D.R. Horton, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2021. The unaudited filing covers the quarter ended June 30, 2021; comparisons are with the corresponding 2020 periods unless noted. D.R. Horton is a national homebuilder operating in 96 markets across 30 states, with homebuilding, residential lot development through 64%-owned Forestar, mortgage and title services, and rental-property operations.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $7.285 billion, up 35% | $19.665 billion, up 41% |
| Income before taxes | $1.416 billion, up 81% | $3.630 billion, up 88% |
| Net income attributable to D.R. Horton | $1.116 billion, up 77% | $2.837 billion, up 84% |
| Diluted earnings per share | $3.06, versus $1.72 | $7.73, versus $4.17 |
| Consolidated pre-tax margin | 19.4%, versus 14.5% | 18.5%, versus 13.9% |
| Operating cash flow | Not separately stated here | $(34.5) million, versus $588.9 million provided |
Homebuilding drove the earnings improvement: quarterly homebuilding revenue rose 35% to $7.070 billion, and pre-tax income increased to $1.337 billion from $709.8 million. Home-sales gross margin expanded to 25.9% from 21.6%; homebuilding SG&A fell to 7.1% of revenue from 7.9%. For the nine-month period, home-sales gross margin was 24.9% versus 21.3%, and homebuilding pre-tax margin was 17.5% versus 12.9%.
Quarterly closings increased 22% to 21,588 homes, with an average closing price of $326,100. Nine-month closings rose 33% to 60,028, at an average price of $315,000. Quarterly net sales orders declined 17% in units to 17,952, but their value increased 2% to $6.449 billion as average order price rose 22%. Backlog was 32,209 homes valued at $11.022 billion, up 39% and 57%, respectively.
For the nine months, Forestar revenue increased 55% to $907.1 million and pre-tax income rose to $87.9 million from $46.1 million. Financial services revenue increased 65% to $601.1 million and pre-tax income more than doubled to $262.1 million. In the quarter, financial services pre-tax income increased only 2% to $70.3 million despite 20% revenue growth, as expenses rose and mortgage-sale gains faced competitive pricing pressure.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $1.943 billion, down from $3.019 billion at September 30, 2020. Total assets were $21.794 billion; total equity was $14.125 billion.
- Notes payable totaled $4.416 billion, versus $4.283 billion at September 30, 2020. Consolidated debt to total capital was 24.2%, down from 26.6%. Homebuilding debt was $2.620 billion and homebuilding debt to total capital was 16.0%.
- The amended homebuilding revolver had $2.19 billion capacity, no borrowings and $2.03 billion available after letters of credit. The company reported compliance with its debt covenants. Management said it expects homebuilding debt to total capital to remain well below its 35% long-term threshold in fiscal Q4 2021 and fiscal 2022.
- Nine-month operating cash flow was negative as the company funded inventory growth: construction-in-progress and finished-home inventory increased cash use by $1.740 billion, and residential land and lots by $1.350 billion. The company also used $829.6 million in financing activities, including $661.4 million for share repurchases and $217.7 million for dividends.
Changes, outlook and risks
- Management attributed stronger demand to low mortgage rates and limited affordable-home supply. Building-material shortages and tight labor markets lengthened construction cycles. The company slowed sales to align orders with production and said it expected to continue restricting sales-order pace in fiscal Q4; no specific full-year earnings or revenue guidance was provided.
- Management plans to keep investing in homebuilding inventory and single- and multi-family rental properties while returning capital through dividends and repurchases. The board authorized $1.0 billion of share repurchases in April; $758.8 million remained at quarter-end. The quarterly dividend was $0.20 per share, and the board approved another $0.20 dividend in July.
- Beginning in fiscal Q3, the company prospectively changed presentation of rental operations: bulk rental-property sales are reported as revenue and cost of sales, rental assets are classified as inventory, and related cash flows are included in operating activities. This affects comparability with prior periods. A single-family rental community sale contributed $23.1 million revenue and $11.4 million gross profit in the quarter.
- Forestar redeemed $350 million of 8.0% notes and issued $400 million of 3.85% notes; the redemption generated an $18.1 million extinguishment loss in the quarter.
- Key risks include ongoing supply and labor constraints, home-price affordability and demand changes, higher interest rates, land and inventory exposure, access to mortgage financing and capital, and warranty or construction-defect claims. Legal-claim reserves were $543.1 million at June 30, compared with $473.8 million at September 30; management said it cannot reasonably estimate losses beyond recorded reserves. Warranty liability was $361.5 million.
- Homebuilding land and lot contracts had approximately $15.0 billion of remaining purchase price, backed by $999.8 million of deposits; a limited $136.9 million portion had specific-performance provisions. Surety bonds were $2.1 billion and letters of credit $219.5 million. The filing reports no material third-party guarantees.
Important facts for investors to verify
- Whether supply-chain and labor constraints continue to limit construction, closings and order pace, particularly given management’s expectation of restricted orders in fiscal Q4.
- Whether higher selling prices and margins are sustainable if demand, affordability, incentives or building costs change.
- How inventory investment, land commitments and rental-property expansion affect cash generation and liquidity; nine-month operating cash flow was negative despite sharply higher net income.
- Whether legal and warranty reserves adequately reflect claims exposure; actual costs and insurance recoveries may differ materially from estimates.
- The effect of the prospective rental-operations presentation change when comparing current results and cash flows with prior periods.