DR HORTON The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this quarterly report and with our annual report on Form 10-K for the fiscal year endedSeptember 30, 2019 . Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those described in the "Forward-Looking Statements" section following this discussion.
BUSINESS
D.R. Horton, Inc. is the largest homebuilding company inthe United States as measured by number of homes closed. We construct and sell homes through our operating divisions in 88 markets across 29 states, primarily under the names ofD.R. Horton , America's Builder;Emerald Homes ;Express Homes andFreedom Homes . Our common stock is included in the S&P 500 Index and listed on theNew York Stock Exchange under the ticker symbol "DHI." Unless the context otherwise requires, the terms "D.R. Horton ," the "Company," "we" and "our" used herein refer toD.R. Horton, Inc. , aDelaware corporation, and its predecessors and subsidiaries. Our business operations consist of homebuilding, a majority-owned residential lot development company, financial services and other activities. Our homebuilding operations are our core business and primarily include the construction and sale of single-family homes with sales prices generally ranging from$100,000 to more than$1,000,000 , with an average closing price of$297,600 during the nine months endedJune 30, 2020 . Approximately 91% of our home sales revenue in the nine months endedJune 30, 2020 was generated from the sale of single-family detached homes, with the remainder from the sale of attached homes, such as townhomes, duplexes and triplexes. During fiscal 2018, we acquired 75% of the outstanding shares ofForestar Group Inc. (Forestar), a publicly traded residential lot development company listed on theNew York Stock Exchange under the ticker symbol "FOR." Forestar is a component of our homebuilding strategy to enhance operational and capital efficiency and returns by expanding relationships with land developers and increasing the portion of our land and lot position controlled under land purchase contracts. AtJune 30, 2020 , we owned 65% of Forestar's outstanding common stock. Our financial services operations provide mortgage financing and title agency services to homebuyers in many of our homebuilding markets.DHI Mortgage , our 100% owned subsidiary, provides mortgage financing services primarily to our homebuyers and sells substantially all of the mortgages it originates and the majority of the related servicing rights to third-party purchasers.DHI Mortgage originates loans in accordance with purchaser guidelines and sells substantially all of its mortgage production shortly after origination. Our 100% owned subsidiary title companies serve as title insurance agents by providing title insurance policies, examination and closing services, primarily to our homebuyers. In addition to our homebuilding, Forestar and financial services operations, we have subsidiaries that engage in other business activities. These subsidiaries conduct insurance-related operations, construct and own income-producing multi-family rental properties, own non-residential real estate including ranch land and improvements and own and operate oil and gas related assets. The operating results of these subsidiaries are immaterial for separate reporting and therefore are grouped together and presented as other. One of these subsidiaries, DHI Communities, develops, constructs and owns multi-family residential properties that produce rental income. DHI Communities is primarily focused on constructing garden style multi-family products, which typically accommodate 200 to 400 dwelling units, in high growth suburban markets. After DHI Communities has completed construction and achieved a stabilized occupancy rate, the property is typically marketed for sale. AtJune 30, 2020 andSeptember 30, 2019 , our consolidated balance sheets included$224.8 million and$204.0 million , respectively, of assets owned by DHI Communities. The combined assets of all of our subsidiaries engaged in other business activities totaled$361.3 million and$317.9 million atJune 30, 2020 andSeptember 30, 2019 , respectively. 33
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OVERVIEW
Fiscal Year-to-Date Operating Results
During the nine months endedJune 30, 2020 , our number of homes closed and home sales revenues increased 10% and 11%, respectively, compared to the prior year period, and our consolidated revenues increased 11% to$13.9 billion compared to$12.6 billion in the prior year period. Our pre-tax income was$1.9 billion in the nine months endedJune 30, 2020 compared to$1.5 billion in the prior year period, and our pre-tax operating margin was 13.9% compared to 11.7%. Net income was$1.5 billion in the nine months endedJune 30, 2020 compared to$1.1 billion in the prior year period. The current nine month period results include a tax benefit of$77.6 million related to the retroactive reinstatement of the federal energy efficient homes tax credit. Cash provided by our homebuilding operations was$1.2 billion in the nine months endedJune 30, 2020 compared to$605.7 million in the prior year period. In the trailing twelve months endedJune 30, 2020 , our return on equity (ROE) was 19.9% compared to 17.3% in the prior year period, and our homebuilding return on inventory (ROI) was 21.6% compared to 18.1%. ROE is calculated as net income attributable toD.R. Horton for the trailing twelve months divided by average stockholders' equity, where average stockholders' equity is the sum of ending stockholders' equity balances of the trailing five quarters divided by five. Homebuilding ROI is calculated as homebuilding pre-tax income for the trailing twelve months divided by average inventory, where average inventory is the sum of ending homebuilding inventory balances for the trailing five quarters divided by five. Within our homebuilding land and lot portfolio, our lots controlled under purchase contracts represent 66% of the lots owned and controlled atJune 30, 2020 compared to 60% atSeptember 30, 2019 and 61% atJune 30, 2019 . Our focus on increasing the controlled portion of our finished lot pipeline has benefited from our relationship with Forestar, our majority-owned lot development company.
COVID-19
During the latter part ofMarch 2020 , the impacts of the COVID-19 pandemic (C-19) and the related widespread reductions in economic activity acrossthe United States began to adversely affect our business. However, residential construction and financial services are designated as essential businesses as part of critical infrastructure in almost all municipalities across theU.S. where we operate. We implemented operational protocols to comply with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of theCenters for Disease Control and Prevention and other public health authorities. DuringApril 2020 when restrictive stay-at-home orders were in place for many markets acrossthe United States , we experienced increases in sales cancellations and decreases in sales orders, and net sales orders for April were 1% lower than the same month in the prior year. However, as economic activity began to resume and restrictive orders began to be lifted, our weekly sales pace during May and June increased significantly, and our cancellation rate returned to normal levels. In both May and June, our net sales orders increased over 50% compared to the prior year periods. For the third quarter of fiscal 2020, our net sales orders increased by 38% compared to the prior year quarter. We believe the increase in demand in May and June was fueled by increased buyer urgency due to lower interest rates on mortgage loans, the limited supply of homes at affordable price points across most of our markets and to some extent the lower levels of home sales from mid-March through early April, which caused some pent-up demand. We were and remain well-positioned for this increased demand with our affordable product offerings, lot supply and housing inventory, particularly completed homes and those close to completion. However, even with the resurgence of demand in May and June, we remain cautious as to the impact C-19 may have on our operations and on the overall economy in the future. There is significant uncertainty regarding the extent to which and how long C-19 and its related effects will impact theU.S. economy and level of employment, capital markets, secondary mortgage markets, consumer confidence, demand for our homes and availability of mortgage loans to homebuyers. The extent to which this impacts our operational and financial performance will depend on future developments, including the duration and spread of C-19 and the impact on our customers, trade partners and employees, all of which are highly uncertain and cannot be predicted. We believe our strong balance sheet and liquidity position provide us with the flexibility to operate effectively through these changing economic conditions. We plan to continue to generate strong cash flows from our homebuilding operations and manage our product offerings, incentives, home pricing, sales pace and inventory levels to optimize the return on our inventory investments in each of our communities based on local housing market conditions. 34 -------------------------------------------------------------------------------- Table of Contents STRATEGY Our operating strategy focuses on enhancing long-term value to our shareholders by leveraging our financial and competitive position in our core homebuilding business to increase the returns on our inventory investments and generate strong profitability and cash flows, while managing risk and maintaining financial flexibility to navigate uncertain economic conditions and make opportunistic strategic investments. We have made operational adjustments as a result of the COVID-19 pandemic; however, our strategy remains consistent and includes the following initiatives: •Developing and retaining highly experienced and productive teams of personnel throughout our company that are aligned and focused on continuous improvement in our operational execution and financial performance. •Maintaining a strong cash balance and overall liquidity position and controlling our level of debt. •Allocating and actively managing our inventory investments across our operating markets to diversify our geographic risk. •Offering new home communities that appeal to a broad range of entry-level, move-up, active adult and luxury homebuyers based on consumer demand in each market. •Modifying product offerings, sales pace, home prices and sales incentives as necessary in each of our markets to meet consumer demand and maintain affordability. •Delivering high quality homes and a positive experience to our customers both during and after the sale. •Managing our inventory of homes under construction relative to demand in each of our markets to adjust to the impact of C-19, while continuing to start construction on unsold homes to capture new home demand and actively controlling the number of unsold, completed homes in inventory. •Monitoring our land acquisition and development investments to adjust to the impact of C-19, while still investing in desirable markets and controlling the level of land and lots we own in each market relative to the local new home demand. •Continuing to seek opportunities to expand the portion of our land and finished lots controlled through purchase contracts and assist Forestar with its operations, while adjusting the timing of our lot purchases under contract, where necessary, to adjust to the impact of C-19. •Controlling the cost of goods purchased from both vendors and subcontractors. •Improving the efficiency of our land development, construction, sales and other key operational activities. •Controlling our selling, general and administrative (SG&A) expense infrastructure to match production levels. •Opportunistically evaluating potential acquisitions to enhance our operations and improve returns. •Ensuring that our financial services business provides high quality mortgage and title services to homebuyers efficiently and effectively. •Investing in the construction of garden style multi-family rental properties to meet rental demand in high growth suburban markets and selling these properties profitably. We believe our operating strategy, which has produced positive results in recent years, will allow us to successfully operate through an uncertain economic environment to maintain and improve our financial and competitive position and balance sheet strength. However, we cannot provide any assurances that the initiatives listed above will continue to be successful, and we may need to adjust components of our strategy to meet future market conditions. 35
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KEY RESULTS
Key financial results as of and for the three months ended
Homebuilding:
•Homebuilding revenues increased 10% to$5.2 billion compared to$4.8 billion . •Homes closed increased 10% to 17,642 homes, and the average closing price of those homes was$295,200 . •Net sales orders increased 38% to 21,519 homes, and the value of net sales orders increased 35% to$6.3 billion . •Sales order backlog increased 41% to 23,205 homes, and the value of sales order backlog increased 41% to$7.0 billion . •Home sales gross margin was 21.6% compared to 20.3%. •Homebuilding SG&A expense was 7.9% of homebuilding revenues compared to 8.1%. •Homebuilding pre-tax income was$709.8 million compared to$561.8 million . •Homebuilding pre-tax income was 13.6% of homebuilding revenues compared to 11.8%. •Homebuilding cash and cash equivalents totaled$1.9 billion compared to$1.0 billion and$577.9 million atSeptember 30, 2019 andJune 30, 2019 , respectively. •Homebuilding inventories totaled$10.9 billion compared to$10.3 billion and$10.7 billion atSeptember 30, 2019 andJune 30, 2019 , respectively. •Homes in inventory totaled 32,800 compared to 27,700 and 29,200 atSeptember 30, 2019 andJune 30, 2019 , respectively. •Owned lots totaled 115,200 compared to 121,400 and 118,500 atSeptember 30, 2019 andJune 30, 2019 , respectively. Lots controlled through purchase contracts increased to 220,300 from 185,900 and 184,500 atSeptember 30, 2019 andJune 30, 2019 , respectively. •Homebuilding debt was$2.5 billion compared to$2.0 billion and$2.2 billion atSeptember 30, 2019 andJune 30, 2019 , respectively. •Homebuilding debt to total capital was 18.4% compared to 17.0% and 18.5% atSeptember 30, 2019 andJune 30, 2019 , respectively. 36
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Forestar:
•Forestar's revenues increased 102% to$177.9 million compared to$88.2 million . Revenues in the current and prior year quarters included$175.5 million and$73.2 million , respectively, of revenue from land and lot sales to our homebuilding segment. •Forestar's lots sold increased 75% to 2,023 compared to 1,158. Lots sold toD.R. Horton totaled 1,991 compared to 995. •Forestar's pre-tax income was$10.3 million compared to$8.4 million . •Forestar's pre-tax income was 5.8% of Forestar revenues compared to 9.5%. •Forestar's cash and cash equivalents totaled$355.6 million compared to$382.8 million and$223.0 million atSeptember 30, 2019 andJune 30, 2019 , respectively. •Forestar's inventories totaled$1.3 billion compared to$1.0 billion at bothSeptember 30, 2019 andJune 30, 2019 . •Owned and controlled lots totaled 50,700 compared to 38,300 and 37,400 atSeptember 30, 2019 andJune 30, 2019 , respectively. Of these lots, 29,600 were under contract to sell to or subject to a right of first offer withD.R. Horton , compared to 23,400 and 24,100 atSeptember 30, 2019 andJune 30, 2019 , respectively. •Forestar's debt was$640.6 million compared to$460.5 million and$458.9 million atSeptember 30, 2019 andJune 30, 2019 , respectively. •Forestar's debt to total capital was 43.1% compared to 36.3% and 39.8% atSeptember 30, 2019 andJune 30, 2019 , respectively. Financial Services: •Financial services revenues increased 31% to$156.6 million compared to$119.6 million . •Financial services pre-tax income was$68.8 million compared to$48.1 million . •Financial services pre-tax income was 43.9% of financial services revenues compared to 40.2%. Consolidated Results: •Consolidated pre-tax income increased 25% to$782.4 million compared to$626.7 million . •Consolidated pre-tax income was 14.5% of consolidated revenues compared to 12.8%. •Income tax expense was$149.5 million compared to$153.1 million , and our effective tax rate was 19.1% compared to 24.4%. •Net income attributable toD.R. Horton increased 33% to$630.7 million compared to$474.8 million . •Diluted net income per common share attributable toD.R. Horton increased 37% to$1.72 compared to$1.26 . •Stockholders' equity was$11.0 billion compared to$10.0 billion and$9.6 billion atSeptember 30, 2019 andJune 30, 2019 , respectively. •Book value per common share increased to$30.38 compared to$27.20 and$26.08 atSeptember 30, 2019 andJune 30, 2019 , respectively. •Debt to total capital was 28.0% compared to 25.3% atSeptember 30, 2019 and 26.4% atJune 30, 2019 . 37
-------------------------------------------------------------------------------- Table of Contents Key financial results for the nine months endedJune 30, 2020 , as compared to the same period of 2019, were as follows:
Homebuilding:
•Homebuilding revenues increased 11% to$13.5 billion compared to$12.2 billion . •Homes closed increased 10% to 45,140 homes, and the average closing price of those homes was$297,600 . •Net sales orders increased 26% to 54,732 homes, and the value of net sales orders increased 27% to$16.3 billion . •Home sales gross margin was 21.3% compared to 19.9%. •Homebuilding SG&A expense was 8.4% of homebuilding revenues compared to 8.8%. •Homebuilding pre-tax income was$1.7 billion compared to$1.3 billion . •Homebuilding pre-tax income was 12.9% of homebuilding revenues compared to 10.8%. •Net cash provided by homebuilding operations was$1.2 billion compared to$605.7 million .
Forestar:
•Forestar's revenues increased 204% to$584.3 million compared to$192.0 million . Revenues in the current and prior year periods included$548.6 million and$141.8 million , respectively, of revenue from land and lot sales to our homebuilding segment. •Forestar's lots sold increased 188% to 6,396 compared to 2,224. Lots sold toD.R. Horton totaled 6,287 compared to 1,903. •Forestar's pre-tax income was$46.1 million compared to$29.6 million . •Forestar's pre-tax income was 7.9% of Forestar revenues compared to 15.4%. Financial Services: •Financial services revenues increased 19% to$364.0 million compared to$306.4 million . •Financial services pre-tax income was$124.0 million compared to$105.6 million . •Financial services pre-tax income was 34.1% of financial services revenues compared to 34.5%. Consolidated Results: •Consolidated pre-tax income increased 32% to$1.9 billion compared to$1.5 billion . •Consolidated pre-tax income was 13.9% of consolidated revenues compared to 11.7%. •Income tax expense was$377.6 million compared to$350.5 million , and our effective tax rate was 19.6% compared to 23.9%. •Net income attributable toD.R. Horton increased 39% to$1.5 billion compared to$1.1 billion . •Diluted net income per common share attributable toD.R. Horton increased 42% to$4.17 compared to$2.94 . •Net cash provided by operations was$588.9 million compared to$80.7 million . 38 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS - HOMEBUILDING We conduct our homebuilding operations in the geographic regions, states and markets listed below, and we conduct our financial services operations in many of these markets. Our homebuilding operating divisions are aggregated into six reporting segments, also referred to as reporting regions, which comprise the markets below. Our financial statements and the notes thereto contain additional information regarding segment performance. State Reporting Region/Market State Reporting Region/Market East Region Southeast Region Delaware Central Delaware Alabama Birmingham Northern Delaware Huntsville Georgia Savannah Mobile/Baldwin County Maryland Baltimore Montgomery Suburban Washington, D.C. Tuscaloosa New Jersey Northern New Jersey Florida Fort Myers/Naples Southern New Jersey Gainesville North Carolina Asheville Jacksonville Charlotte Lakeland Greensboro/Winston-Salem Melbourne/Vero Beach Raleigh/Durham Miami/Fort Lauderdale Wilmington Ocala Pennsylvania Philadelphia Orlando South Carolina Charleston Pensacola/Panama City Columbia Port St. Lucie Greenville/Spartanburg Tampa/Sarasota Hilton Head Volusia County Myrtle Beach West Palm Beach Virginia Northern Virginia Georgia Atlanta Southern Virginia Augusta Mississippi Gulf Coast Midwest Region Tennessee Chattanooga Colorado Denver Knoxville Fort Collins Memphis Illinois Chicago Nashville Indiana Fort Wayne Indianapolis West Region Iowa Des Moines California Bakersfield Minnesota Minneapolis/St. Paul Bay Area Ohio Cincinnati Fresno Columbus Los Angeles County Modesto/Merced South Central Region Riverside County Louisiana Baton Rouge Sacramento Lake Charles/Lafayette San Bernardino County Oklahoma Oklahoma City San Diego County Texas Austin Hawaii Maui Bryan/College Station Oahu Dallas Nevada Las Vegas Fort Worth Reno Houston Oregon Bend Killeen/Temple/Waco Portland/Salem Midland/Odessa Utah Salt Lake City New Braunfels/San Marcos Washington Seattle/Tacoma/Everett/Olympia San Antonio Spokane Vancouver Southwest Region Arizona Phoenix Tucson New Mexico Albuquerque 39
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The following tables and related discussion set forth key operating and
financial data for our homebuilding operations by reporting segment as of and
for the three and nine months ended
Net Sales Orders (1)
Three Months Ended June 30,
Net Homes Sold Value (In millions) Average Selling Price
% % %
2020 2019 Change 2020 2019 Change 2020 2019 Change
East 2,803 2,073 35 % $ 837.8 $ 606.0 38 % $ 298,900 $ 292,300 2 %
Midwest 1,374 881 56 % 483.8 298.1 62 % 352,100 338,400 4 %
Southeast 6,991 5,105 37 % 1,920.0 1,379.5 39 % 274,600 270,200 2 %
South Central 6,644 4,475 48 % 1,693.5 1,139.7 49 % 254,900 254,700 - %
Southwest 1,017 799 27 % 285.4 217.6 31 % 280,600 272,300 3 %
West 2,690 2,255 19 % 1,116.8 1,066.2 5 % 415,200 472,800 (12) %
21,519 15,588 38 % $ 6,337.3 $ 4,707.1 35 % $ 294,500 $ 302,000 (2) %
Nine Months Ended June 30,
Net Homes Sold Value (In millions) Average Selling Price
% % %
2020 2019 Change 2020 2019 Change 2020 2019 Change
East 7,393 6,069 22 % $ 2,188.3 $ 1,744.0 25 % $ 296,000 $ 287,400 3 %
Midwest 3,514 2,449 43 % 1,245.5 856.3 45 % 354,400 349,700 1 %
Southeast 17,381 14,326 21 % 4,746.7 3,831.2 24 % 273,100 267,400 2 %
South Central 16,558 12,649 31 % 4,226.7 3,198.7 32 % 255,300 252,900 1 %
Southwest 2,626 2,126 24 % 752.8 558.7 35 % 286,700 262,800 9 %
West 7,260 5,816 25 % 3,147.9 2,685.4 17 % 433,600 461,700 (6) %
54,732 43,435 26 % $ 16,307.9 $ 12,874.3 27 % $ 298,000 $ 296,400 1 %
Sales Order Cancellations
Three Months Ended June 30,
Cancelled Sales Orders Value (In millions) Cancellation Rate (2)
2020 2019 2020 2019 2020 2019
East 841 565 $ 239.7 $ 156.4 23 % 21 %
Midwest 311 216 98.8 70.3 18 % 20 %
Southeast 2,005 1,446 556.3 382.3 22 % 22 %
South Central 1,970 1,204 507.4 304.5 23 % 21 %
Southwest 276 216 77.4 55.9 21 % 21 %
West 565 331 243.6 155.0 17 % 13 %
5,968 3,978 $ 1,723.2 $ 1,124.4 22 % 20 %
Nine Months Ended June 30,
Cancelled Sales Orders Value (In millions) Cancellation Rate (2)
2020 2019 2020 2019 2020 2019
East 1,931 1,637 $ 551.3 $ 459.3 21 % 21 %
Midwest 696 485 225.7 163.6 17 % 17 %
Southeast 4,871 4,043 1,340.0 1,076.6 22 % 22 %
South Central 4,336 3,494 1,114.8 875.6 21 % 22 %
Southwest 660 736 187.8 184.9 20 % 26 %
West 1,251 965 552.3 450.2 15 % 14 %
13,745 11,360 $ 3,971.9 $ 3,210.2 20 % 21 %
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(1)Net sales orders represent the number and dollar value of new sales contracts
executed with customers (gross sales orders), net of cancelled sales orders.
(2)Cancellation rate represents the number of cancelled sales orders divided by
gross sales orders.
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The number of net sales orders increased 38% and 26% in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods, with increases in all of our regions. The value of net sales orders increased 35% to$6.3 billion (21,519 homes) and 27% to$16.3 billion (54,732 homes) for the three and nine months endedJune 30, 2020 , respectively, compared to$4.7 billion (15,588 homes) and$12.9 billion (43,435 homes) in the prior year periods. The average selling price of net sales orders during the three and nine months endedJune 30, 2020 was$294,500 and$298,000 , respectively, down 2% and up 1% from the prior year periods. The markets contributing most to the increases in sales volumes in our regions were as follows: the Carolina markets (particularlyMyrtle Beach ) in the East; theDenver ,Chicago andIndiana markets (quarter) and theDenver, Iowa andIndiana markets (nine month period) in the Midwest; theFlorida markets (particularlyTampa ) in the Southeast; theHouston ,Dallas andFort Worth markets in theSouth Central ; thePhoenix market in the Southwest; and thePortland andCalifornia markets in the West.
Our sales order cancellation rate (cancelled sales orders divided by gross sales
orders for the period) was 22% and 20% in the three and nine months ended
During the month ofApril 2020 when restrictive stay at home orders were in place for many of our markets, we experienced increases in sales cancellations and decreases in sales orders, and our net sales orders for the month were 1% lower than the same period a year ago. However, as some economic activity began to resume and restrictive orders began to be lifted, our weekly sales pace during May and June increased significantly, and our cancellation rate returned to normal levels. Sales Order Backlog As of June 30, Homes in Backlog Value (In millions) Average Selling Price % % % 2020 2019 Change 2020 2019 Change 2020 2019 Change East 3,028 2,267 34 %$ 929.3 $ 675.5 38 %$ 306,900 $ 298,000 3 % Midwest 1,834 1,253 46 % 646.6 414.0 56 % 352,600 330,400 7 % Southeast 6,675 5,056 32 % 1,873.7 1,409.6 33 % 280,700 278,800 1 % South Central 7,380 5,086 45 % 1,920.0 1,313.4 46 % 260,200 258,200 1 % Southwest 1,348 957 41 % 384.8 264.8 45 % 285,500 276,700 3 % West 2,940 1,888 56 % 1,259.4 893.0 41 % 428,400 473,000 (9) % 23,205 16,507 41 %$ 7,013.8 $ 4,970.3 41 %$ 302,300 $ 301,100 - % Sales Order Backlog Sales order backlog represents homes under contract but not yet closed at the end of the period. Many of the contracts in our sales order backlog are subject to contingencies, including mortgage loan approval and buyers selling their existing homes, which can result in cancellations. A portion of the contracts in backlog will not result in closings due to cancellations. 41
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Homes Closed and Home Sales Revenue
Three Months Ended June 30,
Homes Closed Value (In millions) Average Selling Price
% % %
2020 2019 Change 2020 2019 Change 2020 2019 Change
East 2,500 2,356 6 % $ 735.2 $ 674.7 9 % $ 294,100 $ 286,400 3 %
Midwest 1,053 856 23 % 372.7 301.8 23 % 353,900 352,600 - %
Southeast 5,921 5,181 14 % 1,627.8 1,384.3 18 % 274,900 267,200 3 %
South Central 5,397 4,635 16 % 1,375.6 1,177.8 17 % 254,900 254,100 - %
Southwest 750 855 (12) % 213.8 228.7 (7) % 285,100 267,500 7 %
West 2,021 2,088 (3) % 882.5 967.3 (9) % 436,700 463,300 (6) %
17,642 15,971 10 % $ 5,207.6 $ 4,734.6 10 % $ 295,200 $ 296,400 - %
Nine Months Ended June 30,
Homes Closed Value (In millions) Average Selling Price
% % %
2020 2019 Change 2020 2019 Change 2020 2019 Change
East 6,281 5,705 10 % $ 1,835.1 $ 1,638.6 12 % $ 292,200 $ 287,200 2 %
Midwest 2,743 2,228 23 % 963.6 793.0 22 % 351,300 355,900 (1) %
Southeast 14,983 13,491 11 % 4,092.5 3,593.9 14 % 273,100 266,400 3 %
South Central 13,344 12,055 11 % 3,390.8 3,037.0 12 % 254,100 251,900 1 %
Southwest 2,093 2,097 - % 609.5 545.6 12 % 291,200 260,200 12 %
West 5,696 5,375 6 % 2,542.7 2,517.7 1 % 446,400 468,400 (5) %
45,140 40,951 10 % $ 13,434.2 $ 12,125.8 11 % $ 297,600 $ 296,100 1 %
Home Sales Revenue
Revenues from home sales increased 10% to $5.2 billion (17,642 homes closed) for
the three months ended June 30, 2020 from $4.7 billion (15,971 homes closed) in
the prior year period. Revenues from home sales increased 11% to $13.4 billion
(45,140 homes closed) for the nine months ended June 30, 2020 from $12.1 billion
(40,951 homes closed) in the prior year period. Home sales revenues increased in
most of our regions primarily due to an increase in the number of homes closed.
The number of homes closed increased 10% in both the three and nine months ended
June 30, 2020 compared to the prior year periods. The markets contributing most
to the increases in closing volumes in our regions were as follows: the Carolina
markets (particularly Myrtle Beach ) in the East; the Denver and Iowa markets
(quarter) and the Indiana and Iowa markets (nine month period) in the Midwest;
the Florida markets in the Southeast; the Dallas and San Antonio markets
(quarter) and the Houston and Dallas markets (nine month period) in the South
Central ; and the California markets (nine month period) in the West. The markets
contributing most to the decreases in closing volumes in the Southwest during
both periods and in the West during the quarter were Phoenix and Seattle ,
respectively.
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Homebuilding Operating Margin Analysis
Percentages of Related Revenues
Three Months Ended Nine Months Ended
June 30, June 30,
2020 2019 2020 2019
Gross profit - home sales 21.6 % 20.3 % 21.3 % 19.9 %
Gross profit - land/lot sales and other 29.7 % 15.6 % 29.8 % 23.6 %
Inventory and land option charges (0.1) % (0.4) % (0.1) % (0.3) %
Gross profit - total homebuilding 21.5 % 19.9 % 21.2 % 19.5 %
Selling, general and administrative expense 7.9 % 8.1 % 8.4 % 8.8 %
Other (income) expense - % (0.1) % (0.1) % (0.1) %
Homebuilding pre-tax income 13.6 % 11.8 % 12.9 % 10.8 %
Home Sales Gross Profit
Gross profit from home sales increased to $1.1 billion in the three months ended
June 30, 2020 from $961.6 million in the prior year period and increased 130
basis points to 21.6% as a percentage of home sales revenues. The percentage
increase resulted from improvements of 120 basis points due to a decrease in the
average cost of our homes closed while the average selling price remained flat,
10 basis points from a decrease in the amount of purchase accounting adjustments
related to prior year acquisitions and 10 basis points due to a decrease in the
amortization of capitalized interest, partially offset by a 10 basis point
decrease due to increased warranty and construction defect costs.
Gross profit from home sales increased to $2.9 billion in the nine months ended
June 30, 2020 from $2.4 billion in the prior year period and increased 140 basis
points to 21.3% as a percentage of home sales revenues. The percentage increase
resulted from improvements of 130 basis points due to a decrease in the average
cost of our homes closed while the average selling price increased slightly, 10
basis points from a decrease in the amount of purchase accounting adjustments
related to prior year acquisitions and 10 basis points due to a decrease in the
amortization of capitalized interest, partially offset by a 10 basis point
decrease due to increased warranty and construction defect costs.
We remain focused on managing the pricing, incentives and sales pace in each of
our communities during this uncertain environment to optimize the returns on our
inventory investments and adjust to local market conditions and new home demand.
These actions could cause our gross profit margins to fluctuate in future
periods. If a prolonged economic recession and a resulting decline in new home
demand occur due to C-19, we would expect our gross profit margins to decline
from current levels.
Land/Lot Sales and Other Revenues
Land/lot sales and other revenues from our homebuilding operations were$14.5 million and$49.7 million in the three and nine months endedJune 30, 2020 , respectively, and$27.5 million and$49.2 million in the comparable periods of fiscal 2019. We continually evaluate our land and lot supply, and fluctuations in revenues and profitability from land sales occur based on how we manage our inventory levels in various markets. We generally purchase land and lots with the intent to build and sell homes on them. However, some of the land that we purchase includes commercially zoned parcels that we may sell to commercial developers. We may also sell residential lots or land parcels to manage our supply or for other strategic reasons. As ofJune 30, 2020 , our homebuilding operations had$28.1 million of land held for sale that we expect to sell in the next twelve months. 43
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Inventory and Land Option Charges
At the end of each quarter, we review the performance and outlook for all of our communities and land inventories for indicators of potential impairment and perform detailed impairment evaluations and analyses when necessary. As ofJune 30, 2020 , we performed detailed impairment evaluations of communities and land inventories with a combined carrying value of$52.1 million and determined that no communities or land inventories were impaired. Accordingly, no impairment charges were recorded during the three months endedJune 30, 2020 compared to$6.8 million of impairment charges in the prior year period. During the nine months endedJune 30, 2020 and 2019, impairment charges totaled$1.7 million and$18.6 million , respectively. As we manage our inventory investments across our operating markets to optimize returns and cash flows, we may modify our pricing and incentives, construction and development plans or land sale strategies in individual active communities and land held for development, which could result in the affected communities being evaluated for potential impairment. If the housing market or economic conditions are adversely affected for a prolonged period due to C-19 or otherwise, we may be required to evaluate additional communities for potential impairment. These evaluations could result in additional impairment charges which could be significant. During the three and nine months endedJune 30, 2020 , earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were$4.9 million and$15.6 million , respectively, compared to$12.4 million and$22.4 million in the same periods of fiscal 2019.
Selling, General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities increased 7% to$415.1 million and 6% to$1.14 billion in the three and nine months endedJune 30, 2020 , respectively, from$387.4 million and$1.07 billion in the prior year periods. SG&A expense as a percentage of homebuilding revenues was 7.9% and 8.4% in the three and nine months endedJune 30, 2020 , respectively, compared to 8.1% and 8.8% in the prior year periods. Employee compensation and related costs represented 77% and 75% of SG&A costs in the three and nine months endedJune 30, 2020 , respectively, compared to 73% and 72% in the prior year periods. These costs increased 13% to$320.3 million and 10% to$848.0 million in the three and nine months endedJune 30, 2020 , respectively. Our homebuilding operations employed 7,077 and 6,962 employees atJune 30, 2020 and 2019, respectively.
We attempt to control our SG&A costs while ensuring that our infrastructure adequately supports our operations; however, we cannot make assurances that we will be able to maintain or improve upon the current SG&A expense as a percentage of revenues.
Interest Incurred
We capitalize interest costs incurred to inventory during active development and construction (active inventory). Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. Interest incurred by our homebuilding operations decreased 13% to$22.3 million and 17% to$69.5 million in the three and nine months endedJune 30, 2020 , respectively, from$25.7 million and$83.3 million in the prior year periods. The decreases were due to lower average interest rates on our homebuilding debt, as well as decreases of 1% and 8%, respectively, in our average homebuilding debt during the periods. Interest charged to cost of sales was 0.8% of total cost of sales (excluding inventory and land option charges) in both the three and nine months endedJune 30, 2020 compared to 0.9% in both prior year periods.
Other Income
Other income, net of other expenses, included in our homebuilding operations was$0.2 million and$9.7 million in the three and nine months endedJune 30, 2020 , respectively, compared to$2.5 million and$6.1 million in the prior year periods. Other income consists of interest income, rental income and various other types of ancillary income, gains, expenses and losses not directly associated with sales of homes, land and lots. The activities that result in this ancillary income are not significant, either individually or in the aggregate. 44
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Homebuilding Results by
Three Months Ended June 30,
2020 2019
Homebuilding Homebuilding
Homebuilding Pre-tax % of Homebuilding Pre-tax % of
Revenues Income (1) Revenues Revenues Income (1) Revenues
(In millions)
East $ 736.3 $ 106.9 14.5 % $ 675.2 $ 74.1 11.0 %
Midwest 373.3 34.1 9.1 % 303.3 18.7 6.2 %
Southeast 1,629.1 233.5 14.3 % 1,388.1 168.4 12.1 %
South Central 1,376.4 201.8 14.7 % 1,178.0 164.3 13.9 %
Southwest 216.1 29.7 13.7 % 240.6 33.5 13.9 %
West 890.9 103.8 11.7 % 976.9 102.8 10.5 %
$ 5,222.1 $ 709.8 13.6 % $ 4,762.1 $ 561.8 11.8 %
Nine Months Ended June 30,
2020 2019
Homebuilding Homebuilding
Homebuilding Pre-tax % of Homebuilding Pre-tax % of
Revenues Income (1) Revenues Revenues Income (1) Revenues
(In millions)
East $ 1,836.5 $ 240.1 13.1 % $ 1,640.9 $ 158.0 9.6 %
Midwest 964.6 76.4 7.9 % 800.5 38.8 4.8 %
Southeast 4,096.4 567.4 13.9 % 3,607.2 411.6 11.4 %
South Central 3,401.5 490.7 14.4 % 3,040.8 389.6 12.8 %
Southwest 626.8 95.0 15.2 % 557.5 69.8 12.5 %
West 2,558.1 267.3 10.4 % 2,528.1 248.8 9.8 %
$ 13,483.9 $ 1,736.9 12.9 % $ 12,175.0 $ 1,316.6 10.8 %
______________
(1)Expenses maintained at the corporate level consist primarily of interest and
property taxes, which are capitalized and amortized to cost of sales or expensed
directly, and the expenses related to operating our corporate office. The
amortization of capitalized interest and property taxes is allocated to each
segment based on the segment's cost of sales, while expenses associated with the
corporate office are allocated to each segment based on the segment's inventory
balances.
East Region - Homebuilding revenues increased 9% and 12% in the three and nine
months ended June 30, 2020 , respectively, compared to the prior year periods,
primarily due to increases in the number of homes closed in our Myrtle Beach ,
Charlotte and New Jersey markets. The region generated pre-tax income of $106.9
million and $240.1 million in the three and nine months ended June 30, 2020 ,
respectively, compared to $74.1 million and $158.0 million in the prior year
periods. Gross profit from home sales as a percentage of home sales revenue
(home sales gross profit percentage) increased by 320 and 290 basis points in
the three and nine months ended June 30, 2020 , respectively, compared to the
prior year periods, due to increases in the average selling price of homes
closed and a decrease in the average cost of those homes. As a percentage of
homebuilding revenues, SG&A expenses decreased by 30 and 40 basis points in the
three and nine months ended June 30, 2020 , respectively, compared to the prior
year periods, primarily due to the increase in homebuilding revenues.
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Midwest Region - Homebuilding revenues increased 23% and 20% in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods, primarily due to an increase in the number of homes closed in ourDenver market in both periods and ourIndianapolis market in the nine month period. The region generated pre-tax income of$34.1 million and$76.4 million in the three and nine months endedJune 30, 2020 , respectively, compared to$18.7 million and$38.8 million in the prior year periods. Home sales gross profit percentage increased by 170 and 250 basis points in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods, largely due to decreases in purchase accounting adjustments related to the fiscal 2019 acquisitions ofWestport Homes andClassic Builders . As a percentage of homebuilding revenues, SG&A expenses decreased by 200 and 70 basis points in the three and nine months endedJune 30, 2020 , respectively, primarily due to the increase in homebuilding revenues. The decrease in the nine month period was less than the three month period primarily due to increased employee compensation in the first quarter of fiscal 2020.Southeast Region - Homebuilding revenues increased 17% and 14% in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in most of our markets. The region generated pre-tax income of$233.5 million and$567.4 million in the three and nine months endedJune 30, 2020 , respectively, compared to$168.4 million and$411.6 million in the prior year periods. Home sales gross profit percentage increased by 170 and 200 basis points in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 20 and 30 basis points in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.South Central Region - Homebuilding revenues increased 17% and 12% in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in ourDallas ,San Antonio andLouisiana markets. The region generated pre-tax income of$201.8 million and$490.7 million in the three and nine months endedJune 30, 2020 , respectively, compared to$164.3 million and$389.6 million in the prior year periods. Home sales gross profit percentage increased by 30 and 130 basis points in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods, primarily due to increases in the average selling price of homes closed while the average cost of those homes was flat in the three month period and decreased slightly in the nine month period. As a percentage of homebuilding revenues, SG&A expenses decreased by 30 and 40 basis points in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.Southwest Region - Homebuilding revenues decreased 10% and increased 12% in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods. The decrease in the three month period was primarily due to a decrease in the number of homes closed in ourPhoenix market. The increase in the nine month period was primarily due to increases in the average selling price of homes closed in all markets. The region generated pre-tax income of$29.7 million and$95.0 million in the three and nine months endedJune 30, 2020 , respectively, compared to$33.5 million and$69.8 million in the prior year periods. Home sales gross profit percentage increased by 60 and 190 basis points in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods, primarily due to the average selling price of homes closed increasing by more than the average cost. As a percentage of homebuilding revenues, SG&A expenses increased by 130 basis points and decreased by 40 basis points in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods, primarily due to the change in homebuilding revenues.West Region - Homebuilding revenues decreased 9% and increased 1% in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods. The decrease in three month period was due to decreases in the average selling price of homes closed in many markets, as well as decreases in the number of homes closed in most markets, particularlySeattle . The region generated pre-tax income of$103.8 million and$267.3 million in the three and nine months endedJune 30, 2020 , respectively, compared to$102.8 million and$248.8 million in the prior year periods. Home sales gross profit percentage increased by 50 basis points and decreased by 70 basis points in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods. The increase in the three month period was primarily due to the average selling price decreasing by less than the average cost of the homes closed. The decrease in the nine month period was primarily due to the average selling price decreasing by more than the average cost of the homes closed. As a percentage of homebuilding revenues, SG&A expenses increased by 40 basis points and decreased by 40 basis points in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods, primarily due to the change in homebuilding revenues. 46
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HOMEBUILDING INVENTORIES, LAND AND LOT POSITION AND HOMES IN INVENTORY
We routinely enter into contracts to purchase land or developed residential lots at predetermined prices on a defined schedule commensurate with planned development or anticipated new home demand. At the time of purchase, the undeveloped land is generally vested with the rights to begin development or construction work, and we plan and coordinate the development of our land into residential lots for use in our homebuilding business. We manage our inventory of owned land and lots and homes under construction relative to demand in each of our markets, including starting construction on unsold homes to capture new home demand and actively controlling the number of unsold, completed homes in inventory.
Our homebuilding segment's inventories at
As of June 30, 2020
Residential
Land/Lots
Construction in Developed and
Progress and Under Land Held Land Held
Finished Homes Development for Development for Sale Total Inventory
(In millions)
East $ 749.5 $ 502.6 $ 5.4 $ 4.8 $ 1,262.3
Midwest 480.8 432.8 3.5 0.7 917.8
Southeast 1,546.6 1,224.9 32.1 1.5 2,805.1
South Central 1,514.2 1,388.7 0.3 - 2,903.2
Southwest 241.6 426.0 1.6 0.4 669.6
West 1,229.3 873.8 5.6 20.3 2,129.0
Corporate and unallocated (1) 124.0 104.8 0.6 0.4 229.8
$ 5,886.0 $ 4,953.6 $ 49.1 $ 28.1 $ 10,916.8
As of September 30, 2019
Residential
Land/Lots
Construction in Developed and
Progress and Under Land Held Land Held
Finished Homes Development for Development for Sale Total Inventory
(In millions)
East $ 697.1 $ 581.2 $ 10.5 $ - $ 1,288.8
Midwest 473.9 361.1 1.8 - 836.8
Southeast 1,434.7 1,299.9 31.8 1.6 2,768.0
South Central 1,215.4 1,317.5 0.3 - 2,533.2
Southwest 221.8 335.6 1.6 15.4 574.4
West 1,089.0 950.6 13.9 2.5 2,056.0
Corporate and unallocated (1) 117.1 110.2 0.8 0.3 228.4
$ 5,249.0 $ 4,956.1 $ 60.7 $ 19.8 $ 10,285.6
__________
(1)Corporate and unallocated inventory consists primarily of capitalized interest and property taxes.
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Our homebuilding segment's land and lot position and homes in inventory at
As of June 30, 2020
Lots Controlled
Under Total
Land and Lot Land/Lots Homes
Land/Lots Purchase Owned and in
Owned (1) Contracts (2)(3) Controlled Inventory (4)
East 8,800 41,900 50,700 4,300
Midwest 8,500 15,700 24,200 2,300
Southeast 29,600 86,300 115,900 9,700
South Central 43,100 51,900 95,000 10,600
Southwest 7,400 5,700 13,100 1,600
West 17,800 18,800 36,600 4,300
115,200 220,300 335,500 32,800
34 % 66 % 100 %
As of September 30, 2019
Lots Controlled
Under Total
Land and Lot Land/Lots Homes
Land/Lots Purchase Owned and in
Owned (1) Contracts (2)(3) Controlled Inventory (4)
East 11,000 30,500 41,500 3,900
Midwest 8,300 10,900 19,200 2,200
Southeast 34,800 73,300 108,100 8,900
South Central 41,600 51,400 93,000 7,900
Southwest 6,700 5,800 12,500 1,300
West 19,000 14,000 33,000 3,500
121,400 185,900 307,300 27,700
40 % 60 % 100 %
___________________
(1)Land/lots owned include approximately 36,500 and 36,100 owned lots that are
fully developed and ready for home construction at June 30, 2020 and
September 30, 2019 , respectively. Land/lots owned also include land held for
development representing 1,700 lots at both June 30, 2020 and September 30,
2019 .
(2)The total remaining purchase price of lots controlled through land and lot
purchase contracts at June 30, 2020 and September 30, 2019 was $8.5 billion and
$7.2 billion , respectively, secured by earnest money deposits of $561.9 million
and $515.4 million , respectively. The total remaining purchase price of lots
controlled through land and lot purchase contracts at June 30, 2020 and
September 30, 2019 included $1.0 billion and $953.8 million , respectively,
related to lot purchase contracts with Forestar, secured by $97.9 million and
$88.7 million , respectively, of earnest money.
(3)Lots controlled at June 30, 2020 include approximately 29,600 lots owned or
controlled by Forestar, 14,100 of which our homebuilding divisions have under
contract to purchase and 15,500 of which our homebuilding divisions have a right
of first offer to purchase. Of these, approximately 12,500 lots were in our
Southeast region, 5,700 lots were in our South Central region, 4,700 lots were
in our West region, 2,900 lots were in our East region, 2,500 lots were in our
Southwest region, and 1,300 lots were in our Midwest region. Lots controlled at
September 30, 2019 included approximately 23,400 lots owned or controlled by
Forestar, 12,800 of which our homebuilding divisions had under contract to
purchase and 10,600 of which our homebuilding divisions had a right of first
offer to purchase.
(4)Approximately 12,700 and 16,000 of our homes in inventory were unsold at
June 30, 2020 and September 30, 2019 , respectively. At June 30, 2020 ,
approximately 2,900 of our unsold homes were completed, of which approximately
400 homes had been completed for more than six months. At September 30, 2019 ,
approximately 5,200 of our unsold homes were completed, of which approximately
800 homes had been completed for more than six months. Homes in inventory
exclude approximately 1,900 model homes at both June 30, 2020 and September 30,
2019 .
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RESULTS OF OPERATIONS - FORESTAR
In October 2017 , we acquired 75% of the outstanding shares of Forestar, and as
of June 30, 2020 we owned 65% of its outstanding shares. Forestar is a publicly
traded residential lot development company with operations in 51 markets across
22 states as of June 30, 2020 . Forestar's segment results are presented on their
historical cost basis, consistent with the manner in which management evaluates
segment performance. (See Note B for additional Forestar segment information and
purchase accounting adjustments.)
Results of operations for the Forestar segment for the three and nine months
ended
Three Months Ended Nine Months Ended
June 30, June 30,
2020 2019 2020 2019
(In millions)
Residential land and lot sales $ 177.8 $ 87.6 $ 581.4 $ 171.6
Commercial tract sales - - 2.5 18.5
Other 0.1 0.6 0.4 1.9
Total revenues $ 177.9 $ 88.2 $ 584.3 $ 192.0
Cost of sales 157.1 75.3 510.3 149.6
Selling, general and administrative expense 11.2 7.9 32.8 19.8
Gain on sale of assets - (1.5) (0.1) (2.4)
Other (income) expense (0.7) (1.9) (4.8) (4.6)
Income before income taxes $ 10.3 $ 8.4 $ 46.1 $ 29.6
At June 30, 2020 , Forestar owned directly or controlled through land and lot
purchase contracts approximately 50,700 residential lots, of which approximately
6,000 are fully developed. Approximately 29,600 of these lots are under contract
to sell to D.R. Horton or subject to a right of first offer under the master
supply agreement with D.R. Horton . Approximately 200 of these lots are under
contract to sell to other builders.
Residential land and lot sales primarily consist of the sale of single-family
lots to local, regional and national homebuilders. During the three and nine
months ended June 30, 2020 and 2019, Forestar's land and lot sales, including
the portion sold to D.R. Horton and the revenues generated from those sales,
were as follows.
Three Months Ended Nine Months Ended
June 30, June 30,
2020 2019 2020 2019
($ in millions)
Total residential single-family lots sold 2,023 1,158 6,396 2,224
Residential single-family lots sold to D.R.
Horton 1,991 995 6,287 1,903
Residential lot sales revenues from sales to
D.R. Horton $ 162.1 $ 73.2 $ 528.0 $ 141.8
Residential tract acres sold to D.R. Horton 30 - 66 -
Residential land sales revenues from sales to
D.R. Horton $ 13.4 $ - $ 20.6 $ -
SG&A expense for the three and nine months ended June 30, 2020 includes charges
of $1.2 million and $3.8 million , respectively, related to the shared services
agreement between Forestar and D.R. Horton whereby D.R. Horton provides Forestar
with certain administrative, compliance, operational and procurement services.
Shared services charges were $0.5 million and $1.6 million , respectively, in the
same periods of fiscal 2019.
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RESULTS OF OPERATIONS - FINANCIAL SERVICES
The following tables and related discussion set forth key operating and financial data for our financial services operations, comprisingDHI Mortgage and our subsidiary title companies, for the three and nine months endedJune 30, 2020 and 2019. Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 % Change 2020 2019 % Change Number of first-lien loans originated or brokered byDHI Mortgage for D.R. Horton homebuyers 12,487 9,235 35 % 30,628 22,997 33 % Number of homes closed by D.R. Horton 17,642 15,971 10 % 45,140 40,951 10 % Percentage ofD.R. Horton homes financed by DHI Mortgage 71 % 58 % 68 % 56 % Number of total loans originated or brokered byDHI Mortgage for D.R. Horton homebuyers 12,511 9,264 35 % 30,745 23,061 33 % Total number of loans originated or brokered by DHI Mortgage 12,920 9,451 37 % 31,672 23,511 35 % Captive business percentage 97 % 98 % 97 % 98 % Loans sold byDHI Mortgage to third parties 12,661 8,901 42 % 30,180 22,897 32 % Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 % Change 2020 2019 % Change (In millions) Loan origination fees$ 0.8 $ 3.5 (77) %$ 2.2 $ 10.2 (78) % Sale of servicing rights and gains from sale of mortgage loans 116.7 85.4 37 % 263.7 218.3 21 % Other revenues 10.2 6.6 55 % 23.8 16.3 46 % Total mortgage operations revenues 127.7 95.5 34 % 289.7 244.8 18 % Title policy premiums 28.9 24.1 20 % 74.3 61.6 21 % Total revenues 156.6 119.6 31 % 364.0 306.4 19 % General and administrative expense 93.9 76.4 23 % 257.7 213.4 21 % Other (income) expense (6.1) (4.9) 24 % (17.7) (12.6) 40 % Financial services pre-tax income$ 68.8 $ 48.1 43 %$ 124.0 $ 105.6 17 % Financial Services Operating Margin Analysis Percentages of Financial Services Revenues Three Months Ended Nine Months Ended June 30, June 30, 2020 2019 2020 2019 General and administrative expense 60.0 % 63.9 % 70.8 % 69.6 % Other (income) expense (3.9) % (4.1) % (4.9) % (4.1) % Financial services pre-tax income 43.9 % 40.2 % 34.1 % 34.5 % 50
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Mortgage Loan Activity
The volume of loans originated by our mortgage operations is directly related to the number of homes closed by our homebuilding operations. In the three and nine months endedJune 30, 2020 , the volume of first-lien loans originated or brokered byDHI Mortgage for our homebuyers increased 35% and 33%, respectively, due to increases in the percentage of homes closed for whichDHI Mortgage handled the homebuyers' financing, as well as increases in the number of homes closed by our homebuilding operations of 10% in both periods. The percentages of homes closed for whichDHI Mortgage handled the homebuyers' financing were 71% and 68% in the three and nine months endedJune 30, 2020 , respectively, compared to 58% and 56% in the prior year periods. Increases in these percentages were primarily due to the Company's program to offer below market interest rates toD.R. Horton homebuyers, expanded coverage in certain markets and increased efficiencies resulting from technology advances. Homes closed by our homebuilding operations constituted 97% ofDHI Mortgage loan originations in the three and nine months endedJune 30, 2020 compared to 98% in the prior year periods. These percentages reflectDHI Mortgage's consistent focus on the captive business provided by our homebuilding operations. The number of loans sold increased 42% and 32% in the three and nine months endedJune 30, 2020 , respectively, compared to the prior year periods. Virtually all of the mortgage loans held for sale onJune 30, 2020 were eligible for sale to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or theGovernment National Mortgage Association (Ginnie Mae ). Approximately 93% of the mortgage loans sold byDHI Mortgage during the nine months endedJune 30, 2020 were sold to four major financial entities, of which one entity purchased 36%. Due to the disruption in the secondary mortgage markets beginning in lateMarch 2020 caused by C-19 and the uncertainty of the impact of the CARES Act, many financial entities began offering lower pricing and limiting their purchases of our mortgages and servicing rights. We began retaining the servicing rights on some of our loan originations during the three months endedJune 30, 2020 . Continued uncertainty could result in a greater concentration of our mortgage sales in future periods to fewer financial entities and directly to Fannie Mae orGinnie Mae , and we may need to make other adjustments to our mortgage operations to adapt to changes in market conditions.
Financial Services Revenues and Expenses
Revenues from our mortgage operations increased 34% to$127.7 million and 18% to$289.7 million in the three and nine months endedJune 30, 2020 , respectively, from$95.5 million and$244.8 million in the prior year periods, while the number of loan originations increased 37% and 35% over those same periods. Revenues increased at a lower rate than origination volume due to lower pricing and resulting net gains on loan originations due to disruption in the secondary mortgage market caused by C-19 and the uncertainty of the impact of the CARES Act, which included changes to current forbearance options for government-backed loans designed to keep homeowners in their homes. Due to the uncertainty surrounding these forbearance options, servicing values declined rapidly at the end of March. The significant decline in servicing values resulted in lower net gains on loan originations during the current year periods compared to the prior year periods even as loan originations increased 37%. General and administrative (G&A) expense related to our financial services operations increased 23% to$93.9 million and 21% to$257.7 million in the three and nine months endedJune 30, 2020 , respectively, from$76.4 million and$213.4 million in the prior year periods. The increases were primarily due to increases in employee related costs to support a higher volume of transactions. Our financial services operations employed 1,979 and 1,938 employees atJune 30, 2020 and 2019, respectively. As a percentage of financial services revenues, G&A expense was 60.0% and 70.8% in the three and nine months endedJune 30, 2020 , respectively, compared to 63.9% and 69.6% in the prior year periods. Fluctuations in financial services G&A expense as a percentage of revenues occur because some components of revenue fluctuate differently than loan volumes, and some expenses are not directly related to mortgage loan volume or to changes in the amount of revenue earned.
Other income, net of other expense, included in our financial services operations consists primarily of the interest income of our mortgage subsidiary.
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RESULTS OF OPERATIONS - OTHER BUSINESSES
The combined pre-tax loss of all of our subsidiaries engaged in other business
activities was $0.6 million in the three months ended June 30, 2020 and the
combined pre-tax income was $56.9 million in the nine months ended June 30,
2020 , compared to pre-tax income of $24.1 million and $52.6 million ,
respectively, in the prior year periods. Income generated by our other
businesses can vary significantly based on the timing of sales of multi-family
rental properties of which there were none during the current quarter.
Through DHI Communities, a 100% owned subsidiary, we develop, construct and own
multi-family residential properties that produce rental income. DHI Communities
is primarily focused on constructing garden style multi-family products, which
typically accommodate 200 to 400 dwelling units, in high growth suburban
markets. After DHI Communities has completed construction and achieved a
stabilized occupancy rate, the property is typically marketed for sale. We had
four projects under active construction and one project that was substantially
complete at June 30, 2020 . DHI Communities sold two multi-family rental
properties during the current fiscal year, one in November 2019 and another in
February 2020 , for a total of $128.5 million and recorded gains on sale totaling
$59.4 million .
RESULTS OF OPERATIONS - CONSOLIDATED
Income before Income Taxes
Pre-tax income for the three and nine months endedJune 30, 2020 was$782.4 million and$1.9 billion , respectively, compared to$626.7 million and$1.5 billion in the prior year periods. The increases were primarily due to increases in pre-tax income generated by our homebuilding operations as a result of higher revenues from increased home closings and an increase in home sales gross margin.
Income Taxes
Our income tax expense for the three and nine months endedJune 30, 2020 was$149.5 million and$377.6 million , respectively, compared to$153.1 million and$350.5 million in the prior year periods. Our effective tax rate was 19.1% and 19.6% for the three and nine months endedJune 30, 2020 , respectively, compared to 24.4% and 23.9% in the prior year periods. The effective tax rate for the three and nine months endedJune 30, 2020 includes a tax benefit of$38.1 million and$77.6 million , respectively, from the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Act). The Act retroactively reinstated the federal energy efficient homes tax credit that expired onDecember 31, 2017 to homes closed fromJanuary 1, 2018 toDecember 31, 2020 . The effective tax rates for all periods include an expense for state income taxes, reduced by tax benefits related to stock-based compensation. Our deferred tax assets, net of deferred tax liabilities, were$172.2 million atJune 30, 2020 compared to$181.8 million atSeptember 30, 2019 . We have a valuation allowance of$13.6 million atJune 30, 2020 and$18.7 million atSeptember 30, 2019 related to state deferred tax assets for net operating loss (NOL) carryforwards that are more likely than not to expire before being realized. We will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to our remaining state NOL carryforwards. Any reversal of the valuation allowance in future periods will impact our effective tax rate. The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of our deferred tax assets. 52 -------------------------------------------------------------------------------- Table of Contents CAPITAL RESOURCES AND LIQUIDITY We have historically funded our operations with cash flows from operating activities, borrowings under bank credit facilities and the issuance of new debt securities. Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to the recent sudden, significant changes in economic conditions and the housing market acrossthe United States . Currently, we are managing our homes under construction and land acquisition and land development activities to adjust to the impact of the C-19 pandemic on our business across our markets. AtJune 30, 2020 , our ratio of debt to total capital (notes payable divided by stockholders' equity plus notes payable) was 28.0% compared to 25.3% atSeptember 30, 2019 and 26.4% atJune 30, 2019 . Our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders' equity plus homebuilding notes payable) was 18.4% compared to 17.0% atSeptember 30, 2019 and 18.5% atJune 30, 2019 . Over the long term, we intend to maintain our ratio of homebuilding debt to total capital below 35%, and we expect it to remain significantly lower than 35% throughout fiscal 2020. We believe that the ratio of homebuilding debt to total capital is useful in understanding the leverage employed in our homebuilding operations and comparing our capital structure with other homebuilders. We exclude the debt of Forestar and our financial services business because they are separately capitalized and not guaranteed by our parent company or any of our homebuilding entities. We regularly assess our projected capital requirements to fund growth in our business, repay debt obligations, pay dividends, repurchase our common stock and support other general corporate and operational needs, and we regularly evaluate our opportunities to raise additional capital.D.R. Horton has an automatically effective universal shelf registration statement filed with theSecurities and Exchange Commission (SEC) inAugust 2018 , registering debt and equity securities that may be issued from time to time in amounts to be determined. Forestar also has an effective shelf registration statement filed with theSEC inSeptember 2018 , registering$500 million of equity securities, of which$394.3 million remains available. As market conditions permit, we may issue new debt or equity securities through the capital markets or obtain additional bank financing to fund our projected capital requirements or provide additional liquidity. We believe that our existing cash resources, revolving credit facilities, mortgage repurchase facility and ability to access the capital markets or obtain additional bank financing will provide sufficient liquidity to fund our near-term working capital needs and debt obligations. However, due to the current economic uncertainties related to C-19, we may be limited in accessing the capital markets or obtaining additional bank financing or the cost of accessing this financing could become more expensive for funding our longer-term capital needs.
Capital Resources - Homebuilding
Cash and Cash Equivalents - At
Bank Credit Facilities - We have a$1.59 billion senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to$2.5 billion , subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to 100% of the revolving credit commitment. Letters of credit issued under the facility reduce the available borrowing capacity. The interest rate on borrowings under the revolving credit facility may be based on either the Prime Rate orLondon Interbank Offered Rate (LIBOR) plus an applicable margin, as defined in the credit agreement governing the facility. The maturity date of the facility isOctober 2, 2024 . Borrowings and repayments under the facility were$1.06 billion each during the nine months endedJune 30, 2020 . AtJune 30, 2020 , there were no borrowings outstanding and$127.8 million of letters of credit issued under the revolving credit facility, resulting in available capacity of approximately$1.46 billion . InMay 2020 , we entered into a credit agreement providing for a$375 million 364-day senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to$550 million , subject to certain conditions and availability of additional bank commitments. The interest rate on borrowings under the 364-day revolving credit facility may be based on either the Prime Rate or LIBOR plus an applicable margin, as defined in the credit agreement governing the facility. The maturity date of the facility isMay 27, 2021 . There were no borrowings under the facility for the period from its inception throughJune 30, 2020 . 53 -------------------------------------------------------------------------------- Table of Contents Our homebuilding revolving credit facilities impose restrictions on our operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if our leverage ratio exceeds a certain level. Both facilities include substantially the same affirmative and negative covenants, events of default and financial covenants. These covenants are measured as defined in the credit agreements governing the facilities and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facilities or cause any outstanding borrowings to become due and payable prior to maturity. The credit agreements governing the facilities impose restrictions on the creation of secured debt and liens. AtJune 30, 2020 , we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facilities. Public Unsecured Debt - We have$2.45 billion principal amount of homebuilding senior notes outstanding as ofJune 30, 2020 that mature fromDecember 2020 throughOctober 2025 . InOctober 2019 , we issued$500 million principal amount of 2.5% senior notes dueOctober 15, 2024 , with interest payable semi-annually. The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 2.7%. InFebruary 2020 , we repaid$500 million principal amount of our 4.0% senior notes at maturity. InMay 2020 , we issued$500 million principal amount of 2.6% senior notes dueOctober 15, 2025 with interest payable semi-annually. The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 2.8%. The indentures governing our senior notes impose restrictions on the creation of secured debt and liens. AtJune 30, 2020 , we were in compliance with all of the limitations and restrictions associated with our public debt obligations. Repurchases of Common Stock - We repurchased 7.0 million shares of our common stock for$360.4 million during the nine months endedJune 30, 2020 , none of which were purchased in the three months endedJune 30, 2020 . Debt and Equity Repurchase Authorizations - EffectiveJuly 30, 2019 , our Board of Directors authorized the repurchase of up to$500 million of debt securities and$1.0 billion of our common stock. AtJune 30, 2020 , the full amount of the debt repurchase authorization was remaining and$535.3 million of the equity repurchase authorization was remaining. These authorizations have no expiration date.
Capital Resources - Forestar
Forestar's ability to achieve its long-term growth objectives will depend on its ability to obtain financing in sufficient capacities. As market conditions permit, Forestar may issue new debt or equity securities through the capital markets or obtain additional bank financing to provide capital for future growth and additional liquidity.
Cash and Cash Equivalents - At
Bank Credit Facility - Forestar has a$380 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to$570 million , subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of$100 million and 50% of the revolving credit commitment. Borrowings under the revolving credit facility are subject to a borrowing base based on Forestar's book value of its real estate assets and unrestricted cash. Letters of credit issued under the facility reduce the available borrowing capacity. AtJune 30, 2020 , there were no borrowings outstanding and$31.6 million of letters of credit issued under the revolving credit facility, resulting in available capacity of$348.4 million . The maturity date of the facility isOctober 2, 2022 , which can be extended by up to one year on up to two additional occasions, subject to the approval of lenders holding a majority of the commitments. The Forestar revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require Forestar to maintain a minimum level of tangible net worth, a minimum level of liquidity and a maximum allowable leverage ratio. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. 54 -------------------------------------------------------------------------------- Table of Contents Unsecured Debt - InFebruary 2020 , Forestar issued$300 million principal amount of 5.0% senior notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The notes are dueMarch 1, 2028 , with interest payable semiannually, and represent unsecured obligations of Forestar. The annual effective interest rate of these notes after giving effect to the amortization of financing costs is 5.2%. These notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreement. Forestar also has$350 million principal amount of 8.0% senior notes that matureApril 15, 2024 . InMarch 2020 , Forestar repaid$118.9 million principal amount of its 3.75% convertible senior notes in cash at maturity. Forestar's revolving credit facility and its senior notes are not guaranteed byD.R. Horton, Inc. or any of the subsidiaries that guarantee our homebuilding debt. AtJune 30, 2020 , Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations.
Capital Resources - Financial Services
Cash and Cash Equivalents - At
Mortgage Repurchase Facility - Our mortgage subsidiary,DHI Mortgage , has a mortgage repurchase facility that provides financing and liquidity toDHI Mortgage by facilitating purchase transactions in whichDHI Mortgage transfers eligible loans to the counterparties upon receipt of funds from the counterparties.DHI Mortgage then has the right and obligation to repurchase the purchased loans upon their sale to third-party purchasers in the secondary market or within specified time frames from 45 to 60 days in accordance with the terms of the mortgage repurchase facility. InMay 2020 , the mortgage repurchase facility was amended to increase its total capacity to$1.35 billion ; however, the capacity increases without requiring additional commitments to$1.575 billion for approximately 30 days at the end of the third quarter of fiscal 2020 and first quarter of fiscal 2021 and for approximately 45 days at the end of fiscal 2020. The capacity of the facility can also be increased to$1.8 billion subject to the availability of additional commitments. The maturity date of the facility isFebruary 19, 2021 . As ofJune 30, 2020 ,$1.39 billion of mortgage loans held for sale with a collateral value of$1.36 billion were pledged under the mortgage repurchase facility.DHI Mortgage had an obligation of$1.2 billion outstanding under the mortgage repurchase facility atJune 30, 2020 at a 2.4% annual interest rate. The mortgage repurchase facility is not guaranteed byD.R. Horton, Inc. or any of the subsidiaries that guarantee our homebuilding debt. The facility contains financial covenants as to the mortgage subsidiary's minimum required tangible net worth, its maximum allowable leverage ratio and its minimum required liquidity. These covenants are measured and reported to the lenders monthly. AtJune 30, 2020 ,DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility. In the past,DHI Mortgage has been able to renew or extend its mortgage credit facility at a sufficient capacity and on satisfactory terms prior to its maturity and obtain temporary additional commitments through amendments to the credit agreement during periods of higher than normal volumes of mortgages held for sale. The liquidity of our financial services business depends upon its continued ability to renew and extend the mortgage repurchase facility or to obtain other additional financing in sufficient capacities. 55 -------------------------------------------------------------------------------- Table of Contents Operating Cash Flow Activities
In the nine months ended
Cash used to increase construction in progress and finished home inventory was$602.3 million in the current year period compared to$393.0 million in the prior year period. In both periods, the expenditures were made to support increased sales and closing volumes. Cash used to increase residential land and lots in the current year period was$361.9 million compared to$606.2 million in the prior year period. Of these amounts,$259.8 million and$531.5 million , respectively, related to Forestar. The most significant source of cash provided by operating activities in both periods was net income.
Investing Cash Flow Activities
In the nine months endedJune 30, 2020 , net cash used in investing activities was$100.4 million compared to$326.3 million in the prior year period. In the current year period, uses of cash included expenditures related to our rental properties totaling$153.6 million and purchases of property and equipment totaling$66.8 million , partially offset by proceeds from the sale of assets primarily consisting of$128.5 million related to the sale of two multi-family rental properties. In the prior year period, the most significant uses of cash were the purchases of the homebuilding operations ofWestport Homes ,Classic Builders andTerramor Homes . Proceeds from the sale of assets in the prior year period included$133.4 million related to the sale of two multi-family rental properties.
Financing Cash Flow Activities
We expect the short-term financing needs of our operations will be funded with existing cash, cash generated from operations and borrowings under our credit facilities. Long-term financing needs for our homebuilding and Forestar operations may be funded with the issuance of senior unsecured debt securities or equity securities through the capital markets. During the nine months endedJune 30, 2020 , net cash provided by financing activities was$370.2 million , consisting primarily of note proceeds of$1.06 billion from draws on our homebuilding revolving credit facility, our issuance of$500 million principal amount of 2.5% homebuilding senior notes, our issuance of$500 million principal amount of 2.6% homebuilding senior notes, Forestar's issuance of$300 million principal amount of 5.0% senior notes and net advances of$284.0 million on our mortgage repurchase facility. Note proceeds were partially offset by repayment of amounts drawn on our homebuilding revolving credit facility totaling$1.06 billion , repayment of$500 million principal amount of our 4.0% senior notes at maturity, Forestar's repayment of$118.9 million principal amount of its 3.75% convertible senior notes at maturity, cash used to repurchase 7.0 million shares of our common stock for$360.4 million and payment of cash dividends totaling$192.3 million . During the nine months endedJune 30, 2019 , net cash used in financing activities was$375.1 million , consisting primarily of repayment of amounts drawn on our homebuilding and Forestar revolving credit facilities totaling$2.0 billion , repayment of$500 million principal amount of our 3.75% homebuilding senior notes at maturity, cash used to repurchase 9.4 million shares of our common stock for$361.5 million and payment of cash dividends totaling$167.9 million . These uses of cash were partially offset by note proceeds of$2.2 billion from draws on our homebuilding and Forestar revolving credit facilities, Forestar's issuance of$350 million principal amount of 8.0% senior notes and net advances of$158.8 million on our mortgage repurchase facility. During each of the first three quarters of fiscal 2020, our Board of Directors approved and paid quarterly cash dividends of$0.175 per common share, the most recent of which was paid onMay 21, 2020 to stockholders of record onMay 11, 2020 . InJuly 2020 , our Board of Directors approved a quarterly cash dividend of$0.175 per common share, payable onAugust 24, 2020 to stockholders of record onAugust 12, 2020 . Cash dividends of$0.15 per common share were approved and paid in each quarter of fiscal 2019. The declaration of future cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, our future earnings, cash flows, capital requirements, financial condition and general business conditions. 56
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CONTRACTUAL CASH OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
Our primary contractual cash obligations are payments under our debt agreements and lease payments under operating leases. We expect to fund our contractual obligations in the ordinary course of business through a combination of our existing cash resources, cash flows generated from profits, our credit facilities or other bank financing, and the issuance of new debt or equity securities through the public capital markets as market conditions may permit. AtJune 30, 2020 , we had outstanding letters of credit of$159.4 million and surety bonds of$1.7 billion , issued by third parties to secure performance under various contracts. We expect that our performance obligations secured by these letters of credit and bonds will generally be completed in the ordinary course of business and in accordance with the applicable contractual terms. When we complete our performance obligations, the related letters of credit and bonds are generally released shortly thereafter, leaving us with no continuing obligations. We have no material third-party guarantees. Our mortgage subsidiary enters into various commitments related to the lending activities of our mortgage operations. Further discussion of these commitments is provided in Item 3 "Quantitative and Qualitative Disclosures about Market Risk" under Part I of this quarterly report on Form 10-Q. We enter into land and lot purchase contracts to acquire land or lots for the construction of homes. Lot purchase contracts enable us to control significant lot positions with limited capital investment. Among our homebuilding land and lot purchase contracts atJune 30, 2020 , there were a limited number of contracts, representing$50.8 million of remaining purchase price, subject to specific performance provisions that may require us to purchase the land or lots upon the land sellers meeting their respective contractual obligations. Of this amount,$11.5 million related to contracts between our homebuilding segment and Forestar. Further information about our land purchase contracts is provided in the "Homebuilding Inventories, Land and Lot Position and Homes in Inventory" section included herein. 57
-------------------------------------------------------------------------------- Table of Contents SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
As of
All of the homebuilding senior notes and the homebuilding revolving credit facilities are fully and unconditionally guaranteed, on a joint and several basis, by certain subsidiaries ofD.R. Horton, Inc. (Guarantors or Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, byD.R. Horton, Inc. Our subsidiaries associated with the Forestar lot development operation, financial services operations, multi-family residential construction and certain other subsidiaries do not guarantee the homebuilding senior notes or the homebuilding revolving credit facilities (collectively, Non-Guarantor Subsidiaries). The guarantees are senior unsecured obligations of each Guarantor and rank equal with all existing and future senior debt of such Guarantor and senior to all subordinated debt of such Guarantor. The guarantees are effectively subordinated to any secured debt of such Guarantor to the extent of the value of the assets securing such debt. The guarantees will be structurally subordinated to indebtedness and other liabilities of Non-Guarantor Subsidiaries of the Guarantors. The guarantees by a Guarantor Subsidiary will be automatically and unconditionally released and discharged upon: (1) the sale or other disposition of its common stock whereby it is no longer a subsidiary of ours; (2) the sale or other disposition of all or substantially all of its assets (other than to us or another Guarantor); (3) its merger or consolidation with an entity other than us or another Guarantor; or (4) its ceasing to guarantee any of our publicly traded debt securities and ceasing to guarantee any of our obligations under our homebuilding revolving credit facility. The following tables present summarized financial information forD.R. Horton, Inc. and the Guarantor Subsidiaries on a combined basis after intercompany transactions and balances have been eliminated amongD.R. Horton, Inc. and the Guarantor Subsidiaries, as well as their investment in, and equity in earnings from the Non-Guarantor Subsidiaries. D.R. Horton, Inc. and Guarantor Subsidiaries June 30, September 30, Summarized Balance Sheet Data 2020 2019 (In millions) Assets Cash$ 1,842.4 $ 992.9 Inventories 10,792.7 10,056.8 Amount due from Non-Guarantor Subsidiaries 487.5 473.2 Total assets 14,571.0 12,874.1 Liabilities & Stockholders' Equity Notes payable$ 2,490.3 $ 1,970.1 Total liabilities 4,568.8 3,657.5 Stockholders' equity 10,002.2 9,216.6 Nine Months Ended Fiscal Year Ended Summarized Statement of Operations Data
(In millions)
Revenues $ 13,489.2 $ 17,023.0
Cost of sales 10,626.9 13,651.8
Selling, general and administrative expense 1,129.9 1,476.2
Income before income taxes 1,739.4 1,903.5
Net income 1,403.2 1,447.1
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A court could void or subordinate any Guarantor's guarantee under the fraudulent
conveyance laws if existing or future creditors of any such Guarantor were
successful in establishing that:
•such guarantee was incurred with fraudulent intent; or
•such Guarantor did not receive fair consideration or reasonably equivalent
value for issuing its guarantee; and
•was insolvent at the time of the guarantee;
•was rendered insolvent by reason of the guarantee;
•was engaged in a business or transaction for which its assets constituted
unreasonably small capital to carry on its business; or
•intended to incur, or believed that it would incur, debt beyond its ability to
pay such debt as it matured.
The measures of insolvency for purposes of determining whether a fraudulent
conveyance occurred would vary depending upon the laws of the relevant
jurisdiction and upon the valuation assumptions and methodology applied by the
court. Generally, however, a company would be considered insolvent for purposes
of the foregoing if:
•the sum of the company's debts, including contingent, unliquidated and
unmatured liabilities, is greater than all of such company's property at a fair
valuation; or
•the present fair saleable value of the company's assets is less than the amount
that will be required to pay the probable liability on its existing debts as
they become absolute and matured.
The indentures governing our homebuilding senior notes contain a "savings
clause," which limits the liability of each Guarantor on its guarantee to the
maximum amount that such Guarantor can incur without risk that its guarantee
will be subject to avoidance as a fraudulent transfer. This provision may not be
effective to protect such guarantees from fraudulent transfer challenges or, if
it does, it may reduce such Guarantor's obligation such that the remaining
amount due and collectible under the guarantees would not suffice, if necessary,
to pay the notes in full when due.
On the basis of historical financial information, operating history and other
factors, we believe that each of the Guarantors, after giving effect to the
issuance of the guarantees when such guarantees were issued, was not insolvent,
did not have unreasonably small capital for the business in which it engaged and
did not and has not incurred debts beyond its ability to pay such debts as they
mature. We cannot assure you, however, as to what standard a court would apply
in making these determinations or that a court would agree with our conclusions
in this regard.
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CRITICAL ACCOUNTING POLICIES
As disclosed in our annual report on Form 10-K for the fiscal year endedSeptember 30, 2019 , our most critical accounting policies relate to revenue recognition, inventories and cost of sales, warranty claims and legal claims and insurance. SinceSeptember 30, 2019 , there have been no significant changes to those critical accounting policies. As disclosed in our critical accounting policies in our Form 10-K for the fiscal year endedSeptember 30, 2019 , our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims. AtJune 30, 2020 andSeptember 30, 2019 , we had reserves for approximately 240 and 180 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During the nine months endedJune 30, 2020 , we established reserves for approximately 120 new construction defect claims and resolved 60 construction defect claims for a total cost of$20.6 million . AtJune 30, 2019 andSeptember 30, 2018 , we had reserves for approximately 180 and 155 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During the nine months endedJune 30, 2019 , we established reserves for approximately 80 new construction defect claims and resolved 55 construction defect claims for a total cost of$6.9 million .
SEASONALITY
Although significant changes in market conditions have impacted our seasonal
patterns in the past and could do so again in the future, we generally close
more homes and generate greater revenues and operating income in the third and
fourth quarters of our fiscal year. The seasonal nature of our business can also
cause significant variations in our working capital requirements in our
homebuilding, lot development and financial services operations. As a result of
seasonal activity, our quarterly results of operations and financial position at
the end of a particular fiscal quarter are not necessarily representative of the
balance of our fiscal year. Due to the impact of C-19, our homes closed,
revenues and operating income in fiscal 2020 may not follow our historical
seasonal patterns.
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Forward-Looking Statements
Some of the statements contained in this report, as well as in other materials
we have filed or will file with the SEC , statements made by us in periodic press
releases and oral statements we make to analysts, stockholders and the press in
the course of presentations about us, may be construed as "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
Section 21E of the Securities Exchange Act of 1934 and the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are based on
management's beliefs as well as assumptions made by, and information currently
available to, management. These forward-looking statements typically include the
words "anticipate," "believe," "consider," "continue," "could," "estimate,"
"expect," "forecast," "goal," "intend," "likely," "may," "outlook," "plan,"
"possible," "potential," "predict," "projection," "seek," "should," "strategy,"
"target," "will," "would" or other words of similar meaning. Any or all of the
forward-looking statements included in this report and in any other of our
reports or public statements may not approximate actual experience, and the
expectations derived from them may not be realized, due to risks, uncertainties
and other factors. As a result, actual results may differ materially from the
expectations or results we discuss in the forward-looking statements. These
risks, uncertainties and other factors include, but are not limited to:
•the effects of public health issues such as a major epidemic or pandemic,
including the impact of C-19 on the economy and our businesses;
•the cyclical nature of the homebuilding and lot development industries and
changes in economic, real estate and other conditions;
•constriction of the credit and public capital markets, which could limit our
ability to access capital and increase our costs of capital;
•reductions in the availability of mortgage financing provided by government
agencies, changes in government financing programs, a decrease in our ability to
sell mortgage loans on attractive terms or an increase in mortgage interest
rates;
•the risks associated with our land and lot inventory;
•our ability to effect our growth strategies, acquisitions or investments
successfully;
•the impact of an inflationary, deflationary or higher interest rate
environment;
•home warranty and construction defect claims;
•the effects of health and safety incidents;
•the effects of negative publicity;
•supply shortages and other risks of acquiring land, building materials and
skilled labor;
•reductions in the availability of performance bonds;
•increases in the costs of owning a home;
•the effects of governmental regulations and environmental matters on our
homebuilding and land development operations;
•the effects of governmental regulations on our financial services operations;
•our ability to manage and service our debt and comply with related debt
covenants, restrictions and limitations;
•competitive conditions within the homebuilding, lot development and financial
services industries;
•the effects of the loss of key personnel; and
•information technology failures and data security breaches.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, any further disclosures made on related subjects in subsequent reports
on Forms 10-K, 10-Q and 8-K should be consulted. Additional information about
issues that could lead to material changes in performance and risk factors that
have the potential to affect us is contained in our annual report on Form 10-K
for the fiscal year ended September 30, 2019 , which is filed with the SEC ,
including the section entitled "Risk Factors," as supplemented by Part II, Item
1A. in this quarterly report on Form 10-Q.
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