D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. The unaudited filing covers a U.S. homebuilder operating in 89 markets across 29 states, with homebuilding, residential lot development through majority-owned Forestar, and mortgage and title services.
Financial performance
| Metric | Three months ended March 31, 2020 | Six months ended March 31, 2020 |
|---|---|---|
| Revenue | $4.50 billion, up 9% year over year | $8.52 billion, up 11% |
| Pre-tax income | $621.3 million, up 34% | $1.145 billion, up 36% |
| Net income attributable to D.R. Horton | $482.7 million, up 37% | $914.0 million, up 43% |
| Diluted earnings per share | $1.30, versus $0.93 | $2.46, versus $1.68 |
| Homebuilding pre-tax margin | 12.9%, versus 10.0% | 12.4%, versus 10.2% |
| Home sales gross margin | 21.3%, versus 19.3% | 21.1%, versus 19.6% |
- Home closings increased 8% in the quarter to 14,539 and 10% year to date to 27,498. Net sales orders rose 20% and 19%, respectively; quarter-end backlog was 19,328 homes, up 14% year over year.
- Homebuilding SG&A declined to 8.3% of homebuilding revenue for the quarter and 8.7% year to date, from 9.0% and 9.2% in the comparable periods.
- Financial-services pre-tax income fell 27% in the quarter to $24.7 million and 4% year to date to $55.2 million, despite revenue growth. Management cited higher operating costs and COVID-related pressure on mortgage and servicing-rights pricing.
- Operating cash flow was negative $395.1 million for the six months, versus negative $461.7 million a year earlier. Homebuilding operations generated $52.1 million, while Forestar and financial services used $123.8 million and $312.1 million, respectively. Investing cash use was $34.6 million; financing provided $453.0 million.
- At March 31, cash and cash equivalents were $1.523 billion (including $14.5 million restricted cash). Notes payable totaled $4.307 billion, up from $3.399 billion at September 30, 2019. Debt to total capital was 29.2%, versus 25.3% at fiscal year-end; homebuilding debt to total capital was 19.2%.
- Homebuilding’s revolving facility had $500 million drawn and approximately $973.7 million available. Forestar’s facility had no borrowings and $349 million available. The mortgage repurchase facility had $1.187 billion outstanding; its capacity was temporarily increased to $1.5 billion through April 23, 2020.
- Total inventory was $12.225 billion, versus $11.282 billion at September 30, 2019. Stockholders’ equity was $10.458 billion. The company repurchased 7.0 million shares for $360.4 million and paid $128.7 million in dividends during the six-month period.
Material changes and notable items
- Results improved substantially year over year, principally from more home closings, higher homebuilding gross margins and lower SG&A as a share of revenue.
- Forestar revenue rose sharply, largely reflecting increased lot sales to D.R. Horton; its quarter pre-tax income declined to $13.7 million from $16.4 million. Forestar issued $300 million of 5.0% notes and repaid $118.9 million of convertible notes at maturity.
- D.R. Horton issued $500 million of 2.5% senior notes due 2024 and repaid $500 million of 4.0% notes at maturity. Homebuilding debt increased from fiscal year-end, partly reflecting revolving-credit borrowing.
- Two multifamily rental properties were sold during the six months, generating aggregate gains of $59.4 million. The six-month effective tax rate was 19.9%, including a $39.5 million benefit from retroactive reinstatement of the federal energy-efficient homes tax credit.
- Quarter-end inventory impairment charges were $1.7 million, compared with $7.7 million in the prior-year quarter. The company also recorded $11.1 million of earnest-money and pre-acquisition cost write-offs for land contracts during the six months.
Outlook, risks and contingencies
- Management reported that COVID-19 began adversely affecting operations and housing demand in late March and April. As of April 28, net sales orders for April were approximately 11% below the comparable prior-year period; the filing cautions that this was not a full-month result and that recent weekly orders had improved from the preceding four weeks.
- The company provided no quantified full-year earnings or revenue guidance. It said it was cautiously managing construction and inventory, limiting land acquisition and development spending, and adjusting prices, incentives and sales pace to local demand. Management cited its balance sheet and liquidity as support for operating through uncertainty.
- COVID-19 risks include weaker employment and consumer confidence, lower home demand, mortgage-market disruption and tighter credit standards, reduced mortgage-sale pricing, possible operational interruptions, and potentially significant additional inventory impairments. The company also noted that fiscal 2020 results may not follow normal seasonal patterns.
- Land and lot purchase contracts carried approximately $8.1 billion of remaining purchase price, supported by $566.5 million of deposits. A limited set of contracts representing $70.7 million of remaining purchase price had specific-performance provisions.
- Recorded legal-claims reserves were $442.2 million, approximately 99% related to construction defects; warranty liabilities were $262.7 million. Management said it could not reasonably estimate possible legal losses beyond recorded reserves. The filing also describes ongoing DOJ mortgage-underwriting inquiries and environmental matters, which management did not expect to have a material effect.
- The company and its relevant subsidiaries reported compliance with debt covenants at March 31. Management warned that constrained capital markets or financing availability, and higher financing costs, could affect liquidity. The mortgage business also had significant counterparty concentration: about 90% of loans sold during the six months went to four financial entities, with one buyer accounting for 33%.
Investor verification priorities
- Track post-quarter net orders, cancellations, backlog conversions and the effect of COVID-19 on home demand and closings.
- Review liquidity and refinancing needs, especially mortgage repurchase-facility capacity and maturity, debt levels, and the duration of temporary financing arrangements.
- Monitor secondary-mortgage-market pricing, purchaser concentration, servicing-rights values and financial-services margins.
- Assess inventory growth, land commitments and deposits, impairment exposure, and management’s pace of land and construction spending.
- Evaluate how much earnings growth depended on improved homebuilding margins, property-sale gains and the one-time tax benefit.
- Follow legal and warranty reserves, including whether actual claims, settlements or insurance recoveries differ materially from estimates.