DHI

Business Context and Reporting Period

Company: D.R. Horton, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2000
Business Overview: D.R. Horton is a national homebuilder operating in 23 states and 39 markets across the Mid-Atlantic, Midwest, Southeast, Southwest, and West regions. The company constructs and sells single-family homes, primarily for first-time and move-up buyers, and operates a financial services segment providing mortgage and title services. Fiscal 2000 marked the company's 23rd consecutive year of growth in revenues and profitability.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 15.8% driven by a 15.6% increase in homebuilding revenues and a 32.9% increase in financial services revenues. The average selling price of homes closed rose 9.9% to $182,600.
• Profitability: Net income grew 20% to a record $191.7 million. The effective income tax rate decreased to 38.0% from 39.4% in 1999.
• Operational Efficiency: Cost of sales as a percentage of home sales revenues declined slightly to 81.4% from 81.6%, aided by increased prices and national purchasing savings. SG&A expenses increased to 10.0% of revenues from 9.9%.
• Capital Structure: The company reduced its leverage ratio, with homebuilding debt to total capitalization dropping to 56.2%. Stockholders' equity increased by 22%.
• Debt Issuances: To support growth and reduce reliance on revolving credit, the company issued $200 million of 10.5% Senior Notes (due 2005) and $150 million of 9.75% Senior Subordinated Notes (due 2010).

Guidance, Outlook, and Risks

Management Commentary: Management anticipates a 24th consecutive year of growth and profitability for fiscal 2001. The company believes it is well-positioned due to its solid balance sheet, reduced leverage, and record sales backlog. Management expressed disappointment that the stock price (trailing P/E of 6.7) did not reflect the company's growth rates (33% revenue CAGR since 1995).

Strategic Initiatives:

• Market Focus: Continued growth in existing markets leveraging both production and custom building capabilities.
• Financial Services: Expansion of mortgage and title operations to serve a larger share of homebuyers.
• Venture Capital: Formation of Encore Venture Partners II to invest in technology and emerging growth companies to improve supply chain efficiency.
• Shareholder Returns: Repurchased $14.5 million of stock in fiscal 2000 and declared a 9% stock dividend. Quarterly cash dividends increased 33% to $0.04 per share.

Risks and Contingencies:

• Interest Rates: Housing demand is sensitive to mortgage rates; credit tightening in early 2000 adversely affected demand, though rates eased later in the year.
• Debt Levels: Significant debt levels could limit flexibility and increase vulnerability during economic downturns.
• Regulatory/Environmental: Subject to extensive zoning, environmental, and building regulations that can delay development or increase costs.
• Competition: Highly competitive industry requiring competition for land, labor, and financing.

Investor Verification Checklist

• Backlog Conversion: Verify the conversion rate of the record $1.54 billion sales backlog into future revenues.
• Debt Covenants: Review the specific covenants limiting additional debt ($652.2 million capacity) and restricted payments (dividends/repurchases limited to 50% of net income).
• Interest Rate Exposure: Assess the impact of the $290.8 million variable rate debt and the effectiveness of the $200 million interest rate swap agreements.
• Acquisition Integration: Monitor the performance of recent acquisitions (e.g., Cambridge Homes) and their contribution to the 12.3% revenue growth in existing markets.
• Stock Valuation: Evaluate the discrepancy between the company's high growth rates and its low P/E multiple (6.7x) cited by management.