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 discusses the results of operations for fiscal 2022 compared to 2021. For similar operating and financial data and discussion of our fiscal 2021 results compared to our fiscal 2020 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, 2021 , which was filed with theSEC onNovember 18, 2021 . 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 2022 Operating Results
In fiscal 2022, our number of homes closed and home sales revenues increased 1% and 20%, respectively, compared to the prior year, and our consolidated revenues increased 21% to$33.5 billion compared to$27.8 billion in the prior year. Our pre-tax income was$7.6 billion in fiscal 2022 compared to$5.4 billion in fiscal 2021, and our pre-tax operating margin was 22.8% compared to 19.3%. Net income was$5.9 billion in fiscal 2022 compared to$4.2 billion in fiscal 2021, and our diluted earnings per share was$16.51 compared to$11.41 . Consolidated net cash provided by operating activities was$561.8 million in fiscal 2022 and$534.4 million in fiscal 2021, and cash provided by our homebuilding operations was$1.9 billion in fiscal 2022 compared to$1.2 billion in fiscal 2021. In fiscal 2022, our return on equity (ROE) was 34.5% compared to 31.6% in fiscal 2021, and our homebuilding return on inventory (ROI) was 42.8% compared to 37.9%. 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. During the first half of fiscal 2022 and for most of the third quarter, demand for our homes remained strong. InJune 2022 , we began to see a moderation in housing demand that persisted through the end of our fiscal year as mortgage interest rates increased substantially and inflationary pressures remained elevated. The supply of homes at affordable price points remains limited across most of our markets, and disruptions in the supply chains for certain building materials and tightness in the labor market have caused our construction cycle to lengthen. Although these pressures may persist for some time, we believe we are well-positioned to meet these changing market conditions with our affordable product offerings and lot supply, and we will manage our home pricing, sales incentives and number of homes in inventory based on the level of homebuyer demand. Within our homebuilding land and lot portfolio, our lots controlled through purchase contracts represent 77% of the lots owned and controlled atSeptember 30, 2022 compared to 76% atSeptember 30, 2021 . Our relationship with Forestar and expanded relationships with other land developers across the country have allowed us to significantly increase the controlled portion of our lot pipeline over the past few years. 29 -------------------------------------------------------------------------------- Table of Contents 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 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. 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 significant cash balance and strong overall liquidity position while 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 lots, 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.
•Ensuring that our financial services business provides high quality mortgage and title services to homebuyers efficiently and effectively.
•Investing 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.
•Opportunistically evaluating potential acquisitions to enhance our operating platform.
We believe our operating strategy, which has produced positive results in recent
years, will allow us to successfully operate through changing economic
conditions and maintain our strong financial performance 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 20% to
•Homes closed increased 1% to 82,744 homes, and the average closing price of
those homes increased 19% to
•Net sales orders decreased 6% to 76,137 homes, while the value of net sales
orders increased 9% to
•Sales order backlog decreased 25% to 19,614 homes, and the value of sales order
backlog decreased 16% to
•Home sales gross margin was 28.7% compared to 25.5%.
•Homebuilding SG&A expense was 6.8% of homebuilding revenues compared to 7.3%.
•Homebuilding pre-tax income was
•Homebuilding pre-tax income was 21.7% of homebuilding revenues compared to 18.1%.
•Homebuilding return on inventory was 42.8% compared to 37.9%.
•Net cash provided by homebuilding operations was
•Homebuilding cash and cash equivalents totaled
•Homebuilding inventories totaled
•Homes in inventory totaled 46,400 compared to 47,800.
•Owned lots totaled 131,100 compared to 127,800, and lots controlled through purchase contracts increased to 442,100 from 402,500.
•Homebuilding debt was
•Homebuilding debt to total capital was 13.2% compared to 17.8%, and net homebuilding debt to total capital was 4.4% compared to 1.7%.
Forestar:
•Forestar's revenues increased 15% to$1.5 billion compared to$1.3 billion . Revenues in both fiscal 2022 and 2021 included$1.2 billion of revenue from land and lot sales to our homebuilding segment.
•Forestar's lots sold increased 11% to 17,691 compared to 15,915. Lots sold to
•Forestar's pre-tax income was
•Forestar's pre-tax income was 15.5% of revenues compared to 11.1%.
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•Forestar's cash and cash equivalents totaled $264.8 million compared to $153.6
million .
•Forestar's inventories totaled
•Forestar's owned and controlled lots totaled 90,100 compared to 97,000. Of these lots, 36,700 were under contract to sell to or subject to a right of first offer withD.R. Horton compared to 39,200.
•Forestar's debt was
•Forestar's debt to total capital was 37.1% compared to 41.0%, and Forestar's net debt to total capital was 26.9% compared to 35.2%.
Financial Services:
•Financial services revenues decreased 3% to
•Financial services pre-tax income decreased 20% to
•Financial services pre-tax income was 36.6% of financial services revenues compared to 44.3%.
Rental:
•Rental revenues were
•Rental pre-tax income was
•Rental inventory totaled
•Multi-family rental units closed totaled 775 compared to 959.
•Single-family rental homes closed totaled 774 compared to 257.
Consolidated Results:
•Consolidated revenues increased 21% to
•Consolidated pre-tax income increased 42% to
•Consolidated pre-tax income was 22.8% of consolidated revenues compared to 19.3%.
•Income tax expense was
•Net income attributable to
•Diluted net income per common share attributable to
•Net cash provided by operations was
•Stockholders' equity was
•Book value per common share increased to
•Debt to total capital was 23.8% compared to 26.7%, and net debt to total capital was 15.4% compared to 12.9%.
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Results of Operations - Homebuilding
Our operating segments are our 78 homebuilding divisions, our majority-owned Forestar residential lot development operations, our financial services operations, our rental operations and our other business activities. The homebuilding operating segments are aggregated into six reporting segments. These reporting segments, which we also refer to as reporting regions, have homebuilding operations located in the following states:
Northwest: Colorado , Oregon , Utah and Washington
Southwest: Arizona , California , Hawaii , Nevada and New Mexico
South Central: Arkansas , 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 ,Virginia andWest Virginia
The following tables and related discussion set forth key operating and
financial data for our homebuilding operations by reporting segment as of and
for the fiscal years ended
Net Sales Orders (1)
Year Ended September 30,
Net Homes Sold Value (In millions) Average Selling Price
% % %
2022 2021 Change 2022 2021 Change 2022 2021 Change
Northwest 4,509 4,530 - % $ 2,566.5 $ 2,320.2 11 % $ 569,200 $ 512,200 11 %
Southwest 8,111 9,456 (14) % 4,235.5 4,179.3 1 % 522,200 442,000 18 %
South Central 21,417 23,631 (9) % 7,409.8 6,992.9 6 % 346,000 295,900 17 %
Southeast 21,649 24,239 (11) % 8,193.6 7,632.1 7 % 378,500 314,900 20 %
East 13,479 14,038 (4) % 5,059.7 4,496.9 13 % 375,400 320,300 17 %
North 6,972 5,484 27 % 2,908.5 2,126.8 37 % 417,200 387,800 8 %
76,137 81,378 (6) % $ 30,373.6 $ 27,748.2 9 % $ 398,900 $ 341,000 17 %
._____________
(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.
Sales Order Cancellations
Year Ended September 30,
Cancelled Sales Orders Value (In millions) Cancellation Rate (1)
2022 2021 2022 2021 2022 2021
Northwest 845 583 $ 468.2 $ 294.2 16 % 11 %
Southwest 2,485 1,497 1,190.8 598.0 23 % 14 %
South Central 6,866 5,301 2,343.8 1,510.2 24 % 18 %
Southeast 5,612 5,356 2,006.3 1,585.1 21 % 18 %
East 2,913 3,136 1,055.5 947.6 18 % 18 %
North 1,384 986 564.2 354.6 17 % 15 %
20,105 16,859 $ 7,628.8 $ 5,289.7 21 % 17 %
_____________
(1)Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.
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Net Sales Orders
The number of net sales orders decreased 6% during 2022 compared to 2021, and
the value of net sales orders increased 9% to $30.4 billion (76,137 homes) in
2022 from $27.7 billion (81,378 homes) in 2021 due to the increase in our
average selling price. The average selling price of net sales orders during
fiscal 2022 was $398,900 , up 17% from the prior year.
During the first half of fiscal 2022 and for most of the third quarter, demand
for our homes remained strong. We restricted our sales order pace during the
year in most of our communities to match our longer construction cycles, which
have resulted from disruptions in the supply chains for certain building
materials and tightness in the labor market. In June 2022 , we began to see a
moderation in housing demand that persisted through the end of our fiscal year
as mortgage interest rates increased substantially and inflationary pressures
remained elevated. Our net sales order volume decreased 15% in the fourth
quarter of fiscal 2022 compared to the prior year quarter, and the average
selling price of net sales orders declined by 4% sequentially in the fourth
quarter compared to the third quarter. Although these pressures may persist for
some time, we believe we are well-positioned to meet these changing market
conditions with our affordable product offerings.
In regions with a decrease in sales order volume, the markets contributing most
to the decreases were: the Arizona and California markets in the Southwest; the
Austin market in the South Central; the Louisiana markets in the Southeast; and
the Atlanta market in the East. In the North region, the markets contributing
most to the increase in sales order volume were the Chicago , Indianapolis , New
Jersey and Iowa markets.
Our sales order cancellation rate (cancelled sales orders divided by gross sales
orders for the period) was 21% in 2022 compared to 17% in 2021. The increase in
the cancellation rate primarily reflects the moderation in demand we experienced
beginning in June 2022 as mortgage rates increased substantially and
inflationary pressures remained elevated throughout the remainder of the year.
Our cancellation rate in the fourth quarter of fiscal 2022 was 32%, up
sequentially from 24% in the third quarter.
Sales Order Backlog
As of September 30,
Homes in Backlog Value (In millions) Average Selling Price
% % %
2022 2021 Change 2022 2021 Change 2022 2021 Change
Northwest 724 954 (24) % $ 427.1 $ 497.7 (14) % $ 589,900 $ 521,700 13 %
Southwest 1,760 3,438 (49) % 905.0 1,495.9 (40) % 514,200 435,100 18 %
South Central 5,692 8,733 (35) % 2,051.7 2,825.4 (27) % 360,500 323,500 11 %
Southeast 6,983 7,319 (5) % 2,787.3 2,534.7 10 % 399,200 346,300 15 %
East 3,086 4,217 (27) % 1,214.8 1,469.4 (17) % 393,600 348,400 13 %
North 1,369 1,560 (12) % 589.1 640.0 (8) % 430,300 410,300 5 %
19,614 26,221 (25) % $ 7,975.0 $ 9,463.1 (16) % $ 406,600 $ 360,900 13 %
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.
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Homes Closed and Revenue
Year Ended September 30,
Homes Closed Home Sales Revenue (In millions) Average Selling Price
% % %
2022 2021 Change 2022 2021 Change 2022 2021 Change
Northwest 4,739 5,120 (7) % $ 2,637.1 $ 2,515.6 5 % $ 556,500 $ 491,300 13 %
Southwest 9,789 9,760 - % 4,826.4 4,024.7 20 % 493,000 412,400 20 %
South Central 24,458 22,236 10 % 8,183.5 6,104.2 34 % 334,600 274,500 22 %
Southeast 21,985 23,842 (8) % 7,941.0 7,066.1 12 % 361,200 296,400 22 %
East 14,610 14,678 - % 5,314.2 4,453.9 19 % 363,700 303,400 20 %
North 7,163 6,329 13 % 2,959.5 2,338.1 27 % 413,200 369,400 12 %
82,744 81,965 1 % $ 31,861.7 $ 26,502.6 20 % $ 385,100 $ 323,300 19 %
Home Sales Revenue
Revenues from home sales increased 20% to $31.9 billion (82,744 homes closed) in
2022 from $26.5 billion (81,965 homes closed) in 2021. Although our homes closed
during the year were negatively impacted by supply chain disruptions, home sales
revenues increased in all of our regions due to an increase in average selling
price.
The number of homes closed in 2022 increased 1% from 2021. In regions with an
increase in closings volume, the markets contributing most to the increases
were: the Dallas market in the South Central and the Chicago and New Jersey
markets in the North. In regions with a decrease in closings volume, the markets
contributing most to the decreases were: the Seattle market in the Northwest and
the Orlando market in the Southeast.
Homebuilding Operating Margin Analysis
Percentages of Related Revenues
Year Ended September 30,
2022 2021
Gross profit - home sales 28.7 % 25.5 %
Gross profit - land/lot sales and other 36.3 % 25.1 %
Inventory and land option charges (0.2) % (0.1) %
Gross profit - total homebuilding 28.5 % 25.4 %
Selling, general and administrative expense 6.8 % 7.3 %
Other (income) expense (0.1) % - %
Homebuilding pre-tax income 21.7 % 18.1 %
Home Sales Gross Profit
Gross profit from home sales increased to $9.1 billion in 2022 from $6.8
billion in 2021 and increased 320 basis points to 28.7% 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, partially offset by increased warranty and
construction defect costs of 20 basis points.
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. To adjust to market conditions,
we increased our use of incentives in the fourth quarter of fiscal 2022, and our
home sales gross profit margin declined sequentially by 180 basis points from
30.1% in the third quarter to 28.3% in the fourth quarter. During fiscal 2023,
we expect to continue offering a higher level of incentives and also expect our
average sales price to decrease, which will cause our gross profit margins to
decline from current levels.
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Land/Lot Sales and Other Revenues
Land/lot sales and other revenues from our homebuilding operations were $61.4
million and $75.0 million in fiscal 2022 and 2021, 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 of September 30, 2022 , our homebuilding operations had $29.4 million
of land held for sale that we expect to sell in the next twelve months.
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 a result of these reviews, there were no impairments recorded in our homebuilding segment during the three months endedSeptember 30, 2022 or during fiscal 2022. There were$5.6 million of homebuilding impairment charges recorded in fiscal 2021. 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 impairment charges, which could be significant.
During fiscal 2022 and 2021, 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 increased 12% to
Employee compensation and related costs were$1.8 billion and$1.6 billion in fiscal 2022 and 2021, respectively, representing 82% and 81% of SG&A costs in those years. These costs increased 13% in fiscal 2022 from the prior year period. Our homebuilding operations employed 9,499 and 8,429 people atSeptember 30, 2022 and 2021, respectively.
We attempt to control our homebuilding 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$110.7 million and$93.6 million in fiscal 2022 and 2021, respectively. Interest charged to cost of sales was 0.6% and 0.7% 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$16.4 million in fiscal 2022 compared to$10.3 million in fiscal 2021. 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. 36 -------------------------------------------------------------------------------- Table of Contents Homebuilding Results byReporting Region Year EndedSeptember 30, 2022 2021 Homebuilding Homebuilding
Homebuilding Pre-tax % of Homebuilding Pre-tax % of
Revenues Income (1) Revenues Revenues Income (1) Revenues
(In millions)
Northwest $ 2,658.4 $ 560.8 21.1 % $ 2,516.6 $ 510.8 20.3 %
Southwest 4,840.7 968.3 20.0 % 4,071.0 653.1 16.0 %
South Central 8,192.3 1,910.7 23.3 % 6,111.2 1,150.2 18.8 %
Southeast 7,951.2 1,918.5 24.1 % 7,079.6 1,371.9 19.4 %
East 5,318.1 1,126.3 21.2 % 4,459.0 795.1 17.8 %
North 2,962.4 456.3 15.4 % 2,340.2 331.7 14.2 %
$ 31,923.1 $ 6,940.9 21.7 % $ 26,577.6 $ 4,812.8 18.1 %
________
(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.
Northwest Region - Homebuilding revenues increased 6% in fiscal 2022 compared to
fiscal 2021, due to increases in the average selling price of homes closed in
all markets, partially offset by a decrease in the number of homes closed in our
Seattle and Portland markets. The region generated pre-tax income of $560.8
million in 2022 compared to $510.8 million in 2021. Gross profit from home sales
as a percentage of home sales revenue (home sales gross profit percentage)
increased by 130 basis points in 2022 compared to 2021, 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
increased by 10 basis points in 2022 compared to 2021.
Southwest Region - Homebuilding revenues increased 19% in fiscal 2022 compared
to fiscal 2021, primarily due to increases in the average selling price of homes
closed in all markets. The region generated pre-tax income of $968.3 million in
2022 compared to $653.1 million in 2021. Home sales gross profit percentage
increased by 330 basis points in 2022 compared to 2021, 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 2022 compared to 2021, primarily due to the
increase in homebuilding revenues.
South Central Region - Homebuilding revenues increased 34% in fiscal 2022
compared to fiscal 2021, primarily due to increases in the average selling price
of homes closed in all markets. The region generated pre-tax income of $1.9
billion in 2022 compared to $1.2 billion in 2021. Home sales gross profit
percentage increased by 370 basis points in 2022 compared to 2021, 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 80 basis points in 2022 compared to 2021, primarily due to the
increase in homebuilding revenues.
Southeast Region - Homebuilding revenues increased 12% in fiscal 2022 compared
to fiscal 2021, due to increases in the average selling price of homes closed in
all markets, partially offset by a decrease in the number of homes closed. The
region generated pre-tax income of $1.9 billion in 2022 compared to $1.4 billion
in 2021. Home sales gross profit percentage increased by 440 basis points in
2022 compared to 2021, 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 30 basis points in 2022
compared to 2021, primarily due to the increase in homebuilding revenues.
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East Region - Homebuilding revenues increased 19% in fiscal 2022 compared to
fiscal 2021, due to increases in the average selling price of homes closed in
all markets. The region generated pre-tax income of $1.1 billion in 2022
compared to $795.1 million in 2021. Home sales gross profit percentage increased
by 300 basis points in 2022 compared to 2021, 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 40
basis points in 2022 compared to 2021, primarily due to the increase in
homebuilding revenues.
North Region - Homebuilding revenues increased 27% in fiscal 2022 compared to
fiscal 2021, due to increases in the average selling price and the number of
homes closed in all markets. The region generated pre-tax income of $456.3
million in 2022 compared to $331.7 million in 2021. Home sales gross profit
percentage increased by 120 basis points in 2022 compared to 2021, 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 20 basis points in 2022 compared to 2021, primarily due to the
increase in homebuilding revenues.
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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 at September 30, 2022 and 2021 are
summarized as follows:
September 30, 2022
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 $ 854.9 $ 945.1 $ - $ 2.2 $ 1,802.2
Southwest 1,328.7 1,447.2 7.2 18.6 2,801.7
South Central 2,304.9 1,625.4 0.3 1.1 3,931.7
Southeast 2,692.7 1,385.2 13.2 - 4,091.1
East 1,389.3 1,153.4 - - 2,542.7
North 1,251.9 676.7 - 7.1 1,935.7
Corporate and unallocated (1) 129.1 89.5 0.3 0.4 219.3
$ 9,951.5 $ 7,322.5 $ 21.0 $ 29.4 $ 17,324.4
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
_____________
(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, 2022 and 2021
are summarized as follows:
September 30, 2022
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 11,100 32,200 43,300 2,900
Southwest 22,100 36,500 58,600 4,900
South Central 37,800 66,500 104,300 12,400
Southeast 24,700 138,600 163,300 14,200
East 22,700 105,700 128,400 6,800
North 12,700 62,600 75,300 5,200
131,100 442,100 573,200 46,400
23 % 77 % 100 %
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 %
_________________________
(1)Land/lots owned included approximately 37,600 and 30,800 owned lots that are
fully developed and ready for home construction at September 30, 2022 and 2021,
respectively. Land/lots owned also included land held for development
representing 400 and 1,300 lots at September 30, 2022 and 2021, respectively.
(2)The total remaining purchase price of lots controlled through land and lot
purchase contracts at September 30, 2022 and 2021 was $19.7 billion and $15.5
billion , respectively, secured by earnest money deposits of $1.6 billion and
$1.1 billion , respectively. The total remaining purchase price of lots
controlled through land and lot purchase contracts at September 30, 2022 and
2021 included $1.4 billion and $1.6 billion , respectively, related to lot
purchase contracts with Forestar, secured by $131.7 million and $151.0 million ,
respectively, of earnest money. Our lots controlled under land and lot purchase
contracts include approximately 4,077 lots at September 30, 2022 , representing
lots controlled under contracts for which we do not expect to exercise our
option to purchase the land or lots, but the underlying contracts have yet to be
terminated. We have reserved the deposits related to these contracts if the
deposits are not refundable.
(3)Lots controlled at September 30, 2022 included approximately 36,700 lots
owned or controlled by Forestar, 17,800 of which our homebuilding divisions have
under contract to purchase and 18,900 of which our homebuilding divisions have a
right of first offer to purchase. Of these, approximately 14,100 lots were in
our Southeast region, 6,800 lots were in our East region, 6,200 lots were in our
South Central region, 4,900 lots were in our Southwest region, 3,900 lots were
in our North region and 800 lots were in our Northwest region. Lots controlled
at September 30, 2021 included approximately 39,200 lots owned or controlled by
Forestar, 21,000 of which our homebuilding divisions had under contract to
purchase and 18,200 of which our homebuilding divisions had a right of first
offer to purchase.
(4)Approximately 27,200 and 21,700 of our homes in inventory were unsold at
September 30, 2022 and 2021, respectively. At September 30, 2022 , approximately
4,400 of our unsold homes were completed, of which approximately 90 homes had
been completed for more than six months. 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. Homes in inventory exclude
approximately 1,800 model homes at both September 30, 2022 and 2021.
40
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Table of Contents
Results of Operations - Forestar
In fiscal 2018, we acquired 75% of the outstanding shares of Forestar and at
September 30, 2022 , we owned 63% of its outstanding shares. Forestar is a
publicly traded residential lot development company with operations in 53
markets across 21 states as of September 30, 2022 . 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,
2022 2021
(In millions)
Total revenues $ 1,519.1 $ 1,325.8
Cost of land/lot sales and other 1,182.7 1,093.6
Inventory and land option charges 12.4
3.0
Total cost of sales 1,195.1
1,096.6
Selling, general and administrative expense 93.6
68.4
Loss on extinguishment of debt - 18.1 Other (income) expense (5.4) (3.9) Income before income taxes$ 235.8 $ 146.6 Revenues are primarily derived from sales of single-family residential lots to local, regional and national homebuilders. During fiscal 2022 and 2021, 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, 2022 2021 ($ in millions) Total residential single-family lots sold 17,691 15,915 Residential single-family lots sold to D.R. Horton 14,895 14,839 Residential lot sales revenues from sales to D.R. Horton$ 1,231.8 $ 1,206.5 Tract acres sold to D.R. Horton - 85 Tract sales revenues from sales to D.R. Horton $ -$ 25.9 SG&A expense for fiscal 2022 and 2021 included charges of$4.1 million and$4.0 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, 2022 , Forestar owned directly or controlled through land and lot purchase contracts approximately 90,100 residential lots, of which 5,500 are fully developed. Approximately 36,700 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 , and 1,400 of these lots are under contract to sell to other builders. 41 -------------------------------------------------------------------------------- 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, 2022 and 2021.
Year Ended
2022 2021 % Change
Number of first-lien loans originated or brokered by
57,355 54,694 5 %
Number of homes closed by D.R. Horton 82,744 81,965 1 %
Percentage of D.R. Horton homes financed by DHI Mortgage 69 % 67 %
Number of total loans originated or brokered by
57,414 54,767 5 %
Total number of loans originated or brokered by
58,298 56,054 4 %
Captive business percentage 98 % 98 %
Loans sold by DHI Mortgage to third parties 57,213 54,977 4 %
Year Ended September 30,
2022 2021 % Change
(In millions)
Loan origination and other fees $ 52.3 $ 48.1 9 %
Gains on sale of mortgage loans and mortgage servicing rights
561.7 619.1 (9) %
Servicing income 3.4 3.6 (6) %
Total mortgage operations revenues 617.4 670.8 (8) %
Title policy premiums 177.6 152.8 16 %
Total revenues 795.0 823.6 (3) %
General and administrative expense 547.6 488.3 12 %
Other (income) expense (43.2) (29.3) 47 %
Financial services pre-tax income $ 290.6 $ 364.6 (20) %
Financial Services Operating Margin Analysis
Percentages of
Financial Services Revenues
Year Ended September 30,
2022 2021
General and administrative expense 68.9 % 59.3 %
Other (income) expense (5.4) % (3.6) %
Financial services pre-tax income 36.6 % 44.3 %
42-------------------------------------------------------------------------------- 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 2022, the volume of first-lien loans originated or brokered byDHI Mortgage for our homebuyers increased 5% from the prior year due to an increase in the percentage of homes closed for whichDHI Mortgage handled our homebuyers' financing. Homes closed by our homebuilding operations constituted 98% ofDHI Mortgage loan originations in both fiscal 2022 and 2021. This percentage reflectsDHI Mortgage's consistent focus on the captive business provided by our homebuilding operations. The number of loans sold increased 4% in fiscal 2022 compared to the prior year. Virtually all of the mortgage loans held for sale onSeptember 30, 2022 were eligible for sale to Fannie Mae, Freddie Mac orGinnie Mae . During fiscal 2022, approximately 62% of our mortgage loans were sold directly to Fannie Mae, Freddie Mac or into securities backed byGinnie Mae , and 30% were sold to one other major financial entity. 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, Freddie Mac orGinnie Mae , and we may need to make other adjustments to our mortgage operations.
Financial Services Revenues and Expenses
Revenues from our mortgage operations decreased 8% to$617.4 million in fiscal 2022 from$670.8 million in fiscal 2021, primarily due to a more competitive environment in the mortgage industry due to rising interest rates. Revenues from our title operations increased 16% to$177.6 million in fiscal 2022 from$152.8 million in fiscal 2021, primarily due to an increase in the average premium collected on closing transactions from higher sales prices of homes closed by our homebuilding operations, as well as expansion of our title insurance operations. General and administrative (G&A) expense related to our financial services operations increased 12% to$547.6 million in fiscal 2022 from$488.3 million in the prior year. As a percentage of financial services revenues, G&A expense was 68.9% in fiscal 2022 compared to 59.3% 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. Our financial services operations employed 3,024 and 2,891 people atSeptember 30, 2022 and 2021, respectively.
Other income, net of other expense, included in our financial services operations consists primarily of the interest income of our mortgage subsidiary.
Primarily as a result of the reduction in revenue and operating margin of our mortgage operations, pre-tax income from our financial services operations decreased 20% to$290.6 million in fiscal 2022 from$364.6 million in fiscal 2021. 43 -------------------------------------------------------------------------------- Table of Contents Results of Operations - Rental Our rental segment consists of multi-family and single-family rental operations. The multi-family rental operations develop, construct, lease and sell residential rental properties, with a primary focus on constructing garden style multi-family rental communities typically accommodating 200 to 400 dwelling units in high growth suburban markets. The single-family rental operations primarily construct and lease single-family homes within a community and then market each community for a bulk sale of rental homes. Multi-family and single-family rental property sales are recognized as revenues, and rental income is recognized as other income. Results of operations for the rental segment for the fiscal years endedSeptember 30, 2022 and 2021 were as follows: Year Ended September 30, 2022 2021 (In millions) Revenues Single-family rental$ 313.8 $ 75.9 Multi-family rental and other 196.4 191.9 Total revenues 510.2 267.8 Cost of sales Single-family rental 147.8 42.4 Multi-family rental and other 96.4 119.1 Total cost of sales 244.2 161.5 Selling, general and administrative expense 91.1 44.6 Other (income) expense (27.1) (24.8) Income before income taxes$ 202.0 $ 86.5 AtSeptember 30, 2022 , our rental property inventory of$2.6 billion included$1.7 billion of inventory related to our single-family rental operations and$897.2 million of inventory related to our multi-family rental operations. AtSeptember 30, 2021 , our rental property inventory of$840.9 million included$415.8 million of assets related to our single-family rental operations and$425.1 million of assets related to our multi-family rental operations. During fiscal 2022, we sold 774 single-family rental homes for$313.8 million compared to 257 homes sold for$75.9 million in fiscal 2021. AtSeptember 30, 2022 , we had single-family rental properties consisting of 7,400 homes, of which 3,530 were completed, and 6,680 lots, of which 1,770 were finished. AtSeptember 30, 2021 , we had single-family rental properties consisting of 1,895 homes, of which 895 homes were completed, and 3,930 lots, of which 760 were finished. During fiscal 2022, we sold 775 multi-family rental units for$195.5 million compared to 959 units sold for$191.9 million in fiscal 2021. AtSeptember 30, 2022 , we had multi-family rental properties consisting of 5,810 units under active construction and 300 units that were substantially complete and in the lease-up phase. AtSeptember 30, 2021 , we had multi-family rental properties consisting of 4,340 units under active construction and 350 units that were substantially complete and in the lease-up phase. 44 -------------------------------------------------------------------------------- Table of Contents 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 water rights and other water-related assets, 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$58.1 million in fiscal 2022 compared to$32.7 million in fiscal 2021.
In
Results of Operations - Consolidated
Income before Income Taxes
Pre-tax income was$7.6 billion in fiscal 2022 compared to$5.4 billion in fiscal 2021. 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 average selling prices and an increase in home sales gross margin. In fiscal 2022, our homebuilding, financial services, Forestar and rental businesses generated pre-tax income of$6.9 billion ,$290.6 million ,$235.8 million and$202.0 million , respectively, compared to$4.8 billion ,$364.6 million ,$146.6 million and$86.5 million , respectively, in fiscal 2021.
Income Taxes
Our income tax expense was
The federal energy efficient homes tax credit was retroactively extended to qualifying homes closed fromJanuary 1, 2022 throughDecember 31, 2032 as a result of the enactment of the Inflation Reduction Act (IRA) that was signed into law onAugust 16, 2022 . Beginning with homes closed afterDecember 31, 2022 , the requirements to qualify for the energy efficient homes tax credit will be increased. We are currently analyzing the impact of the increased requirements on our ability to qualify homes for the credit. Other tax related provisions of the IRA, including the corporate alternative minimum tax, had no material impact on our financial statements and are not expected to have a material impact on our financial statements in the future. Our deferred tax assets, net of deferred tax liabilities, were$159.0 million atSeptember 30, 2022 compared to$159.5 million atSeptember 30, 2021 . We have a valuation allowance of$17.9 million and$4.2 million atSeptember 30, 2022 and 2021, respectively, related to deferred tax assets for state net operating loss (NOL), state capital loss and tax credit carryforwards that are expected to expire before being realized. Of the$17.9 million valuation allowance,$15.8 million relates to state NOL, state capital loss and tax credit carryforwards acquired in the Vidler acquisition. 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, state capital loss and tax credit carryforwards. Any reversal of the valuation allowance in future periods will impact our effective tax rate. We have$30.9 million of tax benefits for a federal NOL carryforward acquired in the Vidler acquisition. The utilization of the federal NOL is subject to IRC Section 382 limitations; however, it is expected that all of the federal NOL will be utilized within the carryforward period.D.R. Horton has$12.0 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction. Of the total amount,$4.3 million of the tax benefits expire over the next ten years and the remaining$7.7 million expire from fiscal years 2033 to 2042. Forestar has$1.2 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction. 45 -------------------------------------------------------------------------------- Table of Contents 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 at bothSeptember 30, 2022 and 2021.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 2022. An audit by the Internal Revenue Service of a federal refund claim related to the retroactive extension of energy efficient homes tax credits for fiscal 2018 and additional energy efficient tax credits for fiscal 2017 was completed during the current fiscal year with no material adjustments.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 federal income tax remains open for examination for tax years 2019 through 2022. The statute of limitations for Forestar's major state tax jurisdictions generally remain open for examination for tax years 2017 through 2022. Forestar is not currently under audit for federal or state income taxes. 46 -------------------------------------------------------------------------------- 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. We have continued 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. We are also returning capital to our shareholders through dividend payments and repurchases of our common stock. We are maintaining significant homebuilding cash balances and liquidity 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, 2022 , we had outstanding notes payable with varying maturities totaling an aggregate principal amount of$6.1 billion , of which$2.5 billion is payable within 12 months and includes$1.6 billion outstanding under the mortgage repurchase facility. Future interest payments associated with the notes total$507.6 million , of which$215.8 million is payable within 12 months. AtSeptember 30, 2022 , our ratio of debt to total capital (notes payable divided by stockholders' equity plus notes payable) was 23.8% compared to 26.7% atSeptember 30, 2021 . Our net debt to total capital (notes payable net of cash divided by stockholders' equity plus notes payable net of cash) was 15.4% atSeptember 30, 2022 compared to 12.9% atSeptember 30, 2021 . AtSeptember 30, 2022 , our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders' equity plus homebuilding notes payable) was 13.2% compared to 17.8% atSeptember 30, 2021 . Our net homebuilding debt to total capital (homebuilding notes payable net of cash divided by stockholders' equity plus homebuilding notes payable net of cash) was 4.4% atSeptember 30, 2022 compared to 1.7% atSeptember 30, 2021 . 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 2023. 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, DRH Rental and our financial services business because they are separately capitalized and not guaranteed by our parent company or any of our homebuilding entities. AtSeptember 30, 2022 , we had outstanding letters of credit of$273.3 million and surety bonds of$2.8 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 and liquidity 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 inOctober 2021 , registering$750 million of equity securities, of which$300 million was reserved for sales under its at-the-market equity offering program that became effective inNovember 2021 . AtSeptember 30, 2022 ,$748.2 million remained available for issuance under Forestar's shelf registration statement, of which$298.2 million was reserved for sales under its at-the-market equity offering program. 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 for the next 12 months and thereafter for the foreseeable future. 47 -------------------------------------------------------------------------------- Table of Contents Capital Resources - Homebuilding
Cash and Cash Equivalents - At
Bank Credit Facility - We have a$2.19 billion senior unsecured homebuilding revolving credit facility 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 facility also provides for the issuance of letters of credit with a sublimit equal to 100% of the total revolving credit commitments. Letters of credit issued under the facility reduce the available borrowing capacity. Borrowings and repayments under the facility totaled$3.45 billion each during fiscal 2022. AtSeptember 30, 2022 , there were no borrowings outstanding and$220 million of letters of credit issued under the revolving credit facility, resulting in available capacity of$1.97 billion .
In
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, 2022 , we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facility. Public Unsecured Debt - We have$2.8 billion principal amount of homebuilding senior notes outstanding as ofSeptember 30, 2022 that mature fromFebruary 2023 throughOctober 2027 . The indentures governing our senior notes impose restrictions on the creation of secured debt and liens. AtSeptember 30, 2022 , we were in compliance with all of the limitations and restrictions associated with our public debt obligations.
Our homebuilding revolving credit facility and senior notes are guaranteed by
Debt and Stock Repurchase Authorizations - InJuly 2019 , our Board of Directors authorized the repurchase of up to$500 million of debt securities. InApril 2022 , our Board of Directors authorized the repurchase of up to$1.0 billion of our common stock, replacing the prior stock repurchase authorization. During fiscal 2022, we repurchased 14.0 million shares of our common stock for$1.1 billion . AtSeptember 30, 2022 , the full amount of the debt repurchase authorization was remaining, and$438.3 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 and generate sufficient cash flows from operations. 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, 2022 , Forestar's ratio of debt to total capital (notes payable divided by stockholders' equity plus notes payable) was 37.1% compared to 41.0% atSeptember 30, 2021 . 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 26.9% compared to 35.2% atSeptember 30, 2021 .
Cash and Cash Equivalents - At
48
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Table of Contents
Bank Credit Facility - Forestar has a $410 million senior unsecured revolving
credit facility 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 facility also provides for the
issuance of letters of credit with a sublimit equal to the greater of $100
million and 50% of the total revolving credit commitments. Borrowings under the
revolving credit facility are subject to a borrowing base calculation based on
the book value of Forestar's real estate assets and unrestricted cash. Letters
of credit issued under the facility reduce the available borrowing capacity. At
September 30, 2022 , there were no borrowings outstanding and $53.3 million of
letters of credit issued under the revolving credit facility, resulting in
available capacity of $356.7 million .
In
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, 2022 , 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 that mature inMay 2026 and$300 million principal amount of 5.0% senior notes that mature inMarch 2028 . Forestar's revolving credit facility and its senior notes are guaranteed by Forestar's wholly-owned subsidiaries that are not immaterial subsidiaries or have not been designated as unrestricted subsidiaries. They are not guaranteed byD.R. Horton, Inc. or any of the subsidiaries that guarantee the debt of our homebuilding, financial services or rental operations. AtSeptember 30, 2022 , Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations. Debt Repurchase Authorization - InApril 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, 2022 , and the authorization has no expiration date. Issuance of Common Stock - During fiscal 2022, Forestar issued 84,547 shares of common stock under its at-the-market equity offering program for proceeds of$1.7 million , net of commissions and other issuance costs totaling$0.1 million . AtSeptember 30, 2022 ,$748.2 million remained available for issuance under Forestar's shelf registration statement, of which$298.2 million was reserved for sales under its at-the-market equity offering program.
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$1.6 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, 2022 was$2.2 billion , and its maturity date isFebruary 17, 2023 . 49 -------------------------------------------------------------------------------- Table of Contents As ofSeptember 30, 2022 ,$2.5 billion of mortgage loans held for sale with a collateral value of$2.4 billion were pledged under the mortgage repurchase facility. As a result of advance paydowns totaling$827.2 million ,DHI Mortgage had an obligation of$1.6 billion outstanding under the mortgage repurchase facility atSeptember 30, 2022 at a 4.6% annual interest rate. The mortgage repurchase facility is not guaranteed byD.R. Horton, Inc. or any of the subsidiaries that guarantee the debt of our homebuilding, Forestar or rental operations. 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, 2022 ,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, 2022 , cash and cash equivalents of our rental segment totaled$109.9 million . During fiscal 2022, we continued to increase the investment in our rental operations. The inventory in our rental segment totaled$2.6 billion atSeptember 30, 2022 compared to$840.9 million atSeptember 30, 2021 . Bank Credit Facility - InMarch 2022 , our rental subsidiary, DRH Rental, entered into a$625 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to$1.25 billion , subject to certain conditions and availability of additional bank commitments. On subsequent occasions, DRH Rental utilized the accordion feature to obtain additional commitments, thereby increasing the size of the facility to$975 million atSeptember 30, 2022 . Availability under the revolving credit facility is subject to a borrowing base calculation based on the book value of DRH Rental's real estate assets and unrestricted cash. AtSeptember 30, 2022 , the borrowing base limited the available capacity under the facility to$811.9 million . The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of$100 million and 50% of the total revolving credit commitments. The maturity date of the facility isMarch 4, 2026 . AtSeptember 30, 2022 , there were$800 million of borrowings outstanding at a 4.8% annual interest rate and no letters of credit issued under the facility, resulting in available capacity of$11.9 million . InNovember 2022 , DRH Rental utilized the accordion feature and increased the size of the revolving credit facility to$1.025 billion through an additional commitment. The revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require DRH Rental 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. AtSeptember 30, 2022 , DRH Rental was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility. DRH Rental's revolving credit facility is guaranteed by DRH Rental's wholly-owned subsidiaries that are not immaterial subsidiaries or have not been designated as unrestricted subsidiaries. The rental revolving credit facility is not guaranteed byD.R. Horton, Inc. or any of the subsidiaries that guarantee the debt of our homebuilding, Forestar or financial services operations. 50 -------------------------------------------------------------------------------- Table of Contents Operating Cash Flow Activities In fiscal 2022, net cash provided by operating activities was$561.8 million compared to$534.4 million in fiscal 2021. Cash provided by operating activities in the current year primarily consisted of$1.9 billion and$108.7 million of cash provided by our homebuilding and Forestar segments, respectively, partially offset by$1.4 billion and$10.5 million of cash used in our rental and financial services segments, respectively. The most significant source of cash provided by operating activities in both years was net income. Cash used to increase construction in progress and finished home inventory was$2.1 billion in fiscal 2022 compared to$1.7 billion in fiscal 2021. The increase is due to increased home construction costs and more homes in inventory that were complete or closer to completion at the end of the current year. Cash used to increase residential land and lots was$1.4 billion in fiscal 2022 compared to$1.7 billion in fiscal 2021. Of these amounts,$142.3 million and$585.6 million , respectively, related to Forestar. During fiscal 2022, cash used to increase our single-family and multi-family rental properties totaled$1.7 billion and is reflected as cash used in operating activities. During fiscal 2021, cash used to increase our single-family and multi-family rental properties totaled$477.5 million , of which$173.9 million related to the first half of the year and is presented as cash used in investing activities and$303.6 million related to the second half of the year and is presented as cash used in operating activities.
Investing Cash Flow Activities
In fiscal 2022, net cash used in investing activities was$414.9 million compared to$252.2 million in fiscal 2021. In fiscal 2022, uses of cash included the acquisition ofVidler Water Resources, Inc. for$271.5 million , net of the cash acquired, and purchases of property and equipment totaling$148.2 million . In fiscal 2021, uses of cash included expenditures related to our rental operations totaling$173.9 million , the acquisition of the homebuilding operations ofBraselton Homes for$23.0 million and purchases of property and equipment totaling$93.5 million , partially offset by proceeds from the sale of a single-family rental community for$31.8 million .
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 2022, net cash used in financing activities was$811.2 million , consisting primarily of repayments of amounts drawn on our homebuilding revolving credit facility totaling$3.5 billion , cash used to repurchase shares of our common stock of$1.1 billion , repayment of$350 million principal amount of our 4.375% homebuilding senior notes at maturity and payment of cash dividends totaling$316.5 million . These uses of cash were partially offset by draws on our homebuilding revolving credit facility of$3.5 billion , draws on DRH Rental's revolving credit facility of$800 million and net advances on our mortgage repurchase facility of$123.7 million . 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 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. Our Board of Directors approved and paid quarterly cash dividends of$0.225 per common share in fiscal 2022 and$0.20 per common share in fiscal 2021. InOctober 2022 , our Board of Directors approved a quarterly cash dividend of$0.25 per common share, payable onDecember 12, 2022 , to stockholders of record onDecember 2, 2022 . 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. 51 -------------------------------------------------------------------------------- Table of Contents Supplemental Guarantor Financial Information As ofSeptember 30, 2022 ,D.R. Horton, Inc. had$2.8 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 and single-family rental operations 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 enforceability of the obligations of the Guarantor Subsidiaries under their guarantees may be subject to review under applicable federal or state laws relating to fraudulent conveyance or transfer, voidable preference and similar laws affecting the rights of creditors generally. In certain circumstances, a court could void the guarantees, subordinate amounts owing under the guarantees or order other relief detrimental to the holders of our guaranteed obligations. 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. 52 -------------------------------------------------------------------------------- Table of Contents 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, 2022 (In millions) Assets Cash $ 1,974.6 Inventories 18,096.5 Amount due from Non-Guarantor Subsidiaries
1,034.9
Total assets
24,001.0
Liabilities & Stockholders' Equity
Notes payable $ 2,878.3
Total liabilities 6,345.8
Stockholders' equity 17,655.2
Summarized Statement of Operations Data Year Ended September 30, 2022
(In millions)
Revenues $ 31,890.0
Cost of sales 22,794.1
Selling, general and administrative expense 2,128.5
Income before income taxes 6,946.0
Net income 5,372.7
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, 2022 and 2021, and for the years ended
September 30, 2022 , 2021 and 2020. 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 do not 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, 2022 and 2021. Our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims. AtSeptember 30, 2022 and 2021, we had reserves for approximately 560 and 380 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During fiscal 2022, we were notified of approximately 355 new construction defect claims and resolved 175 construction defect claims for a total cost of$24.4 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. 57
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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$133.8 million in our reserves and a$46.9 million increase in our insurance receivable, resulting in additional expense of$86.9 million . A 10% decrease in the claim frequency and the average cost per claim would result in a decrease of approximately$120.4 million in our reserves and a$49.5 million decrease in our insurance receivable, resulting in a reduction in expense of$70.9 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 Standards InMarch 2020 , theFinancial Accounting Standards Board (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 , with early adoption permitted. We are currently evaluating the impact of this guidance, and it is not expected to have a material impact on our consolidated financial position, results of operations or cash flows. 58
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