Business Context and Reporting Period
Company: D.R. Horton, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 1999
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 provides mortgage banking and title agency services through its financial services division.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 1999 |
Six Months Ended Mar 31, 1999 |
|---|---|---|
| Total Revenues | $699.1 million | $1,359.7 million |
| Net Income | $33.4 million | $66.1 million |
| Diluted EPS | $0.52 | $1.05 |
| Homebuilding Gross Margin | 17.4% | 17.8% |
| Cash and Equivalents | $54.7 million (Balance Sheet) | N/A |
| Total Debt (Notes Payable) | $1,067.3 million | N/A |
| Stockholders' Equity | $728.6 million | N/A |
Note: Debt figures include $300 million in revolving credit facility advances and $382.9 million in 8% senior notes.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 54.3% for the quarter and 55.2% for the six-month period compared to the prior year, driven by higher home and land/lot sales volumes.
- Profitability: Net income rose 71.4% for the quarter and 74.8% for the six-month period. Income before taxes improved to 7.8% of revenue (quarter) and 8.0% (six months), aided by SG&A expense reduction as a percentage of revenue.
- Operational Volume: Homes closed increased 40.5% (4,163 homes) for the quarter. New net sales contracts rose 21.2% to 5,631 homes.
- Backlog: Sales backlog increased 41.9% to $1,369.3 million (7,952 homes) as of March 31, 1999.
- Acquisitions: The acquisition of Cambridge Homes of Chicago in January 1999 contributed significantly to inventory and revenue growth.
Guidance, Outlook, and Risks
- Capital Resources: The company maintains an $825 million revolving credit facility with $475 million in additional borrowing capacity. It recently issued $385 million in 8% Senior Notes due 2009.
- Dividends: The Board declared a quarterly cash dividend of $0.03 per share, payable May 14, 1999.
- Year 2000 (Y2K) Risk: Management believes principal systems are Y2K compliant. Non-principal systems are expected to be converted or modified by August 1999 at a cost of less than $1 million. Risks include potential disruptions from third-party vendors or government agencies.
- Market Risks: The company is exposed to interest rate fluctuations, though it utilizes interest rate swaps to fix rates on a portion of variable debt. Other risks include changes in economic conditions, material costs, and labor availability.
- Unusual Items: SG&A expenses included a $6.4 million charge for severance benefits associated with former Continental executives. Cost of sales included a $7.4 million inventory write-up related to the Cambridge acquisition.
Investor Verification Checklist
- Acquisition Integration: Verify the final valuation adjustments for the Cambridge Homes acquisition, as the determination was not complete as of May 11, 1999.
- Debt Covenants: Confirm compliance with debt covenants given the high leverage ratio (59.4% consolidated notes payable to total capital).
- Y2K Compliance: Monitor the completion of Y2K modifications for non-principal systems and third-party vendor readiness by August 1999.
- Inventory Levels: Assess the $348.5 million increase in inventory to ensure it aligns with sales velocity and market demand.
- Interest Rate Exposure: Review the effectiveness of interest rate swaps in mitigating the impact of rising rates on the $300 million variable rate revolving credit facility.