Business Context and Reporting Period
Company: D.R. Horton, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2004
Business Overview: A national homebuilder operating in 51 markets across 21 states, engaged in the construction and sale of single-family housing. The company also operates a financial services segment providing mortgage banking and title agency services.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Mar 31, 2004 |
Three Months Ended Mar 31, 2003 |
Six Months Ended Mar 31, 2004 |
Six Months Ended Mar 31, 2003 |
|---|---|---|---|---|
| Total Revenues | $2,335,263 | $1,908,547 | $4,539,793 | $3,653,481 |
| Net Income | $188,557 | $127,835 | $374,171 | $239,663 |
| Diluted EPS | $0.80 | $0.57 | $1.58 | $1.08 |
| Cash and Equivalents (Balance Sheet) |
$218,693 | $187,478 | N/A (Balance Sheet Item) | |
| Notes Payable (Total Debt) |
$3,147,725 | $2,963,123 | N/A (Balance Sheet Item) | |
| Operating Cash Flow (Six Months) |
N/A | $(459,599) | $(19,695) |
Note: Total Notes Payable includes Homebuilding ($2,780,861) and Financial Services ($366,864) segments.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 22.4% for the quarter and 24.3% for the six-month period compared to the prior year, driven by strong housing demand and increased home closings.
- Profitability: Net income rose 47.5% for the quarter and 56.1% for the six-month period. Pre-tax operating margins improved significantly in the homebuilding segment (up 2.7 percentage points for the quarter) due to higher home prices and lower construction costs.
- Inventory Build: Total inventory increased by $753.3 million since September 30, 2003, to support seasonally higher closings expected in the third and fourth fiscal quarters. This buildup contributed to a net cash outflow from operating activities of $459.6 million for the six-month period.
- Stock Split: A three-for-two stock split (50% stock dividend) was effected on January 12, 2004. All per-share data has been adjusted to reflect this split.
Guidance, Outlook, and Risks
- Outlook: Management anticipates higher revenues and net income in the third and fourth fiscal quarters due to the seasonal nature of the business. The company maintains a strong sales backlog of 18,137 homes valued at $4.6 billion as of March 31, 2004.
- Liquidity: The company restructured its revolving credit facility in March 2004, increasing capacity to $1 billion with an accordion feature up to $1.25 billion. Approximately $863 million remained available under the facility at period end.
- Financial Services: While revenues increased, pre-tax margins in the financial services segment declined due to increased competition in the mortgage industry and higher costs associated with expanding operations into California.
- Risks: Key risks include changes in interest rates, availability of mortgage financing, general economic conditions, and the company's substantial leverage. The company utilizes interest rate swaps to mitigate exposure to variable rate debt.
Investor Verification Checklist
- Inventory Turnover: Verify the ability to convert the $753 million inventory increase into sales during the peak season to ensure cash flow recovery.
- Debt Covenants: Confirm continued compliance with borrowing base limitations and tangible net worth covenants, especially given the increased leverage ratio (43.3% debt-to-capital).
- Margin Sustainability: Assess whether the 22.5% gross profit margin in homebuilding is sustainable given potential increases in construction material costs or labor shortages.
- Financial Services Mix: Monitor the impact of California expansion costs and mortgage competition on the profitability of the financial services segment.
- Backlog Conversion: Track the conversion rate of the $4.6 billion sales backlog into actual revenue in upcoming quarters.