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 89 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$299,200 during the six months endedMarch 31, 2020 . Approximately 91% of our home sales revenue in the six months endedMarch 31, 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) for$558.3 million in cash. Forestar is 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. AtMarch 31, 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 generally sells the mortgages it originates and 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. We currently have three projects under active construction and one project that is substantially complete. InNovember 2019 , DHI Communities sold a multi-family rental property for$61.5 million and recorded a gain on the sale of$31.2 million . InFebruary 2020 , DHI Communities sold a multi-family rental property for$67.0 million and recorded a gain on the sale of$28.2 million . AtMarch 31, 2020 andSeptember 30, 2019 , our consolidated balance sheets included$202.8 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$333.4 million and$317.9 million atMarch 31, 2020 andSeptember 30, 2019 , respectively, and the combined pre-tax income of these subsidiaries was$28.0 million and$57.5 million in the three and six months endedMarch 31, 2020 , respectively, compared to$27.5 million and$28.5 million in the prior year periods. 33 -------------------------------------------------------------------------------- Table of Contents OVERVIEW
Fiscal Year-to-Date Operating Results
Economic fundamentals remained solid in the housing market throughout most of the second quarter of fiscal 2020, as interest rates on mortgage loans remained low, demand was strong and there was a limited supply of homes at affordable prices across most of our markets. During the six months endedMarch 31, 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$8.5 billion compared to$7.6 billion in the prior year period. Our pre-tax income was$1.1 billion in the six months endedMarch 31, 2020 compared to$838.5 million in the prior year period, and our pre-tax operating margin was 13.4% compared to 11.0%. Net income was$916.4 million in the six months endedMarch 31, 2020 compared to$641.1 million in the prior year period. The current six month period results include a tax benefit of$39.5 million related to the retroactive reinstatement of the federal energy efficient homes tax credit. Cash provided by our homebuilding operations was$52.1 million in the six months endedMarch 31, 2020 compared to cash used of$215.9 million in the prior year period. In the trailing twelve months endedMarch 31, 2020 , our homebuilding return on inventory (ROI) was 20.2% compared to 18.6% in the prior year period. Homebuilding ROI is calculated as homebuilding pre-tax income for the year divided by average inventory. Average inventory in the ROI calculation is the sum of ending inventory balances for the trailing five quarters divided by five. Within our homebuilding land and lot portfolio, our lots controlled under purchase contracts represent 64% of the lots owned and controlled atMarch 31, 2020 compared to 60% atSeptember 30, 2019 and 62% atMarch 31, 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 of March and into April, the impacts of the COVID-19 pandemic (COVID-19) and the related widespread reductions in economic activity acrossthe United States began to adversely affect our business operations and the demand for our homes across all of our operating markets. We have experienced increases in sales cancellations and decreases in sales orders in late March and April as compared to the same period in the prior year. As ofApril 28, 2020 , our net sales orders for the month of April are approximately 11% lower than the same period a year ago. This trend in net sales orders may not be indicative of the net sales order results that may be expected for the full month ofApril 2020 , because a significant number of sales contract cancellations typically occur in the final days of each month, which can significantly affect net sales orders for the full month. As ofApril 28, 2020 , our weekly net sales order volumes in the most recent two weeks have increased as compared to the preceding four weeks. In almost all of the municipalities across theU.S. where we operate, residential construction and financial services have been designated as essential businesses as part of critical infrastructure. We have continued our homebuilding, lot development and financial services operations in those markets where allowed and have 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. Our mortgage company has experienced lower pricing and margins on sales of mortgage loans and servicing rights in late March and April due to disruption in the secondary mortgage markets. Many purchasers and servicers of our mortgages have limited their purchases and tightened their credit standards due to liquidity and operational challenges caused by COVID-19 and the uncertainty of the impact of the borrower forbearance provisions of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted in lateMarch 2020 . There is significant uncertainty regarding the extent to which and how long COVID-19 and related government directives, actions and economic relief efforts will disrupt 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 COVID-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 will help us operate in this uncertain environment. We will seek to maintain our flexible financial position by generating strong cash flows from our homebuilding operations, limiting land acquisition and land development spending and adjusting 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 withstand an economic downturn and remain positioned to make opportunistic strategic investments. We are making operational adjustments and limiting capital investments as a result of the COVID-19 pandemic and its potential impact on our businesses, including cautiously managing our homes under construction and limiting land acquisition and land development activities; 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. •Currently, we are cautiously managing our inventory of homes under construction relative to demand in each of our markets to adjust to the impact of COVID-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. •Currently, we are limiting our land acquisition and development investments to adjust to the impact of COVID-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. •Currently, our homebuilding operations are working with land developers and our majority-owned Forestar lot development subsidiary to adjust timing of lot purchases under contract to align with current and expected new home demand in each of our markets to adjust to the impact of COVID-19, while continuing to seek opportunities to expand the portion of our land and finished lots controlled through purchase contracts and assisting Forestar with their operations. •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 withstand the impact of COVID-19 and related economic downturn and 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
--------------------------------------------------------------------------------
Table of Contents
KEY RESULTS
Key financial results as of and for the three months ended
Homebuilding:
•Homebuilding revenues increased 10% to$4.4 billion compared to$4.0 billion . •Homes closed increased 8% to 14,539 homes, and the average closing price of those homes was$300,100 . •Net sales orders increased 20% to 20,087 homes, and the value of net sales orders increased 22% to$6.0 billion . •Sales order backlog increased 14% to 19,328 homes, and the value of sales order backlog increased 18% to$5.9 billion . •Home sales gross margin was 21.3% compared to 19.3%. •Homebuilding SG&A expense was 8.3% of homebuilding revenues compared to 9.0%. •Homebuilding pre-tax income was$565.5 million compared to$400.4 million . •Homebuilding pre-tax income was 12.9% of homebuilding revenues compared to 10.0%. •Homebuilding cash and cash equivalents totaled$1.0 billion compared to$1.0 billion and$557.3 million atSeptember 30, 2019 andMarch 31, 2019 , respectively. •Homebuilding inventories totaled$11.1 billion compared to$10.3 billion and$11.1 billion atSeptember 30, 2019 andMarch 31, 2019 , respectively. •Homes in inventory totaled 33,400 compared to 27,700 and 32,100 atSeptember 30, 2019 andMarch 31, 2019 , respectively. •Owned lots totaled 118,700 compared to 121,400 and 120,900 atSeptember 30, 2019 andMarch 31, 2019 , respectively. Lots controlled through purchase contracts increased to 210,600 from 185,900 and 195,500 atSeptember 30, 2019 andMarch 31, 2019 , respectively. •Homebuilding debt was$2.5 billion compared to$2.0 billion and$2.8 billion atSeptember 30, 2019 andMarch 31, 2019 , respectively. •Homebuilding debt to total capital was 19.2% compared to 17.0% and 22.9% atSeptember 30, 2019 andMarch 31, 2019 , respectively. 36
--------------------------------------------------------------------------------
Table of Contents
Forestar:
•Forestar's revenues increased 143% to$159.1 million compared to$65.4 million . Revenues in the current and prior year quarters included$151.9 million and$39.7 million , respectively, of revenue from land and lot sales to our homebuilding segment. •Forestar's lots sold increased 256% to 1,951 compared to 548. Lots sold toD.R. Horton totaled 1,906 compared to 453. •Forestar's pre-tax income was$13.7 million compared to$16.4 million . •Forestar's pre-tax income was 8.6% of Forestar revenues compared to 25.1%. •Forestar's cash and cash equivalents totaled$438.2 million compared to$382.8 million and$66.4 million atSeptember 30, 2019 andMarch 31, 2019 , respectively. •Forestar's inventories totaled$1.2 billion compared to$1.0 billion and$851.5 million atSeptember 30, 2019 andMarch 31, 2019 , respectively. •Owned and controlled lots totaled 52,300 compared to 38,300 and 31,400 atSeptember 30, 2019 andMarch 31, 2019 , respectively. Of these lots, 28,600 were under contract to sell to or subject to a right of first offer withD.R. Horton , compared to 23,400 and 21,700 atSeptember 30, 2019 andMarch 31, 2019 , respectively. •Forestar's debt was$640.1 million compared to$460.5 million and$149.2 million atSeptember 30, 2019 andMarch 31, 2019 , respectively. •Forestar's debt to total capital was 43.4% compared to 36.3% and 17.8% atSeptember 30, 2019 andMarch 31, 2019 , respectively. Financial Services: •Financial services revenues increased 3% to$104.5 million compared to$101.6 million . •Financial services pre-tax income was$24.7 million compared to$34.0 million . •Financial services pre-tax income was 23.6% of financial services revenues compared to 33.5%. Consolidated Results: •Consolidated pre-tax income increased 34% to$621.3 million compared to$462.8 million . •Consolidated pre-tax income was 13.8% of consolidated revenues compared to 11.2%. •Income tax expense was$137.3 million compared to$108.4 million . •Net income attributable toD.R. Horton increased 37% to$482.7 million compared to$351.3 million . •Diluted net income per common share attributable toD.R. Horton increased 40% to$1.30 compared to$0.93 . •Stockholders' equity was$10.5 billion compared to$10.0 billion and$9.4 billion atSeptember 30, 2019 andMarch 31, 2019 , respectively. •Book value per common share increased to$28.77 compared to$27.20 and$25.09 atSeptember 30, 2019 andMarch 31, 2019 , respectively. •Debt to total capital was 29.2% compared to 25.3% atSeptember 30, 2019 and 27.9% atMarch 31, 2019 . 37
--------------------------------------------------------------------------------
Table of Contents
Key financial results for the six months ended
Homebuilding:
•Homebuilding revenues increased 11% to$8.3 billion compared to$7.4 billion . •Homes closed increased 10% to 27,498 homes, and the average closing price of those homes was$299,200 . •Net sales orders increased 19% to 33,213 homes, and the value of net sales orders increased 22% to$10.0 billion . •Home sales gross margin was 21.1% compared to 19.6%. •Homebuilding SG&A expense was 8.7% of homebuilding revenues compared to 9.2%. •Homebuilding pre-tax income was$1.0 billion compared to$754.8 million . •Homebuilding pre-tax income was 12.4% of homebuilding revenues compared to 10.2%. •Net cash provided by homebuilding operations was$52.1 million compared to net cash used of$215.9 million .
Forestar:
•Forestar's revenues increased 292% to$406.4 million compared to$103.8 million . Revenues in the current and prior year periods included$373.2 million and$68.7 million , respectively, of revenue from land and lot sales to our homebuilding segment. •Forestar's lots sold increased 310% to 4,373 compared to 1,066. Lots sold toD.R. Horton totaled 4,296 compared to 908. •Forestar's pre-tax income was$35.8 million compared to$21.3 million . •Forestar's pre-tax income was 8.8% of Forestar revenues compared to 20.5%. Financial Services: •Financial services revenues increased 11% to$207.4 million compared to$186.9 million . •Financial services pre-tax income was$55.2 million compared to$57.6 million . •Financial services pre-tax income was 26.6% of financial services revenues compared to 30.8%. Consolidated Results: •Consolidated pre-tax income increased 36% to$1.1 billion compared to$838.5 million . •Consolidated pre-tax income was 13.4% of consolidated revenues compared to 11.0%. •Income tax expense was$228.1 million compared to$197.4 million . •Net income attributable toD.R. Horton increased 43% to$914.0 million compared to$638.4 million . •Diluted net income per common share attributable toD.R. Horton increased 46% to$2.46 compared to$1.68 . •Net cash used in operations was$395.1 million compared to$461.7 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 Lafayette San Bernardino County Oklahoma Oklahoma City San Diego County Texas Austin Ventura County Bryan/College Station Hawaii Maui Dallas Oahu Fort Worth Nevada Las Vegas Houston Reno Killeen/Temple/Waco Oregon Bend Midland/Odessa Portland/Salem New Braunfels/San Marcos Utah Salt Lake City San Antonio Washington Seattle/Tacoma/Everett/Olympia Spokane Southwest Region Vancouver Arizona Phoenix Tucson New Mexico Albuquerque 39
--------------------------------------------------------------------------------
Table of Contents
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 six months ended
Net Sales Orders (1)
Three Months Ended March 31,
Net Homes Sold Value (In millions) Average Selling Price
% % %
2020 2019 Change 2020 2019 Change 2020 2019 Change
East 2,749 2,426 13 % $ 803.8 $ 693.1 16 % $ 292,400 $ 285,700 2 %
Midwest 1,426 1,036 38 % 506.4 361.3 40 % 355,100 348,700 2 %
Southeast 6,016 5,605 7 % 1,634.9 1,488.4 10 % 271,800 265,500 2 %
South Central 6,139 4,779 28 % 1,569.0 1,203.2 30 % 255,600 251,800 2 %
Southwest 942 797 18 % 267.6 206.2 30 % 284,100 258,700 10 %
West 2,815 2,162 30 % 1,239.2 989.8 25 % 440,200 457,800 (4) %
20,087 16,805 20 % $ 6,020.9 $ 4,942.0 22 % $ 299,700 $ 294,100 2 %
Six Months Ended March 31,
Net Homes Sold Value (In millions) Average Selling Price
% % %
2020 2019 Change 2020 2019 Change 2020 2019 Change
East 4,590 3,996 15 % $ 1,350.5 $ 1,138.0 19 % $ 294,200 $ 284,800 3 %
Midwest 2,140 1,568 36 % 761.7 558.2 36 % 355,900 356,000 - %
Southeast 10,390 9,221 13 % 2,826.7 2,451.7 15 % 272,100 265,900 2 %
South Central 9,914 8,174 21 % 2,533.2 2,059.0 23 % 255,500 251,900 1 %
Southwest 1,609 1,327 21 % 467.3 341.1 37 % 290,400 257,000 13 %
West 4,570 3,561 28 % 2,031.2 1,619.2 25 % 444,500 454,700 (2) %
33,213 27,847 19 % $ 9,970.6 $ 8,167.2 22 % $ 300,200 $ 293,300 2 %
Sales Order Cancellations
Three Months Ended March 31,
Cancelled Sales Orders Value (In millions) Cancellation Rate (2)
2020 2019 2020 2019 2020 2019
East 660 573 $ 188.5 $ 162.8 19 % 19 %
Midwest 224 162 75.7 55.3 14 % 14 %
Southeast 1,695 1,378 463.1 367.6 22 % 20 %
South Central 1,372 1,234 352.9 307.4 18 % 21 %
Southwest 224 234 65.8 57.9 19 % 23 %
West 395 315 178.8 147.8 12 % 13 %
4,570 3,896 $ 1,324.8 $ 1,098.8 19 % 19 %
Six Months Ended March 31,
Cancelled Sales Orders Value (In millions) Cancellation Rate (2)
2020 2019 2020 2019 2020 2019
East 1,090 1,072 $ 311.6 $ 302.8 19 % 21 %
Midwest 385 269 126.8 93.4 15 % 15 %
Southeast 2,866 2,597 783.7 694.3 22 % 22 %
South Central 2,366 2,290 607.4 571.1 19 % 22 %
Southwest 384 520 110.5 129.0 19 % 28 %
West 686 634 308.7 295.2 13 % 15 %
7,777 7,382 $ 2,248.7 $ 2,085.8 19 % 21 %
___________________________________________
(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.
40--------------------------------------------------------------------------------
Table of Contents
The number of net sales orders increased 20% and 19% in the three and six months endedMarch 31, 2020 , respectively, compared to the prior year periods, with increases in all of our regions. The value of net sales orders increased 22% to$6.0 billion (20,087 homes) and to$10.0 billion (33,213 homes) for the three and six months endedMarch 31, 2020 , respectively, compared to$4.9 billion (16,805 homes) and$8.2 billion (27,847 homes) in the prior year periods. The average selling price of net sales orders during the three and six months endedMarch 31, 2020 was$299,700 and$300,200 , respectively, up 2% from both prior year periods.
The markets contributing most to the increases in sales volumes in our regions
were as follows: the Carolina markets in the East; the
Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 19% in both the three and six months endedMarch 31, 2020 compared to 19% and 21% in the prior year periods. During the latter part of March and into April, the impacts of the COVID-19 pandemic and the related widespread reductions in economic activity began to adversely affect our business operations and the demand for our homes. We experienced increases in sales cancellations and decreases in sales orders in late March and April as compared to the same period in the prior year. There is significant uncertainty regarding the extent to which and how long COVID-19 and related government directives, actions and economic relief efforts will disrupt theU.S. economy and level of employment, capital markets, secondary mortgage markets, consumer confidence, demand for our homes and availability of mortgage loans to homebuyers. The extent to which this impacts our operational and financial performance will depend on future developments, including the duration and spread of COVID-19 and the impact on our customers, trade partners and employees, all of which are highly uncertain and cannot be predicted. We believe we are well positioned to operate in this uncertain environment and will continue to adjust product offerings, incentives, home pricing, sales pace and inventory levels to optimize the return on our inventory investments in each of our communities based on local housing market conditions. Sales Order Backlog As of March 31, Homes in Backlog Value (In millions) Average Selling Price % % % 2020 2019 Change 2020 2019 Change 2020 2019 Change East 2,725 2,550 7 %$ 826.7 $ 744.1 11 %$ 303,400 $ 291,800 4 % Midwest 1,513 1,228 23 % 535.6 417.7 28 % 354,000 340,100 4 % Southeast 5,605 5,132 9 % 1,581.5 1,414.5 12 % 282,200 275,600 2 % South Central 6,133 5,246 17 % 1,602.0 1,351.5 19 % 261,200 257,600 1 % Southwest 1,081 1,013 7 % 313.2 275.9 14 % 289,700 272,400 6 % West 2,271 1,721 32 % 1,025.2 794.0 29 % 451,400 461,400 (2) % 19,328 16,890 14 %$ 5,884.2 $ 4,997.7 18 %$ 304,400 $ 295,900 3 %
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--------------------------------------------------------------------------------
Table of Contents
Homes Closed and Home Sales Revenue
Three Months Ended March 31,
Homes Closed Value (In millions) Average Selling Price
% % %
2020 2019 Change 2020 2019 Change 2020 2019 Change
East 1,983 1,791 11 % $ 579.5 $ 518.0 12 % $ 292,200 $ 289,200 1 %
Midwest 877 701 25 % 308.7 246.4 25 % 352,000 351,500 - %
Southeast 4,831 4,527 7 % 1,315.4 1,196.1 10 % 272,300 264,200 3 %
South Central 4,167 3,942 6 % 1,057.2 986.9 7 % 253,700 250,400 1 %
Southwest 680 681 - % 199.7 173.2 15 % 293,700 254,300 15 %
West 2,001 1,838 9 % 902.8 859.9 5 % 451,200 467,800 (4) %
14,539 13,480 8 % $ 4,363.3 $ 3,980.5 10 % $ 300,100 $ 295,300 2 %
Six Months Ended March 31,
Homes Closed Value (In millions) Average Selling Price
% % %
2020 2019 Change 2020 2019 Change 2020 2019 Change
East 3,781 3,349 13 % $ 1,099.9 $ 963.9 14 % $ 290,900 $ 287,800 1 %
Midwest 1,690 1,372 23 % 590.9 491.2 20 % 349,600 358,000 (2) %
Southeast 9,062 8,310 9 % 2,464.7 2,209.5 12 % 272,000 265,900 2 %
South Central 7,947 7,420 7 % 2,015.2 1,859.3 8 % 253,600 250,600 1 %
Southwest 1,343 1,242 8 % 395.7 316.8 25 % 294,600 255,100 15 %
West 3,675 3,287 12 % 1,660.2 1,550.5 7 % 451,800 471,700 (4) %
27,498 24,980 10 % $ 8,226.6 $ 7,391.2 11 % $ 299,200 $ 295,900 1 %
Home Sales Revenue
Revenues from home sales increased 10% to $4.4 billion (14,539 homes closed) for
the three months ended March 31, 2020 from $4.0 billion (13,480 homes closed) in
the prior year period. Revenues from home sales increased 11% to $8.2 billion
(27,498 homes closed) for the six months ended March 31, 2020 from $7.4 billion
(24,980 homes closed) in the prior year period. Home sales revenues increased in
all of our regions primarily due to an increase in the number of homes closed,
as well as an increase in the average selling price of homes in our Southwest
region.
The number of homes closed increased 8% and 10% in the three and six months
ended March 31, 2020 , respectively, compared to the prior year periods. The
markets contributing most to the increases in closing volumes in our regions
were as follows: the New Jersey and Carolina markets in the East; the Indiana
markets in the Midwest; the Florida markets in the Southeast; the Houston market
in the South Central ; the Tucson market in the Southwest; and the Portland and
Washington markets in the West.
42--------------------------------------------------------------------------------
Table of Contents
Homebuilding Operating Margin Analysis
Percentages of Related Revenues
Three Months Ended Six Months Ended
March 31, March 31,
2020 2019 2020 2019
Gross profit - home sales 21.3 % 19.3 % 21.1 % 19.6 %
Gross profit - land/lot sales and other 27.1 % 37.6 % 29.8 % 33.2 %
Inventory and land option charges (0.2) % (0.3) % (0.2) % (0.3) %
Gross profit - total homebuilding 21.1 % 19.0 % 21.0 % 19.3 %
Selling, general and administrative expense 8.3 % 9.0 % 8.7 % 9.2 %
Other (income) expense (0.1) % - % (0.1) % - %
Homebuilding pre-tax income 12.9 % 10.0 % 12.4 % 10.2 %
Home Sales Gross Profit
Gross profit from home sales increased to $927.8 million in the three months
ended March 31, 2020 from $766.3 million in the prior year period and increased
200 basis points to 21.3% as a percentage of home sales revenues. The percentage
increase resulted from improvements of 180 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.
Gross profit from home sales increased to $1.7 billion in the six months ended
March 31, 2020 from $1.4 billion in the prior year period and increased 150
basis points to 21.1% as a percentage of home sales revenues. The percentage
increase resulted from improvements of 140 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 an economic recession and a decline in new home demand occur due to
COVID-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$15.5 million and$35.2 million in the three and six months endedMarch 31, 2020 , respectively, and$14.9 million and$21.7 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 ofMarch 31, 2020 , our homebuilding operations had$26.1 million of land held for sale that we expect to sell in the next twelve months.
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. AtMarch 31, 2020 , we performed detailed impairment evaluations of communities and land inventories with a combined carrying value of$47.6 million and recorded impairment charges of$1.7 million during the three months endedMarch 31, 2020 to reduce the carrying value of impaired land to fair value. During the six months endedMarch 31, 2020 , impairment charges totaled$1.7 million . There were$7.7 million and$11.9 million of impairment charges recorded in the three and six months endedMarch 31, 2019 , respectively. 43
--------------------------------------------------------------------------------
Table of Contents
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. There is uncertainty regarding the extent to which and how long COVID-19 will disrupt our operations. If the housing market or economic conditions are adversely affected for a prolonged period due to COVID-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 six months endedMarch 31, 2020 , earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were$7.1 million and$10.7 million , respectively, compared to$6.1 million and$9.9 million in the same periods of fiscal 2019.
Selling, General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities increased 1% to$361.8 million and 5% to$720.2 million in the three and six months endedMarch 31, 2020 , respectively, from$359.3 million and$683.9 million in the prior year periods. SG&A expense as a percentage of homebuilding revenues was 8.3% and 8.7% in the three and six months endedMarch 31, 2020 , respectively, compared to 9.0% and 9.2% in the prior year periods. Employee compensation and related costs represented 73% of SG&A costs in both the three and six months endedMarch 31, 2020 compared to 73% and 72% in the prior year periods. These costs increased 1% to$265.7 million and 8% to$527.7 million in the three and six months endedMarch 31, 2020 , respectively. Our homebuilding operations employed 6,987 and 6,904 employees atMarch 31, 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 25% to$22.9 million and 18% to$47.2 million in the three and six months endedMarch 31, 2020 , respectively, from$30.5 million and$57.6 million in the prior year periods. The decreases were due to decreases of 17% and 11%, respectively, in our average homebuilding debt and lower average interest rates on our 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 six months endedMarch 31, 2020 compared to 0.9% in both prior year periods.
Other Income
Other income, net of other expenses, included in our homebuilding operations was$4.1 million and$9.6 million in the three and six months endedMarch 31, 2020 , respectively, compared to$1.6 million and$3.5 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
--------------------------------------------------------------------------------
Table of Contents
Homebuilding Results by
Three Months Ended March 31,
2020 2019
Homebuilding Homebuilding
Homebuilding Pre-tax % of Homebuilding Pre-tax % of
Revenues Income (1) Revenues Revenues Income (1) Revenues
(In millions)
East $ 579.7 $ 73.3 12.6 % $ 518.2 $ 45.9 8.9 %
Midwest 308.7 23.6 7.6 % 248.1 9.5 3.8 %
Southeast 1,316.7 187.8 14.3 % 1,205.3 131.0 10.9 %
South Central 1,066.4 156.2 14.6 % 990.2 119.3 12.0 %
Southwest 199.7 30.8 15.4 % 173.2 18.6 10.7 %
West 907.6 93.8 10.3 % 860.4 76.1 8.8 %
$ 4,378.8 $ 565.5 12.9 % $ 3,995.4 $ 400.4 10.0 %
Six Months Ended March 31,
2020 2019
Homebuilding Homebuilding
Homebuilding Pre-tax % of Homebuilding Pre-tax % of
Revenues Income (1) Revenues Revenues Income (1) Revenues
(In millions)
East $ 1,100.2 $ 133.2 12.1 % $ 965.7 $ 83.9 8.7 %
Midwest 591.3 42.3 7.2 % 497.2 20.2 4.1 %
Southeast 2,467.3 333.9 13.5 % 2,219.2 243.2 11.0 %
South Central 2,025.1 288.9 14.3 % 1,862.7 225.3 12.1 %
Southwest 410.7 65.3 15.9 % 316.9 36.3 11.5 %
West 1,667.2 163.5 9.8 % 1,551.2 145.9 9.4 %
$ 8,261.8 $ 1,027.1 12.4 % $ 7,412.9 $ 754.8 10.2 %
______________
(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 12% and 14% in the three and six
months ended March 31, 2020 , respectively, compared to the prior year periods,
primarily due to increases in the number of homes closed in our New Jersey and
Carolina markets. The region generated pre-tax income of $73.3 million and
$133.2 million in the three and six months ended March 31, 2020 , respectively,
compared to $45.9 million and $83.9 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 270 basis points in both the three and six
months ended March 31, 2020 compared to the prior year periods, due to decreases
in the average cost of homes closed while the average selling price of those
homes increased slightly. As a percentage of homebuilding revenues, SG&A
expenses decreased by 90 and 50 basis points in the three and six months ended
March 31, 2020 , respectively, compared to the prior year periods, primarily due
to the increase in homebuilding revenues.
45--------------------------------------------------------------------------------
Table of Contents
Midwest Region - Homebuilding revenues increased 24% and 19% in the three and six months endedMarch 31, 2020 , respectively, compared to the prior year periods, primarily due to an increase in the number of homes closed in ourIndiana andDenver markets. The region generated pre-tax income of$23.6 million and$42.3 million in the three and six months endedMarch 31, 2020 , respectively, compared to$9.5 million and$20.2 million in the prior year periods. Home sales gross profit percentage increased by 260 and 300 basis points in the three and six months endedMarch 31, 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 140 basis points in the three month period, primarily due to the increase in homebuilding revenues, and it increased by 10 basis points in the six month period, primarily due to increased employee compensation in the first quarter of fiscal 2020.Southeast Region - Homebuilding revenues increased 9% and 11% in the three and six months endedMarch 31, 2020 , respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in ourFlorida markets. The region generated pre-tax income of$187.8 million and$333.9 million in the three and six months endedMarch 31, 2020 , respectively, compared to$131.0 million and$243.2 million in the prior year periods. Home sales gross profit percentage increased by 290 and 220 basis points in the three and six months endedMarch 31, 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 decreased slightly. As a percentage of homebuilding revenues, SG&A expenses decreased by 40 and 30 basis points in the three and six months endedMarch 31, 2020 , respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.South Central Region - Homebuilding revenues increased 8% and 9% in the three and six months endedMarch 31, 2020 , respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in ourHouston market. The region generated pre-tax income of$156.2 million and$288.9 million in the three and six months endedMarch 31, 2020 , respectively, compared to$119.3 million and$225.3 million in the prior year periods. Home sales gross profit percentage increased by 240 and 200 basis points in the three and six months endedMarch 31, 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 decreased slightly. As a percentage of homebuilding revenues, SG&A expenses decreased by 70 and 40 basis points in the three and six months endedMarch 31, 2020 , respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.Southwest Region - Homebuilding revenues increased 15% and 30% in the three and six months endedMarch 31, 2020 , respectively, compared to the prior year periods, primarily due to increases in the average selling price of homes closed in all markets and an increase in the number of homes closed in ourTucson market. The region generated pre-tax income of$30.8 million and$65.3 million in the three and six months endedMarch 31, 2020 , respectively, compared to$18.6 million and$36.3 million in the prior year periods. Home sales gross profit percentage increased by 350 and 270 basis points in the three and six months endedMarch 31, 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 decreased by 110 and 160 basis points in the three and six months endedMarch 31, 2020 , respectively, compared to the prior year periods, primarily due to the significant increase in homebuilding revenues.West Region - Homebuilding revenues increased 5% and 7% in the three and six months endedMarch 31, 2020 , respectively, compared to the prior year periods, due to increases in the number of homes closed in most markets, partially offset by a decrease in the average selling price of homes closed. The region generated pre-tax income of$93.8 million and$163.5 million in the three and six months endedMarch 31, 2020 , respectively, compared to$76.1 million and$145.9 million in the prior year periods. Home sales gross profit percentage decreased by 50 and 130 basis points in the three and six months endedMarch 31, 2020 , respectively, compared to the prior year periods, primarily due to the average selling price decreasing by more than the average cost of the homes closed. As a percentage of homebuilding revenues, SG&A expenses decreased by 90 basis points in both the three and six months endedMarch 31, 2020 , respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues. 46
--------------------------------------------------------------------------------
Table of Contents
HOMEBUILDING INVENTORIES, LAND AND LOT POSITION AND HOMES IN INVENTORY
We routinely enter into contracts to purchase land or developed residential lots at predetermined prices on a defined schedule commensurate with planned development or anticipated new home demand. At the time of purchase, the undeveloped land is generally vested with the rights to begin development or construction work, and we plan and coordinate the development of our land into residential lots for use in our homebuilding business. We manage our inventory of owned land and lots and homes under construction relative to demand in each of our markets, including starting construction on unsold homes to capture new home demand and actively controlling the number of unsold, completed homes in inventory. Our homebuilding segment's inventories atMarch 31, 2020 andSeptember 30, 2019 are summarized as follows: As of March 31, 2020 Residential Land/Lots Construction in Developed and Progress and Under Land Held Land Held Finished Homes Development for Development for Sale Total Inventory (In millions) East$ 778.9 $ 545.5 $ 5.4 $ -$ 1,329.8 Midwest 487.2 411.8 3.4 0.8 903.2 Southeast 1,648.6 1,285.8 32.0 1.7 2,968.1 South Central 1,461.3 1,382.3 0.3 1.5 2,845.4 Southwest 233.9 396.1 1.6 2.2 633.8 West 1,266.7 882.3 5.5 19.6 2,174.1 Corporate and unallocated (1) 127.2 105.8 0.7 0.3 234.0$ 6,003.8 $ 5,009.6 $ 48.9$ 26.1 $ 11,088.4 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.
47
--------------------------------------------------------------------------------
Table of Contents
Our homebuilding segment's land and lot position and homes in inventory at
As of March 31, 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 9,600 37,100 46,700 4,600
Midwest 8,000 15,000 23,000 2,300
Southeast 32,200 81,500 113,700 10,300
South Central 43,500 55,100 98,600 10,200
Southwest 7,300 6,700 14,000 1,500
West 18,100 15,200 33,300 4,500
118,700 210,600 329,300 33,400
36 % 64 % 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 38,000 and 36,100 owned lots that are
fully developed and ready for home construction at March 31, 2020 and
September 30, 2019 , respectively. Land/lots owned also include land held for
development representing 1,700 lots at both March 31, 2020 and September 30,
2019 .
(2)The total remaining purchase price of lots controlled through land and lot
purchase contracts at March 31, 2020 and September 30, 2019 was $8.1 billion and
$7.2 billion , respectively, secured by earnest money deposits of $566.5 million
and $515.4 million , respectively. The total remaining purchase price of lots
controlled through land and lot purchase contracts at March 31, 2020 and
September 30, 2019 included $1.0 billion and $953.8 million , respectively,
related to lot purchase contracts with Forestar, secured by $99.3 million and
$88.7 million , respectively, of earnest money.
(3)Lots controlled at March 31, 2020 include approximately 28,600 lots owned or
controlled by Forestar, 14,200 of which our homebuilding divisions have under
contract to purchase and 14,400 of which our homebuilding divisions have a right
of first offer to purchase. Of these, approximately 11,000 lots were in our
Southeast region, 5,600 lots were in our South Central region, 4,800 lots were
in our West region, 2,900 lots were in our Southwest region, 2,800 lots were in
our East region and 1,500 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 16,700 and 16,000 of our homes in inventory were unsold at
March 31, 2020 and September 30, 2019 , respectively. At March 31, 2020 ,
approximately 4,700 of our unsold homes were completed, of which approximately
600 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 March 31, 2020 and September 30,
2019 .
48
--------------------------------------------------------------------------------
Table of Contents
RESULTS OF OPERATIONS - FORESTAR
In October 2017 , we acquired 75% of the outstanding shares of Forestar, and as
of March 31, 2020 we owned 65% of its outstanding shares. Forestar is a publicly
traded residential lot development company with operations in 50 markets across
21 states as of March 31, 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 six months
ended
Three Months Ended Six Months Ended
March 31, March 31,
2020 2019 2020 2019
(In millions)
Residential land and lot sales $ 156.4 $ 49.4 $ 403.5 $ 84.0
Commercial tract sales 2.5 15.0 2.5 18.5
Other 0.2 1.0 0.4 1.3
Total revenues $ 159.1 $ 65.4 $ 406.4 $ 103.8
Cost of sales 136.6 43.7 353.2 74.3
Selling, general and administrative expense 11.2 6.2 21.7 11.9
Gain on sale of assets (0.3) - (0.1) (0.9)
Other (income) expense (2.1) (0.9) (4.2) (2.8)
Income before income taxes $ 13.7 $ 16.4 $ 35.8 $ 21.3
At March 31, 2020 , Forestar owned directly or controlled through land and lot
purchase contracts approximately 52,300 residential lots, of which approximately
4,400 are fully developed. Approximately 28,600 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 six
months ended March 31, 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 Six Months Ended
March 31, March 31,
2020 2019 2020 2019
($ in millions)
Total residential single-family lots sold 1,951 548 4,373 1,066
Residential single-family lots sold to D.R.
Horton 1,906 453 4,296 908
Residential lot sales revenues from sales to
D.R. Horton $ 151.9 $ 39.7 $ 366.0 $ 68.7
Residential tract acres sold to D.R. Horton - - 36 -
Residential land sales revenues from sales to
D.R. Horton $ - $ - $ 7.2 $ -
SG&A expense for the three and six months ended March 31, 2020 includes charges
of $1.3 million and $2.6 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 $1.0 million , respectively, in the
same periods of fiscal 2019.
49--------------------------------------------------------------------------------
Table of Contents
RESULTS OF OPERATIONS - FINANCIAL SERVICES
The following tables and related discussion set forth key operating and financial data for our financial services operations, comprisingDHI Mortgage and our subsidiary title companies, for the three and six months endedMarch 31, 2020 and 2019. Three Months Ended March 31, Six Months Ended March 31, 2020 2019 % Change 2020 2019 % Change Number of first-lien loans originated or brokered byDHI Mortgage for D.R. Horton homebuyers 9,740 7,518 30 % 18,141 13,762 32 % Number of homes closed by D.R. Horton 14,539 13,480 8 % 27,498 24,980 10 % Percentage ofD.R. Horton homes financed by DHI Mortgage 67 % 56 % 66 % 55 % Number of total loans originated or brokered byDHI Mortgage for D.R. Horton homebuyers 9,792 7,536 30 % 18,234 13,797 32 % Total number of loans originated or brokered by DHI Mortgage 10,029 7,662 31 % 18,752 14,060 33 % Captive business percentage 98 % 98 % 97 % 98 % Loans sold byDHI Mortgage to third parties 8,774 6,949 26 % 17,519 13,996 25 % Three Months Ended March 31, Six Months Ended March 31, 2020 2019 % Change 2020 2019 % Change (In millions) Loan origination fees$ 0.6 $ 3.5 (83) %$ 1.4 $ 6.8 (79) % Sale of servicing rights and gains from sale of mortgage loans 73.3 73.1 - % 147.0 132.9 11 % Other revenues 7.0 5.2 35 % 13.6 9.7 40 % Total mortgage operations revenues 80.9 81.8 (1) % 162.0 149.4 8 % Title policy premiums 23.6 19.8 19 % 45.4 37.5 21 % Total revenues 104.5 101.6 3 % 207.4 186.9 11 % General and administrative expense 85.9 71.3 20 % 163.8 137.0 20 % Other (income) expense (6.1) (3.7) 65 % (11.6) (7.7) 51 % Financial services pre-tax income$ 24.7 $ 34.0 (27) %$ 55.2 $ 57.6 (4) % Financial Services Operating Margin Analysis Percentages of Financial Services Revenues Three Months Ended Six Months Ended March 31, March 31, 2020 2019 2020 2019 General and administrative expense 82.2 % 70.2 % 79.0 % 73.3 % Other (income) expense (5.8) % (3.6) % (5.6) % (4.1) % Financial services pre-tax income 23.6 % 33.5 % 26.6 % 30.8 % 50
--------------------------------------------------------------------------------
Table of Contents
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 six months endedMarch 31, 2020 , the volume of first-lien loans originated or brokered byDHI Mortgage for our homebuyers increased 30% and 32%, respectively, due to increases in the number of homes closed by our homebuilding operations of 8% and 10% and increases in the percentage of homes closed for whichDHI Mortgage handled the homebuyers' financing. These percentages were 67% and 66% in the three and six months endedMarch 31, 2020 , respectively, compared to 56% and 55% in the prior year periods. Increases in the portion of home closings financed byDHI Mortgage 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 98% and 97% ofDHI Mortgage loan originations in the three and six months endedMarch 31, 2020 , respectively, compared to 98% in both 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 26% and 25% in the three and six months endedMarch 31, 2020 , respectively, compared to the prior year periods. Virtually all of the mortgage loans held for sale onMarch 31, 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 90% of the mortgage loans sold byDHI Mortgage during the six months endedMarch 31, 2020 were sold to four major financial entities, of which one entity purchased 33%. Due to the disruption in the secondary mortgage markets beginning in lateMarch 2020 caused by COVID-19 and the uncertainty of the impact of the CARES Act, many financial entities have begun offering lower pricing and limiting their purchases of our mortgages and servicing rights. This 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 make other adjustments to our mortgage operations to adapt to changes in market conditions.
Financial Services Revenues and Expenses
Revenues from our mortgage operations decreased 1% to$80.9 million and increased 8% to$162.0 million in the three and six months endedMarch 31, 2020 , respectively, from$81.8 million and$149.4 million in the prior year periods, while the number of loan originations increased 31% and 33% 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 COVID-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 three months endedMarch 31, 2020 compared to the prior year period even as loan originations increased 31%. General and administrative (G&A) expense related to our financial services operations increased 20% to$85.9 million and$163.8 million in the three and six months endedMarch 31, 2020 , respectively, from$71.3 million and$137.0 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 1,934 and 1,923 employees atMarch 31, 2020 and 2019, respectively. As a percentage of financial services revenues, G&A expense was 82.2% and 79.0% in the three and six months endedMarch 31, 2020 , respectively, compared to 70.2% and 73.3% in the prior year periods. Fluctuations in financial services G&A expense as a percentage of revenues can be expected to occur, as some components of revenue may 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.
51
--------------------------------------------------------------------------------
Table of Contents
RESULTS OF OPERATIONS - OTHER BUSINESSES
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
currently have three projects under active construction and one project that is
substantially complete. In November 2019 , DHI Communities sold a multi-family
rental property for $61.5 million and recorded a gain on the sale of $31.2
million . In February 2020 , DHI Communities sold a multi-family rental property
for $67.0 million and recorded a gain on the sale of $28.2 million .
RESULTS OF OPERATIONS - CONSOLIDATED
Income before Income Taxes
Pre-tax income for the three and six months endedMarch 31, 2020 was$621.3 million and$1.1 billion , respectively, compared to$462.8 million and$838.5 million 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 six months endedMarch 31, 2020 was$137.3 million and$228.1 million , respectively, compared to$108.4 million and$197.4 million in the prior year periods. Our effective tax rate was 22.1% and 19.9% for the three and six months endedMarch 31, 2020 , respectively, compared to 23.4% and 23.5% in the prior year periods. The effective tax rate for the three and six months endedMarch 31, 2020 includes a tax benefit of$6.6 million and$39.5 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$167.3 million atMarch 31, 2020 compared to$181.8 million atSeptember 30, 2019 . We have a valuation allowance of$17.8 million atMarch 31, 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 current uncertainty in the housing market acrossthe United States . Currently, we are cautiously managing our homes under construction and limiting land acquisition and land development activities as a result of the COVID-19 pandemic and its potential impact on our business. AtMarch 31, 2020 , our ratio of debt to total capital (notes payable divided by stockholders' equity plus notes payable) was 29.2% compared to 25.3% atSeptember 30, 2019 and 27.9% atMarch 31, 2019 . Our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders' equity plus homebuilding notes payable) was 19.2% compared to 17.0% atSeptember 30, 2019 and 22.9% atMarch 31, 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. Due to the current economic uncertainties related to COVID-19 and the related disruption in the financial markets, 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. 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.
Capital Resources - Homebuilding
Cash and Cash Equivalents - At
Bank Credit Facility - 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$800 million and$300 million , respectively, during the six months endedMarch 31, 2020 . AtMarch 31, 2020 , there were$500 million of borrowings outstanding at a 1.7% annual interest rate and$116.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of$973.7 million . Our homebuilding revolving credit facility imposes 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. 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. The credit agreement governing the facility imposes restrictions on the creation of secured debt and liens. AtMarch 31, 2020 , we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facility. 53 -------------------------------------------------------------------------------- Table of Contents Public Unsecured Debt - We have$1.95 billion principal amount of homebuilding senior notes outstanding as ofMarch 31, 2020 that mature fromDecember 2020 throughOctober 2024 . 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. The indentures governing our senior notes impose restrictions on the creation of secured debt and liens. AtMarch 31, 2020 , we were in compliance with all of the limitations and restrictions associated with our public debt obligations. Repurchases of Common Stock - During the three and six months endedMarch 31, 2020 , we repurchased 4.0 million and 7.0 million shares, respectively, of our common stock for$197.3 million and$360.4 million , respectively. 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. AtMarch 31, 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. AtMarch 31, 2020 , there were no borrowings outstanding and$31.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of$349.0 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 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. 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. AtMarch 31, 2020 , Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations. 54
-------------------------------------------------------------------------------- Table of Contents 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. InFebruary 2020 , the mortgage repurchase facility was amended to extend its maturity date toFebruary 19, 2021 . The total capacity of the facility is$1.2 billion ; however, the capacity increases without requiring additional commitments to$1.4 billion for approximately 30 days at each quarter end and 45 days at fiscal year end. The capacity of the facility can also be increased to$1.5 billion subject to the availability of additional commitments. Through additional commitments, the capacity of the facility was temporarily increased to$1.5 billion effectiveMarch 26, 2020 throughApril 23, 2020 .
As of
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. AtMarch 31, 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.
Operating Cash Flow Activities
In the six months endedMarch 31, 2020 , net cash used in operating activities was$395.1 million compared to$461.7 million in the prior year period. Cash used in operating activities in the current year period primarily consisted of$312.1 million and$123.8 million of cash used in our financial services and Forestar segments, respectively, partially offset by$52.1 million of cash provided by our homebuilding segment. Cash used to increase construction in progress and finished home inventory was$724.4 million in the current year period compared to$755.2 million in the prior year period. In both periods, the expenditures were made to support the expected increases in sales and closing volumes. Cash used to increase residential land and lots in the current year period was$324.2 million compared to$445.6 million in the prior year period. Of these amounts,$171.4 million and$341.8 million related to Forestar, respectively. The most significant source of cash provided by operating activities in both periods was net income.
Investing Cash Flow Activities
In the six months endedMarch 31, 2020 , net cash used in investing activities was$34.6 million compared to$321.1 million in the prior year period. In the current year period, uses of cash included expenditures related to our rental properties totaling$113.0 million and purchases of property and equipment totaling$47.6 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 , whereby$309.6 million of the aggregate purchase price was paid during the period. 55 -------------------------------------------------------------------------------- Table of Contents 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 six months endedMarch 31, 2020 , net cash provided by financing activities was$453.0 million , consisting primarily of note proceeds of$800 million from draws on our homebuilding revolving credit facility, our issuance of$500 million principal amount of 2.5% homebuilding senior notes, Forestar's issuance of$300 million principal amount of 5.0% senior notes and net advances of$297.6 million on our mortgage repurchase facility. Note proceeds were partially offset by repayment of amounts drawn on our homebuilding revolving credit facility totaling$300 million , 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$128.7 million . During the six months endedMarch 31, 2019 , net cash provided by financing activities was$8.0 million , consisting primarily of note proceeds of$1.8 billion from draws on our homebuilding revolving credit facility and net advances of$53.0 million on our mortgage repurchase facility. Note proceeds were largely offset by repayment of amounts drawn on our homebuilding revolving credit facility totaling$1.0 billion , repayment of$500 million principal amount of our 3.75% homebuilding senior notes at maturity, cash used to repurchase 6.1 million shares of our common stock for$216.2 million and payment of cash dividends totaling$111.9 million . During each of the first two 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 onFebruary 24, 2020 to stockholders of record onFebruary 10, 2020 . InApril 2020 , our Board of Directors approved a quarterly cash dividend of$0.175 per common share, payable onMay 21, 2020 to stockholders of record onMay 11, 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
--------------------------------------------------------------------------------
Table of Contents
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. AtMarch 31, 2020 , we had outstanding letters of credit of$147.3 million and surety bonds of$1.8 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 atMarch 31, 2020 , there were a limited number of contracts, representing$70.7 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,$24.2 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 ofMarch 31, 2020 ,D.R. Horton, Inc. had outstanding$1.95 billion principal amount of homebuilding senior notes due throughOctober 2024 and$500 million drawn on its homebuilding revolving credit facility. All of the homebuilding senior notes and the homebuilding revolving credit facility 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 facility (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
Summarized Balance Sheet Data March 31, 2020 September 30, 2019
(In millions)
Assets
Cash $ 959.2 $ 992.9
Inventories 10,938.7 10,056.8
Amount due from Non-Guarantor Subsidiaries 515.0 473.2
Total assets 13,866.3 12,874.1
Liabilities & Stockholders' Equity
Notes payable $ 2,480.0 $ 1,970.1
Total liabilities 4,255.3 3,657.5
Stockholders' equity 9,611.0 9,216.6
Six Months Ended Fiscal Year Ended
Summarized Statement of Operations Data March 31, 2020 September 30, 2019
(In millions)
Revenues $ 8,269.1 $ 17,023.0
Cost of sales 6,531.3 13,651.8
Selling, general and administrative expense 717.7 1,476.2
Income before income taxes 1,028.1 1,903.5
Net income 826.7 1,447.1
58--------------------------------------------------------------------------------
Table of Contents
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.
59--------------------------------------------------------------------------------
Table of Contents
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. AtMarch 31, 2020 andSeptember 30, 2019 , we had reserves for approximately 220 and 180 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During the six months endedMarch 31, 2020 , we established reserves for approximately 85 new construction defect claims and resolved 45 construction defect claims for a total cost of$18.3 million . AtMarch 31, 2019 andSeptember 30, 2018 , we had reserves for approximately 160 and 155 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During the six months endedMarch 31, 2019 , we established reserves for approximately 50 new construction defect claims and resolved 45 construction defect claims for a total cost of$5.4 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 COVID-19, our homes closed,
revenues and operating income in fiscal 2020 may not follow our historical
seasonal patterns.
60
--------------------------------------------------------------------------------
Table of Contents
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 COVID-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 , including the section entitled
"Risk Factors," as supplemented by Part II, Item 1A. in this quarterly report on
Form 10-Q, which is filed with the SEC .
61--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
