DHI

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, 2006
Business Overview: The Company is the largest homebuilder in the United States by domestic homes closed. It operates in 82 markets across 27 states, primarily constructing and selling single-family detached homes. The Company also operates a financial services segment (DHI Mortgage) providing mortgage banking and title agency services.

Key Financial Metrics

All figures in millions, except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 25% for the quarter and 20% for the six-month period compared to the prior year, driven by a 19% and 11% increase in homes closed, respectively.
• Profitability: Net income increased 20% for the quarter and 24% for the six-month period. Homebuilding gross margins improved by 30 basis points (quarter) and 160 basis points (six months) year-over-year.
• Order Activity: Net sales orders increased 10% (quarter) and 12% (six months). Sales order backlog increased 15% to $7.1 billion.
• Cash Flow: Net cash used in operating activities increased to $1.3 billion for the six months ended March 31, 2006, compared to $714.1 million in the prior year. This was primarily due to a strategic decision to fund $2.4 billion in inventory growth to support future closings.
• Debt Structure: The Company redeemed $209.4 million of 9.375% senior subordinated notes in March 2006, incurring a $10.6 million charge. In April 2006 (subsequent event), the Company issued $750 million in new senior notes to repay revolving credit facility borrowings.

Guidance, Outlook, and Risks

• Outlook: Management expects gross profit percentages in the next two fiscal quarters to be lower than the first half of fiscal 2006 due to market conditions narrowing the range between selling prices and costs. SG&A expenses as a percentage of revenue are expected to decline in the third and fourth quarters but remain higher than the prior year overall.
• Liquidity: The Company maintains a strong balance sheet with a targeted net homebuilding debt to total capital ratio of less than 45%. It has $690 million available under its revolving credit facility and $2.25 billion remaining capacity under its universal shelf registration statement.
• Seasonality: The Company notes that operating results for the first half of the fiscal year are not necessarily indicative of full-year results, as the homebuilding industry typically experiences higher revenues and net income in the third and fourth quarters.
• Risks: Key risks include changes in interest rates, availability of mortgage financing, competitive conditions, and the substantial debt load. The Company also faces risks related to warranty claims and construction defects.

Investor Verification Checklist

• Inventory Levels: Verify the $10.9 billion inventory balance and the $2.4 billion increase in inventory investment to ensure alignment with future sales projections.
• Debt Covenants: Confirm compliance with debt covenants, particularly regarding the $2.15 billion revolving credit facility and the impact of recent investment grade ratings on covenant restrictions.
• Margin Sustainability: Assess the sustainability of the 27.0% homebuilding gross margin given management's expectation of lower margins in the second half of the fiscal year.
• Land Options: Review the $5.8 billion remaining purchase price on land and lot options, noting that only $135.5 million is subject to specific performance clauses.
• Subsequent Debt Issuance: Review the terms of the $750 million in senior notes issued in April 2006 and their impact on future interest expense.