D.R. Horton, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022; comparisons are with the three months ended December 31, 2021 unless noted. D.R. Horton is a U.S. homebuilder operating in 109 markets across 33 states, with Forestar lot development, financial services and rental businesses. Financial statements are unaudited.
Key financial results
| Metric | Q1 FY2023 | Prior year | Change |
|---|---|---|---|
| Revenue | $7.26 billion | $7.05 billion | Up 3% |
| Income before taxes | $1.27 billion | $1.50 billion | Down 15% |
| Net income attributable to D.R. Horton | $958.7 million | $1.14 billion | Down 16% |
| Diluted EPS | $2.76 | $3.17 | Down 13% |
| Pre-tax margin | 17.5% | 21.2% | Down 3.7 percentage points |
| Operating cash flow | $829.1 million provided | $174.1 million used | Improved |
Homebuilding revenue was $6.74 billion, up 1%, while closings fell 6% to 17,340; the average closing price rose 7% to $386,900. Home sales gross margin declined to 23.9% from 27.4%, and homebuilding pre-tax margin fell to 16.2% from 20.0%. SG&A was 7.8% of homebuilding revenue, compared with 7.5%.
By segment, Forestar revenue fell 47% to $216.7 million and pre-tax income fell to $27.9 million from $53.5 million. Financial services revenue declined 26% to $137.0 million and pre-tax income fell 73% to $18.2 million, primarily reflecting lower mortgage-sale gains. Rental revenue rose to $327.5 million from $156.5 million and pre-tax income increased to $110.3 million from $70.1 million.
Financial position, cash flow and capital
- At December 31, 2022, cash and cash equivalents were $2.59 billion; total cash including restricted cash was $2.61 billion. Total assets were $30.26 billion and total equity was $20.55 billion.
- Notes payable totaled $5.69 billion, down from $6.07 billion at September 30, 2022. Debt to total capital was 22.0%, and net debt to total capital was 13.3%. Management reported covenant compliance across the facilities and public debt obligations.
- The homebuilding revolving facility had no borrowings and $1.98 billion available. Forestar had $366.2 million available under its revolving facility. DRH Rental had $800 million outstanding and $225 million available. DHI Mortgage’s repurchase facility had $1.2 billion outstanding and was due February 17, 2023; management expected to renew and extend it.
- Operating cash flow benefited in part from lower construction-in-progress and finished-home inventory and lower mortgage loans held for sale; cash was used for land and lot investment. Investing activities used $142.9 million, including $97.1 million paid in the Riggins acquisition. Financing activities used $646.6 million, including mortgage-facility paydowns, share repurchases and dividends.
- The company repurchased 1.4 million shares for $118.1 million and paid a $0.25-per-share dividend. The board approved another $0.25 dividend payable in February 2023.
Material changes, outlook and risks
- Housing demand moderated from June 2022 as mortgage rates rose substantially and inflation remained elevated. Net sales orders fell 38% to 13,382 homes, order value declined 40% to $4.9 billion, and the cancellation rate rose to 27% from 15%. Backlog fell 46% to 15,759 homes.
- Management said it had increased incentives and reduced prices or home sizes where needed for affordability. It expects higher incentive levels through FY2023, average selling prices to decrease, and gross profit margins to decline from current levels. It also expects supply-chain and labor constraints to improve for homes started during FY2023; timing and extent are uncertain.
- Management cited limited affordable new and existing home supply and favorable housing-demand demographics, while noting that higher rates and economic uncertainty may persist. It plans to adjust pricing, incentives, sales pace and inventory to local demand. It expects its homebuilding debt-to-capital ratio to remain below 20% during FY2023.
- Inventory and land-option charges were $27.5 million, versus $4.8 million a year earlier, including $4.8 million of community impairments and $22.7 million of land-contract earnest-money and pre-acquisition cost write-offs. Further adverse housing or economic conditions could prompt additional impairments.
- The company acquired Riggins Custom Homes in Northwest Arkansas for approximately $107 million in cash, adding about 170 homes in inventory, 3,000 lots and a backlog of about 100 homes. Purchase-price allocation was still in progress.
- Legal-claims reserves were $748.5 million, largely for construction-defect matters; warranty liability was $464.0 million. The company said actual claim costs and insurance recoveries could differ materially from estimates and that it could not reasonably estimate losses above recorded reserves.
- Other stated risks include housing-market cyclicality, higher interest rates and financing costs, land and rental inventory exposure, availability and cost of materials and labor, mortgage-loan sale conditions, debt and covenant risks, weather, regulation and construction-defect claims. The quarter is seasonally weaker and is not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether orders, cancellations and backlog stabilize, and whether incentives and lower selling prices continue to compress homebuilding margins.
- Whether cash generation remains adequate as the company invests in land and rental properties, and whether debt, near-term maturities and facility availability remain manageable.
- Whether DHI Mortgage renews its February 2023 repurchase facility on acceptable terms and maintains mortgage-sale access and profitability.
- Whether inventory charges, land-contract write-offs and legal or warranty reserves increase beyond current estimates.
- Whether the Riggins acquisition is completed through purchase-price allocation as expected and performs in line with management’s plans.