D.R. Horton, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. This is an annual filing; fiscal Q4 ended September 30, 2018. Amounts are U.S. dollars unless noted.
Business context
D.R. Horton was the largest U.S. homebuilder by homes closed, operating in 81 markets across 27 states. Homebuilding accounted for 97% of consolidated revenue. The company closed 51,857 homes at an average price of $298,900. It acquired a 75% controlling interest in residential lot developer Forestar in October 2017 and consolidated its results from the acquisition date.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $16.07 billion | $14.09 billion |
| Income before tax | $2.06 billion | $1.60 billion |
| Net income attributable to D.R. Horton | $1.46 billion | $1.04 billion |
| Diluted EPS | $3.81 | $2.74 |
| Net cash provided by operating activities | $545.2 million | $440.2 million |
| Cash and cash equivalents at year-end | $1.47 billion | $1.01 billion |
| Notes payable at year-end | $3.20 billion | $2.87 billion |
| Debt to total capital | 26.3% | 27.0% |
Margins and operating metrics: Consolidated pre-tax margin rose to 12.8% from 11.4%. Home sales gross margin increased 130 basis points to 21.3%; homebuilding pre-tax margin improved to 12.5% from 10.8%. Homebuilding return on inventory reached 20.2%, versus 16.6%.
Fiscal Q4: Revenue was $4.51 billion, pre-tax income $607.7 million, net income attributable to D.R. Horton $466.1 million, and diluted EPS $1.22.
Liquidity and debt: The homebuilding revolver had $1.325 billion of capacity, no borrowings outstanding and approximately $1.2 billion available after letters of credit. The company reported $1.1 billion of homebuilding cash. It had $2.45 billion of homebuilding notes and $637.7 million outstanding under DHI Mortgage’s repurchase facility. Consolidated principal maturities included $1.1 billion in FY2019, including $500 million of senior notes and the mortgage facility balance. Management said available cash, facilities and capital-market access were expected to cover near-term needs.
Changes versus prior year
- Revenue increased 14%; homes closed rose 13% to 51,857. Net sales orders increased 13% to 52,740 homes, while backlog grew 8% to 13,371 homes valued at $4.0 billion. Average backlog price was $301,300, slightly below the prior year.
- Net income attributable to D.R. Horton rose 41% and diluted EPS increased 39%. Improved homebuilding gross margin and higher closing volume were key contributors.
- Operating cash flow increased to $545.2 million, though it remained below net income; homebuilding operations provided $1.0 billion, partly offset by cash used in Forestar and financial services.
- Homebuilding lots controlled through options rose to 164,200 from 124,000; optioned lots represented 57% of the owned-and-controlled position.
- Financial services revenue grew 7% to $375.3 million, but pre-tax income declined 5% to $117.8 million, with margin falling to 31.4% from 35.6%, primarily amid mortgage pricing pressure and higher operating costs.
Outlook, risks and unusual items
- Management described demand as strong in most markets, especially for affordable homes, but noted recent moderation, higher mortgage rates and weaker affordability, particularly at higher price points. It expected market conditions to vary by geography; no specific FY2019 earnings or revenue guidance was provided.
- Management’s strategy emphasizes affordability, pricing and incentives responsive to local conditions, controlled inventory and debt, increased use of optioned lots, and growth through Forestar. It targeted homebuilding debt to total capital below 35% over the long term and expected it to remain significantly below that level in FY2019.
- The Tax Cuts and Jobs Act caused a $108.7 million deferred-tax remeasurement charge in FY2018. The reported effective tax rate was 29.0%, compared with 35.2% in FY2017; the 2018 rate also reflected other tax benefits and adjustments.
- FY2018 homebuilding inventory and land-option charges totaled $48.8 million, including a $24.5 million settlement of a land-transaction dispute. Consolidated inventory impairment charges were $11.8 million. Forestar generated $48.7 million of pre-tax income during the period included after acquisition.
- Key risks include housing cyclicality, interest rates and affordability, land and inventory valuation, labor and material costs, mortgage financing and loan-sale counterparties, warranty/construction-defect claims, regulation, and access to credit. DHI Mortgage’s repurchase facility was due to mature in February 2019; management expected renewal.
- Contingencies include an ongoing DOJ inquiry into historical FHA loan underwriting and quality-control processes, with no formal claim amount, penalty or fine asserted to date. The company also disclosed EPA stormwater notices and an October 2018 agreement in principle to settle an alleged wetlands violation for an expected $267,000 penalty.
- After year-end, the company acquired Westport Homes for approximately $190 million in cash. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether higher mortgage rates and affordability constraints affect sales pace, pricing, incentives, cancellations and backlog conversions.
- Renewal terms and capacity of DHI Mortgage’s repurchase facility, and refinancing or repayment of FY2019 maturities.
- Cash generation relative to reported earnings, particularly inventory investment and Forestar’s operating cash use.
- Whether improved homebuilding margins persist as land, labor and construction costs change; monitor inventory impairments and warranty claims.
- Developments in the DOJ mortgage inquiry and EPA matters, and adequacy of reserves for construction-defect and other legal claims.
- Forestar’s lot-development returns, capital requirements and related-party lot supply to D.R. Horton; also assess integration and performance of the Westport acquisition.