Business Context and Reporting Period
This Form 10-Q covers D.R. Horton, Inc. for the quarterly period ended March 31, 1998. The Company is a homebuilder operating in multiple regions across the United States. The reporting period includes the impact of two significant transactions: the acquisition of C. Richard Dobson Builders, Inc. (Dobson) in February 1998 and the merger with Continental Homes Holding Corp. (Continental) consummated on April 20, 1998. Financial data for the prior year has been restated to reflect the Continental merger as a pooling of interests.
Key Financial Metrics
Revenue and Profitability (Six Months Ended March 31, 1998):
- Revenues: $508.6 million (Restated combined: $867.5 million).
- Net Income: $22.6 million (Restated combined: $37.8 million).
- Gross Profit Margin: 18.5% (Restated combined: 18.0%).
- Operating Income: $38.2 million (Restated combined: $62.4 million).
- Net Income Per Share (Diluted): $0.59 (Restated combined: $0.64).
Liquidity and Balance Sheet:
- Cash and Cash Equivalents: $62.0 million (as of March 31, 1998).
- Total Assets: $932.6 million (Restated combined: $1.51 billion).
- Total Liabilities: $647.4 million (Restated combined: $1.04 billion).
- Notes Payable: $524.6 million (Restated combined: $846.1 million).
- Stockholders' Equity: $285.2 million (Restated combined: $465.1 million).
Cash Flow (Six Months Ended March 31, 1998):
- Net Cash Used in Operating Activities: $(69.2) million.
- Net Cash Used in Investing Activities: $(32.9) million.
- Net Cash Provided by Financing Activities: $120.1 million.
Material Changes vs. Prior Period
Revenue Growth: Revenues increased 67.3% to $508.6 million for the six months ended March 31, 1998, compared to $304.0 million in the prior year. Home closings increased 70.5% to 3,111 units. A significant portion of this growth is attributed to the acquisitions of Torrey (acquired in 1997) and Dobson (acquired in 1998).
Acquisition Impact:
- Dobson: Acquired for $23.4 million; contributed $19.3 million in revenue and 121 home closings in the quarter ended March 31, 1998.
- Continental: Merger completed April 20, 1998. Financials are restated to include Continental's operations. The merger added $150 million in senior notes and $86.1 million in convertible subordinated notes to the Company's debt load.
Backlog: The backlog of sales contracts increased 80.4% to 3,322 homes ($579.0 million) as of March 31, 1998, compared to 1,841 homes in the prior year.
Cost Structure: Cost of sales increased 67.3%, remaining constant at 81.5% of revenues. SG&A expenses increased 64.4% but decreased as a percentage of revenue to 11.0% due to operating leverage.
Outlook, Risks, and Management Commentary
Capital Resources: The Company restructured its unsecured bank credit facility on April 21, 1998, increasing capacity to $825 million ($775 million revolving loan and $50 million letter of credit). Following the Continental merger and debt repayments, the Company had approximately $165.5 million in additional borrowing capacity as of March 31, 1998.
Dividends: The Board declared two quarterly cash dividends of $0.0225 per share during fiscal 1998.
Risks and Contingencies:
- Debt Covenants: The $150 million 10% senior notes assumed from Continental may be put to the Company at 101% of par value through June 18, 1998, under change of control provisions.
- Market Conditions: Management cites risks related to general economic conditions, interest rate fluctuations, and increases in material, supply, and labor costs.
- Forward-Looking Statements: Actual results may differ materially from anticipated results due to the factors listed above.
Investor Verification Checklist
- Verify the impact of the Continental Homes merger on future debt service obligations, specifically the $150 million senior notes and $86.1 million convertible notes.
- Confirm the utilization of the new $825 million credit facility and the remaining borrowing capacity of $165.5 million.
- Review the restated financial data to ensure accurate year-over-year comparisons, as prior periods have been adjusted for the pooling of interests with Continental.
- Monitor the put option on the $150 million senior notes exercisable through June 18, 1998.
- Assess the inventory levels which increased by $171.2 million, largely due to the Dobson acquisition and general business expansion.