Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
2021 September 30,
2020
(In millions)
(Unaudited)
ASSETS
Cash and cash equivalents $ 2,205.2 $ 3,018.5
Restricted cash 26.7 21.6
Total cash, cash equivalents and restricted cash 2,231.9 3,040.1
Inventories:
Construction in progress and finished homes 7,300.1 5,984.1
Residential land and lots — developed and under development 7,066.1 6,171.8
Land held for development 86.0 53.2
Land held for sale 24.1 28.3
Total inventory 14,476.3 12,237.4
Mortgage loans held for sale 1,755.8 1,529.0
Deferred income taxes, net of valuation allowance of $ 7.4 million and $ 7.5 million
at March 31, 2021 and September 30, 2020, respectively
142.8 144.9
Property and equipment, net 895.0 683.7
Other assets 1,418.5 1,113.7
Goodwill 163.5 163.5
Total assets $ 21,083.8 $ 18,912.3
LIABILITIES
Accounts payable $ 1,137.4 $ 900.5
Accrued expenses and other liabilities 2,198.1 1,607.0
Notes payable 4,472.3 4,283.3
Total liabilities 7,807.8 6,790.8
Commitments and contingencies (Note L)
EQUITY
Preferred stock, $ .10 par value, 30,000,000 shares authorized, no shares issued
— —
Common stock, $ .01 par value, 1,000,000,000 shares authorized, 396,696,502 shares issued
and 360,479,511 shares outstanding at March 31, 2021 and 394,741,349 shares issued
and 363,999,982 shares outstanding at September 30, 2020
4.0 3.9
Additional paid-in capital 3,208.4 3,240.9
Retained earnings 11,333.5 9,757.8
Treasury stock, 36,216,991 shares and 30,741,367 shares at March 31, 2021
and September 30, 2020, respectively, at cost
( 1,582.8 ) ( 1,162.6 )
Stockholders’ equity 12,963.1 11,840.0
Noncontrolling interests 312.9 281.5
Total equity 13,276.0 12,121.5
Total liabilities and equity $ 21,083.8 $ 18,912.3
See accompanying notes to consolidated financial statements.
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D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31, Six Months Ended
March 31,
2021 2020 2021 2020
(In millions, except per share data)
(Unaudited)
Revenues $ 6,446.9 $ 4,500.0 $ 12,380.3 $ 8,520.7
Cost of sales 4,650.9 3,450.8 8,983.5 6,535.0
Selling, general and administrative expense 621.5 466.8 1,207.4 922.6
Gain on sale of assets — ( 28.5 ) ( 14.0 ) ( 59.5 )
Other (income) expense ( 5.4 ) ( 10.4 ) ( 10.8 ) ( 21.9 )
Income before income taxes 1,179.9 621.3 2,214.2 1,144.5
Income tax expense 246.0 137.3 485.1 228.1
Net income 933.9 484.0 1,729.1 916.4
Net income attributable to noncontrolling interests 4.4 1.3 7.8 2.4
Net income attributable to D.R. Horton, Inc. $ 929.5 $ 482.7 $ 1,721.3 $ 914.0
Basic net income per common share attributable to D.R. Horton, Inc. $ 2.57 $ 1.32 $ 4.74 $ 2.49
Weighted average number of common shares 362.3 365.8 363.4 367.1
Diluted net income per common share attributable to D.R. Horton, Inc. $ 2.53 $ 1.30 $ 4.67 $ 2.46
Adjusted weighted average number of common shares 367.2 370.1 368.6 371.8
See accompanying notes to consolidated financial statements.
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D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF TOTAL EQUITY
Common
Stock Additional
Paid-in
Capital Retained
Earnings Treasury
Stock Non-controlling
Interests Total
Equity
(In millions, except common stock share data)
(Unaudited)
Balances at September 30, 2020 ( 363,999,982 shares)
$ 3.9 $ 3,240.9 $ 9,757.8 $ ( 1,162.6 ) $ 281.5 $ 12,121.5
Net income — — 791.8 — 3.4 795.2
Exercise of stock options ( 42,950 shares)
— 0.9 — — — 0.9
Stock issued under employee benefit plans ( 604,947 shares)
0.1 — — — — 0.1
Cash paid for shares withheld for taxes — ( 26.3 ) — — — ( 26.3 )
Stock-based compensation expense — 21.7 — — — 21.7
Cash dividends declared ($ 0.20 per share)
— — ( 72.9 ) — — ( 72.9 )
Repurchases of common stock ( 1,000,000 shares)
— — — ( 69.8 ) — ( 69.8 )
Distributions to noncontrolling interests — — — — ( 0.1 ) ( 0.1 )
Change of ownership interest in Forestar — ( 0.3 ) — — 0.3 —
Balances at December 31, 2020 ( 363,647,879 shares)
$ 4.0 $ 3,236.9 $ 10,476.7 $ ( 1,232.4 ) $ 285.1 $ 12,770.3
Net income — — 929.5 — 4.4 933.9
Exercise of stock options ( 391,047 shares)
— 1.4 — — — 1.4
Stock issued under employee benefit plans ( 916,209 shares)
— 3.2 — — — 3.2
Cash paid for shares withheld for taxes — ( 56.6 ) — — — ( 56.6 )
Stock-based compensation expense — 25.4 — — — 25.4
Cash dividends declared ($ 0.20 per share)
— — ( 72.7 ) — — ( 72.7 )
Repurchases of common stock ( 4,475,624 shares)
— — — ( 350.4 ) — ( 350.4 )
Change of ownership interest in Forestar and other — ( 1.9 ) — — 23.4 21.5
Balances at March 31, 2021 ( 360,479,511 shares)
$ 4.0 $ 3,208.4 $ 11,333.5 $ ( 1,582.8 ) $ 312.9 $ 13,276.0
See accompanying notes to consolidated financial statements.
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D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF TOTAL EQUITY (Continued)
Common
Stock Additional
Paid-in
Capital Retained
Earnings Treasury
Stock Non-controlling
Interests Total
Equity
(In millions, except common stock share data)
(Unaudited)
Balances at September 30, 2019 ( 368,431,454 shares)
$ 3.9 $ 3,179.1 $ 7,640.1 $ ( 802.2 ) $ 274.2 $ 10,295.1
Net income — — 431.3 — 1.2 432.5
Exercise of stock options ( 258,800 shares)
— 4.1 — — — 4.1
Stock issued under employee benefit plans ( 582,936 shares)
— — — — — —
Cash paid for shares withheld for taxes — ( 17.3 ) — — — ( 17.3 )
Stock-based compensation expense — 16.6 — — — 16.6
Cash dividends declared ($ 0.175 per share)
— — ( 64.6 ) — — ( 64.6 )
Repurchases of common stock ( 3,000,000 shares)
— — — ( 163.1 ) — ( 163.1 )
Distributions to noncontrolling interests — — — — ( 0.4 ) ( 0.4 )
Change of ownership interest in Forestar — ( 0.5 ) — — 0.5 —
Balances at December 31, 2019 ( 366,273,190 shares)
$ 3.9 $ 3,182.0 $ 8,006.8 $ ( 965.3 ) $ 275.5 $ 10,502.9
Net income — — 482.7 — 1.3 484.0
Exercise of stock options ( 310,032 shares)
— 6.2 — — — 6.2
Stock issued under employee benefit plans ( 954,588 shares)
— 2.6 — — — 2.6
Cash paid for shares withheld for taxes — ( 20.8 ) — — — ( 20.8 )
Stock-based compensation expense — 21.3 — — — 21.3
Cash dividends declared ($ 0.175 per share)
— — ( 64.1 ) — — ( 64.1 )
Repurchases of common stock ( 4,000,000 shares)
— — — ( 197.3 ) — ( 197.3 )
Balances at March 31, 2020 ( 363,537,810 shares)
$ 3.9 $ 3,191.3 $ 8,425.4 $ ( 1,162.6 ) $ 276.8 $ 10,734.8
See accompanying notes to consolidated financial statements.
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D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
March 31,
2021 2020
(In millions)
(Unaudited)
OPERATING ACTIVITIES
Net income $ 1,729.1 $ 916.4
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 39.3 38.8
Amortization of discounts and fees 4.8 5.8
Stock-based compensation expense 47.1 37.9
Equity in earnings of unconsolidated entities ( 1.0 ) ( 0.9 )
Deferred income taxes 2.6 10.0
Inventory and land option charges 12.1 12.8
Gain on sale of assets ( 14.0 ) ( 59.5 )
Changes in operating assets and liabilities:
Increase in construction in progress and finished homes ( 1,295.8 ) ( 724.4 )
Increase in residential land and lots –
developed, under development, held for development and held for sale
( 975.2 ) ( 324.2 )
Increase in other assets ( 295.2 ) ( 153.1 )
Net increase in mortgage loans held for sale ( 226.8 ) ( 307.4 )
Increase in accounts payable, accrued expenses and other liabilities 818.1 152.7
Net cash used in operating activities ( 154.9 ) ( 395.1 )
INVESTING ACTIVITIES
Expenditures for property and equipment ( 30.5 ) ( 47.6 )
Proceeds from sale of assets 31.8 129.8
Expenditures related to rental properties ( 173.9 ) ( 113.0 )
Return of investment in unconsolidated entities 2.2 2.4
Net principal increase of other mortgage loans and real estate owned ( 1.5 ) ( 0.6 )
Payments related to business acquisitions ( 24.2 ) ( 5.6 )
Net cash used in investing activities ( 196.1 ) ( 34.6 )
FINANCING ACTIVITIES
Proceeds from notes payable 494.1 1,591.3
Repayment of notes payable ( 400.1 ) ( 918.9 )
Advances on mortgage repurchase facility, net 70.9 297.6
Proceeds from stock associated with certain employee benefit plans 5.6 12.9
Cash paid for shares withheld for taxes ( 82.9 ) ( 38.1 )
Cash dividends paid ( 145.6 ) ( 128.7 )
Repurchases of common stock
( 420.2 ) ( 360.4 )
Distributions to noncontrolling interests, net
( 0.1 ) ( 0.4 )
Net proceeds from issuance of Forestar common stock 23.3 —
Other financing activities
( 2.2 ) ( 2.3 )
Net cash (used in) provided by financing activities ( 457.2 ) 453.0
Net (decrease) increase in cash, cash equivalents and restricted cash ( 808.2 ) 23.3
Cash, cash equivalents and restricted cash at beginning of period 3,040.1 1,514.0
Cash, cash equivalents and restricted cash at end of period $ 2,231.9 $ 1,537.3
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Notes payable issued for inventory $ 12.5 $ —
Stock issued under employee incentive plans $ 114.5 $ 84.3
Accrued expenditures for property and equipment $ 24.9 $ 8.6
Accrual for holdback payments related to acquisitions $ 1.4 $ 3.9
See accompanying notes to consolidated financial statements.
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2021
NOTE A – BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements include the accounts of D.R. Horton, Inc. and all of its 100% owned, majority-owned and controlled subsidiaries, which are collectively referred to as the Company, unless the context otherwise requires. Noncontrolling interests represent the proportionate equity interests in consolidated entities that are not 100% owned by the Company. The Company owns a 64 % controlling interest in Forestar Group Inc. (Forestar) and therefore is required to consolidate 100% of Forestar within its consolidated financial statements, and the 36 % interest the Company does not own is accounted for as noncontrolling interests. All intercompany accounts, transactions and balances have been eliminated in consolidation.
The financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments considered necessary to fairly state the results for the interim periods shown, including normal recurring accruals and other items. These financial statements, including the consolidated balance sheet as of September 30, 2020, which was derived from audited financial statements, do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2020.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Seasonality
Historically, the homebuilding industry has experienced seasonal fluctuations; therefore, the operating results for the three and six months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2021 or subsequent periods.
Business Acquisition
In October 2020, the Company acquired the homebuilding operations of Braselton Homes in Corpus Christi, Texas for approximately $ 23.0 million in cash. The assets acquired included approximately 90 homes in inventory, 95 lots and control of approximately 840 additional lots through purchase contracts. The Company also acquired a sales order backlog of approximately 125 homes.
Pending Accounting Standards
In December 2019, the Financial Accounting Standards Board (FASB) issued ASU 2019-12 related to simplifying the accounting for income taxes. The guidance is effective for the Company beginning October 1, 2021, although early adoption is permitted. The Company is currently evaluating the impact of this guidance, and it is not expected to have a material impact on its consolidated financial position, results of operations or cash flows.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued. The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform - Scope,” which clarified the scope and application of the original guidance. The Company will adopt these standards when LIBOR is discontinued and does not expect them to have a material impact on its consolidated financial statements or related disclosures.
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
NOTE B – SEGMENT INFORMATION
The Company is a national homebuilder that is primarily engaged in the acquisition and development of land and the construction and sale of residential homes, with operations in 91 markets across 29 states. The Company’s operating segments are its 55 homebuilding divisions, its majority-owned Forestar residential lot development operations, its financial services operations and its other business activities. The Company’s reporting segments are its homebuilding reporting segments, its Forestar lot development segment and its financial services segment. The homebuilding operating segments are aggregated into the following six reporting segments: East, Midwest, Southeast, South Central, Southwest and West. These reporting segments have homebuilding operations located in the following states:
East: Delaware, Georgia (Savannah only), Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina and Virginia
Midwest: Colorado, Illinois, Indiana, Iowa, Minnesota and Ohio
Southeast: Alabama, Florida, Georgia, Mississippi and Tennessee
South Central: Louisiana, Oklahoma and Texas
Southwest: Arizona and New Mexico
West: California, Hawaii, Nevada, Oregon, Utah and Washington
The Company’s homebuilding divisions design, build and sell single-family detached homes on lots they develop and on fully developed lots purchased ready for home construction. To a lesser extent, the homebuilding divisions also build and sell attached homes, such as townhomes, duplexes and triplexes. Most of the revenue generated by the Company’s homebuilding operations is from the sale of completed homes and to a lesser extent from the sale of land and lots.
During fiscal 2020, the Company began constructing and leasing homes as income-producing single-family rental communities. After a rental community is constructed and achieves a stabilized level of leased occupancy, the Company generally expects to market the community for a bulk sale of homes. These operations are reported in the Company’s homebuilding segment. During the six months ended March 31, 2021, the Company completed its first sale of a single-family rental community representing 124 homes for $ 31.8 million, resulting in a gain on sale of $ 14.0 million. At March 31, 2021, the Company’s homebuilding fixed assets included $ 182.6 million of assets related to 27 single-family rental communities compared to $ 87.2 million of assets related to 10 single-family rental communities at September 30, 2020. At March 31, 2021, the Company’s single-family rental platform included 1,650 homes and finished lots, of which 570 homes were completed, compared to 740 homes and finished lots, of which 440 homes were completed at September 30, 2020.
The Forestar segment is a residential lot development company with operations in 54 markets across 22 states. Forestar has made significant investments in land acquisition and development to expand its business across the United States. The homebuilding divisions acquire finished lots from Forestar in accordance with the master supply agreement between the two companies. Forestar’s segment results are presented on their historical cost basis, consistent with the manner in which management evaluates segment performance.
The Company’s financial services segment provides mortgage financing and title agency services to homebuyers in many of the Company’s homebuilding markets. The segment generates the substantial majority of its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services. The Company sells substantially all of the mortgages it originates and the majority of the related servicing rights to third-party purchasers.
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
In addition to its homebuilding, Forestar and financial services operations, the Company engages in other business activities through its subsidiaries. The Company conducts insurance-related operations, constructs and owns income-producing multi-family rental properties, owns non-residential real estate including ranch land and improvements and owns and operates oil and gas related assets. The results of these operations are immaterial for separate reporting and therefore are grouped together and presented as other. The Company’s multi-family rental operations develop, construct, lease and own multi-family rental properties, which are typically marketed for sale after achieving a stabilized level of leased occupancy. At March 31, 2021, the Company had eight multi-family rental projects under active construction and four projects that were substantially complete and in the lease-up phase. These 12 projects represent 3,760 multi-family units, including 2,450 units under active construction and 1,310 completed units. At March 31, 2021 and September 30, 2020, the consolidated balance sheets included $ 394.4 million and $ 246.2 million, respectively, of assets related to multi-family rental operations.
The accounting policies of the reporting segments are described throughout Note A included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2020. Financial information relating to the Company’s reporting segments is as follows:
March 31, 2021
Homebuilding Forestar (1) Financial Services Other Eliminations and Other Adjustments (2) Consolidated
(In millions)
Assets
Cash and cash equivalents
$ 1,887.2 $ 167.2 $ 94.7 $ 56.1 $ — $ 2,205.2
Restricted cash
14.0 — 12.4 0.3 — 26.7
Inventories:
Construction in progress and finished homes
7,377.4 — — — ( 77.3 ) 7,300.1
Residential land and lots — developed and under development 5,464.4 1,643.1 — — ( 41.4 ) 7,066.1
Land held for development
30.5 55.5 — — — 86.0
Land held for sale
24.1 — — — — 24.1
12,896.4 1,698.6 — — ( 118.7 ) 14,476.3
Mortgage loans held for sale
— — 1,755.8 — — 1,755.8
Deferred income taxes, net
143.5 — — — ( 0.7 ) 142.8
Property and equipment, net
463.2 2.0 3.5 432.4 ( 6.1 ) 895.0
Other assets
1,245.3 31.1 188.9 58.7 ( 105.5 ) 1,418.5
Goodwill
134.3 — — — 29.2 163.5
$ 16,783.9 $ 1,898.9 $ 2,055.3 $ 547.5 $ ( 201.8 ) $ 21,083.8
Liabilities
Accounts payable
$ 1,078.0 $ 39.8 $ — $ 19.6 $ — $ 1,137.4
Accrued expenses and other liabilities
1,881.2 260.0 195.4 13.2 ( 151.7 ) 2,198.1
Notes payable
2,616.9 654.6 1,203.5 — ( 2.7 ) 4,472.3
$ 5,576.1 $ 954.4 $ 1,398.9 $ 32.8 $ ( 154.4 ) $ 7,807.8
______________
(1) Amounts are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.
(2) Amounts primarily represent the elimination of intercompany transactions and, to a lesser extent, purchase accounting adjustments related to the Forestar acquisition.
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
September 30, 2020
Homebuilding Forestar (1) Financial Services Other Eliminations and Other Adjustments (2) Consolidated
(In millions)
Assets
Cash and cash equivalents
$ 2,551.1 $ 394.3 $ 55.6 $ 17.5 $ — $ 3,018.5
Restricted cash
9.5 — 11.9 0.2 — 21.6
Inventories:
Construction in progress and finished homes
6,037.5 — — — ( 53.4 ) 5,984.1
Residential land and lots — developed and under development
4,901.4 1,304.3 — — ( 33.9 ) 6,171.8
Land held for development
47.8 5.4 — — — 53.2
Land held for sale
28.3 — — — — 28.3
11,015.0 1,309.7 — — ( 87.3 ) 12,237.4
Mortgage loans held for sale
— — 1,529.0 — — 1,529.0
Deferred income taxes, net
142.3 — — — 2.6 144.9
Property and equipment, net
372.8 1.1 3.9 308.9 ( 3.0 ) 683.7
Other assets
996.4 34.8 125.8 52.8 ( 96.1 ) 1,113.7
Goodwill
134.3 — — — 29.2 163.5
$ 15,221.4 $ 1,739.9 $ 1,726.2 $ 379.4 $ ( 154.6 ) $ 18,912.3
Liabilities
Accounts payable
$ 859.3 $ 29.2 $ — $ 12.0 $ — $ 900.5
Accrued expenses and other liabilities
1,438.3 197.8 86.8 12.2 ( 128.1 ) 1,607.0
Notes payable
2,514.4 641.1 1,132.6 — ( 4.8 ) 4,283.3
$ 4,812.0 $ 868.1 $ 1,219.4 $ 24.2 $ ( 132.9 ) $ 6,790.8
______________
(1) Amounts are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.
(2) Amounts primarily represent the elimination of intercompany transactions and, to a lesser extent, purchase accounting adjustments related to the Forestar acquisition.
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
Three Months Ended March 31, 2021
Homebuilding Forestar (1) Financial Services Other Eliminations and Other Adjustments (2) Consolidated
(In millions)
Revenues
Home sales
$ 6,170.4 $ — $ — $ — $ — $ 6,170.4
Land/lot sales and other
17.3 287.1 — 15.3 ( 268.3 ) 51.4
Financial services
— — 225.1 — — 225.1
6,187.7 287.1 225.1 15.3 ( 268.3 ) 6,446.9
Cost of sales
Home sales (3) 4,652.0 — — — ( 35.6 ) 4,616.4
Land/lot sales and other
12.7 233.2 — — ( 215.2 ) 30.7
Inventory and land option charges
3.2 0.6 — — — 3.8
4,667.9 233.8 — — ( 250.8 ) 4,650.9
Selling, general and administrative expense
469.5 16.3 123.7 11.9 0.1 621.5
Other (income) expense ( 1.8 ) ( 0.6 ) ( 6.3 ) 3.3 — ( 5.4 )
Income before income taxes $ 1,052.1 $ 37.6 $ 107.7 $ 0.1 $ ( 17.6 ) $ 1,179.9
______________
(1) Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.
(2) Amounts primarily represent the elimination of intercompany transactions and, to a lesser extent, purchase accounting adjustments related to the Forestar acquisition.
(3) Amount in the Eliminations and Other Adjustments column represents the profit on lots sold from Forestar to the homebuilding segment. Intercompany profit is eliminated in the consolidated financial statements when Forestar sells lots to the homebuilding segment and is recognized in the consolidated financial statements when the homebuilding segment closes homes on the lots to homebuyers.
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
Six Months Ended March 31, 2021
Homebuilding Forestar (1) Financial Services Other Eliminations and Other Adjustments (2) Consolidated
(In millions)
Revenues:
Home sales
$ 11,869.1 $ — $ — $ — $ — $ 11,869.1
Land/lot sales and other
37.2 594.2 — 30.0 ( 562.5 ) 98.9
Financial services
— — 412.3 — — 412.3
11,906.3 594.2 412.3 30.0 ( 562.5 ) 12,380.3
Cost of sales:
Home sales (3) 8,977.1 — — — ( 63.3 ) 8,913.8
Land/lot sales and other
26.5 495.8 — — ( 464.7 ) 57.6
Inventory and land option charges
11.2 0.9 — — — 12.1
9,014.8 496.7 — — ( 528.0 ) 8,983.5
Selling, general and administrative expense
920.6 31.8 233.3 21.5 0.2 1,207.4
Gain on sale of assets
( 13.1 ) — — ( 0.9 ) — ( 14.0 )
Other (income) expense ( 3.3 ) ( 1.1 ) ( 12.8 ) 7.1 ( 0.7 ) ( 10.8 )
Income before income taxes $ 1,987.3 $ 66.8 $ 191.8 $ 2.3 $ ( 34.0 ) $ 2,214.2
Summary Cash Flow Information:
Depreciation and amortization
$ 30.0 $ 0.2 $ 0.8 $ 8.0 $ 0.3 $ 39.3
Cash provided by (used in) operating activities
$ 138.0 $ ( 249.5 ) $ ( 32.3 ) $ 4.2 $ ( 15.3 ) $ ( 154.9 )
______________
(1) Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.
(2) Amounts primarily represent the elimination of intercompany transactions and, to a lesser extent, purchase accounting adjustments related to the Forestar acquisition.
(3) Amount in the Eliminations and Other Adjustments column represents the profit on lots sold from Forestar to the homebuilding segment. Intercompany profit is eliminated in the consolidated financial statements when Forestar sells lots to the homebuilding segment and is recognized in the consolidated financial statements when the homebuilding segment closes homes on the lots to homebuyers.
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
Three Months Ended March 31, 2020
Homebuilding Forestar (1) Financial Services Other Eliminations and Other Adjustments (2) Consolidated
(In millions)
Revenues
Home sales
$ 4,363.3 $ — $ — $ — $ — $ 4,363.3
Land/lot sales and other
15.5 159.1 — 9.5 ( 151.9 ) 32.2
Financial services
— — 104.5 — — 104.5
4,378.8 159.1 104.5 9.5 ( 151.9 ) 4,500.0
Cost of sales
Home sales (3) 3,435.5 — — — ( 11.0 ) 3,424.5
Land/lot sales and other
11.3 136.5 — — ( 130.4 ) 17.4
Inventory and land option charges
8.8 0.1 — — — 8.9
3,455.6 136.6 — — ( 141.4 ) 3,450.8
Selling, general and administrative expense
361.8 11.2 85.9 7.8 0.1 466.8
Gain on sale of assets — ( 0.3 ) — ( 28.2 ) — ( 28.5 )
Other (income) expense ( 4.1 ) ( 2.1 ) ( 6.1 ) 1.9 — ( 10.4 )
Income before income taxes $ 565.5 $ 13.7 $ 24.7 $ 28.0 $ ( 10.6 ) $ 621.3
______________
(1) Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.
(2) Amounts primarily represent the elimination of intercompany transactions and, to a lesser extent, purchase accounting adjustments related to the Forestar acquisition.
(3) Amount in the Eliminations and Other Adjustments column represents the profit on lots sold from Forestar to the homebuilding segment. Intercompany profit is eliminated in the consolidated financial statements when Forestar sells lots to the homebuilding segment and is recognized in the consolidated financial statements when the homebuilding segment closes homes on the lots to homebuyers.
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
Six Months Ended March 31, 2020
Homebuilding Forestar (1) Financial Services Other Eliminations and Other Adjustments (2) Consolidated
(In millions)
Revenues:
Home sales
$ 8,226.6 $ — $ — $ — $ — $ 8,226.6
Land/lot sales and other
35.2 406.4 — 18.3 ( 373.2 ) 86.7
Financial services
— — 207.4 — — 207.4
8,261.8 406.4 207.4 18.3 ( 373.2 ) 8,520.7
Cost of sales:
Home sales (3) 6,487.0 — — — ( 17.7 ) 6,469.3
Land/lot sales and other
24.7 352.8 — — ( 324.6 ) 52.9
Inventory and land option charges
12.4 0.4 — — — 12.8
6,524.1 353.2 — — ( 342.3 ) 6,535.0
Selling, general and administrative expense
720.2 21.7 163.8 16.7 0.2 922.6
Gain on sale of assets
— ( 0.1 ) — ( 59.4 ) — ( 59.5 )
Other (income) expense ( 9.6 ) ( 4.2 ) ( 11.6 ) 3.5 — ( 21.9 )
Income before income taxes $ 1,027.1 $ 35.8 $ 55.2 $ 57.5 $ ( 31.1 ) $ 1,144.5
Summary Cash Flow Information:
Depreciation and amortization
$ 33.7 $ 0.1 $ 0.8 $ 3.9 $ 0.3 $ 38.8
Cash provided by (used in) operating activities
$ 52.1 $ ( 123.8 ) $ ( 312.1 ) $ 5.5 $ ( 16.8 ) $ ( 395.1 )
______________
(1) Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.
(2) Amounts primarily represent the elimination of intercompany transactions and, to a lesser extent, purchase accounting adjustments related to the Forestar acquisition.
(3) Amount in the Eliminations and Other Adjustments column represents the profit on lots sold from Forestar to the homebuilding segment. Intercompany profit is eliminated in the consolidated financial statements when Forestar sells lots to the homebuilding segment and is recognized in the consolidated financial statements when the homebuilding segment closes homes on the lots to homebuyers.
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
Homebuilding Inventories by Reporting Segment (1)
March 31,
2021 September 30,
2020
(In millions)
East $ 1,518.8 $ 1,328.3
Midwest 1,113.5 958.5
Southeast 3,305.9 2,919.9
South Central 3,477.8 2,879.9
Southwest 888.1 695.8
West 2,376.9 2,009.1
Corporate and unallocated (2) 215.4 223.5
$ 12,896.4 $ 11,015.0
_________________
(1) Homebuilding inventories are the only assets included in the measure of homebuilding segment assets used by the Company’s chief operating decision makers.
(2) Corporate and unallocated consists primarily of homebuilding capitalized interest and property taxes.
Homebuilding Results by Reporting Segment Three Months Ended
March 31, Six Months Ended
March 31,
2021 2020 2021 2020
(In millions)
Revenues
East $ 861.5 $ 579.7 $ 1,670.7 $ 1,100.2
Midwest 468.4 308.7 881.5 591.3
Southeast 2,054.9 1,316.7 3,833.3 2,467.3
South Central 1,504.1 1,066.4 2,979.0 2,025.1
Southwest 243.1 199.7 475.7 410.7
West 1,055.7 907.6 2,066.1 1,667.2
$ 6,187.7 $ 4,378.8 $ 11,906.3 $ 8,261.8
Inventory and Land Option Charges
East $ 0.7 $ ( 0.5 ) $ 1.3 $ ( 0.3 )
Midwest 0.2 1.4 0.3 1.5
Southeast 1.1 2.8 7.8 4.2
South Central 0.4 2.9 0.6 4.4
Southwest 0.3 — 0.4 0.1
West 0.5 2.2 0.8 2.5
$ 3.2 $ 8.8 $ 11.2 $ 12.4
Income before Income Taxes
East $ 146.0 $ 73.3 $ 278.5 $ 133.2
Midwest 60.9 23.6 110.1 42.3
Southeast 376.7 187.8 682.5 333.9
South Central 266.8 156.2 531.5 288.9
Southwest 39.5 30.8 78.1 65.3
West 162.2 93.8 306.6 163.5
$ 1,052.1 $ 565.5 $ 1,987.3 $ 1,027.1
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
NOTE C – INVENTORIES
At the end of each quarter, the Company reviews the performance and outlook for all of its communities and land inventories for indicators of potential impairment and performs detailed impairment evaluations and analyses when necessary. As of March 31, 2021, the Company determined that no communities were impaired, and no impairment charges were recorded during the three months ended March 31, 2021. During the six months ended March 31, 2021, impairment charges totaled $ 5.6 million. There were $ 1.7 million of impairment charges recorded in the three and six months ended March 31, 2020.
During the three and six months ended March 31, 2021, earnest money and pre-acquisition cost write-offs related to land purchase contracts that the Company has terminated or expects to terminate were $ 3.8 million and $ 6.5 million, respectively, compared to $ 7.2 million and $ 11.1 million in the same periods of fiscal 2020. Inventory impairments and land option charges are included in cost of sales in the consolidated statements of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
NOTE D – NOTES PAYABLE
The Company’s notes payable at their carrying amounts consist of the following:
March 31,
2021 September 30,
2020
(In millions)
Homebuilding:
Unsecured:
Revolving credit facility $ — $ —
364-day revolving credit facility — —
2.55 % senior notes due 2020 (1)
— 399.8
4.375 % senior notes due 2022 (1)
349.4 349.2
4.75 % senior notes due 2023 (1)
299.4 299.2
5.75 % senior notes due 2023 (1)
398.9 398.7
2.5 % senior notes due 2024 (1)
496.9 496.5
2.6 % senior notes due 2025 (1)
495.8 495.1
1.4 % senior notes due 2027 (1)
494.3 —
Other secured notes (2)
79.5 71.1
2,614.2 2,509.6
Forestar:
Unsecured:
Revolving credit facility — —
8.0 % senior notes due 2024 (3)
345.9 345.2
5.0 % senior notes due 2028 (3)
296.2 295.9
Other secured notes 12.5 —
654.6 641.1
Financial Services:
Mortgage repurchase facility 1,203.5 1,132.6
$ 4,472.3 $ 4,283.3
____________________________
(1) Debt issuance costs that were deducted from the carrying amounts of the homebuilding senior notes totaled $ 13.3 million and $ 10.7 million at March 31, 2021 and September 30, 2020, respectively.
(2) Homebuilding other secured notes excludes $ 2.7 million and $ 4.8 million of earnest money notes payable due to Forestar at March 31, 2021 and September 30, 2020, respectively. These intercompany notes are eliminated in consolidation.
(3) Debt issuance costs that were deducted from the carrying amount of Forestar’s senior notes totaled $ 7.9 million and $ 8.9 million at March 31, 2021 and September 30, 2020, respectively.
Homebuilding:
The Company has a $ 1.59 billion senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $ 2.5 billion, subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to 100 % of the revolving credit commitment. Letters of credit issued under the facility reduce the available borrowing capacity. The interest rate on borrowings under the revolving credit facility may be based on either the Prime Rate or LIBOR plus an applicable margin, as defined in the credit agreement governing the facility. The maturity date of the facility is October 2, 2024. At March 31, 2021, there were no borrowings outstanding and $ 143.6 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $ 1.45 billion.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
In April 2021, the Company’s senior unsecured homebuilding revolving credit facility was amended to extend its maturity date to April 20, 2026. The maturity date may be extended subject to the approval of lenders holding a majority of the commitments. The capacity of the homebuilding revolving credit facility was increased to $ 2.19 billion with an uncommitted accordion feature that could increase the size of the facility to $ 3.0 billion, subject to certain conditions and availability of additional bank commitments.
In May 2020, the Company entered into a credit agreement providing for a $ 375 million 364-day senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $ 550 million, subject to certain conditions and availability of additional bank commitments. The interest rate on borrowings under the 364-day revolving credit facility may be based on either the Prime Rate or LIBOR plus an applicable margin, as defined in the credit agreement governing the facility. There were no borrowings outstanding under the facility at March 31, 2021. This facility is not expected to be renewed upon its maturity on May 27, 2021.
The Company’s homebuilding revolving credit facilities impose 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. Both facilities include substantially the same affirmative and negative covenants, events of default and financial covenants. These covenants are measured as defined in the credit agreements governing the facilities and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facilities or cause any outstanding borrowings to become due and payable prior to maturity. The credit agreements governing the facilities and the indentures governing the senior notes also impose restrictions on the creation of secured debt and liens. At March 31, 2021, the Company was in compliance with all of the covenants, limitations and restrictions of its homebuilding revolving credit facilities and public debt obligations.
D.R. Horton has an automatically effective universal shelf registration statement filed with the 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 2020, the Company issued $ 500 million principal amount of 1.4 % senior notes due October 15, 2027, 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 1.6 %. In December 2020, the Company repaid $ 400 million principal amount of its 2.55 % 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 March 31, 2021.
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 calculation 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. The maturity date of the facility is October 2, 2022. At March 31, 2021, there were no borrowings outstanding and $ 46.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $ 334.0 million.
In April 2021, Forestar’s revolving credit facility was amended to extend its maturity date to April 16, 2025. The maturity date may be extended subject to the approval of lenders holding a majority of the commitments. The capacity of Forestar’s revolving credit facility was increased to $ 410 million with an uncommitted accordion feature that could increase the size of the facility to $ 600 million, subject to certain conditions and availability of additional bank commitments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
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 March 31, 2021, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility.
In April 2021, Forestar issued $ 400 million principal amount of 3.85 % senior notes that mature May 15, 2026 with interest payable semi-annually. The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 4.1 %. A portion of the net proceeds from the issuance of the notes will be used to redeem the $ 350 million principal amount of 8.0 % senior notes due April 15, 2024 in full, and the remainder of the proceeds will be used for general corporate purposes.
In April 2021, Forestar delivered notice for the full redemption of its $ 350 million principal amount of 8.0 % senior notes outstanding. The redemption price of $ 365.6 million includes a call premium of $ 14.0 million and accrued and unpaid interest of $ 1.6 million. The notes are scheduled to be redeemed May 7, 2021.
Forestar’s revolving credit facility and its 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, 2021, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations.
Effective April 30, 2020, Forestar’s Board of Directors authorized the repurchase of up to $ 30 million of Forestar’s debt securities. The authorization has no expiration date. All of the $ 30 million authorization was remaining at March 31, 2021.
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 2021, the mortgage repurchase facility was amended to increase its capacity and extend its maturity date to February 18, 2022. The total capacity of the facility is $ 1.4 billion; however, the capacity increases, without requiring additional commitments, to $ 1.633 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 $ 1.8 billion, subject to the availability of additional commitments.
As of March 31, 2021, $ 1.69 billion of mortgage loans held for sale with a collateral value of $ 1.66 billion were pledged under the mortgage repurchase facility. As a result of advance paydowns totaling $ 454.8 million, DHI Mortgage had an obligation of $ 1.2 billion outstanding under the mortgage repurchase facility at March 31, 2021 at a 2.1 % 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 March 31, 2021, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
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 six months of fiscal 2021 and fiscal 2020, 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 March 31, 2021 and 2020:
Three Months Ended
March 31, Six Months Ended
March 31,
2021 2020 2021 2020
(In millions)
Capitalized interest, beginning of period $ 215.1 $ 192.1 $ 207.7 $ 180.1
Interest incurred (1) 37.9 37.6 78.3 75.3
Interest charged to cost of sales ( 34.4 ) ( 29.2 ) ( 67.4 ) ( 54.9 )
Capitalized interest, end of period $ 218.6 $ 200.5 $ 218.6 $ 200.5
__________________
(1) Interest incurred includes interest on the Company's mortgage repurchase facility of $ 3.8 million and $ 8.3 million in the three and six months ended March 31, 2021, respectively, and $ 5.0 million and $ 9.7 million in the same periods of fiscal 2020. Also included in interest incurred is Forestar interest of $ 11.5 million and $ 23.0 million in the three and six months ended March 31, 2021, respectively, and $ 9.7 million and $ 18.4 million in the same periods of fiscal 2020.
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
NOTE F – PROPERTY AND EQUIPMENT
The Company’s property and equipment balances and the related accumulated depreciation at March 31, 2021 and September 30, 2020 are summarized below.
March 31,
2021 September 30,
2020
(In millions)
Homebuilding
Buildings and improvements $ 275.0 $ 267.4
Model home furniture 133.1 134.0
Office furniture and equipment 110.8 108.1
Land 33.1 32.3
Single-family rental operations
Single-family rental properties 158.7 68.1
Land 23.9 19.1
Total single-family rental operations 182.6 87.2
Accumulated depreciation ( 271.4 ) ( 256.2 )
Total homebuilding 463.2 372.8
Other Businesses
Multi-family rental operations
Multi-family rental properties 248.9 173.8
Land 106.5 58.3
Total multi-family rental operations 355.4 232.1
Oil and gas related assets 71.1 69.7
Office furniture and equipment 16.8 15.6
Land 19.7 19.7
Accumulated depreciation ( 30.6 ) ( 28.2 )
Total other businesses 432.4 308.9
Forestar, net 2.0 1.1
Financial services, net 3.5 3.9
Eliminations ( 6.1 ) ( 3.0 )
Property and equipment, net $ 895.0 $ 683.7
Depreciation expense was $ 17.0 million and $ 34.8 million during the three and six months ended March 31, 2021, respectively, compared to $ 17.3 million and $ 34.5 million in the same periods of fiscal 2020.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
NOTE G – MORTGAGE LOANS
Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. At March 31, 2021, mortgage loans held for sale had an aggregate carrying value of $ 1.76 billion and an aggregate outstanding principal balance of $ 1.73 billion. At September 30, 2020, mortgage loans held for sale had an aggregate carrying value of $ 1.53 billion and an aggregate outstanding principal balance of $ 1.46 billion. During the six months ended March 31, 2021 and 2020, mortgage loans originated totaled $ 7.3 billion and $ 4.9 billion, respectively, and mortgage loans sold totaled $ 7.0 billion and $ 4.6 billion, respectively. The Company had gains on sales of loans and servicing rights of $ 178.6 million and $ 317.4 million during the three and six months ended March 31, 2021, respectively, compared to $ 73.3 million and $ 147.0 million in the prior year periods. Net gains on sales of loans and servicing rights are included in revenues in the consolidated statements of operations. During the six months ended March 31, 2021, approximately 54 % of the Company’s mortgage loans were sold directly to the Federal National Mortgage Association (Fannie Mae) or into securities backed by the Government National Mortgage Association (Ginnie Mae), and 37 % were sold to two other major financial entities.
In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which included changes to forbearance options for government-backed loans designed to keep homeowners in their homes during the COVID-19 pandemic (C-19). Due to the uncertainty surrounding these forbearance options, servicing values declined rapidly at the end of March 2020. As a result, the Company began retaining the servicing rights on a portion of its loan originations. Servicing values have since improved, and the Company sold a portion of its retained mortgage servicing rights in the six months ended March 31, 2021. The Company expects to continue retaining some servicing rights prior to selling them to third parties, typically within six months of loan origination. At March 31, 2021 and September 30, 2020, the fair value of mortgage servicing rights was $ 6.4 million and $ 17.1 million, respectively, and is included in other assets in the consolidated balance sheets.
The Company also uses hedging instruments as part of a program to offer below market interest rate financing to its homebuyers. At March 31, 2021 and September 30, 2020, the Company had mortgage-backed securities (MBS) totaling $ 1.5 billion and $ 1.1 billion, respectively, that did not yet have interest rate lock commitments or closed loans created or assigned and recorded an asset of $ 5.0 million and a liability of $ 5.3 million, respectively, for the fair value of such MBS position.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
NOTE H – INCOME TAXES
The Company’s income tax expense for the three and six months ended March 31, 2021 was $ 246.0 million and $ 485.1 million, respectively, compared to $ 137.3 million and $ 228.1 million in the prior year periods. The effective tax rate was 20.8 % and 21.9 % for the three and six months ended March 31, 2021 compared to 22.1 % and 19.9 % in the prior year periods. The effective tax rates for all periods include an expense for state income taxes and tax benefits related to stock-based compensation and the federal energy efficient homes tax credit. For the six months ended March 31, 2020, the retroactive reinstatement of the federal energy efficient homes tax credit reduced the effective tax rate by 2.6 %. For the three and six months ended March 31, 2021, a change in the estimate of homes qualifying for the fiscal 2020 retroactive extension of the energy efficient tax credit reduced the effective tax rate by 0.6 % and 0.3 %, respectively.
The Company’s deferred tax assets, net of deferred tax liabilities, were $ 150.2 million at March 31, 2021 compared to $ 152.4 million at September 30, 2020. The Company has a valuation allowance of $ 7.4 million and $ 7.5 million at March 31, 2021 and September 30, 2020, respectively, 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.
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,
2021 2020 2021 2020
(In millions)
Numerator:
Net income attributable to D.R. Horton, Inc. $ 929.5 $ 482.7 $ 1,721.3 $ 914.0
Denominator:
Denominator for basic earnings per share — weighted average common shares 362.3 365.8 363.4 367.1
Effect of dilutive securities:
Employee stock awards 4.9 4.3 5.2 4.7
Denominator for diluted earnings per share — adjusted weighted average common shares 367.2 370.1 368.6 371.8
Basic net income per common share attributable to D.R. Horton, Inc. $ 2.57 $ 1.32 $ 4.74 $ 2.49
Diluted net income per common share attributable to D.R. Horton, Inc. $ 2.53 $ 1.30 $ 4.67 $ 2.46
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
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, of which $ 100 million is reserved for sales under its at-the-market equity offering program that became effective in August 2020. During the three months ended March 31, 2021, Forestar issued 1.0 million shares of common stock under its at-the-market equity offering program for proceeds of $ 23.3 million, net of commissions and other issuance costs. At March 31, 2021, $ 370.6 million remained available for issuance under Forestar’s shelf registration statement, of which $ 76.3 million is reserved for sales under its at-the-market equity offering program.
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 six months ended March 31, 2021, the Company repurchased 5.5 million shares of its common stock for $ 420.2 million. The Company’s remaining authorization at March 31, 2021 was $ 115.1 million. Effective April 20, 2021, the Board of Directors authorized the repurchase of up to $ 1.0 billion of the Company’s common stock, replacing the prior authorization. The authorization has no expiration date.
During each of the first two quarters of fiscal 2021, the Board of Directors approved and paid quarterly cash dividends of $ 0.20 per common share, the most recent of which was paid on February 25, 2021 to stockholders of record on February 17, 2021. In April 2021, the Board of Directors approved a quarterly cash dividend of $ 0.20 per common share, payable on May 20, 2021 to stockholders of record on May 10, 2021. Cash dividends of $ 0.175 per common share were approved and paid in each quarter of fiscal 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 2020, the Company granted 360,000 performance-based RSU equity awards to its executive officers. These awards vest at the end of a three -year performance period ending September 30, 2023. 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 $ 70.60 per unit. Compensation expense related to this grant was $ 3.0 million and $ 6.2 million in the three and six months ended March 31, 2021, respectively, based on an estimate of the Company’s performance against its peer group, the elapsed portion of the performance period and the grant date fair value of the award.
In March 2021, the Company granted approximately 850,000 time-based RSUs to 1,030 recipients, including executive officers, other key employees and non-management directors. The weighted average grant date fair value of these equity awards was $ 83.11 per unit, and they vest annually in equal installments over periods of three to five years. Compensation expense related to this grant was $ 5.5 million in both the three and six months ended March 31, 2021, of which $ 4.8 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 performance-based and time-based restricted stock units was $ 24.0 million and $ 45.2 million during the three and six months ended March 31, 2021, respectively, compared to $ 20.3 million and $ 36.2 million during the three and six months ended March 31, 2020.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
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 March 31, 2021 and 2020 were as follows:
Three Months Ended
March 31, Six Months Ended
March 31,
2021 2020 2021 2020
(In millions)
Warranty liability, beginning of period $ 324.0 $ 251.6 $ 310.2 $ 247.3
Warranties issued 36.3 24.5 69.7 45.6
Changes in liability for pre-existing warranties 1.1 5.6 3.7 8.4
Settlements made ( 20.7 ) ( 19.0 ) ( 42.9 ) ( 38.6 )
Warranty liability, end of period $ 340.7 $ 262.7 $ 340.7 $ 262.7
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 $ 524.4 million and $ 473.8 million at March 31, 2021 and September 30, 2020, 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 March 31, 2021 and September 30, 2020. Expenses related to the Company’s legal contingencies were $ 37.3 million and $ 26.6 million in the six months ended March 31, 2021 and 2020, respectively.
Changes in the Company’s legal claims reserves during the six months ended March 31, 2021 and 2020 were as follows:
Six Months Ended
March 31,
2021 2020
(In millions)
Reserves for legal claims, beginning of period $ 473.8 $ 434.7
Increase in reserves 56.2 33.6
Payments ( 5.6 ) ( 26.1 )
Reserves for legal claims, end of period $ 524.4 $ 442.2
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
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. However, because the self-insured retentions under these policies are significant, the Company anticipates it will largely be self-insured. The Company’s estimated insurance receivables from estimated losses for pending legal claims and anticipated future claims related to previously closed homes totaled $ 90.5 million, $ 81.2 million and $ 76.6 million at March 31, 2021, September 30, 2020 and March 31, 2020, respectively, and are included in other assets in the consolidated balance sheets. 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 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 March 31, 2021, the Company’s homebuilding segment had total deposits of $ 873.9 million, consisting of cash deposits of $ 798.6 million and promissory notes and surety bonds of $ 75.3 million, related to contracts to purchase land and lots with a total remaining purchase price of approximately $ 13.5 billion. The majority of land and lots under contract are currently expected to be purchased within three years. Of these amounts, $ 139.6 million of the deposits related to contracts with Forestar to purchase land and lots with a remaining purchase price of $ 1.5 billion. A limited number of the homebuilding land and lot purchase contracts at March 31, 2021, representing $ 80.5 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 $ 80.5 million remaining purchase price subject to specific performance provisions, $ 41.5 million related to contracts between the homebuilding segment and Forestar.
During the three and six months ended March 31, 2021, Forestar reimbursed the homebuilding segment $ 8.0 million and $ 24.2 million, respectively, for previously paid earnest money and $ 7.3 million and $ 28.2 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, 2020, Forestar reimbursed the homebuilding segment $ 5.5 million and $ 16.2 million, respectively, for previously paid earnest money and $ 8.2 million and $ 13.3 million, respectively, for pre-acquisition and other due diligence costs.
Other Commitments
At March 31, 2021, the Company had outstanding surety bonds of $ 2.1 billion and letters of credit of $ 189.6 million to secure performance under various contracts. Of the total letters of credit, $ 143.6 million were issued under the homebuilding revolving credit facility and $ 46.0 million were issued under Forestar’s revolving credit facility.
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
NOTE M – OTHER ASSETS, ACCRUED EXPENSES AND OTHER LIABILITIES
The Company’s other assets at March 31, 2021 and September 30, 2020 were as follows:
March 31,
2021 September 30,
2020
(In millions)
Earnest money and refundable deposits $ 860.6 $ 657.1
Insurance receivables 90.5 81.2
Other receivables 166.6 143.1
Prepaid assets 51.7 46.0
Forward sales of mortgage-backed securities 87.8 —
Interest rate lock commitments 26.8 31.3
Margin deposits 0.2 16.2
Contract assets - insurance agency commissions 51.1 47.1
Lease right of use assets 33.9 34.7
Mortgage servicing rights 6.4 17.1
Other 42.9 39.9
$ 1,418.5 $ 1,113.7
The Company’s accrued expenses and other liabilities at March 31, 2021 and September 30, 2020 were as follows:
March 31,
2021 September 30,
2020
(In millions)
Reserves for legal claims $ 524.4 $ 473.8
Employee compensation and related liabilities 443.7 376.1
Warranty liability 340.7 310.2
Mortgage hedging instruments and commitments 49.2 16.5
Margin call liabilities 72.1 —
Accrued interest 36.1 35.3
Federal and state income tax liabilities 241.4 42.6
Inventory related accruals 167.1 93.9
Customer deposits 163.6 93.1
Accrued property taxes 27.0 44.1
Lease liabilities 35.4 37.0
Other 97.4 84.4
$ 2,198.1 $ 1,607.0
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
NOTE N – FAIR VALUE MEASUREMENTS
The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis at March 31, 2021 and September 30, 2020. Changes in the fair value of the Level 3 assets during the six months ended March 31, 2021 and 2020 were not material.
Fair Value at March 31, 2021
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 (1) Mortgage loans held for sale — 1,727.0 18.5 1,745.5
Mortgage servicing rights (2) Other assets — — 6.4 6.4
Derivatives not designated as hedging instruments (3):
Interest rate lock commitments (4) Other assets/other liabilities — ( 17.3 ) — ( 17.3 )
Forward sales of mortgage-backed securities Other assets — 87.8 — 87.8
Fair Value at September 30, 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 (1) Mortgage loans held for sale — 1,503.2 15.1 1,518.3
Mortgage servicing rights (2) Other assets — — 17.1 17.1
Derivatives not designated as hedging instruments (3):
Interest rate lock commitments Other assets — 31.3 — 31.3
Forward sales of mortgage-backed securities Other liabilities — ( 16.2 ) — ( 16.2 )
___________________
(1) 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 March 31, 2021 and September 30, 2020 included $ 18.5 million and $ 15.1 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.
(2) Although the majority of the Company’s mortgage loans are sold on a servicing-released basis, when the servicing rights are retained, the Company records them at fair value using third-party valuations. The key assumptions used in the valuation, which are generally unobservable inputs, are mortgage prepayment rates, discount rates and delinquency rates, which were 10 %, 11 % and 6 %, respectively, at March 31, 2021 and 13 %, 11 % and 5 %, respectively, at September 30, 2020.
(3) 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. The net fair value change for the three and six months ended March 31, 2021 and 2020 recognized in revenues in the consolidated statements of operations was not significant.
(4) The fair value of interest rate lock commitments (IRLCs) at March 31, 2021 reflects $ 26.8 million of servicing release premiums in other assets and a change in fair value of $ 44.1 million in other liabilities.
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2021
The following table summarizes the Company’s assets measured at fair value on a nonrecurring basis at March 31, 2021 and September 30, 2020:
Fair Value at
March 31, 2021 Fair Value at
September 30, 2020
Balance Sheet Location Level 2 Level 3 Level 2 Level 3
(In millions)
Mortgage loans held for sale (1) (2) Mortgage loans held for sale $ 1.0 $ 1.9 $ 1.5 $ 2.2
Other mortgage loans (1) (3) Other assets 2.4 1.9 0.6 2.0
___________________
(1) 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.
(2) 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).
(3) The fair values of other mortgage loans were 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 March 31, 2021 and September 30, 2020:
Carrying Value Fair Value at March 31, 2021
Level 1 Level 2 Level 3 Total
(In millions)
Cash and cash equivalents (1) $ 2,205.2 $ 2,205.2 $ — $ — $ 2,205.2
Restricted cash (1) 26.7 26.7 — — 26.7
Notes payable (2) (3) 4,472.3 — 3,345.8 1,295.5 4,641.3
Carrying Value Fair Value at September 30, 2020
Level 1 Level 2 Level 3 Total
(In millions)
Cash and cash equivalents (1) $ 3,018.5 $ 3,018.5 $ — $ — $ 3,018.5
Restricted cash (1) 21.6 21.6 — — 21.6
Notes payable (2) (3) 4,283.3 — 3,285.5 1,203.7 4,489.2
___________________
(1) 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.
(2) The fair value of the senior notes is determined based on quoted prices, which is classified as Level 2 within the fair value hierarchy.
(3) 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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.