Business context and reporting period
D.R. Horton, Inc. is a U.S. homebuilder operating in 84 markets across 29 states, with additional residential lot development through its 75%-owned Forestar business and mortgage and title services. This unaudited Form 10-Q covers the quarter and six months ended March 31, 2019, the second quarter of fiscal 2019.
Financial and operating results
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Revenue | $4.129 billion, versus $3.795 billion | $7.648 billion, versus $7.128 billion |
| Income before tax | $462.8 million, versus $444.8 million | $838.5 million, versus $836.1 million |
| Net income attributable to D.R. Horton | $351.3 million, versus $351.0 million | $638.4 million, versus $540.3 million |
| Diluted EPS | $0.93, versus $0.91 | $1.68, versus $1.41 |
| Homebuilding pre-tax margin | 10.0%, versus 11.3% | 10.2%, versus 11.4% |
| Home sales gross margin | 19.3%, versus 20.8% | 19.6%, versus 20.8% |
- Second-quarter home closings rose 10% to 13,480; home sales revenue increased 8% to $4.0 billion. Average closing price was $295,300, down slightly year over year.
- Net sales orders increased 6% to 16,805 homes in the quarter; backlog was 16,890 homes, up 7%. The quarterly cancellation rate was 19%, unchanged year over year.
- For the six-month period, home closings rose 8% to 24,980 and net sales orders rose 5% to 27,847. The six-month cancellation rate increased to 21% from 20%.
- Financial services second-quarter revenue increased 7% to $101.6 million and pre-tax income increased 8% to $34.0 million. Forestar reported $65.4 million revenue and $16.4 million pre-tax income for the quarter.
- At March 31, cash and cash equivalents were $698.8 million, with another $32.4 million restricted. Total assets were $15.0 billion, including $11.9 billion of inventory. Inventory increased from $10.4 billion at September 30, 2018.
- Notes payable totaled $3.62 billion, compared with $3.20 billion at September 30, 2018. Debt to total capital was 27.9%; homebuilding debt to total capital was 22.9%. The company reported $447 million available under its homebuilding revolver and compliance with its debt covenants.
- Six-month operating cash flow was negative $461.7 million, versus negative $98.8 million a year earlier. Cash used for construction-in-progress and finished homes was $755.2 million; cash used for residential land and lots was $445.6 million. Cash declined to $731.2 million including restricted cash.
Material changes versus the prior comparable period
- Revenue grew, but homebuilding margins contracted as average home costs rose and selling prices eased. Homebuilding pre-tax income declined to $400.4 million in the quarter from $416.0 million, despite higher closings.
- Six-month net income attributable to D.R. Horton increased 18%, while pre-tax income was nearly unchanged. The prior-year period included a $108.7 million tax charge related to the Tax Cuts and Jobs Act; this makes the after-tax comparison notably favorable to 2019.
- Cash used in operations increased substantially, reflecting higher home and land investment. Investing cash flow was also negative, including $309.6 million paid for three homebuilder acquisitions.
- The company repurchased 6.1 million shares for $216.2 million and paid $111.9 million in dividends during the six months. The remaining common-stock repurchase authorization was $159.3 million at quarter-end.
- Homebuilding lots controlled under purchase contracts increased to 195,500 from 164,200 at September 30, 2018; these represented 62% of owned and controlled lots, up from 57%. Homes in inventory rose to 32,100 from 27,900.
Outlook, commentary, risks, contingencies and unusual items
- Management cited recent moderation in new-home demand following reduced affordability and higher mortgage rates, but described economic fundamentals and the supply of affordable homes as supportive. It expects housing conditions to vary by market and stated that continued economic growth could support demand where employment and affordability are favorable.
- No specific full-year revenue, earnings, or closing guidance is provided. Management said it will adjust pricing, sales pace, incentives, product offerings, and inventory to local conditions; it aims to generate positive annual operating cash flow and expects homebuilding debt to remain significantly below its 35% long-term debt-to-capital limit during fiscal 2019.
- Key risks identified include economic and housing-market cycles, affordability and mortgage-rate changes, access to mortgage and capital-market financing, land and lot risks, supply and labor constraints, construction defects and warranty claims, regulation, competition, debt covenants, and acquisition execution.
- The quarter included a $29.3 million gain from the sale of DHI Communities’ first multifamily rental property. Fiscal 2019 acquisitions of Westport Homes, Classic Builders, and Terramor Homes cost $325.9 million in aggregate; preliminary purchase accounting included $54.3 million of goodwill.
- Forestar issued $350 million of 8.0% senior notes in April 2019, after quarter-end; the notes are due in 2024 and carry an 8.5% effective annual interest rate after financing costs. This debt is not guaranteed by D.R. Horton.
- At quarter-end, warranty liability was $213.9 million and legal-claim reserves were $419.1 million, approximately 99% related to construction-defect matters. Management noted that actual claims and insurance recoveries could differ significantly from estimates and that it could not reasonably estimate losses beyond recorded reserves.
- Homebuilding had $7.4 billion of remaining purchase prices under land and lot contracts, supported by $461.0 million in deposits. A limited portion, $96.8 million, was subject to specific-performance provisions. In a related-party transaction, the company consolidated a variable-interest entity involving a land purchase contract assigned to entities owned by the Chairman’s adult sons; the company expects to purchase the land in phases.
- The company adopted ASC 606 effective October 1, 2018, recording a $27.1 million increase to retained earnings; management reported no material revenue impact for the current quarter or six-month period. The company also paid a $267,000 EPA penalty in March 2019 and disclosed a separate wetlands matter with a potential penalty estimated at $100,000 to $350,000.
Important facts for investors to verify
- Whether homebuilding gross-margin pressure, lower average selling prices, and regional softness—particularly in the West and Southwest—continue in subsequent periods.
- Whether sales orders and backlog convert into closings, given buyer contingencies and the six-month cancellation rate increase.
- Whether elevated inventory and land investment translate into stronger future cash generation; operating cash flow was materially negative in the first half.
- Debt levels, revolver availability, covenant compliance, and Forestar’s financing costs following its post-quarter $350 million note issuance.
- The adequacy of construction-defect, warranty, and legal reserves, as well as the recoverability of related insurance receivables.
- The terms and execution of the related-party land arrangement, and the final purchase-price allocation for the three acquisitions.