D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020; comparative periods ended June 30, 2019. Amounts are in U.S. dollars. D.R. Horton is a national homebuilder operating in 88 markets across 29 states, with homebuilding, Forestar lot development, financial services and other businesses.
Financial performance
| Metric | Three months ended June 30, 2020 | Nine months ended June 30, 2020 |
|---|---|---|
| Revenue | $5.39 billion, up 10% year over year | $13.91 billion, up 11% |
| Income before taxes | $782.4 million, up 25%; 14.5% of revenue versus 12.8% | $1.93 billion, up 32%; 13.9% of revenue versus 11.7% |
| Net income attributable to D.R. Horton | $630.7 million, up 33% | $1.54 billion, up 39% |
| Diluted earnings per share | $1.72 versus $1.26 | $4.17 versus $2.94 |
| Homebuilding gross margin on home sales | 21.6% versus 20.3% | 21.3% versus 19.9% |
| Operating cash flow | Not separately reported for the quarter | $588.9 million versus $80.7 million |
For the nine-month period, home closings rose 10% to 45,140 and home sales revenue increased 11% to $13.43 billion. Net sales orders rose 26% to 54,732 homes; quarter orders increased 38% to 21,519. Quarter-end backlog was 23,205 homes, up 41%, valued at $7.01 billion.
Cash, cash equivalents and restricted cash were $2.37 billion at June 30, 2020, up from $1.51 billion at September 30, 2019. Total notes payable were $4.30 billion, compared with $3.40 billion; total equity was $11.33 billion. Consolidated debt to total capital was 28.0%, versus 25.3% at fiscal year-end. Homebuilding debt was $2.49 billion, and homebuilding debt to total capital was 18.4%. The company reported approximately $1.46 billion available under its main homebuilding revolver, with no borrowings outstanding, plus a new $375 million 364-day facility with no borrowings at quarter-end. Forestar and financial services debt are included in consolidated notes payable; DHI Mortgage’s $1.17 billion mortgage repurchase facility is substantially supported by loans held for sale.
Changes and notable items
- Homebuilding revenue, closings and margins improved year over year. Management attributed higher pretax income primarily to increased closings and improved home sales gross margin. Homebuilding SG&A fell to 7.9% of revenue in the quarter from 8.1%.
- Cash provided by operating activities increased to $588.9 million from $80.7 million. Homebuilding operations provided $1.16 billion, while Forestar used $205.7 million and financial services used $347.7 million. Cash and inventory levels rose, reflecting operating activity and investment in homes and lots.
- Forestar quarterly revenue doubled to $177.9 million, but much of it was from sales to D.R. Horton; its pretax margin declined to 5.8% from 9.5%. Financial services quarterly revenue rose 31% to $156.6 million and pretax income rose 43% to $68.8 million.
- The effective tax rate fell to 19.1% for the quarter and 19.6% year to date, including tax benefits of $38.1 million and $77.6 million, respectively, from retroactive reinstatement of the federal energy-efficient homes tax credit.
- Year-to-date results included $59.4 million in gains from sales of two multifamily rental properties. No multifamily property was sold during the quarter.
- The company repurchased 7.0 million shares for $360.4 million in the nine-month period; none were repurchased in the quarter. It paid quarterly dividends of $0.175 per share and declared the same dividend for August 2020.
Outlook, risks and contingencies
Management gave no specific financial or earnings guidance in the supplied filing text. It said April sales were affected by stay-at-home orders, but net sales orders increased more than 50% year over year in May and June as restrictions eased; quarter cancellations were 22%, versus 20% a year earlier. Management cited low mortgage rates, limited affordable-home supply and some pent-up demand, while emphasizing that the duration and effects of COVID-19 remain uncertain. It intends to adjust pricing, incentives, construction, inventory and land purchases to local conditions and believes cash, liquidity and borrowing access provide flexibility.
Key risks include a prolonged pandemic or recession affecting employment, buyer demand, consumer confidence, mortgage availability and capital markets; mortgage-market disruption and dependence on a small group of loan purchasers; potential inventory impairments; land, labor and material availability and costs; and legal, warranty and construction-defect claims. Management reported no impairment charges in the quarter and $1.7 million year to date, but warned that prolonged weakness could lead to significant additional impairments. At June 30, reserves were $461.3 million for legal claims and $281.3 million for warranty claims; actual costs and insurance recoveries could differ materially. The company also disclosed $561.9 million in deposits on land and lot purchase contracts covering approximately $8.5 billion of remaining purchase price, including a limited $50.8 million subject to specific-performance provisions.
Credit facilities carry financial covenants; the company reported compliance at quarter-end. DHI Mortgage’s repurchase facility matures February 2021 and had $1.2 billion outstanding. The company also disclosed ongoing ordinary-course litigation, a DOJ inquiry concerning historical FHA loan underwriting and quality-control processes, and environmental matters; it said these were not expected to have a material adverse effect based on current estimates.
Important facts for investors to verify
- Whether the strong May–June order rebound and backlog convert into closings, and how cancellations and affordability develop.
- COVID-19 effects on employment, home demand, construction operations, mortgage financing and secondary-market loan purchasers.
- Cash-flow conversion and working-capital needs, including inventory growth, Forestar investment and mortgage-loan funding.
- Debt maturities, revolver availability and covenant compliance, especially the 2021 mortgage facility maturity and Forestar’s separate debt.
- Whether higher margins and lower SG&A as a share of revenue are sustainable, and the effects of the one-time tax credit and multifamily sale gains.
- Changes in legal and warranty reserves, insurance recoveries, land-contract commitments and any future inventory impairment charges.