D.R. Horton, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023; comparisons are primarily with fiscal 2022. D.R. Horton is a U.S. homebuilder operating in 118 markets across 33 states, with rental, residential lot development, mortgage and title businesses.
Financial and operating results
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Consolidated revenue | $35.46 billion | $33.48 billion | +6% |
| Income before taxes | $6.31 billion | $7.63 billion | -17% |
| Net income attributable to D.R. Horton | $4.75 billion | $5.86 billion | -19% |
| Diluted earnings per share | $13.82 | $16.51 | -16% |
| Operating cash flow | $4.30 billion | $561.8 million | Increased |
| Cash, cash equivalents and restricted cash | $3.90 billion | $2.57 billion | Increased |
| Notes payable | $5.09 billion | $6.07 billion | Decreased |
- Margins and returns: Consolidated pre-tax margin declined to 17.8% from 22.8%. Homebuilding pre-tax margin fell to 16.6% from 21.7%; home-sales gross margin fell to 23.5% from 28.7%. Return on equity was 22.7% versus 34.5%, and homebuilding return on inventory was 29.7% versus 42.8%.
- Homebuilding: Closed 82,917 homes, essentially flat year over year, at an average price of $381,600, down 1%. Homebuilding revenue was $31.74 billion, down 1%; pre-tax income was $5.27 billion, down from $6.94 billion. Net sales orders rose 3% to 78,342 homes, while their value fell 3% to $29.5 billion.
- Backlog: 15,197 homes valued at $5.9 billion at year-end, down 23% in units and 26% in value. Average backlog price was $389,800 versus $406,600. The cancellation rate improved to 20% from 21%; backlog contracts remain subject to contingencies.
- Other segments: Rental revenue increased to $2.61 billion from $510.2 million, and rental pre-tax income rose to $524.2 million from $202.0 million, reflecting a sharp increase in rental-property sales. Forestar revenue declined 5% to $1.44 billion and pre-tax income declined to $221.6 million. Financial-services revenue increased 1% to $801.5 million, while pre-tax income declined 3% to $283.3 million.
- Cash flow and liquidity: Operating cash flow rose substantially, helped by an $861.8 million cash release from construction-in-progress and finished-home inventory, compared with a $2.06 billion cash use in FY2022. Year-end total equity was $23.14 billion; debt-to-total-capital was 18.3% versus 23.8%, and net debt-to-total-capital was 5.1% versus 15.4%. Homebuilding cash was $2.9 billion, with $1.96 billion available on its revolving facility and no borrowings outstanding.
- Debt and capital returns: Of $5.09 billion in notes payable, $1.9 billion was due within 12 months, including $1.7 billion under mortgage repurchase facilities. The company repurchased 11.1 million shares for $1.2 billion and paid $341.2 million in dividends. It reported $3.2 billion of surety bonds and $254.3 million of letters of credit.
Material changes and management commentary
- Higher mortgage rates and affordability pressures led the company to increase incentives and adjust prices and home sizes. Management attributed lower homebuilding margins mainly to lower selling prices alongside higher average home costs, with some margin improvement in the second half as prices and incentives stabilized and certain construction costs eased.
- Demand improved from the second quarter, supported by seasonal factors and sales incentives; annual net sales orders increased. Management cited limited supply of affordable new and existing homes and favorable housing-demand demographics, while noting that higher rates and economic uncertainty may persist.
- Supply-chain and labor constraints largely eased, construction cycle times improved, and management expects cycle times to return to normalized levels during FY2024. Most homes took three to eight months to build in FY2023.
- Management expects to continue higher levels of sales incentives in FY2024 and to adjust pricing, sales pace and inventory to local demand. It did not provide specific FY2024 revenue, earnings or margin guidance in the supplied filing text. Management said it expects debt-to-total-capital to remain below 20% in FY2024.
- Owned and controlled homebuilding lots totaled 568,400; 75% were controlled through purchase contracts. Remaining purchase prices on those contracts totaled $21.1 billion, secured by $1.8 billion of deposits. Management says this approach limits land risk, but contract deposits and certain purchase obligations remain exposed.
Risks, contingencies and unusual items
- Key risks include housing cyclicality, elevated mortgage rates and inflation, affordability, land and inventory values, construction costs and labor availability, regulatory delays, weather and natural disasters, and access to mortgage and capital markets.
- Legal-claims reserves were $858.9 million at year-end, approximately 97% related to construction defects; related insurance receivables were $165.8 million. The independent auditor identified estimation of construction-defect reserves as a critical audit matter. Management’s sensitivity analysis indicates a 10% increase in assumed claim frequency and average cost would increase estimated expense by about $97 million after estimated insurance recoveries.
- The company is largely self-insured for construction-defect exposure and states that actual claim frequency and costs could differ materially from estimates. It reported 600 pending construction-defect claims at year-end and resolved 305 claims during FY2023 for $40.6 million.
- The company is negotiating resolution of stormwater-compliance notices received in 2014 involving EPA Region 4 and state agencies. A monetary payment, supplemental environmental project and consent decree are expected; the company does not believe the matter will materially affect its financial position, results or cash flows.
- DHI Mortgage’s committed mortgage repurchase facility had a stated maturity of February 16, 2024, with $1.4 billion outstanding at year-end; the filing describes renewal or extension as important to mortgage-business liquidity. The filing does not establish in the supplied text whether that facility was subsequently renewed.
- FY2023 included $7.7 million of homebuilding impairment charges, $19.0 million of consolidated inventory impairments and $61.3 million of land-contract deposit and pre-acquisition cost write-offs. The company also completed two homebuilder acquisitions for approximately $107 million and $110 million.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The filing reports effective disclosure controls and internal controls.
Important facts for investors to verify
- Whether mortgage rates, buyer incentives and homebuilding gross margins improve or deteriorate, and how these factors affect affordability, order value and cancellations.
- Whether backlog converts to closings as expected, given the 26% year-over-year decline in backlog value and contract contingencies.
- How much of the $21.1 billion purchase-contract land and lot pipeline is ultimately acquired, and the potential exposure of deposits and specific-performance contracts.
- Developments in construction-defect claims and reserve assumptions, including insurance recoveries and the company’s substantial self-insured exposure.
- Renewal and terms of DHI Mortgage’s short-dated repurchase facility, as well as the availability and cost of mortgage-loan buyers and financing.
- Whether rental-property sales and earnings are repeatable, and whether the growing rental business produces returns sufficient to justify its inventory and debt commitments.
- Cash deployment through buybacks, dividends, inventory investment and debt repayment; FY2023 repurchases exceeded the stated $1.0 billion authorization, and the board approved a new $1.5 billion authorization in October 2023.