Business Context and Reporting Period
Company: D.R. Horton, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2000
Business Overview: A national builder engaged primarily in the construction and sale of single-family housing across 23 states and 40 markets. The company also operates a financial services segment providing mortgage banking and title agency services.
Key Financial Metrics
| Metric (Nine Months Ended June 30, 2000) | Value (in thousands) |
|---|---|
| Total Revenues | $2,567,020 |
| Net Income | $130,033 |
| Diluted EPS | $2.08 |
| Operating Cash Flow | $(180,093) (Used) |
| Total Debt (Notes Payable) | $1,389,026 |
| Cash and Equivalents | $79,144 |
| Stockholders' Equity | $907,885 |
Note: Total Debt includes $415,000 in revolving credit facility advances and $974,026 in senior notes and other secured debt.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 16.5% to $2.57 billion for the nine months ended June 30, 2000, compared to $2.20 billion in the prior year. Homebuilding revenues drove this growth, up 16.3%.
- Profitability: Net income rose 17.7% to $130.0 million. Income before taxes increased 15.1% to $209.7 million.
- Operational Volume: Homes closed increased to 13,866 (up 6.9% from 12,971). The average selling price of closed homes increased 10.0% to $179,800.
- Backlog: Sales backlog increased 7.5% in value to $1.58 billion (7,823 homes), though the number of homes in backlog decreased slightly from 8,267.
- Cost Structure: Selling, general, and administrative (SG&A) expenses increased 19.5% to $262.1 million, rising as a percentage of revenue to 10.4% due to positioning for the peak closing season.
Guidance, Outlook, and Risks
Management Commentary:
- Strong housing demand continues across most markets, allowing the company to sell more custom features and raise prices.
- Inventory levels increased by $316.4 million to prepare for the peak home-closing season in the fourth quarter.
- Financial services revenues grew 33.8% due to rapid expansion of mortgage and title services, though SG&A expenses rose disproportionately due to startup costs in new markets.
Capital Resources:
- Issued $200 million in 10 1/2% Senior Notes due 2005 to repay revolving credit facility debt and for general corporate purposes.
- Repurchased $14.5 million of common stock during the period.
- Committed up to $125 million to venture capital partnerships (GP-Encore and Encore II) for e-commerce and strategic diversification; $18.6 million invested as of June 30, 2000.
Risks and Contingencies:
- Leverage: The company maintains substantial leverage, with homebuilding notes payable to total capital at 59.0%.
- Market Risk: Exposure to interest rate fluctuations on variable rate debt, partially mitigated by interest rate swap agreements.
- Operational Risks: Dependence on general economic conditions, availability of mortgage financing, and costs of materials and labor.
- Unusual Items: A decision was made to reduce the carrying amount of two parcels of developed land to net realizable value, impacting land/lot sales margins.
Investor Verification Checklist
- Inventory Valuation: Verify the impact of the write-down on two land parcels and the sustainability of the $2.18 billion inventory balance.
- Debt Covenants: Confirm compliance with debt covenants given the $1.39 billion debt load and the 59.0% debt-to-capital ratio.
- Cash Flow Usage: Analyze the $180 million cash used in operating activities, driven primarily by a $306 million increase in inventories.
- Backlog Quality: Assess the risk of cancellations given the backlog value increased while the number of homes decreased.
- Financial Services Margins: Monitor the high SG&A ratio (72.0%) in the financial services segment as it expands into new markets.