Company Quick10K Filing
Quick10K
Horton D R
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$45.69 373 $17,060
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-02-22 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-01-25 Earnings, Exhibits
8-K 2019-01-25 Earnings, Exhibits
8-K 2019-01-23 Shareholder Vote
8-K 2019-01-23 Shareholder Vote
8-K 2018-12-07 Accountant, Exhibits
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-11-06 Officers, Exhibits
8-K 2018-10-09 Earnings, Exhibits
8-K 2018-09-25 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-02-23 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-01-31 Earnings, Exhibits
8-K 2018-01-24 Shareholder Vote
8-K 2018-01-09 Earnings, Exhibits
HUNT Hunter Maritime Acquisition 19,740
RPM RPM International 8,090
AN Autonation 3,430
REDU Rise Education Cayman 613
ORBC Orbcomm 567
SNDX Syndax Pharmaceuticals 170
PFMT Performant Financial 108
ABFF Ceres Abingdon 0
STBZ State Bank Financial 0
ALFA Alfacourse 0
DHI 2018-12-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 a12312018exhibit311.htm
EX-31.2 a12312018exhibit312.htm
EX-32.1 a12312018exhibit321.htm
EX-32.2 a12312018exhibit322.htm

Horton D R Earnings 2018-12-31

DHI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a1231201810q.htm 10-Q Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________________________________________
 FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2018
Commission file number 1-14122
___________________________________________________________________________________________________________________
D.R. Horton, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
75-2386963
 
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
1341 Horton Circle
Arlington, Texas 76011
 
 
(Address of principal executive offices) (Zip Code)
 
 
 
 
 
 
(817) 390-8200
 
 
(Registrant’s telephone number, including area code)
 
 
 
 
 
 
Not Applicable
 
 
(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 every Interactive Data File required to be submitted 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 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  ¨
 
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 – 373,423,120 shares as of January 23, 2019



D.R. HORTON, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
 
 
 
 
Page
 
 
 



2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


December 31,
2018

September 30,
2018

(In millions)
(Unaudited)
ASSETS



Cash and cash equivalents
$
737.0


$
1,473.1

Restricted cash
31.3


32.9

Total cash, cash equivalents and restricted cash
768.3

 
1,506.0

Inventories:



Construction in progress and finished homes
5,842.8


5,086.3

Residential land and lots — developed and under development
5,596.0


5,172.4

Land held for development
109.8


96.1

Land held for sale
47.0


40.2

Total inventory
11,595.6


10,395.0

Mortgage loans held for sale
622.2


796.4

Deferred income taxes, net of valuation allowance of $17.1 million and $17.7 million
at December 31, 2018 and September 30, 2018, respectively
181.4


194.0

Property and equipment, net
391.1


401.1

Other assets
818.8


712.9

Goodwill
158.4


109.2

Total assets
$
14,535.8


$
14,114.6

LIABILITIES



Accounts payable
$
697.2


$
624.7

Accrued expenses and other liabilities
1,198.1


1,127.5

Notes payable
3,342.3


3,203.5

Total liabilities
5,237.6


4,955.7

Commitments and contingencies (Note K)





EQUITY



Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued



Common stock, $.01 par value, 1,000,000,000 shares authorized, 389,200,668 shares issued
and 373,242,060 shares outstanding at December 31, 2018 and 388,120,243 shares issued
and 376,261,635 shares outstanding at September 30, 2018
3.9


3.9

Additional paid-in capital
3,107.6


3,085.0

Retained earnings
6,476.2


6,217.9

Treasury stock, 15,958,608 shares and 11,858,608 shares at December 31, 2018
and September 30, 2018, respectively, at cost
(463.0
)

(322.4
)
Stockholders’ equity
9,124.7


8,984.4

Noncontrolling interests
173.5


174.5

Total equity
9,298.2


9,158.9

Total liabilities and equity
$
14,535.8


$
14,114.6





See accompanying notes to consolidated financial statements.


3


D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 

Three Months Ended 
 December 31,
 
2018

2017

(In millions, except per share data)
(Unaudited)
Revenues
$
3,519.0


$
3,332.7

Cost of sales
2,751.1


2,580.1

Selling, general and administrative expense
402.8


384.2

Gain on sale of assets
(2.0
)
 
(13.4
)
Other (income) expense
(8.6
)

(9.4
)
Income before income taxes
375.7


391.2

Income tax expense
89.0


202.4

Net income
286.7


188.8

Net loss attributable to noncontrolling interests
(0.5
)

(0.5
)
Net income attributable to D.R. Horton, Inc.
$
287.2


$
189.3







Basic net income per common share attributable to D.R. Horton, Inc.
$
0.77


$
0.50

Weighted average number of common shares
375.1

 
375.8

 
 
 
 
Diluted net income per common share attributable to D.R. Horton, Inc.
$
0.76


$
0.49

Adjusted weighted average number of common shares
380.1

 
383.8



























See accompanying notes to consolidated financial statements.


4


D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF TOTAL EQUITY

 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Non-controlling
Interests
 
Total
Equity
 
(In millions, except common stock share data)
(Unaudited)
Balances at September 30, 2018 (376,261,635 shares)
$
3.9

 
$
3,085.0

 
$
6,217.9

 
$
(322.4
)
 
$
174.5

 
$
9,158.9

Cumulative effect of adoption of ASC 606 (see Note A)

 

 
27.1

 

 

 
27.1

Net income

 

 
287.2

 

 
(0.5
)
 
286.7

Exercise of stock options (806,817 shares)

 
8.6

 

 

 

 
8.6

Stock issued under employee incentive plans (273,608 shares)

 

 

 

 

 

Cash paid for shares withheld for taxes

 
(4.1
)
 

 

 

 
(4.1
)
Stock-based compensation expense

 
18.1

 

 

 

 
18.1

Cash dividends declared

 

 
(56.0
)
 

 

 
(56.0
)
Repurchases of common stock (4,100,000 shares)

 

 

 
(140.6
)
 

 
(140.6
)
Distributions to noncontrolling interests

 

 

 

 
(0.5
)
 
(0.5
)
Balances at December 31, 2018 (373,242,060 shares)
$
3.9

 
$
3,107.6

 
$
6,476.2

 
$
(463.0
)
 
$
173.5

 
$
9,298.2



 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Non-controlling
Interests
 
Total
Equity
 
(In millions, except common stock share data)
(Unaudited)
Balances at September 30, 2017 (374,986,079 shares)
$
3.8

 
$
2,992.2

 
$
4,946.0

 
$
(194.9
)
 
$
0.5

 
$
7,747.6

Noncontrolling interests acquired

 

 

 

 
175.2

 
175.2

Net income

 

 
189.3

 

 
(0.5
)
 
188.8

Exercise of stock options (916,913 shares)
0.1

 
14.7

 

 

 

 
14.8

Stock issued under employee incentive plans (290,974 shares)

 

 

 

 

 

Cash paid for shares withheld for taxes

 
(10.3
)
 

 

 

 
(10.3
)
Stock-based compensation expense

 
13.6

 

 

 

 
13.6

Cash dividends declared

 

 
(47.1
)
 

 

 
(47.1
)
Repurchases of common stock (500,000 shares)

 

 

 
(25.4
)
 

 
(25.4
)
Distributions to noncontrolling interests

 

 

 

 
(1.8
)
 
(1.8
)
Balances at December 31, 2017 (375,693,966 shares)
$
3.9

 
$
3,010.2

 
$
5,088.2

 
$
(220.3
)
 
$
173.4

 
$
8,055.4









See accompanying notes to consolidated financial statements.


5





D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Three Months Ended 
 December 31,
 
2018
 
2017
 
(In millions)
(Unaudited)
OPERATING ACTIVITIES
 
 
 
Net income
$
286.7

 
$
188.8

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
16.9

 
16.2

Amortization of discounts and fees
2.6

 
1.2

Stock-based compensation expense
18.1

 
13.6

Equity in earnings of unconsolidated entities
(0.6
)
 
(2.3
)
Distributions of earnings of unconsolidated entities
0.5

 
0.2

Deferred income taxes
3.9

 
126.3

Inventory and land option charges
8.0

 
3.7

Gain on sale of assets
(2.0
)
 
(13.4
)
Changes in operating assets and liabilities:
 
 
 
Increase in construction in progress and finished homes
(500.3
)
 
(302.3
)
Increase in residential land and lots –
     developed, under development, held for development and held for sale
(435.9
)
 
(185.2
)
(Increase) decrease in other assets
(34.0
)
 
4.3

Decrease in mortgage loans held for sale
174.2

 
49.1

Increase in accounts payable, accrued expenses and other liabilities
88.8

 
24.8

Net cash used in operating activities
(373.1
)
 
(75.0
)
INVESTING ACTIVITIES
 
 
 
Expenditures for property and equipment
(20.2
)
 
(25.3
)
Proceeds from sale of assets
10.4

 
24.8

Expenditures related to multi-family rental properties
(11.4
)
 
(19.1
)
Return of investment in unconsolidated entities
4.4

 
14.9

Net principal (increase) decrease of other mortgage loans and real estate owned
(0.6
)
 
0.1

Payments related to business acquisitions, net of cash acquired
(293.0
)
 
(156.4
)
Net cash used in investing activities
(310.4
)
 
(161.0
)
FINANCING ACTIVITIES
 
 
 
Proceeds from notes payable
578.3

 
1,113.9

Repayment of notes payable
(276.1
)
 
(825.8
)
Payments on mortgage repurchase facility, net
(163.8
)
 
(32.6
)
Proceeds from stock associated with certain employee benefit plans
8.6

 
14.6

Cash paid for shares withheld for taxes
(4.1
)
 
(10.3
)
Cash dividends paid
(56.0
)
 
(47.0
)
Repurchases of common stock
(140.6
)
 
(25.4
)
Distributions to noncontrolling interests, net
(0.5
)
 
(1.7
)
Net cash (used in) provided by financing activities
(54.2
)
 
185.7

DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(737.7
)
 
(50.3
)
Cash, cash equivalents and restricted cash at beginning of period
1,506.0

 
1,024.3

Cash, cash equivalents and restricted cash at end of period
$
768.3

 
$
974.0

Supplemental disclosures of non-cash activities:
 
 
 
Stock issued under employee incentive plans
$
9.4

 
$
13.9

Accrual for holdback payment related to acquisition
$
27.7

 
$


See accompanying notes to consolidated financial statements.


6


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 2018


NOTE A – BASIS OF PRESENTATION

The accompanying unaudited, consolidated financial statements include the accounts of D.R. Horton, Inc. and all of its 100% owned, majority-owned and controlled subsidiaries, which are collectively referred to as the Company, unless the context otherwise requires. Noncontrolling interests represent the proportionate equity interests in consolidated entities that are not 100% owned by the Company. The Company owns a 75% controlling interest in Forestar Group Inc. (Forestar) and therefore is required to consolidate 100% of Forestar within its consolidated financial statements, and the 25% interest the Company does not own is accounted for as noncontrolling interests. All intercompany accounts, transactions and balances have been eliminated in consolidation.

The financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments considered necessary to fairly state the results for the interim periods shown, including normal recurring accruals and other items. These financial statements, including the consolidated balance sheet as of September 30, 2018, 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, 2018.

Changes in Presentation and Reclassifications

In connection with the adoption of Accounting Standards Update (ASU) 2016-18 in the current quarter, restricted cash is now included with cash and cash equivalents when reconciling beginning and ending amounts in the consolidated statements of cash flows. Prior period amounts have been reclassified to conform to the current year presentation, resulting in a decrease in cash used in investing activities of $37.2 million for the three months ended December 31, 2017.

In August 2018, the Securities and Exchange Commission (SEC) issued Final Rule Release No. 33-10532, “Disclosure Update and Simplification,” which makes a number of changes meant to simplify interim disclosures. In complying with the relevant aspects of the rule within this quarterly report, the Company has removed the presentation of cash dividends declared per common share from the statements of operations and included consolidated statements of total equity.

Certain other prior period amounts have been reclassified to conform to the current year presentation.

Adoption of New Accounting Standards

On October 1, 2018, the Company adopted Accounting Standards Codification 606, "Revenue from Contracts with Customers" (ASC 606), which is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services and satisfaction of performance obligations to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company applied the modified retrospective method to contracts that were not completed as of October 1, 2018. Results for the reporting period beginning after October 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and will continue to be reported under the previous accounting standards. The Company recorded an increase to retained earnings of $27.1 million, net of tax, as of October 1, 2018, due to the cumulative effect of adopting ASC 606 which was primarily related to the recognition of contract assets totaling $32.4 million for insurance brokerage commission renewals. Under ASC 606, the Company recognizes revenue and a contract asset for estimated future renewals of these policies upon issuance of the initial policy, the date at which the performance obligation is satisfied. There was not a material impact to revenues as a result of applying ASC 606 for the three months ended December 31, 2018, and there have not been significant changes to the Company’s business processes, systems, or internal controls as a result of implementing the standard.


7


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




In January 2016, the Financial Accounting Standards Board (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 was effective for the Company on October 1, 2018 and did not 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 was effective for the Company on October 1, 2018 and did not have a material impact on its consolidated statements of cash flows.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory,” which requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance was effective for the Company on October 1, 2018 and did not have a material impact on its consolidated financial position or 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 Company adopted the guidance as of October 1, 2018 on a retrospective basis and made the required changes to its statements of cash flows as described in the “Changes in Presentation and Reclassifications” section above.

In February 2017, the FASB issued ASU 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets,” which updates the definition of an in substance nonfinancial asset and clarifies the derecognition guidance for nonfinancial assets to conform to the new revenue recognition standard (ASU 2014-09). The guidance was effective for the Company on October 1, 2018, concurrent with the adoption of ASU 2014-09 and did not have a material impact on its consolidated financial position, results of operations and 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 was effective for the Company on October 1, 2018 and did not have a material impact on its consolidated financial position, results of operations or cash flows.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Seasonality

Historically, the homebuilding industry has experienced seasonal fluctuations; therefore, the operating results for the three months ended December 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2019 or subsequent periods.


8


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




Revenue Recognition

Homebuilding revenue and related profit are generally recognized at the time of the closing of a sale, when title to and possession of the property are transferred to the buyer. The Company’s performance obligation, to deliver the agreed-upon home, is generally satisfied in less than one year from the original contract date. 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. Contract liabilities include customer deposit liabilities related to sold but undelivered homes.

The Company rarely purchases land for resale, but periodically may elect to sell parcels of land that no longer fit into its strategic operating plans. Cash consideration from land sales is typically due on the closing date, which is generally when performance obligations are satisfied.

Financial services revenues associated with the Company’s title operations are recognized as closing services are rendered and title insurance policies are issued, both of which generally occur simultaneously as each home is closed. The Company transfers substantially all underwriting risk associated with title insurance policies to third-party insurers. The Company typically elects the fair value option for its mortgage loan originations. Mortgage loans held for sale are initially recorded at fair value based on either sale commitments or current market quotes and are adjusted for subsequent changes in fair value until the loans are sold. Net origination costs and fees associated with mortgage loans are recognized at the time of origination. The expected net future cash flows related to the associated servicing of a loan are included in the measurement of all written loan commitments that are accounted for at fair value through earnings at the time of commitment. The Company sells substantially all of the mortgages it originates and the related servicing rights to third-party purchasers. Interest income is earned from the date a mortgage loan is originated until the loan is sold.

The Company collects insurance commissions on homeowner policies placed with third party carriers through its wholly owned insurance agency. The Company recognizes revenue and a contract asset for estimated future renewals of these policies upon issuance of the initial policy, the date at which the performance obligation is satisfied.

Business Acquisitions

During the three months ended December 31, 2018, the Company acquired the homebuilding operations of Westport Homes, Classic Builders and Terramor Homes for $320.7 million. The assets acquired included approximately 700 homes in inventory, 4,500 lots and control of approximately 4,300 additional lots through option contracts. The Company also acquired a sales order backlog of approximately 700 homes. Westport Homes operates in Indianapolis and Fort Wayne, Indiana, and Columbus, Ohio; Classic Builders operates in Des Moines, Iowa; and Terramor Homes operates in Raleigh, North Carolina.

The Company’s allocation of the aggregate purchase price to the assets and liabilities acquired through these transactions is not finalized and is subject to revision as additional information becomes available and more detailed analyses are completed. The preliminary allocation of the purchase price to the assets and liabilities acquired is as follows (in millions):
Inventories
$
271.3

Other assets
14.8

Goodwill
49.2

Intangible assets
11.3

Other liabilities
(25.9
)
     Net assets acquired
$
320.7





9


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




As a result of these transactions, the Company’s preliminary estimate of goodwill is $49.2 million, of which $43.2 million is allocated to the Midwest region and $6.0 million is allocated to the East region. The goodwill is tax deductible and relates to expected synergies from expanding the Company’s market presence in its Midwest and East regions, the experienced and knowledgeable workforce of these entities and their capital efficient operating processes. The intangible assets will be amortized on a straight-line basis to selling, general and administrative (SG&A) expense over their expected lives, which range from 1 to 3 years.

Pending Accounting Standards

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 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 January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other,” which simplifies the measurement of goodwill impairment by removing the second step of the goodwill impairment test and 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.




10


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




NOTE B – SEGMENT INFORMATION

The Company is a national homebuilder that is primarily engaged in the acquisition and development of land and the construction and sale of residential homes, with operations in 84 markets in 29 states across the United States. The Company’s operating segments are its 51 homebuilding divisions, its majority-owned Forestar residential lot development operations, its financial services operations and its other business activities. The Company’s reporting segments are its homebuilding reporting segments, its Forestar land development segment and its financial services segment. The homebuilding operating segments are aggregated into the following six reporting segments: East, Midwest, Southeast, South Central, Southwest and West. These reporting segments have homebuilding operations located in the following states:
 
East:
 
Delaware, Georgia (Savannah only), Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina and Virginia
 
Midwest:
 
Colorado, Illinois, Indiana, Iowa, Minnesota and Ohio
 
Southeast:
 
Alabama, Florida, Georgia, Mississippi and Tennessee
 
South Central:
 
Louisiana, Oklahoma and Texas
 
Southwest:
 
Arizona and New Mexico
 
West:
 
California, Hawaii, Nevada, Oregon, Utah and Washington

The Company’s homebuilding divisions design, build and sell single-family detached homes on lots they develop and on fully developed lots purchased ready for home construction. To a lesser extent, the homebuilding divisions also build and sell attached homes, such as townhomes, duplexes and triplexes. Most of the revenue generated by the Company’s homebuilding operations is from the sale of completed homes and to a lesser extent from the sale of land and lots.

The Forestar segment is a residential lot development company with operations in 35 markets and 16 states. The Company’s homebuilding divisions and Forestar are identifying land development opportunities to expand Forestar’s platform, and the homebuilding divisions are acquiring finished lots from Forestar in accordance with the master supply agreement between the two companies. Forestar’s segment results are presented on their historical cost basis, consistent with the manner in which management evaluates segment performance.

The Company’s financial services segment provides mortgage financing and title agency services to homebuyers in many of the Company’s homebuilding markets. The segment generates the substantial majority of its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services. The Company sells substantially all of the mortgages it originates and the related servicing rights to third-party purchasers.

In addition to its homebuilding, Forestar 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. One of these subsidiaries, DHI Communities, is developing and constructing multi-family rental properties on land parcels the Company already owned and currently has three projects under active construction and three projects that are substantially complete, one of which was under contract to sell at December 31, 2018. At December 31, 2018, the consolidated balance sheet included $139.7 million of property and equipment and $43.6 million of other assets held for sale owned by DHI Communities. At September 30, 2018, the consolidated balance sheet included $171.4 million of property and equipment owned by DHI Communities. The operating results of these subsidiaries are immaterial for separate reporting and therefore are grouped together and presented as other.



11


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




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, 2018. Financial information relating to the Company’s reporting segments is as follows:
 
 
December 31, 2018
 
 
Homebuilding
 
Forestar (1)
 
Financial Services
 
Other (2)
 
Eliminations (3)
 
Other Adjustments (4)
 
Consolidated
 
 
(In millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
537.5

 
$
154.2

 
$
32.8

 
$
12.5

 
$

 
$

 
$
737.0

Restricted cash
 
8.7

 
16.1

 
6.5

 

 

 

 
31.3

Inventories:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Construction in progress and finished homes
 
5,840.4

 

 

 

 
2.4

 

 
5,842.8

     Residential land and lots — developed and under development
 
4,949.5

 
644.7

 

 

 
(20.4
)
 
22.2

 
5,596.0

     Land held for development
 
61.3

 
48.5

 

 

 

 

 
109.8

     Land held for sale
 
47.0

 

 

 

 

 

 
47.0


 
10,898.2

 
693.2

 

 

 
(18.0
)
 
22.2

 
11,595.6

Mortgage loans held for sale
 

 

 
622.2

 

 

 

 
622.2

Deferred income taxes, net
 
165.0

 
25.5

 

 

 
0.3

 
(9.4
)
 
181.4

Property and equipment, net
 
224.3

 
1.8

 
3.6

 
161.4

 

 

 
391.1

Other assets
 
713.2

 
27.9

 
47.1

 
81.2

 
(61.3
)
 
10.7

 
818.8

Goodwill
 
129.2

 

 

 

 

 
29.2

 
158.4

 
 
$
12,676.1

 
$
918.7

 
$
712.2

 
$
255.1

 
$
(79.0
)
 
$
52.7

 
$
14,535.8

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
674.9

 
$
7.4

 
$
10.6

 
$
4.3

 
$

 
$

 
$
697.2

Accrued expenses and other liabilities
 
1,116.3

 
120.4

 
35.5

 
14.4

 
(73.1
)
 
(15.4
)
 
1,198.1

Notes payable
 
2,748.7

 
112.9

 
473.9

 

 

 
6.8

 
3,342.3

 
 
$
4,539.9

 
$
240.7

 
$
520.0

 
$
18.7

 
$
(73.1
)
 
$
(8.6
)
 
$
5,237.6

______________
(1)
Amounts are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance. All purchase accounting adjustments are included in the Other Adjustments column.
(2)
Amounts represent the aggregate balances of certain subsidiaries that are immaterial for separate reporting.
(3)
Amounts represent the elimination of intercompany transactions.
(4)
Amounts represent purchase accounting adjustments related to the Forestar acquisition.


12


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




 
 
September 30, 2018
 
 
Homebuilding
 
Forestar (1)
 
Financial Services
 
Other (2)
 
Eliminations (3)
 
Other Adjustments (4)
 
Consolidated
 
 
(In millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,111.8

 
$
318.8

 
$
33.7

 
$
8.8

 
$

 
$

 
$
1,473.1

Restricted cash
 
8.6

 
16.2

 
8.1

 

 

 

 
32.9

Inventories:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Construction in progress and finished homes
 
5,084.4

 

 

 

 
1.9

 

 
5,086.3

     Residential land and lots — developed and under development
 
4,689.3

 
463.1

 

 

 
(7.2
)
 
27.2

 
5,172.4

     Land held for development
 
61.2

 
34.9

 

 

 

 

 
96.1

     Land held for sale
 
40.2

 

 

 

 

 

 
40.2


 
9,875.1

 
498.0

 

 

 
(5.3
)
 
27.2

 
10,395.0

Mortgage loans held for sale
 

 

 
796.4

 

 

 

 
796.4

Deferred income taxes, net
 
176.5

 
26.9

 

 

 
1.1

 
(10.5
)
 
194.0

Property and equipment, net
 
207.1

 
1.8

 
3.0

 
189.2

 

 

 
401.1

Other assets
 
673.7

 
31.4

 
43.6

 
0.9

 
(48.6
)
 
11.9

 
712.9

Goodwill
 
80.0

 

 

 

 

 
29.2

 
109.2

 
 
$
12,132.8

 
$
893.1

 
$
884.8

 
$
198.9

 
$
(52.8
)
 
$
57.8

 
$
14,114.6

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
612.4

 
$
11.2

 
$
0.2

 
$
4.2

 
$
(3.3
)
 
$

 
$
624.7

Accrued expenses and other liabilities
 
1,041.3

 
95.7

 
41.9

 
9.9

 
(46.1
)
 
(15.2
)
 
1,127.5

Notes payable
 
2,445.9

 
111.7

 
637.7

 

 

 
8.2

 
3,203.5

 
 
$
4,099.6

 
$
218.6

 
$
679.8

 
$
14.1

 
$
(49.4
)
 
$
(7.0
)
 
$
4,955.7

______________
(1)
Amounts are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance. All purchase accounting adjustments are included in the Other Adjustments column.
(2)
Amounts represent the aggregate balances of certain subsidiaries that are immaterial for separate reporting.
(3)
Amounts represent the elimination of intercompany transactions and the reclassification of Forestar interest expense to inventory.
(4)
Amounts represent purchase accounting adjustments related to the Forestar acquisition.


13


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




 
 
Three Months Ended December 31, 2018
 
 
Homebuilding
 
Forestar (1)
 
Financial Services
 
Other (2)
 
Eliminations (3)
 
Other Adjustments (4)
 
Consolidated
 
 
(In millions)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home sales
 
$
3,410.6

 
$

 
$

 
$

 
$

 
$

 
$
3,410.6

Land/lot sales and other
 
6.7

 
38.5

 

 
6.9

 
(29.0
)
 

 
23.1

Financial services
 

 

 
85.3

 

 

 

 
85.3

 
 
3,417.3

 
38.5

 
85.3

 
6.9

 
(29.0
)
 

 
3,519.0

Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home sales (5)
 
2,729.2

 

 

 

 
(1.1
)
 

 
2,728.1

Land/lot sales and other
 
5.1

 
30.7

 

 

 
(24.4
)
 
3.6

 
15.0

Inventory and land option charges
 
8.0

 

 

 

 

 

 
8.0

 
 
2,742.3

 
30.7

 

 

 
(25.5
)
 
3.6

 
2,751.1

Selling, general and administrative expense
 
324.7

 
5.7

 
65.6

 
6.7

 

 
0.1

 
402.8

Gain on sale of assets
 
(2.0
)
 
(0.9
)
 

 

 

 
0.9

 
(2.0
)
Other (income) expense
 
(2.0
)
 
(1.9
)
 
(3.9
)
 
(0.8
)
 

 

 
(8.6
)
Income before income taxes
 
$
354.3

 
$
4.9

 
$
23.6

 
$
1.0

 
$
(3.5
)
 
$
(4.6
)
 
$
375.7

Summary Cash Flow Information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
14.7

 
$
0.1

 
$
0.4

 
$
1.6

 
$

 
$
0.1

 
$
16.9

Cash (used in) provided by operating activities
 
$
(396.8
)
 
$
(164.1
)
 
$
193.8

 
$
(1.6
)
 
$

 
$
(4.4
)
 
$
(373.1
)
______________
(1)
Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance. All purchase accounting adjustments are included in the Other Adjustments column.
(2)
Amounts represent the aggregate results of certain subsidiaries that are immaterial for separate reporting.
(3)
Amounts represent the elimination of intercompany transactions.
(4)
Amounts represent purchase accounting adjustments related to the Forestar acquisition.
(5)
Amount in the Eliminations column represents the profit on lots sold from Forestar to the homebuilding segment. Intercompany profit is eliminated in the consolidated financial statements when Forestar sells lots to the homebuilding segment and is recognized in the consolidated financial statements when the homebuilding segment closes homes on the lots to homebuyers.

 



14


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018





 
 
Three Months Ended December 31, 2017
 
 
Homebuilding
 
Forestar (1)
 
Financial Services
 
Other (2)
 
Eliminations (3)
 
Other Adjustments (4)
 
Consolidated
 
 
(In millions)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home sales
 
$
3,184.5

 
$

 
$

 
$

 
$

 
$

 
$
3,184.5

Land/lot sales and other
 
36.4

 
30.8

 

 

 

 

 
67.2

Financial services
 

 

 
81.0

 

 

 

 
81.0

 
 
3,220.9

 
30.8

 
81.0

 

 

 

 
3,332.7

Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home sales
 
2,521.5

 

 

 

 

 

 
2,521.5

Land/lot sales and other
 
31.2

 
19.3

 

 

 

 
4.4

 
54.9

Inventory and land option charges
 
3.7

 

 

 

 

 

 
3.7

 
 
2,556.4

 
19.3

 

 

 

 
4.4

 
2,580.1

Selling, general and administrative expense
 
304.8

 
13.6

 
61.7

 
4.0

 

 
0.1

 
384.2

Gain on sale of assets
 
(13.4
)
 

 

 

 

 

 
(13.4
)
Interest expense
 

 
2.1

 

 

 
(2.1
)
 

 

Other (income) expense
 
(0.7
)
 
(8.2
)
 
(2.9
)
 
(2.9
)
 

 
5.3

 
(9.4
)
Income (loss) before income taxes
 
$
373.8

 
$
4.0

 
$
22.2

 
$
(1.1
)
 
$
2.1

 
$
(9.8
)
 
$
391.2

Summary Cash Flow Information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
13.1

 
$
1.2

 
$
0.4

 
$
1.4

 
$

 
$
0.1

 
$
16.2

Cash (used in) provided by operating activities
 
$
(101.6
)
 
$
(36.2
)
 
$
67.9

 
$
3.0

 
$

 
$
(8.1
)
 
$
(75.0
)
______________
(1)
Results are presented from the date of acquisition and on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance. All purchase accounting adjustments are included in the Other Adjustments column.
(2)
Amounts represent the aggregate results of certain subsidiaries that are immaterial for separate reporting.
(3)
Amount represents the reclassification of Forestar interest expense to inventory.
(4)
Amounts represent purchase accounting adjustments related to the Forestar acquisition.

 



15


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




Homebuilding Inventories by Reporting Segment (1)
 
December 31,
2018
 
September 30,
2018
 
 
(In millions)
East
 
$
1,311.1

 
$
1,192.0

Midwest
 
831.7

 
583.1

Southeast
 
2,826.0

 
2,668.7

South Central
 
2,610.7

 
2,439.4

Southwest
 
539.4

 
499.7

West
 
2,547.4

 
2,268.5

Corporate and unallocated (2)
 
231.9

 
223.7

 
 
$
10,898.2

 
$
9,875.1

_________________

(1)
Homebuilding inventories are the only assets included in the measure of homebuilding segment assets used by the Company’s chief operating decision makers.
(2)
Corporate and unallocated consists primarily of capitalized interest and property taxes.

Homebuilding Results by Reporting Segment
 
Three Months Ended 
 December 31,
 
 
2018
 
2017
 
 
(In millions)
Revenues
 
 
 
 
East
 
$
447.5

 
$
393.0

Midwest
 
249.0

 
161.4

Southeast
 
1,013.9

 
988.7

South Central
 
872.5

 
808.8

Southwest
 
143.6

 
156.4

West
 
690.8

 
712.6

 
 
$
3,417.3

 
$
3,220.9

Inventory and Land Option Charges
 
 
 
 
East
 
$
1.4

 
$
(0.1
)
Midwest
 
0.3

 
0.2

Southeast
 
1.2

 
1.1

South Central
 
0.5

 
1.3

Southwest
 
0.1

 
0.8

West
 
4.5

 
0.4

 
 
$
8.0

 
$
3.7

Income before Income Taxes (1)
 
 
 
 
East
 
$
38.0

 
$
45.0

Midwest
 
10.6

 
13.3

Southeast
 
112.3

 
122.5

South Central
 
106.0

 
101.5

Southwest
 
17.6

 
14.7

West
 
69.8

 
76.8

 
 
$
354.3

 
$
373.8

_________________
(1)
Expenses maintained at the corporate level consist primarily of interest and property taxes, which are capitalized and amortized to cost of sales or expensed directly, and the expenses related to operating the Company’s corporate office. The amortization of capitalized interest and property taxes is allocated to each homebuilding segment based on the segment’s cost of sales, while expenses associated with the corporate office are allocated to each homebuilding segment based on the segment’s inventory balances.


16


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




NOTE C – INVENTORIES

At December 31, 2018, 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 $59.8 million and recorded impairment charges of $4.2 million during the three months ended December 31, 2018 to reduce the carrying value of impaired communities to fair value. There were $1.4 million of impairment charges recorded in the three months ended December 31, 2017. Inventory impairments and the land option charges discussed below are included in cost of sales in the consolidated statements of operations.

During the three months ended December 31, 2018 and 2017, the Company wrote off $3.8 million and $2.3 million, respectively, of earnest money deposits and pre-acquisition costs related to land option contracts that the Company has terminated or expects to terminate.



17


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




NOTE D – NOTES PAYABLE

The Company’s notes payable at their principal amounts, net of unamortized discounts and debt issuance costs, consist of the following:
 
 
December 31,
2018
 
September 30,
2018
 
 
(In millions)
Homebuilding:
 
 
 
 
Unsecured:
 
 
 
 
Revolving credit facility, maturing 2023
 
$
300.0

 
$

3.75% senior notes due 2019
 
499.9

 
499.6

4.0% senior notes due 2020
 
499.0

 
498.8

2.55% senior notes due 2020
 
398.2

 
397.9

4.375% senior notes due 2022
 
348.5

 
348.4

4.75% senior notes due 2023
 
298.7

 
298.7

5.75% senior notes due 2023
 
398.1

 
398.0

Other secured notes
 
6.3

 
4.5

 
 
2,748.7

 
2,445.9

Forestar:
 
 
 
 
Unsecured:
 
 
 
 
Revolving credit facility, maturing 2021
 

 

3.75% convertible senior notes due 2020
 
119.7

 
119.9

 
 
119.7

 
119.9

Financial Services:
 
 
 
 
Mortgage repurchase facility, maturing 2019
 
473.9

 
637.7

 
 
$
3,342.3

 
$
3,203.5


Debt issuance costs that were deducted from the carrying amounts of the homebuilding senior notes totaled $7.6 million and $8.5 million at December 31, 2018 and September 30, 2018, respectively. These costs are capitalized into inventory as they are amortized. Forestar’s 3.75% convertible senior notes due 2020 include an unamortized fair value adjustment of $6.8 million at December 31, 2018.

Homebuilding:

The Company has a $1.325 billion senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $1.9 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 25, 2023. Borrowings and repayments under the facility were $575 million and $275 million, respectively, during the three months ended December 31, 2018. At December 31, 2018, there were $300 million of borrowings outstanding at a 4.1% annual interest rate and $124.4 million of letters of credit issued under the revolving credit facility.



18


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




The Company’s revolving credit facility imposes restrictions on its operations and activities, including requiring the maintenance of 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. The credit agreement governing the facility and the indenture governing the senior notes also impose restrictions on the creation of secured debt and liens. At December 31, 2018, 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 SEC in August 2018, registering debt and equity securities that the Company may issue from time to time in amounts to be determined.

Effective August 1, 2018, the Board of Directors authorized the repurchase of up to $500 million of the Company’s debt securities effective through September 30, 2019. All of the $500 million authorization was remaining at December 31, 2018.

Forestar:

Forestar has a $380 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $570 million, subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of $100 million and 50% of the revolving credit commitment. Borrowings under the revolving credit facility are subject to a borrowing base based on Forestar’s book value of its real estate assets and unrestricted cash. The maturity date of the facility is August 16, 2021. The maturity date of the revolving credit facility may be extended by up to one year on up to three occasions, subject to the approval of lenders holding a majority of the commitments. At December 31, 2018, there were no borrowings outstanding and $3.4 million of letters of credit issued under the revolving credit facility.

The revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require Forestar to maintain a minimum level of tangible net worth, a minimum level of liquidity and a maximum allowable leverage ratio. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. At December 31, 2018, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility.

Forestar also has a secured letter of credit agreement which requires it to deposit cash as collateral with the issuing bank. At December 31, 2018, letters of credit outstanding under the letter of credit facility totaled $15.3 million, secured by $16.1 million in cash, which is included in restricted cash in the consolidated balance sheet.

Forestar’s revolving credit facility and its convertible senior notes are not guaranteed by D.R. Horton, Inc. or any of the subsidiaries that guarantee the Company’s homebuilding debt.



19


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




Financial Services:

The Company’s mortgage subsidiary, DHI Mortgage, has a mortgage repurchase facility that provides financing and liquidity to DHI Mortgage by facilitating purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties 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. The total capacity of the facility is $600 million; however, the capacity 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. The Company is currently in discussions with its lenders and expects to renew and extend the facility on similar terms prior to its February 22, 2019 maturity date.

As of December 31, 2018, $573.8 million of mortgage loans held for sale with a collateral value of $555.6 million were pledged under the mortgage repurchase facility. DHI Mortgage had an obligation of $473.9 million outstanding under the mortgage repurchase facility at December 31, 2018 at a 4.4% 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 December 31, 2018, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.


20


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




NOTE E – CAPITALIZED INTEREST

The Company capitalizes interest costs incurred to inventory during active development and construction (active inventory). Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. During periods in which the Company’s active inventory is lower than its debt level, a portion of the interest incurred is reflected as interest expense in the period incurred. During the first quarter of fiscal 2019 and fiscal 2018, 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 months ended December 31, 2018 and 2017:
 
 
Three Months Ended 
 December 31,
 
 
2018
 
2017
 
 
(In millions)
Capitalized interest, beginning of period
 
$
162.7

 
$
167.9

Interest incurred (1)
 
31.7

 
31.0

Interest charged to cost of sales
 
(25.6
)
 
(28.6
)
Capitalized interest, end of period
 
$
168.8

 
$
170.3

_______________
(1)
Interest incurred included interest on the Company's mortgage repurchase facility of $3.3 million and $2.1 million in the three months ended December 31, 2018 and 2017, respectively, and interest incurred by Forestar of $1.3 million and $0.1 million.


NOTE F – MORTGAGE LOANS

Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. At December 31, 2018, mortgage loans held for sale had an aggregate carrying value of $622.2 million and an aggregate outstanding principal balance of $602.1 million. At September 30, 2018, mortgage loans held for sale had an aggregate carrying value of $796.4 million and an aggregate outstanding principal balance of $776.1 million. During the three months ended December 31, 2018 and 2017, mortgage loans originated totaled $1.6 billion in both periods and mortgage loans sold totaled $1.8 billion and $1.6 billion, respectively. The Company had gains on sales of loans and servicing rights of $59.9 million during the three months ended December 31, 2018 compared to $57.0 million in the prior year period. Net gains on sales of loans and servicing rights are included in revenues in the consolidated statements of operations. Approximately 94% of the mortgage loans sold by DHI Mortgage during the three months ended December 31, 2018 were sold to four major financial entities, the largest of which purchased 35% of the total loans sold.


21


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




NOTE G – INCOME TAXES

The Company’s income tax expense for the three months ended December 31, 2018 and 2017 was $89.0 million and $202.4 million, respectively. The effective tax rate was 23.7% for the three months ended December 31, 2018 compared to 51.7% in the prior year period. The higher effective tax rate for the three months ended December 31, 2017 was primarily due to the remeasurement of the Company’s deferred tax assets and liabilities as a result of the Tax Cuts and Jobs Act (Tax Act), which was enacted into law on December 22, 2017. The effective tax rates for both periods include an expense for state income taxes, reduced by tax benefits related to stock-based compensation.

The Tax Act reduced the federal corporate tax rate from 35% to 21% for all corporations effective January 1, 2018. For fiscal year companies, the change in law required the application of a blended tax rate in the year of change, which for the Company was 24.5% for the fiscal year ended September 30, 2018. For the fiscal year ending September 30, 2019 and thereafter, the applicable statutory federal tax rate is 21%. The Tax Act also repealed the domestic production activities deduction effective for the Company for fiscal 2019.

The Company’s deferred tax assets, net of deferred tax liabilities, were $198.5 million at December 31, 2018 compared to $211.7 million at September 30, 2018. The Company has a valuation allowance related to state deferred tax assets for net operating loss (NOL) carryforwards of $17.1 million at December 31, 2018 and $17.7 million at September 30, 2018. The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to the remaining state NOL carryforwards. Any reversal of the valuation allowance in future periods will impact the Company’s effective tax rate.

The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on the Company’s consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of the Company’s deferred tax assets.


NOTE H – EARNINGS PER SHARE

The following table sets forth the numerators and denominators used in the computation of basic and diluted earnings per share.
 
 
Three Months Ended 
 December 31,
 
 
2018
 
2017
 
 
(In millions)
Numerator:
 
 
 
 
Net income attributable to D.R. Horton, Inc.
 
$
287.2

 
$
189.3

Denominator:
 
 
 
 
Denominator for basic earnings per share — weighted average common shares
 
375.1

 
375.8

Effect of dilutive securities:
 
 
 
 
Employee stock awards
 
5.0

 
8.0

Denominator for diluted earnings per share — adjusted weighted average common shares
 
380.1

 
383.8

 
 
 
 
 
Basic net income per common share attributable to D.R. Horton, Inc.
 
$
0.77

 
$
0.50

Diluted net income per common share attributable to D.R. Horton, Inc.
 
$
0.76

 
$
0.49




22


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




NOTE I – STOCKHOLDERS’ EQUITY

The Company has an automatically effective universal shelf registration statement, filed with the SEC in August 2018, registering debt and equity securities that it may issue from time to time in amounts to be determined. Forestar also has an effective shelf registration statement filed with the SEC in September 2018, registering $500 million of equity securities.

Effective August 1, 2018, the Board of Directors authorized the repurchase of up to $400 million of the Company’s common stock effective through September 30, 2019. During the three months ended December 31, 2018, the Company repurchased 4.1 million shares of its common stock for $140.6 million. The Company’s remaining authorization at December 31, 2018 was $234.9 million.

During the three months ended December 31, 2018, the Board of Directors approved a quarterly cash dividend of $0.15 per common share, which was paid on December 10, 2018 to stockholders of record on November 26, 2018. In January 2019, the Board of Directors approved a quarterly cash dividend of $0.15 per common share, payable on February 25, 2019 to stockholders of record on February 11, 2019. Cash dividends of $0.125 per common share were approved and paid in each quarter of fiscal 2018.


NOTE J – EMPLOYEE BENEFIT PLANS

Restricted Stock Units (RSUs)

The Company’s Stock Incentive Plan provides for the granting of stock options and restricted stock units to executive officers, other key employees and non-management directors. Restricted stock unit awards may be based on performance (performance-based) or on service over a requisite time period (time-based). Performance-based and time-based RSU equity awards represent the contingent right to receive one share of the Company’s common stock per RSU if the vesting conditions and/or performance criteria are satisfied. The RSUs have no dividend or voting rights until vested.

In November 2018, a total of 360,000 performance-based RSU equity awards were granted to the Company’s Chairman and executive officers. These awards vest at the end of a three-year performance period ending September 30, 2021. The number of units that ultimately vest depends on the Company’s relative position as compared to its peers in achieving certain performance criteria and can range from 0% to 200% of the number of units granted. The performance criteria are total shareholder return; return on investment; selling, general and administrative expense containment; and gross profit. The grant date fair value of these equity awards was $37.75 per unit. Compensation expense related to these grants was $1.7 million in the three months ended December 31, 2018 based on the Company’s performance against its peer group, the elapsed portion of the performance period and the grant date fair value of the award.

In November 2018, a total of 1.7 million time-based RSUs were granted to approximately 900 recipients, including the Company’s executive officers, other key employees and non-management directors. The weighted average grant date fair value of these equity awards was $33.70 per unit, and they vest annually in equal installments over periods of three to five years. Compensation expense related to these grants was $4.4 million in the three months ended December 31, 2018, of which $3.5 million related to expense recognized for employees that were retirement eligible on the date of grant.



23


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




NOTE K – COMMITMENTS AND CONTINGENCIES

Warranty Claims

The Company provides its homebuyers with a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems, a two-year limited warranty on major mechanical systems, and a one-year limited warranty on other construction components. The Company’s warranty liability is based upon historical warranty cost experience in each market in which it operates and is adjusted to reflect qualitative risks associated with the types of homes built and the geographic areas in which they are built.

Changes in the Company’s warranty liability during the three months ended December 31, 2018 and 2017 were as follows:

 
 
Three Months Ended 
 December 31,
 
 
2018
 
2017
 
 
(In millions)
Warranty liability, beginning of period
 
$
202.0

 
$
143.7

Warranties issued
 
18.0

 
16.4

Changes in liability for pre-existing warranties
 
5.5

 
6.8

Settlements made
 
(19.9
)
 
(17.5
)
Warranty liability, end of period
 
$
205.6

 
$
149.4


Legal Claims and Insurance

The Company is named as a defendant in various claims, complaints and other legal actions in the ordinary course of business. At any point in time, the Company is managing several hundred individual claims related to construction defect matters, personal injury claims, employment matters, land development issues, contract disputes and other matters. The Company has established reserves for these contingencies based on the estimated costs of pending claims and the estimated costs of anticipated future claims related to previously closed homes. The estimated liabilities for these contingencies were $412.2 million and $408.1 million at December 31, 2018 and September 30, 2018, respectively, and are included in accrued expenses and other liabilities in the consolidated balance sheets. Approximately 99% of these reserves related to construction defect matters at both December 31, 2018 and September 30, 2018. Expenses related to the Company’s legal contingencies were $5.8 million and $8.8 million in the three months ended December 31, 2018 and 2017, respectively.

The Company’s reserves for legal claims increased from $408.1 million at September 30, 2018 to $412.2 million at December 31, 2018. Changes in the Company’s legal claims reserves during the three months ended December 31, 2018 and 2017 were as follows:
 
Three Months Ended 
 December 31,
 
2018
 
2017
 
(In millions)
Reserves for legal claims, beginning of period
$
408.1

 
$
420.6

Increase in reserves
11.6

 
10.6

Payments
(7.5
)
 
(11.5
)
Reserves for legal claims, end of period
$
412.2

 
$
419.7




24


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




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 $57.8 million, $54.6 million and $73.1 million at December 31, 2018, September 30, 2018 and December 31, 2017, respectively, and are included in other assets in the consolidated balance sheets.

The estimation of losses related to these reserves and the related estimates of recoveries from insurance policies are subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to the Company’s markets and the types of products built, claim frequency, claim settlement costs and patterns, insurance industry practices and legal interpretations, among others. Due to the high degree of judgment required in establishing reserves for these contingencies, actual future costs and recoveries from insurance could differ significantly from current estimated amounts, and it is not possible for the Company to make a reasonable estimate of the possible loss or range of loss in excess of its reserves.

Land and Lot Option Purchase Contracts

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 other assets in the consolidated balance sheets.

At December 31, 2018, the Company’s homebuilding segment had total option deposits of $449.1 million, consisting of cash deposits of $446.1 million and promissory notes and letters of credit of $3.0 million, to purchase land and lots with a total remaining purchase price of approximately $6.9 billion. The majority of land and lots under contract are currently expected to be purchased within three years. Of these amounts, $65.0 million of the option deposits related to contracts with Forestar to purchase land and lots with a remaining purchase price of $706.4 million. A limited number of the homebuilding land and lot option purchase contracts at December 31, 2018, representing $96.5 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. Of the $96.5 million remaining purchase price subject to specific performance provisions, $44.4 million related to contracts between the homebuilding segment and Forestar.

During the three months ended December 31, 2018, Forestar reimbursed the Company’s homebuilding segment $12.1 million for previously paid earnest money and $3.0 million for pre-acquisition and other due diligence costs related to land purchase contracts whereby the homebuilding segment assigned its rights under contract to Forestar.

At December 31, 2018, Forestar had total option deposits of $5.4 million to purchase land and lots from third parties with a total remaining purchase price of approximately $68.0 million.

Other Commitments

At December 31, 2018, the Company had outstanding surety bonds of $1.5 billion and letters of credit of $144.5 million to secure performance under various contracts. Of the total letters of credit, $124.4 million were issued under the homebuilding revolving credit facility and $3.4 million were issued under Forestar’s revolving credit facility. The remaining $16.7 million of letters of credit were issued under secured letter of credit agreements, of which $1.4 million related to homebuilding operations and $15.3 million related to Forestar. These agreements require the deposit of cash as collateral with the issuing banks, which is included in restricted cash in the consolidated balance sheets.


25


D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
December 31, 2018




NOTE L – OTHER ASSETS, ACCRUED EXPENSES AND OTHER LIABILITIES

The Company’s other assets at December 31, 2018 and September 30, 2018 were as follows:
 
 
December 31,
2018
 
September 30, 2018
 
 
(In millions)
Earnest money and refundable deposits
 
$
474.0

 
$
445.2

Insurance receivables
 
57.8

 
54.6

Other receivables
 
73.2

 
81.7

Prepaid assets
 
36.4

 
36.9