Business Context and Reporting Period
Company: D.R. Horton, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2001
Business Overview: A national builder engaged primarily in the construction and sale of single-family housing in the United States, operating in 23 states and 39 markets. The company also provides mortgage banking and title agency services through its financial services segment.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2001 | Six Months Ended Mar 31, 2001 |
|---|---|---|
| Total Revenues | $906.8 million | $1,794.5 million |
| Net Income | $51.6 million | $101.4 million |
| Diluted EPS | $0.67 | $1.33 |
| Cash and Equivalents | $126.1 million (Balance Sheet) | N/A |
| Homebuilding Debt | $1,588.9 million | N/A |
| Inventory | $2,533.0 million | N/A |
| Stockholders' Equity | $1,072.2 million | N/A |
Operating Margins (Homebuilding): Gross profit margin for home sales was 20.0% for the three months ended March 31, 2001, compared to 18.4% in the prior year period. Income before taxes as a percentage of total revenues was 9.1% for the quarter.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 13.5% for the quarter and 11.6% for the six-month period compared to the prior year, driven primarily by increased home sales revenues and higher average selling prices.
- Profitability: Net income increased 30.8% for the quarter and 23.8% for the six-month period. Income before taxes rose 29.8% for the quarter.
- Backlog: Sales contract backlog increased 37.8% to $2.08 billion (9,709 homes) at March 31, 2001, from $1.51 billion at March 31, 2000.
- New Sales: The value of new net sales contracts increased 36.3% for the quarter and 31.4% for the six-month period.
- Accounting Change: A cumulative effect of a change in accounting principle (adoption of SFAS No. 133 regarding derivative instruments) increased net income by $2.1 million for the six-month period ended March 31, 2001.
Guidance, Outlook, and Risks
Management Commentary: Management attributes revenue growth to strong housing demand and the ability to sell more custom features and raise prices. The company continues to expand operations and expects to fund future growth through internally generated funds and existing credit facilities.
Liquidity and Capital Resources:
- The company has an $825 million unsecured revolving credit facility, with $461 million available at March 31, 2001.
- In May 2001 (post-period), the company issued $381.1 million in zero-coupon convertible senior notes.
- Dividends: A quarterly cash dividend of $0.05 per share was paid, and an 11% stock dividend was declared and paid in March 2001.
Risks and Contingencies:
- Interest Rate Risk: The company is exposed to interest rate fluctuations on variable rate debt, though it utilizes interest rate swaps to mitigate this risk. Changes in fair value of these swaps impact earnings under SFAS No. 133.
- Leverage: The company maintains substantial leverage, with homebuilding notes payable to total capital increasing to 59.7%.
- Market Conditions: Performance is subject to changes in general economic conditions, real estate markets, and the availability of mortgage financing.
Investor Verification Checklist
- Debt Covenants: Verify compliance with debt covenants associated with the $825 million revolving credit facility and senior notes.
- Interest Rate Swaps: Review the impact of SFAS No. 133 on earnings volatility due to the fair value adjustments of interest rate swaps.
- Backlog Conversion: Monitor the conversion rate of the $2.08 billion sales backlog into closed homes and revenue.
- Convertible Notes: Assess the dilution impact of the $381.1 million zero-coupon convertible senior notes issued in May 2001.
- Inventory Levels: Evaluate the $342 million increase in inventory against sales velocity to ensure efficient capital deployment.