; actual costs and insurance recoveries could differ materially. A longstanding DOJ inquiry into FHA loan underwriting and quality controls remained ongoing, with no formal claim amount, penalty or fine asserted.
Important facts for investors to verify
- Whether the elevated order backlog converts into closings, and whether cancellations remain near the reported 15% quarterly rate.
- Whether home price increases continue to exceed construction-cost inflation and preserve homebuilding gross margins.
- Cash requirements and exposure associated with the $13.5 billion remaining purchase price on land and lot contracts, including contracts with specific-performance provisions.
- Whether operating cash flow improves as inventory grows and the deferred tax-payment timing benefit reverses.
- Changes in construction-defect and warranty claims, reserve adequacy, insurance recoveries, and the status of the DOJ inquiry.
- Mortgage funding capacity and loan-sale economics, as well as the effect of interest rates and market conditions on demand and affordability.