D.R. Horton, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2022; unaudited. Comparisons are with the corresponding 2021 periods unless noted. D.R. Horton is a national homebuilder operating in 105 markets across 33 states, with homebuilding, lot development, financial services and rental businesses.
Financial performance
| Metric | Q3 FY2022 | Nine months FY2022 | Change vs. prior year |
|---|---|---|---|
| Revenue | $8.79 billion | $23.84 billion | +21% in both periods |
| Income before taxes | $2.18 billion | $5.56 billion | +54%; +53% |
| Net income attributable to D.R. Horton | $1.65 billion | $4.23 billion | +48%; +49% |
| Diluted earnings per share | $4.67 | $11.85 | +53% in both periods |
| Consolidated pre-tax margin | 24.8% | 23.3% | 19.4%; 18.5% in 2021 |
| Home sales gross margin | 30.1% | 28.9% | 25.9%; 24.9% in 2021 |
| Net cash used in operating activities | Not stated for quarter | $562.8 million | $34.5 million used in 2021 |
Growth in earnings principally reflected higher home prices and improved homebuilding gross margins. Home closings declined 1% in both the quarter and nine-month period, while average closing prices rose 20%. Consolidated nine-month revenue also benefited from higher rental and financial-services activity.
Cash, debt and liquidity
- Cash, cash equivalents and restricted cash were $1.68 billion at June 30, down from $3.24 billion at September 30, 2021. Total assets were $28.87 billion; total equity was $18.44 billion.
- Notes payable totaled $5.98 billion, versus $5.41 billion at September 30. Company-reported debt to total capital was 24.9%; net debt to total capital was 19.3%, up from 12.9% at September 30.
- Homebuilding debt to total capital was 17.0%. Management said it intends to keep this ratio below 30% and expects it to remain significantly below that level through the rest of FY2022 and FY2023.
- The homebuilding revolver had $400 million drawn and $1.60 billion available. Forestar had no revolver borrowings and $354 million available. DRH Rental had $175 million drawn and $474.6 million available. DHI Mortgage had $1.4 billion outstanding on its mortgage repurchase facility.
- Operating cash use reflected investment in homes under construction and rental properties; rental operations used $826.4 million of operating cash. Investing activities used $372.9 million, including $271.5 million net for the Vidler acquisition. Financing activities used $617.2 million, including share repurchases and dividends.
Operating changes and management commentary
- In Q3, net sales orders fell 7% to 16,693 homes, although their value rose 8% to $6.94 billion as average order price increased 16%. Backlog fell 9% in homes to 29,244, but its value rose 8% to $11.92 billion.
- The Q3 cancellation rate increased to 24% from 17%. Management said demand moderated in June as mortgage rates rose substantially and inflation remained elevated. It had restricted sales pace in many communities to match longer construction cycles caused by materials supply disruptions and labor tightness.
- Management expects the pace of home-price increases to slow and incentives to rise from historically low levels, which could reduce future gross margins. It said it would adjust pricing, incentives, sales pace and inventory to local demand, and cited affordable products, lot supply, liquidity and financial flexibility as supports.
- Homebuilding inventory increased to $17.9 billion from $13.9 billion at September 30; homes in inventory rose to 56,400 from 47,800. Lots owned or controlled increased to 598,200, including 467,100 controlled through purchase contracts.
- The company acquired Vidler Water Resources for $290.5 million in May. The preliminary purchase allocation included primarily water rights and other intangible assets and remained subject to revision.
- Q3 and nine-month effective tax rates rose to 24.0% and 23.7%, respectively, from 21.1% and 21.6%, partly because the federal energy-efficient homes tax credit expired for homes closed after December 31, 2021.
Risks, contingencies and unusual items
- Management identifies housing-market cyclicality, higher interest rates and inflation, mortgage financing availability, land and lot exposure, material and labor shortages, and access to capital as risks. Seasonal patterns mean quarterly results may not indicate full-year results.
- Legal-claims reserves were $674.4 million at June 30, up from $577.5 million at September 30; approximately 99% related to construction-defect matters. The company said it could not reasonably estimate potential losses beyond recorded reserves. Warranty liability was $431.8 million.
- Land and lot purchase contracts carried approximately $20.2 billion of remaining purchase price, supported by $1.6 billion in deposits; most were expected to be purchased within three years. Certain contracts have specific-performance provisions.
- Outstanding surety bonds were $2.7 billion and letters of credit were $244.7 million. The company reported compliance with its debt-facility covenants. It cautioned that actual warranty, legal and insurance outcomes may differ materially from estimates.
- Inventory and land-option charges were $30.6 million for the nine months, including $3.8 million of Forestar impairment and write-offs related to terminated or expected-to-be-terminated land contracts.
Important facts for investors to verify
- Whether June’s demand moderation, higher cancellations and rising incentives persisted, and how they affected orders, backlog and realized prices.
- Whether elevated construction costs, supply-chain and labor constraints, or inventory growth pressured margins, cash generation or impairment risk.
- Liquidity and refinancing needs, particularly the $2.2 billion of notes payable due within 12 months as reported, including the mortgage repurchase facility balance.
- Potential changes in legal-claims reserves, insurance recoveries, warranty costs and land-contract commitments.
- Vidler’s final purchase-price allocation and the returns and cash requirements of the expanding rental business.