Business Context and Reporting Period
Company: D.R. Horton, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1998 (Nine months ended June 30, 1998)
Business Overview: A national builder engaged primarily in the construction and sale of single-family housing in the United States, along with title agency and mortgage brokerage services.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 1998 |
Nine Months Ended June 30, 1998 |
Nine Months Ended June 30, 1997 |
|---|---|---|---|
| Total Revenues | $613,864 | $1,490,020 | $1,099,258 |
| Net Income | $23,088 | $60,904 | $43,212 |
| Diluted EPS | $0.39 | $1.02 | $0.78 |
| Gross Profit Margin | 17.8% | 17.8% | 17.2% |
| Cash and Equivalents | $112,747 | $112,747 | $78,228 (Sep 30, 1997) |
| Total Debt (Notes Payable) | $905,886 | $905,886 | $632,552 (Sep 30, 1997) |
| Stockholders' Equity | $492,567 | $492,567 | $427,866 (Sep 30, 1997) |
Note: Total Revenues include Homebuilding ($608.3M / $1,475.9M) and Financing ($5.5M / $14.2M) segments.
Material Changes vs. Prior Period
- Revenue Growth: Homebuilding revenues increased 39.8% for the quarter and 35.4% for the nine-month period compared to the prior year, driven by a 46.5% increase in home closings (3,929 homes vs. 2,681) and a 41.0% increase in new sales contracts.
- Profitability: Net income rose 47.8% for the quarter and 40.9% for the nine-month period. Gross profit margins improved slightly due to selling price increases outpacing construction costs.
- Acquisitions: Significant growth was fueled by the April 1998 merger with Continental Homes (treated as a pooling of interests) and the acquisition of Dobson, Mareli, and RMP Properties.
- Debt Levels: Total notes payable increased significantly to $905.9 million from $632.6 million at the prior fiscal year-end, primarily to finance inventory growth and acquisitions. The debt-to-total capital ratio rose to 64.8%.
- Backlog: Sales backlog increased 61.4% to 6,559 homes as of June 30, 1998.
Guidance, Outlook, and Risks
- Merger Costs: The Company expensed $11.9 million in non-recurring merger costs associated with the Continental acquisition, impacting the effective tax rate due to non-deductibility of certain costs.
- Capital Resources: The Company restructured its credit facility to $825 million ($775M revolving + $50M letter of credit) with $345.2 million in remaining borrowing capacity. It maintains a $400 million universal shelf registration for future securities.
- Convertible Notes: The Company intends to call all outstanding 6 7/8% convertible subordinated notes (approx. $82.7M) on or after November 1, 1998, if current conditions prevail.
- Risks: Management highlights risks related to substantial leverage, interest rate fluctuations affecting mortgage affordability, inflation impacting land and construction costs, and the ability to successfully integrate acquisitions.
- Dividends: Quarterly cash dividends of $0.0225 per share were declared.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the new $825 million credit facility covenants given the increased leverage ratio (64.8%).
- Merger Integration: Assess the operational integration of Continental Homes and the impact of the $11.9 million merger expense on future earnings.
- Convertible Note Redemption: Monitor the Company's ability and intent to redeem the $82.7 million convertible notes in November 1998.
- Inventory Levels: Review the $1.29 billion inventory balance to ensure it aligns with the 6,559 home backlog and market absorption rates.
- Interest Rate Sensitivity: Evaluate the impact of rising mortgage rates on the affordability of the Company's average selling price ($154,300).