Business Context and Reporting Period
Company: D.R. Horton, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 1998
Business Overview: A national builder engaged primarily in the construction and sale of single-family housing in the United States, operating in 24 states and 41 markets. The company also provides mortgage banking and title agency services.
Key Financial Metrics
| Metric | Q1 1999 (Ended Dec 31, 1998) | Q1 1998 (Ended Dec 31, 1997) |
|---|---|---|
| Total Revenues | $660.6 million | $423.2 million |
| Net Income | $32.7 million | $18.3 million |
| Diluted EPS | $0.52 | $0.31 |
| Cash and Equivalents | $93.8 million | $73.1 million |
| Total Debt (Notes Payable) | $893.3 million | $826.0 million (Homebuilding only) |
| Backlog (Homes) | 6,032 homes ($1.02 billion) | 4,020 homes ($636.1 million) |
Margins: Gross profit margin for homebuilding was 18.2% (consistent with prior year). Income before taxes as a percentage of revenue increased to 8.2% from 7.2%.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 56.1% year-over-year, driven by a 55.9% increase in homebuilding revenues and a 71.8% increase in financial services revenues.
- Volume Increases: Homes closed increased to 3,846 from 2,821. New net sales contracts rose 22.8% to 3,537 homes.
- Profitability: Net income increased 78.4% to $32.7 million. The effective tax rate remained stable at 39.8%.
- Acquisitions: Growth was partially attributable to acquisitions of C. Richard Dobson Builders, Mareli Development, and RMP Development in fiscal 1998.
- Inventory: Inventories increased by $109.2 million quarter-over-quarter due to business expansion.
Guidance, Outlook, and Risks
Management Commentary: Management attributes growth to strong housing demand, entry into new markets, and acquisitions. SG&A expenses as a percentage of revenue decreased to 10.0% due to cost containment and revenue absorption of fixed overhead.
Subsequent Events:
- Acquisition: On January 28, 1999, the company acquired Cambridge Homes of Chicago for approximately $55 million in stock and $103 million in assumed debt.
- Debt Issuance: On February 4, 1999, the company issued $385 million of 8% Senior Notes due 2009 to repay revolving credit facility borrowings.
Risks and Contingencies:
- Year 2000 (Y2K): The company is assessing Y2K compliance for hardware and software. Costs are expected to be less than $1 million for principal systems, with completion targeted by June 1999. Potential disruptions from third-party failures remain a risk.
- Leverage: The company maintains substantial leverage, with a notes payable to total capital ratio of 58.2%.
- Market Conditions: Results are subject to changes in interest rates, availability of mortgage financing, and general economic conditions.
Investor Verification Checklist
- Debt Covenants: Verify the impact of the new $385 million Senior Notes on dividend restrictions and future borrowing capacity.
- Acquisition Integration: Monitor the financial performance and integration of the Cambridge Homes acquisition.
- Y2K Compliance: Confirm the completion of Y2K modifications for non-principal systems by the June 1999 deadline.
- Backlog Conversion: Track the conversion rate of the $1.02 billion sales backlog into future revenue.
- Interest Rate Exposure: Review the effectiveness of the $300 million interest rate swap agreements in mitigating variable rate risk on the revolving credit facility.