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(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer ¨
Non-accelerated
filer ¨
(Do not check if a
smaller reporting company)
Smaller reporting company ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock, $.01 par value – 374,283,035 shares as of July 19, 2017
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). 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, 2016,
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, 2016.
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.
Reclassifications
In addition to its core homebuilding and financial services operations, the Company has subsidiaries that engage in other business activities. These subsidiaries conduct insurance-related operations, construct and own income-producing rental properties, own non-residential real estate including ranch land and improvements
and own and operate oil and gas related assets. During the fourth quarter of fiscal 2016, the Company reclassified the assets, liabilities and operating results of these subsidiaries from the Homebuilding sections of its balance sheet and statement of operations to the Financial Services and Other sections. The statements of operations for the three and nine months ended June 30, 2016 reflect the reclassification of $1.1 million and $3.6 million, respectively, of general and administrative expenses and $1.9 million and
$5.6 million, respectively, of other income from the Homebuilding section to the Financial Services and Other section. These reclassifications had no effect on the Company’s consolidated financial position or results of operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents. Proceeds from home closings held for the Company’s benefit at title companies are included in
homebuilding cash and cash equivalents in the consolidated balance sheets.
Cash balances of the Company’s captive insurance subsidiary, which are expected to be used to fund the subsidiary’s operations and pay future anticipated legal claims, were $40.8 million and $40.5 million at June 30, 2017 and September 30, 2016, respectively, and are included in homebuilding cash and cash equivalents in the consolidated balance sheets.
Seasonality
Historically,
the homebuilding industry has experienced seasonal fluctuations; therefore, the operating results for the three and nine months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2017 or subsequent periods.
On June 29, 2017, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with Forestar Group Inc., a Delaware corporation (Forestar), and a wholly owned subsidiary of the
Company. Forestar is a publicly-traded residential real estate development company. Under the terms of the Merger Agreement, for each share of Forestar common stock, stockholders will have the right to receive $17.75 per share in cash, or retain such share of the surviving entity (Forestar Successor). Cash and stock elections will be prorated, as appropriate, such that 75% of the shares of Forestar common stock outstanding before the merger are converted into $17.75 per share or approximately $560 million of total cash consideration. Following the merger, the Company will own 75% of the outstanding Forestar Successor shares, and existing stockholders will
own 25% of the outstanding Forestar Successor shares. Following the merger, Forestar will remain a public company, and its common stock will continue to trade on the NYSE under the symbol “FOR.” The transaction is expected to close during the Company’s first quarter of fiscal 2018, subject to the approval of Forestar shareholders and other customary closing conditions.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which is a comprehensive new revenue recognition model that will replace
most existing revenue recognition guidance. The core principle of this guidance is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The guidance is effective for the Company beginning October 1, 2018 and allows for full retrospective or modified retrospective methods of adoption. The Company currently plans to adopt this standard using the modified retrospective method and is continuing to evaluate its effect.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which simplifies the subsequent measurement
of inventory, excluding inventory measured using the last-in, first-out or retail inventory methods. The guidance specifies that inventory currently measured at the lower of cost or market, where market could be determined with different methods, should now be measured at the lower of cost or net realizable value. The guidance is effective for the Company beginning October 1, 2017 and is not expected to have a material impact on its consolidated financial position, results of operations or cash flows.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities,” which addresses certain aspects of recognition, measurement, presentation and disclosure of
financial instruments. The guidance is effective for the Company beginning October 1, 2018 and is not expected to have a material impact on its consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires that lease assets and liabilities be recognized on the balance sheet and that key information about leasing arrangements be disclosed. The guidance is effective for the Company beginning October 1, 2019, although early adoption is permitted. The
Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation,” which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for the Company beginning October 1, 2017 and is not expected to have a material impact on its consolidated financial position, results of operations or cash flows.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” which replaces the current incurred loss impairment methodology
with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information in determining credit loss estimates. The guidance is effective for the Company beginning October 1, 2020 and is not expected to have a material impact on its consolidated financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments,” which amends and clarifies the current guidance to reduce diversity in practice of the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for the
Company beginning October 1, 2018 and is not expected to have a material impact on its consolidated statements of cash flows.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows - Restricted Cash,” which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The guidance is effective for the Company beginning October 1, 2018 and is not expected to have a material impact on its consolidated financial position or cash flows.
In
January 2017, the FASB issued ASU 2017-01, “Business Combinations - Clarifying the Definition of a Business,” which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for the Company beginning October 1, 2018 and is not expected to have a material impact on its consolidated financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other.” The guidance simplifies the measurement of goodwill impairment by removing the second step of the goodwill impairment test, which requires the determination of the fair value of individual assets
and liabilities of a reporting unit. Under the new guidance, goodwill impairment is measured as the amount by which a reporting unit’s carrying amount exceeds its fair value with the loss recognized limited to the total amount of goodwill allocated to the reporting unit. The guidance is effective for the Company beginning October 1, 2020 and is not expected to have a material impact on its consolidated financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation: Scope of Modification Accounting,” which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, modification
accounting is required if the fair value, vesting conditions or classification (equity or liability) of the new award are different from the original award immediately before the original award is modified. The guidance is effective for the Company beginning October 1, 2018 and will not have a material impact on its consolidated financial position, results of operations or cash flows.
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
79 markets in 26 states across the United States. The Company designs, builds and sells single-family detached homes on lots it develops and on fully developed lots purchased ready for home construction. To a lesser extent, the Company also builds and sells attached homes, such as townhomes, duplexes, triplexes and condominiums. Periodically, the Company sells land and lots to other developers and homebuilders where it has excess land and lot positions or for other strategic reasons. The homebuilding operations generate most of their revenues from the sale of completed homes, with a lesser amount from the sale of land and lots.
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 related servicing rights to third-party purchasers.
In addition to its core homebuilding and financial services operations, the Company has subsidiaries
that engage in other business activities. These subsidiaries conduct insurance-related operations, construct and own income-producing rental properties, own non-residential real estate including ranch land and improvements and own and operate oil and gas related assets.
The Company’s operating segments are its 41 homebuilding divisions, its financial services operations and its other business activities. The homebuilding operating segments are aggregated into six reporting segments and the financial services segment is its own reporting segment. The
Company’s reportable homebuilding segments are: 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 and Minnesota
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
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, 2016. Financial information relating to the Company’s reporting segments is as follows:
Homebuilding
and financial services pre-tax income
449.1
379.7
1,124.2
923.9
Other pre-tax loss
(4.6
)
(1.1
)
(7.7
)
(3.5
)
Income
before income taxes
$
444.5
$
378.6
$
1,116.5
$
920.4
___________________
(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 the Company’s 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.
(2)
The operating results of certain subsidiaries that were previously included with the
Company’s homebuilding operations are now grouped together and presented as other. The operating results of these subsidiaries are immaterial for separate reporting. The prior year amounts have been reclassified to conform to the current year presentation.
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 capitalized interest and property taxes.
NOTE C – INVENTORY
At June 30,
2017, the Company reviewed the performance and outlook for all of its communities and land inventories for indicators of potential impairment and performed detailed impairment evaluations and analyses when necessary. The Company performed detailed impairment evaluations of communities and land inventories with a combined carrying value of $75.0 million and recorded impairment charges of $1.0 million during the three months ended June 30, 2017 to reduce the carrying value of impaired communities to their estimated fair value. During the nine
months ended June 30, 2017, impairment charges totaled $10.4 million. There were $5.2 million and $8.9 million of impairment charges recorded in the three and nine months ended June 30, 2016, respectively.
During the three and nine months ended June 30, 2017, the Company
wrote off $4.4 million and $9.5 million, respectively, of earnest money deposits and pre-acquisition costs related to land option contracts that the Company has terminated or expects to terminate. Earnest money and pre-acquisition cost write-offs for the three and nine months ended June 30, 2016 were $2.9 million and $7.1 million, respectively.
Debt
issuance costs that were deducted from the carrying amounts of the senior notes totaled $10.3 million and $13.3 million at June 30, 2017 and September 30, 2016, respectively. These costs are capitalized into inventory as they are amortized.
Homebuilding:
The Company has a $975 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase
the size of the facility to $1.25 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 approximately 50% 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 London Interbank Offered Rate (LIBOR) plus an applicable margin, as defined in the credit agreement governing the facility. The maturity date of the facility is September 7, 2020. Borrowings and repayments under the facility were $700 million during the three months
ended June 30, 2017. At June 30, 2017, there were no borrowings outstanding and $75.1 million of letters of credit issued under the revolving credit facility.
The Company’s revolving credit facility imposes restrictions on its operations and activities, including requiring the maintenance of a minimum level of tangible net worth, a maximum allowable ratio of debt to tangible net worth and a borrowing base restriction if the Company’s
ratio of debt to tangible net worth 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. In addition, the credit agreement governing the facility and the indenture governing the senior notes impose restrictions on the creation of secured debt and liens. At June 30, 2017, the Company was in compliance with all of the covenants, limitations and restrictions of its revolving
credit facility and public debt obligations.
The
Company has an automatically effective universal shelf registration statement, filed with the Securities and Exchange Commission (SEC) in August 2015, registering debt and equity securities that the Company may issue from time to time in amounts to be determined.
On May 15, 2017, the Company repaid the $350 million principal amount of its 4.75% senior notes, which were due on that date.
Effective August 1,
2016, the Board of Directors authorized the repurchase of up to $500 million of the Company’s debt securities effective through July 31, 2017. All of the $500 million authorization was remaining at June 30, 2017. In July 2017, the Board of Directors authorized the repurchase of up to $500 million of the Company’s debt securities effective through July
31, 2018, which replaced the previous authorization.
Financial Services:
The Company’s mortgage subsidiary, DHI Mortgage, has a mortgage repurchase facility that is accounted for as a secured financing. The mortgage repurchase facility provides financing and liquidity to DHI Mortgage by facilitating purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties against the transfer of funds by the counterparties, thereby becoming purchased loans. 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 2017, the mortgage repurchase facility was amended to increase its capacity to $600 million and extend its maturity date to February 23, 2018. The capacity of the facility increases, without requiring additional commitments, to $725 million for approximately 30 days at each quarter end and to $800 million for approximately 45 days at fiscal year end. The capacity of the facility can also be increased to $1.0 billion subject to the availability of additional commitments.
As
of June 30, 2017, $584.5 million of mortgage loans held for sale with a collateral value of $564.1 million were pledged under the mortgage repurchase facility. As a result of advance paydowns totaling $90.7 million, DHI Mortgage had an obligation of $473.4 million outstanding under the mortgage repurchase facility at June 30, 2017 at a 3.3% 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 ratio of debt to tangible net worth and its minimum required liquidity. These covenants are measured and reported to the lenders monthly. At June 30, 2017, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.
In the past, DHI Mortgage has been able to renew or extend its mortgage credit facility at a sufficient capacity and on satisfactory terms prior to its maturity and obtain temporary additional commitments through amendments to the credit agreement during periods
of higher than normal volumes of mortgages held for sale. The liquidity of the Company’s 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.
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 three quarters of fiscal 2017 and in fiscal 2016, 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 nine months ended June 30, 2017 and 2016:
Interest
incurred includes interest on the Company's mortgage repurchase facility of $2.4 million and $5.9 million in the three and nine months ended June 30, 2017, respectively, and $2.4 million and $5.9 million in the same periods of fiscal 2016.
NOTE F
– MORTGAGE LOANS
Mortgage Loans Held for Sale
Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. At June 30, 2017, mortgage loans held for sale had an aggregate carrying value of $627.4 million and an aggregate outstanding principal balance of $609.6 million. At September 30, 2016, mortgage loans held for sale had an aggregate carrying value of $654.0 million and an aggregate outstanding principal balance of $631.8
million. During the nine months ended June 30, 2017 and 2016, mortgage loans originated totaled $4.8 billion and $4.0 billion, respectively, and mortgage loans sold totaled $4.8 billion and $4.0 billion, respectively. The Company had gains on sales of loans and servicing rights of $65.0 million and $185.9 million during the three and
nine months ended June 30, 2017, respectively, compared to $59.8 million and $143.6 million in the prior year periods. Net gains on sales of loans and servicing rights are included in financial services revenues in the consolidated statements of operations. Approximately 87% of the mortgage loans sold by DHI Mortgage during the nine months ended June 30, 2017 were sold to three major financial entities, one of which purchased 46% of the total loans sold.
To
manage the interest rate risk inherent in its mortgage operations, the Company hedges 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 notional amounts of the hedging instruments used to hedge mortgage loans held for sale vary in relationship to the underlying loan amounts, depending on the movements in the
value of each hedging instrument relative to the value of the underlying mortgage loans. The fair value change related to the hedging instruments generally offsets the fair value change in the mortgage loans held for sale. The net fair value change, which for the three and nine months ended June 30, 2017 and 2016 was not significant, is recognized in financial services revenues in the consolidated statements of operations. At June 30, 2017 and September 30, 2016, the
Company’s mortgage loans held for sale that were not committed to third-party purchasers totaled $247.5 million and $284.5 million, respectively, and the notional amounts of the hedging instruments related to those loans totaled $247.4 million and $284.5 million, respectively.
Other Mortgage Loans and Loss Reserves
Mortgage loans are sold with limited recourse provisions derived from industry-standard representations and warranties in the relevant agreements. These representations and warranties primarily involve the absence of misrepresentations by the borrower or other parties, the appropriate underwriting
of the loan and in some cases, a required minimum number of payments to be made by the borrower. The Company generally does not retain any other continuing interest related to mortgage loans sold in the secondary market. The majority of other mortgage loans consists of loans repurchased due to these limited recourse obligations. Typically, these loans are impaired, and some become real estate owned through the foreclosure process. At June 30, 2017 and September 30, 2016, the Company’s total other mortgage loans and real estate owned, before loss reserves, were as follows:
The
Company has recorded reserves for estimated losses on other mortgage loans, real estate owned and future loan repurchase obligations due to the limited recourse provisions, all of which are recorded as reductions of financial services revenue. The loss reserve for loan repurchase and settlement obligations is estimated based on analysis of the volume of mortgages originated, loan repurchase requests received, actual repurchases and losses through the disposition of such loans or requests and discussions with mortgage purchasers. The reserve balances at June 30, 2017 and September 30, 2016 were as follows:
Loan repurchase and settlement obligations – known and expected
8.0
6.8
$
9.4
$
8.7
Other
mortgage loans and real estate owned net of the related loss reserves are included in other assets, while loan repurchase obligations are included in accounts payable and other liabilities, both of which are in the Financial Services and Other section of the Company’s consolidated balance sheets.
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. At June 30, 2017 and September 30,
2016, the notional amount of IRLCs, which are accounted for as derivative instruments recorded at fair value, totaled $656.0 million and $467.6 million, respectively.
The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments and hedging instruments. These instruments are considered derivatives in an economic hedge and are accounted for at fair value with gains and losses recognized in financial services revenues in the consolidated statements of operations. At June 30, 2017 and September 30,
2016, the notional amount of best-efforts whole loan delivery commitments totaled $54.5 million and $37.2 million, respectively, and the notional amount of hedging instruments related to IRLCs not yet committed to purchasers totaled $554.6 million and $385.5 million, respectively.
NOTE G – INCOME TAXES
The Company’s income tax expense
for the three and nine months ended June 30, 2017 was $155.5 million and $391.4 million, respectively, compared to $128.8 million and $317.8 million in the prior year periods. The effective tax rate was 35.0% and 35.1% for the three and nine months ended June 30, 2017, respectively, compared to 34.0% and 34.5% in the prior year
periods. The effective tax rate for all periods includes an expense for state income taxes, reduced by tax benefits for the domestic production activities deduction and federal energy tax credits.
The Companypreviously filed three requests for advance consent for a change in tax accounting method with the Internal Revenue Service (IRS) relating to changes in the timing of income and expense recognition for tax purposes. The Company agreed to and signed consent agreements for two of the three requests during the quarter ended June 30, 2017. The impact of the approved
tax accounting method changes on the consolidated financial statements as of June 30, 2017 was a reduction in income taxes payable of $58.2 million, a reduction in deferred tax assets of $63.5 million and income tax expense of $5.3 million. The third request for advance consent for a change in tax accounting method will be recognized in the period in which a consent agreement is issued by the IRS and agreed to and signed by the Company.
At June 30, 2017 and September 30,
2016, the Company had deferred tax assets, net of deferred tax liabilities, of $394.1 million and $486.6 million, respectively, partially offset by valuation allowances of $10.4 million and $10.3 million, respectively. 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.
When assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of sufficient taxable income in future periods. The Company records a valuation allowance when it determines it is more likely than not that a portion of the deferred tax assets will not be realized. The valuation allowance for both periods relates to the Company’s
state deferred tax assets for net operating loss (NOL) carryforwards. As of June 30, 2017, the Company believes it is more likely than not that a portion of its state NOL carryforwards will not be realized because some state NOL carryforward periods are too brief to realize the related deferred tax assets. The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to its remaining state NOL carryforwards.
Denominator
for basic earnings per share — weighted average common shares
374.8
371.8
374.1
370.4
Effect
of dilutive securities:
Employee stock awards
4.6
4.1
4.4
4.0
Denominator
for diluted earnings per share — adjusted weighted average common shares
379.4
375.9
378.5
374.4
Basic
net income per common share
$
0.77
$
0.67
$
1.94
$
1.63
Net
income per common share assuming dilution
$
0.76
$
0.66
$
1.92
$
1.61
NOTE I – STOCKHOLDERS’ EQUITY
The Company has an automatically effective universal shelf registration statement, filed with the SEC in August 2015, registering debt and equity securities that it may issue from time to time in amounts to be determined.
Effective August 1, 2016, the Board of Directors authorized the repurchase of up to $100
million of the Company’s common stock effective through July 31, 2017. During the three months ended June 30, 2017, the Company repurchased 1,850,000 shares of its common stock for $60.6 million, resulting in a remaining authorization of $39.4 million at June 30, 2017. In July 2017, the Board of Directors authorized
the repurchase of up to $200 million of the Company’s common stock effective through July 31, 2018, which replaced the previous authorization.
During the three months ended June 30, 2017, the Board of Directors approved a quarterly cash dividend of $0.10 per common share, which was paid on May 19, 2017 to stockholders of record on May 5,
2017. In July 2017, the Board of Directors approved a quarterly cash dividend of $0.10 per common share, payable on August 23, 2017 to stockholders of record on August 9, 2017. Quarterly cash dividends of $0.08 per common share were approved and paid in the comparable quarters of fiscal 2016.
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 2016, a total of 330,000 performance-based RSU equity awards were granted to the
Company’s Chairman, its Chief Executive Officer and its Chief Operating Officer. These awards vest at the end of a three-year performance period ending September 30, 2019. The number of units that ultimately vest depends on the Company’s relative position as compared to its peers at the end of the three-year period 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 $29.20 per unit. Compensation expense related to these grants was $1.0 million and $3.0 million, respectively, in the three and nine months ended June 30, 2017, based on the Company’s performance against the peer group, the elapsed portion of the performance period and the grant date fair value of the award. There were also 30,000 time-based RSUs granted to the Company’s Chief Financial Officer in November 2016. These time-based
RSUs vest annually in equal installments over a three-year period ending November 2019. The fair value of this equity award on the date of grant was $27.61 per unit.
In February 2017, a total of 1.8 million time-based RSUs were granted to the Company’s executive officers, other key employees and non-management directors (collectively, approximately 600 recipients). The weighted average grant date fair value of these equity awards was $28.65 per unit, and they vest annually in
equal installments over periods of three to five years. Compensation expense related to these grants was $2.7 million and $6.9 million in the three and nine months ended June 30, 2017, respectively.
NOTE K – COMMITMENTS AND CONTINGENCIES
Warranty Claims
The
Company typically 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 nine months ended June 30,
2017 and 2016 were as follows:
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 $453.5 million and $423.5 million
at June 30, 2017 and September 30, 2016, respectively, and are included in homebuilding accrued expenses and other liabilities in the consolidated balance sheets. Approximately 96% and 95% of these reserves related to construction defect matters at June 30, 2017 and September 30, 2016, respectively. Expenses related to the Company’s legal contingencies were $80.6 million
and $34.2 million in the nine months ended June 30, 2017 and 2016, respectively.
The Company’s reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims. As of June 30, 2017, no individual existing claim was material to the Company’s financial statements. The
Company has closed a significant number of homes during recent years and may be subject to future construction defect claims on these homes. Although regulations vary from state to state, construction defect issues can generally be reported for up to ten years after the home has closed in many states in which the Company operates. Historical data and trends regarding the frequency of claims incurred and the costs to resolve claims relative to the types of products and markets where the Company operates are used to estimate the construction defect liabilities for both existing and anticipated future claims. These estimates are subject to ongoing revision as the circumstances of individual pending claims and historical data and trends change. Adjustments to estimated reserves are recorded in the accounting
period in which the change in estimate occurs.
Historical trends in construction defect claims have been inconsistent, and the Company believes they may continue to fluctuate. Housing market conditions have been volatile across most of the Company’s markets over the past ten years, and the Company believes such conditions can affect the frequency and cost of construction defect claims. If the ultimate resolution of construction defect claims resulting from the Company’s home closings in prior years varies from current expectations, it could significantly
change the Company’s estimates regarding the frequency and timing of claims incurred and the costs to resolve existing and anticipated future claims, which would impact the construction defect reserves in the future. If the frequency of claims incurred or costs of existing and future legal claims significantly exceed the Company’s current estimates, they will have a significant negative impact on its future earnings and liquidity.
The Company’s reserves for legal claims increased from $423.5 million at September 30,
2016 to $453.5 million at June 30, 2017 due to an increase in known claims and the number of closed homes that are subject to possible future construction defect claims, partially offset by payments made for legal claims during the period, net of reimbursements received from subcontractors. Changes in the Company’s legal claims reserves during the nine months ended June 30, 2017 and 2016 were as follows:
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 $82.6 million,
$88.7 million and $97.5 million at June 30, 2017, September 30, 2016 and June 30, 2016, respectively, and are included in homebuilding 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.
The
Company enters into land and lot option 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 option purchase contracts, the option deposits are not refundable in the event the Company elects to terminate the contract.
Option deposits are included in homebuilding other assets in the consolidated balance sheets.
At June 30, 2017, the Company had total deposits of $201.0 million, consisting of cash deposits of $196.0 million and promissory notes and letters of credit of $5.0 million, to purchase land and lots with a total remaining purchase price of approximately $4.5 billion. The majority of land and lots under contract are currently expected to
be purchased within three years. A limited number of the land and lot option purchase contracts at June 30, 2017, representing $30.1 million of remaining purchase price, were subject to specific performance provisions which may require the Company to purchase the land or lots upon the land sellers meeting their contractual obligations.
Option purchase contracts can result in the creation of a variable interest in the entity holding the land parcel under option. There were no
variable interest entities reported in the consolidated balance sheets at June 30, 2017 and September 30, 2016 because the Company determined it did not control the activities that most significantly impact the variable interest entity’s economic performance, and it did not have an obligation to absorb losses of or the right to receive benefits from the entity. The maximum exposure to losses related to the Company’s variable interest entities is limited to the amounts of the Company’s related option deposits. At June 30,
2017 and September 30, 2016, the option deposits related to these contracts totaled $195.2 million and $149.5 million, respectively.
Other Commitments
At June 30, 2017, the Company had outstanding surety bonds of $1.2 billion and letters of credit of $77.9
million to secure performance under various contracts. Of the total letters of credit, $75.1 million were issued under the Company’s revolving credit facility and were cash collateralized to receive better pricing. This unrestricted cash can be withdrawn by the Company at its discretion. The remaining $2.8 million of letters of credit were issued under a secured letter of credit agreement requiring the Company to deposit cash as collateral with the issuing bank, and the cash restricted for this purpose is included
in homebuilding restricted cash in the consolidated balance sheets.
Fair value measurements are used for the Company’s mortgage loans held for sale, debt securities collateralized by residential real estate, IRLCs and other derivative instruments on a recurring basis and are used for inventories, other mortgage loans, rental properties and real estate owned on a nonrecurring basis, when events and circumstances indicate that the carrying value may not be recoverable. The fair value hierarchy and its application to the Company’s assets and liabilities is as follows:
•
Level
1 – Valuation is based on quoted prices in active markets for identical assets and liabilities. The Company does not currently have any assets or liabilities measured at fair value using Level 1 inputs.
•
Level 2 – Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market. The Company’s assets and liabilities measured at fair value using Level 2 inputs on a recurring basis
are as follows:
▪
mortgage loans held for sale;
▪
IRLCs; and
▪
loan sale commitments and hedging instruments.
The Company’s assets
measured at fair value using Level 2 inputs on a nonrecurring basis are a limited number of mortgage loans held for sale with some degree of impairment affecting their marketability and are reported at the lower of carrying value or fair value. When available, fair value is determined by reference to quoted prices in the secondary markets for such assets.
•
Level 3 – Valuation is typically derived from model-based techniques in which at least one significant input is unobservable and based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.
The
Company’s assets measured at fair value using Level 3 inputs on a recurring basis are as follows:
▪
debt securities collateralized by residential real estate; and
▪
a limited number of mortgage loans held for sale with some degree of impairment affecting their marketability.
The Company’s assets measured at fair value using Level 3 inputs that are typically reported at the lower
of carrying value or fair value on a nonrecurring basis are as follows:
The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2017 and September 30, 2016, and the changes in the fair value of the Level 3 assets during the nine months ended June 30, 2017
and 2016.
Debt securities collateralized by residential real estate (c)
$
33.9
$
2.2
$
—
$
(35.8
)
$
(0.3
)
$
—
$
—
Mortgage
loans held for sale (a)
13.9
1.2
—
(15.6
)
—
14.9
14.4
________________
(a)
Mortgage
loans held for sale are reflected at fair value. Interest income earned on mortgage loans held for sale is based on contractual interest rates and included in financial services interest and other income. Mortgage loans held for sale at June 30, 2017 and September 30, 2016 include $5.3 million and $6.8 million, respectively, of loans for which the Company elected the fair value option upon origination and did not sell into the secondary market. Mortgage loans held for sale totaling $6.6 million and $14.9 million were
transferred to Level 3 during the nine months ended June 30, 2017 and 2016, respectively, due to significant unobservable inputs used in determining the fair value of these loans. 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 other liabilities. Changes in the fair value of these derivatives are included in financial services revenues in the consolidated statements of operations.
(c)
In October 2012, the Company purchased defaulted debt securities, which were secured by residential real estate, for $18.6 million in cash. In fiscal 2015, the Company purchased the
residential real estate parcel and all additional defaulted debt securities associated with the parcel for $19.9 million in cash, of which $5.1 million was allocated to the land and $14.8 million was allocated to the debt securities. The Company sold these debt securities to a third party for $35.8 million in January 2016. The resulting gain of $4.5 million on the sale is included in homebuilding other income in the consolidated statement of operations for the nine months ended June 30, 2016.
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 10% to 14% were used in the periods presented.
(c)
The fair value of inventory available for sale was determined based on recent
offers received from outside third parties, comparable sales or actual contracts.
(d)
These mortgage loans have some degree of impairment affecting their marketability. 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 and real estate owned are 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 June 30, 2017 and September 30, 2016:
The
fair value approximates carrying value due to its short-term nature, short maturity or floating interest rate terms, as applicable.
(b)
The fair value is determined based on quoted prices, which is classified as Level 2 within the fair value hierarchy.
(c)
Restricted cash of the financial services segment represents escrow funds for taxes and insurance and is included in other assets in the Financial Services and Other section of the consolidated balance sheet.
All of the Company’s senior notes and the unsecured revolving credit facility are fully and unconditionally guaranteed, on a joint and several basis, by D. R. Horton, Inc. and other subsidiaries (Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by the Company. The Company’s subsidiaries
engaged in the financial services segment and certain other subsidiaries do not guarantee the Company’s senior notes and the unsecured 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) depending on the provisions of the applicable indenture, either (a) its proper designation as an unrestricted subsidiary, (b) its ceasing to guarantee any of the
Company’s publicly traded debt securities, or (c) its ceasing to guarantee any of the Company’s obligations under the revolving credit facility.
As described in Note A, the operating results of certain subsidiaries previously included in the Company’s homebuilding operations have been reclassified to its financial services and other operations. These reclassifications are limited to the Non-Guarantor Subsidiaries column of the condensed consolidating statement of operations for the three and nine months
ended June 30, 2016.
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, 2016. 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 and revenues. We construct and sell homes through our operating divisions in 79 markets in 26 states, under the
names of D.R. Horton, America’s Builder, Emerald Homes, Express Homes, Freedom Homes and Pacific Ridge Homes. 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, financial services and other activities. Our homebuilding operations 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 $295,200
during the nine months ended June 30, 2017. Approximately 89% of our home sales revenues in the nine months ended June 30, 2017 were generated from the sale of single-family detached homes, with the remainder from the sale of attached homes, such as townhomes, duplexes, triplexes and condominiums. We owned approximately 400 attached and detached residential rental homes in our homebuilding operations at June 30, 2017 compared to 600 at September 30,
2016.
On June 29, 2017, we entered into a definitive merger agreement with Forestar Group Inc. (Forestar), a publicly-traded residential real estate development company, to acquire 75% of the currently outstanding shares of Forestar for $17.75 per share in cash or approximately $560 million of total cash consideration. Forestar stockholders will have the right to receive cash or retain their shares of the surviving entity as described in Note A. The transaction is expected to close during our first quarter of fiscal 2018, subject to the approval of Forestar shareholders and other customary closing conditions. The transaction is a component of our strategy to expand
relationships with land developers and increase the optioned portion of our land and lot position to enhance operational efficiency and returns.
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 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 core homebuilding and financial services operations, we have subsidiaries that engage in other business activities. These subsidiaries conduct insurance-related operations, construct and own income-producing rental properties, own non-residential real estate including ranch land and improvements and own and operate oil and gas related assets. At June 30, 2017, assets totaling $120.1 million associated with these subsidiaries were included in the Financial Services and Other section of our balance sheet.
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 contain additional information regarding segment performance.
During the first three quarters of fiscal 2017, demand for new homes continued to reflect the stable to moderately improved trends we experienced across most of our operating markets in fiscal 2016. We continue to see varying levels of strength in new home demand and home prices across our markets, with demand in each market generally reflecting the relative strength of each market’s economy, as measured by job growth, household incomes, household formations and consumer confidence.
Our
position as the largest and most geographically diverse homebuilder in the United States provides a strong platform for us to compete for new home sales. In recent years, we have focused on expanding our product offerings to consistently include a broad range of homes for entry-level, move-up and luxury buyers across most of our markets. Our affordable entry-level homes have experienced very strong demand from homebuyers, as the entry-level segment of the new home market remains under-served, with low inventory levels relative to demand. Since the fourth quarter of fiscal 2016, we have been introducing affordable homes in communities designed for active adult buyers seeking a low-maintenance lifestyle. We plan to continue to expand our product offerings across more of our operating markets.
During the third quarter of fiscal 2017,
the number and value of our net sales orders increased 11% and 13%, respectively, compared to the prior year quarter, and the number of homes closed and home sales revenues increased 16% and 17%, respectively. Our pre-tax income in the third quarter was $444.5 million compared to $378.6 million in the prior year quarter, and our pre-tax operating margin was 11.8% compared to 11.7%.
We
believe our business is well positioned for the future because of our broad geographic footprint and diverse product offerings, our ample supply of finished lots, land and homes, our strong balance sheet and liquidity and our experienced personnel across our operating markets. We remain focused on growing our profitability, generating positive annual cash flows from operations and managing our product offerings, pricing, sales pace, and inventory levels to optimize the return on our inventory investments.
We believe that housing demand in our individual operating markets is tied closely to each market’s economy; therefore, we expect that housing market conditions will vary across our markets. If the U.S. economy continues to improve, we expect to see slow to moderate growth in housing demand, concentrated in markets where job growth is occurring. 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, significant increases in mortgage interest rates or tightening of mortgage lending standards.
Our operating strategy focuses on leveraging our financial and competitive position to increase the returns on our inventory investments and generate strong
profitability and cash flows, while managing risk. This strategy includes the following initiatives:
•
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.
•
Managing our inventory of 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.
•
Investing in land and land development and pursuing opportunistic acquisitions of homebuilding companies in desirable markets, while controlling the level of land and lots we own in each of our markets relative to the local new home demand.
•
Increasing the amount of land and finished lots controlled through option purchase contracts by expanding relationships with land developers across the country.
•
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.
We believe our operating strategy, which has produced positive results in recent years, will allow us to maintain and improve
our competitive position, financial performance 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 financial results as of and for the three
months ended June 30, 2017, as compared to the same period of 2016, were as follows:
Homebuilding:
•
Homebuilding revenues increased 17% to $3.7 billion.
•
Homes
closed increased 16% to 12,497 homes, and the average closing price of those homes increased 1% to $293,100.
•
Net sales orders increased 11% to 13,040 homes, and the value of net sales orders increased 13% to $3.9 billion.
•
Sales
order backlog increased 3% to 15,161 homes, and the value of sales order backlog increased 6% to $4.6 billion.
•
Home sales gross margin decreased 50 basis points to 19.8%.
•
Inventory
and land option charges were $5.4 million compared to $8.1 million.
•
Homebuilding SG&A expenses as a percentage of homebuilding revenues decreased by 50 basis points to 8.4%.
•
Homebuilding pre-tax income increased 19%
to $415.2 million compared to $348.4 million.
•
Homebuilding pre-tax income as a percentage of homebuilding revenues was 11.3% compared to 11.1%.
•
Homebuilding cash and cash equivalents totaled $460.8 million compared to $1.3 billion and $857.9
million at September 30, 2016 and June 30, 2016, respectively.
•
Homebuilding inventories totaled $9.6 billion compared to $8.3 billion and $8.5 billion at September 30, 2016 and June 30, 2016, respectively.
The following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the three and nine months ended June 30, 2017 and 2016. As described in Note A, the prior year amounts presented throughout this discussion reflect certain reclassifications made to conform to the classifications used in the current year.
Net
Sales Orders (1)
Three Months Ended June 30,
Net Homes Sold
Value (In millions)
Average Selling Price
2017
2016
% Change
2017
2016
% Change
2017
2016
% Change
East
1,642
1,361
21
%
$
453.8
$
382.1
19
%
$
276,400
$
280,700
(2
)%
Midwest
457
527
(13
)%
177.9
200.4
(11
)%
389,300
380,300
2
%
Southeast
4,401
3,930
12
%
1,151.0
1,023.4
12
%
261,500
260,400
—
%
South Central
3,691
3,588
3
%
926.4
887.3
4
%
251,000
247,300
1
%
Southwest
816
535
53
%
186.7
126.3
48
%
228,800
236,100
(3
)%
West
2,033
1,773
15
%
976.2
815.7
20
%
480,200
460,100
4
%
13,040
11,714
11
%
$
3,872.0
$
3,435.2
13
%
$
296,900
$
293,300
1
%
Nine
Months Ended June 30,
Net Homes Sold
Value (In millions)
Average Selling Price
2017
2016
% Change
2017
2016
% Change
2017
2016
% Change
East
4,579
3,784
21
%
$
1,297.9
$
1,064.2
22
%
$
283,400
$
281,200
1
%
Midwest
1,463
1,372
7
%
570.3
517.9
10
%
389,800
377,500
3
%
Southeast
12,019
10,663
13
%
3,143.2
2,768.8
14
%
261,500
259,700
1
%
South Central
10,858
10,089
8
%
2,709.0
2,463.5
10
%
249,500
244,200
2
%
Southwest
2,019
1,352
49
%
466.2
313.8
49
%
230,900
232,100
(1
)%
West
5,334
4,810
11
%
2,638.5
2,250.7
17
%
494,700
467,900
6
%
36,272
32,070
13
%
$
10,825.1
$
9,378.9
15
%
$
298,400
$
292,500
2
%
Sales
Order Cancellations
Three Months Ended June 30,
Cancelled Sales Orders
Value (In millions)
Cancellation Rate (2)
2017
2016
2017
2016
2017
2016
East
508
414
$
143.2
$
113.7
24
%
23
%
Midwest
81
70
34.0
24.8
15
%
12
%
Southeast
1,267
1,189
323.9
293.2
22
%
23
%
South Central
1,019
1,037
258.2
256.1
22
%
22
%
Southwest
254
178
56.2
37.6
24
%
25
%
West
315
305
157.7
146.8
13
%
15
%
3,444
3,193
$
973.2
$
872.2
21
%
21
%
Nine
Months Ended June 30,
Cancelled Sales Orders
Value (In millions)
Cancellation Rate (2)
2017
2016
2017
2016
2017
2016
East
1,355
1,157
$
373.1
$
309.0
23
%
23
%
Midwest
207
182
82.7
68.5
12
%
12
%
Southeast
3,567
3,154
909.8
789.2
23
%
23
%
South Central
2,956
2,739
740.8
675.6
21
%
21
%
Southwest
610
499
138.5
105.8
23
%
27
%
West
850
822
424.6
399.4
14
%
15
%
9,545
8,553
$
2,669.5
$
2,347.5
21
%
21
%
___________________________________________
(1)
Net
sales orders represent the number and dollar value of new sales contracts executed with customers (gross sales orders), net of cancelled sales orders.
(2)
Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.
The value of net sales orders increased 13% to $3.9 billion (13,040 homes) for the three months ended June 30, 2017 from $3.4 billion (11,714 homes) in the prior year period, with increases in most of our regions. The value of net sales orders increased 15% to $10.8 billion (36,272
homes) for the nine months ended June 30, 2017 from $9.4 billion (32,070 homes) in the prior year period, with increases in all of our regions. The increases in the value of sales orders were primarily due to increases in volume and to a lesser extent, increases in selling prices in most regions.
The number of net sales orders increased 11% and 13% in the three and nine months ended June 30, 2017,
respectively, compared to the prior year periods. The overall increase in our net sales orders reflects the continued stable to moderately improved market conditions in most of our markets. Our Phoenix market contributed the most to the higher volume in our Southwest region and our North Carolina markets contributed most to the higher volume in our East region. The decrease in volume in our Midwest region was due to lower sales in our Chicago and Denver markets during the quarter. Our sales order cancellation rates (cancelled sales orders divided by gross sales orders for the period) remained consistent with the prior year periods.
We believe our business is well positioned to continue to generate increased sales volume; however, our future sales volumes will depend on the economic strength of each of our operating markets and our ability to successfully implement our operating
strategies in each market.
Sales
Order Backlog
As of June 30,
Homes in Backlog
Value (In millions)
Average Selling Price
2017
2016
%
Change
2017
2016
%
Change
2017
2016
%
Change
East
1,794
1,646
9
%
$
520.5
$
492.9
6
%
$
290,100
$
299,500
(3
)%
Midwest
593
575
3
%
234.7
219.1
7
%
395,800
381,000
4
%
Southeast
4,710
4,864
(3
)%
1,277.6
1,313.3
(3
)%
271,300
270,000
—
%
South Central
4,937
5,048
(2
)%
1,268.6
1,307.5
(3
)%
257,000
259,000
(1
)%
Southwest
1,030
839
23
%
232.9
191.1
22
%
226,100
227,800
(1
)%
West
2,097
1,698
23
%
1,110.7
856.3
30
%
529,700
504,300
5
%
15,161
14,670
3
%
$
4,645.0
$
4,380.2
6
%
$
306,400
$
298,600
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.
Revenues from home sales increased 17% to $3.7 billion (12,497 homes closed) for the three months ended June 30, 2017 from $3.1 billion (10,739 homes closed) in the prior year period. Revenues from home sales increased 18% to $9.6 billion (32,586 homes closed) for the nine
months ended June 30, 2017 from $8.1 billion (28,062 homes closed) in the prior year period. The overall increase in home sales revenues reflects the continued stable to moderately improved market conditions in most of our markets.
The number of homes closed increased 16% in both the three and nine months ended June 30, 2017 compared to the prior year periods due to increases in all of our regions. Our Phoenix, Florida and South Carolina markets
contributed the most to higher closings volumes in our Southwest, Southeast and East regions, respectively. The average selling price of homes closed during the three and nine months ended June 30, 2017 was $293,100 and $295,200, respectively, up slightly from the prior year periods.
Prior
period percentages for selling, general and administrative expense and other (income) expense reflect certain reclassifications made to the prior year financial statements to conform to the classifications used in the current year. See Note A - Basis of Presentation to the Consolidated Financial Statements included in Part I, Item I, above.
Home Sales Gross Profit
Gross profit from home sales increased 15% to $725.4 million in the three months ended June 30, 2017 from $632.2
million in the prior year period and decreased 50 basis points to 19.8% as a percentage of home sales revenues. The 50 basis point decrease in home sales gross profit percentage resulted from decreases of 60 basis points due to an increase in warranty and construction defect expenses as a percentage of home sales revenues, 20 basis points due to the average cost of our homes closed increasing by more than the average selling price and 10 basis points related to an increase in the amount of purchase
accounting adjustments for recent acquisitions. These decreases were partially offset by an improvement of 40 basis points due to a decrease in the amortization of capitalized interest and property taxes as a percentage of home sales revenues.
Gross profit from home sales increased 17% to $1.9 billion in the nine months ended June 30, 2017 from $1.6 billion in the prior year period and decreased 30 basis
points to 19.8% as a percentage of home sales revenues. The 30 basis point decrease in the home sales gross profit percentage resulted from decreases of 60 basis points due to an increase in warranty and construction defect expenses as a percentage of home sales revenues and 10 basis points related to an increase in the amount of purchase accounting adjustments for recent acquisitions. These decreases were partially offset by improvements of 30 basis points due to a decrease in the amortization of capitalized interest and property taxes and 10 basis points due
to the average selling price of our homes increasing by more than the average cost.
We remain focused on managing the pricing, incentives and sales pace in each of our communities to optimize the returns on our inventory investments and adjust to local market conditions. Our gross profit margins have remained relatively stable in recent years and based on current market conditions, we expect continued stability; however, our gross profit margins could fluctuate in future periods.
Land Sales and Other Revenues
Land sales and other revenues were $22.2 million and $56.9 million in the three
and nine months ended June 30, 2017, respectively, and $30.1 million and $65.2 million in the comparable periods of 2016. 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 June 30, 2017,
we had $11.5 million of land held for sale that we expect to sell in the next twelve months.
At June 30, 2017, we reviewed the performance and outlook for all of our communities and land inventories for indicators of potential impairment and performed detailed impairment evaluations and analyses
when necessary. We performed detailed impairment evaluations of communities and land inventories with a combined carrying value of $75.0 million and recorded impairment charges of $1.0 million during the three months ended June 30, 2017 to reduce the carrying value of impaired communities to their estimated fair value. During the nine months ended June 30, 2017, impairment charges totaled $10.4 million. There were $5.2 million and $8.9 million of impairment charges
recorded in the three and nine months ended June 30, 2016, 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, if housing or economic conditions weaken in specific markets in which we operate, or if conditions weaken in the broader economy or homebuilding industry, we may be required to evaluate additional communities for potential impairment. These evaluations could result in additional impairment charges.
During
the three and nine months ended June 30, 2017, we wrote off $4.4 million and $9.5 million, respectively, of earnest money deposits and pre-acquisition costs related to land option contracts that we have terminated or expect to terminate. Earnest money and pre-acquisition cost write-offs for the three and nine months ended June 30, 2016 were $2.9 million and $7.1 million, respectively.
Selling,
General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities increased 11% to $309.5 million and 12% to $872.4 million in the three and nine months ended June 30, 2017, respectively, from $279.3 million and $778.4 million in the prior year periods. As a percentage of homebuilding revenues, SG&A expense decreased 50
basis points to 8.4% and 9.0% in the three and nine months ended June 30, 2017, respectively, from 8.9% and 9.5% in the prior year periods. This improvement in SG&A expense as a percentage of revenues was achieved primarily through leverage of our fixed overhead costs resulting from the increase in homebuilding revenues.
Employee compensation and related costs represented 73% and 71% of SG&A costs in the three and nine months
ended June 30, 2017, respectively, compared to 69% in both prior year periods. These costs increased 17% to $226.5 million and 15% to $615.7 million in the three and nine months ended June 30, 2017, respectively, due to increases in the number of employees and the amount of incentive compensation as compared to the prior year periods. Our homebuilding operations employed 5,870 and 5,172
employees at June 30, 2017 and 2016, respectively.
We attempt to control our SG&A costs while ensuring that our infrastructure adequately supports our operations. We expect our SG&A expense as a percentage of homebuilding revenues to be lower in fiscal 2017 than in fiscal 2016.
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 decreased 8% to $32.4 million and 16% to $99.4 million in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods. These decreases were due to decreases in our average debt of 6% and 12% in the three and nine months ended June 30, 2017, respectively, and lower average interest rates on outstanding debt during
the periods. Interest charged to cost of sales was 1.3% and 1.4% of total cost of sales (excluding inventory and land option charges) in the three and nine months ended June 30, 2017, respectively, compared to 1.7% and 1.8% in the three and nine months ended June 30, 2016, respectively.
Other Income
Other income, net of other
expenses, included in our homebuilding operations was $1.3 million and $7.8 million in the three and nine months ended June 30, 2017, respectively, compared to $1.9 million and $11.2 million in the prior year periods. Other income in the nine-month period of fiscal 2016 includes a $4.5 million gain from the sale of an investment in debt securities. Other income consists of interest income, rental income and various other types of ancillary income, gains, expenses and losses not directly associated with our homebuilding operations. The activities that result
in this ancillary income or expense are not significant, either individually or in the aggregate.
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 23% and 16% in the three and nine months ended June 30,
2017, respectively, compared to the prior year periods, primarily due to an increase in the number of homes closed in our South Carolina markets. The region generated pre-tax income of $54.2 million and $106.4 million in the three and nine months ended June 30, 2017, respectively, compared to $40.3 million and $90.6 million in the prior year periods. Pre-tax income was reduced by inventory impairment charges of $5.8 million in the nine months ended June 30, 2017
and by $4.2 million and $7.4 million in the three and nine months ended June 30, 2016, respectively. Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) decreased by 90 and 30 basis points in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods, due to the average cost of homes increasing by more than the average selling price. The decrease in the three-month period was
also due to higher warranty and construction defect costs in the current year. As a percentage of homebuilding revenues, SG&A expenses decreased by 20 basis points and increased by 10 basis points in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods.
Midwest
Region — Homebuilding revenues increased 12% in the three and nine months ended June 30, 2017 compared to the prior year periods, primarily due to an increase in the number of homes closed in our Minneapolis market. The region generated pre-tax income of $17.9 million and $28.8 million in the three and nine months ended June 30, 2017, respectively, compared to $13.4 million and $29.4 million in
the prior year periods. Home sales gross profit percentage increased by 190 basis points and decreased by 130 basis points in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods. The decrease in the nine-month period was largely due to higher warranty and construction defect costs in our Denver market. As a percentage of homebuilding revenues, SG&A expenses were unchanged in the three-month period and decreased by 70 basis points in the nine-month period compared to the prior year periods.
Southeast
Region — Homebuilding revenues increased 24% and 23% in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods, primarily due to an increase in the number of homes closed in our Florida markets. The region generated pre-tax income of $128.6 million and $341.3 million in the three and nine months ended June 30, 2017, respectively, compared to $107.6 million
and $279.0 million in the prior year periods. Home sales gross profit percentage decreased by 120 and 60 basis points in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods, due to the average cost of homes increasing by more than the average selling price. As a percentage of homebuilding revenues, SG&A expenses decreased by 80 and 70 basis points in the three and nine months ended June 30,
2017, respectively, compared to the prior year periods.
South Central Region — Homebuilding revenues increased 13% and 18% in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods, primarily due to an increase in the number of homes closed in our Dallas market. The region generated pre-tax income of $119.1 million and $321.4 million in the three and nine months ended June 30,
2017, respectively, compared to $109.3 million and $262.6 million in the prior year periods. Home sales gross profit percentage decreased by 130 and 20 basis points in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods, due to the average cost of homes increasing by more than the average selling price. As a percentage of homebuilding revenues, SG&A expenses decreased by 80 basis points in both the three and nine months
ended June 30, 2017 compared to the prior year periods.
Southwest Region — Homebuilding revenues increased 64% and 57% in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods, primarily due to an increase in the number of homes closed in our Phoenix market, as well as an increase in the average selling price of those homes. The region generated pre-tax income of $14.8 million and $26.0
million in the three and nine months ended June 30, 2017, respectively, compared to $0.9 million and $5.6 million in the prior year periods. Home sales gross profit percentage increased by 640 and 240 basis points in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods. These increases were due to the average selling price increasing by more than the average cost of homes closed in the region, as well
as lower warranty and construction defect costs in our Phoenix market in the current year periods. As a percentage of homebuilding revenues, SG&A expenses decreased by 230 and 200 basis points in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods, primarily due to the significant increases in homebuilding revenues.
West Region — Homebuilding revenues increased 4% and 9% in the three
and nine months ended June 30, 2017, respectively, compared to the prior year periods, primarily due to an increase in the number of homes closed in our Las Vegas and northern California markets, as well as increases in the average selling price of homes closed in our Seattle, Portland and Sacramento markets. The region generated pre-tax income of $80.6 million and $207.6 million in the three and nine months ended June 30, 2017, respectively, compared to $76.9 million and $192.1 million in the prior year periods. Home sales gross
profit percentage increased by 10 and 20 basis points in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods. As a percentage of homebuilding revenues, SG&A expenses increased by 30 and 20 basis points in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods.
INVENTORIES, LAND AND LOT POSITION AND HOMES IN INVENTORY
We routinely enter into land/lot option contracts to purchase land or developed residential lots at predetermined prices on a defined schedule commensurate with planned development or anticipated new home demand. We also purchase undeveloped land that generally is 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.
Land/lots
owned include approximately 32,800 and 30,400 owned lots that are fully developed and ready for home construction at June 30, 2017 and September 30, 2016, respectively. Land/lots owned also include land held for development representing 5,300 and 7,300 lots at June 30, 2017 and September 30, 2016, respectively.
(2)
The
total remaining purchase price of lots controlled through land and lot option purchase contracts at June 30, 2017 and September 30, 2016 was $4.5 billion and $3.6 billion, respectively, secured by earnest money deposits of $201.0 million and $167.0 million, respectively. Our lots controlled under land and lot option purchase contracts exclude approximately 300
and 700 lots at June 30, 2017 and September 30, 2016, respectively, representing lots controlled under lot option contracts for which we do not expect to exercise our option to purchase the land or lots, but the underlying contracts have yet to be terminated. We have reserved the deposits related to these contracts.
(3)
Homes
in inventory include approximately 1,600 model homes at both June 30, 2017 and September 30, 2016. Approximately 12,800 and 11,800 of our homes in inventory were unsold at June 30, 2017 and September 30, 2016, respectively. At June 30, 2017, approximately 3,600 of our unsold homes were completed, of
which approximately 400 homes had been completed for more than six months. At September 30, 2016, approximately 3,500 of our unsold homes were completed, of which approximately 500 homes had been completed for more than six months.
RESULTS
OF OPERATIONS – FINANCIAL SERVICES AND OTHER
The following tables and related discussion set forth key operating and financial data for our financial services and other operations, comprising DHI Mortgage, our subsidiary title companies and other businesses, for the three and nine months ended June 30, 2017 and 2016. As described in Note A - Basis of Presentation to the Consolidated Financial Statements included in Part I, Item I, above, the prior year amounts presented throughout this discussion reflect certain reclassifications made to conform to the classifications used in the current year.
Prior
period amounts and percentages for general and administrative expense and interest and other (income) expense reflect certain reclassifications made to conform to the classifications used in the current year. See Note A - Basis of Presentation to the Consolidated Financial Statements included in Part I, Item I, above.
The volume of loans originated by our mortgage operations is directly related to the number of homes closed
by our homebuilding operations. In the three and nine months ended June 30, 2017, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 13% and 21%, respectively, primarily as a result of the 16% increase in the number of homes closed by our homebuilding operations in both periods, combined with a slight increase in our mortgage capture rate (the percentage of total home closings by our homebuilding operations for which DHI Mortgage handled the homebuyers’ financing) in the nine-month period. Our mortgage capture rate was 55%
and 56% in the three and nine months ended June 30, 2017, respectively, compared to 56% and 54% in the prior year periods.
Home closings from our homebuilding operations constituted 95% of DHI Mortgage loan originations in both the three and nine months ended June 30, 2017 compared to 92% in both prior year periods. These rates reflect DHI Mortgage’s consistent focus on the
captive business provided by our homebuilding operations.
The number of loans sold increased 6% and 17% in the three and nine months ended June 30, 2017, respectively, compared to the prior year periods. Virtually all of the mortgage loans held for sale on June 30, 2017 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 87%
of the mortgage loans sold by DHI Mortgage during the nine months ended June 30, 2017 were sold to three major financial entities, one of which purchased 46% of the total loans sold.
Financial Services and Other Revenues and Expenses
Revenues from our financial services and other operations increased 11% to $91.9 million and 25% to $256.9 million
in the three and nine months ended June 30, 2017, respectively, from $83.1 million and $205.4 million in the prior year periods, while the number of loan originations increased 9% and 18% during the same periods. Revenues increased at a higher rate than origination volume in the nine-month period primarily due to improved loan sale execution in the secondary market and increased revenue from title operations.
Our mortgage operations revenues were reduced by $0.7 million
and $2.6 million in the three and nine months ended June 30, 2017, respectively, and by $0.7 million and $2.7 million in the prior year periods, to increase our loss reserves for estimated future recourse obligations and other mortgage loans, and to adjust certain mortgage loans held for sale to fair value. Our loss reserves for loan recourse obligations are estimated based upon analysis of the volume of mortgages originated, loan repurchase requests received, actual repurchases and losses through the disposition of such loans or requests and discussions with our mortgage purchasers. Actual losses on mortgage loans may differ from our estimates, which may result in future changes to our loss
reserves.
General and administrative (G&A) expense from financial services and other operations increased 13% to $65.0 million and 17% to $183.1 million in the three and nine months ended June 30, 2017, respectively, from $57.5 million and $157.1 million in the prior year periods. These increases were primarily due to increases in employee related costs due to both increased volume and the cost of compliance with mortgage
industry regulations. Our financial services and other operations employed 1,812 and 1,548 employees at June 30, 2017 and 2016, respectively.
As a percentage of financial services and other revenues, G&A expense was 70.7% and 71.3% in the three and nine months ended June 30, 2017, respectively, compared to 69.2% and 76.5%
in the prior year periods. Fluctuations in financial services G&A expense as a percentage of revenues can be expected to occur, as some components of revenue may fluctuate differently than loan volumes, and some expenses are not directly related to mortgage loan volume or to changes in the amount of revenue earned.
Interest and other income, net of other expense, included in our financial services and other operations consists primarily of the interest income of our mortgage subsidiary.
Pre-tax income for the three and nine months ended June 30, 2017 was $444.5 million and $1.1 billion, respectively, compared to $378.6 million and $920.4 million for the prior year periods. The increase in our operating income is primarily due to higher revenues from increased home closings.
Income Taxes
Our
income tax expense for the three and nine months ended June 30, 2017 was $155.5 million and $391.4 million, respectively, compared to $128.8 million and $317.8 million in the prior year periods. Our effective tax rate was 35.0% and 35.1% for the three and nine months ended June 30, 2017, respectively, compared to 34.0% and 34.5%
in the prior year periods. The effective tax rate for all periods includes an expense for state income taxes, reduced by tax benefits for the domestic production activities deduction and federal energy tax credits.
We previously filed three requests for advance consent for a change in tax accounting method with the Internal Revenue Service (IRS) relating to changes in the timing of income and expense recognition for tax purposes. We agreed to and signed consent agreements for two of the three requests during the quarter ended June 30, 2017. The impact of the approved tax accounting method changes on our consolidated financial statements as of June 30, 2017
was a reduction in income taxes payable of $58.2 million, a reduction in deferred tax assets of $63.5 million and income tax expense of $5.3 million. The third request for advance consent for a change in tax accounting method will be recognized in the period in which a consent agreement is issued by the IRS and agreed to and signed by us.
At June 30, 2017 and September 30, 2016, we had deferred tax assets, net of deferred tax liabilities, of $394.1 million and $486.6 million,
respectively, partially offset by valuation allowances of $10.4 million and $10.3 million, respectively. 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.
When assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of our deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of sufficient taxable income in future periods.
We record a valuation allowance when we determine it is more likely than not that a portion of the deferred tax assets will not be realized. The valuation allowance for both periods relates to our state deferred tax assets for net operating loss (NOL) carryforwards. As of June 30, 2017, we believe it is more likely than not that a portion of our state NOL carryforwards will not be realized because some state NOL carryforward periods are too brief to realize the related deferred tax assets. 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.
We have historically funded our homebuilding and financial services and other 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 changes in homebuilding market conditions and allow us to increase our investments in homes, finished lots, land and land development to expand our operations and grow our profitability.
At June 30, 2017, our ratio of homebuilding debt to total
capital (homebuilding notes payable divided by total equity plus homebuilding notes payable) was 24.8% compared to 29.2% at September 30, 2016 and 30.0% at June 30, 2016. Over the long term, we intend to maintain our ratio of homebuilding debt to total capital below 40%, and we expect it to remain significantly lower than 40% throughout fiscal 2017 and 2018. We believe that the ratio of homebuilding debt to total capital is useful in understanding the leverage employed in our homebuilding operations and comparing our capital structure with other homebuilders.
We exclude the debt of our financial services business because it is separately capitalized, and its obligation under its repurchase facility is substantially collateralized and not guaranteed by our parent company or any of our homebuilding entities.
We believe that our existing cash resources, our revolving credit facility and our mortgage repurchase facility provide sufficient liquidity to fund our near-term working capital needs. We expect to have the cash on hand and other immediately available capital to fund the approximately $560 million cash consideration for the proposed Forestar merger. We regularly assess our projected capital requirements to fund growth in our business, repay debt obligations, and support other general corporate and operational needs, and we regularly evaluate our opportunities to raise additional capital.
We have an automatically effective universal shelf registration statement filed with the SEC in August 2015, registering debt and equity securities which we may issue from time to time in amounts to be determined. As market conditions permit, we may issue new debt or equity securities through the public capital markets or obtain additional bank financing to fund our projected capital requirements or provide additional liquidity.
Capital Resources - Homebuilding
Cash and Cash Equivalents — At June 30, 2017, cash and cash equivalents of our homebuilding segment totaled $460.8 million.
Bank
Credit Facility — We have a $975 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $1.25 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 approximately 50% 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 London Interbank Offered Rate (LIBOR) plus an applicable margin, as defined in the credit agreement governing the facility. The maturity date of the facility is September
7, 2020. Borrowings and repayments under the facility were $700 million during the three months ended June 30, 2017. At June 30, 2017, there were no borrowings outstanding and $75.1 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $899.9 million.
Our revolving credit facility imposes restrictions on our operations and activities, including requiring the maintenance of a minimum
level of tangible net worth, a maximum allowable ratio of debt to tangible net worth and a borrowing base restriction if our ratio of debt to tangible net worth 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. In addition, the credit agreement governing the facility imposes restrictions on the creation of secured debt and liens. At June 30, 2017, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.
Secured Letter of Credit Agreement — We have a secured letter of credit agreement which requires us to deposit cash, in an amount approximating the balance of letters of credit outstanding, as collateral with the issuing bank. The amount of cash restricted for letters of credit issued under this agreement totaled $2.8 million and $2.9 million at June 30, 2017 and September 30, 2016, respectively, and is included in homebuilding
restricted cash in our consolidated balance sheets.
Public Unsecured Debt — On May 15, 2017, we repaid the $350 million principal amount of our 4.75% senior notes, which were due on that date. The indenture governing our senior notes imposes restrictions on the creation of secured debt and liens. At June 30, 2017, we were in compliance with all of the limitations and restrictions associated with our public debt obligations.
Repurchases
of Common Stock — During the three months ended June 30, 2017, we repurchased 1,850,000 shares of our common stock for $60.6 million.
Debt and Equity Repurchase Authorizations — Effective August 1, 2016, our Board of Directors authorized the repurchase of up to $500 million of debt securities and $100 million of our common stock effective through July 31, 2017. The
full amount of the debt securities authorization was remaining at June 30, 2017. Repurchases of common stock through June 30, 2017 reduced the stock repurchase authorization to $39.4 million. In July 2017, our Board of Directors authorized the repurchase of up to $500 million of debt securities and $200 million of our common stock effective through July 31, 2018, which replaced the previous authorizations.
Capital
Resources - Financial Services and Other
Cash and Cash Equivalents — At June 30, 2017, cash and cash equivalents of our financial services and other operations totaled $51.6 million.
Mortgage Repurchase Facility — Our mortgage subsidiary, DHI Mortgage, has a mortgage repurchase facility that is accounted for as a secured financing. The mortgage repurchase facility provides financing and liquidity to DHI Mortgage by facilitating purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties against the transfer of funds by the counterparties, thereby becoming purchased
loans. 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 2017, the mortgage repurchase facility was amended to increase its capacity to $600 million and extend its maturity date to February 23, 2018. The capacity of the facility increases, without requiring additional commitments, to $725 million for approximately 30 days at each quarter end and to $800 million for approximately 45 days at fiscal year end. The capacity of the
facility can also be increased to $1.0 billion subject to the availability of additional commitments.
As of June 30, 2017, $584.5 million of mortgage loans held for sale with a collateral value of $564.1 million were pledged under the mortgage repurchase facility. As a result of advance paydowns totaling $90.7 million, DHI Mortgage had an obligation of $473.4 million outstanding under the mortgage repurchase facility at June 30, 2017 at a 3.3%
annual interest rate.
The mortgage repurchase facility is not guaranteed by D.R. Horton, Inc. or any of the subsidiaries that guarantee our homebuilding debt. The facility contains financial covenants as to the mortgage subsidiary’s minimum required tangible net worth, its maximum allowable ratio of debt to tangible net worth and its minimum required liquidity. These covenants are measured and reported to the lenders monthly. At June 30, 2017, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.
In the past, our mortgage subsidiary 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.
In
the nine months ended June 30, 2017, net cash used in operating activities was $190.8 million compared to cash provided by operating activities of $88.6 million in the prior year period. We used $870.9 million of cash to increase our construction in progress and finished home inventory compared to $879.1 million used in the prior year period. The cash used in both periods increased our number of homes under construction to support an expected increase in sales and closings volumes. Cash used to increase residential land and lots inventory was $352.2 million compared to $151.3 million
of cash provided by a decrease in residential land and lots inventory in the prior year period. The most significant source of cash provided by operating activities in both periods was net income.
Investing Cash Flow Activities
In the nine months ended June 30, 2017, net cash used in investing activities was $121.0 million compared to $27.2 million in the prior year period. We used $103.5 million and $65.2 million in the nine months
ended June 30, 2017 and 2016, respectively, to purchase and construct property and equipment, including office buildings, rental properties, model home furniture and office and technology equipment to support our operations. During the current year period, we purchased $8.8 million of debt securities which were secured by residential real estate, and in the prior year period, we sold a previous investment in debt securities for proceeds of $35.8 million. Additionally, we paid $4.1 million during the current year period to complete our purchase of the homebuilding operations of Wilson Parker Homes,
acquired in September 2016.
Financing Cash Flow Activities
We expect the short-term financing needs of our operations will be funded with existing cash, cash generated from operations and borrowings under our homebuilding and financial services credit facilities. Long-term financing needs for the growth of our operations have historically been funded with the issuance of senior unsecured debt securities through the public capital markets.
During the nine months ended June 30, 2017, net cash used in financing activities was $479.0
million, consisting primarily of note repayments, payments of cash dividends and repurchases of common stock, partially offset by note proceeds. Note repayments of $1.1 billion included our repayment of the $350 million principal amount of our 4.75% senior notes at maturity and repayments of amounts drawn on our revolving credit facility of $700 million. Proceeds from notes payable of $700.4 million included draws of $700 million on the revolving credit facility and borrowings of $0.4 million under our mortgage repurchase facility. We also used cash to repurchase 1,850,000 shares of
our common stock for $60.6 million during the period. During the nine months ended June 30, 2016, net cash used in financing activities was $538.4 million, consisting primarily of note repayments and payments of cash dividends. Note repayments of $543.9 million included our repayment of $170.2 million principal amount of our 5.625% senior notes and $372.7 million principal amount of our 6.5% senior notes at maturity.
During the three months ended June 30, 2017,
our Board of Directors approved a quarterly cash dividend of $0.10 per common share, which was paid on May 19, 2017 to stockholders of record on May 5, 2017. In July 2017, our Board of Directors approved a quarterly cash dividend of $0.10 per common share, payable on August 23, 2017 to stockholders of record on August 9, 2017. Quarterly cash dividends of $0.08 per common share were approved and paid in the comparable
quarters of fiscal 2016. The declaration of future cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, our future earnings, cash flows, capital requirements, financial condition and general business conditions.
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 homebuilding and financial services 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.
At June 30, 2017, our homebuilding operations had outstanding letters of credit of $77.9 million and surety bonds of $1.2 billion, issued by third parties to secure performance under various contracts.
We expect that our performance obligations secured by these letters of credit and bonds will generally be completed in the ordinary course of business and in accordance with the applicable contractual terms. When we complete our performance obligations, the related letters of credit and bonds are generally released shortly thereafter, leaving us with no continuing obligations. We have no material third-party guarantees.
Our mortgage subsidiary enters into various commitments related to the lending activities of our mortgage operations. Further discussion of these commitments is provided in Item 3 “Quantitative and Qualitative Disclosures about Market Risk” under Part I of this quarterly report on Form 10-Q.
We enter into land and lot option purchase contracts
to acquire land or lots for the construction of homes. Lot option contracts enable us to control significant lot positions with limited capital investment and substantially reduce the risks associated with land ownership and development. Among our land and lot option purchase contracts at June 30, 2017, there were a limited number of contracts, representing $30.1 million of remaining purchase price, subject to specific performance provisions which may require us to purchase the land or lots upon the land sellers meeting their contractual obligations. Further information
about our land option contracts is provided in the “Inventories, Land and Lot Position and Homes in Inventory” section included herein.
On June 29, 2017, we entered into a definitive merger agreement with Forestar Group Inc. (Forestar), a publicly-traded residential real estate development company, to acquire 75% of the currently outstanding shares of Forestar for $17.75 per share in cash or approximately $560 million of total cash consideration. Forestar stockholders will have the right to receive cash or retain their shares of the surviving entity as described in Note A. The transaction is expected
to close during our first quarter of fiscal 2018, subject to the approval of Forestar shareholders and other customary closing conditions.
As disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2016, our most critical accounting policies relate
to revenue recognition, inventories and cost of sales, business acquisitions, goodwill, warranty claims, legal claims and insurance, income taxes, stock-based compensation and fair value measurements. Since September 30, 2016, 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, 2016, our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims. At both June 30, 2017 and September 30,
2016, we had reserves for approximately 140 pending construction defect claims, and no individual existing claim was material to our financial statements. During the nine months ended June 30, 2017, we established reserves for approximately 60 new construction defect claims and resolved 60 construction defect claims for a total cost of $36.1 million. At June 30, 2016 and September 30, 2015, we had reserves for approximately 155
and 185 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During the nine months ended June 30, 2016, we established reserves for approximately 55 new construction defect claims and resolved 85 construction defect claims for a total cost of $31.8 million.
SEASONALITY
Although
significant changes in market conditions have impacted our seasonal patterns in the past and could do so again in the future, we generally close more homes and generate greater revenues and operating income in the third and fourth quarters of our fiscal year. The seasonal nature of our business can also cause significant variations in our working capital requirements in both our homebuilding 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.
Some of the statements contained in this report, as well as in other materials we have filed or will file with the SEC, statements made by us in periodic press releases and oral statements we make to analysts, stockholders and the press in the course of presentations about us, may be construed as “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s beliefs as well as assumptions made by, and information currently available to, management. These forward-looking statements typically
include the words “anticipate,”“believe,”“consider,”“continue,”“could,”“estimate,”“expect,”“forecast,”“goal,”“intend,”“likely,”“may,”“outlook,”“plan,”“possible,”“potential,”“predict,”“projection,”“seek,”“should,”“strategy,”“target,”“will,”“would” or other words of similar meaning. Any or all of the forward-looking statements included in this report and in any other of our reports or public statements may not approximate actual experience, and the expectations derived from them may not be realized, due to risks, uncertainties and other factors. As a result, actual results may differ materially from the expectations or results we discuss in the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to:
•
the
cyclical nature of the homebuilding industry and changes in economic, real estate and other conditions;
•
constriction of the credit markets, which could limit our ability to access capital and increase our costs of capital;
•
reductions in the availability of mortgage financing provided by government agencies, changes in government financing programs, a decrease in our ability to sell mortgage loans on attractive terms or an increase in mortgage interest rates;
•
the
risks associated with our land and lot inventory;
•
home warranty and construction defect claims;
•
the effects of a health and safety incident;
•
the effects of negative publicity;
•
supply
shortages and other risks of acquiring land, building materials and skilled labor;
•
the impact of an inflationary, deflationary or higher interest rate environment;
•
reductions in the availability of performance bonds;
•
increases in the costs of owning a home;
•
the
effects of governmental regulations and environmental matters on our homebuilding operations;
•
the effects of governmental regulations on our financial services operations;
•
our significant debt and our ability to comply with related debt covenants, restrictions and limitations;
•
competitive
conditions within the homebuilding and financial services industries;
•
our ability to effect our growth strategies, acquisitions or investments successfully, including the proposed Forestar merger;
•
the effects of the loss of key personnel; and
•
information technology failures and data security
breaches.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. Additional information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained in our annual report on Form 10-K for the fiscal year ended September 30, 2016, including the section entitled “Risk Factors,” which is filed with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk on our long-term debt. We monitor our exposure to changes in interest rates and utilize both fixed and variable rate debt. For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the fair value of the debt instrument, but may affect our future earnings and cash flows. Except in very limited circumstances, we do not have an obligation to prepay fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair value would not have a significant impact on our cash flows related to our fixed-rate debt until such
time as we are required to refinance, repurchase or repay such debt.
We are exposed to interest rate risk associated with our mortgage loan origination services. We manage interest rate risk through the use of forward sales of mortgage-backed securities (MBS), which are referred to as “hedging instruments” in the following discussion. We do not enter into or hold derivatives for trading or speculative purposes.
Interest rate lock commitments (IRLCs) are extended to borrowers who have applied for loan funding and who meet defined credit and underwriting criteria. Typically, the IRLCs have a duration of less than six months. Some IRLCs are committed immediately to a specific purchaser through the use of best-efforts whole loan delivery commitments, while other IRLCs are funded prior
to being committed to third-party purchasers. The hedging instruments related to IRLCs are classified and accounted for as derivative instruments in an economic hedge, with gains and losses recognized in financial services revenues in the consolidated statements of operations. Hedging instruments related to funded, uncommitted loans are accounted for at fair value, with changes recognized in financial services revenues in the consolidated statements of operations, along with changes in the fair value of the funded, uncommitted loans. The fair value change related to the hedging instruments generally offsets the fair value change in the uncommitted loans. The net fair value change, which for the three and nine months ended June 30, 2017 and 2016
was not significant, is recognized in current earnings. At June 30, 2017, hedging instruments used to mitigate interest rate risk related to uncommitted mortgage loans held for sale and uncommitted IRLCs totaled a notional amount of $802.0 million. Uncommitted IRLCs totaled a notional amount of approximately $601.5 million and uncommitted mortgage loans held for sale totaled a notional amount of approximately $247.5 million at June 30, 2017.
The following table sets forth principal cash flows by scheduled maturity, effective weighted average interest
rates and estimated fair value of our debt obligations as of June 30, 2017. Because the mortgage repurchase facility is effectively secured by certain mortgage loans held for sale which are typically sold within 60 days, its outstanding balance is included in the most current period presented. The interest rate for our variable rate debt represents the weighted average interest rate in effect at June 30, 2017.
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the
Company’s disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures as of June 30, 2017 were effective in providing reasonable assurance that information required to be disclosed in the reports the Company files, furnishes, submits or otherwise provides the SEC under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed in reports filed by the
Company under the Exchange Act is accumulated and communicated to the Company’s management, including the CEO and CFO, in such a manner as to allow timely decisions regarding the required disclosure.
There have been no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are involved in lawsuits and other contingencies in the ordinary course of business. While the outcome of such contingencies cannot be predicted with certainty, we believe that the liabilities arising from these matters will not have a material adverse effect on our consolidated financial position,
results of operations or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds our estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.
In May and July of 2014, we received Notices of Violation from the United States Environmental Protection Agency related to stormwater compliance at certain of our sites in the Southeast. This matter could potentially result in monetary sanctions to the Company; however, we do not believe it is reasonably possible that this matter would result in a loss that would have a material effect on our consolidated financial position, results of operations or cash flows.
In
fiscal 2013, our subsidiary mortgage company was subpoenaed by the United States Department of Justice (DOJ) regarding the adequacy of certain underwriting and quality control processes related to Federal Housing Administration loans originated and sold in prior years. We have provided information related to these loans and our processes to the DOJ, and communications are ongoing. The DOJ has to date not asserted a formal claim amount, penalty or fine.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
We
may repurchase shares of our common stock from time to time pursuant to our common stock repurchase authorization. The following table sets forth information concerning our common stock repurchases during the three months ended June 30, 2017. All share repurchases were made in accordance with the safe harbor provisions of Rule 10b-18 under the Securities Exchange Act of 1934.
Total
Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that may yet be Purchased Under the Plans or Programs (1)
(1) Shares
purchased during the three months ended June 30, 2017 were part of a $100 million common stock repurchase authorization approved by our Board of Directors in July 2016. These purchases resulted in a remaining authorization of $39.4 million at June 30, 2017, which expires on July 31, 2017. In July 2017, our Board of Directors authorized the repurchase of up to $200 million of our common stock effective through July 31,
2018.
Stockholder’s
Agreement dated June 29, 2017 by and between D.R. Horton, Inc. and Forestar Group Inc. (4)
10.2
Master Supply Agreement dated June 29, 2017 by and between D.R. Horton, Inc. and Forestar Group Inc. (5)
12.1
Statement of Computation of Ratio of Earnings to Fixed Charges. (*)
31.1
Certificate
of Chief Executive Officer provided pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. (*)
31.2
Certificate of Chief Financial Officer provided pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. (*)
32.1
Certificate provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Company’s
Chief Executive Officer. (*)
32.2
Certificate provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Company’s Chief Financial Officer. (*)
101
The following financial statements from D.R. Horton, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June
30, 2017, filed on July 27, 2017, formatted in XBRL (Extensible Business Reporting Language); (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive Income, (iii) Consolidated Statements of Cash Flows and (iv) the Notes to Consolidated Financial Statements. (*)
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.