01—Abstract
Summary
Summary of the 10-K filed January 25, 2018. Cited figures are marked; the original filing is the authoritative source.
Lennar Corporation (LEN) reported fiscal 2017 (year ended November 30, 2017) results in this annual report filed January 2018.
Homebuilding is the core business, with revenues of $11.2 billiona, about 89% of consolidated revenues of $12.65 billion. Net earnings attributable to Lennar were $810.5 million, or $3.38 per diluted share, down from $911.8 million, or $3.86 per diluted share, in 2016. Home deliveries rose to 29,394 from 26,563, and the average sales price increased to $376,000 from $361,000.
Gross margin on home sales declined to 22.1% from 23.0%, mainly due to higher construction and land costs per home. Results were reduced by a $140 millionb loss due to litigation over a 2005 Maryland land purchase contract. The pending merger with CalAtlantic Group, Inc. is the central strategic event.
Lennar expects to issue about 83.8 million Class A and 1.7 million Class B shares and pay CalAtlantic stockholders about $1.16 billionc in cash, and the company says the deal will make it the largest U.S. homebuilder by revenue. The filing states that Lennar's consolidated homebuilding debt to total capital, net of cash, of 34.4% at November 30, 2017 would rise to a pro forma 45.5% after the merger, and that it expects to return to its pre-merger ratio by the end of fiscal 2019. Lennar also estimates the merger would add about $3.4 billion of goodwill and that it must raise and refinance substantial debt during fiscal 2018.
Other segments are Lennar Financial Services, which reported operating earnings of $155.5 milliond, Rialto, which posted an operating loss of $22.5 million, and Lennar Multifamily, with operating earnings of $73.4 million. Management expects 32,000 to 32,500 home deliveries in fiscal 2018 excluding the merger, and it expects the Tax Cuts and Jobs Act to cut its 2018 effective tax rate from 34% to about 25%, with a one-time deferred tax asset write-down of about $70 million in the first quarter of 2018.
02—Key points
Key Highlights
- Total revenues of $12.65 billion in fiscal 2017, up from $10.95 billion in 2016; Lennar Homebuilding revenues were $11.2 billion.
- Net earnings attributable to Lennar were $810.5 million, or $3.38 per diluted share, compared with $911.8 million, or $3.86 per diluted share, in 2016.
- Gross margin on home sales was 22.1%, down from 23.0% in 2016, primarily due to higher construction and land costs per home.
- Pending CalAtlantic merger: about $1.16 billion in cash plus about 83.8 million Class A and 1.7 million Class B shares, expected to close around February 12, 2018.
- Homebuilding debt to total capital, net of cash, of 34.4% at November 30, 2017 is expected to rise to a pro forma 45.5% after the merger.
- Backlog dollar value including unconsolidated entities was $3.6 billion at November 30, 2017, up from $2.9 billion a year earlier.
- Management expects 32,000 to 32,500 home deliveries in fiscal 2018, excluding the CalAtlantic merger, and a 2018 effective tax rate of approximately 25%.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed January 25, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $12.65B$10.95B | +15.5% |
| Operating Expenses | $11.31B$9.69B | +16.7% |
| Operating Income | $1.48B$1.56B | −5.6% |
| Net Income | $810.48M$911.84M | −11.1% |
| EPS (Basic) | $3.38$4.05 | −16.5% |
| EPS (Diluted) | $3.38$3.86 | −12.4% |
| Shares Outstanding (Basic) | 237.16M223.08M | +6.3% |
| Shares Outstanding (Diluted) | 237.16M235.37M | +0.8% |
05—Questions
Frequently Asked Questions
What is the CalAtlantic merger and how will it affect Lennar's capital structure?
Lennar agreed on October 29, 2017 to merge with CalAtlantic Group, Inc. The company will pay about $1.16 billion in cash and issue shares of Class A and Class B common stock to CalAtlantic stockholders. Lennar sold $1.2 billion of senior notes in November 2017 to fund the cash portion. The filing estimates the merger will raise homebuilding debt to total capital, net of cash, from 34.4% to a pro forma 45.5%, and Lennar expects to return to its pre-merger level by the end of fiscal 2019.
Why did profitability decline in fiscal 2017 despite higher revenue?
Revenue from home sales rose 15% to $11.0 billion on higher deliveries and average prices. However, gross margin on home sales fell to 22.1% from 23.0%, mainly due to higher construction and land costs per home. Lennar also recorded a $140 million loss due to litigation over a 2005 Maryland property contract, and equity in losses from unconsolidated entities rose to $61.7 million.
What did the litigation charge relate to?
The charge related to a 2005 contract to buy property in Maryland. After the district court ordered Lennar to purchase the property and the Fourth Circuit upheld that decision, Lennar bought the property for $114 million and paid about $124 million in interest and other closing costs. The company had accrued $140 million for the litigation.
What does the filing say about the impact of the Tax Cuts and Jobs Act?
The Tax Cuts and Jobs Act, signed December 22, 2017, will reduce Lennar's effective tax rate in 2018 from 34% to approximately 25%. Lennar expects a one-time non-cash write-down of deferred tax assets of approximately $70 million in the first quarter of fiscal 2018. The filing also notes possible limits on homebuyers' deductions for mortgage interest, property taxes and state and local income taxes.
What are the key outlook points for fiscal 2018?
Management expects to deliver between 32,000 and 32,500 homes in fiscal 2018, excluding the CalAtlantic merger, and expects a one-time, non-core transaction in the first quarter of 2018 to produce a profit. Its main priority is integrating CalAtlantic, which it expects to close around February 12, 2018. Lennar also has about $2.6 billion of warehouse lines to renew or replace and $250 million of senior notes maturing in June 2018.
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