Business Context and Reporting Period
Company: D.R. Horton, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2002
Business Overview: A national builder of single-family housing operating in 21 states and 42 markets, alongside a financial services segment providing mortgage and title agency services.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Mar 31, 2002 | Six Months Ended Mar 31, 2002 | Three Months Ended Mar 31, 2001 | Six Months Ended Mar 31, 2001 |
|---|---|---|---|---|
| Total Revenues | $1,600,065 | $2,759,955 | $906,836 | $1,794,499 |
| Net Income | $88,931 | $162,359 | $51,581 | $101,442 |
| Diluted EPS | $0.64 | $1.26 | $0.45 | $0.88 |
| Cash and Equivalents (Total) | $189,726 | $189,726 | $239,280 (Sep 30, 2001) | $126,147 (Mar 31, 2001) |
| Notes Payable (Homebuilding) | $2,748,197 | $2,748,197 | $1,701,689 (Sep 30, 2001) | N/A |
| Inventory (Homebuilding) | $4,201,134 | $4,201,134 | $2,804,377 (Sep 30, 2001) | N/A |
Homebuilding Segment Performance:
- Homes Closed (3 Months): 6,639 (vs. 4,330 in 2001).
- Average Selling Price (3 Months): $231,100 (up 17.3% from $197,100).
- Sales Backlog (Mar 31, 2002): 12,398 homes valued at $2,663.7 million.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 76.4% for the quarter and 53.8% for the six-month period compared to the prior year. This growth is primarily driven by the acquisition of Schuler Homes, Inc. (closed Feb 21, 2002), Fortress-Florida, and Emerald Builders.
- Profitability: Net income increased 72.4% for the quarter and 60.1% for the six-month period. Income before taxes as a percentage of revenue decreased slightly for the quarter (8.9% vs 9.1%) due to purchase accounting adjustments related to Schuler, but increased for the six-month period (9.4% vs 8.9%) due to SG&A leverage.
- Cost of Sales: Cost of home sales as a percentage of revenue increased to 82.0% for the quarter (from 80.0%) and 81.1% for the six months (from 80.3%). This increase is attributed to $33.6 million in charges related to recording Schuler's inventory at fair value.
- Balance Sheet Expansion: Total assets grew from $3.65 billion (Sep 30, 2001) to $5.60 billion (Mar 31, 2002). Inventory increased by $1.4 billion, largely due to the Schuler acquisition.
Guidance, Outlook, and Risks
Management Commentary:
- Acquisition Impact: The Schuler merger significantly expanded operations in the West Coast and Hawaii, raising the average selling price. Management notes that fixed cost leverage from Schuler's closings helped offset purchase accounting charges.
- Capital Resources: The company maintains an $805 million unsecured revolving credit facility (maturing Jan 2006) and recently issued $250 million of 8.5% Senior Notes due 2012. The company has a shelf registration for up to $1.0 billion in debt/equity.
- Dividends: A 3-for-2 stock split was declared in March 2002. Quarterly cash dividends of $0.06 per share were declared.
Risks and Contingencies:
- Market Risk: Exposure to interest rate fluctuations on variable rate debt and mortgage loan production. The company uses interest rate swaps (not designated as hedges under SFAS 133) which impact earnings based on fair value changes.
- Leverage: The company carries substantial debt, with homebuilding notes payable increasing significantly to fund growth and acquisitions.
- Forward-Looking Statements: Results are subject to risks including changes in economic conditions, interest rates, government regulations, and competitive conditions.
Investor Verification Checklist
- Acquisition Accounting: Verify the impact of the $33.6 million fair value adjustment on Schuler's inventory on future cost of sales and margins.
- Debt Covenants: Review the specific covenants in the new $805 million credit facility and the assumed Schuler debt indentures regarding restricted payments and leverage ratios.
- Interest Rate Exposure: Assess the volatility in earnings caused by the fair value changes of interest rate swaps not designated as hedges.
- Backlog Conversion: Monitor the conversion rate of the $2.66 billion sales backlog into revenue in subsequent quarters.
- Stock Split Impact: Confirm the restatement of share counts and EPS for the 3-for-2 stock split declared in March 2002.