DHI

Business Context and Reporting Period

Company: D.R. Horton, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2002
Business Overview: A national builder of single-family housing operating in 44 markets across 20 states. The company also provides mortgage banking and title agency services through its financial services segment. Approximately 98% of consolidated revenues are derived from homebuilding operations.

Key Financial Metrics

Note: Total Debt includes Homebuilding ($2,699,559) and Financial Services ($338,336) notes payable.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 50.4% to $1.745 billion, driven by a 50.4% increase in homebuilding revenues and a 53.4% increase in financial services revenues. Approximately $356 million of the homebuilding revenue increase was attributable to the acquisition of Schuler Homes in February 2002.
• Profitability: Net income rose 52.3% to $111.8 million. Income before taxes increased to $178.9 million (10.3% of revenue) from $117.5 million (10.1% of revenue).
• Operational Volume: Homes closed increased to 7,514 from 5,691. Net new sales orders increased 66.3% in value to $1.699 billion (7,252 homes). Sales backlog grew 56.2% to $2.857 billion (12,435 homes).
• Average Selling Price: The average selling price of homes closed increased 12.1% to $221,800, primarily due to the Schuler acquisition which operates in higher-priced West Coast and Hawaii markets.
• Cost Structure: Cost of sales increased 50.9%, tracking revenue growth. SG&A expenses increased 51.3% to $179.2 million. Interest expense for homebuilding activities decreased 71.0% to $0.3 million due to a high rate of interest capitalization.

Guidance, Outlook, and Risks

Management Commentary: Management attributes growth to strong housing demand and the Schuler merger. The company expects future growth to be funded by internally generated funds, existing credit facilities, and new debt or equity issuances. A quarterly cash dividend of $0.06 per share was declared.

Liquidity and Capital Resources:

• Cash and equivalents totaled $194.7 million.
• The company has an $805 million unsecured revolving credit facility with $688.9 million available (no amounts outstanding).
• Debt covenants limit additional borrowing capacity to $1.196 billion based on inventory borrowing base arrangements.
• On May 11, 2003, holders of zero coupon convertible senior notes may require the company to purchase notes with an accreted value of $213.3 million. Management believes current resources are adequate to meet this obligation.

Risks and Contingencies:

• Market Risk: Exposure to interest rate fluctuations on variable rate debt and mortgage loan origination. The company uses interest rate swaps and forward sales of mortgage-backed securities to hedge these risks.
• Forward-Looking Statements: Risks include changes in economic conditions, interest rates, government regulations, substantial leverage, and competitive conditions.
• Accounting Changes: The company will adopt SFAS No. 148 regarding stock-based compensation disclosures in the second quarter of fiscal 2003. Interpretation No. 46 regarding variable interest entities is expected to have no material effect.

Investor Verification Checklist

• Acquisition Impact: Verify the extent to which revenue and margin growth is organic versus driven by the Schuler Homes acquisition.
• Debt Covenants: Confirm compliance with borrowing base limitations tied to unencumbered inventory values.
• Convertible Notes: Assess the liquidity impact of the potential $213.3 million redemption of zero coupon convertible notes in May 2003.
• Interest Capitalization: Review the ratio of capitalized interest to total interest incurred to understand the true cost of debt relative to construction pace.
• Backlog Conversion: Monitor the conversion rate of the $2.86 billion sales backlog into future revenue.