DR HORTON Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote an understanding of our financial condition, results of operations, liquidity and certain other factors that may affect future results. MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-K. This section generally discusses the results of operations for fiscal 2021 compared to 2020. For similar operating and financial data and discussion of our fiscal 2020 results compared to our fiscal 2019 results, refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Part II of our annual report on Form 10-K for the fiscal year endedSeptember 30, 2020 , which was filed with theSEC onNovember 20, 2020 . The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption "Forward-Looking Statements" and under Item 1A, "Risk Factors."
Results of Operations - Overview
Fiscal 2021 Operating Results
In fiscal 2021, our number of homes closed and home sales revenues increased 25% and 35%, respectively, compared to the prior year, and our consolidated revenues increased 37% to$27.8 billion compared to$20.3 billion in the prior year. Our pre-tax income was$5.4 billion in fiscal 2021 compared to$3.0 billion in fiscal 2020, and our pre-tax operating margin was 19.3% compared to 14.7%. Net income was$4.2 billion in fiscal 2021 compared to$2.4 billion in fiscal 2020, and our diluted earnings per share was$11.41 compared to$6.41 . Cash provided by our homebuilding operations was$1.2 billion in fiscal 2021 compared to$1.9 billion in fiscal 2020. In fiscal 2021, our return on equity (ROE) was 31.6% compared to 22.1% in fiscal 2020, and our homebuilding return on inventory (ROI) was 37.9% compared to 24.6%. ROE is calculated as net income attributable toD.R. Horton for the year divided by average stockholders' equity, where average stockholders' equity is the sum of ending stockholders' equity balances of the trailing five quarters divided by five. Homebuilding ROI is calculated as homebuilding pre-tax income for the year divided by average inventory, where average inventory is the sum of ending homebuilding inventory balances for the trailing five quarters divided by five. DuringMarch 2020 , the impacts of the COVID-19 pandemic and the related widespread reductions in economic activity acrossthe United States began to adversely affect our business. As economic activity resumed and restrictive orders relating to COVID-19 were eased, demand for our homes improved significantly during the remainder of fiscal 2020 and remained strong throughout fiscal 2021. We believe the increase in demand has been fueled by historically low interest rates on mortgage loans and the limited supply of homes at affordable price points across most of our markets. We are well-positioned for increased demand with our affordable product offerings, lot supply and housing inventory. However, multiple disruptions in the supply chain, combined with the improvement in economic conditions and strong demand for new homes, have resulted in shortages in certain building materials and tightness in the labor market, which has caused our construction cycle to lengthen. We have slowed our home sales pace to more closely align with our production levels, and we are selling homes later in the construction cycle when we have more certainty regarding the home close date for our homebuyers. Based on the current availability of labor and materials, the stage of completion of our current homes in inventory, production schedules and capacity, we expect to continue restricting the pace of our sales orders in many of our communities in the near term to match our production levels. Within our homebuilding land and lot portfolio, our lots controlled through purchase contracts represent 76% of the lots owned and controlled atSeptember 30, 2021 compared to 70% atSeptember 30, 2020 . Our relationship with Forestar and expanded relationships with other land developers across the country have allowed us to continue to increase the controlled portion of our lot pipeline. 28
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We believe our strong balance sheet and liquidity position provide us with the flexibility to operate effectively through changing economic conditions. We plan to continue to generate strong cash flows from our homebuilding operations and manage our product offerings, incentives, home pricing, sales pace and inventory levels to optimize the return on our inventory investments in each of our communities based on local housing market conditions.
Strategy
Our operating strategy focuses on enhancing long-term value to our shareholders
by leveraging our financial and competitive position in our core homebuilding
business to maximize the returns on our inventory investments and generate
strong profitability and cash flows, while managing risk and maintaining
financial flexibility to navigate changing economic conditions and make
opportunistic strategic investments. Our strategy remains consistent and
includes the following initiatives:
•Developing and retaining highly experienced and productive teams of personnel
throughout our company that are aligned and focused on continuous improvement in
our operational execution and financial performance.
•Maintaining a strong cash balance and overall liquidity position and
controlling our level of debt.
•Allocating and actively managing our inventory investments across our operating
markets to diversify our geographic risk.
•Offering new home communities that appeal to a broad range of entry-level,
move-up, active adult and luxury homebuyers based on consumer demand in each
market.
•Modifying product offerings, sales pace, home prices and sales incentives as
necessary in each of our markets to meet consumer demand and maintain
affordability.
•Delivering high quality homes and a positive experience to our customers both
during and after the sale.
•Managing our inventory of homes under construction relative to demand in each
of our markets, including starting construction on unsold homes to capture new
home demand and actively controlling the number of unsold, completed homes in
inventory.
•Investing in land and land development in desirable markets, while controlling
the level of land and lots we own in each market relative to the local new home
demand.
•Continuing to seek opportunities to expand the portion of our land and finished
lots controlled through purchase contracts with Forestar and other land
developers.
•Controlling the cost of goods purchased from both vendors and subcontractors.
•Improving the efficiency of our land development, construction, sales and other
key operational activities.
•Controlling our selling, general and administrative (SG&A) expense
infrastructure to match production levels.
•Opportunistically evaluating potential acquisitions to enhance our operations
and improve returns.
•Ensuring that our financial services business provides high quality mortgage
and title services to homebuyers efficiently and effectively.
•Increasing our investments in the construction and leasing of single-family and
multi-family rental properties to meet rental demand in high growth suburban
markets and selling these properties profitably.
We believe our operating strategy, which has produced positive results in recent
years, will allow us to successfully operate through changing economic
conditions to maintain and improve our financial and competitive position.
However, we cannot provide any assurances that the initiatives listed above will
continue to be successful, and we may need to adjust parts of our strategy to
meet future market conditions.
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Key Results
Key financial results as of and for our fiscal year ended
Homebuilding:
•Homebuilding revenues increased 35% to$26.6 billion compared to$19.6 billion . •Homes closed increased 25% to 81,965 homes, and the average closing price of those homes was$323,300 . •Net sales orders increased 4% to 81,378 homes, and the value of net sales orders increased 18% to$27.7 billion . •Sales order backlog decreased 2% to 26,221 homes, while the value of sales order backlog increased 16% to$9.5 billion . •Home sales gross margin was 25.5% compared to 21.8%. •Homebuilding SG&A expense was 7.3% of homebuilding revenues compared to 8.1%. •Homebuilding pre-tax income was$4.8 billion compared to$2.7 billion . •Homebuilding pre-tax income was 18.1% of homebuilding revenues compared to 13.6%. •Homebuilding return on inventory was 37.9% compared to 24.6%. •Net cash provided by homebuilding operations was$1.2 billion compared to$1.9 billion . •Homebuilding cash and cash equivalents totaled$3.0 billion compared to$2.6 billion . •Homebuilding inventories totaled$13.9 billion compared to$11.0 billion . •Homes in inventory totaled 47,800 compared to 38,000. •Owned lots totaled 127,800 compared to 112,600, and lots controlled through purchase contracts increased to 402,500 from 264,300. •Homebuilding debt was$3.2 billion compared to$2.5 billion . •Homebuilding debt to total capital was 17.8% compared to 17.5%, and net homebuilding debt to total capital was 1.7% compared to (0.3)%. 30 -------------------------------------------------------------------------------- Table of Contents Forestar: •Forestar's revenues increased 42% to$1.3 billion compared to$931.8 million . Revenues in fiscal 2021 and 2020 included$1.2 billion and$887.4 million , respectively, of revenue from land and lot sales to our homebuilding segment. •Forestar's lots sold increased 53% to 15,915 compared to 10,373. Lots sold toD.R. Horton totaled 14,839 compared to 10,164. •Forestar's pre-tax income was$146.6 million , which included an$18.1 million loss on extinguishment of debt, compared to$78.1 million . •Forestar's pre-tax income was 11.1% of Forestar revenues compared to 8.4%. •Forestar's cash and cash equivalents totaled$153.6 million compared to$394.3 million . •Forestar's inventories totaled$1.9 billion compared to$1.3 billion . •Forestar's owned and controlled lots totaled 97,000 compared to 60,500. Of these lots, 39,200 were under contract to sell to or subject to a right of first offer withD.R. Horton compared to 30,400. •Forestar's debt was$704.5 million compared to$641.1 million .
•Forestar's debt to total capital was 41.0% compared to 42.4%. Forestar's net debt to total capital was 35.2% compared to 22.1%.
Financial Services: •Financial services revenues increased 41% to$823.6 million compared to$584.9 million . •Financial services pre-tax income increased 49% to$364.6 million compared to$245.2 million . •Financial services pre-tax income was 44.3% of financial services revenues compared to 41.9%. Consolidated Results: •Consolidated pre-tax income increased 80% to$5.4 billion compared to$3.0 billion . •Consolidated pre-tax income was 19.3% of consolidated revenues compared to 14.7%. •Income tax expense was$1.2 billion compared to$602.5 million , and our effective tax rate was 21.8% compared to 20.2%. •Net income attributable toD.R. Horton increased 76% to$4.2 billion compared to$2.4 billion . •Diluted net income per common share attributable toD.R. Horton increased 78% to$11.41 compared to$6.41 . •Net cash provided by operations was$534.4 million compared to$1.4 billion . •Stockholders' equity was$14.9 billion compared to$11.8 billion . •Book value per common share increased to$41.81 compared to$32.53 . •Debt to total capital was 26.7% compared to 26.6%, and net debt to total capital was 12.9% compared to 9.7%. 31 -------------------------------------------------------------------------------- Table of Contents Results of Operations - Homebuilding Due to the change in aggregation of our homebuilding operating segments into six new reportable segments during fiscal 2021, the following tables and related discussion of our homebuilding results include comparative information for the fiscal years endedSeptember 30, 2021 , 2020 and 2019.
Based on the new aggregation, our six reporting segments and the states in which we have homebuilding operations are as follows:
Northwest: Colorado , Oregon , Utah and Washington
Southwest: Arizona , California , Hawaii , Nevada and New Mexico
South Central: Oklahoma and Texas
Southeast: Alabama , Florida , Louisiana and Mississippi
East: Georgia , North Carolina , South Carolina and Tennessee
North : Delaware , Illinois , Indiana , Iowa ,
Nebraska,
New Jersey, Ohio, Pennsylvania and Virginia
Net Sales Orders (1) Net Homes Sold
Year Ended September 30, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Northwest 4,530 5,308 3,919 (15) % 35 %
Southwest 9,456 10,214 7,382 (7) % 38 %
South Central 23,631 21,511 14,942 10 % 44 %
Southeast 24,239 21,103 15,640 15 % 35 %
East 14,038 14,480 11,011 (3) % 32 %
North 5,484 5,842 3,671 (6) % 59 %
81,378 78,458 56,565 4 % 39 %
Value (In millions)
Northwest $ 2,320.2 $ 2,342.3 $ 1,737.4 (1) % 35 %
Southwest 4,179.3 3,838.8 2,909.8 9 % 32 %
South Central 6,992.9 5,555.2 3,821.5 26 % 45 %
Southeast 7,632.1 5,781.2 4,122.0 32 % 40 %
East 4,496.9 4,086.3 3,034.1 10 % 35 %
North 2,126.8 2,002.5 1,218.6 6 % 64 %
$ 27,748.2 $ 23,606.3 $ 16,843.4 18 % 40 %
Average Selling Price
Northwest $ 512,200 $ 441,300 $ 443,300 16 % - %
Southwest 442,000 375,800 394,200 18 % (5) %
South Central 295,900 258,200 255,800 15 % 1 %
Southeast 314,900 274,000 263,600 15 % 4 %
East 320,300 282,200 275,600 14 % 2 %
North 387,800 342,800 332,000 13 % 3 %
$ 341,000 $ 300,900 $ 297,800 13 % 1 %
_____________(1)Net sales orders represent the number and dollar value of new sales contracts executed with customers (gross sales orders), net of cancelled sales orders.
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Sales Order Cancellations
Year Ended September 30,
Cancelled Sales Orders Value (In millions) Cancellation Rate (1)
2021 2020 2019 2021 2020 2019 2021 2020 2019
Northwest 583 760 540 $ 294.2 $ 334.1 $ 228.5 11 % 13 % 12 %
Southwest 1,497 1,994 1,889 598.0 739.1 697.5 14 % 16 % 20 %
South Central 5,301 5,432 4,184 1,510.2 1,413.2 1,064.2 18 % 20 % 22 %
Southeast 5,356 5,882 4,323 1,585.1 1,604.1 1,128.1 18 % 22 % 22 %
East 3,136 3,948 3,488 947.6 1,073.4 937.4 18 % 21 % 24 %
North 986 1,150 864 354.6 365.0 279.4 15 % 16 % 19 %
16,859 19,166 15,288 $ 5,289.7 $ 5,528.9 $ 4,335.1 17 % 20 % 21 %
_____________(1)Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.
Net Sales Orders 2021 versus 2020 The number of net sales orders increased 4% during 2021 compared to 2020, and the value of net sales orders increased 18% to$27.7 billion (81,378 homes) in 2021 from$23.6 billion (78,458 homes) in 2020. The average selling price of net sales orders during fiscal 2021 was$341,000 , up 13% from the prior year. During fiscal 2021, demand for homes remained strong. However, multiple disruptions in the supply chain, combined with the improvement in economic conditions and strong demand for new homes, have resulted in shortages in certain building materials and tightness in the labor market, which has caused our construction cycle to lengthen. As a result, during the second half of fiscal 2021, we slowed our home sales pace to more closely align with our production levels, and we are selling homes later in the construction cycle when we have more certainty regarding the home close date for our homebuyers. Based on the stage of completion of our current homes in inventory, production schedules and capacity, we expect to continue restricting the pace of our sales orders in many of our communities in the near term to match our production levels. Although these challenges may persist for some time, we expect to ultimately increase our production capacity and close more homes in fiscal 2022 than we closed in fiscal 2021. In regions with an increase in sales volume, the markets contributing most to the increases were theSan Antonio andDallas markets in the South Central and theFlorida markets (particularlyTampa ) in the Southeast. In regions with a decrease in sales volume, the markets having the most effect were as follows: theSeattle andPortland markets in the Northwest; thePhoenix market in the Southwest; theCharlotte andAtlanta markets in the East; and theMinneapolis market in the North.
Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 17% in 2021 compared to 20% in 2020.
2020 versus 2019
The number of net sales orders increased 39% during 2020 compared to 2019, with significant increases in all of our regions. The value of net sales orders increased 40% to$23.6 billion (78,458 homes) in 2020 from$16.8 billion (56,565 homes) in 2019. The average selling price of net sales orders during 2020 was$300,900 , up 1% from the prior year. The markets contributing most to the increases in sales volumes in our regions were as follows: theDenver andPortland markets in the Northwest; thePhoenix andCalifornia markets in the Southwest; theHouston andDallas markets in the South Central; theFlorida markets (particularlyTampa ) in the Southeast; the Carolina markets (particularlyMyrtle Beach andCharlotte ) in the East; and theMinneapolis ,Delaware andIndiana markets in the North. 33 -------------------------------------------------------------------------------- Table of Contents Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 20% in 2020 compared to 21% in 2019. Sales Order Backlog Homes in Backlog As of September 30, % Change 2021 2020 2019 2021 vs 2020 2020 vs 2019 Northwest 954 1,544 694 (38) % 122 % Southwest 3,438 3,742 1,673 (8) % 124 % South Central 8,733 7,213 3,667 21 % 97 % Southeast 7,319 6,922 3,740 6 % 85 % East 4,217 4,857 2,643 (13) % 84 % North 1,560 2,405 1,196 (35) % 101 % 26,221 26,683 13,613 (2) % 96 % Value (In millions) Northwest$ 497.7 $ 693.1 $ 301.6 (28) % 130 % Southwest 1,495.9 1,341.3 675.6 12 % 99 % South Central 2,825.4 1,904.9 964.2 48 % 98 % Southeast 2,534.7 1,968.6 1,051.3 29 % 87 % East 1,469.4 1,426.4 748.6 3 % 91 % North 640.0 851.3 398.8 (25) % 113 %$ 9,463.1 $ 8,185.6 $ 4,140.1 16 % 98 % Average Selling Price Northwest$ 521,700 $ 448,900 $ 434,600 16 % 3 % Southwest 435,100 358,400 403,800 21 % (11) % South Central 323,500 264,100 262,900 22 % - % Southeast 346,300 284,400 281,100 22 % 1 % East 348,400 293,700 283,200 19 % 4 % North 410,300 354,000 333,400 16 % 6 %$ 360,900 $ 306,800 $ 304,100 18 % 1 % Sales Order Backlog Sales order backlog represents homes under contract but not yet closed at the end of the period. Many of the contracts in our sales order backlog are subject to contingencies, including mortgage loan approval and buyers selling their existing homes, which can result in cancellations. A portion of the contracts in backlog will not result in closings due to cancellations. 34
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Home Closings and Revenue Homes Closed
Year Ended September 30, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Northwest 5,120 4,458 3,878 15 % 15 %
Southwest 9,760 8,145 7,578 20 % 7 %
South Central 22,236 17,965 15,428 24 % 16 %
Southeast 23,842 17,921 15,411 33 % 16 %
East 14,678 12,266 11,086 20 % 11 %
North 6,329 4,633 3,594 37 % 29 %
81,965 65,388 56,975 25 % 15 %
Home Sales Revenue (In millions)
Northwest $ 2,515.6 $ 1,950.8 $ 1,718.3 29 % 14 %
Southwest 4,024.7 3,173.1 2,999.7 27 % 6 %
South Central 6,104.2 4,614.6 3,932.9 32 % 17 %
Southeast 7,066.1 4,863.8 4,009.9 45 % 21 %
East 4,453.9 3,408.5 3,075.9 31 % 11 %
North 2,338.1 1,550.0 1,188.3 51 % 30 %
$ 26,502.6 $ 19,560.8 $ 16,925.0 35 % 16 %
Average Selling Price
Northwest $ 491,300 $ 437,600 $ 443,100 12 % (1) %
Southwest 412,400 389,600 395,800 6 % (2) %
South Central 274,500 256,900 254,900 7 % 1 %
Southeast 296,400 271,400 260,200 9 % 4 %
East 303,400 277,900 277,500 9 % - %
North 369,400 334,600 330,600 10 % 1 %
$ 323,300 $ 299,100 $ 297,100 8 % 1 %
Home Sales Revenue
2021 versus 2020
Revenues from home sales increased 35% to $26.5 billion (81,965 homes closed) in
2021 from $19.6 billion (65,388 homes closed) in 2020. Home sales revenues
increased in all of our regions due to an increase in the number of homes closed
and to a lesser extent, an increase in average selling prices.
The number of homes closed in 2021 increased 25% from 2020. The markets
contributing most to the increased closing volumes in our regions were as
follows: the Denver and Salt Lake City markets in the Northwest; the Phoenix and
California markets in the Southwest; the Houston and Dallas markets in the South
Central; the Florida markets (particularly Tampa ) in the Southeast; the Carolina
markets (particularly Myrtle Beach ) in the East; and the Indiana and Delaware
markets in the North.
2020 versus 2019
Revenues from home sales increased 16% to $19.6 billion (65,388 homes closed) in
2020 from $16.9 billion (56,975 homes closed) in 2019. Home sales revenues
increased in all of our regions primarily due to an increase in the number of
homes closed.
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The number of homes closed in 2020 increased 15% from 2019. The markets contributing most to the increase in closing volumes in our regions were as follows: theDenver andPortland markets in the Northwest; theCalifornia markets in the Southwest; theHouston ,Dallas andSan Antonio markets in the South Central; theFlorida markets (particularlyTampa ) in the Southeast; the Carolina markets (particularlyMyrtle Beach andCharlotte ) in the East; and theDelaware ,Indiana andIowa markets in the North. Homebuilding Operating Margin Analysis Percentages of Related Revenues Year Ended September 30, 2021 2020 2019 Gross profit - home sales 25.5 % 21.8 % 20.2 % Gross profit - land/lot sales and other 25.1 % 27.8 % 18.3 % Inventory and land option charges (0.1) % (0.1) % (0.3) % Gross profit - total homebuilding 25.4 % 21.7 % 19.9 % Selling, general and administrative expense 7.3 % 8.1 % 8.7 % Other (income) expense - % (0.1) % (0.1) % Homebuilding pre-tax income 18.1 % 13.6 % 11.2 % Home Sales Gross Profit 2021 versus 2020 Gross profit from home sales increased to$6.9 billion in 2021 from$4.3 billion in 2020 and increased 370 basis points to 25.5% as a percentage of home sales revenues. The percentage increase resulted from improvements of 340 basis points due to the average selling price of our homes closed increasing by more than the average cost of those homes, 20 basis points due to a decrease in the amortization of capitalized interest and 10 basis points due to a decrease in warranty and construction defect costs. We remain focused on managing the pricing, incentives and sales pace in each of our communities to optimize the returns on our inventory investments and adjust to local market conditions and new home demand. These actions could cause our gross profit margins to fluctuate in future periods. If new home demand declines from current levels, we would expect our gross profit margins to also decline.
2020 versus 2019
Gross profit from home sales increased to$4.3 billion in 2020 from$3.4 billion in 2019 and increased 160 basis points to 21.8% as a percentage of home sales revenues. The percentage increase resulted from improvements of 150 basis points due to a decrease in the average cost of our homes closed while the average selling price increased slightly, 20 basis points from a decrease in the amount of purchase accounting adjustments related to prior year acquisitions and 10 basis points due to a decrease in the amortization of capitalized interest, partially offset by increased warranty and construction defect costs of 20 basis points.
Land/Lot Sales and Other Revenues
Land/lot sales and other revenues from our homebuilding operations were$75.0 million ,$80.7 million and$91.9 million in fiscal 2021, 2020 and 2019, respectively. We continually evaluate our land and lot supply, and fluctuations in revenues and profitability from land sales occur based on how we manage our inventory levels in various markets. We generally purchase land and lots with the intent to build and sell homes on them. However, some of the land that we purchase includes commercially zoned parcels that we may sell to commercial developers. We may also sell residential lots or land parcels to manage our supply or for other strategic reasons. As ofSeptember 30, 2021 , our homebuilding operations had$25.4 million of land held for sale that we expect to sell in the next twelve months. 36
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Inventory and Land Option Charges
At the end of each quarter, we review the performance and outlook for all of our communities and land inventories for indicators of potential impairment and perform detailed impairment evaluations and analyses when necessary. As ofSeptember 30, 2021 , we determined that no communities were impaired, and no impairment charges were recorded during the three months endedSeptember 30, 2021 . There were$5.6 million of homebuilding impairment charges recorded during fiscal 2021 compared to$1.7 million and$24.9 million of impairment charges recorded in fiscal 2020 and 2019, respectively. As we manage our inventory investments across our operating markets to optimize returns and cash flows, we may modify our pricing and incentives, construction and development plans or land sale strategies in individual active communities and land held for development, which could result in the affected communities being evaluated for potential impairment. If the housing market or economic conditions are adversely affected for a prolonged period, we may be required to evaluate additional communities for potential impairment. These evaluations could result in additional impairment charges, which could be significant.
During fiscal 2021, 2020 and 2019, earnest money and pre-acquisition cost
write-offs related to land purchase contracts that we have terminated or expect
to terminate were
Selling, General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities was$1.9 billion ,$1.6 billion and$1.5 billion in fiscal 2021, 2020 and 2019, respectively, an increase of 22% in 2021 and 8% in 2020 from the respective prior years. SG&A expense as a percentage of homebuilding revenues was 7.3%, 8.1% and 8.7% in fiscal 2021, 2020 and 2019, respectively. Employee compensation and related costs were$1.6 billion ,$1.2 billion and$1.1 billion in fiscal 2021, 2020 and 2019, respectively, representing 81%, 75% and 72% of SG&A costs in those years. These costs increased 31% in 2021 and 13% in 2020. Our homebuilding operations employed 8,429, 7,281 and 6,810 people atSeptember 30, 2021 , 2020 and 2019, respectively.
We attempt to control our SG&A costs while ensuring that our infrastructure adequately supports our operations; however, we cannot make assurances that we will be able to maintain or improve upon the current SG&A expense as a percentage of revenues.
Interest Incurred
We capitalize interest costs incurred to inventory during active development and construction (active inventory). Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. Interest incurred by our homebuilding operations was$93.6 million ,$93.0 million and$104.7 million in fiscal 2021, 2020 and 2019, respectively. Interest charged to cost of sales was 0.7%, 0.8% and 0.9% of total cost of sales (excluding inventory and land option charges) in those years.
Other Income
Other income, net of other expenses, included in our homebuilding operations was$10.3 million ,$11.7 million and$9.5 million in fiscal 2021, 2020 and 2019, respectively. Other income consists of interest income and various other types of ancillary income, gains, expenses and losses not directly associated with sales of homes, land and lots. The activities that result in this ancillary income are not significant, either individually or in the aggregate.
Business Acquisition
InOctober 2020 , we acquired the homebuilding operations ofBraselton Homes inCorpus Christi, Texas for approximately$23.0 million in cash. The assets acquired included approximately 90 homes in inventory, 95 lots and control of approximately 840 additional lots through purchase contracts. We also acquired a sales order backlog of approximately 125 homes. 37 -------------------------------------------------------------------------------- Table of Contents Homebuilding Results byReporting Region Year Ended September 30, Pre-tax Income as a Percentage of Homebuilding Homebuilding Revenues Homebuilding Pre-tax Income (1) Revenues 2021 2020 2019 2021 2020 2019 2021 2020 2019 (In millions) Northwest$ 2,516.6 $ 1,953.4 $ 1,721.5 $ 510.8 $ 264.5 $ 222.9 20.3 % 13.5 % 12.9 % Southwest 4,071.0 3,230.3 3,050.8 653.1 366.1 284.5 16.0 % 11.3 % 9.3 % South Central 6,111.2 4,625.9 3,944.0 1,150.2 714.9 527.6 18.8 % 15.5 % 13.4 % Southeast 7,079.6 4,871.5 4,023.5 1,371.9 709.5 477.8 19.4 % 14.6 % 11.9 % East 4,459.0 3,410.1 3,081.2 795.1 484.3 361.9 17.8 % 14.2 % 11.7 % North 2,340.2 1,550.3 1,195.9 331.7 126.2 36.0 14.2 % 8.1 % 3.0 %$ 26,577.6 $ 19,641.5 $ 17,016.9 $ 4,812.8 $ 2,665.5 $ 1,910.7 18.1 % 13.6 % 11.2 % ________ (1)Expenses maintained at the corporate level consist primarily of interest and property taxes, which are capitalized and amortized to cost of sales or expensed directly, and the expenses related to operating our corporate office. The amortization of capitalized interest and property taxes is allocated to each segment based on the segment's cost of sales, while expenses associated with the corporate office are allocated to each segment based on the segment's inventory balances. 2021 versus 2020Northwest Region - Homebuilding revenues increased 29% in fiscal 2021 compared to fiscal 2020, primarily due to increases in the number of homes closed in ourDenver ,Salt Lake City andSeattle markets as well as an increase in the average selling price. The region generated pre-tax income of$510.8 million in 2021 compared to$264.5 million in 2020. Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased by 620 basis points in 2021 compared to 2020, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 60 basis points in 2021 compared to 2020, primarily due to the increase in homebuilding revenues.Southwest Region - Homebuilding revenues increased 26% in fiscal 2021 compared to fiscal 2020, primarily due to increases in the number of homes closed in ourCalifornia andPhoenix markets. The region generated pre-tax income of$653.1 million in 2021 compared to$366.1 million in 2020. Home sales gross profit percentage increased by 380 basis points in 2021 compared to 2020, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 100 basis points in 2021 compared to 2020, primarily due to the increase in homebuilding revenues.South Central Region - Homebuilding revenues increased 32% in fiscal 2021 compared to fiscal 2020, primarily due to increases in the number of homes closed in ourHouston ,Dallas andAustin markets. The region generated pre-tax income of$1.2 billion in 2021 compared to$714.9 million in 2020. Home sales gross profit percentage increased by 260 basis points in 2021 compared to 2020, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 70 basis points in 2021 compared to 2020, primarily due to the increase in homebuilding revenues.Southeast Region - Homebuilding revenues increased 45% in fiscal 2021 compared to fiscal 2020, primarily due to increases in the number of homes closed in all of our markets. The region generated pre-tax income of$1.4 billion in 2021 compared to$709.5 million in 2020. Home sales gross profit percentage increased by 390 basis points in 2021 compared to 2020, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 100 basis points in 2021 compared to 2020, primarily due to the increase in homebuilding revenues. 38 -------------------------------------------------------------------------------- Table of ContentsEast Region - Homebuilding revenues increased 31% in fiscal 2021 compared to fiscal 2020, primarily due to increases in the average selling price of homes closed in all markets. The region generated pre-tax income of$795.1 million in 2021 compared to$484.3 million in 2020. Home sales gross profit percentage increased by 290 basis points in 2021 compared to 2020, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 70 basis points in 2021 compared to 2020, primarily due to the increase in homebuilding revenues.North Region - Homebuilding revenues increased 51% in fiscal 2021 compared to fiscal 2020, primarily due to increases in the number of homes closed in ourIndianapolis andDelaware markets. The region generated pre-tax income of$331.7 million in 2021 compared to$126.2 million in 2020. Home sales gross profit percentage increased by 490 basis points in 2021 compared to 2020, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 110 basis points in 2021 compared to 2020, primarily due to the increase in homebuilding revenues.
2020 versus 2019
Northwest Region - Homebuilding revenues increased 13% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in ourDenver andPortland markets. The region generated pre-tax income of$264.5 million in 2020 compared to$222.9 million in 2019. Home sales gross profit percentage decreased by 20 basis points in 2020 compared to 2019, primarily due to the average selling price of homes closed decreasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 40 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.Southwest Region - Homebuilding revenues increased 6% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in most of our markets. The region generated pre-tax income of$366.1 million in 2020 compared to$284.5 million in 2019. Home sales gross profit percentage increased by 60 basis points in 2020 compared to 2019, primarily due to the average cost of homes closed decreasing by more than the average selling price. The region also benefited from lower inventory and land option charges, which were$3.5 million in 2020 compared to$18.6 million in 2019. As a percentage of homebuilding revenues, SG&A expenses decreased by 60 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.South Central Region - Homebuilding revenues increased 17% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in ourHouston ,Dallas andSan Antonio markets. The region generated pre-tax income of$714.9 million in 2020 compared to$527.6 million in 2019. Home sales gross profit percentage increased by 140 basis points in 2020 compared to 2019, primarily due to an increase in the average selling price of homes closed while the average cost of those homes decreased. As a percentage of homebuilding revenues, SG&A expenses decreased by 60 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.Southeast Region - Homebuilding revenues increased 21% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in all of our markets. The region generated pre-tax income of$709.5 million in 2020 compared to$477.8 million in 2019. Home sales gross profit percentage increased by 210 basis points in 2020 compared to 2019, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 50 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.East Region - Homebuilding revenues increased 11% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the average selling price of homes closed in ourMyrtle Beach ,Knoxville andCharlotte markets. The region generated pre-tax income of$484.3 million in 2020 compared to$361.9 million in 2019. Home sales gross profit percentage increased by 210 basis points in 2020 compared to 2019, primarily due to an increase in the average selling price of homes closed while the average cost of those homes decreased. As a percentage of homebuilding revenues, SG&A expenses decreased by 30 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues. 39 -------------------------------------------------------------------------------- Table of ContentsNorth Region - Homebuilding revenues increased 30% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in ourDelaware ,Iowa ,Indianapolis andNew Jersey markets. The region generated pre-tax income of$126.2 million in 2020 compared to$36.0 million in 2019. Home sales gross profit percentage increased by 380 basis points in 2020 compared to 2019, primarily due to an increase in the average selling price of homes closed while the average cost of those homes decreased. As a percentage of homebuilding revenues, SG&A expenses decreased by 130 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues. 40 -------------------------------------------------------------------------------- Table of Contents Homebuilding Inventories, Land and Lot Position and Homes in Inventory We routinely enter into contracts to purchase land or developed residential lots at predetermined prices on a defined schedule commensurate with planned development or anticipated new home demand. At the time of purchase, the undeveloped land is generally vested with the rights to begin development or construction work, and we plan and coordinate the development of our land into residential lots for use in our homebuilding business. We manage our inventory of owned land and lots and homes under construction relative to demand in each of our markets, including starting construction on unsold homes to capture new home demand and actively controlling the number of unsold, completed homes in inventory. Our homebuilding segment's inventories atSeptember 30, 2021 and 2020 are summarized as follows: September 30, 2021 Residential Land/Lots Construction in Developed Progress and and Under Land Held Land Held Finished Homes Development for Development for Sale Total Inventory (In millions) Northwest $ 609.6$ 685.4 $ -$ 12.5 $ 1,307.5 Southwest 1,113.5 1,315.8 6.9 9.4 2,445.6 South Central 1,977.4 1,501.5 0.4 - 3,479.3 Southeast 2,002.4 1,160.1 16.1 - 3,178.6 East 1,124.6 792.3 1.3 1.4 1,919.6 North 901.4 460.4 5.3 1.8 1,368.9 Corporate and unallocated (1) 119.1 88.5 0.4 0.3 208.3$ 7,848.0 $ 6,004.0 $ 30.4$ 25.4 $ 13,907.8 September 30, 2020 Residential Land/Lots Construction in Developed Progress and and Under Land Held Land Held Finished Homes Development for Development for Sale Total Inventory (In millions) Northwest $ 573.3$ 410.8 $ -$ 0.5 $ 984.6 Southwest 973.7 1,063.5 7.3 18.8 2,063.3 South Central 1,434.6 1,141.7 0.3 1.0 2,577.6 Southeast 1,445.9 1,170.7 31.7 0.6 2,648.9 East 917.5 615.6 0.9 6.2 1,540.2 North 570.6 398.5 7.0 0.8 976.9 Corporate and unallocated (1) 121.9 100.6 0.6 0.4 223.5$ 6,037.5 $ 4,901.4 $ 47.8$ 28.3 $ 11,015.0 _____________
(1)Corporate and unallocated inventory consists primarily of capitalized interest and property taxes.
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Our land and lot position and homes in inventory at September 30, 2021 and 2020
are summarized as follows:
September 30, 2021
Lots Controlled Through Total Land/Lots
Land/Lots Land and Lot Purchase Owned and Homes in
Owned (1) Contracts (2)(3) Controlled Inventory (4)
Northwest 9,000 31,400 40,400 2,600
Southwest 22,800 34,300 57,100 5,500
South Central 42,800 79,000 121,800 14,000
Southeast 26,700 125,500 152,200 13,600
East 17,300 83,100 100,400 7,300
North 9,200 49,200 58,400 4,800
127,800 402,500 530,300 47,800
24 % 76 % 100 %
September 30, 2020
Lots Controlled
Through Total Land/Lots
Land/Lots Land and Lot Purchase Owned and Homes in
Owned (1) Contracts (2)(3) Controlled Inventory (4)
Northwest 5,000 21,300 26,300 2,500
Southwest 21,300 19,800 41,100 4,500
South Central 35,400 57,400 92,800 11,300
Southeast 29,100 84,700 113,800 10,200
East 12,200 54,800 67,000 6,400
North 9,600 26,300 35,900 3,100
112,600 264,300 376,900 38,000
30 % 70 % 100 %
________________________
(1)Land/lots owned included approximately 30,800 and 33,800 owned lots that are
fully developed and ready for home construction at September 30, 2021 and 2020,
respectively. Land/lots owned also included land held for development
representing 1,300 and 1,600 lots at September 30, 2021 and 2020, respectively.
(2)The total remaining purchase price of lots controlled through land and lot
purchase contracts at September 30, 2021 and 2020 was $15.5 billion and $9.9
billion , respectively, secured by earnest money deposits of $1.1 billion and
$653.4 million , respectively. The total remaining purchase price of lots
controlled through land and lot purchase contracts at September 30, 2021 and
2020 included $1.6 billion and $1.0 billion , respectively, related to lot
purchase contracts with Forestar, secured by $151.0 million and $98.2 million ,
respectively, of earnest money.
(3)Lots controlled at September 30, 2021 included approximately 39,200 lots
owned or controlled by Forestar, 21,000 of which our homebuilding divisions have
under contract to purchase and 18,200 of which our homebuilding divisions have a
right of first offer to purchase. Of these, approximately 17,800 lots were in
our Southeast region, 6,500 lots were in our East region, 5,400 lots were in our
Southwest region, 4,600 lots were in our South Central region, 3,400 lots were
in our North region and 1,500 lots were in our Northwest region. Lots controlled
at September 30, 2020 included approximately 30,400 lots owned or controlled by
Forestar, 14,000 of which our homebuilding divisions had under contract to
purchase and 16,400 of which our homebuilding divisions had a right of first
offer to purchase.
(4)Approximately 21,700 and 14,900 of our homes in inventory were unsold at
September 30, 2021 and 2020, respectively. At September 30, 2021 , approximately
900 of our unsold homes were completed, of which approximately 100 homes had
been completed for more than six months. At September 30, 2020 , approximately
1,900 of our unsold homes were completed, of which approximately 300 homes had
been completed for more than six months. Homes in inventory exclude
approximately 1,800 model homes at both September 30, 2021 and 2020.
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Results of Operations - Forestar
In fiscal 2018, we acquired 75% of the outstanding shares of Forestar and at
September 30, 2021 , we owned 63% of its outstanding shares. Forestar is a
publicly traded residential lot development company with operations in 56
markets across 23 states as of September 30, 2021 . Forestar's segment results
are presented on their historical cost basis, consistent with the manner in
which management evaluates segment performance. (See Note B to the accompanying
financial statements for additional Forestar segment information.)
Results of operations for the Forestar segment for the fiscal years ended
Year Ended September 30,
2021 2020
(In millions)
Residential lot sales $ 1,293.1 $ 880.3
Tract sales and other 32.7 51.5
Total revenues 1,325.8 931.8
Cost of sales 1,096.6 813.7
Selling, general and administrative expense 68.4 45.7
Gain on sale of assets (2.5)
(0.1)
Loss on extinguishment of debt 18.1 - Other (income) expense (1.4) (5.6) Income before income taxes$ 146.6 $ 78.1 Residential land and lot sales primarily consist of the sale of single-family lots to local, regional and national homebuilders. During fiscal 2021 and 2020, Forestar's land and lot sales, including the portion sold toD.R. Horton and the revenues generated from those sales, were as follows: Year Ended September 30, 2021 2020 ($ in millions) Total residential single-family lots sold 15,915 10,373 Residential single-family lots sold to D.R. Horton 14,839 10,164 Residential lot sales revenues from sales to D.R. Horton$ 1,206.5 $ 861.8 Tract acres sold to D.R. Horton 85 143 Tract sales revenues from sales to D.R. Horton $
25.9
SG&A expense for fiscal 2021 and 2020 included charges of$4.0 million and$5.0 million , respectively, related to the shared services agreement between Forestar andD.R. Horton wherebyD.R. Horton provides Forestar with certain administrative, compliance, operational and procurement services.
Loss on extinguishment of debt of
AtSeptember 30, 2021 , Forestar owned directly or controlled through land and lot purchase contracts 97,000 residential lots, of which approximately 5,300 are fully developed. Approximately 39,200 of these lots are under contract to sell toD.R. Horton or subject to a right of first offer under the master supply agreement withD.R. Horton . Approximately 800 of these lots are under contract to sell to other builders. 43 -------------------------------------------------------------------------------- Table of Contents Results of Operations - Financial Services The following tables and related discussion set forth key operating and financial data for our financial services operations, comprisingDHI Mortgage and our subsidiary title companies, for the fiscal years endedSeptember 30, 2021 and 2020.
Year Ended
2021 2020 % Change
Number of first-lien loans originated or brokered by
54,694 44,600 23 %
Number of homes closed by D.R. Horton 81,965 65,388 25 %
Percentage of D.R. Horton homes financed by DHI Mortgage 67 % 68 %
Number of total loans originated or brokered by
54,767 44,738 22 %
Total number of loans originated or brokered by
56,054 46,010 22 %
Captive business percentage 98 % 97 %
Loans sold by DHI Mortgage to third parties 54,977 44,423 24 %
Year Ended September 30,
2021 2020 % Change
(In millions)
Loan origination and other fees $ 48.1 $ 39.5 22 %
Gains on sale of mortgage loans and mortgage servicing rights
619.1 437.2 42 %
Servicing income 3.6 - - %
Total mortgage operations revenues 670.8 476.7 41 %
Title policy premiums 152.8 108.2 41 %
Total revenues 823.6 584.9 41 %
General and administrative expense 488.3 364.7 34 %
Other (income) expense (29.3) (25.0) 17 %
Financial services pre-tax income $ 364.6 $ 245.2 49 %
Financial Services Operating Margin Analysis
Percentages of
Financial Services Revenues
Year Ended September 30,
2021 2020
General and administrative expense 59.3 % 62.4 %
Other (income) expense (3.6) % (4.3) %
Financial services pre-tax income 44.3 % 41.9 %
44-------------------------------------------------------------------------------- Table of Contents Mortgage Loan Activity The volume of loans originated by our mortgage operations is directly related to the number of homes closed by our homebuilding operations. In fiscal 2021, the volume of first-lien loans originated or brokered byDHI Mortgage for our homebuyers increased 23% from the prior year due to a 25% increase in the number of homes closed by our homebuilding operations.
Homes closed by our homebuilding operations constituted 98% and 97% of
The number of loans sold increased 24% in fiscal 2021 compared to the prior year. Virtually all of the mortgage loans held for sale onSeptember 30, 2021 were eligible for sale to Fannie Mae, Freddie Mac orGinnie Mae . During fiscal 2021, approximately 52% of our mortgage loans were sold directly to Fannie Mae or into securities backed byGinnie Mae , and 41% were sold to two other major financial entities. Changes in market conditions could result in a greater concentration of our mortgage sales in future periods to fewer financial entities and directly to Fannie Mae orGinnie Mae , and we may need to make other adjustments to our mortgage operations.
Financial Services Revenues and Expenses
Revenues from our mortgage operations increased 41% to$670.8 million in fiscal 2021 from$476.7 million in fiscal 2020, primarily due to a 22% increase in loan originations and higher net gains achieved on the sale of loan originations in the secondary market. Revenues from our title operations increased 41% to$152.8 million in fiscal 2021 from$108.2 million in fiscal 2020, primarily due to a 30% increase in escrow closings. General and administrative (G&A) expense related to our financial services operations increased 34% to$488.3 million in fiscal 2021 from$364.7 million in the prior year. The increase was primarily due to an increase in employee related costs to support a higher volume of transactions. Our financial services operations employed 2,891 and 2,163 people atSeptember 30, 2021 and 2020, respectively. As a percentage of financial services revenues, G&A expense was 59.3% in fiscal 2021 compared to 62.4% in the prior year. Fluctuations in financial services G&A expense as a percentage of revenues can occur because some components of revenue fluctuate differently than loan volumes, and some expenses are not directly related to mortgage loan volume or to changes in the amount of revenue earned.
Other income, net of other expense, included in our financial services operations consists primarily of the interest income of our mortgage subsidiary.
As a result of the revenue increase from a higher volume of mortgage
originations and escrow closings and better leverage of our G&A expenses,
pre-tax income from our financial services operations increased 49% to
45
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Results of Operations - Rental
Our rental segment consists of multi-family and single-family rental operations.
The multi-family rental operations develop, construct, lease, own and ultimately
sell the residential properties. We primarily focus on constructing garden style
multi-family rental communities, which typically accommodate 200 to 400 dwelling
units, in high growth suburban markets. The single-family rental operations
construct single-family rental homes with the intent to later market the
community for a bulk sale of homes. Multi-family and single-family rental
property sales are recognized as revenues, and rental income is recognized as
other income. Results of operations for the rental segment for the fiscal years
ended September 30, 2021 and 2020 were as follows:
Year Ended September 30,
2021 2020
(In millions)
Revenues
Single-family rental $ 75.9 $ -
Multi-family rental 191.9 128.5
Total revenues 267.8 128.5
Cost of sales
Single-family rental 42.4 -
Multi-family rental 119.1 69.0
Total cost of sales 161.5 69.0
Selling, general and administrative expense 44.6 27.8
Other (income) expense (24.8) (8.1)
Income before income taxes $ 86.5 $ 39.8
During fiscal 2021, we sold three multi-family rental properties for $191.9
million (960 total units) compared to two properties (540 total units) in fiscal
2020 for $128.5 million . During fiscal 2021, we sold three single-family rental
properties (260 total homes) for $75.9 million . There were no bulk sales of
single-family rental properties in fiscal 2020.
At September 30, 2021 , our rental property inventory of $840.9 million included
$425.1 million of assets related to our multi-family rental operations and
$415.8 million of assets related to our single-family rental operations. At
September 30, 2021 , we had 15 multi-family rental properties under active
construction and one community that was substantially complete and in the
lease-up phase. These 16 communities represent 4,690 multi-family units,
including 4,340 units under active construction and 350 completed units. At
September 30, 2021 , our single-family rental properties (55 total communities)
included 2,650 homes and finished lots, of which 865 homes were completed.
At September 30, 2020 , our rental property inventory of $316.0 million included
$229.9 million of assets related to our multi-family rental operations and $86.1
million of assets related to our single-family rental operations. At
September 30, 2020 , we had five multi-family rental properties under active
construction and one community that was substantially complete and in the
lease-up phase. These six communities represent 1,730 multi-family units,
including 1,430 units under active construction and 300 completed units. At
September 30, 2020 , our single-family rental properties (10 total communities)
included 740 homes and finished lots, of which 440 homes were completed.
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Results of Operations - Other Businesses
In addition to our homebuilding, Forestar, financial services and rental
operations, we engage in other business activities through our subsidiaries. We
conduct insurance-related operations, own non-residential real estate including
ranch land and improvements and own and operate energy related assets. The
pre-tax income of all of our subsidiaries engaged in other business activities
was $32.7 million in fiscal 2021 compared to $14.8 million in fiscal 2020.
Results of Operations - Consolidated
Income before Income Taxes
Pre-tax income was$5.4 billion in fiscal 2021 compared to$3.0 billion in fiscal 2020. The increase was primarily due to an increase in pre-tax income generated by our homebuilding operations as a result of higher revenues from increased home closings and an increase in home sales gross margin. In fiscal 2021, our homebuilding, financial services, Forestar and rental businesses generated pre-tax income of$4.8 billion ,$364.6 million ,$146.6 million and$86.5 million , respectively, compared to$2.7 billion ,$245.2 million ,$78.1 million and$39.8 million , respectively, in fiscal 2020.
Income Taxes
Our income tax expense was$1.2 billion and$602.5 million in fiscal 2021 and 2020, respectively, and our effective tax rate was 21.8% and 20.2% in those years. The effective tax rates in fiscal 2021 and 2020 include an expense for state income taxes, tax benefits related to stock-based compensation and a reduction of 2.2% and 3.1%, respectively, for tax benefits related to the federal energy efficient homes tax credit. Our effective tax rate for fiscal 2020 also includes a reduction of 0.4% for a tax benefit related to the release of a valuation allowance against our state deferred tax assets. Our deferred tax assets, net of deferred tax liabilities, were$159.5 million atSeptember 30, 2021 compared to$152.4 million atSeptember 30, 2020 . We have a valuation allowance of$4.2 million and$7.5 million atSeptember 30, 2021 and 2020, respectively, related to state deferred tax assets for net operating loss (NOL) carryforwards that are more likely than not to expire before being realized. We will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to our remaining state NOL carryforwards. Any reversal of the valuation allowance in future periods will impact our effective tax rate.D.R. Horton has$10.3 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction. Of the total amount,$2.9 million of the tax benefits expire over the next ten years and the remaining$7.4 million expire from fiscal years 2032 to 2041. Forestar has$1.4 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction. The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of our deferred tax assets. Unrecognized tax benefits are the differences between tax positions taken or expected to be taken in a tax return and the benefits recognized in our financial statements. Our unrecognized tax benefits totaled$2.9 million and$8.9 million atSeptember 30, 2021 and 2020, respectively.D.R. Horton is subject to federal income tax and state income tax in multiple jurisdictions. The statute of limitations forD.R. Horton's major tax jurisdictions remains open for examination for fiscal years 2018 through 2021. A federal refund claim related to the retroactive extension of energy efficient homes tax credits for fiscal year 2018 is currently under audit by the Internal Revenue Service.D.R. Horton is under audit by various states, however, we are not aware of any significant findings by the state taxing authorities. Forestar is subject to federal income tax and state income tax in multiple jurisdictions. The statute of limitations for Forestar's major tax jurisdictions remains open for examination for tax years 2016 through 2021. Forestar is not currently under audit for federal or state income taxes. 47 -------------------------------------------------------------------------------- Table of Contents Capital Resources and Liquidity We have historically funded our operations with cash flows from operating activities, borrowings under bank credit facilities and the issuance of new debt securities. Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to changes in economic and market conditions. During fiscal 2021 and currently, we have and continue to increase our investments in homebuilding inventories and single-family and multi-family rental properties to expand our operations and grow our revenues and profitability, as well as consider opportunistic strategic investments as they may arise. We are also returning capital to our shareholders through dividend payments and repurchases of our common stock. In the last two fiscal years, we have maintained higher homebuilding cash balances than in prior years to support the increased scale and level of activity in our business and to provide flexibility to adjust to changing conditions and opportunities. AtSeptember 30, 2021 , our ratio of debt to total capital (notes payable divided by stockholders' equity plus notes payable) was 26.7% compared to 26.6% atSeptember 30, 2020 . Our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders' equity plus homebuilding notes payable) was 17.8% compared to 17.5% atSeptember 30, 2020 . Over the long term, we intend to maintain our ratio of homebuilding debt to total capital below 30%, and we expect it to remain significantly lower than 30% throughout fiscal 2022. We believe that the ratio of homebuilding debt to total capital is useful in understanding the leverage employed in our homebuilding operations and comparing our capital structure with other homebuilders. We exclude the debt of Forestar and our financial services business because they are separately capitalized and not guaranteed by our parent company or any of our homebuilding entities. As ofSeptember 30, 2021 , we had outstanding notes payable with varying maturities totaling an aggregate principal amount of$5.4 billion , with$1.9 billion payable within 12 months. Future interest payments associated with the notes total$451.4 million , with$156.4 million payable within 12 months. AtSeptember 30, 2021 , we had outstanding letters of credit of$247.4 million and surety bonds of$2.3 billion , issued by third parties to secure performance under various contracts. We expect that our performance obligations secured by these letters of credit and bonds will generally be completed in the ordinary course of business and in accordance with the applicable contractual terms. When we complete our performance obligations, the related letters of credit and bonds are generally released shortly thereafter, leaving us with no continuing obligations. We have no material third-party guarantees. We regularly assess our projected capital requirements to fund growth in our business, repay debt obligations, pay dividends, repurchase our common stock and maintain sufficient cash levels to support our other operational needs, and we regularly evaluate our opportunities to raise additional capital.D.R. Horton has an automatically effective universal shelf registration statement filed with theSEC inJuly 2021 , registering debt and equity securities that may be issued from time to time in amounts to be determined. Forestar also has an effective shelf registration statement filed with theSEC inSeptember 2018 , registering$500 million of equity securities. AtSeptember 30, 2021 ,$359.9 million remained available under Forestar's shelf registration statement, of which$65.6 million was reserved for sales under its at-the-market equity offering program. InOctober 2021 , after the expiration of Forestar's existing registration statement and at-the-market equity offering program, a new shelf registration statement became effective, registering$750 million of equity securities. Forestar anticipates entering into a new at-the-market equity offering program under this new registration statement. As market conditions permit, we may issue new debt or equity securities through the capital markets or obtain additional bank financing to fund our projected capital requirements or provide additional liquidity. We believe that our existing cash resources, revolving credit facilities, mortgage repurchase facility and ability to access the capital markets or obtain additional bank financing will provide sufficient liquidity to fund our near-term working capital needs and debt obligations.
Capital Resources - Homebuilding
Cash and Cash Equivalents - At
48
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Bank Credit Facilities - In April 2021 , our senior unsecured homebuilding
revolving credit facility was amended to increase its capacity to $2.19 billion
with an uncommitted accordion feature that could increase the size of the
facility to $3.0 billion , subject to certain conditions and availability of
additional bank commitments. The maturity date of the facility was extended to
April 20, 2026 . The facility also provides for the issuance of letters of credit
with a sublimit equal to 100% of the revolving credit commitment. Letters of
credit issued under the facility reduce the available borrowing capacity. The
interest rate on borrowings under the revolving credit facility may be based on
either the Prime Rate or London Interbank Offered Rate (LIBOR) plus an
applicable margin, as defined in the credit agreement governing the facility. At
September 30, 2021 , there were no borrowings outstanding and $187.1 million of
letters of credit issued under the revolving credit facility, resulting in
available capacity of $2.0 billion .
Our
Our homebuilding revolving credit facility imposes restrictions on our operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if our leverage ratio exceeds a certain level. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. The credit agreement governing the facility imposes restrictions on the creation of secured debt and liens. AtSeptember 30, 2021 , we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facility. Public Unsecured Debt - We have$3.15 billion principal amount of homebuilding senior notes outstanding as ofSeptember 30, 2021 that mature fromSeptember 2022 throughOctober 2027 . InOctober 2020 , we issued$500 million principal amount of 1.4% senior notes dueOctober 15, 2027 , with interest payable semi-annually. The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 1.6%. InDecember 2020 , we repaid$400 million principal amount of our 2.55% senior notes at maturity. InAugust 2021 , we issued$600 million principal amount of 1.3% senior notes dueOctober 15, 2026 , with interest payable semi-annually. The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 1.5%. The indentures governing our senior notes impose restrictions on the creation of secured debt and liens. AtSeptember 30, 2021 , we were in compliance with all of the limitations and restrictions associated with our public debt obligations. Debt and Stock Repurchase Authorizations - InJuly 2019 , our Board of Directors authorized the repurchase of up to$500 million of debt securities. InApril 2021 , our Board of Directors authorized the repurchase of up to$1.0 billion of our common stock, replacing the prior authorization. During fiscal 2021, we repurchased 10.4 million shares of our common stock for$874.0 million . AtSeptember 30, 2021 , the full amount of the debt repurchase authorization was remaining, and$546.2 million of the stock repurchase authorization was remaining. These authorizations have no expiration date.
Capital Resources - Forestar
The achievement of Forestar's long-term growth objectives will depend on its ability to obtain financing in sufficient capacities. As market conditions permit, Forestar may issue new debt or equity securities through the capital markets or obtain additional bank financing to provide capital for future growth and additional liquidity. AtSeptember 30, 2021 , Forestar's ratio of debt to total capital (notes payable divided by stockholders' equity plus notes payable) was 41.0% compared to 42.4% atSeptember 30, 2020 . Forestar's ratio of net debt to total capital (notes payable net of cash divided by stockholders' equity plus notes payable net of cash) was 35.2% compared to 22.1% atSeptember 30, 2020 .
Cash and Cash Equivalents - At
Bank Credit Facility - InApril 2021 , Forestar's senior unsecured revolving credit facility was amended to increase its capacity to$410 million with an uncommitted accordion feature that could increase the size of the facility to$600 million , subject to certain conditions and availability of additional bank commitments. The maturity date of the facility was extended toApril 16, 2025 . The facility also provides for the issuance of letters of credit with a sublimit 49 -------------------------------------------------------------------------------- Table of Contents equal to the greater of$100 million and 50% of the revolving credit commitment. Borrowings under the revolving credit facility are subject to a borrowing base calculation based on Forestar's book value of its real estate assets and unrestricted cash. Letters of credit issued under the facility reduce the available borrowing capacity. Borrowings and repayments under the facility totaled$58.0 million each during fiscal 2021. AtSeptember 30, 2021 , there were no borrowings outstanding and$60.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of$349.7 million . The Forestar revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require Forestar to maintain a minimum level of tangible net worth, a minimum level of liquidity and a maximum allowable leverage ratio. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. Unsecured Debt - As ofSeptember 30, 2021 , Forestar had$700 million principal amount of senior notes issued pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, which represent unsecured obligations of Forestar. These notes include$400 million principal amount of 3.85% senior notes issued inApril 2021 that matureMay 15, 2026 with interest payable semiannually. The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 4.1%. The net proceeds from this issuance were primarily used to redeem Forestar's$350 million principal amount of 8.0% senior notes due 2024 inMay 2021 . The redemption price of$365.6 million included a call premium of$14.0 million and accrued and unpaid interest of$1.6 million . Forestar recognized an$18.1 million loss on extinguishment of debt upon redemption of the notes. Forestar also has$300 million principal amount of 5.0% senior notes that matureMarch 1, 2028 . The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 5.2%. Forestar's senior notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreements. Forestar's revolving credit facility and its senior notes are not guaranteed byD.R. Horton, Inc. or any of the subsidiaries that guarantee our homebuilding debt. AtSeptember 30, 2021 , Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations. Debt Repurchase Authorization - EffectiveApril 30, 2020 , Forestar's Board of Directors authorized the repurchase of up to$30 million of Forestar's debt securities. All of the$30 million authorization was remaining atSeptember 30, 2021 , and the authorization has no expiration date. Issuance of Common Stock - During fiscal 2021, Forestar issued 1.4 million shares of common stock under its at-the-market equity offering program for proceeds of$33.4 million , net of commissions and other issuance costs. AtSeptember 30, 2021 ,$359.9 million remained available for issuance under Forestar's shelf registration statement, of which$65.6 million was reserved for sales under its at-the-market equity offering program. InOctober 2021 , after the expiration of Forestar's existing registration statement and at-the-market equity offering program, a new shelf registration statement became effective, registering$750 million of equity securities. Forestar anticipates entering into a new at-the-market equity offering program under this new registration statement.
Capital Resources - Financial Services
Cash and Cash Equivalents - At
Mortgage Repurchase Facility - Our mortgage subsidiary,DHI Mortgage , has a mortgage repurchase facility that provides financing and liquidity toDHI Mortgage by facilitating purchase transactions in whichDHI Mortgage transfers eligible loans to the counterparties upon receipt of funds from the counterparties.DHI Mortgage then has the right and obligation to repurchase the purchased loans upon their sale to third-party purchasers in the secondary market or within specified time frames from 45 to 60 days in accordance with the terms of the mortgage repurchase facility. The total capacity of the facility is$1.4 billion ; however, the capacity automatically increases during certain higher volume periods and can be further increased through additional commitments. The total capacity of the facility atSeptember 30, 2021 was$1.8 billion , and its maturity date isFebruary 18, 2022 . 50 -------------------------------------------------------------------------------- Table of Contents As ofSeptember 30, 2021 ,$1.9 billion of mortgage loans held for sale with a collateral value of$1.9 billion were pledged under the mortgage repurchase facility. As a result of advance paydowns totaling$362.4 million ,DHI Mortgage had an obligation of$1.5 billion outstanding under the mortgage repurchase facility atSeptember 30, 2021 at a 2.1% annual interest rate. The mortgage repurchase facility is not guaranteed byD.R. Horton, Inc. or any of the subsidiaries that guarantee our homebuilding debt. The facility contains financial covenants as to the mortgage subsidiary's minimum required tangible net worth, its maximum allowable leverage ratio and its minimum required liquidity. These covenants are measured and reported to the lenders monthly. AtSeptember 30, 2021 ,DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility. In the past,DHI Mortgage has been able to renew or extend its mortgage credit facility at a sufficient capacity and on satisfactory terms prior to its maturity and obtain temporary additional commitments through amendments to the credit agreement during periods of higher than normal volumes of mortgages held for sale. The liquidity of our financial services business depends upon its continued ability to renew and extend the mortgage repurchase facility or to obtain other additional financing in sufficient capacities.
Capital Resources - Rental
Cash and Cash Equivalents - AtSeptember 30, 2021 , cash and cash equivalents of our rental operations segment totaled$16.8 million . During fiscal 2021, we substantially increased the investment in our rental operations. The inventory in our rental segment totaled$840.9 million atSeptember 30, 2021 compared to$316.0 million atSeptember 30, 2020 . To date, we have funded our rental operations with capital from our homebuilding operations. Our rental operations had no debt outstanding atSeptember 30, 2021 ; however, we are currently exploring debt financing with our banks to fund a portion of the expected future growth. Over the longer term, as our rental operations continue to grow, we plan to evaluate additional capital sources to fund future growth opportunities.
Operating Cash Flow Activities
In fiscal 2021, net cash provided by operating activities was$534.4 million compared to$1.4 billion in fiscal 2020. Cash provided by operating activities in the current year consisted of$1.2 billion of cash provided by our homebuilding segment, which was partially offset by cash used in our Forestar, financial services and rental segments. The most significant source of cash provided by operating activities in both periods was net income. Cash used to increase construction in progress and finished home inventory was$1.7 billion in fiscal 2021 compared to$739.1 million in fiscal 2020. In both years, the expenditures were made to increase our homes in inventory in response to the strength of homebuyer demand. Cash used to increase residential land and lots was$1.7 billion in fiscal 2021 compared to$324.4 million in fiscal 2020. Of these amounts,$585.6 million and$281.5 million , respectively, related to Forestar. During the six months endedSeptember 30, 2021 , we increased our single-family and multi-family rental properties by$303.6 million , which is reflected as cash used in operating activities. Prior to the change in presentation of rental operations, as discussed in Note A to the accompanying financial statements, cash activities related to rental properties were presented as investing activities. During the six month period endedMarch 31, 2021 and in fiscal 2020, expenditures related to rental properties were$173.9 million and$190.3 million , respectively, and are reflected as cash used in investing activities.
Investing Cash Flow Activities
In fiscal 2021, net cash used in investing activities was$252.2 million compared to$166.1 million in fiscal 2020. In fiscal 2021, uses of cash included expenditures related to our rental operations totaling$173.9 million , purchases of property and equipment totaling$93.5 million and the acquisition of the homebuilding operations ofBraselton Homes for$23.0 million , partially offset by proceeds from the sale of a single-family rental community for$31.8 million in the first quarter of fiscal 2021. In fiscal 2020, uses of cash included expenditures related to our rental operations totaling$190.3 million and purchases of property and equipment totaling$96.5 million , partially offset by proceeds from the sale of assets, primarily consisting of$128.5 million related to the sale of two multi-family rental properties. 51 -------------------------------------------------------------------------------- Table of Contents Financing Cash Flow Activities We expect the short-term financing needs of our operations will be funded with existing cash, cash generated from operations and borrowings under our credit facilities. Long-term financing needs for our operations may be funded with the issuance of senior unsecured debt securities or equity securities through the capital markets. In fiscal 2021, net cash used in financing activities was$85.1 million , consisting primarily of repayment of$400 million principal amount of our 2.55% homebuilding senior notes at maturity, Forestar's early redemption of its$350 million principal amount of 8.0% senior notes, cash used to repurchase shares of our common stock of$848.4 million and payment of cash dividends totaling$289.3 million . These uses of cash were partially offset by note proceeds from our issuance of$500 million principal amount of 1.4% homebuilding senior notes and$600 million principal amount of 1.3% homebuilding senior notes, Forestar's issuance of$400 million principal amount of 3.85% senior notes and net advances of$362.0 million on our mortgage repurchase facility. In fiscal 2020, net cash provided by financing activities was$270.6 million , consisting primarily of note proceeds of$1.1 billion from draws on our homebuilding revolving credit facility, our issuance of$500 million principal amount of 2.5% homebuilding senior notes, our issuance of$500 million principal amount of 2.6% homebuilding senior notes, Forestar's issuance of$300 million principal amount of 5.0% senior notes and net advances of$243.7 million on our mortgage repurchase facility. Note proceeds were partially offset by repayment of amounts drawn on our homebuilding revolving credit facility totaling$1.1 billion , repayment of$500 million principal amount of our 4.0% homebuilding senior notes at maturity, Forestar's repayment of$118.9 million principal amount of its 3.75% convertible senior notes at maturity, cash used to repurchase shares of our common stock of$360.4 million and payment of cash dividends totaling$256.0 million . Our Board of Directors approved and paid quarterly cash dividends of$0.20 per common share in fiscal 2021 and$0.175 per common share in fiscal 2020. InOctober 2021 , our Board of Directors approved a quarterly cash dividend of$0.225 per common share, payable onDecember 15, 2021 , to stockholders of record onDecember 6, 2021 . The declaration of future cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, our future earnings, cash flows, capital requirements, financial condition and general business conditions. 52 -------------------------------------------------------------------------------- Table of Contents Supplemental Guarantor Financial Information As ofSeptember 30, 2021 ,D.R. Horton, Inc. had$3.15 billion principal amount of homebuilding senior notes outstanding due throughOctober 2027 and no amounts outstanding on its homebuilding revolving credit facility. All of the homebuilding senior notes and the homebuilding revolving credit facility are fully and unconditionally guaranteed, on a joint and several basis, by certain subsidiaries ofD.R. Horton, Inc. (Guarantors or Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, byD.R. Horton, Inc. Our subsidiaries associated with the Forestar lot development operations, financial services operations, multi-family residential construction and certain other subsidiaries do not guarantee the homebuilding senior notes or the homebuilding revolving credit facility (collectively, Non-Guarantor Subsidiaries). The guarantees are senior unsecured obligations of each Guarantor and rank equal with all existing and future senior debt of such Guarantor and senior to all subordinated debt of such Guarantor. The guarantees are effectively subordinated to any secured debt of such Guarantor to the extent of the value of the assets securing such debt. The guarantees will be structurally subordinated to indebtedness and other liabilities of Non-Guarantor Subsidiaries of the Guarantors. The guarantees by a Guarantor Subsidiary will be automatically and unconditionally released and discharged upon: (1) the sale or other disposition of its common stock whereby it is no longer a subsidiary of ours; (2) the sale or other disposition of all or substantially all of its assets (other than to us or another Guarantor); (3) its merger or consolidation with an entity other than us or another Guarantor; or (4) its ceasing to guarantee any of our publicly traded debt securities and ceasing to guarantee any of our obligations under our homebuilding revolving credit facility. The following tables present summarized financial information forD.R. Horton, Inc. and the Guarantor Subsidiaries on a combined basis after intercompany transactions and balances have been eliminated amongD.R. Horton, Inc. and the Guarantor Subsidiaries, as well as their investment in, and equity in earnings from the Non-Guarantor Subsidiaries. D.R. Horton, Inc. and Guarantor Subsidiaries Summarized Balance Sheet Data September 30, 2021 (In millions) Assets Cash $ 2,893.3 Inventories 14,203.2 Amount due from Non-Guarantor Subsidiaries
592.4
Total assets
19,724.9
Liabilities & Stockholders' Equity
Notes payable $ 3,214.0
Total liabilities 6,157.4
Stockholders' equity 13,567.5
Summarized Statement of Operations Data Year Ended September 30, 2021
(In millions)
Revenues $ 26,566.8
Cost of sales 19,824.1
Selling, general and administrative expense 1,889.4
Income before income taxes 4,825.6
Net income 3,786.5
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A court could void or subordinate any Guarantor's guarantee under the fraudulent
conveyance laws if existing or future creditors of any such Guarantor were
successful in establishing that: (i) such guarantee was incurred with fraudulent
intent; or (ii) such Guarantor did not receive fair consideration or reasonably
equivalent value for issuing its guarantee and was insolvent at the time of the
guarantee, was rendered insolvent by reason of the guarantee, was engaged in a
business or transaction for which its assets constituted unreasonably small
capital to carry on its business, or intended to incur, or believed that it
would incur, debt beyond its ability to pay such debt as it matured.
The measures of insolvency for purposes of determining whether a fraudulent
conveyance occurred would vary depending upon the laws of the relevant
jurisdiction and upon the valuation assumptions and methodology applied by the
court. Generally, however, a company would be considered insolvent for purposes
of the foregoing if the sum of the company's debts, including contingent,
unliquidated and unmatured liabilities, is greater than all of such company's
property at a fair valuation, or if the present fair saleable value of the
company's assets is less than the amount that will be required to pay the
probable liability on its existing debts as they become absolute and matured.
The indentures governing our homebuilding senior notes contain a "savings
clause," which limits the liability of each Guarantor on its guarantee to the
maximum amount that such Guarantor can incur without risk that its guarantee
will be subject to avoidance as a fraudulent transfer. This provision may not be
effective to protect such guarantees from fraudulent transfer challenges or, if
it does, it may reduce such Guarantor's obligation such that the remaining
amount due and collectible under the guarantees would not suffice, if necessary,
to pay the notes in full when due.
On the basis of historical financial information, operating history and other
factors, we believe that each of the Guarantors, after giving effect to the
issuance of the guarantees when such guarantees were issued, was not insolvent,
did not have unreasonably small capital for the business in which it engaged and
did not and has not incurred debts beyond its ability to pay such debts as they
mature. We cannot assure you, however, as to what standard a court would apply
in making these determinations or that a court would agree with our conclusions
in this regard.
Seasonality
Although significant changes in market conditions have impacted our seasonal
patterns in the past and could do so again in the future, we generally close
more homes and generate greater revenues and pre-tax income in the third and
fourth quarters of our fiscal year. The seasonal nature of our business can also
cause significant variations in the working capital requirements for our
homebuilding, lot development, financial services and rental operations. As a
result of seasonal activity, our quarterly results of operations and financial
position at the end of a particular fiscal quarter are not necessarily
representative of the balance of our fiscal year.
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Forward-Looking Statements
Some of the statements contained in this report, as well as in other materials
we have filed or will file with the Securities and Exchange Commission ,
statements made by us in periodic press releases and oral statements we make to
analysts, stockholders and the press in the course of presentations about us,
may be construed as "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on management's beliefs as well as
assumptions made by, and information currently available to, management. These
forward-looking statements typically include the words "anticipate," "believe,"
"consider," "continue," "could," "estimate," "expect," "forecast," "goal,"
"intend," "likely," "may," "outlook," "plan," "possible," "potential,"
"predict," "projection," "seek," "should," "strategy," "target," "will," "would"
or other words of similar meaning. Any or all of the forward-looking statements
included in this report and in any other of our reports or public statements may
not approximate actual experience, and the expectations derived from them may
not be realized, due to risks, uncertainties and other factors. As a result,
actual results may differ materially from the expectations or results we discuss
in the forward-looking statements. These risks, uncertainties and other factors
include, but are not limited to:
•the cyclical nature of the homebuilding, lot development and rental housing
industries and changes in economic, real estate or other conditions;
•constriction of the credit and public capital markets, which could limit our
ability to access capital and increase our costs of capital;
•reductions in the availability of mortgage financing provided by government
agencies, changes in government financing programs, a decrease in our ability to
sell mortgage loans on attractive terms or an increase in mortgage interest
rates;
•the risks associated with our land, lot and rental inventory;
•our ability to effect our growth strategies, acquisitions or investments
successfully;
•the impact of an inflationary, deflationary or higher interest rate
environment;
•supply shortages and other risks of acquiring land, building materials and
skilled labor;
•the effects of public health issues such as a major epidemic or pandemic,
including the impact of COVID-19 on the economy and our businesses;
•the effects of weather conditions and natural disasters on our business and
financial results;
•home warranty and construction defect claims;
•the effects of health and safety incidents;
•reductions in the availability of performance bonds;
•increases in the costs of owning a home;
•the effects of governmental regulations and environmental matters on our
homebuilding and land development operations;
•the effects of governmental regulations on our financial services operations;
•competitive conditions within the industries in which we operate;
•our ability to manage and service our debt and comply with related debt
covenants, restrictions and limitations;
•the effects of negative publicity;
•the effects of the loss of key personnel;
•actions by activist stockholders; and
•information technology failures, data security breaches and our ability to
satisfy privacy and data protection laws and regulations.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, any further disclosures made on related subjects in subsequent reports
on Forms 10-K, 10-Q and 8-K should be consulted. Additional information about
issues that could lead to material changes in performance and risk factors that
have the potential to affect us is contained in Item 1A, "Risk Factors" under
Part I of this annual report on Form 10-K.
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Critical Accounting Policies and Estimates
General - A comprehensive enumeration of the significant accounting policies of
D.R. Horton, Inc. and subsidiaries is presented in Note A to the accompanying
financial statements as of September 30, 2021 and 2020, and for the years ended
September 30, 2021 , 2020 and 2019. Each of our accounting policies has been
chosen based upon current authoritative literature that collectively comprises
U.S. Generally Accepted Accounting Principles (GAAP). In instances where
alternative methods of accounting are permissible under GAAP, we have chosen the
method that most appropriately reflects the nature of our business, the results
of our operations and our financial condition, and have consistently applied
those methods over each of the periods presented in the financial statements.
The Audit Committee of our Board of Directors has reviewed and approved the
accounting policies selected.
We believe the following critical accounting policies describe the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition - We generally recognize homebuilding revenue and related profit at the time of the closing of a sale, when title to and possession of the property are transferred to the buyer. Our performance obligation, to deliver the agreed-upon home, is generally satisfied in less than one year from the original contract date. Proceeds from home closings held for our benefit at title companies are included in homebuilding cash and cash equivalents in the consolidated balance sheets. When we execute sales contracts with our homebuyers, or when we require advance payment from homebuyers for custom changes, upgrades or options related to their homes, we record the cash deposits received as liabilities until the homes are closed or the contracts are cancelled. We either retain or refund to the homebuyer deposits on cancelled sales contracts, depending upon the applicable provisions of the contract or other circumstances. Forestar's land and lot sales revenue and related profit are generally recognized at the time of the closing of a sale, when title to and possession of the property are transferred to a third-party buyer. Forestar's revenues from land and lot sales toD.R. Horton are eliminated in the consolidated financial statements. We rarely purchase unimproved land for resale, but periodically may elect to sell parcels of land that no longer fit into our strategic operating plans. Revenue from land sales is typically recognized on the closing date, which is generally when performance obligations are satisfied. We recognize financial services revenues associated with our title operations as closing services are rendered and title insurance policies are issued, both of which generally occur simultaneously as each home is closed. Revenues associated with our mortgage operations primarily include net gains on the sale of mortgage loans and servicing rights. We typically elect the fair value option for our mortgage loan originations whereby mortgage loans held for sale are recorded at fair value based on either sale commitments or current market quotes and loan values are adjusted through revenues for subsequent changes in fair value until the loans are sold. Expected gains and losses from the sale of servicing rights are included in the measurement of all written loan commitments that are accounted for at fair value through revenues at the time of commitment. We sell substantially all of the mortgages we originate and the related servicing rights to third-party purchasers. Interest income is earned from the date a mortgage loan is originated until the loan is sold. Mortgage loans are sold with limited recourse provisions, which can result in repurchases of loans previously sold to investors or payments to reimburse investors for loan losses. Based on historical experience, analysis of the volume of mortgages we originated, discussions with our mortgage purchasers and current housing and credit market conditions, we estimate and record a loss reserve for mortgage loans held in portfolio and mortgage loans held for sale, as well as known and projected mortgage loan repurchase requests.
Inventories and Cost of Sales - Inventory includes the costs of direct land acquisition, land development and construction, capitalized interest, real estate taxes and direct overhead costs incurred during development and construction. Costs that we incur after projects or homes are substantially complete, such as utilities, maintenance, and cleaning, are charged to SG&A expense as incurred. All indirect overhead costs, such as compensation of sales personnel, division and region management, and the costs of advertising and builder's risk insurance are charged to SG&A expense as incurred.
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Land and development costs are typically allocated to individual residential
lots on a pro-rata basis, and the costs of residential lots are transferred to
construction in progress when home construction begins. Home construction costs
are specifically identified and recorded to individual homes. Cost of sales for
homes closed includes the specific construction costs of each home and all
applicable land acquisition, land development and related costs (both incurred
and estimated to be incurred) allocated to each residential lot based upon the
total number of homes expected to be closed in each community. Cost of sales for
lots sold includes all applicable land acquisition, land development and related
costs (both incurred and estimated to be incurred) allocated to each residential
lot in the community. Any changes to the estimated total development costs
subsequent to the initial home or lot closings in a community are generally
allocated on a pro-rata basis to the remaining homes or lots in the community
associated with the relevant development activity.
When a home is closed, we generally have not paid all incurred costs necessary
to complete the home. We record a liability and a corresponding charge to cost
of sales for the amount estimated to ultimately be paid related to completed
homes that have been closed. We compare our home construction budgets to actual
recorded costs to determine the additional costs remaining to be paid on each
closed home. We monitor the accrual by comparing actual costs incurred on closed
homes in subsequent months to the amounts previously accrued. Although actual
costs to be paid in the future on previously closed homes could differ from our
current accruals, such differences have not been significant.
At the end of each quarter, we review the performance and outlook for all of our
communities and land inventories for indicators of potential impairment. We
generally review our inventory for impairment indicators at the community level,
and the inventory within each community is categorized as land held for
development, residential land and lots developed and under development, land
held for sale, rental properties and construction in progress and finished
homes, based on the stage of production or plans for future development or sale.
A particular community often includes inventory in more than one category. In
certain situations, inventory may be analyzed separately for impairment purposes
based on its product type or future plans. In reviewing each of our communities,
we determine if impairment indicators exist on inventory held and used by
analyzing a variety of factors including, but not limited to, the following:
•gross margins on homes closed in recent months;
•projected gross margins on homes sold but not closed;
•projected gross margins based on community budgets;
•projected gross margins of rental property sales;
•trends in gross margins, average selling prices or cost of sales;
•sales absorption rates; and
•performance of other communities in nearby locations.
If indicators of impairment are present for a community, we perform an
impairment evaluation of the community, which includes an analysis to determine
if the undiscounted cash flows estimated to be generated by those assets are
less than their carrying amounts. If so, impairment charges are recorded to cost
of sales if the fair value of such assets is less than their carrying amounts.
These estimates of cash flows are significantly impacted by community specific
factors including estimates of the amounts and timing of future revenues and
estimates of the amount of land development, materials and labor costs which, in
turn, may be impacted by the following local market conditions:
•supply and availability of new and existing homes;
•location and desirability of our communities;
•variety of product types offered in the area;
•pricing and use of incentives by us and our competitors;
•alternative uses for our land or communities such as the sale of land, finished
lots or home sites to third parties;
•amount of land and lots we own or control in a particular market or
sub-market; and
•local economic and demographic trends.
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For those assets deemed to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Our determination of fair value is primarily based on
discounting the estimated cash flows at a rate commensurate with the inherent
risks associated with the assets and related estimated cash flow streams. When
an impairment charge for a community is determined, the charge is then allocated
to each lot in the community in the same manner as land and development costs
are allocated to each lot. Impairment charges are also recorded on finished
homes in substantially completed communities and completed rental properties
when events or circumstances indicate that the carrying values are greater than
the fair values less estimated costs to sell these homes.
We rarely purchase land for resale. However, when we own land or communities
under development that do not fit into our development and construction plans,
and we determine that we will sell the asset, the project is accounted for as
land held for sale if certain criteria are met. We record land held for sale at
the lesser of its carrying value or fair value less estimated costs to sell. In
performing the impairment evaluation for land held for sale, we consider several
factors including, but not limited to, recent offers received to purchase the
property, prices for land in recent comparable sales transactions and market
analysis studies, which include the estimated price a willing buyer would pay
for the land. If the estimated fair value less costs to sell an asset is less
than the current carrying value, the asset is written down to its estimated fair
value less costs to sell.
The key assumptions relating to inventory valuations are impacted by local market and economic conditions, and are inherently uncertain. Although our quarterly assessments reflect management's best estimates, due to uncertainties in the estimation process, actual results could differ from such estimates.
Warranty Claims - We typically provide our homebuyers with a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems, a two-year limited warranty on major mechanical systems and a one-year limited warranty on other construction components. Since we subcontract our construction work to subcontractors who typically provide us with an indemnity and a certificate of insurance prior to receiving payments for their work, claims relating to workmanship and materials are generally the primary responsibility of the subcontractors. Warranty liabilities have been established by charging cost of sales for each home delivered. The amounts charged are based on management's estimate of expected warranty-related costs under all unexpired warranty obligation periods. Our warranty liability is based upon historical warranty cost experience in each market in which we operate and is adjusted to reflect qualitative risks associated with the types of homes we build and the geographic areas in which we build them. Actual future warranty costs could differ from our currently estimated amounts. A 10% change in the historical warranty rates used to estimate our warranty accrual would not result in a material change in our accrual. For additional information regarding our warranty liability, see Note L, "Commitments and Contingencies," to our consolidated financial statements included elsewhere in this report. Legal Claims and Insurance - We are named as a defendant in various claims, complaints and other legal actions in the ordinary course of business. At any point in time, we are managing several hundred individual claims related to construction defect matters, personal injury claims, employment matters, land development issues, contract disputes and other matters. We have established reserves for these contingencies based on the estimated costs of pending claims and the estimated costs of anticipated future claims related to previously closed homes. Approximately 99% of these reserves related to construction defect matters at bothSeptember 30, 2021 and 2020. Our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims. AtSeptember 30, 2021 and 2020, we had reserves for approximately 380 and 260 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During fiscal 2021, we were notified of approximately 235 new construction defect claims and resolved 115 construction defect claims for a total cost of$16.5 million . We have closed a significant number of homes during recent years, and we may be subject to future construction defect claims on these homes. Although regulations vary from state to state, construction defect issues can generally be reported for up to ten years after the home has closed in many states in which we operate. Historical data and trends regarding the frequency of claims incurred and the costs to resolve claims relative to the types of products and markets where we operate are used to estimate the construction defect liabilities for both existing and anticipated future claims. These estimates are subject to ongoing revision as the circumstances of individual pending claims and historical data and trends change. Adjustments to estimated reserves are recorded in the accounting period in which the change in estimate occurs. 58
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Historical trends in construction defect claims have been inconsistent, and we believe they may continue to fluctuate. We also believe that fluctuations in housing market conditions can affect the frequency and cost of construction defect claims. If the ultimate resolution of construction defect claims resulting from our home closings in prior years varies from current expectations, it could significantly change our estimates regarding the frequency and timing of claims incurred and the costs to resolve existing and anticipated future claims, which would impact the construction defect reserves in the future. If the frequency of claims incurred or costs of existing and future legal claims significantly exceed our current estimates, they will have a significant negative impact on our future earnings and liquidity. We estimate and record receivables under the applicable insurance policies related to our estimated contingencies for known claims and anticipated future construction defect claims on previously closed homes and other legal claims and lawsuits incurred in the ordinary course of business when recovery is probable. However, because the self-insured retentions under these policies are significant, we anticipate we will largely be self-insured. Additionally, we may have the ability to recover a portion of our losses from our subcontractors and their insurance carriers when we have been named as an additional insured on their insurance policies. The estimation of losses related to these reserves and the related estimates of recoveries from insurance policies are subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of products built, claim frequency, claim settlement costs and patterns, insurance industry practices and legal interpretations, among others. Due to the high degree of judgment required in establishing reserves for these contingencies, actual future costs and recoveries from insurance could differ significantly from current estimated amounts. A 10% increase in the claim frequency and the average cost per claim used to estimate the reserves would result in an increase of approximately$101.7 million in our reserves and a$50.9 million increase in our receivable, resulting in additional expense of$50.8 million . A 10% decrease in the claim frequency and the average cost per claim would result in a decrease of approximately$91.8 million in our reserves and a$43.8 million decrease in our receivable, resulting in a reduction in expense of$48.0 million . For additional information regarding our legal claims reserves, see Note L, "Commitments and Contingencies," to our consolidated financial statements included elsewhere in this report.
Pending Accounting Pronouncements
InDecember 2019 , theFinancial Accounting Standards Board (FASB) issued ASU 2019-12 related to simplifying the accounting for income taxes. The guidance is effective for us beginningOctober 1, 2021 and is not expected to have a material impact on our consolidated financial position, results of operations or cash flows. InMarch 2020 , the FASB issued ASU 2020-04, "Reference Rate Reform," which provides optional expedients and exceptions for applyingU.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued. The guidance was effective beginningMarch 12, 2020 and can be applied prospectively throughDecember 31, 2022 . InJanuary 2021 , the FASB issued ASU 2021-01, "Reference Rate Reform - Scope," which clarified the scope and application of the original guidance. We will adopt these standards when LIBOR is discontinued and do not expect them to have a material impact on our consolidated financial statements or related disclosures. InOctober 2021 , the FASB issued ASU 2021-08, which requires application of ASC 606, "Revenue from Contracts with Customers," to recognize and measure contract assets and liabilities from contracts with customers acquired in a business combination. ASU 2021-08 creates an exception to the general recognition and measurement principle in ASC 805 and will result in recognition of contract assets and contract liabilities consistent with those recorded by the acquiree immediately before the acquisition date. The guidance is effective for us beginningOctober 1, 2023 and interim periods therein, with early adoption permitted. We are currently evaluating the impact of this guidance on our consolidated financial position, results of operations and cash flows. 59
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