DHI

Business Context and Reporting Period

Company: D.R. Horton, Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended September 30, 1999
Business Overview: D.R. Horton is one of the nation's three largest homebuilders, operating in 23 states and 40 markets. The company constructs and sells single-family homes, primarily for first-time and move-up buyers, and provides related financial services including mortgage banking and title insurance. Fiscal 1999 marked the company's 22nd consecutive year of growth and profitability.

Key Financial Metrics

Operating Highlights:

• Homes Closed: 18,395 (up from 13,944 in 1998).
• Average Sales Price: $166,100 (up 8.3% from $153,300).
• New Sales Contracts: 18,911 homes valued at $3,266.2 million.
• Sales Backlog: $1,356.5 million (7,309 homes) at year-end.
• Financial Services: Pretax income increased 84% to $13.1 million.

Material Changes vs. Prior Period

The company reported record performance across all major financial and operating categories compared to fiscal 1998.

• Revenue Growth: Driven by a 44.7% increase in homebuilding revenues and a 70.2% increase in financial services revenues. Growth was fueled by strong housing demand, low mortgage rates, and strategic acquisitions.
• Profitability: Net income surged 71% to $159.8 million. Income before taxes increased 54.3% (excluding non-recurring merger costs in 1998).
• Cost Management: Selling, general, and administrative (SG&A) expenses as a percentage of revenue decreased to 10.2% from 10.6% due to cost containment and revenue absorption of fixed overhead.
• Acquisitions: Significant expansion occurred through the acquisition of Cambridge Homes (Chicago/Midwest) and Century Title Agency (Phoenix), alongside internal start-ups in markets like Columbia, South Carolina.
• Capital Structure: The company issued $385 million of 8% Senior Notes in February 1999. The homebuilding debt-to-total-capitalization ratio improved (declined) by 239 basis points to 57.7%.

Guidance, Outlook, and Risks

Outlook and Guidance:

• Management anticipates a 23rd consecutive year of growth and profitability for fiscal 2000.
• The company has set a revenue goal of $4 billion for the upcoming fiscal year.
• Plans include expanding active-adult operations into new markets and further growth in mortgage and title services.

• Despite record earnings, stock performance was depressed due to broader market concerns about a potential recession that did not materialize.
• The company repurchased $22.4 million of common stock under a $100 million program.
• Moody's upgraded the senior unsecured rating to Ba1 from Ba2 in January 1999.

• Interest Rates: Higher mortgage rates could affect homebuyer affordability.
• Economic Conditions: General economic downturns or regional recessions could impact demand.
• Year 2000 (Y2K): While remediation costs were immaterial (<$500,000), the company noted potential risks of system failures or disruptions from third parties.
• Competition: The industry is highly competitive regarding land, labor, and materials.

Investor Verification Checklist

• Acquisition Integration: Verify the financial impact and integration progress of the Cambridge Homes and Century Title Agency acquisitions.
• Debt Covenants: Confirm compliance with debt covenants, specifically the 50% limit on dividends relative to net income and the $443.7 million remaining borrowing capacity under the revolving credit facility.
• Backlog Conversion: Monitor the conversion rate of the record $1.36 billion sales backlog into closed sales for fiscal 2000.
• Financial Services Expansion: Assess the scalability and profitability of the rapidly growing mortgage and title operations (84% pretax income growth).
• Stock Repurchase Program: Track the remaining $77.6 million available under the $100 million stock repurchase authorization.