D.R. Horton, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020; comparative period is the three months ended December 31, 2019. The unaudited results are subject to the homebuilding business’s seasonality and are not necessarily indicative of the full fiscal year.
Financial and operating performance
| Metric | Q1 FY2021 | Prior-year quarter |
|---|---|---|
| Revenue | $5.933 billion | $4.021 billion |
| Income before taxes | $1.034 billion | $523.3 million |
| Net income | $795.2 million | $432.5 million |
| Net income attributable to D.R. Horton | $791.8 million | $431.3 million |
| Diluted EPS | $2.14 | $1.16 |
| Effective tax rate | 23.1% | 17.4% |
- Revenue increased 48%; pretax income increased 98%; and net income attributable to D.R. Horton increased 84% year over year.
- Homebuilding revenue was $5.719 billion, up 47%. Homes closed increased 45% to 18,739, at an average closing price of $304,100. Home sales gross margin rose to 24.1% from 21.0%; homebuilding pretax margin increased to 16.4% from 11.9%.
- Net sales orders rose 56% to 20,418 homes, with value up 62% to $6.416 billion. Backlog increased 107% to 28,487 homes, valued at $8.935 billion; backlog contracts remain subject to cancellation contingencies.
- Financial services revenue rose 82% to $187.2 million and pretax income rose 176% to $84.1 million. Forestar revenue increased 24% to $307.1 million and pretax income increased to $29.2 million.
- Operating cash flow was negative $252.1 million, versus negative $113.8 million, primarily reflecting greater investment in homes under construction and land/lots. Investing cash flow was negative $91.4 million; financing cash flow was negative $221.7 million. Cash, cash equivalents and restricted cash ended the quarter at $2.475 billion, down from $3.040 billion at September 30, 2020.
- Total assets were $19.780 billion and total equity was $12.770 billion at quarter-end. Inventory was $13.577 billion, up from $12.237 billion at fiscal year-end.
- Notes payable totaled $4.226 billion, including $2.606 billion in homebuilding debt, $654.1 million in Forestar debt and $969.1 million outstanding under the mortgage repurchase facility. Consolidated debt to total capital was 25.3%; homebuilding debt to total capital was 17.3%.
Material changes and notable items
- Management attributed the strong results primarily to higher home closings and improved home sales gross margin. The company reported sales-order growth across all regions; the Southeast and South Central contributed the largest homebuilding revenues.
- Homebuilding SG&A declined to 7.9% of homebuilding revenue from 9.2%, despite higher absolute expense, as revenue increased.
- The company issued $500 million of 1.4% senior notes due 2027 and repaid $400 million of 2.55% notes at maturity. It repurchased 1.0 million shares for $69.8 million and declared a $0.20 quarterly dividend.
- The company’s first sale of a single-family rental community comprised 124 homes, generated $31.8 million in proceeds and a $14.0 million gain. In October 2020 it acquired Braselton Homes’ Corpus Christi operations for approximately $23 million.
- Inventory and land option charges were $8.3 million, including $5.6 million of land impairment charges; no impairment charges were recorded in the prior-year quarter. The prior-year period included a $31.2 million gain on sale of a multifamily rental property, contributing to lower reported pretax income in “other” businesses this quarter.
Outlook, liquidity and risks
- Management described demand as strong, driven largely by low mortgage rates and limited affordable-home supply. It said it intends to manage pricing, incentives, sales pace and inventory according to local conditions, and expects to maintain homebuilding debt to total capital below 35% throughout fiscal 2021. The filing provides no specific revenue or earnings forecast.
- Management cited cash, credit facilities and capital-market access as supporting near-term liquidity. The homebuilding revolver had approximately $1.44 billion of available capacity and no borrowings at quarter-end. The mortgage repurchase facility, with $969.1 million outstanding, matured February 19, 2021; management said it expected renewal and extension on similar terms and was in discussions with lenders.
- COVID-19 effects remain uncertain, including possible impacts on employment, customer demand, mortgage availability, capital markets, trade partners and employees. Management also identified risks from economic and housing-market cyclicality, interest rates, land and lot exposure, building-material and labor availability and costs, regulation, and access to financing.
- Land and lot purchase contracts had approximately $11.9 billion of remaining purchase price, supported by $776.0 million of deposits. A limited subset, representing $73.5 million of remaining purchase price, had specific-performance provisions. Surety bonds were $1.9 billion and letters of credit were $192.1 million.
- Legal-claims reserves were $491.8 million, approximately 99% related to construction defects; estimated insurance receivables were $82.2 million. Management said actual costs and recoveries could differ significantly and it could not reasonably estimate possible losses above recorded reserves. A DOJ inquiry concerning historical FHA-loan underwriting and quality-control processes remains ongoing; the DOJ had not asserted a formal claim amount, penalty or fine.
- Management reported compliance with applicable debt covenants. Disclosure controls were considered effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the mortgage repurchase facility was renewed or extended before maturity, and whether its terms or capacity changed.
- Whether order and backlog growth converted into closings, including the impact of cancellations and buyer financing contingencies.
- Whether the company can sustain improved homebuilding margins amid changes in affordability, pricing, incentives, labor and material costs.
- How inventory investment, land-contract commitments and cash usage evolve, and whether liquidity and leverage remain within management’s stated objectives.
- Any material developments in COVID-19-related operating conditions, construction-defect claims, insurance recoveries or the DOJ inquiry.