D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
DecemberMarch 31, 20192020
The Company’s homebuilding revolving credit facility imposes restrictions on its operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if the 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 and the indentureindentures governing the senior notes also impose restrictions on the creation of secured debt and liens. At DecemberMarch 31, 2019,2020, the Company was in compliance with all of the covenants, limitations and restrictions of its homebuilding revolving credit facility and public debt obligations.
D.R. Horton has an automatically effective universal shelf registration statement filed with the Securities and Exchange Commission (SEC)SEC in August 2018, registering debt and equity securities that the Company may issue from time to time in amounts to be determined.
In October 2019, the Company issued $500 million principal amount of 2.5% senior notes due October 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%. In February 2020, the Company repaid $500 million principal amount of its 4.0% senior notes at maturity.
Effective July 30, 2019, the Board of Directors authorized the repurchase of up to $500 million of the Company’s debt securities. The authorization has no expiration date. All of the $500 million authorization was remaining at DecemberMarch 31, 2019.2020.
Forestar:
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. At DecemberMarch 31, 2019,2020, there were 0 borrowings outstanding and $28.7$31.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $351.3$349.0 million. The maturity date of the facility is October 2, 2022, which can be extended by up to one year on up to two additional occasions, subject to the approval of lenders holding a majority of the commitments.
The Forestar revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require Forestar to maintain a minimum level of tangible net worth, a minimum level of liquidity and a maximum allowable leverage ratio. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. At December 31, 2019,
In February 2020, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility.
At December 31, 2019, theissued $300 million principal amount of Forestar’s5.0% senior notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The notes are due March 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 mature April 15, 2024. In March 2020, Forestar repaid $118.9 million principal amount of its 3.75% convertible senior notes was $118.9 million. Forestar intends to settle these notes in cash upon their maturity on at maturity.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 1,31, 2020 with any excess conversion value to be settled in shares of its common stock. At December 31, 2019, Forestar was in compliance with all of the limitations and restrictions associated with its senior note obligations.
Forestar’s revolving credit facility its senior notes and its convertible senior notes are not guaranteed by D.R. Horton, Inc. or any of the subsidiaries that guarantee the Company’s homebuilding debt. At March 31, 2020, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2019
Financial Services:
The Company’s mortgage subsidiary, DHI Mortgage, has a mortgage repurchase facility that provides financing and liquidity to DHI Mortgage by facilitating purchase transactions in which DHI 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. In February 2020, the mortgage repurchase facility was amended to extend its maturity date to February 19, 2021. The total capacity of the facility is $900 million, which$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 $1.2$1.5 billion subject to the availability of additional commitments. In December 2019,Through additional commitments, the Company received an additional commitment of $50 million increasing the total capacity of the facility was temporarily increased to $950 million. The additional commitment expired on January$1.5 billion effective March 26, 2020. The Company is currently in discussions with its lenders and expects to renew and extend the facility on similar terms prior to its February 21, 2020 maturity date.through April 23, 2020.
As of DecemberMarch 31, 2019, $953.7 million2020, $1.3 billion of mortgage loans held for sale with a collateral value of $915.1 million$1.2 billion were pledged under the mortgage repurchase facility. DHI Mortgage had an obligation of $850.2 million$1.2 billion outstanding under the mortgage repurchase facility at DecemberMarch 31, 20192020 at a 3.5%2.6% annual interest rate.
The mortgage repurchase facility is not guaranteed by D.R. Horton, Inc. or any of the subsidiaries that guarantee the Company’s 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. At DecemberMarch 31, 2019,2020, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.
NOTE E – CAPITALIZED INTEREST
The Company capitalizes 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. During periods in which the Company’s active inventory is lower than its debt level, a portion of the interest incurred is reflected as interest expense in the period incurred. During the first threesix months of fiscal 2020 and fiscal 2019, the Company’s active inventory exceeded its debt level, and all interest incurred was capitalized to inventory.
The following table summarizes the Company’s interest costs incurred, capitalized and expensed during the three and six months ended DecemberMarch 31, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | | | Six Months Ended
March 31, | | |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (In millions) | | | | | | |
| Capitalized interest, beginning of period | | $ | 192.1 | | | $ | 168.8 | | | $ | 180.1 | | | $ | 162.7 | |
| Interest incurred (1) | | 37.6 | | | 35.0 | | | 75.3 | | | 66.7 | |
| Interest charged to cost of sales | | (29.2) | | | (29.9) | | | (54.9) | | | (55.5) | |
| Capitalized interest, end of period | | $ | 200.5 | | | $ | 173.9 | | | $ | 200.5 | | | $ | 173.9 | |
|
| | | | | | | | |
| | | Three Months Ended
December 31, |
| | | 2019 | | 2018 |
| | | (In millions) |
| Capitalized interest, beginning of period | | $ | 180.1 |
| | $ | 162.7 |
|
| Interest incurred (1) | | 37.7 |
| | 31.7 |
|
| Interest charged to cost of sales | | (25.7 | ) | | (25.6 | ) |
| Capitalized interest, end of period | | $ | 192.1 |
| | $ | 168.8 |
|
(1) Interest incurred included interest on the Company's mortgage repurchase facility of $5.0 million and $9.7 million in the three and six months ended March 31, 2020, respectively, and $3.0 million and $6.3 million in the same periods of fiscal 2019. Also included in interest incurred is Forestar interest of $9.7 million and $18.4 million in the three and six months ended March 31, 2020, respectively, and $1.5 million and $2.8 million in the same periods of fiscal 2019.
_______________
| |
(1) | Interest incurred included interest on the Company's mortgage repurchase facility of $4.7 million and $3.3 million in the three months ended December 31, 2019 and 2018, respectively, and Forestar interest of $8.7 million and $1.3 million, respectively. |
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
DecemberMarch 31, 20192020
NOTE F – PROPERTY AND EQUIPMENT
The Company’s property and equipment balances and the related accumulated depreciation at DecemberMarch 31, 20192020 and September 30, 2019 are summarized below. These balances include properties related to the operations of DHI Communities, which develops, constructs and owns multi-family residential properties that produce rental income. DHI Communities has 43 projects under active construction and 1 project that was substantially complete at DecemberMarch 31, 2019.2020.
| | | | December 31,
2019 | | September 30,
2019 | | March 31,
2020 | | September 30,
2019 |
| | (In millions) | | (In millions) | |
Buildings and improvements (1) (2) | $ | 350.5 |
| | $ | 329.4 |
| Buildings and improvements (1) (2) | $ | 335.7 | | | $ | 329.4 | |
| Multi-family rental properties under construction | 64.8 |
| | 65.2 |
| Multi-family rental properties under construction | 75.5 | | | 65.2 | |
| Single-family rental properties | 62.4 |
| | 37.0 |
| Single-family rental properties | 101.6 | | | 37.0 | |
| Model home furniture | 130.3 |
| | 128.3 |
| Model home furniture | 134.5 | | | 128.3 | |
| Office furniture and equipment | 124.5 |
| | 128.6 |
| Office furniture and equipment | 126.0 | | | 128.6 | |
Land (1) (2) | 90.7 |
| | 71.6 |
| Land (1) (2) | 91.9 | | | 71.6 | |
| Total property and equipment | $ | 823.2 |
| | $ | 760.1 |
| Total property and equipment | $ | 865.2 | | | $ | 760.1 | |
| Accumulated depreciation | (259.8 | ) | | (260.9 | ) | Accumulated depreciation | (275.5) | | | (260.9) | |
| Property and equipment, net | $ | 563.4 |
| | $ | 499.2 |
| Property and equipment, net | $ | 589.7 | | | $ | 499.2 | |
_____________
| |
(1) | At December 31, 2019, buildings and improvements included $74.9 million related to completed multi-family rental properties and $61.1 million related to the Company’s oil and gas related assets. Additionally, at December 31, 2019, land included $57.0 million related to the Company’s multi-family rental operations. |
| |
(2) | At September 30, 2019, buildings and improvements included $50.7 million related to completed multi-family rental properties and $56.9 million related to the Company’s oil and gas related assets. Additionally, at September 30, 2019, land included $38.0 million related to the Company’s multi-family rental operations. |
(1)At March 31, 2020, buildings and improvements included $53.1 million related to completed multi-family rental properties and $63.6 million related to the Company’s oil and gas related assets. Additionally, at March 31, 2020, land included $55.1 million related to the Company’s multi-family rental operations.
(2)At September 30, 2019, buildings and improvements included $50.7 million related to completed multi-family rental properties and $56.9 million related to the Company’s oil and gas related assets. Additionally, at September 30, 2019, land included $38.0 million related to the Company’s multi-family rental operations.
Depreciation expense was $17.2$17.3 million and $15.9$34.5 million during the three and six months ended DecemberMarch 31, 20192020, respectively, compared to $15.9 million and 2018, respectively.$31.7 million in the same periods of fiscal 2019.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2020
NOTE G – MORTGAGE LOANS
Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. At DecemberMarch 31, 2019,2020, mortgage loans held for sale had an aggregate carrying value of $1.4 billion and an aggregate outstanding principal balance of $1.0$1.3 billion. At September 30, 2019, mortgage loans held for sale had an aggregate carrying value of $1.1 billion and an aggregate outstanding principal balance of $1.0 billion. During the threesix months ended DecemberMarch 31, 20192020 and 2018,2019, mortgage loans originated totaled $2.3$4.9 billion and $1.6$3.6 billion, respectively, and mortgage loans sold totaled $2.3$4.6 billion and $1.8$3.6 billion, respectively. The Company had gains on sales of loans and servicing rights of $73.6$73.3 million and $147.0 million during the three and six months ended DecemberMarch 31, 20192020, respectively, compared to $59.9$73.1 million and $132.9 million in the prior year period.periods. Net gains on sales of loans and servicing rights are included in revenues in the consolidated statements of operations. Approximately 86%90% of the mortgage loans sold by DHI Mortgage during the threesix months ended DecemberMarch 31, 20192020 were sold to four major financial entities, of which one entity purchased 31%33%.
TheTo manage the interest rate risk inherent in its mortgage operations, the Company occasionally enters intohedges its risk using derivative instruments, generally forward sales of mortgage-backed securities (MBS), which are referred to as “hedging instruments” in the following discussion. The Company does not enter into or hold derivatives for trading or speculative purposes.
Newly originated loans that have been closed but not committed to third-party purchasers are hedged to mitigate the risk of changes in their fair value. Hedged loans are committed to third-party purchasers typically within three days after origination.
The Company is party to interest rate lock commitments (IRLCs), which are extended to borrowers who have applied for loan funding and meet defined credit and underwriting criteria. The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments and hedging instruments.
In response to COVID-19, the U.S. government has taken various actions to support the economy and the continued functioning of the financial markets. On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (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. This resulted in lower net gains on loan originations during the three months ended March 31, 2020 compared to the prior year period. Additionally, in March 2020 the Federal Reserve announced its commitment to purchase U.S. Treasury securities, MBS, municipal bonds and other assets. This led to a significant increase in the price of MBS, which increased the change in the fair market value of the Company’s IRLCs and mortgage loans held for sale and decreased the fair market value of its hedging instruments. The net fair value change for the three and six months ended March 31, 2020 and 2019 recognized in revenues in the consolidated statements of operations was not significant.
The Company also occasionally uses hedging instruments as part of a program to offer below market interest rate financing to its homebuyers in certain markets. At DecemberMarch 31, 2019,2020, the Company had MBS totaling $594.4$383.4 million that did not yet have interest rate lock commitments or closed loans created or assigned and recorded a liability of $0.1$4.9 million for the fair value of such MBS position.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
DecemberMarch 31, 20192020
NOTE H – INCOME TAXES
The Company’s income tax expense for the three and six months ended DecemberMarch 31, 2019 and 20182020 was $90.8$137.3 million and $89.0$228.1 million, respectively.respectively, compared to $108.4 million and $197.4 million in the prior year periods. The effective tax rate was 17.4%22.1% and 19.9% for the three and six months ended DecemberMarch 31, 20192020, respectively, compared to 23.7%23.4% and 23.5% in the prior year period.periods. The effective tax rate for the three and six months ended DecemberMarch 31, 20192020 includes a tax benefit of $32.9$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 on December 31, 2017 to homes closed from January 1, 2018 to December 31, 2020. The effective tax rates for bothall periods include an expense for state income taxes, reduced by tax benefits related to stock-based compensation.
The Company’s deferred tax assets, net of deferred tax liabilities, were $172.4$167.3 million at DecemberMarch 31, 20192020 compared to $181.8 million at September 30, 2019. The Company has a valuation allowance of $18.3$17.8 million at DecemberMarch 31, 20192020 and $18.7 million at September 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. The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to the remaining state NOL carryforwards. Any reversal of the valuation allowance in future periods will impact the Company’s 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 the Company’s 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 the Company’s deferred tax assets.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2020
NOTE I – EARNINGS PER SHARE
The following table sets forth the numerators and denominators used in the computation of basic and diluted earnings per share.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | | | Six Months Ended
March 31, | | |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (In millions) | | | | | | |
| Numerator: | | | | | | | | |
| Net income attributable to D.R. Horton, Inc. | | $ | 482.7 | | | $ | 351.3 | | | $ | 914.0 | | | $ | 638.4 | |
| Denominator: | | | | | | | | |
| Denominator for basic earnings per share — weighted average common shares | | 365.8 | | | 373.3 | | | 367.1 | | | 374.2 | |
| Effect of dilutive securities: | | | | | | | | |
| Employee stock awards | | 4.3 | | | 4.4 | | | 4.7 | | | 4.7 | |
| Denominator for diluted earnings per share — adjusted weighted average common shares | | 370.1 | | | 377.7 | | | 371.8 | | | 378.9 | |
| | | | | | | | |
| Basic net income per common share attributable to D.R. Horton, Inc. | | $ | 1.32 | | | $ | 0.94 | | | $ | 2.49 | | | $ | 1.71 | |
| Diluted net income per common share attributable to D.R. Horton, Inc. | | $ | 1.30 | | | $ | 0.93 | | | $ | 2.46 | | | $ | 1.68 | |
|
| | | | | | | | |
| | | Three Months Ended
December 31, |
| | | 2019 | | 2018 |
| | | (In millions) |
| Numerator: | | | | |
| Net income attributable to D.R. Horton, Inc. | | $ | 431.3 |
| | $ | 287.2 |
|
| Denominator: | | | | |
| Denominator for basic earnings per share — weighted average common shares | | 368.3 |
| | 375.1 |
|
| Effect of dilutive securities: | | | | |
| Employee stock awards | | 5.1 |
| | 5.0 |
|
| Denominator for diluted earnings per share — adjusted weighted average common shares | | 373.4 |
| | 380.1 |
|
| | | | | |
| Basic net income per common share attributable to D.R. Horton, Inc. | | $ | 1.17 |
| | $ | 0.77 |
|
| Diluted net income per common share attributable to D.R. Horton, Inc. | | $ | 1.16 |
| | $ | 0.76 |
|
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2019
NOTE J – STOCKHOLDERS’ EQUITY
D.R. Horton has an automatically effective universal shelf registration statement, filed with the SEC in August 2018, registering debt and equity securities that it may issue from time to time in amounts to be determined.
Forestar also has an effective shelf registration statement filed with the SEC in September 2018, registering $500 million of equity securities. On September 30, 2019, Forestar issued approximately 6.0 million shares of its common stock for $17.50 per share in a public underwritten offering. Following the offering, $394.3 million remains available for issuance under Forestar’s shelf registration statement.
Effective July 30, 2019, the Board of Directors authorized the repurchase of up to $1.0 billion of the Company’s common stock. The authorization has no expiration date. During the threesix months ended DecemberMarch 31, 2019,2020, the Company repurchased 3.07.0 million shares of its common stock for $163.1$360.4 million. The Company’s remaining authorization at DecemberMarch 31, 20192020 was $732.6$535.3 million.
During each of the three months ended December 31, 2019,first two quarters of fiscal 2020, the Board of Directors approved aand paid quarterly cash dividenddividends of $0.175 per common share, the most recent of which was paid on December 11, 2019February 24, 2020 to stockholders of record on November 27, 2019.February 10, 2020. In JanuaryApril 2020, the Board of Directors approved a quarterly cash dividend of $0.175 per common share, payable on February 24,May 21, 2020 to stockholders of record on February 10,May 11, 2020. Cash dividends of $0.15 per common share were approved and paid in each quarter of fiscal 2019.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2020
NOTE K – EMPLOYEE BENEFIT PLANS
Restricted Stock Units (RSUs)
The Company’s Stock Incentive Plan provides for the granting of stock options and restricted stock units to executive officers, other key employees and non-management directors. Restricted stock unit awards may be based on performance (performance-based) or on service over a requisite time period (time-based). Performance-based and time-based RSU equity awards represent the contingent right to receive one share of the Company’s common stock per RSU if the vesting conditions and/or performance criteria are satisfied. The RSUs have no dividend or voting rights until vested.
In November 2019, a total of 360,000 performance-based RSU equity awards were granted to the Company’s executive officers. These awards vest at the end of a three-year performance period ending September 30, 2022. The number of units that ultimately vest depends on the Company’s relative position as compared to its peers in achieving certain performance criteria and can range from 0% to 200% of the number of units granted. The performance criteria are total shareholder return; return on investment; selling, general and administrative expense containment; and gross profit. The grant date fair value of these equity awards was $52.54 per unit. Compensation expense related to these grantsthis grant was $2.1$2.3 million and $4.5 million in the three and six months ended DecemberMarch 31, 2019,2020, respectively, based on the Company’s performance against its peer group, the elapsed portion of the performance period and the grant date fair value of the award.
During the six months ended March 31, 2020, a total of 1.7 million time-based RSUs were granted to approximately 960 recipients, including the Company’s executive officers, other key employees and non-management directors. The weighted average grant date fair value of these equity awards was $35.98 per unit, and they vest annually in equal installments over periods of three to five years. Compensation expense related to these grants was $4.1 million in both the three and six months ended March 31, 2020, of which $3.5 million related to expense recognized for employees that were retirement eligible on the date of grant.
Total stock-based compensation expense related to the Company’s restricted stock units during the three and six months ended March 31, 2020 was $20.3 million and $36.2 million, respectively, compared to $17.2 million and $34.4 million during the three and six months ended March 31, 2019, respectively.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
DecemberMarch 31, 20192020
NOTE L – COMMITMENTS AND CONTINGENCIES
Warranty Claims
The Company provides its homebuyers with a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems, a two-year limited warranty on major mechanical systems, and a one-year limited warranty on other construction components. The Company’s warranty liability is based upon historical warranty cost experience in each market in which it operates and is adjusted to reflect qualitative risks associated with the types of homes built and the geographic areas in which they are built.
Changes in the Company’s warranty liability during the three and six months ended DecemberMarch 31, 20192020 and 20182019 were as follows:
|
| | | | | | | | |
| | | Three Months Ended
December 31, |
| | | 2019 | | 2018 |
| | | (In millions) |
| Warranty liability, beginning of period | | $ | 247.3 |
| | $ | 202.0 |
|
| Warranties issued | | 21.2 |
| | 18.0 |
|
| Changes in liability for pre-existing warranties | | 2.7 |
| | 5.5 |
|
| Settlements made | | (19.6 | ) | | (19.9 | ) |
| Warranty liability, end of period | | $ | 251.6 |
| | $ | 205.6 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | | | Six Months Ended
March 31, | | |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (In millions) | | | | | | |
| Warranty liability, beginning of period | | $ | 251.6 | | | $ | 205.6 | | | $ | 247.3 | | | $ | 202.0 | |
| Warranties issued | | 24.5 | | | 21.0 | | | 45.6 | | | 38.9 | |
| Changes in liability for pre-existing warranties | | 5.6 | | | 6.0 | | | 8.4 | | | 11.5 | |
| Settlements made | | (19.0) | | | (18.7) | | | (38.6) | | | (38.5) | |
| Warranty liability, end of period | | $ | 262.7 | | | $ | 213.9 | | | $ | 262.7 | | | $ | 213.9 | |
Legal Claims and Insurance
The Company is named as a defendant in various claims, complaints and other legal actions in the ordinary course of business. At any point in time, the Company is managing several hundred individual claims related to construction defect matters, personal injury claims, employment matters, land development issues, contract disputes and other matters. The Company has established reserves for these contingencies based on the estimated costs of pending claims and the estimated costs of anticipated future claims related to previously closed homes. The estimated liabilities for these contingencies were $432.5$442.2 million and $434.7 million at DecemberMarch 31, 20192020 and September 30, 2019, respectively, and are included in accrued expenses and other liabilities in the consolidated balance sheets. Approximately 99% of these reserves related to construction defect matters at both DecemberMarch 31, 20192020 and September 30, 2019. Expenses related to the Company’s legal contingencies were $16.6$26.6 million and $5.8$14.6 million in the threesix months ended DecemberMarch 31, 20192020 and 2018,2019, respectively.
The Company’s reserves for legal claims were $432.5$442.2 million at DecemberMarch 31, 20192020 compared to $434.7 million at September 30, 2019. Changes in the Company’s legal claims reserves during the threesix months ended DecemberMarch 31, 20192020 and 20182019 were as follows:
| | | | | | | | | | | |
| Six Months Ended
March 31, | | |
| 2020 | | 2019 |
| (In millions) | | |
| Reserves for legal claims, beginning of period | $ | 434.7 | | | $ | 408.1 | |
| Increase in reserves | 33.6 | | | 23.3 | |
| Payments | (26.1) | | | (12.3) | |
| Reserves for legal claims, end of period | $ | 442.2 | | | $ | 419.1 | |
|
| | | | | | | |
| | Three Months Ended
December 31, |
| | 2019 | | 2018 |
| | (In millions) |
| Reserves for legal claims, beginning of period | $ | 434.7 |
| | $ | 408.1 |
|
| Increase in reserves | 21.1 |
| | 11.6 |
|
| Payments | (23.3 | ) | | (7.5 | ) |
| Reserves for legal claims, end of period | $ | 432.5 |
| | $ | 412.2 |
|
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
DecemberMarch 31, 20192020
The Company estimates and records receivables under its applicable insurance policies related to its estimated contingencies for known claims and anticipated future construction defect claims on previously closed homes and other legal claims and lawsuits incurred in the ordinary course of business when recovery is probable. Additionally, the Company may have the ability to recover a portion of its losses from its subcontractors and their insurance carriers when the Company has been named as an additional insured on their insurance policies. The Company’s receivables related to its estimates of insurance recoveries from estimated losses for pending legal claims and anticipated future claims related to previously closed homes totaled $76.9$76.6 million, $75.1 million and $57.8$56.9 million at DecemberMarch 31, 2019,2020, September 30, 2019 and DecemberMarch 31, 2018,2019, respectively, and are included in other assets in the consolidated balance sheets.
The estimation of losses related to these reserves and the related estimates of recoveries from insurance policies are subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to the Company’s markets and the types of products built, claim frequency, claim settlement costs and patterns, insurance industry practices and legal interpretations, among others. Due to the high degree of judgment required in establishing reserves for these contingencies, actual future costs and recoveries from insurance could differ significantly from current estimated amounts, and it is not possible for the Company to make a reasonable estimate of the possible loss or range of loss in excess of its reserves.
Land and Lot Purchase Contracts
The Company enters into land and lot purchase contracts to acquire land or lots for the construction of homes. Under these contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase land or lots at a future point in time with predetermined terms. Under the terms of many of the purchase contracts, the deposits are not refundable in the event the Company elects to terminate the contract. Land purchase contract deposits and capitalized pre-acquisition costs are expensed to inventory and land option charges when the Company believes it is probable that it will not acquire the property under contract and will not be able to recover these costs through other means.
At DecemberMarch 31, 2019,2020, the Company’s homebuilding segment had total deposits of $538.5$566.5 million, consisting of cash deposits of $515.9$534.9 million and promissory notes of $22.6$31.6 million, related to contracts to purchase land and lots with a total remaining purchase price of approximately $7.6$8.1 billion. The majority of land and lots under contract are currently expected to be purchased within three years. Of these amounts, $88.8$99.3 million of the deposits related to contracts with Forestar to purchase land and lots with a remaining purchase price of $918.6 million.$1.0 billion. A limited number of the homebuilding land and lot purchase contracts at DecemberMarch 31, 2019,2020, representing $57.3$70.7 million of remaining purchase price, were subject to specific performance provisions that may require the Company to purchase the land or lots upon the land sellers meeting their respective contractual obligations. Of the $57.3$70.7 million remaining purchase price subject to specific performance provisions, $12.3$24.2 million related to contracts between the homebuilding segment and Forestar.
During the three and six months ended DecemberMarch 31, 2019 and 2018,2020, Forestar reimbursed the homebuilding segment $10.7$5.5 million and $12.1$16.2 million, respectively, for previously paid earnest money and $5.2$8.2 million and $3.0$13.3 million, respectively, for pre-acquisition and other due diligence costs related to land purchase contracts whereby the homebuilding segment assigned its rights under contract to Forestar. During the three and six months ended March 31, 2019, Forestar reimbursed the homebuilding segment $4.7 million and $16.8 million, respectively, for previously paid earnest money and $0.7 million and $3.7 million, respectively, for pre-acquisition and other due diligence costs.
Other Commitments
At DecemberMarch 31, 2019,2020, the Company had outstanding surety bonds of $1.7$1.8 billion and letters of credit of $170.4$147.3 million to secure performance under various contracts. Of the total letters of credit, $141.7$116.3 million were issued under the homebuilding revolving credit facility and $28.7$31.0 million were issued under Forestar’s revolving credit facility. At December 31, 2019, letters of credit issued under the homebuilding revolving credit facility were cash collateralized to improve pricing terms. This unrestricted cash can be withdrawn by the Company at its discretion.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
DecemberMarch 31, 20192020
NOTE M – OTHER ASSETS, ACCRUED EXPENSES AND OTHER LIABILITIES
The Company’s other assets at DecemberMarch 31, 20192020 and September 30, 2019 were as follows:
| | | | | | | | | | | | | | |
| | March 31, 2020 | | September 30, 2019 |
| | | (In millions) | | |
| Earnest money and refundable deposits | | $ | 580.9 | | | $ | 540.0 | |
| Insurance receivables | | 76.6 | | | 75.1 | |
| Other receivables | | 112.4 | | | 103.6 | |
| Prepaid assets | | 48.4 | | | 49.6 | |
| Margin deposits | | 83.7 | | | 19.6 | |
| Multi-family rental property held for sale | | — | | | 28.9 | |
| Contract assets - insurance agency commissions | | 42.2 | | | 39.3 | |
| Lease right of use assets | | 37.8 | | | — | |
| Other | | 104.1 | | | 56.7 | |
| | $ | 1,086.1 | | | $ | 912.8 | |
|
| | | | | | | | |
| | | December 31,
2019 | | September 30, 2019 |
| | | (In millions) |
| Earnest money and refundable deposits | | $ | 559.5 |
| | $ | 540.0 |
|
| Insurance receivables | | 76.9 |
| | 75.1 |
|
| Other receivables | | 94.9 |
| | 103.6 |
|
| Prepaid assets | | 58.6 |
| | 49.6 |
|
| Multi-family rental property held for sale | | — |
| | 28.9 |
|
| Contract assets - insurance agency commissions | | 40.7 |
| | 39.3 |
|
| Lease right of use assets | | 36.2 |
| | — |
|
| Other | | 54.9 |
| | 76.3 |
|
| | | $ | 921.7 |
| | $ | 912.8 |
|
The Company’s accrued expenses and other liabilities at DecemberMarch 31, 20192020 and September 30, 2019 were as follows:
|
| | | | | | | | |
| | | December 31,
2019 | | September 30, 2019 |
| | | (In millions) |
| Reserves for legal claims | | $ | 432.5 |
| | $ | 434.7 |
|
| Employee compensation and related liabilities | | 255.4 |
| | 282.1 |
|
| Warranty liability | | 251.6 |
| | 247.3 |
|
| Accrued interest | | 38.5 |
| | 26.3 |
|
| Federal and state income tax liabilities | | 118.0 |
| | 33.4 |
|
| Inventory related accruals | | 62.7 |
| | 61.5 |
|
| Customer deposits | | 54.3 |
| | 57.7 |
|
| Accrued property taxes | | 28.1 |
| | 40.1 |
|
| Lease liabilities | | 37.6 |
| | — |
|
| Other | | 98.7 |
| | 95.0 |
|
| | | $ | 1,377.4 |
| | $ | 1,278.1 |
|
| | | | | | | | | | | | | | |
| | March 31, 2020 | | September 30, 2019 |
| | | (In millions) | | |
| Reserves for legal claims | | $ | 442.2 | | | $ | 434.7 | |
| Employee compensation and related liabilities | | 269.2 | | | 282.1 | |
| Warranty liability | | 262.7 | | | 247.3 | |
| Mortgage hedging instruments and loan commitments | | 81.5 | | | — | |
| Accrued interest | | 30.7 | | | 26.3 | |
| Federal and state income tax liabilities | | 20.0 | | | 33.4 | |
| Inventory related accruals | | 48.9 | | | 61.5 | |
| Customer deposits | | 68.3 | | | 57.7 | |
| Accrued property taxes | | 23.8 | | | 40.1 | |
| Lease liabilities | | 40.5 | | | — | |
| Other | | 93.8 | | | 95.0 | |
| | $ | 1,381.6 | | | $ | 1,278.1 | |
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
DecemberMarch 31, 20192020
NOTE N – FAIR VALUE MEASUREMENTS
The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis at DecemberMarch 31, 20192020 and September 30, 2019. Changes in the fair value of the Level 3 assets during the threesix months ended DecemberMarch 31, 20192020 and 20182019 were not material.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value at March 31, 2020 | | | | | | |
| | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | (In millions) | | | | | | |
| Debt securities collateralized by residential real estate | Other assets | | $ | — | | | $ | — | | | $ | 3.9 | | | $ | 3.9 | |
| Mortgage loans held for sale (a) | Mortgage loans held for sale | | — | | | 1,356.6 | | | 14.1 | | | 1,370.7 | |
| Derivatives not designated as hedging instruments (b): | | | | | | | | | |
| Interest rate lock commitments | Other assets | | — | | | 64.4 | | | — | | | 64.4 | |
| Forward sales of mortgage-backed securities | Other liabilities | | — | | | (69.1) | | | — | | | (69.1) | |
| Best-efforts and mandatory commitments | Other liabilities | | — | | | (11.7) | | | — | | | (11.7) | |
|
| | | | | | | | | | | | | | | | | |
| | | | Fair Value at December 31, 2019 |
| | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | (In millions) |
| Debt securities collateralized by residential real estate | Other assets | | $ | — |
| | $ | — |
| | $ | 3.9 |
| | $ | 3.9 |
|
| Mortgage loans held for sale (a) | Mortgage loans held for sale | | — |
| | 1,005.6 |
| | 11.8 |
| | 1,017.4 |
|
| Derivatives not designated as hedging instruments (b): | | | | | | | | | |
| Interest rate lock commitments | Other assets | | — |
| | 18.7 |
| | — |
| | 18.7 |
|
| Forward sales of mortgage-backed securities | Other assets | | — |
| | 0.5 |
| | — |
| | 0.5 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value at September 30, 2019 | | | | | | |
| | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | (In millions) | | | | | | |
| Debt securities collateralized by residential real estate | Other assets | | $ | — | | | $ | — | | | $ | 3.9 | | | $ | 3.9 | |
| Mortgage loans held for sale (a) | Mortgage loans held for sale | | — | | | 1,055.3 | | | 9.8 | | | 1,065.1 | |
| Derivatives not designated as hedging instruments (b): | | | | | | | | | |
| Interest rate lock commitments | Other assets | | — | | | 19.2 | | | — | | | 19.2 | |
| Forward sales of mortgage-backed securities | Other liabilities | | — | | | (4.1) | | | — | | | (4.1) | |
| Best-efforts and mandatory commitments | Other liabilities | | — | | | (1.0) | | | — | | | (1.0) | |
|
| | | | | | | | | | | | | | | | | |
| | | | Fair Value at September 30, 2019 |
| | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | (In millions) |
| Debt securities collateralized by residential real estate | Other assets | | $ | — |
| | $ | — |
| | $ | 3.9 |
| | $ | 3.9 |
|
| Mortgage loans held for sale (a) | Mortgage loans held for sale | | — |
| | 1,055.3 |
| | 9.8 |
| | 1,065.1 |
|
| Derivatives not designated as hedging instruments (b): | | | | | | | | | |
| Interest rate lock commitments | Other assets | | — |
| | 19.2 |
| | — |
| | 19.2 |
|
| Forward sales of mortgage-backed securities | Other liabilities | | — |
| | (4.1 | ) | | — |
| | (4.1 | ) |
| Best-efforts and mandatory commitments | Other liabilities | | — |
| | (1.0 | ) | | — |
| | (1.0 | ) |
___________________
| |
(a) | The Company typically elects the fair value option upon origination for mortgage loans held for sale. Interest income earned on mortgage loans held for sale is based on contractual interest rates and included in other income. Mortgage loans held for sale valued using Level 3 inputs at December 31, 2019 and September 30, 2019 include $11.8 million and $9.8 million, respectively, of loans for which the Company elected the fair value option upon origination and did not sell into the secondary market. The fair value of these mortgage loans held for sale is generally calculated considering pricing in the secondary market and adjusted for the value of the underlying collateral, including interest rate risk, liquidity risk and prepayment risk. The Company plans to sell these loans as market conditions permit. |
| |
(b) | Fair value measurements of these derivatives represent changes in fair value, as calculated by reference to quoted prices for similar assets, and are reflected in the balance sheet as other assets or accrued expenses and other liabilities. Changes in the fair value of these derivatives are included in revenues in the consolidated statements of operations. |
(b)Fair value measurements of these derivatives represent changes in fair value, as calculated by reference to quoted prices for similar assets, and are reflected in the balance sheet as other assets or accrued expenses and other liabilities. Changes in the fair value of these derivatives are included in revenues in the consolidated statements of operations. In March 2020, the Federal Reserve announced its commitment to purchase U.S. Treasury securities, MBS, municipal bonds and other assets. This led to a significant increase in the price of MBS which increased the change in fair market value of the Company’s IRLCs and mortgage loans held for sale and decreased the fair market value of its hedging instruments. The net fair value change for the three and six months ended March 31, 2020 and 2019 recognized in revenues in the consolidated statements of operations was not significant.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
DecemberMarch 31, 20192020
The following table summarizes the Company’s assets measured at fair value on a nonrecurring basis at DecemberMarch 31, 20192020 and September 30, 20192019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value at
March 31, 2020 | | | | Fair Value at
September 30, 2019 | | |
| Balance Sheet Location | | Level 2 | | Level 3 | | Level 2 | | Level 3 |
| | | (In millions) | | | | | | |
| Inventory held and used (a) (b) | Inventories | | $ | — | | | $ | — | | | $ | — | | | $ | 4.5 | |
| Inventory available for sale (a) (c) | Inventories | | — | | | 12.3 | | | — | | | — | |
| Mortgage loans held for sale (a) (d) | Mortgage loans held for sale | | — | | | 1.3 | | | — | | | 2.7 | |
| Other mortgage loans (a) (e) | Other assets | | — | | | 1.1 | | | — | | | 1.8 | |
___________________
(a):The fair values included in the table above represent only those assets whose carrying values were adjusted to fair value as a result of impairment in the respective period and were held at the end of the period.
(b)In performing its impairment analysis of communities, discount rates ranging from 16% to 18% were used in the periods presented.
|
| | | | | | | | | | | | | | | | | |
| | | | Fair Value at
December 31, 2019 | | Fair Value at
September 30, 2019 |
| | Balance Sheet Location | | Level 2 | | Level 3 | | Level 2 | | Level 3 |
| | | | (In millions) |
| Inventory held and used (a) (b) | Inventories | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4.5 |
|
| Mortgage loans held for sale (a) (c) | Mortgage loans held for sale | | — |
| | 3.6 |
| | — |
| | 2.7 |
|
| Other mortgage loans (a) (d) | Other assets | | — |
| | 1.1 |
| | — |
| | 1.8 |
|
(d)These mortgage loans have some degree of impairment affecting their marketability and are valued at the lower of carrying value or fair value. When available, quoted prices in the secondary market are used to determine fair value (Level 2); otherwise, a cash flow valuation model is used to determine fair value (Level 3).
(e)The fair values of other mortgage loans was determined based on the value of the underlying collateral.
___________________
| |
(a) | The fair values included in the table above represent only those assets whose carrying values were adjusted to fair value as a result of impairment in the respective period and were held at the end of the period. |
| |
(b) | In performing its impairment analysis of communities, discount rates ranging from 16% to 18% were used in the periods presented. |
| |
(c) | These mortgage loans have some degree of impairment affecting their marketability and are valued at the lower of carrying value or fair value. When available, quoted prices in the secondary market are used to determine fair value (Level 2); otherwise, a cash flow valuation model is used to determine fair value (Level 3). |
| |
(d) | The fair values of other mortgage loans was determined based on the value of the underlying collateral. |
For the financial assets and liabilities that the Company does not reflect at fair value, the following tables present both their respective carrying value and fair value at DecemberMarch 31, 20192020 and September 30, 2019:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying Value | | Fair Value at March 31, 2020 | | | | | | |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| (In millions) | | | | | | | | |
| Cash and cash equivalents (a) | $ | 1,522.8 | | | $ | 1,522.8 | | | $ | — | | | $ | — | | | $ | 1,522.8 | |
| Restricted cash (a) | 14.5 | | | 14.5 | | | — | | | — | | | 14.5 | |
| Notes payable (b) (c) | 4,306.6 | | | — | | | 2,541.2 | | | 1,724.5 | | | 4,265.7 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Carrying Value | | Fair Value at December 31, 2019 |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In millions) |
| Cash and cash equivalents (a) | $ | 1,583.3 |
| | $ | 1,583.3 |
| | $ | — |
| | $ | — |
| | $ | 1,583.3 |
|
| Restricted cash (a) | 12.6 |
| | 12.6 |
| | — |
| | — |
| | 12.6 |
|
| Notes payable (b) (c) | 3,783.3 |
| | — |
| | 3,035.1 |
| | 879.1 |
| | 3,914.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying Value | | Fair Value at September 30, 2019 | | | | | | |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| (In millions) | | | | | | | | |
| Cash and cash equivalents (a) | $ | 1,494.3 | | | $ | 1,494.3 | | | $ | — | | | $ | — | | | $ | 1,494.3 | |
| Restricted cash (a) | 19.7 | | | 19.7 | | | — | | | — | | | 19.7 | |
| Notes payable (b) (c) | 3,399.4 | | | — | | | 2,533.9 | | | 991.9 | | | 3,525.8 | |
___________________
| |
(a) | The fair values of cash, cash equivalents and restricted cash approximate their carrying values due to their short-term nature and are classified as Level 1 within the fair value hierarchy. |
| |
(b) | The fair value of the senior notes is determined based on quoted prices, which is classified as Level 2 within the fair value hierarchy. |
| |
(c) | The fair values of other secured notes and borrowings on the revolving credit facilities and the mortgage repurchase facility approximate carrying value due to their short-term nature or floating interest rate terms, as applicable, and are classified as Level 3 within the fair value hierarchy. |
(b)The fair value of the senior notes is determined based on quoted prices, which is classified as Level 2 within the fair value hierarchy.
(c)The fair values of other secured notes and borrowings on the revolving credit facilities and the mortgage repurchase facility approximate carrying value due to their short-term nature or floating interest rate terms, as applicable, and are classified as Level 3 within the fair value hierarchy.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
DecemberMarch 31, 20192020
NOTE O – RELATED PARTY TRANSACTIONS
In March 2019, the Company assigned its rights under a land purchase contract it entered into in December 2017 to R&R Riverview LLC (R&R), an entity owned by Ryan Horton and Reagan Horton, the adult sons of Donald R. Horton, the Company’s Chairman. In March 2019, R&R exercised its rights under the purchase contract and paid $77.5 million for 119 acres of undeveloped land in Arizona. In connection with the transaction, Donald R. Horton loaned R&R $77.5 million at a 2.55% annual interest rate and obtained a security interest in the land. Concurrent with the contract assignment to R&R, the Company entered into a land purchase contract with R&R to purchase the 119 acres for R&R’s cost plus an annualized return of 16%. In accordance with the Company’s policy on related party transactions, this transaction was reviewed and approved by a committee of the Board of Directors composed of independent directors.
The Company determined that R&R was a variable interest entity, and the Company had the power through its rights in its land purchase contract with R&R to control the activities that most significantly impact the entity’s economic performance, and the Company is the primary beneficiary. Accordingly, the Company consolidated the variable interest entity in its consolidated financial statements by increasing inventory and notes payable by $77.5 million, and this amount was included in those balances at September 30, 2019.
In October 2019, the Company paid R&R $84.2 million for all 119 acres of land and deconsolidated the variable interest entity from the financial statements. The purchase transaction was also reviewed and approved by a committee of the Board of Directors composed of independent directors.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2019
NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION
All of the Company’s homebuilding senior notes and the homebuilding revolving credit facility are fully and unconditionally guaranteed, on a joint and several basis, by certain subsidiaries of D.R. Horton, Inc. (Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by the Company. The Company’s subsidiaries associated with the Forestar land development operation, the financial services operations and certain other subsidiaries do not guarantee the Company’s homebuilding senior notes or the homebuilding revolving credit facility (collectively, Non-Guarantor Subsidiaries). In lieu of providing separate financial statements for the Guarantor Subsidiaries, consolidating condensed financial statements are presented below. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that they are not material to investors.
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 the Company; (2) the sale or other disposition of all or substantially all of its assets (other than to the Company or another Guarantor); (3) its merger or consolidation with an entity other than the Company or another Guarantor; or (4) its ceasing to guarantee any of the Company’s publicly traded debt securities and ceasing to guarantee any of the Company’s obligations under the homebuilding revolving credit facility.
As described in Note A, at December 31, 2019, the Company reclassified its single-family rental properties from other assets to property and equipment in its homebuilding segment. Reclassification of prior period amounts resulted in decreases in other assets of $26.9 million and $10.1 million in the D.R. Horton, Inc. and Guarantor Subsidiaries columns, respectively, with corresponding increases in property and equipment at September 30, 2019.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2019
NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Balance Sheet
December 31, 2019
|
| | | | | | | | | | | | | | | | | | | | |
| | | D.R. Horton, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | | (In millions) |
| ASSETS | | | | | | | | | | |
| Cash and cash equivalents | | $ | 1,069.1 |
|
| $ | 30.3 |
|
| $ | 483.9 |
|
| $ | — |
| | $ | 1,583.3 |
|
| Restricted cash | | 4.8 |
| | 1.8 |
| | 6.0 |
| | — |
| | 12.6 |
|
| Investment in subsidiaries | | 7,595.7 |
| | — |
| | — |
| | (7,595.7 | ) | | — |
|
| Inventories | | 4,527.1 |
| | 6,207.5 |
| | 1,219.9 |
| | (55.3 | ) | | 11,899.2 |
|
| Mortgage loans held for sale | | — |
| | — |
| | 1,025.1 |
| | — |
| | 1,025.1 |
|
| Deferred income taxes, net | | 58.9 |
| | 84.7 |
| | 2.3 |
| | 8.2 |
| | 154.1 |
|
| Property and equipment, net | | 158.3 |
| | 99.9 |
| | 313.6 |
| | (8.4 | ) | | 563.4 |
|
| Other assets | | 412.6 |
| | 458.7 |
| | 146.6 |
| | (96.2 | ) | | 921.7 |
|
| Goodwill | | — |
| | 134.3 |
| | 29.2 |
| | — |
| | 163.5 |
|
| Intercompany receivables | | — |
| | 825.5 |
| | — |
| | (825.5 | ) | | — |
|
| Total Assets | | $ | 13,826.5 |
| | $ | 7,842.7 |
| | $ | 3,226.6 |
| | $ | (8,572.9 | ) | | $ | 16,322.9 |
|
| LIABILITIES & EQUITY | | | | | | | | | | |
| Accounts payable and other liabilities | | $ | 719.7 |
| | $ | 1,089.1 |
| | $ | 329.5 |
| | $ | (101.6 | ) | | $ | 2,036.7 |
|
| Intercompany payables | | 372.8 |
| | — |
| | 452.7 |
| | (825.5 | ) | | — |
|
| Notes payable | | 2,452.5 |
| | 17.4 |
| | 1,313.4 |
| | — |
| | 3,783.3 |
|
| Total Liabilities | | 3,545.0 |
| | 1,106.5 |
| | 2,095.6 |
| | (927.1 | ) | | 5,820.0 |
|
| Stockholders’ equity | | 10,281.5 |
| | 6,736.2 |
| | 860.4 |
| | (7,650.7 | ) | | 10,227.4 |
|
| Noncontrolling interests | | — |
| | — |
| | 270.6 |
| | 4.9 |
| | 275.5 |
|
| Total Equity | | 10,281.5 |
| | 6,736.2 |
| | 1,131.0 |
| | (7,645.8 | ) | | 10,502.9 |
|
| Total Liabilities & Equity | | $ | 13,826.5 |
| | $ | 7,842.7 |
| | $ | 3,226.6 |
| | $ | (8,572.9 | ) | | $ | 16,322.9 |
|
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2019
NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Balance Sheet
September 30, 2019
|
| | | | | | | | | | | | | | | | | | | | |
| | | D.R. Horton, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | | (In millions) |
| ASSETS | | | | | | | | | | |
| Cash and cash equivalents | | $ | 877.1 |
| | $ | 115.8 |
| | $ | 501.4 |
| | $ | — |
| | $ | 1,494.3 |
|
| Restricted cash | | 6.8 |
| | 1.3 |
| | 11.6 |
| | — |
| | 19.7 |
|
| Investment in subsidiaries | | 7,349.8 |
| | — |
| | — |
| | (7,349.8 | ) | | — |
|
| Inventories | | 4,166.1 |
| | 5,890.7 |
| | 1,260.5 |
| | (35.3 | ) | | 11,282.0 |
|
| Mortgage loans held for sale | | — |
| | — |
| | 1,072.0 |
| | — |
| | 1,072.0 |
|
| Deferred income taxes, net | | 60.6 |
| | 89.4 |
| | 8.0 |
| | 5.1 |
| | 163.1 |
|
| Property and equipment, net | | 150.7 |
| | 86.7 |
| | 267.8 |
| | (6.0 | ) | | 499.2 |
|
| Other assets | | 371.8 |
| | 449.6 |
| | 180.9 |
| | (89.5 | ) | | 912.8 |
|
| Goodwill | | — |
| | 134.3 |
| | 29.2 |
| | — |
| | 163.5 |
|
| Intercompany receivables | | — |
| | 825.9 |
| | — |
| | (825.9 | ) | | — |
|
| Total Assets | | $ | 12,982.9 |
| | $ | 7,593.7 |
| | $ | 3,331.4 |
| | $ | (8,301.4 | ) | | $ | 15,606.6 |
|
| LIABILITIES & EQUITY | | | | | | | | | | |
| Accounts payable and other liabilities | | $ | 616.1 |
| | $ | 1,071.3 |
| | $ | 316.4 |
| | $ | (91.7 | ) | | $ | 1,912.1 |
|
| Intercompany payables | | 352.7 |
| | — |
| | 473.2 |
| | (825.9 | ) | | — |
|
| Notes payable | | 1,955.9 |
| | 14.2 |
| | 1,429.3 |
| | — |
| | 3,399.4 |
|
| Total Liabilities | | 2,924.7 |
| | 1,085.5 |
| | 2,218.9 |
| | (917.6 | ) | | 5,311.5 |
|
| Stockholders’ equity | | 10,058.2 |
| | 6,508.2 |
| | 841.6 |
| | (7,387.1 | ) | | 10,020.9 |
|
| Noncontrolling interests | | — |
| | — |
| | 270.9 |
| | 3.3 |
| | 274.2 |
|
| Total Equity | | 10,058.2 |
| | 6,508.2 |
| | 1,112.5 |
| | (7,383.8 | ) | | 10,295.1 |
|
| Total Liabilities & Equity | | $ | 12,982.9 |
| | $ | 7,593.7 |
| | $ | 3,331.4 |
| | $ | (8,301.4 | ) | | $ | 15,606.6 |
|
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2019
NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Operations
Three Months Ended December 31, 2019
|
| | | | | | | | | | | | | | | | | | | | |
|
| D.R. Horton, Inc. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Eliminations |
| Total |
| |
| (In millions) |
| Revenues |
| $ | 1,593.6 |
|
| $ | 2,294.4 |
|
| $ | 360.3 |
|
| $ | (227.6 | ) |
| $ | 4,020.7 |
|
| Cost of sales |
| 1,232.4 |
|
| 1,841.0 |
|
| 217.7 |
|
| (206.9 | ) |
| 3,084.2 |
|
| Selling, general and administrative expense |
| 177.3 |
|
| 180.3 |
|
| 98.2 |
|
| — |
|
| 455.8 |
|
| Gain on sale of assets | | — |
| | — |
| | (29.3 | ) | | (1.8 | ) | | (31.1 | ) |
| Other (income) expense |
| (4.1 | ) |
| (0.3 | ) |
| (7.1 | ) |
| — |
|
| (11.5 | ) |
| Income before income taxes |
| 188.0 |
|
| 273.4 |
|
| 80.8 |
|
| (18.9 | ) |
| 523.3 |
|
| Income tax expense |
| 31.2 |
|
| 45.4 |
|
| 17.3 |
|
| (3.1 | ) |
| 90.8 |
|
| Equity in net income of subsidiaries, net of tax | | 291.4 |
| | — |
| | — |
| | (291.4 | ) | | — |
|
| Net income |
| 448.2 |
|
| 228.0 |
|
| 63.5 |
|
| (307.2 | ) |
| 432.5 |
|
| Net income attributable to noncontrolling interests | | — |
| | — |
| | 0.1 |
| | 1.1 |
| | 1.2 |
|
| Net income attributable to D.R. Horton, Inc. | | $ | 448.2 |
| | $ | 228.0 |
| | $ | 63.4 |
| | $ | (308.3 | ) | | $ | 431.3 |
|
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2019
NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Operations
Three Months Ended December 31, 2018
|
| | | | | | | | | | | | | | | | | | | | |
| | | D.R. Horton, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | | (In millions) |
| Revenues | | $ | 1,335.7 |
| | $ | 2,081.7 |
| | $ | 130.6 |
| | $ | (29.0 | ) | | $ | 3,519.0 |
|
| Cost of sales | | 1,057.2 |
| | 1,681.4 |
| | 38.0 |
| | (25.5 | ) | | 2,751.1 |
|
| Selling, general and administrative expense | | 157.9 |
| | 165.9 |
| | 79.0 |
| | — |
| | 402.8 |
|
| Gain on sale of assets | | (2.0 | ) | | — |
| | — |
| | — |
| | (2.0 | ) |
| Other (income) expense | | (0.8 | ) | | (0.4 | ) | | (7.4 | ) | | — |
| | (8.6 | ) |
| Income before income taxes | | 123.4 |
| | 234.8 |
| | 21.0 |
| | (3.5 | ) | | 375.7 |
|
| Income tax expense | | 29.2 |
| | 55.8 |
| | 4.8 |
| | (0.8 | ) | | 89.0 |
|
| Equity in net income of subsidiaries, net of tax | | 195.9 |
| | — |
| | — |
| | (195.9 | ) | | — |
|
| Net income | | 290.1 |
| | 179.0 |
| | 16.2 |
| | (198.6 | ) | | 286.7 |
|
| Net loss attributable to noncontrolling interests | | — |
| | — |
| | (0.7 | ) | | 0.2 |
| | (0.5 | ) |
| Net income attributable to D.R. Horton, Inc. | | $ | 290.1 |
| | $ | 179.0 |
| | $ | 16.9 |
| | $ | (198.8 | ) | | $ | 287.2 |
|
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2019
NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Cash Flows
Three Months Ended December 31, 2019
|
| | | | | | | | | | | | | | | | | | | | |
| | | D.R. Horton, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | | (In millions) |
| OPERATING ACTIVITIES | | | | | | | | | | |
| Net cash (used in) provided by operating activities | | $ | (67.2 | ) | | $ | (64.6 | ) | | $ | 73.8 |
| | $ | (55.8 | ) | | $ | (113.8 | ) |
| INVESTING ACTIVITIES | | | | | | | | | | |
| Expenditures for property and equipment | | (8.6 | ) | | (12.0 | ) | | (1.0 | ) | | — |
| | (21.6 | ) |
| Proceeds from sale of assets | | — |
| | — |
| | 62.8 |
| | — |
| | 62.8 |
|
| Expenditures related to rental properties | | (7.3 | ) | | (8.3 | ) | | (54.8 | ) | | 10.8 |
| | (59.6 | ) |
| Return of investment in unconsolidated entities | | — |
| | — |
| | 1.9 |
| | — |
| | 1.9 |
|
| Net principal increase of other mortgage loans and real estate owned | | — |
| | — |
| | (0.6 | ) | | — |
| | (0.6 | ) |
| Intercompany advances | | 20.7 |
| | — |
| | — |
| | (20.7 | ) | | — |
|
| Payments related to business acquisitions | | (0.7 | ) | | — |
| | — |
| | — |
| | (0.7 | ) |
| Net cash provided by (used in) investing activities | | 4.1 |
| | (20.3 | ) | | 8.3 |
| | (9.9 | ) | | (17.8 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | |
| Proceeds from notes payable | | 495.7 |
| | — |
| | — |
| | — |
| | 495.7 |
|
| Payments on mortgage repurchase facility, net | | — |
| | — |
| | (38.6 | ) | | — |
| | (38.6 | ) |
| Intercompany advances | | — |
| | (0.1 | ) | | (20.6 | ) | | 20.7 |
| | — |
|
| Proceeds from stock associated with certain employee benefit plans | | 4.1 |
| | — |
| | — |
| | — |
| | 4.1 |
|
| Cash paid for shares withheld for taxes | | (17.3 | ) | | — |
| | — |
| | — |
| | (17.3 | ) |
| Cash dividends paid | | (64.6 | ) | | — |
| | (45.0 | ) | | 45.0 |
| | (64.6 | ) |
| Repurchases of common stock | | (163.1 | ) | | — |
| | — |
| | — |
| | (163.1 | ) |
| Distributions to noncontrolling interests, net | | — |
| | — |
| | (0.4 | ) | | — |
| | (0.4 | ) |
| Other financing activities | | (1.7 | ) | | — |
| | (0.6 | ) | | — |
| | (2.3 | ) |
| Net cash provided by (used in) financing activities | | 253.1 |
| | (0.1 | ) | | (105.2 | ) | | 65.7 |
| | 213.5 |
|
| Net increase (decrease) in cash, cash equivalents and restricted cash | | 190.0 |
| | (85.0 | ) | | (23.1 | ) | | — |
| | 81.9 |
|
| Cash, cash equivalents and restricted cash at beginning of period | | 883.9 |
| | 117.1 |
| | 513.0 |
| | — |
| | 1,514.0 |
|
| Cash, cash equivalents and restricted cash at end of period | | $ | 1,073.9 |
| | $ | 32.1 |
| | $ | 489.9 |
| | $ | — |
| | $ | 1,595.9 |
|
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2019
NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Cash Flows
Three Months Ended December 31, 2018
|
| | | | | | | | | | | | | | | | | | | | |
| | | D.R. Horton, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | | (In millions) |
| OPERATING ACTIVITIES | | | | | | | | | | |
| Net cash (used in) provided by operating activities | | $ | (137.6 | ) | | $ | (244.2 | ) | | $ | 33.7 |
| | $ | (25.0 | ) | | $ | (373.1 | ) |
| INVESTING ACTIVITIES | | | | | | | | | | |
| Expenditures for property and equipment | | (10.2 | ) | | (6.4 | ) | | (3.6 | ) | | — |
| | (20.2 | ) |
| Proceeds from sale of assets | | 10.4 |
| | — |
| | — |
| | — |
| | 10.4 |
|
| Expenditures related to rental properties | | — |
| | — |
| | (11.4 | ) | | — |
| | (11.4 | ) |
| Return of investment in unconsolidated entities | | — |
| | — |
| | 4.4 |
| | — |
| | 4.4 |
|
| Net principal increase of other mortgage loans and real estate owned | | — |
| | — |
| | (0.6 | ) | | — |
| | (0.6 | ) |
| Intercompany advances | | (129.9 | ) | | — |
| | — |
| | 129.9 |
| | — |
|
| Payments related to business acquisitions | | (293.0 | ) | | — |
| | — |
| | — |
| | (293.0 | ) |
| Net cash used in investing activities | | (422.7 | ) | | (6.4 | ) | | (11.2 | ) | | 129.9 |
| | (310.4 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | |
| Proceeds from notes payable | | 578.3 |
| | — |
| | — |
| | — |
| | 578.3 |
|
| Repayment of notes payable | | (275.0 | ) | | (1.1 | ) | | — |
| | — |
| | (276.1 | ) |
| Payments on mortgage repurchase facility, net | | — |
| | — |
| | (163.8 | ) | | — |
| | (163.8 | ) |
| Intercompany advances | | — |
| | 125.7 |
| | 4.2 |
| | (129.9 | ) | | — |
|
| Proceeds from stock associated with certain employee benefit plans | | 8.6 |
| | — |
| | — |
| | — |
| | 8.6 |
|
| Cash paid for shares withheld for taxes | | (4.1 | ) | | — |
| | — |
| | — |
| | (4.1 | ) |
| Cash dividends paid | | (56.0 | ) | | — |
| | (25.0 | ) | | 25.0 |
| | (56.0 | ) |
| Repurchases of common stock | | (140.6 | ) | | — |
| | — |
| | — |
| | (140.6 | ) |
| Distributions to noncontrolling interests, net | | — |
| | — |
| | (0.5 | ) | | — |
| | (0.5 | ) |
| Net cash provided by (used in) financing activities | | 111.2 |
| | 124.6 |
| | (185.1 | ) | | (104.9 | ) | | (54.2 | ) |
| Net decrease in cash, cash equivalents and restricted cash | | (449.1 | ) | | (126.0 | ) | | (162.6 | ) | | — |
| | (737.7 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | | 914.7 |
| | 160.7 |
| | 430.6 |
| | — |
| | 1,506.0 |
|
| Cash, cash equivalents and restricted cash at end of period | | $ | 465.6 |
| | $ | 34.7 |
| | $ | 268.0 |
| | $ | — |
| | $ | 768.3 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 ended September 30, 2019.2019. 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 in the United States as measured by number of homes closed. We construct and sell homes through our operating divisions in 9089 markets across 29 states, primarily under the names of D.R. Horton, America’s Builder; Emerald Homes; Express Homes and Freedom Homes. Our common stock is included in the S&P 500 Index and listed on the New 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 to D.R. Horton, Inc., a Delaware 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 $298,100$299,200 during the threesix months ended DecemberMarch 31, 2019.2020. Approximately 91% of our home sales revenue in the threesix months ended DecemberMarch 31, 20192020 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 of Forestar Group Inc. (Forestar), for $558.3 million in cash. Forestar is a publicly traded residential lot development company listed on the New 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. WeAt March 31, 2020, we owned approximately 65% of Forestar’s outstanding common stock at December 31, 2019.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 fourthree 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. At DecemberMarch 31, 20192020 and September 30, 2019, our consolidated balance sheets included $209.8$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 at DecemberMarch 31, 20192020 and September 30, 2019, respectively, and the combined pre-tax income of these subsidiaries was $29.6$28.0 million and $57.5 million in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to $1.0$27.5 million and $28.5 million in the prior year period.
OVERVIEW
The improvementFiscal Year-to-Date Operating Results
Economic fundamentals remained solid in the housing market that we have experienced in recent quarters continued duringthroughout most of the firstsecond quarter of 2020. Asfiscal 2020, as interest rates on mortgage loans remained low, demand was strong and demand strengthened, we reduced sales incentives compared to the prior year quarter. We continue to see solid economic fundamentals andthere was a limited supply of homes at affordable prices across most of our markets.
We believe our business is well positioned with a broad geographic footprint; affordable product offerings; a balanced supply of finished lots, land and homes; a strong balance sheet and liquidity position; and experienced personnel across our operating markets. We remain focused on growing our revenues and profitability, generating consistently strong annual cash flows from our homebuilding operations and managing our product offerings, pricing, sales pace and inventory levels to optimize the return on our inventory investments. We are monitoring our sales pace, pricing and homes in inventory in each of our communities, and we will adjust sales pace, home pricing and incentives based on local housing market conditions.
During the threesix months ended DecemberMarch 31, 2019,2020, our number of homes closed and home sales revenues both increased 13%10% and 11%, respectively, compared to the prior year period, and our consolidated revenues increased 14%11% to $4.0$8.5 billion compared to $3.5$7.6 billion in the prior year period. Our pre-tax income was $523.3 million$1.1 billion in the threesix months ended DecemberMarch 31, 20192020 compared to $375.7$838.5 million in the prior year period, and our pre-tax operating margin was 13.0%13.4% compared to 10.7%11.0%. Net income was $432.5$916.4 million in the threesix months ended DecemberMarch 31, 20192020 compared to $286.7$641.1 million in the prior year period. The current quartersix month period results include a tax benefit of $32.9$39.5 million related to the retroactive reinstatement of the federal energy efficient homes tax credit.
Cash used inprovided by our homebuilding operations was $178.4$52.1 million in the threesix months ended DecemberMarch 31, 20192020 compared to $396.8cash used of $215.9 million in the prior year period. In the trailing twelve months ended DecemberMarch 31, 2019,2020, our homebuilding return on inventory (ROI) was 18.7%20.2% compared to 19.3%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 61%64% of the lots owned and controlled at DecemberMarch 31, 20192020 compared to 60% at September 30, 2019 and 58%62% at DecemberMarch 31, 2018. Growing2019. Our focus on increasing the controlled portion of our finished lot pipeline has benefited from our relationship with Forestar, our majority-owned Forestar lot development operations is advancing our homebuilding strategy of increasing our controlled finished lot pipelinecompany.
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 across the 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 of April 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 of April 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 of April 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 the U.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 the Centers 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 late March 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 the U.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 that housing demandour strong balance sheet and liquidity position will help us operate in this uncertain environment. We will seek to maintain our individual operating markets is tied closelyflexible 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 market’s economy. Therefore, we expect thatof our communities based on local housing market conditions will vary across our markets. If the U.S. economy continues to grow, we expect to see solid housing demand, concentrated in markets where job growth is occurring and new home prices remain affordable relative to household incomes. The pace and sustainability of new home demand and our future results could be negatively affected by weakening economic conditions, decreases in the level of employment and housing demand, decreased home affordability, increases in mortgage interest rates or tightening of mortgage lending standards.
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. ThisWe 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.
Managing•Currently, we are cautiously managing our inventory of homes under construction relative to demand in each of our markets including startingto 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.
Investing in•Currently, we are limiting our land acquisition and land development investments to adjust to the impact of COVID-19, while still investing in desirable markets whileand controlling the level of land and lots we own in each of our marketsmarket relative to the local new home demand.
Increasing•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 amountimpact of COVID-19, while continuing to seek opportunities to expand the portion of our land and finished lots controlled through purchase contracts by expanding relationshipsand assisting Forestar with land developers across the country and continuing to assist our majority-owned Forestar lot development subsidiary with the growth of their operations.
Opportunistically pursuing acquisitions to enhance our operations and improve returns.
•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.
KEY RESULTS
Key financial results as of and for the three months ended DecemberMarch 31, 2019,2020, as compared to the same period of 2018,2019, were as follows:
Homebuilding:
•Homebuilding revenues increased 14%10% to $3.9$4.4 billion compared to $3.4$4.0 billion.
•Homes closed increased 13%8% to 12,95914,539 homes, and the average closing price of those homes was $298,100.$300,100.
•Net sales orders increased 19%20% to 13,12620,087 homes, and the value of net sales orders increased 22% to $3.9$6.0 billion.
•Sales order backlog increased 2%14% to 13,78019,328 homes, and the value of sales order backlog increased 5%18% to $4.2$5.9 billion.
•Home sales gross margin was 21.0%21.3% compared to 20.0%19.3%.
•Homebuilding SG&A expense was 9.2%8.3% of homebuilding revenues compared to 9.5%9.0%.
•Homebuilding pre-tax income was $461.6$565.5 million compared to $354.3$400.4 million.
•Homebuilding pre-tax income was 11.9%12.9% of homebuilding revenues compared to 10.4%10.0%.
Net cash used in homebuilding operations was $178.4 million compared to $396.8 million.
•Homebuilding cash and cash equivalents totaled $1.2$1.0 billion compared to $1.0 billion and $537.5$557.3 million at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively.
•Homebuilding inventories totaled $10.9$11.1 billion compared to $10.3 billion and $10.9$11.1 billion at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively.
•Homes in inventory totaled 30,20033,400 compared to 27,700 and 31,80032,100 at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively.
•Owned lots totaled 123,400118,700 compared to 121,400 and 128,500120,900 at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively. Lots controlled through purchase contracts increased to 195,600210,600 from 185,900 and 180,900195,500 at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively.
•Homebuilding debt was $2.5 billion compared to $2.0 billion and $2.7$2.8 billion at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively.
•Homebuilding debt to total capital was 19.5%19.2% compared to 17.0% and 23.2%22.9% at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively.
Forestar:
•Forestar’s revenues increased 542%143% to $247.2$159.1 million compared to $38.5$65.4 million. Revenues in the current and prior year quarters included $221.2$151.9 million and $29.0$39.7 million, respectively, of revenue from land and lot sales to our homebuilding segment.
•Forestar’s lot saleslots sold increased 368%256% to 2,4221,951 compared to 518. Lot sales548. Lots sold to D.R. Horton were 2,390totaled 1,906 compared to 455.453.
•Forestar’s pre-tax income was $22.2$13.7 million compared to $4.9$16.4 million.
•Forestar’s pre-tax income was 9.0%8.6% of Forestar revenues compared to 12.7%25.1%.
•Forestar’s cash and cash equivalents totaled $373.3$438.2 million compared to $382.8 million and $154.2$66.4 million at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively.
•Forestar’s inventories totaled $1.1$1.2 billion compared to $1.0 billion and $693.2$851.5 million at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively.
•Owned and controlled lots totaled 44,50052,300 compared to 38,300 and 25,60031,400 at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively. Of these lots, 25,60028,600 were under contract to sell to or subject to a right of first offer with D.R. Horton, compared to 23,400 and 18,80021,700 at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively.
•Forestar’s debt was $462.1$640.1 million compared to $460.5 million and $112.9$149.2 million at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively.
•Forestar’s debt to total capital was 35.9%43.4% compared to 36.3% and 14.3%17.8% at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively.
Financial Services:
•Financial services revenues increased 21%3% to $102.9$104.5 million compared to $85.3$101.6 million.
Financial services pre-tax income increased 29% to $30.5 million compared to $23.6 million.
•Financial services pre-tax income was 29.6%$24.7 million compared to $34.0 million.
•Financial services pre-tax income was 23.6% of financial services revenues compared to 27.7%33.5%.
Consolidated Results:
| |
• | Consolidated pre-tax income increased 39% to $523.3 million compared to $375.7 million. |
| |
• | Consolidated pre-tax income was 13.0% of consolidated revenues compared to 10.7%. |
| |
• | Income tax expense was $90.8 million compared to $89.0 million. |
| |
• | Net income attributable to D.R. Horton increased 50% to $431.3 million compared to $287.2 million. |
•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 to D.R. Horton increased 37% to $482.7 million compared to $351.3 million.
•Diluted net income per common share attributable to D.R. Horton increased 53%40% to $1.16$1.30 compared to $0.76.$0.93.
Net cash used in operations was $113.8 million compared to $373.1 million.
•Stockholders’ equity was $10.2$10.5 billion compared to $10.0 billion and $9.1$9.4 billion at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively.
•Book value per common share increased to $27.92$28.77 compared to $27.20 and $24.45$25.09 at September 30, 2019 and DecemberMarch 31, 2018,2019, respectively.
•Debt to total capital was 27.0%29.2% compared to 25.3% at September 30, 2019 and 26.8%27.9% at DecemberMarch 31, 2018.2019.
Key financial results for the six months ended March 31, 2020, as compared to the same period of 2019, were as follows:
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 to D.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 to D.R. Horton increased 43% to $914.0 million compared to $638.4 million.
•Diluted net income per common share attributable to D.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.
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 |
| | | | | | |
State | | Reporting Region/Market East Region | | State | | Reporting Region/MarketSoutheast Region |
| Delaware | | Central Delaware | | Alabama | | Birmingham |
| | East RegionNorthern Delaware | | | | Southeast RegionHuntsville |
DelawareGeorgia | | Central DelawareSavannah | | Alabama | | BirminghamMobile/Baldwin County |
| Maryland | | Northern DelawareBaltimore | | | | HuntsvilleMontgomery |
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 | | HawaiiMaui |
| | Dallas | | | | MauiOahu |
| | Fort Worth | | Nevada | | OahuLas Vegas |
| | Houston | | Nevada | | Las VegasReno |
| | Killeen/Temple/Waco | | Oregon | | RenoBend |
| | Midland/Odessa | | Oregon | | BendPortland/Salem |
| | New Braunfels/San Marcos | | Utah | | Portland/Salem |
| | San Antonio | | Utah | | Salt Lake City |
| | San Antonio | | Washington | | Seattle/Tacoma/Everett/Olympia |
| | Southwest Region | | | | Spokane |
Arizona | | PhoenixSouthwest Region | | | | Vancouver |
| Arizona | | TucsonPhoenix | | | | |
| | Tucson | | | | |
| New Mexico | | Albuquerque | | | | |
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 March 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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)December 31, 2019Net sales orders represent the number and dollar value of new sales contracts executed with customers (gross sales orders), net of cancelled sales orders.
(2) and Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.
2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Net Sales Orders (1) |
|
| Three Months Ended December 31, |
| |
| Net Homes Sold |
| Value (In millions) |
| Average Selling Price |
| |
| 2019 |
| 2018 |
| %
Change |
| 2019 |
| 2018 |
| %
Change |
| 2019 |
| 2018 |
| %
Change |
| East | | 1,841 | | 1,570 | | 17 | % | | $ | 546.8 |
| | $ | 444.9 |
| | 23 | % | | $ | 297,000 |
| | $ | 283,400 |
| | 5 | % |
| Midwest | | 714 | | 532 | | 34 | % | | 255.4 |
| | 196.9 |
| | 30 | % | | 357,700 |
| | 370,100 |
| | (3 | )% |
| Southeast | | 4,374 | | 3,616 | | 21 | % | | 1,191.8 |
| | 963.3 |
| | 24 | % | | 272,500 |
| | 266,400 |
| | 2 | % |
| South Central | | 3,775 | | 3,395 | | 11 | % | | 964.2 |
| | 855.8 |
| | 13 | % | | 255,400 |
| | 252,100 |
| | 1 | % |
| Southwest | | 667 | | 530 | | 26 | % | | 199.7 |
| | 134.9 |
| | 48 | % | | 299,400 |
| | 254,500 |
| | 18 | % |
| West | | 1,755 | | 1,399 | | 25 | % | | 791.9 |
| | 629.4 |
| | 26 | % | | 451,200 |
| | 449,900 |
| | — | % |
| | | 13,126 | | 11,042 | | 19 | % | | $ | 3,949.8 |
| | $ | 3,225.2 |
| | 22 | % | | $ | 300,900 |
| | $ | 292,100 |
| | 3 | % |
|
| | | | | | | | | | | | | | | | | | |
| | | Sales Order Cancellations |
| | | Three Months Ended December 31, |
| | | Cancelled Sales Orders | | Value (In millions) | | Cancellation Rate (2) |
| | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| East | | 430 | | 499 | | $ | 123.1 |
| | $ | 140.0 |
| | 19 | % | | 24 | % |
| Midwest | | 161 | | 107 | | 51.2 |
| | 38.0 |
| | 18 | % | | 17 | % |
| Southeast | | 1,171 | | 1,219 | | 320.7 |
| | 326.7 |
| | 21 | % | | 25 | % |
| South Central | | 994 | | 1,056 | | 254.4 |
| | 263.7 |
| | 21 | % | | 24 | % |
| Southwest | | 160 | | 286 | | 44.6 |
| | 71.1 |
| | 19 | % | | 35 | % |
| West | | 291 | | 319 | | 129.9 |
| | 147.4 |
| | 14 | % | | 19 | % |
| | | 3,207 | | 3,486 | | $ | 923.9 |
| | $ | 986.9 |
| | 20 | % | | 24 | % |
| |
(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. |
Net Sales Orders
The number of net sales orders increased 20% and 19% in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period,periods, with increases in all of our regions. The value of net sales orders increased 22% to $3.9$6.0 billion (13,126(20,087 homes) and to $10.0 billion (33,213 homes) for the three and six months ended DecemberMarch 31, 20192020, respectively, compared to $3.2$4.9 billion (11,042(16,805 homes) and $8.2 billion (27,847 homes) in the prior year period.periods. The average selling price of net sales orders during the three and six months ended DecemberMarch 31, 20192020 was $300,900,$299,700 and $300,200, respectively, up 3%2% from theboth prior year period.periods.
The markets contributing most to the increases in sales volumes in our regions were as follows: the Carolina markets in the East; the Denver, Iowa Minnesota and IndianaMinnesota markets in the Midwest; the Florida markets in the Southeast; Fort Worththe Houston and HoustonDallas markets in the South Central; the Phoenix market in the Southwest; and Portland and Seattlethe California markets in the West.
Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 20%19% in both the three and six months ended DecemberMarch 31, 20192020 compared to 24%19% and 21% in the prior year period.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 the U.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 business iswe are well positioned to operate in this uncertain environment and will continue to generate increasedadjust product offerings, incentives, home pricing, sales volume; however,pace and inventory levels to optimize the return on our future sales volumes will depend on new home demandinventory investments in each of our operating markets and our ability to successfully implement our operating strategies.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 |
| | | As of December 31, |
| | | Homes in Backlog | | Value (In millions) | | Average Selling Price |
| | | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change |
| East | | 1,959 | | 1,915 | | 2 | % | | $ | 602.5 |
| | $ | 569.0 |
| | 6 | % | | $ | 307,600 |
| | $ | 297,100 |
| | 4 | % |
| Midwest | | 964 | | 893 | | 8 | % | | 337.8 |
| | 302.9 |
| | 12 | % | | 350,400 |
| | 339,200 |
| | 3 | % |
| Southeast | | 4,420 | | 4,054 | | 9 | % | | 1,262.0 |
| | 1,122.1 |
| | 12 | % | | 285,500 |
| | 276,800 |
| | 3 | % |
| South Central | | 4,161 | | 4,409 | | (6 | )% | | 1,090.2 |
| | 1,135.2 |
| | (4 | )% | | 262,000 |
| | 257,500 |
| | 2 | % |
| Southwest | | 819 | | 897 | | (9 | )% | | 245.4 |
| | 242.9 |
| | 1 | % | | 299,600 |
| | 270,800 |
| | 11 | % |
| West | | 1,457 | | 1,397 | | 4 | % | | 688.7 |
| | 664.2 |
| | 4 | % | | 472,700 |
| | 475,400 |
| | (1 | )% |
| | | 13,780 | | 13,565 | | 2 | % | | $ | 4,226.6 |
| | $ | 4,036.3 |
| | 5 | % | | $ | 306,700 |
| | $ | 297,600 |
| | 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.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Homes Closed and Home Sales Revenue |
| | | Three Months Ended December 31, |
| | | Homes Closed | | Value (In millions) | | Average Selling Price |
| | | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change |
| East | | 1,798 | | 1,558 | | 15 | % | | $ | 520.4 |
| | $ | 445.9 |
| | 17 | % | | $ | 289,400 |
| | $ | 286,200 |
| | 1 | % |
| Midwest | | 813 | | 671 | | 21 | % | | 282.2 |
| | 244.7 |
| | 15 | % | | 347,100 |
| | 364,700 |
| | (5 | )% |
| Southeast | | 4,231 | | 3,783 | | 12 | % | | 1,149.3 |
| | 1,013.4 |
| | 13 | % | | 271,600 |
| | 267,900 |
| | 1 | % |
| South Central | | 3,780 | | 3,478 | | 9 | % | | 958.0 |
| | 872.4 |
| | 10 | % | | 253,400 |
| | 250,800 |
| | 1 | % |
| Southwest | | 663 | | 561 | | 18 | % | | 196.0 |
| | 143.6 |
| | 36 | % | | 295,600 |
| | 256,000 |
| | 15 | % |
| West | | 1,674 | | 1,449 | | 16 | % | | 757.4 |
| | 690.6 |
| | 10 | % | | 452,400 |
| | 476,600 |
| | (5 | )% |
| | | 12,959 | | 11,500 | | 13 | % | | $ | 3,863.3 |
| | $ | 3,410.6 |
| | 13 | % | | $ | 298,100 |
| | $ | 296,600 |
| | 1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 13%10% to $3.9$4.4 billion (12,959(14,539 homes closed) for the three months ended DecemberMarch 31, 20192020 from $3.4$4.0 billion (11,500(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 those homes in our Southwest region.
The number of homes closed increased 13%8% and 10% in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period.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 and Iowa markets in the Midwest; the Florida markets in the Southeast; the Houston market in the South Central; the PhoenixTucson market in the Southwest; and Californiathe Portland and Washington markets in the West.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Homebuilding Operating Margin Analysis | | | | | | | | |
| | | Percentages of Related Revenues | | | | | | |
| | | Three Months Ended
March 31, | | | | Six Months Ended
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 | % |
|
| | | | | | |
| Homebuilding Operating Margin Analysis |
| | | Percentages of Related Revenues |
| | | Three Months Ended
December 31, |
| | | 2019 | | 2018 |
| Gross profit – home sales | | 21.0 | % | | 20.0 | % |
| Gross profit – land/lot sales and other | | 32.5 | % | | 23.9 | % |
| Inventory and land option charges | | (0.1 | )% | | (0.2 | )% |
| Gross profit – total homebuilding | | 21.0 | % | | 19.8 | % |
| Selling, general and administrative expense | | 9.2 | % | | 9.5 | % |
| Gain on sale of assets | | — | % | | (0.1 | )% |
| Other (income) expense | | (0.1 | )% | | (0.1 | )% |
| Homebuilding pre-tax income | | 11.9 | % | | 10.4 | % |
Home Sales Gross Profit
Gross profit from home sales increased to $811.7$927.8 million in the three months ended DecemberMarch 31, 20192020 from $681.4$766.3 million in the prior year period and increased 100200 basis points to 21.0%21.3% as a percentage of home sales revenues. The percentage increase resulted from improvements of 90180 basis points due to a decrease in the average cost of our homes closed while the average selling price increased slightly, 2010 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 2010 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
LandLand/lot sales and other revenues from our homebuilding operations were $19.7$15.5 million and $6.7$35.2 million in the three and six months ended DecemberMarch 31, 20192020, respectively, and 2018, respectively.$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 of DecemberMarch 31, 2019,2020, our homebuilding operations had $22.9$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. At DecemberMarch 31, 2019,2020, we performed detailed impairment evaluations of communities and land inventories with a combined carrying value of $34.2$47.6 million and determined that no communities or land inventories were impaired. Accordingly, norecorded impairment charges were recordedof $1.7 million during the three months ended DecemberMarch 31, 2019 compared2020 to $4.2reduce the carrying value of impaired land to fair value. During the six months ended March 31, 2020, impairment charges totaled $1.7 million. There were $7.7 million and $11.9 million of impairment charges recorded in the prior year period.three and six months ended March 31, 2019, respectively.
As we manage our inventory investments across our operating markets to optimize returns and cash flows, we may modify our pricing and incentives, construction and development plans or land sale strategies in individual active communities and land held for development, which could result in the affected communities being evaluated for potential impairment. Also, ifThere is uncertainty regarding the extent to which and how long COVID-19 will disrupt our operations. If the housing market or economic conditions weaken in specific markets in which we operate,are adversely affected for a prolonged period due to COVID-19 or if conditions weaken in the broader economy or homebuilding industry,otherwise, we may be required to evaluate additional communities for potential impairment. These evaluations could result in additional impairment charges.charges which could be significant.
During the three and six months ended DecemberMarch 31, 2019 and 2018,2020, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $3.5$7.1 million and $3.8$10.7 million, respectively.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 10%1% to $358.4$361.8 million and 5% to $720.2 million in the three and six months ended DecemberMarch 31, 20192020, respectively, from $324.7$359.3 million and $683.9 million in the prior year period.periods. SG&A expense as a percentage of homebuilding revenues was 9.2%8.3% and 8.7% in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to 9.5%9.0% and 9.2% in the prior year period.periods.
Employee compensation and related costs represented 73% and 70% of SG&A costs in both the three and six months ended DecemberMarch 31, 20192020 compared to 73% and 2018, respectively.72% in the prior year periods. These costs increased 16%1% to $262.0$265.7 million and 8% to $527.7 million in the three and six months ended DecemberMarch 31, 2019 due to an increase in the amount of incentive compensation as compared to the prior year period.2020, respectively. Our homebuilding operations employed 6,8116,987 and 6,8496,904 employees at DecemberMarch 31, 20192020 and 2018,2019, 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 10%25% to $24.3$22.9 million and 18% to $47.2 million in the three and six months ended DecemberMarch 31, 20192020, respectively, from $27.1$30.5 million and $57.6 million in the prior year period.periods. The decrease wasdecreases were due to a 5% decreasedecreases of 17% and 11%, respectively, in our average homebuilding debt and a lower average interest raterates on our homebuilding debt during the period.periods. Interest charged to cost of sales was 0.8% and 0.9% of total cost of sales (excluding inventory and land option charges) in both the three and six months ended DecemberMarch 31, 2019 and 2018, respectively.2020 compared to 0.9% in both prior year periods.
Other Income
Other income, net of other expenses, included in our homebuilding operations was $5.4$4.1 million and $9.6 million in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to $2.0$1.6 million and $3.5 million in the prior year period.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.
Homebuilding Results by Reporting Region
| | | | | | Three Months Ended March 31, | |
| | | | | 2020 | | | 2019 | |
| | | | | Homebuilding
Revenues | | Homebuilding
Pre-tax
Income (1) | | % of
Revenues | | Homebuilding
Revenues | | Homebuilding
Pre-tax
Income (1) | | % of
Revenues |
| | | | | (In millions) | |
| East | | East | | $ | 579.7 | | | $ | 73.3 | | | 12.6 | % | | $ | 518.2 | | | $ | 45.9 | | | 8.9 | % |
| Midwest | | Midwest | | 308.7 | | | 23.6 | | | 7.6 | % | | 248.1 | | | 9.5 | | | 3.8 | % |
| Southeast | | Southeast | | 1,316.7 | | | 187.8 | | | 14.3 | % | | 1,205.3 | | | 131.0 | | | 10.9 | % |
| South Central | | South Central | | 1,066.4 | | | 156.2 | | | 14.6 | % | | 990.2 | | | 119.3 | | | 12.0 | % |
| Southwest | | Southwest | | 199.7 | | | 30.8 | | | 15.4 | % | | 173.2 | | | 18.6 | | | 10.7 | % |
| West | | 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 | % |
| | | | Three Months Ended December 31, | | | Six Months Ended March 31, | |
| | | 2019 | | 2018 | | | 2020 | | | 2019 | |
| | | Homebuilding Revenues | | Homebuilding Pre-tax Income (1) | | % of Revenues | | Homebuilding Revenues | | Homebuilding Pre-tax Income (1) | | % of Revenues | | | Homebuilding
Revenues | | Homebuilding
Pre-tax
Income (1) | | % of
Revenues | | Homebuilding
Revenues | | Homebuilding
Pre-tax
Income (1) | | % of
Revenues |
| | | (In millions) | | | (In millions) | |
| East | | $ | 520.5 |
| | $ | 59.9 |
| | 11.5 | % | | $ | 447.5 |
| | $ | 38.0 |
| | 8.5 | % | East | | $ | 1,100.2 | | | $ | 133.2 | | | 12.1 | % | | $ | 965.7 | | | $ | 83.9 | | | 8.7 | % |
| Midwest | | 282.6 |
| | 18.6 |
| | 6.6 | % | | 249.0 |
| | 10.6 |
| | 4.3 | % | Midwest | | 591.3 | | | 42.3 | | | 7.2 | % | | 497.2 | | | 20.2 | | | 4.1 | % |
| Southeast | | 1,150.6 |
| | 146.3 |
| | 12.7 | % | | 1,013.9 |
| | 112.3 |
| | 11.1 | % | Southeast | | 2,467.3 | | | 333.9 | | | 13.5 | % | | 2,219.2 | | | 243.2 | | | 11.0 | % |
| South Central | | 958.7 |
| | 132.6 |
| | 13.8 | % | | 872.5 |
| | 106.0 |
| | 12.1 | % | South Central | | 2,025.1 | | | 288.9 | | | 14.3 | % | | 1,862.7 | | | 225.3 | | | 12.1 | % |
| Southwest | | 211.0 |
| | 34.5 |
| | 16.4 | % | | 143.6 |
| | 17.6 |
| | 12.3 | % | Southwest | | 410.7 | | | 65.3 | | | 15.9 | % | | 316.9 | | | 36.3 | | | 11.5 | % |
| West | | 759.6 |
| | 69.7 |
| | 9.2 | % | | 690.8 |
| | 69.8 |
| | 10.1 | % | West | | 1,667.2 | | | 163.5 | | | 9.8 | % | | 1,551.2 | | | 145.9 | | | 9.4 | % |
| | | $ | 3,883.0 |
| | $ | 461.6 |
| | 11.9 | % | | $ | 3,417.3 |
| | $ | 354.3 |
| | 10.4 | % | | $ | 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 16%12% and 14% in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period,periods, primarily due to an increaseincreases in the number of homes closed in our New Jersey and Carolina markets. The region generated pre-tax income of $59.9$73.3 million and $133.2 million in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to $38.0$45.9 million and $83.9 million in the prior year period.periods. Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased by 280270 basis points in both the three and six months ended DecemberMarch 31, 20192020 compared to the prior year period,periods, due to an increasedecreases in the average selling pricecost of homes closed while the average costselling price of those homes decreasedincreased slightly. As a percentage of homebuilding revenues, SG&A expenses increaseddecreased by 1090 and 50 basis points in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period.periods, primarily due to the increase in homebuilding revenues.
Midwest Region — Homebuilding revenues increased 13%24% and 19% in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period,periods, primarily due to an increase in the number of homes closed fromin our Indiana and Denver markets. The region generated pre-tax income of $23.6 million and $42.3 million in the three and six months ended March 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 ended March 31, 2020, respectively, compared to the prior year periods, largely due to decreases in purchase accounting adjustments related to the fiscal 2019 acquisitions of Westport Homes and Classic Builders. The region generated pre-tax income of $18.6 million in the three months ended December 31, 2019 compared to $10.6 million in the prior year period. Home sales gross profit percentage increased by 330 basis points in the three months ended December 31, 2019 compared to the prior year period, largely due to a decrease in purchase accounting adjustments related to the two acquisitions. As a percentage of homebuilding revenues, SG&A expenses increaseddecreased by 160140 basis points in the three months ended December 31, 2019,month period, primarily due to increasesthe increase in homebuilding revenues, and it increased by 10 basis points in the six month period, primarily due to increased employee compensation.compensation in the first quarter of fiscal 2020.
Southeast Region — Homebuilding revenues increased 13%9% and 11% in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period,periods, primarily due to increases in the number of homes closed in our Florida markets. The region generated pre-tax income of $146.3$187.8 million and $333.9 million in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to $112.3$131.0 million and $243.2 million in the prior year period.periods. Home sales gross profit percentage increased by 140290 and 220 basis points in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period,periods, primarily due to an increaseincreases 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 ended DecemberMarch 31, 20192020, respectively, compared to the prior year period.periods, primarily due to the increase in homebuilding revenues.
South Central Region — Homebuilding revenues increased 10%8% and 9% in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period,periods, primarily due to an increaseincreases in the number of homes closed in our Houston market. The region generated pre-tax income of $132.6$156.2 million and $288.9 million in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to $106.0$119.3 million and $225.3 million in the prior year period.periods. Home sales gross profit percentage increased by 160240 and 200 basis points in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period,periods, primarily due to an increaseincreases 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 1070 and 40 basis points in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period.periods, primarily due to the increase in homebuilding revenues.
Southwest Region — Homebuilding revenues increased 47%15% and 30% in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period,periods, primarily due to an increaseincreases in the average selling price of homes closed in all markets and an increase in the number of homes closed in our PhoenixTucson market. The region generated pre-tax income of $34.5$30.8 million and $65.3 million in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to $17.6$18.6 million and $36.3 million in the prior year period.periods. Home sales gross profit percentage increased by 160350 and 270 basis points in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period,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 220110 and 160 basis points in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period,periods, primarily due to the significant increase in homebuilding revenues.
West Region — Homebuilding revenues increased 10%5% and 7% in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period,periods, due to an increaseincreases 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 $69.7$93.8 million and $163.5 million in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to $69.8$76.1 million and $145.9 million in the prior year period.periods. Home sales gross profit percentage decreased by 24050 and 130 basis points in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period,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 8090 basis points in both the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period,periods, primarily due to anthe increase in homebuilding revenues.
HOMEBUILDING INVENTORIES, LAND AND LOT POSITION AND HOMES IN INVENTORY
We routinely enter into contracts to purchase land or developed residential lots at predetermined prices on a defined schedule commensurate with planned development or anticipated new home demand. At the time of purchase, the undeveloped land is generally vested with the rights to begin development or construction work, and we plan and coordinate the development of our land into residential lots for use in our homebuilding business. We manage our inventory of owned land and lots and homes under construction relative to demand in each of our markets, including starting construction on unsold homes to capture new home demand and actively controlling the number of unsold, completed homes in inventory.
Our homebuilding segment’s inventories at DecemberMarch 31, 20192020 and September 30, 2019 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2020 | | | | | | | | |
| Construction in Progress and
Finished Homes | | Residential Land/Lots
Developed and Under
Development | | Land Held
for Development | | Land Held
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 December 31, 2019 |
| Construction in Progress and Finished Homes | | Residential Land/Lots Developed and Under Development | | Land Held for Development | | Land Held for Sale | | Total Inventory |
| (In millions) |
| East | $ | 726.3 |
| | $ | 568.4 |
| | $ | 10.7 |
| | $ | — |
| | $ | 1,305.4 |
|
| Midwest | 500.3 |
| | 416.9 |
| | 1.8 |
| | — |
| | 919.0 |
|
| Southeast | 1,540.0 |
| | 1,341.4 |
| | 32.0 |
| | 2.0 |
| | 2,915.4 |
|
| South Central | 1,322.4 |
| | 1,371.5 |
| | 0.3 |
| | 9.6 |
| | 2,703.8 |
|
| Southwest | 222.4 |
| | 385.9 |
| | 1.6 |
| | 2.2 |
| | 612.1 |
|
| West | 1,170.7 |
| | 996.7 |
| | 19.4 |
| | 8.8 |
| | 2,195.6 |
|
| Corporate and unallocated (1) | 121.2 |
| | 111.9 |
| | 0.9 |
| | 0.3 |
| | 234.3 |
|
| | $ | 5,603.3 |
| | $ | 5,192.7 |
| | $ | 66.7 |
| | $ | 22.9 |
| | $ | 10,885.6 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2019 | | | | | | | | |
| Construction in Progress and
Finished Homes | | Residential Land/Lots
Developed and Under
Development | | Land Held
for Development | | Land Held
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. |
Our homebuilding segment’s land and lot position and homes in inventory at DecemberMarch 31, 20192020 and September 30, 2019 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2020 | | | | | | |
| | Land/Lots
Owned (1) | | Lots Controlled
Under
Land and Lot
Purchase
Contracts (2)(3) | | Total
Land/Lots
Owned and
Controlled | | Homes
in
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 December 31, 2019 |
| | Land/Lots Owned (1) | | Lots Controlled Under Land and Lot Purchase Contracts (2)(3) | | Total Land/Lots Owned and Controlled | | Homes in Inventory (4) |
| East | 10,200 |
| | 34,300 |
| | 44,500 |
| | 4,200 |
| Midwest | 8,600 |
| | 11,500 |
| | 20,100 |
| | 2,300 |
| Southeast | 34,100 |
| | 76,300 |
| | 110,400 |
| | 9,300 |
| South Central | 44,200 |
| | 53,600 |
| | 97,800 |
| | 9,000 |
| Southwest | 7,500 |
| | 5,600 |
| | 13,100 |
| | 1,400 |
| West | 18,800 |
| | 14,300 |
| | 33,100 |
| | 4,000 |
| | 123,400 |
| | 195,600 |
| | 319,000 |
| | 30,200 |
| | 39 | % | | 61 | % | | 100 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2019 | | | | | | |
| Land/Lots
Owned (1) | | Lots Controlled
Under
Land and Lot
Purchase
Contracts (2)(3) | | Total
Land/Lots
Owned and
Controlled | | Homes
in
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 40,500 and 36,100 owned lots that are fully developed and ready for home construction at December 31, 2019 and September 30, 2019, respectively. Land/lots owned also include land held for development representing 1,800 and 1,700 lots at December 31, 2019 and September 30, 2019, respectively. |
| |
(2) | The total remaining purchase price of lots controlled through land and lot purchase contracts at December 31, 2019 and September 30, 2019 was $7.6 billion and $7.2 billion, respectively, secured by earnest money deposits of $538.5 million and $515.4 million, respectively. The total remaining purchase price of lots controlled through land and lot purchase contracts at December 31, 2019 and September 30, 2019 included $918.6 million and $953.8 million, respectively, related to lot purchase contracts with Forestar, secured by $88.8 million and $88.7 million, respectively, of earnest money. |
| |
(3) | Lots controlled at December 31, 2019 include approximately 25,600 lots owned or controlled by Forestar, 12,700 of which our homebuilding divisions have under contract to purchase and 12,900 of which our homebuilding divisions have a right of first offer to purchase. Of these, approximately 10,100 lots were in our Southeast region, 4,800 lots were in our West region, 4,100 lots were in our South Central region, 2,700 lots were in our East region, 2,400 lots were in our Southwest 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 18,400 and 16,000 of our homes in inventory were unsold at December 31, 2019 and September 30, 2019, respectively. At December 31, 2019, approximately 5,600 of our unsold homes were completed, of which approximately 1,000 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 December 31, 2019 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.
RESULTS OF OPERATIONS – FORESTAR
In October 2017, we acquired 75% of the outstanding shares of Forestar, and as of DecemberMarch 31, 20192020 we owned approximately 65% of its outstanding shares. Forestar is a publicly traded residential lot development company with operations in 5150 markets across 2021 states as of DecemberMarch 31, 2019.2020. 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 DecemberMarch 31, 20192020 and 20182019 were as follows. | | | | Three Months Ended
December 31, | | Three Months Ended
March 31, | | | Six Months Ended
March 31, | |
| | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (In millions) | | (In millions) | |
| Residential land and lot sales | $ | 247.1 |
| | $ | 34.7 |
| Residential land and lot sales | $ | 156.4 | | | $ | 49.4 | | | $ | 403.5 | | | $ | 84.0 | |
| Commercial tract sales | — |
| | 3.5 |
| Commercial tract sales | 2.5 | | | 15.0 | | | 2.5 | | | 18.5 | |
| Other | 0.1 |
| | 0.3 |
| Other | 0.2 | | | 1.0 | | | 0.4 | | | 1.3 | |
| Total revenues | $ | 247.2 |
| | $ | 38.5 |
| Total revenues | $ | 159.1 | | | $ | 65.4 | | | $ | 406.4 | | | $ | 103.8 | |
| Cost of sales | 216.6 |
| | 30.7 |
| Cost of sales | 136.6 | | | 43.7 | | | 353.2 | | | 74.3 | |
| Selling, general and administrative expense | 10.5 |
| | 5.7 |
| Selling, general and administrative expense | 11.2 | | | 6.2 | | | 21.7 | | | 11.9 | |
| Loss (gain) on sale of assets | 0.1 |
| | (0.9 | ) | |
| Gain on sale of assets | | Gain on sale of assets | (0.3) | | | — | | | (0.1) | | | (0.9) | |
| Other (income) expense | (2.2 | ) | | (1.9 | ) | Other (income) expense | (2.1) | | | (0.9) | | | (4.2) | | | (2.8) | |
| Income before income taxes | $ | 22.2 |
| | $ | 4.9 |
| Income before income taxes | $ | 13.7 | | | $ | 16.4 | | | $ | 35.8 | | | $ | 21.3 | |
At DecemberMarch 31, 2019,2020, Forestar owned directly or controlled through land and lot purchase contracts approximately 44,50052,300 residential lots, of which approximately 4,1004,400 are fully developed. Approximately 25,60028,600 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 DecemberMarch 31, 20192020 and 2018,2019, 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
March 31, | | | | Six Months Ended
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 | | | $ | — | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | |
| | Three Months Ended
December 31, |
| | 2019 | | 2018 |
| | ($ in millions) |
| Total residential single-family lots sold | 2,422 |
| | 518 |
|
| Residential single-family lots sold to D.R. Horton | 2,390 |
| | 455 |
|
| Residential lot sales revenues from sales to D.R. Horton | $ | 214.0 |
| | $ | 29.0 |
|
| 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 DecemberMarch 31, 2019 and 20182020 includes charges of $1.3 million and $0.5$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.
RESULTS OF OPERATIONS – FINANCIAL SERVICES
The following tables and related discussion set forth key operating and financial data for our financial services operations, comprising DHI Mortgage and our subsidiary title companies, for the three and six months ended DecemberMarch 31, 20192020 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 by DHI 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 of D.R. Horton homes financed by DHI Mortgage | | 67 | % | | 56 | % | | | | 66 | % | | 55 | % | | |
| Number of total loans originated or brokered by DHI 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 by DHI Mortgage to third parties | | 8,774 | | | 6,949 | | | 26 | % | | 17,519 | | | 13,996 | | | 25 | % |
2018.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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) | % |
|
| | | | | | | | | |
| | | Three Months Ended December 31, |
| | | 2019 | | 2018 | | % Change |
| Number of first-lien loans originated or brokered by DHI Mortgage for D.R. Horton homebuyers | | 8,401 |
| | 6,244 |
| | 35 | % |
| Number of homes closed by D.R. Horton | | 12,959 |
| | 11,500 |
| | 13 | % |
| Percentage of D.R. Horton homes financed by DHI Mortgage | | 65 | % | | 54 | % | | |
| Number of total loans originated or brokered by DHI Mortgage for D.R. Horton homebuyers | | 8,442 |
| | 6,261 |
| | 35 | % |
| Total number of loans originated or brokered by DHI Mortgage | | 8,723 |
| | 6,398 |
| | 36 | % |
| Captive business percentage | | 97 | % | | 98 | % | | |
| Loans sold by DHI Mortgage to third parties | | 8,745 |
| | 7,047 |
| | 24 | % |
|
| | | | | | | | | | | |
| | | Three Months Ended December 31, |
| | | 2019 | | 2018 | | % Change |
| | | (In millions) |
| Loan origination fees | | $ | 0.9 |
| | $ | 3.2 |
| | (72 | )% |
| Sale of servicing rights and gains from sale of mortgage loans | | 73.6 |
| | 59.9 |
| | 23 | % |
| Other revenues | | 6.6 |
| | 4.5 |
| | 47 | % |
| Total mortgage operations revenues | | 81.1 |
| | 67.6 |
| | 20 | % |
| Title policy premiums | | 21.8 |
| | 17.7 |
| | 23 | % |
| Total revenues | | 102.9 |
| | 85.3 |
| | 21 | % |
| General and administrative expense | | 77.9 |
| | 65.6 |
| | 19 | % |
| Other (income) expense | | (5.5 | ) | | (3.9 | ) | | 41 | % |
| Financial services pre-tax income | | $ | 30.5 |
| | $ | 23.6 |
| | 29 | % |
Financial Services Operating Margin Analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Percentages of
Financial Services Revenues | | | | | | |
| | | Three Months Ended
March 31, | | | | Six Months Ended
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 | % |
|
| | | | | | |
| | | Percentages of Financial Services Revenues |
| | | Three Months Ended
December 31, |
| | | 2019 | | 2018 |
| General and administrative expense | | 75.7 | % | | 76.9 | % |
| Other (income) expense | | (5.3 | )% | | (4.6 | )% |
| Financial services pre-tax income | | 29.6 | % | | 27.7 | % |
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 ended DecemberMarch 31, 2019,2020, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 35% from the prior year period, primarily30% and 32%, respectively, due to the 13% increaseincreases in the number of homes closed by our homebuilding operations of 8% and an increase10% and increases in the percentage of homes closed for which DHI Mortgage handled the homebuyers’ financing from 54%financing. These percentages were 67% and 66% in the three and six months ended March 31, 2020, respectively, compared to 56% and 55% in the prior year period to 65% in the current period. The increaseperiods. Increases in the portion of home closings financed by DHI Mortgage waswere primarily due to the Company’s program to offer below market interest rates to D.R. Horton homebuyers, expanded coverage in certain markets and increased efficiencies resulting from technology advances.
Homes closed by our homebuilding operations constituted 97%98% and 98%97% of DHI Mortgage loan originations in the three and six months ended DecemberMarch 31, 2019 and 2018, respectively.2020, respectively, compared to 98% in both prior year periods. These percentages reflect DHI Mortgage’s consistent focus on the captive business provided by our homebuilding operations.
The number of loans sold increased 24%26% and 25% in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to the prior year period.periods. Virtually all of the mortgage loans held for sale on DecemberMarch 31, 20192020 were eligible for sale to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National Mortgage Association (Ginnie Mae). Approximately 86%90% of the mortgage loans sold by DHI Mortgage during the threesix months ended DecemberMarch 31, 20192020 were sold to four major financial entities, of which one entity purchased 31%33%. Due to the disruption in the secondary mortgage markets beginning in late March 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 or Ginnie 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 20%8% to $81.1$162.0 million in the three and six months ended DecemberMarch 31, 20192020, respectively, from $67.6$81.8 million and $149.4 million in the prior year period,periods, while the number of loan originations increased 36%31% and 33% over thatthose same period.periods. Revenues increased at a lower rate than origination volume due to lower pricing and resulting net gains on loan originations due to competitive pressuresdisruption in the secondary mortgage market.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 ended March 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 19%20% to $77.9$85.9 million and $163.8 million in the three and six months ended DecemberMarch 31, 20192020, respectively, from $65.6$71.3 million and $137.0 million in the prior year period.periods. The increase wasincreases were primarily due to an increaseincreases in employee related costs.costs to support a higher volume of transactions. Our financial services operations employed 1,8821,934 and 1,9251,923 employees at DecemberMarch 31, 20192020 and 2018,2019, respectively.
As a percentage of financial services revenues, G&A expense was 75.7%82.2% and 79.0% in the three and six months ended DecemberMarch 31, 20192020, respectively, compared to 76.9%70.2% and 73.3% in the prior year period.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.
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 fourthree 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 ended DecemberMarch 31, 20192020 was $523.3$621.3 million and $1.1 billion, respectively, compared to $375.7$462.8 million and $838.5 million in the prior year period.periods. The increase wasincreases were primarily due to an increaseincreases 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 ended DecemberMarch 31, 2019 and 20182020 was $90.8$137.3 million and $89.0$228.1 million, respectively.respectively, compared to $108.4 million and $197.4 million in the prior year periods. Our effective tax rate was 17.4%22.1% and 19.9% for the three and six months ended DecemberMarch 31, 20192020, respectively, compared to 23.7%23.4% and 23.5% in the prior year period.periods. The effective tax rate for the three and six months ended DecemberMarch 31, 20192020 includes a tax benefit of $32.9$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 on December 31, 2017 to homes closed from January 1, 2018 to December 31, 2020. The effective tax rates for bothall periods include an expense for state income taxes, reduced by tax benefits related to stock-based compensation.
Our deferred tax assets, net of deferred tax liabilities, were $172.4$167.3 million at DecemberMarch 31, 20192020 compared to $181.8 million at September 30, 2019. We have a valuation allowance of $18.3$17.8 million at DecemberMarch 31, 20192020 and $18.7 million at September 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.
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 conditions by increasingacross the United States. Currently, we are cautiously managing our investments in homes finished lots,under construction and limiting land acquisition and land development to expandactivities as a result of the COVID-19 pandemic and its potential impact on our operations and grow our revenues and profitability, as well as to consider opportunistic strategic investments as they arise.business.
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 the Securities and Exchange Commission (SEC) in August 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 the SEC in September 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, including the maturity of $500 million principal amount of homebuilding senior notes in February 2020 and $118.9 million principal amount of Forestar’s convertible senior notes in March 2020.obligations.
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.
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. At December 31, 2019, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit 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.
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 the growth of our homebuilding and Forestar operations may be funded with the issuance of senior unsecured debt securities or equity securities through the capital markets.
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.
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 at DecemberMarch 31, 2019,2020, there were a limited number of contracts, representing $57.3$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, $12.3$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.
As disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2019, our most critical accounting policies relate to revenue recognition, inventories and cost of sales, warranty claims and legal claims and insurance. Since September 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 ended September 30, 2019, our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims. At DecemberMarch 31, 20192020 and September 30, 2019, we had reserves for approximately 195220 and 180 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During the threesix months ended DecemberMarch 31, 2019,2020, we established reserves for approximately 3585 new construction defect claims and resolved 2045 construction defect claims for a total cost of $14.9$18.3 million. At both DecemberMarch 31, 20182019 and September 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 threesix months ended DecemberMarch 31, 2018,2019, we established reserves for approximately 3050 new construction defect claims and resolved 3045 construction defect claims for a total cost of $3.4$5.4 million.
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, landlot 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.
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:
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.