D.R. Horton, Inc. — FY2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2017; it is not a standalone fourth-quarter filing. D.R. Horton is a U.S. homebuilder operating in 79 markets across 26 states. Homebuilding generated 98% of consolidated revenue; mortgage and title services and other activities comprise the remainder.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Consolidated revenue | $14.091 billion | $12.157 billion |
| Pre-tax income | $1.602 billion | $1.354 billion |
| Net income | $1.038 billion | $886.3 million |
| Diluted EPS | $2.74 | $2.36 |
| Cash from operations | $435.1 million | $618.0 million |
| Cash, cash equivalents and marketable securities at year-end | $1.008 billion | $1.303 billion |
| Consolidated notes payable | $2.872 billion | $3.271 billion |
| Total equity | $7.748 billion | $6.793 billion |
- Homebuilding revenue was $13.742 billion, up 16%; 45,751 homes closed, up 14%, at an average closing price of $298,400, up 2%.
- Home sales gross margin was 20.0%, down 20 basis points. Homebuilding pre-tax margin improved to 10.8% from 10.7%; consolidated pre-tax margin rose to 11.4% from 11.1%.
- Financial services and other revenue was $349.5 million, up 18%; related pre-tax income was $112.8 million, up 27%.
- Inventory rose to $9.237 billion from $8.341 billion. Homebuilding debt-to-total-capital improved to 24.0% from 29.2%. The $1.275 billion revolving facility had no borrowings and approximately $1.2 billion available at year-end.
- Net cash from operations fell 30%, primarily amid greater investment in homes under construction and residential land/lots. Investing used $171.0 million and financing used $559.5 million during FY2017.
- FY2017 fourth-quarter results: revenue $4.159 billion, pre-tax income $485.5 million and net income $313.2 million; diluted EPS was $0.82.
Material changes versus prior year
- Net income increased 17% and diluted EPS increased 16%; consolidated pre-tax income rose 18%, reflecting higher home closings and improved financial-services results.
- Net sales orders increased 14% to 46,605 homes, while year-end backlog grew 8% in value to $3.726 billion (12,329 homes). Contract cancellation rate eased to 22% from 23%.
- Homebuilding SG&A declined to 8.9% of homebuilding revenue from 9.3%, reflecting overhead leverage. Conversely, home sales gross margin narrowed as warranty and construction-defect expense increased.
- Cash from operations declined despite earnings growth, as investment in construction-in-progress/finished homes and residential land/lots increased.
- Lots controlled through options rose to 124,000 from 91,600; total owned and controlled lots increased to 249,000 from 204,500.
Outlook, risks and unusual items
- Management expected slow-to-moderate housing-demand growth if the U.S. economy continued improving, with conditions varying by market. It expected gross margins to remain relatively stable based on then-current conditions, but provided no specific earnings or revenue guidance.
- Management emphasized product breadth, affordability, inventory returns, cost control, liquidity and increasing optioned-lot access. The company stated it expected to maintain homebuilding debt-to-total-capital well below its 35% long-term ceiling in FY2018.
- Forestar acquisition: on October 5, 2017, after year-end, D.R. Horton bought 75% of Forestar for $558.3 million cash. Purchase-price allocation was incomplete at the report date. The strategic aim is expanded access to finished lots under a master supply agreement.
- Debt maturities: $400 million of senior notes were due in February 2018, and management expected to refinance them. The $600 million mortgage repurchase facility, with $420 million outstanding at year-end, was due to expire February 23, 2018; management expected renewal. The company reported compliance with facility covenants.
- FY2017 inventory and land-option charges totaled $40.2 million, including $23.2 million of inventory impairments and $17.0 million of option-deposit/pre-acquisition-cost write-offs. Fourth-quarter inventory impairments were $12.8 million.
- Warranty liability was $143.7 million and legal-claim reserves were $420.6 million at year-end. Legal-contingency expense was $87.8 million in FY2017. Estimates, insurance recoveries and future construction-defect claims are uncertain and could affect earnings and liquidity.
- Regulatory matters include ongoing DOJ communications following a 2013 subpoena concerning FHA-loan underwriting and quality control; the DOJ had asserted no formal claim, penalty or fine. EPA stormwater notices at certain Southeast sites could result in additional procedures or monetary sanctions; the company did not consider a material loss reasonably possible.
- Principal risks include housing and credit-market cycles, mortgage rates and financing availability, land and inventory values, labor/material constraints, regulation, natural disasters, construction defects, debt refinancing, and mortgage-loan purchaser concentration. Three financial entities purchased approximately 84% of mortgage loans sold in FY2017; one accounted for 45%.
Investor verification priorities
- Confirm the sustainability of home-closing and order growth, margin trends, cancellation rates and backlog conversion.
- Review operating cash flow relative to rising inventory investment and the company’s liquidity after the Forestar cash purchase.
- Verify refinancing of the February 2018 senior notes and renewal of the mortgage repurchase facility, including subsequent borrowing capacity and terms.
- Assess Forestar’s purchase-price allocation, lot-supply commitments, integration and expected returns.
- Track warranty and construction-defect claims, reserve adequacy, insurance recoveries, and the status and potential cost of the DOJ and EPA matters.