D.R. Horton, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2023; unaudited. D.R. Horton is a U.S. homebuilder operating in 110 markets across 33 states, with lot development, mortgage/title, and rental businesses. Comparisons are with the corresponding 2022 periods unless noted.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $8.0 billion, essentially flat | $15.2 billion, up 1% |
| Income before taxes | $1.245 billion, down 34%; 15.6% of revenue vs. 23.5% | $2.513 billion, down 26%; 16.5% of revenue vs. 22.5% |
| Net income attributable to D.R. Horton | $942.2 million, down 34% | $1.901 billion, down 26% |
| Diluted EPS | $2.73 vs. $4.03 | $5.50 vs. $7.20 |
| Home sales gross margin | 21.6% vs. 28.9% | 22.7% vs. 28.2% |
| Operating cash flow | Six-month inflow of $1.474 billion vs. $834.6 million used in the prior-year period |
At March 31, cash and cash equivalents were $3.051 billion ($3.075 billion including restricted cash); total debt was $5.967 billion and stockholders’ equity was $20.713 billion. Consolidated debt-to-total-capital was 22.4%, and net debt-to-total-capital was 12.3%. Homebuilding debt-to-total-capital was 11.5%; net homebuilding debt-to-total-capital was 1.5%. Homebuilding revolving-credit capacity available was $1.99 billion. The rental facility was fully drawn at $1.025 billion, bearing 7.2%; the mortgage repurchase facility had $1.555 billion outstanding at 6.4%.
Material changes and operating trends
- Six-month home closings fell 3% to 37,004, while average closing price rose 3% to $382,600; home sales revenue was essentially flat at $14.2 billion.
- Six-month net sales orders declined 20% in units and 25% in value. Q2 orders fell 5% year over year but rose 73% from Q1. The cancellation rate was 18% for Q2 and 21% for six months, versus 16% in each prior-year period. Backlog at quarter end fell 43% in units to 19,237 and 44% in value to $7.4 billion.
- Management attributed lower homebuilding profitability mainly to home costs rising faster than selling prices, alongside greater incentives and price adjustments. Homebuilding SG&A rose to 7.5% of revenue for six months from 7.1%.
- Forestar six-month revenue fell 38% to $518.2 million and pre-tax income fell to $63.8 million from $116.7 million; lots sold declined 49% to 5,242.
- Financial-services six-month revenue declined 13% to $353.4 million and pre-tax income fell 35% to $103.8 million, reflecting lower mortgage-sale gains and higher relative expenses.
- Rental six-month revenue increased to $551.6 million from $379.4 million, while pre-tax income decreased to $144.9 million from $172.5 million. Rental inventory rose to $3.3 billion from $2.6 billion at fiscal year-end.
- Six-month inventory and land-option charges were $51.4 million, versus $20.0 million. These included impairments and write-offs associated with communities and land contracts.
Outlook, risks, and notable items
- Management reported improved demand during the spring selling season, citing seasonality, incentives, and pricing adjustments. It expects to maintain a higher level of incentives through fiscal 2023; it provided no numerical revenue or earnings guidance in the filing.
- Management said affordable new and existing homes remain limited, demographic support for housing demand is favorable, and recent construction-cycle times are improving. It also cautioned that elevated mortgage rates and economic uncertainty may persist.
- Management intends to maintain homebuilding debt-to-total-capital below 20% throughout fiscal 2023 and below 30% over the long term. It said available cash, credit facilities, and capital-market access should cover near-term liquidity needs and debt obligations for at least 12 months.
- Debt due within 12 months totaled approximately $2.2 billion, including the $1.6 billion mortgage repurchase facility and $400 million of 5.75% senior notes due August 2023. The company repaid $300 million of 4.75% notes at maturity in February. Credit facilities and debt covenants were reported in compliance at March 31.
- Land and lot purchase contracts had a remaining purchase price of approximately $19.2 billion, supported by $1.6 billion of deposits. A limited set of contracts with $76.7 million of remaining purchase price had specific-performance provisions. Land-contract terminations and associated write-offs are an ongoing risk.
- Legal-claim reserves were $768.3 million, primarily for construction-defect matters; warranty liabilities were $474.7 million. Management stated that losses beyond recorded estimates cannot be reasonably estimated and could differ materially from reserves. The company is largely self-insured due to significant policy retentions.
- Other notable items: the December 2022 acquisition of Riggins Custom Homes for approximately $107 million in cash; an April 2023 replacement authorization for up to $1 billion of common-stock repurchases; and an April 2023 uncommitted mortgage facility providing up to $300 million of capacity.
Investor verification points
- Track whether order growth and spring demand persist, and monitor cancellation rates, backlog conversion, and incentives amid elevated mortgage rates.
- Assess homebuilding gross-margin trends, construction costs, SG&A leverage, and regional performance.
- Verify refinancing or repayment of the August 2023 senior notes and continued access to mortgage-facility funding, especially given the rental facility’s full utilization.
- Monitor land-contract deposits, purchase obligations, impairments, and rental investment returns as inventories expand.
- Review changes in construction-defect, warranty, and insurance-recovery estimates, which involve significant judgment and uncertainty.