D.R. Horton, Inc. — FY2022 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended September 30, 2022; it is not a standalone quarterly report. D.R. Horton is a U.S. homebuilder operating in 106 markets across 33 states, with additional lot development (Forestar), mortgage and title services, and rental businesses. Homebuilding represented 95% of consolidated revenue. The company closed 82,744 homes at an average price of $385,100.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Consolidated revenue | $33.48 billion | $27.77 billion | +21% |
| Pre-tax income | $7.63 billion | $5.36 billion | +42% |
| Net income attributable to D.R. Horton | $5.86 billion | $4.18 billion | +40% |
| Diluted EPS | $16.51 | $11.41 | +45% |
| Consolidated pre-tax margin | 22.8% | 19.3% | +3.5 percentage points |
| Net cash from operating activities | $561.8 million | $534.4 million | +$27.4 million |
- Homebuilding: Revenue rose 20% to $31.9 billion; closings increased 1%, while average closing price increased 19%. Home-sales gross margin rose to 28.7% from 25.5%, and homebuilding pre-tax income increased to $6.94 billion from $4.81 billion.
- Other segments: Forestar revenue increased 15% to $1.52 billion and pre-tax income to $235.8 million. Financial-services revenue fell 3% to $795.0 million and pre-tax income fell 20% to $290.6 million. Rental revenue increased to $510.2 million from $267.8 million; rental pre-tax income was $202.0 million.
- Cash flow and investment: Homebuilding operations provided $1.92 billion of operating cash, but rental operations used $1.39 billion, principally reflecting investment in rental properties. Consolidated operating cash flow was therefore much lower than net income. Investing activities used $414.9 million, including $271.5 million for the Vidler acquisition, net of cash acquired.
- Liquidity and debt: Cash and cash equivalents were $2.54 billion, down from $3.21 billion. Total notes payable were $6.07 billion, up from $5.41 billion. Debt to total capital improved to 23.8% from 26.7%, while net debt to total capital rose to 15.4% from 12.9%. Homebuilding debt was $2.94 billion, with no borrowings on its $2.19 billion revolving facility and $1.97 billion available after letters of credit.
- Capital returns: The company repurchased 14.0 million shares for $1.1 billion and paid $316.5 million in dividends. The October 2022 quarterly dividend was increased to $0.25 per share.
Material changes versus FY2021
- Closings were nearly flat, but home prices drove higher revenue and margins. Homebuilding inventory increased to $17.32 billion from $13.91 billion.
- Demand weakened late in the year: net sales orders declined 6% for the year, backlog value fell 16% to $8.0 billion, and the cancellation rate increased to 21% from 17%. Fourth-quarter cancellations reached 32%; fourth-quarter net orders were down 15% year over year.
- Construction cycle times lengthened amid material shortages, labor tightness, and approval delays. Unsold completed homes increased to about 4,400 from about 900.
- Forestar’s pre-tax income increased, while financial-services pre-tax income declined amid a more competitive mortgage market and rising rates. Rental inventory grew sharply to $2.6 billion from $840.9 million.
Outlook, risks, and notable items
- Management gave no quantified FY2023 revenue or earnings guidance. It expected higher sales incentives and lower average selling prices in FY2023, with homebuilding gross margins expected to decline from current levels.
- Management said it would adjust pricing, incentives, sales pace, product mix, and inventory to local demand, and expressed confidence in its liquidity and ability to manage changing conditions.
- Key risks include higher mortgage rates and inflation reducing affordability and demand; further cancellations; construction-cost and supply-chain pressures; land and inventory impairments; and weather, regulatory, warranty, and construction-defect exposure.
- Construction-defect and other legal reserves totaled $729.1 million, approximately 99% related to construction defects; related insurance receivables were $137.9 million. The auditor identified estimation of construction-defect reserves as a critical audit matter. The filing notes actual claims and recoveries could differ materially from estimates.
- Land and lot purchase contracts had $19.7 billion of remaining purchase price, supported by $1.6 billion of deposits. Fiscal 2022 land-contract earnest-money and pre-acquisition write-offs were $66.6 million. Homebuilding recorded no impairment charges for FY2022; Forestar recorded $3.8 million related to a land-development project.
- Debt maturities included $2.5 billion within 12 months, including $1.6 billion under the mortgage repurchase facility, which matured in February 2023. The company said it expected sufficient liquidity, but renewal and financing access remain relevant risks. Homebuilding and Forestar revolving facilities were extended in October 2022; the rental facility was increased in November 2022.
- The May 2022 Vidler acquisition cost $290.5 million and consisted primarily of water rights and related assets. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- FY2023 order trends, cancellation rates, backlog conversion, and the extent of further price reductions or incentives.
- Whether gross-margin declines and construction-cost pressures are consistent with management’s stated outlook.
- Cash generation after land, homebuilding, and rental investment; rental-property returns as the segment scales.
- Refinancing or repayment of near-term maturities, particularly the mortgage repurchase facility, and the availability and cost of credit.
- Changes in construction-defect reserves, claim frequency, settlement costs, and recoveries from insurers or subcontractors.
- Potential losses on land-contract deposits and inventory if housing demand or land values weaken.