D.R. Horton, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. Although the request references 2016 Q4, this filing is an annual report; fourth-quarter figures are noted separately below. D.R. Horton is a U.S. homebuilder operating in 78 markets across 26 states. Homebuilding generated 98% of consolidated revenue.
Financial and operating performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Consolidated revenue | $12.16 billion | $10.82 billion | Up 12% |
| Homebuilding revenue | $11.86 billion | $10.56 billion | Up 12% |
| Homes closed | 40,309 | 36,648 | Up 10% |
| Average closing price | $292,300 | $285,700 | Up 2% |
| Home sales gross margin | 20.2% | 19.8% | Up 40 basis points |
| Consolidated pre-tax income | $1.354 billion | $1.123 billion | Up 20% |
| Net income | $886.3 million | $750.7 million | Up 18% |
| Diluted EPS | $2.36 | $2.03 | Up 16% |
| Cash from operations | $618.0 million | $700.4 million | Down from prior year |
Consolidated pre-tax margin rose to 11.1% from 10.4%; homebuilding pre-tax margin increased to 10.7% from 9.6%. Net margin was approximately 7.3%. Homebuilding return on inventory improved to 15.4% from 12.8%. Financial services and other revenue rose 12% to $295.6 million, while its pre-tax income declined to $89.1 million from $105.1 million.
At September 30, 2016, cash and marketable securities were $1.303 billion, total assets $11.56 billion, total equity $6.793 billion, and consolidated notes payable $3.271 billion, including $473.0 million under the mortgage repurchase facility. Homebuilding debt was $2.798 billion, down from $3.334 billion; homebuilding debt to total capital improved to 29.2% from 36.1%. The $975 million revolving facility had no borrowings and $881.5 million of available capacity after letters of credit. Inventory was $8.341 billion, up from $7.807 billion.
Cash from operations remained positive but fell year over year, principally as more cash was invested in homes under construction. Investing cash use was $112.6 million and financing cash use was $586.0 million, including $549.7 million of note repayments and $118.7 million in dividends. The company repaid notes due in January and April 2016; $350 million of senior notes matured in May 2017.
Fourth-quarter results
Fiscal Q4 revenue was $3.741 billion, pre-tax income $433.0 million, net income $283.6 million, and diluted EPS $0.75. Q4 included a $7.2 million goodwill impairment charge.
Changes, outlook and material matters
- Net sales orders increased 9% to 40,814 homes, with value up 12% to $12.0 billion. Backlog rose 8% by homes to 11,475 and 9% by value to $3.438 billion; average backlog price was $299,600. Cancellations were 23% of gross orders, unchanged from FY2015.
- Management described demand as stable to moderately improved across most markets, with meaningful regional variation. It expected slow to moderate housing-demand growth if the U.S. economy continued to improve, and expected gross margins to remain relatively stable under then-current conditions. No specific FY2017 earnings or revenue guidance was provided.
- Management emphasized expanding affordable entry-level offerings and introducing active-adult homes, while managing pricing, incentives, sales pace, inventory, liquidity and debt. The Wilson Parker Homes acquisition closed in September 2016 for $91.9 million; it added operations and land positions in several southeastern markets and Phoenix.
- Inventory and land-option charges were $31.4 million, down from $60.3 million. Inventory impairment charges were $20.3 million; the company also wrote off $11.1 million of deposits and pre-acquisition costs on options it expected to terminate. Goodwill impairment was $7.2 million, associated with Huntsville.
- Warranty liability was $104.4 million and legal-claim reserves were $423.5 million. Management cautioned that claims and insurance recoveries are uncertain; a 10% increase in claim frequency and average cost assumptions would increase estimated net expense by $30.9 million.
- The DOJ investigation concerning underwriting and documentation of certain prior FHA loans remained ongoing; no claims or potential penalty amount had been asserted. EPA stormwater Notices of Violation at certain Southeast sites could lead to compliance requirements and sanctions; the company said it could not reasonably estimate the eventual costs.
- Key risks include housing-cycle and local-market weakness, higher mortgage rates or tighter credit, land and inventory impairments, construction-cost and labor constraints, warranty and defect claims, regulation, and access to financing. The mortgage repurchase facility was due for renewal in February 2017; management expected renewal, but gave no assurance.
Important facts for investors to verify
- Whether order growth, backlog conversion and cancellation rates sustain the FY2016 improvement, particularly across regions.
- Whether homebuilding margins hold as costs, incentives and selling prices change, and whether the increased unsold-home inventory is absorbed.
- Cash generation after inventory investment, and the refinancing or repayment plan for the $831.6 million of consolidated debt maturities before FY2018, including the $350 million May 2017 senior notes.
- Renewal terms and capacity of the mortgage repurchase facility, which had $473.0 million outstanding and a February 2017 maturity.
- Actual outcomes and reserve adequacy for construction-defect and warranty claims, the DOJ FHA-loan inquiry, and EPA stormwater matters.
- Performance and integration of the Wilson Parker acquisition, and any future inventory impairments or option-deposit write-offs.