DHI

Business Context and Reporting Period

Company: D.R. Horton, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2002
Business Overview: D.R. Horton is a national homebuilder operating in 20 states and 44 markets across the United States. 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 and title services. Fiscal 2002 marked the company's 25th consecutive year of growth in revenues and profitability.

Key Financial Metrics

Operational Highlights:

• Homes Delivered: 29,761 (up 39.3% from 21,371 in 2001).
• Average Sales Price: $219,400 (up 9.3% from $200,700).
• New Sales Contracts: 31,491 homes valued at $6.89 billion (up 53% in volume, 52.9% in value).
• Sales Backlog: $2.83 billion (12,697 homes) at period end, up 46% from the prior year.

Material Changes vs. Prior Period

The significant growth in fiscal 2002 was driven by a combination of strong organic demand and strategic acquisitions.

• Acquisitions: The company completed its largest acquisition to date, Schuler Homes, Inc., in February 2002. This added dominant market positions in California, Hawaii, Denver, and Portland. Prior acquisitions of Fortress-Florida (May 2001) and Emerald Builders (July 2001) also contributed to the year-over-year increase.
• Revenue Mix: Homebuilding revenues increased 52.2% to $6.53 billion. Financial services revenues grew 57.8% to $113.6 million, with pre-tax income doubling to $56.4 million.
• Margin Impact: While income before taxes improved as a percentage of revenue (9.6% vs 9.2%), homebuilding gross margins declined 0.5 percentage points. This was primarily due to purchase accounting adjustments on Schuler inventory, which reduced reported gross profit by approximately $61.1 million compared to historical cost.
• Balance Sheet: Stockholders' equity increased 82% to $2.3 billion. The ratio of homebuilding debt (net of cash) to total capital improved to 51.3%.

Guidance, Outlook, and Risks

Management Outlook:

• Growth Targets: Management expects to achieve historical growth targets of 20% or more in revenues, net income, and net income per share for fiscal 2003.
• Long-term Goal: The company aims to exceed $10 billion in revenues by fiscal 2004.
• Acquisition Strategy: While currently focusing on internal growth, the company plans no acquisitions during 2003 but maintains a strategy of evaluating opportunities to achieve long-term targets.
• Leverage: The company anticipates net homebuilding leverage will decline to less than 49% by the end of fiscal 2003.

Risks and Contingencies:

• Interest Rates: Increases in mortgage rates could reduce home affordability and demand.
• Debt Levels: The company carries substantial debt, which limits flexibility and increases vulnerability to economic downturns.
• Regulatory Environment: Extensive federal, state, and local regulations regarding zoning, environmental protection, and building standards can delay projects and increase costs.
• Market Conditions: The homebuilding industry is cyclical and sensitive to local economic conditions, employment levels, and consumer confidence.

Investor Verification Checklist

• Acquisition Integration: Verify the successful integration of Schuler Homes operations and the realization of projected synergies in the West region.
• Inventory Valuation: Review the impact of purchase accounting adjustments on gross margins and the recoverability of inventory costs in acquired markets.
• Debt Covenants: Confirm compliance with debt covenants, specifically the borrowing base limitations and the 50% limit on restricted payments (dividends/repurchases) relative to net income.
• Backlog Conversion: Monitor the conversion rate of the record $2.8 billion sales backlog into closed sales in fiscal 2003.
• Financial Services Expansion: Assess the growth trajectory of the mortgage and title services segment, particularly in newly acquired Schuler markets.