Business Context and Reporting Period
Company: D.R. Horton, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2003
Business Overview: A national homebuilder operating in 47 markets across 20 U.S. 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.
Key Financial Metrics
| Metric | Q4 2003 | Q4 2002 |
|---|---|---|
| Total Revenues | $2,204.5 million | $1,744.9 million |
| Net Income | $185.6 million | $111.8 million |
| Earnings Per Share (Diluted) | $0.78 | $0.50 |
| Cash and Cash Equivalents | $164.2 million | $194.7 million |
| Total Debt (Notes Payable) | $2,734.4 million | N/A (Balance Sheet data only) |
| Homebuilding Gross Margin | 22.8% | 19.8% |
| Effective Tax Rate | 38.5% | 37.5% |
Note: Total Debt includes $2,547.7 million in homebuilding notes payable and $186.7 million in financial services notes payable.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 26.3% year-over-year, driven by a 26.8% increase in homebuilding revenues and a 7.0% increase in financial services revenues.
- Profitability: Net income rose 66.9% to $185.6 million. Income before taxes increased 68.7% to $301.8 million.
- Operational Volume: Homes closed increased to 9,242 (up from 7,514). Net new sales orders increased 19.7% in value to $2,033.7 million (8,234 homes).
- Backlog: Sales backlog grew 24.3% to $3,552.5 million (14,480 homes) as of December 31, 2003.
- Cash Flow: Net cash used in operating activities was $152.2 million, primarily due to a $508.1 million increase in inventories to support seasonal closings. This contrasts with a $40.5 million cash outflow in the prior year.
- Stock Split: A three-for-two stock split (50% stock dividend) was declared in December 2003 and paid in January 2004. All per-share data has been restated to reflect this.
Guidance, Outlook, and Risks
- Management Commentary: Strong housing demand across most markets drove increases in both volume and average selling prices. The average selling price of homes closed rose 4.1% to $231,000. Gross margin improvements were attributed to price increases and lower construction costs due to economies of scale.
- Liquidity and Capital: The company maintains an $805 million unsecured revolving credit facility with $713.3 million available. On January 13, 2004, the company issued $200 million of 5.0% Senior Notes due 2009 to refinance maturing debt.
- Dividends: A quarterly cash dividend of $0.07 per share was paid in October 2003. A new dividend of $0.08 per share was declared in January 2004.
- Risks and Contingencies:
- Market Risk: Exposure to interest rate fluctuations on debt and mortgage loans, mitigated by interest rate swaps and derivative instruments.
- Off-Balance Sheet: $154.1 million in deposits to purchase land/lots with a total purchase price of $3.1 billion. Outstanding standby letters of credit and performance bonds totaled $1,280.8 million.
- Accounting Changes: The company is assessing the impact of a revision to FASB Interpretation No. 46 regarding variable interest entities but does not expect a material impact.
Investor Verification Checklist
- Inventory Levels: Verify the $507.4 million increase in inventory and its alignment with the sales backlog of 14,480 homes.
- Debt Covenants: Confirm compliance with borrowing base limitations, which capped additional borrowing capacity at $2,027.9 million as of period end.
- Refinancing Activity: Review the terms and impact of the $200 million Senior Notes issued in January 2004.
- Regional Performance: Analyze the specific drivers of the 38.3% revenue increase in the Southeast region and the 16.7% price increase in the West.
- Stock-Based Compensation: Note that pro forma net income under fair value accounting would be $184.6 million, slightly lower than reported.