Business Context and Reporting Period
Company: D.R. Horton, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Business Overview: A national homebuilder engaged in the construction and sale of single-family homes across 20 states and 44 markets. The company also operates a financial services segment providing mortgage banking and title agency services.
Key Financial Metrics
Revenue (Nine Months Ended June 30, 2002): $4,568.4 million (Homebuilding: $4,490.8 million; Financial Services: $77.7 million).
Net Income: $268.3 million (Diluted EPS: $1.94).
Gross Profit: $846.9 million (Homebuilding gross margin: 18.8%).
Cash Flow: Net cash used in operating activities was $233.4 million; Net cash provided by financing activities was $230.6 million.
Liquidity: Cash and cash equivalents totaled $55.9 million at June 30, 2002.
Debt: Total homebuilding notes payable were $2.75 billion. The company maintains an $805 million unsecured revolving credit facility with $464.9 million available.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 56.7% year-over-year for the nine-month period, driven by strong housing demand and acquisitions (Schuler Homes, Fortress-Florida, Emerald Builders).
- Profitability: Net income rose 57.6% to $268.3 million. Income before taxes increased 59.6% to $429.3 million.
- Operational Volume: Homes closed increased 43.4% to 20,207 units. Net new sales contracts increased 40.9% in value to $4.89 billion.
- Backlog: Sales contract backlog increased 30.4% to $2.95 billion (13,586 homes).
- Acquisition Impact: The February 2002 merger with Schuler Homes significantly increased average selling prices and inventory levels. Inventory increased by $1.58 billion since September 2001.
- Cost Structure: Cost of sales as a percentage of revenue increased slightly (to 81.2%) due to purchase accounting adjustments related to the Schuler acquisition.
Guidance, Outlook, and Risks
Management Commentary: Management attributes growth to strong demand in most markets and successful integration of acquisitions. The company anticipates funding future growth through internally generated funds, existing credit facilities, and new debt or equity issuances. A three-for-two stock split was effected in April 2002.
Risks and Contingencies:
- Market Risk: Exposure to interest rate fluctuations on variable-rate debt and mortgage loan production. The company uses interest rate swaps to mitigate some risk, though changes in fair value of these swaps impact earnings.
- Leverage: The company carries substantial debt, with covenants limiting additional borrowing, stock repurchases, and dividends.
- Economic Sensitivity: Results are subject to changes in general economic conditions, real estate markets, and availability of mortgage financing.
Investor Verification Checklist
- Verify the impact of the Schuler Homes acquisition on future inventory write-downs and cost of sales margins.
- Monitor the utilization of the $805 million revolving credit facility and adherence to debt covenants.
- Assess the sustainability of the 30% increase in sales backlog and its conversion rate into future revenue.
- Review the fair value adjustments of interest rate swaps and their volatility impact on quarterly earnings.
- Confirm the company's ability to service $2.75 billion in homebuilding debt given the $233 million cash outflow from operations.