HORTON D R INC /DE/ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this quarterly report and with our annual report on Form 10-K for the fiscal year ended September 30, 2022. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those described in the “Forward-Looking Statements” section following this discussion. BUSINESS D.R. Horton, Inc. is the largest homebuilding company in the United States as measured by number of homes closed. We construct and sell homes through our operating divisions in 109 markets across 33 states, primarily under the names of D.R. Horton, America’s Builder, Emerald Homes, Express Homes and Freedom Homes. Our common stock is included in the S&P 500 Index and listed on the New York Stock Exchange under the ticker symbol “DHI.” Unless the context otherwise requires, the terms “D.R. Horton,” the “Company,” “we” and “our” used herein refer to D.R. Horton, Inc., a Delaware corporation, and its predecessors and subsidiaries. Our business operations consist of homebuilding, a majority-owned residential lot development company, financial services, rental and other activities. Our homebuilding operations are our core business and primarily include the construction and sale of single-family homes with sales prices generally ranging from $200,000 to more than $1,000,000, with an average closing price of $386,900 during the three months ended December 31, 2022. Approximately 90% of our home sales revenue in the three months ended December 31, 2022 was generated from the sale of single-family detached homes, with the remainder from the sale of attached homes, such as townhomes, duplexes and triplexes. Our position as the most geographically diverse and largest volume homebuilder in the United States provides a strong platform for us to compete for new home sales. Our product offerings include a broad range of homes for entry-level, move-up, active adult and luxury buyers. At December 31, 2022, we owned 63% of the outstanding shares of Forestar Group Inc. (Forestar), a publicly traded residential lot development company listed on the New York Stock Exchange under the ticker symbol “FOR.” Forestar is a key part of our homebuilding strategy to enhance operational and capital efficiency and returns by expanding relationships with land developers and increasing the portion of our land and lot position controlled through land purchase contracts. Forestar has made significant investments in land acquisition and development over the last few years to expand its business across our homebuilding operating footprint. Our financial services operations provide mortgage financing and title agency services to homebuyers in many of our homebuilding markets. DHI Mortgage, our wholly-owned subsidiary, provides mortgage financing services primarily to our homebuyers and sells substantially all of the mortgages it originates and the related servicing rights to third-party purchasers after origination. Our wholly-owned subsidiary title companies serve as title insurance agents by providing title insurance policies, examination, underwriting and closing services, primarily related to our homebuilding transactions. 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. 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. 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 results of these operations are immaterial for separate reporting and therefore are grouped together and presented as other. 25 Table of Contents OVERVIEW During the three months ended December 31, 2022, our number of homes closed decreased 6%, while our home sales revenues increased 1% compared to the prior year period. Our consolidated revenues increased 3% to $7.3 billion in the three months ended December 31, 2022 compared to $7.1 billion in the prior year period. Our pre-tax income was $1.3 billion in the three months ended December 31, 2022 compared to $1.5 billion in the prior year period, and our pre-tax operating margin was 17.5% compared to 21.2%. Net income was $968.3 million in the three months ended December 31, 2022 compared to $1.1 billion in the prior year period, and our diluted earnings per share was $2.76 compared to $3.17. In the trailing twelve months ended December 31, 2022, our return on equity (ROE) was 31.5% compared to 32.4% in the prior year period, and our homebuilding return on inventory (ROI) was 39.5% compared to 38.5%. ROE is calculated as net income attributable to D.R. Horton for the trailing twelve months 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 trailing twelve months divided by average inventory, where average inventory is the sum of ending homebuilding inventory balances for the trailing five quarters divided by five. In June 2022, we began to see a moderation in housing demand that persisted through the end of the first fiscal quarter as mortgage interest rates increased substantially and inflationary pressures remained elevated. Disruptions in the supply chain for certain building materials and tightness in the labor market have caused our construction cycle to lengthen during the past two years; however, we expect this to improve for homes started during fiscal 2023 as supply chain and labor issues are resolved. Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited across most of our markets, and demographics supporting housing demand remain favorable. We believe we are well-positioned to meet these changing market conditions with our affordable product offerings and lot supply and 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 75% of the lots owned and controlled at December 31, 2022 compared to 77% and 76% at September 30, 2022 and December 31, 2021, respectively. We remain focused on our relationships with Forestar and other land developers across the country and expect to continue to maintain a substantial majority of our lot pipeline controlled through purchase contracts . 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. 26 Table of Contents 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. 27 Table of Contents KEY RESULTS Key financial results as of and for the three months ended December 31, 2022, as compared to the same period of 2021 unless otherwise indicated, were as follows: Homebuilding: • Homebuilding revenues were $6.74 billion compared to $6.68 billion. • Homes closed decreased 6% to 17,340 homes, while the average closing price of those homes increased 7% to $386,900. • Net sales orders decreased 38% to 13,382 homes, and the value of net sales orders decreased 40% to $4.9 billion. • Sales order backlog decreased 46% to 15,759 homes, and the value of sales order backlog decreased 44% to $6.2 billion. • Home sales gross margin was 23.9% compared to 27.4%. • Homebuilding SG&A expense was 7.8% of homebuilding revenues compared to 7.5%. • Homebuilding pre-tax income was $1.1 billion compared to $1.3 billion. • Homebuilding pre-tax income was 16.2% of homebuilding revenues compared to 20.0%. • Homebuilding cash and cash equivalents totaled $2.0 billion compared to $2.0 billion and $2.1 billion at September 30, 2022 and December 31, 2021, respectively. • Homebuilding inventories totaled $17.7 billion compared to $17.3 billion and $15.3 billion at September 30, 2022 and December 31, 2021, respectively. • Homes in inventory totaled 43,200 compared to 46,400 and 54,800 at September 30, 2022 and December 31, 2021, respectively. • Owned lots totaled 136,400 compared to 131,100 and 131,900 at September 30, 2022 and December 31, 2021, respectively. Lots controlled through purchase contracts totaled 414,600 compared to 442,100 and 419,500 at September 30, 2022 and December 31, 2021, respectively. • Homebuilding debt was $3.0 billion compared to $2.9 billion and $3.3 billion at September 30, 2022 and December 31, 2021, respectively. • Homebuilding debt to total capital was 12.8% compared to 13.2% and 17.3% at September 30, 2022 and December 31, 2021, respectively. Net homebuilding debt to total capital was 4.4% compared to 4.4% and 6.9% at September 30, 2022 and December 31, 2021, respectively. Forestar: • Forestar’s revenues decreased 47% to $216.7 million compared to $407.6 million. Revenues in the current and prior year quarters included $189.8 million and $330.1 million, respectively, of revenue from land and lot sales to our homebuilding segment. • Forestar’s lots sold decreased 50% to 2,263 compared to 4,516. Lots sold to D.R. Horton totaled 2,094 compared to 4,014. • Forestar’s pre-tax income was $27.9 million compared to $53.5 million. • Forestar’s pre-tax income was 12.9% of revenues compared to 13.1%. • Forestar’s cash and cash equivalents totaled $216.4 million compared to $264.8 million and $162.5 million at September 30, 2022 and December 31, 2021, respectively. 28 Table of Contents • Forestar’s inventories totaled $2.1 billion compared to $2.0 billion at both September 30, 2022 and December 31, 2021. • Forestar’s owned and controlled lots totaled 82,300 compared to 90,100 and 103,300 at September 30, 2022 and December 31, 2021, respectively. Of these lots, 35,000 were under contract to sell to or subject to a right of first offer with D.R. Horton compared to 36,700 and 38,300 at September 30, 2022 and December 31, 2021, respectively. • Forestar’s debt was $706.4 million compared to $706.0 million and $704.9 million at September 30, 2022 and December 31, 2021, respectively. • Forestar’s debt to total capital was 36.7% compared to 37.1% and 40.0% at September 30, 2022 and December 31, 2021, respectively. Forestar’s net debt to total capital was 28.7% compared to 26.9% and 33.9% at September 30, 2022 and December 31, 2021, respectively. Financial Services: • Financial services revenues decreased 26% to $137.0 million compared to $184.3 million. • Financial services pre-tax income decreased 73% to $18.2 million compared to $67.1 million. • Financial services pre-tax income was 13.3% of financial services revenues compared to 36.4%. Rental: • Rental revenues were $327.5 million compared to $156.5 million. • Rental pre-tax income was $110.3 million compared to $70.1 million. • Rental inventory totaled $2.9 billion compared to $2.6 billion and $1.2 billion at September 30, 2022 and December 31, 2021, respectively. • Multi-family rental units closed totaled 300 compared to 351. • Single-family rental homes closed totaled 694 compared to 226. Consolidated Results: • Consolidated revenues increased 3% to $7.3 billion compared to $7.1 billion. • Consolidated pre-tax income decreased 15% to $1.3 billion compared to $1.5 billion. • Consolidated pre-tax income was 17.5% of consolidated revenues compared to 21.2%. • Income tax expense was $298.9 million compared to $351.5 million, and our effective tax rate was 23.6% compared to 23.5%. • Net income attributable to D.R. Horton decreased 16% to $958.7 million compared to $1.1 billion. • Diluted net income per common share attributable to D.R. Horton decreased 13% to $2.76 compared to $3.17. • Stockholders’ equity was $20.2 billion compared to $19.4 billion and $15.7 billion at September 30, 2022 and December 31, 2021, respectively. • Book value per common share increased to $58.71 compared to $56.39 and $44.25 at September 30, 2022 and December 31, 2021, respectively. • Debt to total capital was 22.0% compared to 23.8% and 25.1% at September 30, 2022 and December 31, 2021, respectively. Net debt to total capital was 13.3% compared to 15.4% and 15.2% at September 30, 2022 and December 31, 2021, respectively. 29 Table of Contents RESULTS OF OPERATIONS - HOMEBUILDING We conduct our homebuilding operations in the geographic regions, states and markets listed below. Our homebuilding operating divisions are aggregated into six reporting segments, also referred to as reporting regions, which comprise the markets below. Our financial statements and the notes thereto contain additional information regarding segment performance. 30 Table of Contents State Reporting Region/Market State Reporting Region/Market Northwest Region Southeast Region (Continued) Colorado Colorado Springs Florida Ocala Denver Orlando Fort Collins Pensacola/Panama City Oregon Bend Port St. Lucie Eugene/Springfield Tallahassee Portland/Salem Tampa/Sarasota Utah Salt Lake City Volusia County St. George West Palm Beach Washington Central Washington Louisiana Baton Rouge Seattle/Tacoma/Everett/Olympia Lake Charles/Lafayette Spokane Mississippi Gulf Coast Vancouver East Region Southwest Region Georgia Atlanta Arizona Phoenix Augusta Tucson Central Georgia California Bakersfield Savannah Bay Area Valdosta Fresno/Tulare North Carolina Asheville Los Angeles County Charlotte Modesto/Merced/Stockton Greensboro/Winston-Salem Redding/Chico/Yuba City New Bern/Greenville Riverside County Raleigh/Durham Sacramento Wilmington San Bernardino County South Carolina Charleston Hawaii Oahu Columbia Nevada Las Vegas Greenville/Spartanburg Reno Hilton Head New Mexico Albuquerque Myrtle Beach Tennessee Chattanooga South Central Region Knoxville Arkansas Northwest Arkansas Memphis Oklahoma Oklahoma City Nashville Tulsa Texas Abilene North Region Austin Delaware Central Delaware Beaumont Northern Delaware Bryan/College Station Illinois Chicago Corpus Christi Indiana Fort Wayne Dallas Indianapolis Fort Worth Northwest Indiana Houston Iowa Des Moines Killeen/Temple/Waco Iowa City/Cedar Rapids Lubbock Kentucky Louisville Midland/Odessa Maryland Baltimore New Braunfels/San Marcos Suburban Washington, D.C. San Antonio Western Maryland Minnesota Minneapolis/St. Paul Southeast Region Nebraska Omaha Alabama Birmingham New Jersey Northern New Jersey Huntsville Southern New Jersey Mobile/Baldwin County Ohio Cincinnati Montgomery Columbus Tuscaloosa Pennsylvania Central Pennsylvania Florida Fort Myers/Naples Philadelphia Gainesville Virginia Northern Virginia Jacksonville Richmond Lakeland Virginia Beach/Williamsburg Melbourne/Vero Beach West Virginia Eastern West Virginia Miami/Fort Lauderdale 31 Table of Contents 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 three months ended December 31, 2022 and 2021. Net Sales Orders (1) Three Months Ended December 31, Net Homes Sold Value (In millions) Average Selling Price 2022 2021 % Change 2022 2021 % Change 2022 2021 % Change Northwest 904 1,228 (26) % $ 459.8 $ 657.1 (30) % $ 508,600 $ 535,100 (5) % Southwest 1,254 2,301 (46) % 580.5 1,183.8 (51) % 462,900 514,500 (10) % South Central 3,806 5,862 (35) % 1,174.1 1,946.2 (40) % 308,500 332,000 (7) % Southeast 3,917 6,394 (39) % 1,392.5 2,284.8 (39) % 355,500 357,300 (1) % East 2,313 3,980 (42) % 845.6 1,454.9 (42) % 365,600 365,600 — % North 1,188 1,757 (32) % 470.9 729.6 (35) % 396,400 415,300 (5) % 13,382 21,522 (38) % $ 4,923.4 $ 8,256.4 (40) % $ 367,900 $ 383,600 (4) % Sales Order Cancellations Three Months Ended December 31, Cancelled Sales Orders Value (In millions) Cancellation Rate (2) 2022 2021 2022 2021 2022 2021 Northwest 238 148 $ 133.4 $ 77.2 21 % 11 % Southwest 501 443 249.3 205.3 29 % 16 % South Central 1,707 1,339 602.6 433.7 31 % 19 % Southeast 1,435 1,083 546.5 361.0 27 % 14 % East 648 661 248.8 225.2 22 % 14 % North 359 246 151.8 97.7 23 % 12 % 4,888 3,920 $ 1,932.4 $ 1,400.1 27 % 15 % ________________________ (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. (2) Cancellation rate represents the number of cancelled sales orders divided by gross sales orders. Net Sales Orders The number of net sales orders decreased 38% in the three months ended December 31, 2022 compared to the prior year period. The value of net sales orders decreased 40% to $4.9 billion (13,382 homes) compared to $8.3 billion (21,522 homes) in the prior year period. The average selling price of net sales orders during the three months ended December 31, 2022 was $367,900, down 4% from the prior year period. During most of fiscal 2022, demand for our homes remained strong. In June 2022, we began to see a moderation in housing demand as mortgage interest rates increased substantially and inflationary pressures remained elevated. Although these pressures continued through the first quarter of fiscal 2023 and may persist for some time, we believe we are well-positioned to meet these changing market conditions with our affordable product offerings. The markets contributing most to the decreases in sales order volume were: the Denver and Portland markets in the Northwest; the Phoenix and California markets in the Southwest; the Dallas, Austin and Houston markets in the South Central; the Florida markets in the Southeast; the Atlanta and Carolina markets in the East; and the Indianapolis market in the North. Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 27% in the three months ended December 31, 2022 compared to 15% in the prior year period. The higher current period cancellation rate reflects the moderation in demand we have experienced as mortgage rates increased substantially and inflationary pressures remain elevated, while the prior year cancellation rate was historically low due to strong demand. 32 Table of Contents Sales Order Backlog As of December 31, Homes in Backlog Value (In millions) Average Selling Price 2022 2021 % Change 2022 2021 % Change 2022 2021 % Change Northwest 646 1,157 (44) % $ 366.8 $ 605.9 (39) % $ 567,800 $ 523,700 8 % Southwest 1,307 3,795 (66) % 682.8 1,768.2 (61) % 522,400 465,900 12 % South Central 4,764 9,158 (48) % 1,620.2 3,079.2 (47) % 340,100 336,200 1 % Southeast 5,613 8,389 (33) % 2,185.4 3,009.2 (27) % 389,300 358,700 9 % East 2,384 5,069 (53) % 917.0 1,849.6 (50) % 384,600 364,900 5 % North 1,045 1,779 (41) % 447.6 751.0 (40) % 428,300 422,100 1 % 15,759 29,347 (46) % $ 6,219.8 $ 11,063.1 (44) % $ 394,700 $ 377,000 5 % 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. Homes Closed and Home Sales Revenue Three Months Ended December 31, Homes Closed Value (In millions) Average Selling Price 2022 2021 % Change 2022 2021 % Change 2022 2021 % Change Northwest 982 1,025 (4) % $ 520.1 $ 548.9 (5) % $ 529,600 $ 535,500 (1) % Southwest 1,707 1,944 (12) % 802.7 911.5 (12) % 470,200 468,900 — % South Central 4,837 5,437 (11) % 1,636.2 1,692.3 (3) % 338,300 311,300 9 % Southeast 5,287 5,324 (1) % 1,994.4 1,810.3 10 % 377,200 340,000 11 % East 3,015 3,128 (4) % 1,143.4 1,074.7 6 % 379,200 343,600 10 % North 1,512 1,538 (2) % 612.4 618.7 (1) % 405,000 402,300 1 % 17,340 18,396 (6) % $ 6,709.2 $ 6,656.4 1 % $ 386,900 $ 361,800 7 % Home Sales Revenue Revenues from home sales were $6.71 billion (17,340 homes closed) for the three months ended December 31, 2022 and $6.66 billion (18,396 homes closed) in the prior year period. The number of homes closed decreased 6% in the three months ended December 31, 2022 compared to the prior year period. The markets contributing most to the decreases in closings volume were: the Denver market in the Northwest; the California markets in the Southwest; the Houston and Fort Worth markets in the South Central; the Alabama and Louisiana markets in the Southeast; the Atlanta market in the East; and the Delaware and Ohio markets in the North. 33 Table of Contents Homebuilding Operating Margin Analysis Percentages of Related Revenues Three Months Ended December 31, 2022 2021 Gross profit – home sales 23.9 % 27.4 % Gross profit – land/lot sales and other 85.9 % 25.7 % Inventory and land option charges (0.4) % (0.1) % Gross profit – total homebuilding 23.8 % 27.3 % Selling, general and administrative expense 7.8 % 7.5 % Other (income) expense (0.2) % (0.1) % Homebuilding pre-tax income 16.2 % 20.0 % Home Sales Gross Profit Gross profit from home sales decreased to $1.6 billion in the three months ended December 31, 2022 from $1.8 billion in the prior year period and decreased 350 basis points to 23.9% as a percentage of home sales revenues. The percentage decrease resulted from a decrease of 360 basis points due to the average cost of our homes closed increasing by more than the average selling price of those homes, partially offset by 10 basis points due to a decrease in the amortization of capitalized interest. 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 current market conditions, we have recently increased our use of incentives across all of our markets. We have also reduced home prices and sizes of our home offerings where necessary to provide better affordability to homebuyers in the current higher mortgage rate environment. We expect to continue offering a higher level of incentives throughout fiscal 2023 and also expect our average sales price to decrease, which will cause our gross profit margins to decline from current levels. Land/Lot Sales and Other Revenues Land/lot sales and other revenues from our homebuilding operations were $34.8 million and $23.0 million in the three months ended December 31, 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 December 31, 2022, our homebuilding operations had $29.5 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 this review, there were $4.8 million of impairments recorded in our homebuilding segment during the three months ended December 31, 2022. There were no impairment charges recorded in the prior year quarter. 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. 34 Table of Contents During the three months ended December 31, 2022, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $19.4 million compared to $3.9 million in the same period of fiscal 2022. Selling, General and Administrative (SG&A) Expense SG&A expense from homebuilding activities increased 6% to $527.1 million in the three months ended December 31, 2022 from $497.7 million in the prior year period. SG&A expense as a percentage of homebuilding revenues was 7.8% in the three months ended December 31, 2022 compared to 7.5% in the prior year period. Employee compensation and related costs were $425.3 million in the three months ended December 31, 2022 compared to $409.6 million in the same period of fiscal 2022. Employee compensation and related costs represented 81% of SG&A costs in the three months ended December 31, 2022 compared to 82% in the prior year period. These costs increased 4% in the three months ended December 31, 2022 from the prior year period. Our homebuilding operations employed 9,473 and 8,699 people at December 31, 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 $20.9 million in the three months ended December 31, 2022 compared to $24.8 million in the prior year period. Interest charged to cost of sales was 0.4% of homebuilding cost of sales (excluding inventory and land option charges) in the three months ended December 31, 2022 compared to 0.5% in the prior year period. Other Income Other income, net of other expenses, included in our homebuilding operations increased to $13.3 million in the three months ended December 31, 2022 from $6.2 million in the prior year period, primarily due to an increase in interest income. Other income consists of interest income and various other types of ancillary income, gains, expenses and losses not directly associated with sales of homes, land and lots. The activities that result in this ancillary income are not significant, either individually or in the aggregate. Business Acquisition In December 2022, we acquired the homebuilding operations of Riggins Custom Homes in Northwest Arkansas for approximately $107 million in cash. The assets acquired included approximately 170 homes in inventory, 3,000 lots and a sales order backlog of approximately 100 homes. 35 Table of Contents Homebuilding Results by Reporting Region Three Months Ended December 31, 2022 2021 Homebuilding Revenues Homebuilding Pre-tax Income (1) % of Revenues Homebuilding Revenues Homebuilding Pre-tax Income (1) % of Revenues (In millions) Northwest $ 520.4 $ 58.7 11.3 % $ 569.0 $ 111.8 19.6 % Southwest 803.0 84.0 10.5 % 911.6 159.3 17.5 % South Central 1,642.1 281.6 17.1 % 1,694.3 354.3 20.9 % Southeast 1,996.3 411.3 20.6 % 1,810.9 415.4 22.9 % East 1,143.9 189.4 16.6 % 1,074.9 202.3 18.8 % North 638.3 69.4 10.9 % 618.7 89.9 14.5 % $ 6,744.0 $ 1,094.4 16.2 % $ 6,679.4 $ 1,333.0 20.0 % ______________ (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 decreased 9% in the three months ended December 31, 2022 compared to the prior year period, due to decreases in the number of homes closed and the average selling price of those homes. The region generated pre-tax income of $58.7 million in the three months ended December 31, 2022 compared to $111.8 million in the prior year period. Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) decreased by 820 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to an increase in the average cost of homes closed as well as a slight decrease in the average selling price. As a percentage of homebuilding revenues, SG&A expenses increased by 90 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the decrease in homebuilding revenues. Southwest Region — Homebuilding revenues decreased 12% in the three months ended December 31, 2022 compared to the prior year period, due to decreases in the number of homes closed, particularly in our California markets. The region generated pre-tax income of $84.0 million in the three months ended December 31, 2022 compared to $159.3 million in the prior year period. Home sales gross profit percentage decreased by 550 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the average cost of homes closed increasing by more than the average selling price. As a percentage of homebuilding revenues, SG&A expenses increased by 120 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the decrease in homebuilding revenues. South Central Region — Homebuilding revenues decreased 3% in the three months ended December 31, 2022 compared to the prior year period, due to decreases in the number of homes closed, particularly in our Houston and Fort Worth markets. The region generated pre-tax income of $281.6 million in the three months ended December 31, 2022 compared to $354.3 million in the prior year period. Home sales gross profit percentage decreased by 310 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the average cost of homes closed increasing by more than the average selling price. As a percentage of homebuilding revenues, SG&A expenses increased by 50 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to increases in SG&A expenses. Southeast Region — Homebuilding revenues increased 10% in the three months ended December 31, 2022 compared to the prior year period, due to the increases in the average selling price of homes closed in most markets. The region generated pre-tax income of $411.3 million in the three months ended December 31, 2022 compared to $415.4 million in the prior year period. Home sales gross profit percentage decreased by 240 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the average cost of homes closed increasing by more than the average selling price. As a percentage of homebuilding revenues, SG&A expenses decreased by 30 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the increase in homebuilding revenues. 36 Table of Contents East Region — Homebuilding revenues increased 6% in the three months ended December 31, 2022 compared to the prior year period, due to increases in the average selling price of homes closed in most markets. The region generated pre-tax income of $189.4 million in the three months ended December 31, 2022 compared to $202.3 million in the prior year period. Home sales gross profit percentage decreased by 200 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the average cost of homes closed increasing by more than the average selling price. As a percentage of homebuilding revenues, SG&A expenses increased by 30 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to increases in SG&A expenses. North Region — Homebuilding revenues increased 3% in the three months ended December 31, 2022 compared to the prior year period, primarily due to the sale of a parcel of land in one of our markets. The region generated pre-tax income of $69.4 million in the three months ended December 31, 2022 compared to $89.9 million in the prior year period. Home sales gross profit percentage decreased by 520 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the average cost of homes closed increasing by more than the average selling price. As a percentage of homebuilding revenues, SG&A expenses increased by 60 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to increases in SG&A expenses. 37 Table of Contents HOMEBUILDING INVENTORIES, LAND AND LOT POSITION AND HOMES IN INVENTORY We routinely enter into contracts to purchase land or developed residential lots at predetermined prices on a defined schedule commensurate with planned development or anticipated new home demand. At the time of purchase, the undeveloped land is generally vested with the rights to begin development or construction work, and we plan and coordinate the development of our land into residential lots for use in our homebuilding business. We manage our inventory of owned land and lots and homes under construction relative to demand in each of our markets, including starting construction on unsold homes to capture new home demand and actively controlling the number of unsold, completed homes in inventory. Our homebuilding segment’s inventories at December 31, 2022 and September 30, 2022 are summarized as follows: December 31, 2022 Construction in Progress and Finished Homes Residential Land/Lots Developed and Under Development Land Held for Development Land Held for Sale Total Inventory (In millions) Northwest $ 845.6 $ 1,025.2 $ — $ 2.4 $ 1,873.2 Southwest 1,284.9 1,630.5 7.3 19.2 2,941.9 South Central 2,175.0 1,745.9 0.3 — 3,921.2 Southeast 2,612.9 1,425.9 13.2 4.6 4,056.6 East 1,354.7 1,276.8 — 0.5 2,632.0 North 1,255.1 792.8 — 2.4 2,050.3 Corporate and unallocated (1) 129.2 100.7 0.3 0.4 230.6 $ 9,657.4 $ 7,997.8 $ 21.1 $ 29.5 $ 17,705.8 September 30, 2022 Construction in Progress and Finished Homes Residential Land/Lots Developed and Under Development Land Held for Development Land Held 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 __________ (1) Corporate and unallocated inventory consists primarily of capitalized interest and property taxes. 38 Table of Contents Our land and lot position and homes in inventory at December 31, 2022 and September 30, 2022 are summarized as follows: December 31, 2022 Land/Lots Owned (1) Lots Controlled Through Land and Lot Purchase Contracts (2)(3) Total Land/Lots Owned and Controlled Homes in Inventory (4) Northwest 12,400 26,200 38,600 2,700 Southwest 22,000 36,100 58,100 4,500 South Central 39,900 60,300 100,200 11,300 Southeast 24,400 130,700 155,100 13,400 East 23,900 103,100 127,000 6,500 North 13,800 58,200 72,000 4,800 136,400 414,600 551,000 43,200 25 % 75 % 100 % September 30, 2022 Land/Lots Owned (1) Lots Controlled Through Land and Lot Purchase Contracts (2)(3) Total Land/Lots Owned and Controlled Homes in 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 % ___________________ (1) Land/lots owned included approximately 43,500 and 37,600 owned lots that are fully developed and ready for home construction at December 31, 2022 and September 30, 2022, respectively. Land/lots owned also included land held for development representing 400 lots at both December 31, 2022 and September 30, 2022. (2) The total remaining purchase price of lots controlled through land and lot purchase contracts at December 31, 2022 and September 30, 2022 was $19.0 billion and $19.7 billion, respectively, secured by earnest money deposits of $1.6 billion in both periods. The total remaining purchase price of lots controlled through land and lot purchase contracts at both December 31, 2022 and September 30, 2022 included $1.4 billion related to lot purchase contracts with Forestar, secured by $140.4 million and $131.7 million, respectively, of earnest money. Our lots controlled under land and lot purchase contracts include 439 and 4,077 lots at December 31, 2022 and September 30, 2022, respectively, 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 December 31, 2022 included approximately 35,000 lots owned or controlled by Forestar, 17,000 of which our homebuilding divisions had under contract to purchase and 18,000 of which our homebuilding divisions had a right of first offer to purchase. Of these, approximately 13,300 lots were in our Southeast region, 6,700 lots were in our East region, 6,100 lots were in our South Central region, 4,600 lots were in our Southwest region, 3,700 lots were in our North region and 600 lots were in our Northwest region. Lots controlled at September 30, 2022 included approximately 36,700 lots owned or controlled by Forestar, 17,800 of which our homebuilding divisions had under contract to purchase and 18,900 of which our homebuilding divisions had a right of first offer to purchase. (4) Approximately 27,800 and 27,200 of our homes in inventory were unsold at December 31, 2022 and September 30, 2022, respectively. At December 31, 2022, approximately 7,100 of our unsold homes were completed, of which approximately 190 homes had been completed for more than six months. 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. Homes in inventory exclude approximately 1,800 model homes at both December 31, 2022 and September 30, 2022. 39 Table of Contents RESULTS OF OPERATIONS – FORESTAR At December 31, 2022, we owned 63% of the outstanding shares of Forestar. Forestar is a publicly traded residential lot development company with operations in 52 markets across 20 states as of December 31, 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 three months ended December 31, 2022 and 2021 were as follows: Three Months Ended December 31, 2022 2021 (In millions) Total revenues $ 216.7 $ 407.6 Cost of land/lot sales and other 166.8 333.6 Inventory and land option charges 2.4 0.6 Total cost of sales $ 169.2 $ 334.2 Selling, general and administrative expense 22.9 21.5 Other (income) expense (3.3) (1.6) Income before income taxes $ 27.9 $ 53.5 Forestar’s revenues are primarily derived from sales of single-family residential lots to local, regional and national homebuilders. The following tables provide further information regarding Forestar’s revenues and lot position as of and for the three months ended December 31, 2022 and 2021. Three Months Ended December 31, Lots Closed Value (In millions) 2022 2021 2022 2021 Residential single-family lots sold Lots sold to D.R. Horton 2,094 4,014 $ 189.8 $ 330.1 Total lots sold 2,263 4,516 $ 206.7 $ 404.1 December 31, 2022 September 30, 2022 Residential single-family lots in inventory and under contract Lots owned 61,500 61,800 Lots controlled through land purchase contracts 20,800 28,300 Total lots owned and controlled 82,300 90,100 Owned lots under contract to sell to D.R. Horton 17,000 17,800 Owned lots under contract to customers other than D.R. Horton 1,400 1,400 Total owned lots under contract 18,400 19,200 Owned lots subject to right of first offer with D.R. Horton 18,000 18,900 Owned lots fully developed 7,600 5,500 At December 31, 2022 and September 30, 2022, Forestar’s inventory, which includes land and lots developed, under development and held for development, totaled $2.1 billion and $2.0 billion, respectively. SG&A expense for the three months ended December 31, 2022 and 2021 included charges of $0.9 million and $1.0 million, respectively, related to the shared services agreement between Forestar and D.R. Horton whereby D.R. Horton provides Forestar with certain administrative, compliance, operational and procurement services. 40 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, comprising DHI Mortgage and our subsidiary title companies, for the three months ended December 31, 2022 and 2021. Three Months Ended December 31, 2022 2021 % Change Number of first-lien loans originated or brokered by DHI Mortgage for D.R. Horton homebuyers 13,296 12,089 10 % Number of homes closed by D.R. Horton 17,340 18,396 (6) % Percentage of D.R. Horton homes financed by DHI Mortgage 77 % 66 % Number of total loans originated or brokered by DHI Mortgage for D.R. Horton homebuyers 13,300 12,111 10 % Total number of loans originated or brokered by DHI Mortgage 13,399 12,414 8 % Captive business percentage 99 % 98 % Loans sold by DHI Mortgage to third parties 15,167 13,071 16 % Three Months Ended December 31, 2022 2021 % Change (In millions) Loan origination and other fees $ 15.3 $ 9.5 61 % Gains on sale of mortgage loans and mortgage servicing rights 79.2 134.1 (41) % Servicing income 1.2 0.5 140 % Total mortgage operations revenues 95.7 144.1 (34) % Title policy premiums 41.3 40.2 3 % Total revenues 137.0 184.3 (26) % General and administrative expense 134.1 125.3 7 % Other (income) expense (15.3) (8.1) 89 % Financial services pre-tax income $ 18.2 $ 67.1 (73) % Financial Services Operating Margin Analysis Percentages of Financial Services Revenues Three Months Ended December 31, 2022 2021 General and administrative expense 97.9 % 68.0 % Other (income) expense (11.2) % (4.4) % Financial services pre-tax income 13.3 % 36.4 % 41 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 the three months ended December 31, 2022, while the number of homes closed by our homebuilding operations decreased 6% from the prior year period, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 10% due to an increase in the percentage of homes closed for which DHI Mortgage handled our homebuyers’ financing. Homes closed by our homebuilding operations constituted 99% of DHI Mortgage loan originations in the three months ended December 31, 2022 compared to 98% in the prior year period. These percentages reflect DHI Mortgage’s consistent focus on the captive business provided by our homebuilding operations. The number of loans sold increased 16% in the three months ended December 31, 2022 compared to the prior year period. Virtually all of the mortgage loans held for sale on December 31, 2022 were eligible for sale to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National Mortgage Association (Ginnie Mae). During the three months ended December 31, 2022, approximately 58% of our mortgage loans were sold directly to Fannie Mae, Freddie Mac or into securities backed by Ginnie Mae, and 39% 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 or Ginnie Mae, and we may need to make other adjustments to our mortgage operations. Financial Services Revenues and Expenses Revenues from our mortgage operations decreased 34% to $95.7 million in the three months ended December 31, 2022 from $144.1 million in the prior year period. The decrease was primarily due to lower gains on sales of mortgages resulting from a more competitive environment in the mortgage industry due to rising interest rates. Revenues from our title operations increased 3% to $41.3 million in the three months ended December 31, 2022 from $40.2 million in the prior year period. General and administrative (G&A) expense related to our financial services operations increased 7% to $134.1 million in the three months ended December 31, 2022 from $125.3 million in the prior year period. As a percentage of financial services revenues, G&A expense was 97.9% in the three months ended December 31, 2022 compared to 68.0% in the prior year period. 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 2,897 and 2,942 people at December 31, 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 73% to $18.2 million in the three months ended December 31, 2022 from $67.1 million in the prior year period. 42 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 three months ended December 31, 2022 and 2021 were as follows: Three Months Ended December 31, 2022 2021 (In millions) Revenues Single-family rental $ 228.0 $ 80.3 Multi-family rental and other 99.5 76.2 Total revenues 327.5 156.5 Cost of sales Single-family rental 136.8 36.4 Multi-family rental and other 47.9 36.4 Total cost of sales 184.7 72.8 Selling, general and administrative expense 47.5 18.5 Other (income) expense (15.0) (4.9) Income before income taxes $ 110.3 $ 70.1 At December 31, 2022, our rental property inventory of $2.9 billion included $1.9 billion of inventory related to our single-family rental operations and $997.9 million of inventory related to our multi-family rental operations. At September 30, 2022, our rental property inventory of $2.6 billion included $1.7 billion of assets related to our single-family rental operations and $897.2 million of assets related to our multi-family rental operations. The following tables provide further information regarding our rental operations as of and for the three months ended December 31, 2022 and 2021. Three Months Ended December 31, Homes/Units Closed Value (In millions) 2022 2021 2022 2021 Rental homes/units sold and closed Single-family rental homes 694 226 $ 228.0 $ 80.3 Multi-family rental units 300 351 $ 99.5 $ 76.2 December 31, 2022 September 30, 2022 Rental homes/units and lots in inventory Single-family rental homes (1) 8,240 7,400 Single-family rental lots (2) 6,120 6,680 Multi-family rental units (3) 6,340 6,110 ________________________ (1) Single-family rental homes include 4,240 and 3,530 completed homes at December 31, 2022 and September 30, 2022, respectively. (2) Single-family rental lots include 1,700 and 1,770 finished lots at December 31, 2022 and September 30, 2022, respectively. (3) Multi-family rental units at December 31, 2022 consist of 6,110 units under active construction and 230 units that were substantially complete and in the lease-up phase. Multi-family rental units at September 30, 2022 consist of 5,810 units under active construction and 300 units that were substantially complete and in the lease-up phase. 43 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 $9.4 million in the three months ended December 31, 2022 compared to $10.7 million in the prior year period. RESULTS OF OPERATIONS - CONSOLIDATED Income before Income Taxes Pre-tax income for the three months ended December 31, 2022 was $1.3 billion compared to $1.5 billion in the prior year period. The decrease was primarily due to a decrease in the pre-tax income of our homebuilding operations as a result of a decrease in home sales gross margin. Income Taxes Our income tax expense for the three months ended December 31, 2022 was $298.9 million compared to $351.5 million in the prior year period. Our effective tax rate was 23.6% for the three months ended December 31, 2022 compared to 23.5% in the prior year period. The effective tax rates for both periods include an expense for state income taxes and tax benefits related to stock-based compensation and federal energy efficient homes tax credits. Our deferred tax assets, net of deferred tax liabilities, were $155.8 million at December 31, 2022 compared to $159.0 million at September 30, 2022. We have a valuation allowance of $17.9 million at December 31, 2022 and September 30, 2022 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. 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. 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. 44 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. 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. At December 31, 2022, we had outstanding notes payable with varying maturities totaling an aggregate principal amount of $5.7 billion, of which $2.1 billion is payable within 12 months and includes $1.2 billion outstanding under the mortgage repurchase facility. At December 31, 2022, our ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 22.0% compared to 23.8% at September 30, 2022 and 25.1% at December 31, 2021. Our net debt to total capital (notes payable net of cash divided by stockholders’ equity plus notes payable net of cash) was 13.3% at December 31, 2022 compared to 15.4% at September 30, 2022 and 15.2% at December 31, 2021. At December 31, 2022, our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders’ equity plus homebuilding notes payable) was 12.8% compared to 13.2% at September 30, 2022 and 17.3% at December 31, 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% at December 31, 2022 compared to 4.4% at September 30, 2022 and 6.9% at December 31, 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 below 20% 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. At December 31, 2022, we had outstanding letters of credit of $258.1 million and surety bonds of $2.9 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 the Securities and Exchange Commission (SEC) in July 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 the SEC in October 2021, registering $750 million of equity securities, of which $300 million was reserved for sales under its at-the-market equity offering (ATM) program that became effective in November 2021. At December 31, 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 ATM 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 for the foreseeable future thereafter. Capital Resources - Homebuilding Cash and Cash Equivalents — At December 31, 2022, cash and cash equivalents of our homebuilding segment totaled $2.0 billion. 45 Table of Contents 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. In October 2022, our senior unsecured homebuilding revolving credit facility was amended to extend its maturity date to October 28, 2027. At December 31, 2022, there were no borrowings outstanding and $214.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $1.98 billion. 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. At December 31, 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 of December 31, 2022 that mature from February 2023 through October 2027. The indentures governing our senior notes impose restrictions on the creation of secured debt and liens. At December 31, 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 D.R. Horton, Inc.’s significant wholly-owned homebuilding subsidiaries. Debt and Stock Repurchase Authorizations — In July 2019, our Board of Directors authorized the repurchase of up to $500 million of debt securities. In April 2022, our Board of Directors authorized the repurchase of up to $1.0 billion of our common stock, replacing the previous authorization. During the three months ended December 31, 2022, we repurchased 1.4 million shares of our common stock for $118.1 million. At December 31, 2022, the full amount of the debt repurchase authorization was remaining, and $320.2 million of the stock repurchase authorization was remaining. These authorizations have no expiration date. Capital Resources - Forestar The achievement of Forestar’s long-term growth objectives will depend on its ability to obtain financing 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. At December 31, 2022, Forestar’s ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 36.7% compared to 37.1% at September 30, 2022 and 40.0% at December 31, 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 28.7% compared to 26.9% at September 30, 2022 and 33.9% at December 31, 2021. Cash and Cash Equivalents — At December 31, 2022, Forestar had cash and cash equivalents of $216.4 million. 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. In October 2022, Forestar’s senior unsecured revolving credit facility was amended to extend its maturity date to October 28, 2026. At December 31, 2022, there were no borrowings outstanding and $43.8 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $366.2 million. 46 Table of Contents 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 of December 31, 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 in May 2026 and $300 million principal amount of 5.0% senior notes that mature in March 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 by D.R. Horton, Inc. or any of the subsidiaries that guarantee the debt of our homebuilding, financial services or rental operations. At December 31, 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 — In April 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 at December 31, 2022, and the authorization has no expiration date. Issuance of Common Stock — During the three months ended December 31, 2022, there were no shares of common stock issued under Forestar’s ATM program. At December 31, 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 ATM program. Capital Resources - Financial Services Cash and Cash Equivalents — At December 31, 2022, cash and cash equivalents of our financial services segment totaled $198.4 million. Mortgage Repurchase Facility — Our mortgage subsidiary, DHI Mortgage, has a mortgage repurchase facility that provides financing and liquidity to DHI Mortgage by facilitating purchase transactions in which DHI 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 at December 31, 2022 was $1.8 billion, and its maturity date is February 17, 2023. DHI Mortgage expects to renew and extend the maturity date of the facility. As of December 31, 2022, $1.8 billion of mortgage loans held for sale with a collateral value of $1.7 billion were pledged under the mortgage repurchase facility. As a result of advance paydowns totaling $526.3 million, DHI Mortgage had an obligation of $1.2 billion outstanding under the mortgage repurchase facility at December 31, 2022 at a 6.0% annual interest rate. The mortgage repurchase facility is not guaranteed by D.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. At December 31, 2022, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility. 47 Table of Contents 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 During the first quarter, we continued to increase the investment in our rental operations. The inventory in our rental segment totaled $2.9 billion at December 31, 2022 compared to $2.6 billion at September 30, 2022 and $1.2 billion at December 31, 2021. Cash and Cash Equivalents — At December 31, 2022, cash and cash equivalents of our rental segment totaled $111.4 million. Bank Credit Facility — In March 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. DRH Rental utilized the accordion feature to obtain additional commitments, which increased the size of the facility to $1.025 billion at December 31, 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. 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 is March 4, 2026. Borrowings and repayments under the facility totaled $300 million each during the three months ended December 31, 2022. At December 31, 2022, there were $800 million of borrowings outstanding at a 6.2% annual interest rate and no letters of credit issued under the facility, resulting in available capacity of $225 million. 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. At December 31, 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 by D.R. Horton, Inc. or any of the subsidiaries that guarantee the debt of our homebuilding, Forestar or financial services operations. Operating Cash Flow Activities In the three months ended December 31, 2022, net cash provided by operating activities was $829.1 million compared to $174.1 million of cash used in operating activities in the prior year period. Cash provided by operating activities in the current year period primarily consisted of $493.1 million, $313.9 million and $49.4 million of cash provided by our financial services, homebuilding and rental segments, respectively, partially offset by $49.8 million of cash used in our Forestar segment. Cash provided by a decrease in construction in progress and finished home inventory was $320.7 million in the current year period compared to cash used to increase construction in progress and finished home inventory of $1.0 billion in the prior year period, reflecting a decrease in our homes in inventory in the current period. Cash used to increase residential land and lots was $637.5 million in the current year period compared to $340.7 million in the prior year period. Of these amounts, $49.9 million and $55.5 million, respectively, related to Forestar. 48 Table of Contents Investing Cash Flow Activities In the three months ended December 31, 2022, net cash used in investing activities was $142.9 million compared to $26.5 million in the prior year period. In the current year period, uses of cash included the acquisition of the homebuilding operations of Riggins Custom Homes whereby $97.1 million of the purchase price was paid in the current year period, and purchases of property and equipment totaling $47.5 million. In the prior year period, uses of cash included purchases of property and equipment totaling $30.9 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. During the three months ended December 31, 2022, net cash used in financing activities was $646.6 million, consisting primarily of net payments on our mortgage repurchase facility of $404.4 million, cash used to repurchase shares of our common stock of $118.1 million and payment of cash dividends totaling $86.1 million. During the three months ended December 31, 2021, net cash used in financing activities was $572.0 million, consisting primarily of cash used to repurchase shares of our common stock of $303.8 million, net payments of $234.6 million on our mortgage repurchase facility and payment of cash dividends totaling $80.1 million. During the three months ended December 31, 2022, our Board of Directors approved a quarterly cash dividend of $0.25 per common share, which was paid on December 12, 2022 to stockholders of record on December 2, 2022. In January 2023, our Board of Directors approved a quarterly cash dividend of $0.25 per common share, payable on February 14, 2023 to stockholders of record on February 7, 2023. Cash dividends of $0.225 per common share were approved and paid in each quarter of fiscal 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. 49 Table of Contents SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION As of December 31, 2022, D.R. Horton, Inc. had $2.8 billion principal amount of homebuilding senior notes outstanding due through October 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 of D.R. Horton, Inc. (Guarantors or Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by D.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. 50 Table of Contents The following tables present summarized financial information for D.R. Horton, Inc. and the Guarantor Subsidiaries on a combined basis after intercompany transactions and balances have been eliminated among D.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 December 31, 2022 September 30, 2022 (In millions) Assets Cash $ 1,972.0 $ 1,974.6 Inventories 18,376.9 18,096.5 Amount due from Non-Guarantor Subsidiaries 1,072.0 1,034.9 Total assets 24,601.7 24,001.0 Liabilities & Stockholders’ Equity Notes payable $ 2,874.5 $ 2,878.3 Total liabilities 6,312.0 6,345.8 Stockholders’ equity 18,289.7 17,655.2 Summarized Statement of Operations Data Three Months Ended December 31, 2022 Year Ended September 30, 2022 (In millions) Revenues $ 6,734.5 $ 31,890.0 Cost of sales 5,129.1 22,794.1 Selling, general and administrative expense 514.9 2,128.5 Income before income taxes 1,093.5 6,946.0 Net income 837.4 5,372.7 51 Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES As disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2022, our most critical accounting policies relate to revenue recognition, inventories and cost of sales, warranty and legal claims and insurance. Since September 30, 2022, there have been no significant changes to those critical accounting policies. As disclosed in our critical accounting policies in our Form 10-K for the fiscal year ended September 30, 2022, our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims. At December 31, 2022 and September 30, 2022, we had reserves for approximately 570 and 560 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During the three months ended December 31, 2022, we established reserves for approximately 60 new construction defect claims and resolved 50 construction defect claims for a total cost of $4.6 million. At December 31, 2021 and September 30, 2021, we had reserves for approximately 410 and 380 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During the three months ended December 31, 2021, we established reserves for approximately 70 new construction defect claims and resolved 40 construction defect claims for a total cost of $4.3 million. 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. 52 Table of Contents 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 our annual report on Form 10-K for the fiscal year ended September 30, 2022, including the section entitled “Risk Factors,” which is filed with the SEC. 53 Table of Contents