D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2019; comparisons are with the three months ended December 31, 2018 unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
D.R. Horton is a U.S. homebuilder operating in 90 markets across 29 states, with homebuilding, majority-owned Forestar land development, financial services, and other businesses. The company reported improved housing demand and said low mortgage rates and stronger demand allowed it to reduce sales incentives year over year.
| Metric | Q1 FY2020 | Prior period | Change |
|---|---|---|---|
| Revenue | $4.02 billion | $3.52 billion | +14% |
| Income before taxes | $523.3 million | $375.7 million | +39% |
| Net income attributable to D.R. Horton | $431.3 million | $287.2 million | +50% |
| Diluted EPS | $1.16 | $0.76 | +53% |
| Pre-tax margin | 13.0% | 10.7% | +2.3 percentage points |
Operating performance and material changes
- Homebuilding: Revenue increased 14% to $3.9 billion; 12,959 homes closed, up 13%, at an average price of $298,100. Net sales orders rose 19% to 13,126 homes, and backlog increased 2% to 13,780 homes, valued at $4.23 billion.
- Home sales gross margin improved to 21.0% from 20.0%; homebuilding pre-tax income increased to $461.6 million from $354.3 million. Management attributed margin improvement largely to lower average home costs and slightly higher average selling prices.
- Forestar: Revenue increased to $247.2 million from $38.5 million and pre-tax income to $22.2 million from $4.9 million. The substantial revenue increase included $221.2 million of intercompany land and lot sales to D.R. Horton.
- Financial services: Revenue increased 21% to $102.9 million and pre-tax income rose 29% to $30.5 million. DHI Mortgage financed 65% of D.R. Horton closings, versus 54% a year earlier.
- Homebuilding SG&A was 9.2% of homebuilding revenue, down from 9.5%. Consolidated results also benefited from a $31.1 million gain on asset sales, mainly the sale of a multifamily rental property.
Cash flow, debt, and liquidity
- Operating cash flow was negative $113.8 million, versus negative $373.1 million. Homebuilding used $178.4 million of cash; financial services provided $83.5 million. Inventory investment remained a significant use of cash.
- Cash, cash equivalents, and restricted cash totaled $1.60 billion at quarter-end. Total assets were $16.32 billion and stockholders’ equity was $10.23 billion.
- Notes payable were $3.78 billion, up from $3.40 billion at September 30, 2019. Debt to total capital was 27.0%, versus 25.3% at September 30; homebuilding debt to total capital was 19.5%, versus 17.0%.
- The $1.59 billion homebuilding revolver had no borrowings and approximately $1.4 billion of available capacity. The company reported compliance with its debt covenants.
- The company issued $500 million of 2.5% senior notes due 2024. It had $500 million of homebuilding notes due in February 2020 and Forestar had $118.9 million of convertible notes due in March 2020; management said existing liquidity and capital-market access were expected to cover near-term needs.
Outlook, risks, and unusual items
- Management described housing demand as solid, citing economic fundamentals and limited affordable-home supply. It expected demand to vary by market and linked sustained results to economic growth, employment, affordability, mortgage rates, and lending standards. No specific revenue or earnings guidance was provided.
- The quarter included a $32.9 million tax benefit from retroactive reinstatement of the federal energy-efficient homes tax credit. The effective tax rate was 17.4%, compared with 23.7% a year earlier.
- DHI Communities sold a multifamily property for $61.5 million and recorded a $31.2 million gain. The company had four multifamily projects under construction and one substantially complete.
- Material exposures include homebuilding cyclicality, affordability and interest-rate changes, mortgage-credit availability, land and construction costs, and warranty and construction-defect claims. Legal-claim reserves were $432.5 million; management stated it could not reasonably estimate potential losses in excess of reserves.
- Homebuilding land and lot purchase contracts had approximately $7.6 billion of remaining purchase price, supported by $538.5 million in deposits; a limited subset of contracts, representing $57.3 million, had specific-performance provisions.
- The $950 million mortgage repurchase facility had $850.2 million outstanding and matured February 21, 2020. A temporary $50 million capacity increase expired January 26, 2020; management was discussing renewal and expected an extension on similar terms.
- The filing notes seasonality: historically, more homes and revenue are generated in the third and fourth fiscal quarters, so first-quarter results may not indicate full-year performance.
Important facts for investors to verify
- Whether the mortgage repurchase facility was renewed or extended before its February 2020 maturity, and on what capacity and terms.
- How the February 2020 homebuilding-note maturity and March 2020 Forestar convertible-note maturity were funded or settled.
- Whether sales orders and backlog convert into closings, given backlog contingencies and a 20% cancellation rate.
- Whether homebuilding margins and cash generation remain strong as inventory and land investment grow.
- Developments in construction-defect and other legal claims, insurance recoveries, and the company’s ability to keep losses within recorded reserves.
- How much of earnings growth is attributable to recurring operations versus the tax benefit and multifamily asset-sale gain.