D.R. Horton, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included for context. D.R. Horton is a U.S. homebuilder operating in 88 markets across 29 states, with mortgage, title, residential lot development through majority-owned Forestar, and rental-property businesses.
Financial performance and key metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Consolidated revenue | $20.31 billion | $17.59 billion |
| Income before income taxes | $2.98 billion | $2.13 billion |
| Net income attributable to D.R. Horton | $2.37 billion | $1.62 billion |
| Diluted EPS | $6.41 | $4.29 |
| Operating cash flow | $1.42 billion | $892.1 million |
| Cash and cash equivalents at year-end | $3.02 billion | $1.49 billion |
| Notes payable at year-end | $4.28 billion | $3.40 billion |
- Consolidated pre-tax margin rose to 14.7% from 12.1%. Homebuilding pre-tax income was $2.67 billion, or 13.6% of homebuilding revenue, versus $1.91 billion, or 11.2%, in FY2019.
- Homebuilding revenue increased 15% to $19.64 billion; 65,388 homes closed, up 15%, at an average closing price of $299,100. Home sales gross margin improved to 21.8% from 20.2%.
- Net sales orders rose 39% to 78,458 homes, valued at $23.61 billion. Year-end backlog nearly doubled to 26,683 homes worth $8.19 billion; the filing cautions that contracts may be cancelled.
- Financial services revenue increased 32% to $584.9 million and pre-tax income rose 47% to $245.2 million. Forestar revenue increased to $931.8 million from $428.3 million, while its pre-tax margin declined to 8.4% from 10.7%.
- Homebuilding operations generated $1.90 billion of cash. Consolidated cash from operations was $1.42 billion, including cash used by financial services and Forestar. Homebuilding inventory increased to $11.02 billion; owned and contract-controlled lots totaled 376,900, with 70% controlled under purchase contracts.
- Consolidated debt to total capital was 26.6%, up from 25.3%; homebuilding debt to total capital was 17.5%, versus 17.0%. Stockholders’ equity was $11.84 billion, up from $10.02 billion.
- For FY2020’s fourth quarter, revenue was $6.40 billion, pre-tax income $1.06 billion, net income attributable to D.R. Horton $829.0 million, and diluted EPS $2.24. FY2019 fourth-quarter comparatives were $5.04 billion, $660.1 million, $505.3 million, and $1.35, respectively.
Material changes, outlook and commentary
- COVID-19 initially weakened April sales and increased cancellations, but demand recovered sharply as restrictions eased. Third- and fourth-quarter net sales orders increased 38% and 81%, respectively, year over year. Management attributed stronger demand to low mortgage rates, pent-up demand and limited affordable-home supply.
- Management cited affordable product offerings, strong liquidity and lot supply as supports for continued operations, but emphasized uncertainty about the pandemic’s duration and its effects on employment, consumer confidence, mortgage markets and housing demand. The filing provides no numerical FY2021 revenue or earnings guidance.
- Management intends to maintain a strong cash position, control debt, manage local pricing, incentives and sales pace, invest in land and rental properties, and increase the use of land purchase contracts. It expected homebuilding debt to total capital to remain well below its long-term ceiling of 35% during FY2021.
- FY2020 tax expense included a $93.4 million benefit from retroactive reinstatement of federal energy-efficient home credits and an $11.2 million benefit from releasing a state deferred-tax valuation allowance. The effective tax rate fell to 20.2% from 23.8%.
- Liquidity included $3.02 billion of consolidated cash and approximately $1.45 billion of available capacity under the primary homebuilding revolver. The mortgage repurchase facility had $1.13 billion outstanding and was scheduled to mature February 19, 2021; the company expected renewal. About $1.60 billion of consolidated debt principal was due within one year, including $400 million of homebuilding notes and the mortgage facility balance.
- After year-end, D.R. Horton issued $500 million of 1.4% senior notes due 2027 and acquired Braselton Homes for approximately $23 million. The board approved a quarterly dividend of $0.20 per share in November 2020.
Risks, contingencies and unusual items
- Key risks include prolonged COVID-19 impacts, cyclical housing demand, mortgage-rate and financing availability, land and inventory values, construction labor or material shortages, cost inflation, regulatory and environmental requirements, and access to capital.
- Construction-defect and warranty exposure is significant. Year-end warranty liability was $310.2 million; legal-claim reserves were $473.8 million, approximately 99% related to construction defects. The auditor identified estimation of construction-defect reserves as a critical audit matter; the filing reports $472.4 million for that reserve and notes meaningful sensitivity to claim frequency and resolution costs.
- The company disclosed an ongoing DOJ inquiry into FHA underwriting and quality-control practices, with no formal claim amount, penalty or fine asserted. EPA stormwater notices and a separate wetlands matter could result in sanctions; management did not believe these matters were reasonably likely to materially affect the company.
- Mortgage loans are generally sold with limited recourse, but representations and warranties can require repurchases or indemnification. COVID-related mortgage-market disruption led the company to retain servicing rights on some originations.
- Auditors issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether the exceptional order and backlog growth converts to closings at expected prices and margins, after cancellations and any COVID-related demand changes.
- Renewal and terms of the mortgage repurchase facility, and repayment or refinancing of near-term maturities.
- Construction-defect reserve adequacy, future claim trends, insurance recoveries and warranty costs.
- Whether land commitments, inventory growth and Forestar’s expansion produce expected returns without impairments or excessive leverage.
- How much of FY2020 earnings growth is sustainable after excluding the $93.4 million tax-credit benefit and other tax-related benefits.