DHI

Business Context and Reporting Period

Company: D.R. Horton, Inc. (D.R. Horton)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2001
Business Overview: D.R. Horton is a national homebuilder operating in 20 states and 38 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

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 21.9% to $4.46 billion, driven by a 22.7% increase in home sales revenue and a 45.3% increase in financial services revenue.
• Volume and Pricing: The company closed 21,371 homes in 2001, up from 19,144 in 2000. The average sales price increased 9.9% to $200,700.
• Backlog: Sales backlog increased 25.8% to $1.93 billion (9,263 homes) at year-end.
• Acquisitions: Significant growth was attributed to the acquisitions of Fortress-Florida (May 2001) and Emerald Builders (July 2001).
• Profitability: Income before taxes rose 31.9%. Gross profit percentage for homebuilding improved as cost of sales as a percentage of revenue declined to 80.4% from 81.6%.
• Debt and Liquidity: Notes payable increased by $540 million to $1.88 billion, funded by new senior notes and convertible notes. Cash and cash equivalents grew significantly to $239.3 million.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Expansion Strategy: The company continues to pursue geographic diversification and strategic acquisitions. A definitive agreement was signed in October 2001 to merge with Schuler Homes, Inc., valued at approximately $1.2 billion (including debt assumption), expected to close in early 2002.
• Capital Markets: The company utilized a universal shelf registration to issue $381.1 million in zero-coupon convertible notes, $200 million in 9 3/8% Senior Subordinated Notes, and $200 million in 7 7/8% Senior Notes.
• Dividends: Quarterly cash dividends were declared at $0.05 per share for fiscal 2001. Covenants limit cumulative dividends to 50% of consolidated net income.

Risks and Contingencies:

• Interest Rates: The company is exposed to interest rate risk on variable-rate debt and mortgage loan production. It utilizes interest rate swaps to mitigate exposure on a portion of its debt.
• Market Conditions: The homebuilding industry is cyclical and sensitive to employment levels, mortgage availability, and consumer confidence.
• Regulatory Environment: Operations are subject to extensive zoning, environmental, and building regulations which can delay development or increase costs.
• Debt Covenants: Significant debt levels limit flexibility for future financing and restricted payments (dividends, stock repurchases) are capped by covenants.

Investor Verification Checklist

• Schuler Homes Merger: Verify the closing status and final terms of the $1.2 billion merger with Schuler Homes, Inc., including the assumption of $499 million in public debt.
• Convertible Notes: Review the terms of the $381.1 million zero-coupon convertible senior notes due 2021, specifically the conversion price ($30.00) and repurchase options.
• Inventory Valuation: Assess the $2.8 billion inventory balance, noting that 46% of the total lot position is under option contracts, limiting immediate capital exposure.
• Debt Maturities: Confirm the schedule of debt maturities, with $234.6 million due in 2002 and significant amounts due in 2004-2006.
• Accounting Changes: Note the adoption of SFAS No. 142 (Goodwill) effective October 1, 2001, which will stop goodwill amortization and require impairment testing.