Taylor Morrison(TMHC) - 2018 Q4 - Annual Report

Part I Business Taylor Morrison, a major US homebuilder and land developer, operates across nine states, offering diverse homes and financial services through its East, Central, West, and Financial Services segments, focusing on strategic growth and capital optimization - The company is one of the largest public homebuilders in the U.S., operating in Arizona, California, Colorado, Florida, Georgia, Illinois, North Carolina, South Carolina, and Texas[13][14] - Operations are managed across four reportable segments: East, Central, West, and Financial Services[14] - Recent growth includes the strategic acquisition of AV Homes, Inc. on October 2, 2018, expanding its footprint in Florida, the Carolinas, Arizona, and Texas[14] - The company's long-term strategy is built on four pillars: reinvesting in core operations, pursuing M&A growth, optimizing debt, and returning cash to shareholders[29] 2018 Highlights and Recent Developments In 2018, the company achieved significant financial and operational milestones, including $4.2 billion revenue, the AV Homes acquisition, increased home closings, and a $2.1 billion sales backlog 2018 Financial Highlights | Metric | Value | Change vs. 2017 | | :--- | :--- | :--- | | Total Revenue | $4.2 billion | +8.8% | | Home Closings Revenue | $4.1 billion | +8.3% | | Net Income | $210.5 million | +19.1% | | Diluted EPS | $1.83 | +24.5% | | Adjusted Net Income | $305.5 million | N/A | | Adjusted Diluted EPS | $2.65 | N/A | - Completed the acquisition of AV Homes for total consideration of $534.9 million on October 2, 2018[24] - Completed a holding company reorganization on October 26, 2018, to simplify its capital and tax structure[24] 2018 Operational Highlights | Metric | Value | | :--- | :--- | | Home Closings (YoY Growth) | 9.1% | | Average Sales Price | $470,000 | | Sales Order Backlog (Year-End) | $2.1 billion | | Lots Owned and Controlled (Year-End) | ~57,000 | Land and Development Strategies The company utilizes a disciplined, centralized land investment strategy, significantly increasing owned and controlled lots to 56,840 with a $2.9 billion book value by year-end 2018, largely due to 2018 acquisitions Owned and Controlled Lots by Segment (as of Dec 31) | Segment | 2018 | 2017 | | :--- | :--- | :--- | | East | 32,556 | 18,772 | | Central | 12,929 | 11,727 | | West | 11,355 | 7,313 | | Total | 56,840 | 37,812 | Book Value of Owned Lots by Development Status (as of Dec 31, 2018) | Development Status | Owned Lots | Book Value (in thousands) | | :--- | :--- | :--- | | Raw land | 9,653 | $461,387 | | Partially developed | 12,036 | $756,376 | | Finished lots | 21,975 | $1,677,527 | | Total | 43,664 | $2,895,290 | Homes in Inventory As of December 31, 2018, the company's homes in inventory increased to 6,959 units, comprising backlog, models, and units for sale, with a notable rise in completed units available Homes in Inventory by Status (as of Dec 31) | Status | 2018 | 2017 | | :--- | :--- | :--- | | Homes in Backlog | 4,158 | 3,496 | | Models | 486 | 390 | | Inventory to be Sold | 2,315 | 1,433 | | Total | 6,959 | 5,319 | - The company expects to deliver substantially all homes in its December 31, 2018 backlog during 2019[38] Financial Services The company's financial services, TMHF and Inspired Title, provide mortgage and title services to support home sales, with TMHF operating as an independent mortgage banker selling loans on the secondary market - The strategic purpose of TMHF is to use mortgage finance as a sales tool, ensure a consistent customer experience, and manage the quality and timing of the sales order backlog[62][70] - TMHF operates as an FHA Full Eagle lender and sells originated loans on the secondary market, releasing servicing rights, which minimizes long-term credit risk[63] Risk Factors The company faces substantial risks from the cyclical homebuilding market, economic conditions, operational challenges, financial constraints including debt and land impairments, and extensive regulatory and environmental compliance - The business is cyclical and highly sensitive to changes in economic conditions, including interest rates, employment levels, and consumer confidence, which can impact demand and home prices[80] - A substantial majority of homebuyers require financing; changes in mortgage availability, such as tightening standards or reduced government support (Fannie Mae, Freddie Mac, FHA), could adversely affect sales[87][88] - The company faces risks from labor shortages, increased labor costs, and reliance on subcontractors, which can cause construction delays and cost overruns[95][117] - The market value of land inventory is subject to decline, which could lead to significant impairment charges and write-downs, adversely affecting results of operations[123][124] - Extensive government regulations concerning zoning, environmental laws, and development fees can delay projects, increase costs, and limit homebuilding activities[126][131] - The company has substantial debt ($2.2 billion as of Dec 31, 2018), and restrictive covenants in its debt agreements may limit its ability to pursue business strategies[176][179] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[191] Properties The company leases its Scottsdale, Arizona corporate headquarters and approximately 34 other division offices and design centers, with land details provided in Item 1 - The corporate headquarters in Scottsdale, Arizona is leased, covering approximately 27,000 square feet with a lease expiration in April 2023[194] - The company has approximately 34 other leases for its division offices and design centers[194] Legal Proceedings The company is involved in routine legal claims, accruing liabilities when probable and estimable, and management anticipates no material adverse impact on financial results - The company is subject to litigation and regulatory inquiries common in the homebuilding, land development, and mortgage lending industries[195] - Liabilities for legal claims are accrued when a loss is probable and the amount can be reasonably estimated. Management does not currently expect pending matters to have a material adverse impact[195] Mine Safety Disclosures This item is not applicable to the company - Not applicable[196] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A Common Stock trades on the NYSE, does not pay cash dividends, and repurchased 8.5 million shares in Q4 2018 under an extended stock repurchase program - The company's Class A Common Stock trades on the New York Stock Exchange under the symbol "TMHC"[199] - The company does not currently pay cash dividends and anticipates retaining all available funds for business operations and expansion[204] - On November 21, 2018, the Board of Directors authorized an additional $100 million for the stock repurchase program and extended it through December 31, 2019[205] Share Repurchases (Q4 2018) | Period | Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | Oct 2018 | 2,862,235 | $16.25 | | Nov 2018 | 2,986,571 | $16.22 | | Dec 2018 | 2,656,021 | $16.55 | | Total Q4 | 8,504,827 | N/A | Selected Financial Data Over five years, the company demonstrated consistent growth in revenue and home closings, with total revenue reaching $4.2 billion and assets $5.3 billion by 2018, despite fluctuating net income due to one-time events Selected Financial Data (2014-2018) | (in thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $4,227,393 | $3,885,290 | $3,550,029 | $2,976,820 | $2,708,432 | | Net Income | $210,480 | $176,650 | $206,563 | $229,045 | $267,501 | | Diluted EPS | $1.83 | $1.47 | $1.69 | $1.85 | $2.17 | | Total Assets | $5,264,441 | $4,325,893 | $4,220,926 | $4,122,447 | $4,111,798 | | Total Debt | $2,209,596 | $1,498,062 | $1,586,533 | $1,668,425 | $1,715,791 | Selected Operating Data (2014-2018) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Home Closings (units) | 8,760 | 8,032 | 7,369 | 6,311 | 5,642 | | Net Sales Orders (units) | 8,400 | 8,397 | 7,504 | 6,681 | 5,728 | | Backlog Value (end of period, in thousands) | $2,079,569 | $1,702,071 | $1,531,910 | $1,392,973 | $1,099,767 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong 2018 performance with $4.2 billion revenue and increased home closings, noting impacts from the AV Homes acquisition, reorganization, and a warranty charge, while highlighting strong liquidity and increased debt for strategic investments - The housing market continues to be driven by positive factors like low unemployment and strong home values, but challenges include underemployment and interest rate uncertainty[216] - Comparability of results is impacted by several significant 2018 events: the AV Homes acquisition, corporate reorganization costs ($50.9 million), a warranty charge ($39.3 million), and purchase accounting adjustments[219][220][221][222] - The 2017 results were significantly impacted by the Tax Cuts and Jobs Act, which resulted in a one-time tax expense of $61.0 million[223][225] Adjusted vs. GAAP Net Income (2018) | (in thousands) | GAAP | Adjusted (Non-GAAP) | | :--- | :--- | :--- | | Income before income taxes | $273,516 | $369,105 | | Net income available to TMHC | $206,364 | $299,760 | | Diluted EPS | $1.83 | $2.65 | Results of Operations (2018 vs 2017) In 2018, total revenue increased 8.8% to $4.2 billion, driven by higher home closings, while sales order backlog grew 22.2% to $2.1 billion, and gross margin declined to 17.1% due to a warranty charge and other factors Net Sales Orders (2018 vs 2017) | Metric | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Net Homes Sold | 8,400 | 8,397 | 0.0% | | Sales Value (in thousands) | $4,096,021 | $3,929,351 | +4.2% | | Average Selling Price (in thousands) | $488 | $468 | +4.3% | Home Closings Revenue (2018 vs 2017) | Metric | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Homes Closed | 8,760 | 8,032 | +9.1% | | Revenue (in thousands) | $4,115,216 | $3,799,061 | +8.3% | | Average Selling Price (in thousands) | $470 | $473 | -0.6% | Home Closings Gross Margin % by Segment (2018 vs 2017) | Segment | 2018 | 2017 | | :--- | :--- | :--- | | East | 17.0% | 20.6% | | Central | 14.0% | 18.4% | | West | 19.9% | 16.7% | | Total | 17.1% | 18.6% | - The decrease in the Central region's gross margin was primarily driven by a significant warranty charge recorded in the fourth quarter of 2018[278] Results of Operations (2017 vs 2016) In 2017, total revenue grew 9.4% to $3.9 billion, with increased home closings and improved gross margin to 18.6%, though net income was impacted by a $61.0 million Tax Act expense, raising the effective tax rate to 50.3% Net Sales Orders (2017 vs 2016) | Metric | 2017 | 2016 | % Change | | :--- | :--- | :--- | :--- | | Net Homes Sold | 8,397 | 7,504 | +11.9% | | Sales Value (in thousands) | $3,929,351 | $3,481,752 | +12.9% | | Average Selling Price (in thousands) | $468 | $464 | +0.9% | Home Closings Revenue (2017 vs 2016) | Metric | 2017 | 2016 | % Change | | :--- | :--- | :--- | :--- | | Homes Closed | 8,032 | 7,369 | +9.0% | | Revenue (in thousands) | $3,799,061 | $3,425,521 | +10.9% | | Average Selling Price (in thousands) | $473 | $465 | +1.7% | Home Closings Gross Margin % by Segment (2017 vs 2016) | Segment | 2017 | 2016 | | :--- | :--- | :--- | | East | 20.6% | 20.2% | | Central | 18.4% | 18.0% | | West | 16.7% | 16.6% | | Total | 18.6% | 18.2% | - The effective tax rate for 2017 was 50.3% compared to 34.3% in 2016, primarily due to a $57.4 million charge for revaluing deferred tax assets and a $3.6 million charge for mandatory repatriation of foreign earnings under the Tax Act[321][322] Liquidity and Capital Resources The company's liquidity decreased to $867.3 million by year-end 2018 due to acquisitions and share repurchases, with total debt at $2.2 billion, including $1.65 billion in senior notes, and a net homebuilding debt to capitalization ratio of 41.9% Liquidity Summary (as of Dec 31) | (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Total Cash | $329,645 | $573,925 | | Revolving Credit Facility Availability | $537,685 | $452,874 | | Total Liquidity | $867,330 | $1,026,799 | - Net cash provided by operating activities decreased to $135.6 million in 2018 from $386.2 million in 2017, mainly due to increased spending on real estate inventory[332] - Net cash used in financing activities was $219.5 million in 2018, primarily for repurchases of equity from former principal equityholders and common stock, partially offset by borrowings for the AV Homes acquisition[335] Senior Notes Outstanding (as of Dec 31, 2018) | Series | Principal Amount (in millions) | Interest Rate | Maturity Date | | :--- | :--- | :--- | :--- | | 2021 Notes | $550.0 | 5.250% | April 2021 | | 2022 Notes | $400.0 | 6.625% | May 2022 | | 2023 Notes | $350.0 | 5.875% | April 2023 | | 2024 Notes | $350.0 | 5.625% | March 2024 | | Total | $1,650.0 | | | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity, with 85% fixed-rate debt, and a 1% rate increase would raise annual interest expense by $3.3 million on variable-rate debt - The company's operations are sensitive to interest rate changes. At December 31, 2018, 85.0% of debt was fixed rate and 15.0% was variable rate[372] - For variable rate debt, a hypothetical 1% increase in interest rates would increase annual interest incurred by approximately $3.3 million, based on the debt balance at December 31, 2018[377] - The mortgage loan origination business (TMHF) is not materially exposed to interest rate risk because loans are hedged or sold to investors with locked-in interest rates at the time of origination[373] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2018, including balance sheets, income statements, and cash flows, along with Deloitte & Touche LLP's unqualified audit report - The Report of Independent Registered Public Accounting Firm, Deloitte & Touche LLP, provides an unqualified opinion on the financial statements, stating they are presented fairly in all material respects in conformity with U.S. GAAP[381] Key Balance Sheet Items (as of Dec 31) | (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Total Assets | $5,264,441 | $4,325,893 | | Total Liabilities | $2,845,706 | $1,979,348 | | Total Stockholders' Equity | $2,418,735 | $2,346,545 | Key Income Statement Items (Year Ended Dec 31) | (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Total Revenue | $4,227,393 | $3,885,290 | | Gross Margin | $738,193 | $738,929 | | Income Before Income Taxes | $273,516 | $355,656 | | Net Income Available to TMHC | $206,364 | $91,220 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None[599] Controls and Procedures Management and independent auditors concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, excluding the recently acquired AV Homes - Management concluded that disclosure controls and procedures were effective as of December 31, 2018[600][601] - Management concluded that internal control over financial reporting was effective as of December 31, 2018, based on the COSO 2013 framework[604] - The assessment of internal controls excluded the recently acquired AV Homes, which represented 18.2% of consolidated total assets and 5.5% of consolidated homebuilding revenues for 2018[604][608] - The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[606] Other Information The company reports no other information for this item - None[615] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters Information for Items 10-14, covering directors, executive compensation, security ownership, and related transactions, is incorporated by reference from the company's 2019 definitive proxy statement - Information for Item 10 (Directors, Executive Officers and Corporate Governance) is incorporated by reference from the 2019 Proxy Statement[617] - Information for Item 11 (Executive Compensation) is incorporated by reference from the 2019 Proxy Statement[618] - Information for Item 12 (Security Ownership), Item 13 (Certain Relationships and Related Transactions), and Item 14 (Principal Accounting Fees and Services) is incorporated by reference from the 2019 Proxy Statement[621][622][623] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including key agreements, corporate documents, and required CEO and CFO certifications - Lists key agreements filed as exhibits, including the merger agreement for the AV Homes acquisition and indentures for the company's various series of Senior Notes[625] - Includes required certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[631] Form 10-K Summary The company provides no summary for this item - None[635]