D.R. Horton, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
D.R. Horton is a U.S. homebuilder operating in 90 markets across 29 states. Homebuilding generated 97% of consolidated revenue. Other operations include majority-owned lot developer Forestar, mortgage and title services, and rental properties.
Financial and operating results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $17.59 billion | $16.07 billion |
| Income before tax | $2.13 billion | $2.06 billion |
| Net income attributable to D.R. Horton | $1.62 billion | $1.46 billion |
| Diluted EPS | $4.29 | $3.81 |
| Net cash provided by operations | $892.1 million | $545.2 million |
| Cash and cash equivalents at year-end | $1.49 billion | $1.47 billion |
| Notes payable at year-end | $3.40 billion | $3.20 billion |
| Total inventory at year-end | $11.28 billion | $10.40 billion |
- Consolidated pre-tax margin was 12.1%, down from 12.8%; homebuilding pre-tax margin fell to 11.2% from 12.5%. Home sales gross margin declined to 20.2% from 21.3%.
- Closed 56,975 homes, up 10%; homebuilding revenue rose 9% to $17.0 billion. Average closing price was $297,100, down slightly.
- Backlog was 13,613 homes valued at $4.14 billion, up 2% in units and 3% in value. Contract cancellations were 21% of gross orders versus 22%.
- Homebuilding operating cash flow was $1.4 billion, up from $1.0 billion; consolidated operating cash flow increased to $892.1 million. Forestar and financial services used $395.7 million and $150.2 million, respectively.
- Debt to total capital improved to 25.3% from 26.3%; homebuilding debt to total capital improved to 17.0% from 21.4%.
- Financial services pre-tax income rose 41% to $166.3 million. Forestar revenue rose to $428.3 million, while its pre-tax income declined to $45.7 million from $48.7 million.
- Fourth quarter: Revenue was $5.04 billion, pre-tax income $660.1 million, net income attributable to D.R. Horton $505.3 million, and diluted EPS $1.35. In FY2018 Q4, the respective figures were $4.51 billion, $607.7 million, $466.1 million, and $1.22.
Material changes and capital allocation
- Fiscal 2019 home closings and orders increased, but margins and homebuilding return on inventory weakened; ROI was 18.1% versus 20.2%.
- Mortgage rates declined later in the year after earlier increases. Management reported stronger demand and reduced incentives later in FY2019 following softer demand in late FY2018 and early FY2019.
- Forestar expanded its lot position and sold 3,728 lots to D.R. Horton. D.R. Horton’s ownership of Forestar fell from 75% to approximately 66% after Forestar’s September 2019 equity offering.
- Acquired Westport Homes, Classic Builders, and Terramor Homes for $325.9 million. The acquisitions added inventory, lots, purchase-contract positions, and backlog.
- Repurchased 11.9 million D.R. Horton shares for $479.8 million and paid $223.4 million in dividends. A November 2019 dividend of $0.175 per share was approved.
Liquidity, outlook, risks, and unusual items
- At year-end, the homebuilding revolver had no borrowings and about $1.2 billion available capacity. In October 2019, its capacity was increased to $1.59 billion, with an accordion option up to $2.5 billion, and maturity extended to October 2024.
- Contractual debt principal due within one year was $1.61 billion, including $500 million of homebuilding notes, $888.9 million on the mortgage repurchase facility, and Forestar’s $118.9 million convertible notes. The company expected to renew the mortgage facility, which was due to mature in February 2020. In October 2019, D.R. Horton issued $500 million of 2.5% notes due 2024.
- Management cited solid economic fundamentals and limited affordable-home supply, and expected demand to vary by market. Results remain exposed to affordability, mortgage rates and lending standards, employment, competition, land and construction costs, labor and material availability, and economic conditions. No specific numerical earnings or revenue guidance was provided.
- FY2019 inventory and land-option charges were $54.0 million, including $25.7 million of impairment charges and $28.3 million of land-contract deposit and pre-acquisition cost write-offs. The filing describes uncertain valuation assumptions and potential further impairments if markets weaken.
- Legal claims reserves were $434.7 million, primarily for construction-defect matters; warranty liabilities were $247.3 million. The auditor identified construction-defect reserve estimation as a critical audit matter. A separate EPA wetlands settlement resulted in a $267,000 penalty; another matter could involve an approximately $350,000 penalty. The DOJ’s inquiry into historical FHA loan underwriting remained ongoing, with no formal claim amount, penalty, or fine asserted.
- A related-party land transaction involved a $77.5 million purchase-contract assignment to an entity owned by the Chairman’s adult sons; D.R. Horton consolidated the entity and purchased the land for $84.2 million in October 2019. The filing says independent directors reviewed and approved the transactions.
- The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal controls were effective.
Important facts for investors to verify
- Whether lower homebuilding margins and ROI stabilize as pricing, incentives, and construction costs evolve.
- Backlog conversion, cancellation trends, and demand sensitivity to mortgage rates and affordability.
- Liquidity and refinancing execution, especially the mortgage repurchase facility renewal and near-term maturities; distinguish subsidiary debt and cash from parent/homebuilding resources.
- Returns and funding needs from Forestar’s rapid lot-pipeline expansion, including intercompany lot purchases and the effect of D.R. Horton’s reduced ownership.
- Changes in construction-defect reserves, warranty costs, insurance recoveries, and outcomes of the DOJ and environmental matters.
- Performance of acquired businesses and the economics and governance of the related-party land transaction.