D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2019. Comparisons are with the corresponding 2018 periods unless noted. Amounts are in U.S. dollars.
Business context and results
D.R. Horton is a U.S. homebuilder operating in 87 markets across 29 states, with homebuilding, residential lot development through majority-owned Forestar, mortgage and title services, and other operations.
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $4.91 billion, up 11% | $12.55 billion, up 9% |
| Income before taxes | $626.7 million, up 2% | $1.47 billion, essentially unchanged |
| Net income attributable to D.R. Horton | $474.8 million, up 5% | $1.11 billion, up 12% |
| Diluted earnings per share | $1.26, versus $1.18 | $2.94, versus $2.59 |
| Homebuilding revenue | $4.76 billion, up 10% | $12.18 billion, up 8% |
| Homes closed | 15,971, up 13% | 40,951, up 10% |
Margins, cash flow, debt and liquidity
- Home sales gross margin declined to 20.3% from 21.9% for the quarter and to 19.9% from 21.2% for the nine months. Homebuilding pretax margin fell to 11.8% from 13.6% and to 10.8% from 12.3%, respectively. Management attributed the home-sales margin pressure chiefly to lower average selling prices relative to home costs.
- Consolidated pretax margin was 12.8% for the quarter versus 13.9%, and 11.7% for the nine months versus 12.6%.
- Nine-month operating cash flow was $80.7 million, down from $306.5 million. The company cited investment in home and land inventory; Forestar and financial services also used cash. Investing cash flow was negative $326.3 million and financing cash flow was negative $375.1 million.
- Cash, cash equivalents and restricted cash totaled $885.3 million, down from $1.51 billion at September 30, 2018. Total notes payable were $3.45 billion, compared with $3.20 billion. Debt to total capital was 26.4%; homebuilding debt to total capital was 18.5%, down from 21.4% at September 2018.
- At quarter-end, the homebuilding revolver had $150 million drawn and approximately $1.0 billion available. Forestar’s $380 million revolver had no borrowings and $358.3 million available. DHI Mortgage had $796.5 million outstanding under its mortgage repurchase facility, which matures in February 2020. The company reported compliance with applicable debt covenants.
Material changes and notable items
- Net sales orders rose 6% in the quarter and 5% over nine months; the quarter-end backlog was 16,507 homes valued at $4.97 billion, approximately flat year over year. The cancellation rate was 20% for the quarter and 21% for the nine months.
- Homebuilding inventory increased to $10.7 billion from $9.9 billion at September 30, 2018. Lots controlled under purchase contracts rose to 184,500 from 164,200; these represented 61% of owned and controlled lots.
- Fiscal 2019 acquisitions of Westport Homes, Classic Builders and Terramor Homes cost $325.9 million and added inventory, lots, and backlog. The company recorded $54.3 million of acquisition goodwill.
- Forestar issued $350 million of 8.0% senior notes in April. The company repaid $500 million of its 3.75% homebuilding notes at maturity in March. Share repurchases totaled $361.5 million for the nine months; a new $1.0 billion share repurchase authorization was approved in July.
- Two DHI Communities multifamily properties were sold during the nine months, with gains of $29.3 million and $22.6 million. The quarter’s consolidated gain on asset sales was $22.6 million.
- Fiscal 2018’s nine-month tax expense included a $108.7 million charge related to the Tax Act; the lower current-period tax expense and effective rate therefore are not solely an operating comparison. ASC 606 adoption increased opening retained earnings by $27.1 million; management said the standard had no material revenue impact in the reported periods.
Outlook, commentary and risks
Management said mortgage rates declined during the quarter, demand strengthened versus earlier in the year, and sales incentives were reduced. It cited solid economic fundamentals and limited affordable-home supply in many markets, and expects solid demand if the U.S. economy continues to grow. The filing provides no specific earnings or revenue guidance. Management will adjust pricing, incentives, sales pace and inventory to local conditions and noted that housing demand varies by market.
Risks highlighted include weaker economic or employment conditions, reduced affordability, higher mortgage rates or tighter lending standards, land and inventory impairment, construction costs and labor or material availability, access to financing, warranty and construction-defect claims, regulation, and debt covenant compliance. The company recorded $41.0 million of inventory and land-option charges for the nine months, including $18.6 million of impairments and $22.4 million of land-contract deposit and pre-acquisition write-offs.
Legal-claim reserves were $440.9 million at June 30, 2019, mostly for construction defects; related insurance receivables were $69.8 million. Management said it cannot reasonably estimate potential losses above recorded reserves. The filing also describes ongoing DOJ communications concerning historical FHA mortgage underwriting, and wetlands matters; one EPA matter was settled for a $267,000 penalty, while a separate potential penalty was estimated at $100,000–$350,000.
Important facts for investors to verify
- Whether order growth and backlog convert into closings without further pressure on home prices, incentives or gross margins.
- How inventory growth, land commitments of approximately $7.2 billion in remaining purchase price, and higher unsold completed-home counts affect cash needs and impairment risk.
- Whether operating cash flow improves after the period’s land, homebuilding and acquisition investments.
- Forestar’s higher-cost debt and DHI Mortgage’s facility renewal before its February 2020 maturity; confirm available capacity and covenant headroom.
- Potential changes in construction-defect reserves and insurance recoveries, and developments in the disclosed DOJ and environmental matters.
- The effect of the prior-year Tax Act charge when assessing year-over-year earnings and tax-rate trends.