Business Context and Reporting Period
Company: D.R. Horton, Inc. (D.R. Horton, America's Builder)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2005
Business Overview: The largest homebuilder in the U.S. by domestic homes closed in 2004. Operations include the construction and sale of single-family detached and attached homes across 67 markets in 21 states, as well as financial services (mortgage banking and title agency).
Recent Corporate Action: A four-for-three stock split was effected on March 16, 2005. All per-share data in this report is split-adjusted.
Key Financial Metrics
| Metric (in millions, except per share) | Three Months Ended Mar 31, 2005 |
Six Months Ended Mar 31, 2005 |
|---|---|---|
| Total Revenues | $2,876.7 | $5,396.8 |
| Homebuilding Revenues | $2,826.9 | $5,301.0 |
| Financial Services Revenues | $49.8 | $95.8 |
| Net Income | $294.0 | $535.0 |
| Diluted EPS | $0.92 | $1.68 |
| Homebuilding Gross Margin | 25.5% | 25.4% |
| Cash and Cash Equivalents | $572.8 | $572.8 (Balance Sheet) |
| Total Debt (Notes Payable) | $4,340.6 | $4,340.6 (Balance Sheet) |
| Net Sales Orders (Value) | $4,098.6 | $6,754.4 |
| Sales Order Backlog (Value) | $6,167.0 | $6,167.0 (As of Mar 31) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 23% for the three months and 21% for the six months ended March 31, 2005, compared to the prior year periods. Homebuilding revenue drove this growth, up 23% (quarterly) and 19% (six-month).
- Profitability: Net income surged 56% to $294.0 million for the quarter and 43% to $535.0 million for the six-month period. Diluted EPS increased 53% and 42%, respectively.
- Margins: Homebuilding gross margins improved significantly, rising 300 basis points to 25.5% for the quarter and 270 basis points to 25.4% for the six-month period. This was driven by higher home prices and controlled construction costs.
- Order Volume: Net sales orders increased 23% in value to $4.1 billion for the quarter and 26% to $6.8 billion for the six-month period. The sales order backlog grew 33% to $6.2 billion.
- Cash Flow: Net cash used in operating activities increased to $714.1 million for the six months ended March 31, 2005, compared to $459.6 million in the prior year. This increase was primarily due to a strategic decision to invest $1,278.5 million in inventory to support future home closings.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the strong performance to successful growth strategies, strong demand in key markets (particularly the Southeast and Mid-Atlantic), and the ability to increase home prices. The company is actively managing inventory levels to support planned closings in the third and fourth fiscal quarters.
Liquidity and Capital Resources:
- Debt: Homebuilding debt to total capital ratio increased to 42.5% at March 31, 2005, from 38.9% at September 30, 2004, due to borrowings for inventory growth.
- Credit Facilities: The company has a $1.21 billion unsecured revolving credit facility with $1.1 billion available. It also maintains a $300 million mortgage warehouse facility and a $300 million commercial paper conduit facility for financial services.
- Debt Maturities: On April 1, 2005, the company repaid $200 million of 10.5% Senior notes that matured on that date.
Risks and Contingencies:
- Seasonality: The business is seasonal, with historically higher revenues and net income in the third and fourth fiscal quarters.
- Market Risks: Exposure to changes in interest rates, availability of mortgage financing, and general economic conditions.
- Legal: The company faces various warranty and construction defect claims, for which reserves are established based on historical data. Management believes these will not have a material adverse effect.
- Off-Balance Sheet: The company has $273.1 million in deposits to purchase land/lots with a remaining purchase price of $5.1 billion. Only $36.1 million is subject to specific performance clauses.
Key Facts for Investor Verification
- Inventory Investment: Verify the sustainability of the $1.28 billion increase in inventory investment and its impact on future cash flows and revenue recognition.
- Debt Refinancing: Confirm the successful repayment of the $200 million note due April 1, 2005, and the status of upcoming debt maturities.
- Margin Sustainability: Assess whether the 25%+ gross margins can be maintained given potential increases in construction material costs or labor shortages.
- Backlog Conversion: Monitor the conversion rate of the $6.2 billion sales order backlog into actual closings, noting that some contracts are subject to financing contingencies.
- Stock Split Impact: Ensure all per-share metrics are correctly adjusted for the 33% stock dividend paid in March 2005.