D.R. Horton, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended December 31, 2021; comparisons are with the three months ended December 31, 2020 unless noted. D.R. Horton is a U.S. homebuilder operating in 102 markets across 32 states, with homebuilding, lot development (Forestar), financial services and rental businesses.
Financial and operating results
| Metric | Q1 FY2022 | Prior-year period / change |
|---|---|---|
| Consolidated revenue | $7.05 billion | $5.93 billion; up 19% |
| Income before taxes | $1.50 billion | $1.03 billion; up 45% |
| Net income attributable to D.R. Horton | $1.14 billion | $791.8 million; up 44% |
| Diluted EPS | $3.17 | $2.14; up 48% |
| Consolidated pre-tax margin | 21.2% | 17.4% |
| Cash and cash equivalents, December 31 | $2.44 billion | $3.21 billion at September 30, 2021 |
| Net cash used in operating activities | $174.1 million | $252.1 million used |
| Total notes payable | $5.26 billion | $5.41 billion at September 30, 2021 |
| Debt / total capital; net debt / total capital | 25.1%; 15.2% | 26.7%; 12.9% at September 30, 2021 |
Homebuilding revenue increased 17% to $6.68 billion. Closings declined 2% to 18,396, while average closing price rose 19% to $361,800. Home sales gross margin expanded to 27.4% from 24.1%; homebuilding pre-tax income was $1.33 billion, or 20.0% of homebuilding revenue, versus $922.6 million, or 16.1%. SG&A declined to 7.5% of homebuilding revenue from 7.9%.
Net sales orders rose 5% to 21,522 homes and 29% in value to $8.26 billion; average order price increased 22% to $383,600. Backlog increased 3% to 29,347 homes and 24% in value to $11.06 billion. The cancellation rate fell to 15% from 18%.
Other segments: Forestar revenue rose 33% to $407.6 million and pre-tax income to $53.5 million. Financial services revenue declined 2% to $184.3 million and pre-tax income fell 20% to $67.1 million. Rental revenue was $156.5 million, including sales of one multifamily property and two single-family rental properties; rental pre-tax income was $70.1 million.
Cash used in operations primarily reflected investment in homebuilding inventory and rental properties. Construction-in-progress and finished-home inventory increased $1.00 billion during the quarter; rental-property investment used $319.5 million of operating cash. Financing activities used $572.0 million, including $303.8 million for share repurchases, $234.6 million of net mortgage-facility repayments and $80.1 million of dividends. Cash and restricted cash fell $772.6 million from the fiscal-year opening balance.
Material changes and outlook
- Growth in revenue and earnings was primarily driven by higher home prices and improved homebuilding gross margins, despite fewer homes closed. Management attributed margin improvement chiefly to selling prices rising faster than home costs.
- Management reported strong housing demand, supported by low mortgage rates and limited affordable-home supply. However, building-material shortages and labor-market tightness lengthened construction cycles. The company was moderating sales pace to align orders with production and said it expected to continue doing so as needed.
- Management expected to close more homes in fiscal 2022 than in fiscal 2021. The filing provides no numerical full-year earnings or revenue guidance.
- Lots controlled through purchase contracts represented 76% of owned and controlled lots. At December 31, the company had 131,900 owned lots and 419,500 lots controlled under purchase contracts; the latter carried approximately $17.1 billion of remaining purchase price.
- Management said cash, borrowing capacity and capital-market access should provide sufficient liquidity for near-term working capital and debt needs. It intended to keep homebuilding debt to total capital below 30% over the long term and expected it to remain significantly below that level in FY2022.
Liquidity, debt, risks and contingencies
- At December 31, $1.8 billion of notes payable was due within 12 months, including $1.3 billion under the mortgage repurchase facility. The homebuilding revolver had no borrowings and approximately $2.0 billion available capacity; Forestar’s revolver had no borrowings and $343.7 million available.
- The mortgage repurchase facility had $1.3 billion outstanding, $1.633 billion of capacity and a February 18, 2022 maturity. Management expected to renew and extend it. Its liquidity is dependent on renewal or other financing.
- Supply-chain and labor constraints, higher costs, interest-rate changes, housing-market cyclicality, mortgage availability and land/inventory risks could affect sales, margins, cash flow and asset values. Management noted that lower demand could reduce gross margins and that adverse prolonged conditions could trigger inventory impairments.
- Warranty liability was $390.0 million. Reserves for legal claims were $585.2 million, approximately 99% related to construction-defect matters; related insurance receivables were $107.0 million. The company said it could not reasonably estimate potential losses beyond recorded reserves, and actual claims or recoveries could differ materially from estimates.
- Land purchase contracts had $1.3 billion of deposits and $17.1 billion of remaining purchase price; a limited set of contracts covering $87.7 million of purchase price had specific-performance provisions. Outstanding surety bonds were $2.4 billion and letters of credit were $253.5 million.
- The federal energy-efficient homes tax credit expired for homes closed after December 31, 2021. The effective tax rate was 23.5%, versus 23.1% in the prior-year quarter.
- Homebuilding, Forestar and DHI Mortgage were in compliance with their reported debt-facility covenants at quarter-end. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether construction-cycle delays, labor availability and material costs affect FY2022 closings, order pace and margins.
- Whether demand and pricing remain strong enough to support elevated homebuilding margins and the expected increase in FY2022 closings.
- Renewal and terms of the mortgage repurchase facility before its February 2022 maturity, and the company’s near-term debt maturities.
- Cash conversion as inventory and rental-property investment expands, including the effect of continued buybacks and dividends on liquidity.
- Changes in land-contract commitments, inventory impairment exposure, and construction-defect and warranty reserves relative to actual claims and recoveries.
- Comparability of rental-segment results: the company reorganized reporting in fiscal 2021, and the prior-year segment presentation was conformed; current-quarter rental sales also included property dispositions.