DHI

Business Context and Reporting Period

Company: D.R. Horton, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: A national homebuilder operating in 44 markets across 20 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. The reporting period includes the impact of the Schuler Homes acquisition (anniversary date February 21, 2003).

Key Financial Metrics

Note: Total Revenues include Homebuilding ($2,166.8M / $5,742.2M) and Financial Services ($45.6M / $123.6M). Notes Payable includes Homebuilding ($2,667.0M) and Financial Services ($414.0M).

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 22.3% for the quarter and 28.4% for the nine-month period compared to the prior year. Homebuilding revenues rose 21.8% (quarter) and 27.9% (nine months), driven by strong demand and the Schuler acquisition.
• Profitability: Net income increased 47.4% for the quarter and 47.3% for the nine-month period. Income before taxes improved to 11.3% of revenues (quarter) and 10.8% (nine months), up from 9.4% in both prior periods, largely due to the absence of purchase accounting adjustments that depressed margins in the prior year.
• Operational Volume: Homes closed increased to 9,005 (quarter) and 24,407 (nine months). Net new sales orders increased 28.7% (quarter) and 38.2% (nine months) in value.
• Backlog: Sales backlog grew 36.6% to $4.03 billion (16,901 homes) at June 30, 2003, from $2.95 billion at June 30, 2002.
• Debt Management: The company redeemed $148.5 million of 10% Senior Notes and $100 million of 9% Senior Notes during the period, replacing them with lower-cost long-term debt. Zero coupon convertible notes were converted into approximately 10 million shares of common stock.

Guidance, Outlook, and Risks

• Capital Resources: The company maintains an $805 million unsecured revolving credit facility with $694.7 million available at June 30, 2003. The Board authorized an additional $200 million for stock repurchases and $200 million for debt repurchases in July 2003.
• Outlook: Management anticipates funding future growth through internally generated funds, existing credit facilities, and new debt or equity issuances. The company expects to complete evaluations of Variable Interest Entities (FIN 46) by September 30, 2003, with no expected material impact on financial position.
• Risks: Key risks include changes in general economic conditions, interest rate fluctuations affecting mortgage financing availability, substantial leverage, and competitive market conditions. The company utilizes interest rate swaps to mitigate exposure on variable-rate debt.
• Unusual Items: The prior year's results included purchase accounting adjustments related to the Schuler acquisition which reduced gross margins. The current period benefits from the normalization of these costs.

Investor Verification Checklist

• Debt Covenants: Verify compliance with borrowing base limitations and tangible net worth covenants, which currently limit additional borrowing capacity to approximately $1.6 billion.
• Inventory Levels: Confirm the $654 million increase in inventory is aligned with the $4.0 billion sales backlog and current market absorption rates.
• Interest Rate Exposure: Review the effectiveness of the $200 million interest rate swap portfolio in hedging variable-rate debt risks.
• FIN 46 Impact: Monitor the final evaluation of Variable Interest Entities regarding land option contracts to ensure no unexpected consolidation liabilities arise.
• Regional Performance: Analyze the specific contribution of the West and Southeast regions, which showed the highest growth in backlog value and average selling prices.