Business Context and Reporting Period
Company: D.R. Horton, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 1998
Industry: Residential Homebuilding and Financial Services
D.R. Horton achieved its 21st consecutive year of growth and profitability, solidifying its position as the 3rd largest homebuilder in the United States. The fiscal year was defined by significant expansion through the merger with Continental Homes Holding Corp. (April 1998) and the acquisition of three additional entities: C. Richard Dobson Builders, Mareli Development, and RMP Properties. The company operates in 23 states across 41 markets, focusing on single-family homes for first-time and move-up buyers.
Key Financial Metrics
| Metric | 1998 | 1997 | Change |
|---|---|---|---|
| Total Revenues | $2,176.9 million | $1,578.4 million | +37.9% |
| Homebuilding Revenues | $2,155.0 million | $1,567.5 million | +37.5% |
| Net Income (Continuing Ops) | $93.4 million | $65.0 million | +43.7% |
| Pre-Tax Income | $159.1 million | $108.6 million | +46.5% |
| Diluted EPS (Continuing Ops) | $1.56 | $1.15 | +35.7% |
| Stockholders' Equity | $549.4 million | $427.9 million | +28.4% |
| Total Assets | $1,667.8 million | $1,248.3 million | +33.6% |
| Notes Payable (Debt) | $854.5 million | $650.7 million | +31.3% |
| Cash & Equivalents | $76.8 million | $78.2 million | -1.8% |
| Inventory | $1,358.0 million | $1,024.3 million | +32.6% |
Operational Highlights:
- Homes Closed: 13,944 (vs. 10,038 in 1997)
- New Sales Orders: 15,952 homes ($2.53 billion)
- Sales Backlog: 6,341 homes ($1.05 billion)
- Average Sales Price: $153,300
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 37.5% increase in homebuilding volume and a 99.6% surge in financial services revenues (mortgage and title) to $21.9 million.
- Acquisitions: The merger with Continental Homes (accounted for as a pooling of interests) and three other acquisitions significantly expanded geographic footprint and inventory.
- Cost Structure: Cost of sales increased 36.6%, but as a percentage of revenue, it improved to 81.9% from 82.4% due to pricing power and efficiencies. SG&A expenses rose 34.9% but decreased as a percentage of revenue to 10.6%.
- Debt Restructuring: The company restructured its bank credit facility to $825 million with terms up to 4 years at reduced rates and entered into $200 million in interest rate swaps to fix rates on a portion of the debt.
- Dividends: Quarterly cash dividends increased by 12.5% to $0.0225 per share.
Guidance, Outlook, and Risks
Outlook: Management anticipates a 22nd consecutive year of growth and profitability in 1999. Long-term goals include exceeding $4 billion in revenues by the year 2000. The company plans to continue entering new markets annually and expanding mortgage services.
Management Commentary:
- Emphasis on geographic diversification to mitigate regional economic cycles.
- Commitment to decentralized operations to allow local division managers flexibility.
- Plans to repurchase up to $100 million each of common stock and senior debt if market conditions warrant.
Risks and Contingencies:
- Year 2000 (Y2K): The company is assessing Y2K compliance for hardware and software. While principal systems are compliant, costs for upgrades are expected to be less than $1 million. Disruptions in third-party systems (utilities, zoning) remain a risk.
- Interest Rates: Exposure to variable interest rates on debt, partially mitigated by swap agreements.
- Market Conditions: Sensitivity to general economic conditions, availability of mortgage financing, and construction material costs.
- Legal: Routine litigation incidental to business; management does not expect material adverse effects.
Investor Verification Checklist
- Acquisition Integration: Verify the successful integration of Continental Homes and the three smaller acquisitions into the consolidated financial results.
- Debt Covenants: Confirm compliance with the 50% net income dividend restriction and the $364.5 million remaining borrowing capacity under the restructured credit facility.
- Inventory Valuation: Review the $1.36 billion inventory balance, noting that 60% of the 52,054 lot position is owned or under development.
- Y2K Compliance: Monitor progress on the completion of Y2K modifications for non-principal systems expected by June 1999.
- Convertible Notes: Note that remaining convertible subordinated notes were converted to common stock shortly after the fiscal year-end, increasing equity by $58 million.