Business Context and Reporting Period
Company: D.R. Horton, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2003
Business Overview: D.R. Horton is a national homebuilder operating in 20 states and 47 markets across the Mid-Atlantic, Midwest, Southeast, Southwest, and West regions. The company constructs and sells single-family homes, primarily targeting first-time and move-up buyers. It also operates a financial services segment providing mortgage banking and title insurance services.
Key Financial Metrics
| Metric | Fiscal 2003 | Fiscal 2002 | Change |
|---|---|---|---|
| Total Revenues | $8,728.1 million | $6,738.8 million | +29.5% |
| Homebuilding Revenues | $8,552.1 million | $6,625.2 million | +29.1% |
| Net Income | $625.955 million | $404.692 million | +54.7% |
| Diluted EPS | $4.10 | $2.87 | +42.9% |
| Operating Cash Flow | $423.3 million | ($90.6 million) | Significant Improvement |
| Inventory | $5,082.3 million | $4,343.1 million | +17.0% |
| Total Debt (Notes Payable) | $2,963.1 million | $2,878.3 million | +2.9% |
| Stockholders' Equity | $3,031.3 million | $2,269.9 million | +33.5% |
Operational Highlights:
- Homes Closed: 35,934 (vs. 29,761 in 2002).
- Average Sales Price: $231,900 (vs. $219,400 in 2002).
- Sales Backlog: 15,488 homes valued at $3,653.4 million (up 29.3% from prior year).
- Net New Sales Orders: 38,725 homes valued at $9,162.3 million (up 33.1% from prior year).
Material Changes vs. Prior Period
- Revenue Growth: Driven by strong housing demand across all five geographic regions and the full-year impact of the Schuler Homes acquisition (anniversary date Feb 21, 2003). Home sales revenues increased 27.6%.
- Margin Expansion: Income before taxes as a percentage of revenue increased to 11.6% from 9.6%. Homebuilding gross margins improved by 1.4 percentage points, aided by the recognition of lower-cost inventory from the Schuler acquisition in the prior year.
- Financial Services: Revenues increased 54.9% to $176.0 million, driven by higher home closings and expanded mortgage/title services.
- Debt Management: The company issued $512.6 million in new senior notes during the year to refinance higher-cost debt and redeem convertible notes. The ratio of homebuilding notes payable (net of cash) to total capital improved to 40.0% from 51.3%.
Guidance, Outlook, and Risks
Management Commentary:
- Management attributes growth to geographic diversity, strong demand in existing markets, and successful integration of acquisitions.
- The company focuses on internal growth but remains open to strategic acquisitions.
- Capital allocation is managed through centralized financing and cash management, with a policy of limiting speculative home construction.
- On December 1, 2003, the Board declared a three-for-two common stock split (50% stock dividend) payable January 12, 2004.
- Interest Rates: Increases in mortgage rates could reduce home affordability and demand.
- Land Availability: Risks related to the cost and availability of land suitable for development.
- Debt Levels: Significant debt levels could limit flexibility in reacting to business downturns.
- Regulatory: Extensive federal, state, and local regulations regarding zoning, environmental protection, and consumer credit.
Investor Verification Checklist
- Backlog Conversion: Verify the rate at which the $3.65 billion sales backlog converts to closed homes in the upcoming fiscal year.
- Interest Rate Sensitivity: Assess the impact of potential rising interest rates on the company's variable-rate debt and customer mortgage affordability.
- Inventory Valuation: Review the $5.08 billion inventory balance, specifically the $105 million in consolidated land inventory not owned (per FIN 46), for potential impairment risks.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly the borrowing base limitations tied to inventory values.
- Stock Split Impact: Monitor the market reaction and liquidity effects of the declared three-for-two stock split.