D.R. Horton, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015; filed November 18, 2015. D.R. Horton is a U.S. homebuilder operating in 79 markets across 27 states, with mortgage and title services. Homebuilding generated 98% of consolidated revenue.
Financial and operating highlights
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $10.824 billion | $8.025 billion |
| Homebuilding revenue | $10.559 billion | $7.859 billion |
| Net income | $750.7 million | $533.5 million |
| Diluted EPS | $2.03 | $1.50 |
| Cash from (used in) operations | $700.4 million | ($661.4 million) |
| Cash and marketable securities | $1.384 billion | $661.8 million |
| Total debt | $3.812 billion | $3.666 billion |
| Total equity | $5.895 billion | $5.120 billion |
- Consolidated pre-tax income rose 38% to $1.123 billion; net income increased 41%. Home sales revenue grew 34%, reflecting 28% more closings (36,648) and a 5% increase in average closing price to $285,700.
- Home sales gross margin declined 150 basis points to 19.8%; total homebuilding gross margin was 19.2%, versus 20.2%. Management cited home costs rising faster than selling prices and higher warranty/construction-defect costs.
- Homebuilding SG&A fell to 9.6% of homebuilding revenue from 10.6%, benefiting from operating leverage. Financial services revenue rose 59% to $265.0 million and pre-tax income increased 131% to $105.1 million.
- Net sales orders rose 26% to 37,380 homes; backlog increased 8% to 10,662 homes, valued at $3.147 billion. The cancellation rate remained 23% of gross orders.
- Homebuilding debt was $3.334 billion. Gross homebuilding debt-to-capital improved to 36.1% from 39.2%; net debt-to-capital improved to 25.1% from 34.3%. At year-end, the $975 million revolving credit facility had no borrowings and $865.1 million available capacity after letters of credit.
Changes, outlook and notable items
- Operating cash flow swung from use of $661.4 million in FY2014 to generation of $700.4 million in FY2015, mainly alongside higher earnings and reduced cash investment in construction-in-progress and finished homes.
- Inventory and land-option charges were $60.3 million, down from $85.2 million; this included $44.9 million in inventory impairments and $15.4 million of option-deposit and pre-acquisition-cost write-offs. A $9.8 million goodwill impairment was recorded for the Huntsville operation.
- Management expected FY2016 revenue and profitability to increase, but at a lower growth rate than FY2015, and land and lot inventories to be relatively consistent to slightly higher than FY2015 average levels. It described housing demand as stable to moderately improved but uneven by market.
- Management identified affordability, mortgage rates and lending standards, local economic conditions, land and construction costs, labor/material availability, inventory impairments, warranty and construction-defect claims, regulation, and access to credit as important risks. It expected to renew the mortgage repurchase facility, which matured in February 2016.
- Debt principal of approximately $1.0 billion was scheduled to mature in FY2016, including $542.9 million of senior notes and the mortgage repurchase facility balance. Management stated that available cash and credit facilities were sufficient for near-term needs; renewal and refinancing remain relevant to liquidity.
- Legal claims reserves were $451.0 million, largely for construction-defect matters, with $126.5 million of related insurance receivables. EPA stormwater notices in the Southeast were at an early stage; potential sanctions were not expected by the company to be material, but costs could not be reasonably estimated and no liability was recorded.
- In September 2015, the company sold ranch property and related assets to Chairman Donald R. Horton for $56.0 million cash and recognized a $2.3 million gain. The board approved the transaction with Mr. Horton abstaining.
- The fourth quarter included the $9.8 million goodwill impairment and a $17.5 million income-tax benefit from reducing the deferred-tax valuation allowance. PwC gave an unqualified opinion on the financial statements and internal controls; management reported effective controls.
Important facts for investors to verify
- Whether backlog converts to closings as expected, given contract contingencies and the 23% cancellation rate.
- Whether homebuilding margins stabilize or continue to face pressure from construction costs, pricing, incentives and warranty expenses.
- Liquidity and refinancing plans for FY2016 maturities, and renewal terms for the mortgage repurchase facility.
- Future inventory impairment exposure, particularly in markets where land is being sold or community performance is weak.
- Adequacy of construction-defect and warranty reserves, insurance recoveries, and the eventual outcome of the EPA stormwater matter.
- How much financial-services earnings growth depends on mortgage sale execution, recourse-reserve releases and a concentrated group of loan purchasers.