FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2001
-------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the Transition Period From To
------------------- -------------------
Commission file number 1-14122
-----------
D.R. Horton, Inc.
-----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2386963
---------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1901 Ascension Blvd., Suite 100, Arlington, Texas 76006
-----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(817) 856-8200
-----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
-----------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.01 par value -- 77,183,551 shares as of February 13 , 2002
------------
This Report contains 25 pages.
INDEX
D.R. HORTON, INC.
PART I. FINANCIAL INFORMATION. Page
------- ---------------------- ----
ITEM 1. Financial Statements.
Consolidated Balance Sheets-- December 31, 2001 and September 30, 2001. 3
Consolidated Statements of Income-- Three Months Ended December 31,
2001 and 2000. 4
Consolidated Statement of Stockholders' Equity-- Three Months Ended
December 31, 2001. 5
Consolidated Statement of Cash Flows-- Three Months Ended December 31,
2001 and 2000. 6
Notes to Consolidated Financial Statements. 7-16
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition. 17-22
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. 23
PART II. OTHER INFORMATION.
-------- -----------------
ITEM 6. Exhibits and Reports on Form 8-K 24
SIGNATURES. 25
----------
ITEM 1. FINANCIAL STATEMENTS
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2001 2001
------------- ---------------
(In thousands)
(Unaudited)
ASSETS
Homebuilding:
Cash ................................................................. $ 22,076 $ 232,305
Inventories:
Finished homes and construction in progress ........................ 1,488,924 1,424,101
Residential lots - developed and under development ................. 1,488,336 1,377,452
Land held for development .......................................... 2,824 2,824
---------- ----------
2,980,084 2,804,377
Property and equipment (net) ......................................... 55,093 53,096
Earnest money deposits and other assets .............................. 207,926 181,659
Excess of cost over net assets acquired (net) ........................ 136,765 136,223
---------- ----------
3,401,944 3,407,660
---------- ----------
Financial Services:
Cash ................................................................. 9,904 6,975
Mortgage loans held for sale ......................................... 233,858 222,818
Other assets ......................................................... 15,100 14,737
---------- ----------
258,862 244,530
---------- ----------
$3,660,806 $3,652,190
========== ==========
LIABILITIES
Homebuilding:
Accounts payable and other liabilities ............................... $ 465,617 $ 498,576
Notes payable ........................................................ 1,699,899 1,701,689
---------- ----------
2,165,516 2,200,265
---------- ----------
Financial Services:
Accounts payable and other liabilities ............................... 7,849 10,173
Notes payable to financial institutions .............................. 154,786 182,641
---------- ----------
162,635 192,814
---------- ----------
2,328,151 2,393,079
---------- ----------
Minority interests ................................................... 9,319 8,864
---------- ----------
STOCKHOLDER'S EQUITY
Preferred stock, $.10 par value, 30,000,000 shares authorized,
no shares issued ................................................... -- --
Common stock, $.01 par value, 200,000,000 shares authorized,
77,092,912 shares at December 31, 2001 and 76,901,511 shares at
September 30, 2001, issued and outstanding ......................... 771 769
Additional capital ................................................... 708,346 704,842
Retained earnings .................................................... 614,219 544,636
---------- ----------
1,323,336 1,250,247
---------- ----------
$3,660,806 $3,652,190
========== ==========
See accompanying notes to consolidated financial statements.
-3-
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months
Ended December 31,
-------------------------------------
2001 2000
----------------- ----------------
(In thousands, except per share data)
(Unaudited)
Homebuilding:
Revenues
Home sales ................................................................... $ 1,125,738 $ 856,077
Land/lot sales ............................................................... 9,230 17,477
------------ ------------
1,134,968 873,554
------------ ------------
Cost of sales
Home sales ................................................................... 898,898 689,899
Land/lot sales ............................................................... 7,907 13,432
------------ ------------
906,805 703,331
------------ ------------
Gross profit
Home sales ................................................................... 226,840 166,178
Land/lot sales ............................................................... 1,323 4,045
------------ ------------
228,163 170,223
Selling, general and administrative expense .................................... 118,417 91,898
Interest expense ............................................................... 1,196 2,906
Other expense .................................................................. 2,572 3,314
------------ ------------
105,978 72,105
------------ ------------
Financial Services:
Revenues ....................................................................... 24,922 14,109
Selling, general and administrative expense .................................... 15,123 10,137
Interest expense ............................................................... 1,336 1,132
Other (income) ................................................................. (3,044) (1,416)
------------ ------------
11,507 4,256
------------ ------------
INCOME BEFORE INCOME TAXES ................................................... 117,485 76,361
Provision for income taxes ..................................................... 44,057 28,636
------------ ------------
Income before cumulative effect of change in accounting principle .............. 73,428 47,725
Cumulative effect of change in accounting principle, net of income
taxes of $1,282 .............................................................. -- 2,136
------------ ------------
NET INCOME ................................................................... $ 73,428 $ 49,861
============ ============
Basic earnings per common share:
Income before cumulative effect of change in accounting principle ............ $ 0.95 $ 0.64
Cumulative effect of change in accounting principle, net of income taxes ..... -- 0.03
------------ ------------
Net income ................................................................... $ 0.95 $ 0.67
============ ============
Diluted earnings per common share:
Income before cumulative effect of change in accounting principle ............ $ 0.94 $ 0.63
Cumulative effect of change in accounting principle, net of income taxes ..... -- 0.03
------------ ------------
Net income ................................................................... $ 0.94 $ 0.66
============ ============
Cash dividends per share ....................................................... $ 0.05 $ 0.04
============ ============
See accompanying notes to consolidated financial statements.
-4-
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Total
Common Additional Retained Stockholders'
Stock Capital Earnings Equity
---------- ---------- ---------- ----------
(In thousands, except common stock share data)
(Unaudited)
Balances at September 30, 2001 ................... $ 769 $ 704,842 $ 544,636 $1,250,247
Net income ....................................... -- -- 73,428 73,428
Issuances under D.R. Horton, Inc. employee
benefit plans (740 shares) ..................... -- 17 -- 17
Exercise of stock options (190,661 shares) ....... 2 3,487 -- 3,489
Cash dividends paid .............................. -- -- (3,845) (3,845)
---------- ---------- ---------- ----------
Balances at December 31, 2001 .................... $ 771 $ 708,346 $ 614,219 $1,323,336
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
-5-
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months
Ended December 31,
------------------------
2001 2000
----------- -----------
(In thousands)
(Unaudited)
OPERATING ACTIVITIES
Net income .............................................................. $ 73,428 $ 49,861
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................................... 5,317 5,992
Amortization of debt premiums and fees .................................. 2,272 598
Changes in operating assets and liabilities:
Increase in inventories ............................................... (171,947) (154,791)
Increase in earnest money deposits and other assets ................... (7,331) (6,283)
(Increase) decrease in mortgage loans held for sale ................... (11,040) 23,322
Decrease in accounts payable and other liabilities .................... (56,462) (1,028)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES ..................................... (165,763) (82,329)
---------- ----------
INVESTING ACTIVITIES
Net purchases of property and equipment ................................. (7,036) (3,179)
Distributions from (investments in) venture capital entities ............ 500 (2,022)
Cash paid for acquisitions .............................................. -- (1,364)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES ..................................... (6,536) (6,565)
---------- ----------
FINANCING ACTIVITIES
Proceeds from notes payable ............................................. 450,000 200,000
Repayment of notes payable .............................................. (484,662) (105,251)
Proceeds from issuance of common stock associated with certain
employee benefit plans ................................................ 17 66
Proceeds from exercise of stock options ................................. 3,489 3,384
Payment of cash dividends ............................................... (3,845) (2,702)
---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ....................... (35,001) 95,497
---------- ----------
(DECREASE) INCREASE IN CASH ............................................... (207,300) 6,603
Cash at beginning of period ............................................. 239,280 72,525
---------- ----------
Cash at end of period ................................................... $ 31,980 $ 79,128
========== ==========
See accompanying notes to consolidated financial statements.
-6-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
December 31, 2001
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements include the
accounts of D.R. Horton, Inc. and its subsidiaries (the "Company"). Intercompany
accounts and transactions have been eliminated in consolidation. The statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended December 31, 2001 are not necessarily indicative of the
results that may be expected for the year ending September 30, 2002.
Business - The Company is a national builder that is engaged primarily in the
construction and sale of single-family housing in the United States. The Company
designs, builds and sells single-family houses on lots developed by the Company
and on finished lots which it purchases, ready for home construction.
Periodically, the Company sells land or lots it has developed. The Company also
provides title agency and mortgage brokerage services to its home buyers.
NOTE B - CHANGES IN ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", was issued in June 1998, and was
later amended by SFAS 137 and 138, which were issued in June 1999 and June 2000,
respectively. Pursuant to the implementation requirements of SFAS No. 133, the
Company adopted it on October 1, 2000, the first day of the Company's fiscal
year ending September 30, 2001. The Company's interest rate swaps, the terms of
which are more fully described in Item 3, were not designated as hedges under
the provisions of SFAS No. 133. The Statement requires such swaps to be recorded
in the consolidated balance sheet at fair value. Changes in their fair value
must be recorded in the consolidated statements of income. Accordingly, the
Company recorded a cumulative effect of a change in accounting principle
amounting to $2.1 million, net of income taxes of $1.3 million, as an adjustment
to net income in the three months ended December 31, 2000. The fair value of the
Company's interest rate swaps at December 31, 2001 and September 30, 2001 is
recorded in homebuilding other assets, and the changes in their fair value
during the three months ended December 31, 2001 and 2000 are recorded in
homebuilding other income.
SFAS No. 133 was also implemented on October 1, 2000 for the hedging activities
of the Company's financial services segment. The effects of doing so were not
significant.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under
Statement No. 142, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment
tests. Other intangible assets will continue to be amortized over their useful
lives. The Company has early-adopted the new rules on accounting for goodwill
and other intangible assets beginning October 1, 2001. During the year, the
Company will perform the required tests for impairment of goodwill. The Company
does not believe that such tests will have a significant, adverse effect on its
results of operations or financial position. The following summarizes the pro
forma impact of the non-amortization approach for the three months ended
December 31, 2000 as if these Statements had been adopted on October 1, 2000 (in
thousands, except for per share amounts):
Three Months Ended
December 31, 2000
-----------------
Net income, as previously reported ......................... $ 49,861
Amortization of goodwill, net of income taxes of $764 ...... 1,273
----------
Net income, as adjusted .................................... $ 51,134
==========
Net income per share, as adjusted:
Basic .................................................... $ 0.68
==========
Diluted .................................................. $ 0.67
==========
-7-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
December 31, 2001
NOTE C - SEGMENT INFORMATION
The Company's financial reporting segments consist of homebuilding and financial
services. The Company's homebuilding operations comprise the most substantial
part of its business, with 98% of consolidated revenues for the three months
ended December 31, 2001 and 2000. The homebuilding segment generates the
majority of its revenues from the sale of completed homes, with a lesser amount
from the sale of land and lots. The financial services segment generates its
revenues from originating and selling mortgages and collecting fees for title
insurance agency and closing services.
NOTE D - EARNINGS PER SHARE
Basic earnings per share for the three months ended December 31, 2001 and 2000
is based on the weighted average number of shares of common stock outstanding.
Diluted earnings per share is based on the weighted average number of shares of
common stock and dilutive securities outstanding.
The following table sets forth the weighted average number of shares of common
stock and dilutive securities outstanding used in the computation of basic and
diluted earnings per share (in thousands):
Three Months Ended
December 31,
-----------------------
2001 2000
---------- ----------
Denominator for basic earnings per share--weighted average shares ............. 76,961 74,966
Employee stock options ........................................................ 1,376 1,149
---------- ----------
Denominator for diluted earnings per share--adjusted weighted average shares .. 78,337 76,115
========== ==========
Options to purchase 1,251,000 additional shares of common stock at various
prices were outstanding during the three months ended December 31, 2000, but
were not included in the computation of diluted earnings per share because the
exercise prices were greater than the average market price of the common shares
and, therefore, their effect would be antidilutive. All options outstanding
during the three months ended December 31, 2001 were dilutive and are included
in the computation of diluted earnings per share.
In February, 2001, the Company's Board of Directors declared an 11% stock
dividend, payable on March 23, 2001 to stockholders of record on March 9, 2001.
The average share amounts presented above for the three months ended December
31, 2000 have been restated to reflect the effects of the 11% stock dividend.
On February 5, 2002, each of the Company's 381,113 zero coupon convertible
senior notes outstanding first became eligible for conversion into 17.4927
shares of the Company's common stock. These convertible senior notes are
convertible on any date as of which the average closing price of the Company's
common stock for the twenty preceding trading days exceeds the specified
threshold of 110% of the accreted value of each note, divided by the conversion
rate. If the twenty-day average closing price of the Company's common stock had
exceeded the specified threshold on December 31, 2001, diluted earnings per
share for the three months then ended would have been $0.88.
-8-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
December 31, 2001
NOTE E - DEBT
The Company's homebuilding notes payable consist of the following (in thousands):
December 31, September 30,
2001 2001
----------- ----------
(Unaudited)
Unsecured:
Revolving credit facility due 2002 ....................... $ -- $ --
8 3/8% Senior notes due 2004, net ........................ 149,042 148,943
10 1/2% Senior notes due 2005, net ....................... 199,468 199,439
10% Senior notes due 2006, net ........................... 147,651 147,600
8% Senior notes due 2009, net ............................ 383,301 383,257
9 3/4% Senior subordinated notes due 2010, net ........... 148,935 148,917
9 3/8% Senior subordinated notes due 2011, net ........... 199,693 199,688
7 7/8% Senior notes due 2011, net ........................ 198,348 198,319
Zero coupon convertible senior notes due 2021, net ....... 204,163 202,509
Other secured .............................................. 69,298 73,017
---------- ----------
$1,699,899 $1,701,689
========== ==========
On January 31, 2002, the Company refinanced its existing unsecured revolving
credit facility with a new, replacement facility. The new facility will total
$795 million after the merger with Schuler Homes, Inc. is closed in February,
2002, and includes $125 million which may be used for letters of credit. The new
facility matures in January, 2006, and is guaranteed by substantially all of the
Company's subsidiaries other than its financial services subsidiaries.
NOTE F - INTEREST
The Company capitalizes interest during development and construction.
Capitalized interest is charged to cost of sales as the related inventory is
delivered to the home buyer. Homebuilding interest costs are (in thousands):
Three Months Ended
December 31,
------------------------
2001 2000
----------- -----------
Capitalized interest, beginning of period .................. $ 96,910 $ 66,092
Interest incurred - homebuilding ........................... 36,712 29,543
Interest expensed:
Directly - homebuilding .................................. (1,196) (2,906)
Amortized to cost of sales ............................... (22,300) (18,172)
---------- ----------
Capitalized interest, end of period ........................ $ 110,126 $ 74,557
========== ==========
-9-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
December 31, 2001
NOTE G - ACQUISITIONS
On October 22, 2001, the Company entered into a definitive agreement under which
Schuler Homes, Inc. would merge into D.R. Horton, Inc. through a cash and stock
transaction that is currently valued at approximately $1.5 billion, including
the assumption of debt. The transaction is conditioned upon obtaining the
approvals of both the D.R. Horton stockholders and Schuler Homes stockholders,
including separate class votes by the Class A and Class B common stockholders of
Schuler Homes, as well as other customary closing conditions. Meetings of the
stockholders of Schuler Homes and D.R. Horton will be held on February 21, 2002,
to vote on the merger. Under the terms of the merger agreement, each Schuler
Homes stockholder will have the right to elect to receive a combination of cash
and stock, or all cash or all stock. However, elections to receive either all
cash or all stock will be subject to proration in order to limit the total
amount of cash consideration to be paid by the Company in the merger to an
aggregate of $4.09 multiplied by the total Schuler Homes shares outstanding
other than any dissenting shares. The complete Agreement and Plan of Merger was
filed as an exhibit to the Joint Proxy Statement/Prospectus of D.R. Horton, Inc.
and Schuler Homes, Inc., which is included in the D.R. Horton, Inc. Registration
Statement, Amendment No. 3 to Form S-4, filed with the SEC on January 16, 2002.
-10-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
December 31, 2001
NOTE H - SUMMARIZED FINANCIAL INFORMATION
The 7 7/8%, 8%, 8 3/8%, 10% and 10 1/2% Senior Notes, the 9 3/8% and 9 3/4%
Senior Subordinated Notes, and the Zero Coupon Convertible Senior Notes are
fully and unconditionally guaranteed, on a joint and several basis, by all of
the Company's direct and indirect subsidiaries (Guarantor Subsidiaries), other
than financial services subsidiaries and certain other inconsequential
subsidiaries (collectively, Non-Guarantor Subsidiaries). Each of the Guarantor
Subsidiaries is wholly-owned. In lieu of providing separate financial statements
for the Guarantor Subsidiaries, consolidated condensed financial statements are
presented below. Separate financial statements and other disclosures concerning
the Guarantor Subsidiaries are not presented because management has determined
that they are not material to investors.
Consolidating Balance Sheet
December 31, 2001
Non-Guarantor
Subsidiaries
---------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------- -------------- ------------ -------- --------------- ---------
(In thousands)
ASSETS
Homebuilding:
Cash and cash equivalents .................... $ -- $ 20,518 $ -- $ 1,558 $ -- $ 22,076
Advances to/investments in subsidiaries ...... 2,503,648 175,684 -- -- (2,679,332) --
Inventories .................................. 613,555 2,340,125 -- 26,726 (322) 2,980,084
Property and equipment (net) ................. 9,255 40,930 -- 4,908 -- 55,093
Earnest money deposits and other assets ...... 63,994 143,727 -- 5,436 (5,231) 207,926
Excess of cost over net assets acquired (net). -- 136,765 -- -- -- 136,765
----------- ------------ ---------- -------- ------------- ----------
3,190,452 2,857,749 -- 38,628 (2,684,885) 3,401,944
----------- ------------ ---------- -------- ------------- ----------
Financial services:
Cash and cash equivalents .................... -- -- 9,904 -- -- 9,904
Mortgage loans held for sale ................. -- -- 233,858 -- -- 233,858
Other assets ................................. -- -- 15,100 -- -- 15,100
----------- ------------ ---------- -------- ------------- ----------
-- -- 258,862 -- -- 258,862
----------- ------------ ---------- -------- ------------- ----------
Total Assets ................................. $ 3,190,452 $ 2,857,749 $ 258,862 $ 38,628 $ (2,684,885) $3,660,806
=========== ============ ========== ======== ============= ==========
LIABILITIES & EQUITY
Homebuilding:
Accounts payable and other liabilities ....... $ 202,963 $ 260,411 $ -- $ 2,278 $ (35) $ 465,617
Advances from parent/subsidiaries ............ -- 1,878,508 -- 37,581 (1,916,089) --
Notes payable ................................ 1,664,153 35,746 -- 5,196 (5,196) 1,699,899
----------- ------------ ---------- -------- ------------- ----------
1,867,116 2,174,665 -- 45,055 (1,921,320) 2,165,516
----------- ------------ ---------- -------- ------------- ----------
Financial services:
Accounts payable and other liabilities ....... -- -- 7,849 -- -- 7,849
Advances from parent/subsidiaries ............ -- -- 43,519 -- (43,519) --
Notes payable ................................ -- -- 154,786 -- -- 154,786
----------- ------------ ---------- -------- ------------- ----------
-- -- 206,154 -- (43,519) 162,635
----------- ------------ ---------- -------- ------------- ----------
Total Liabilities ............................ 1,867,116 2,174,665 206,154 45,055 (1,964,839) 2,328,151
----------- ------------ ---------- -------- ------------- ----------
Minority interests ........................... -- -- 19 9,300 -- 9,319
----------- ------------ ---------- -------- ------------- ----------
Common stock ................................. 771 1 6 6,155 (6,162) 771
Additional capital ........................... 708,346 84,611 2,400 10,129 (97,140) 708,346
Retained earnings ............................ 614,219 598,472 50,283 (32,011) (616,744) 614,219
----------- ------------ ---------- -------- ------------- ----------
1,323,336 683,084 52,689 (15,727) (720,046) 1,323,336
----------- ------------ ---------- -------- ------------- ----------
Total Liabilities & Equity ................... $ 3,190,452 $ 2,857,749 $ 258,862 $ 38,628 $ (2,684,885) $3,660,806
=========== ============ ========== ======== ============= ==========
-11-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
December 31, 2001
NOTE H - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Balance Sheet
September 30, 2001
Non-Guarantor
Subsidiaries
--------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------ -------------- ---------- --------- --------------- -----------
(In thousands)
ASSETS
Homebuilding:
Cash and cash equivalents ........................ $ -- $ 230,481 $ -- $ 1,824 $ -- $ 232,305
Advances to/investments in subsidiaries .......... 2,493,783 74,241 -- -- (2,568,024) --
Inventories ...................................... 564,593 2,212,933 -- 27,230 (379) 2,804,377
Property and equipment (net) ..................... 8,114 39,823 -- 5,159 -- 53,096
Earnest money deposits and other assets .......... 39,978 140,436 -- 10,793 (9,548) 181,659
Excess of cost over net assets acquired (net) .... -- 136,223 -- -- -- 136,223
------------ ------------ ----------- ---------- ------------- ------------
3,106,468 2,834,137 -- 45,006 (2,577,951) 3,407,660
------------ ------------ ----------- ---------- ------------- ------------
Financial services:
Cash and cash equivalents ........................ -- -- 6,975 -- -- 6,975
Mortgage loans held for sale ..................... -- -- 222,818 -- -- 222,818
Other assets ..................................... -- -- 14,737 -- -- 14,737
------------ ------------ ----------- ---------- ------------- ------------
-- -- 244,530 -- -- 244,530
------------ ------------ ----------- ---------- ------------- ------------
Total Assets ..................................... $ 3,106,468 $ 2,834,137 $ 244,530 $ 45,006 $ (2,577,951) $ 3,652,190
============ ============ =========== ========== ============= ============
LIABILITIES & EQUITY
Homebuilding:
Accounts payable and other liabilities ........... $ 191,596 $ 304,486 $ -- $ 2,552 $ (58) $ 498,576
Advances from parent/subsidiaries ................ -- 1,944,796 -- 28,367 (1,973,163) --
Notes payable .................................... 1,664,625 37,064 -- 9,489 (9,489) 1,701,689
------------ ------------ ----------- ---------- ------------- ------------
1,856,221 2,286,346 -- 40,408 (1,982,710) 2,200,265
------------ ------------ ----------- ---------- ------------- ------------
Financial services:
Accounts payable and other liabilities ........... -- -- 10,173 -- -- 10,173
Advances from parent/subsidiaries ................ -- -- 13,748 -- (13,748) --
Notes payable .................................... -- -- 182,641 -- -- 182,641
------------ ------------ ----------- ---------- ------------- ------------
-- -- 206,562 -- (13,748) 192,814
------------ ------------ ----------- ---------- ------------- ------------
Total Liabilities ................................ 1,856,221 2,286,346 206,562 40,408 (1,996,458) 2,393,079
------------ ------------ ----------- ---------- ------------- ------------
Minority interests ............................... -- -- 10 8,854 -- 8,864
------------ ------------ ----------- ---------- ------------- ------------
Common stock ..................................... 769 1 6 6,155 (6,162) 769
Additional capital ............................... 704,842 84,612 2,299 10,129 (97,040) 704,842
Retained earnings ................................ 544,636 463,178 35,653 (20,540) (478,291) 544,636
------------ ------------ ----------- ---------- ------------- ------------
1,250,247 547,791 37,958 (4,256) (581,493) 1,250,247
------------ ------------ ----------- ---------- ------------- ------------
Total Liabilities & Equity ....................... $ 3,106,468 $ 2,834,137 $ 244,530 $ 45,006 $ (2,577,951) $ 3,652,190
============ ============ =========== ========== ============= ============
-12-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
NOTE H - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income
Three Months Ended December 31, 2001
Non-Guarantor
Subsidiaries
----------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------- ------------ ---------- ---------- -------------- -----------
(In thousands)
Homebuilding:
Revenues:
Home sales .................................... $ 179,037 $ 938,245 $ -- $ 8,456 $ -- $ 1,125,738
Land/lot sales ................................ 661 8,569 -- -- -- 9,230
---------- ---------- --------- --------- ----------- -----------
179,698 946,814 -- 8,456 -- 1,134,968
---------- ---------- --------- --------- ----------- -----------
Cost of sales:
Home sales .................................... 144,418 748,191 -- 6,465 (176) 898,898
Land/lot sales ................................ 759 7,148 -- -- -- 7,907
---------- ---------- --------- --------- ----------- -----------
145,177 755,339 -- 6,465 (176) 906,805
---------- ---------- --------- --------- ----------- -----------
Gross profit:
Home sales .................................... 34,619 190,054 -- 1,991 176 226,840
Land/lot sales ................................ (98) 1,421 -- -- -- 1,323
---------- ---------- --------- --------- ----------- -----------
34,521 191,475 -- 1,991 176 228,163
Selling, general and administrative expense .... 30,596 84,941 -- 1,295 1,585 118,417
Interest expense ............................... 1,038 157 -- 11 (10) 1,196
Other expense (income) ......................... (114,598) (807) -- 4,791 113,186 2,572
---------- ---------- --------- --------- ----------- -----------
117,485 107,184 -- (4,106) (114,585) 105,978
---------- ---------- --------- --------- ----------- -----------
Financial services:
Revenues ....................................... -- -- 24,922 -- -- 24,922
Selling, general and administrative expense .... -- -- 16,708 -- (1,585) 15,123
Interest expense ............................... -- -- 1,336 -- -- 1,336
Other (income) ................................. -- -- (3,044) -- -- (3,044)
---------- ---------- --------- --------- ----------- -----------
-- -- 9,922 -- 1,585 11,507
---------- ---------- --------- --------- ----------- -----------
Income before income taxes ..................... 117,485 107,184 9,922 (4,106) (113,000) 117,485
Provision for income taxes ..................... 44,057 40,194 3,721 (1,540) (42,375) 44,057
---------- ---------- --------- --------- ----------- -----------
Net income ..................................... $ 73,428 $ 66,990 $ 6,201 $ (2,566) $ (70,625) $ 73,428
========== ========== ========= ========= =========== ===========
-13-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
NOTE H - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income
Three Months Ended December 31, 2000
Non-Guarantor
Subsidiaries
-------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------- ------------ --------- --------- ------------ -----------
(In thousands)
Homebuilding:
Revenues:
Home sales ....................................... $ 119,199 $ 722,139 $ -- $ 14,739 $ -- $ 856,077
Land/lot sales ................................... 6,238 11,239 -- -- -- 17,477
---------- ---------- --------- --------- ---------- -----------
125,437 733,378 -- 14,739 -- 873,554
Cost of sales:
Home sales ....................................... 96,561 581,303 -- 12,181 (146) 689,899
Land/lot sales ................................... 4,788 8,644 -- -- -- 13,432
---------- ---------- --------- --------- ---------- -----------
101,349 589,947 -- 12,181 (146) 703,331
Gross profit:
Home sales ....................................... 22,638 140,836 -- 2,558 146 166,178
Land/lot sales ................................... 1,450 2,595 -- -- -- 4,045
---------- ---------- --------- --------- ---------- -----------
24,088 143,431 -- 2,558 146 170,223
Selling, general and administrative expense ....... 20,216 69,422 -- 2,260 -- 91,898
Interest expense .................................. 2,856 48 -- 108 (106) 2,906
Other expense (income) ............................ (75,345) (799) -- 1,082 78,376 3,314
---------- ---------- --------- --------- ---------- -----------
76,361 74,760 -- (892) (78,124) 72,105
---------- ---------- --------- --------- ---------- -----------
Financial services:
Revenues .......................................... -- -- 14,109 -- -- 14,109
Selling, general and administrative expense ....... -- -- 10,137 -- -- 10,137
Interest expense .................................. -- -- 1,132 -- -- 1,132
Other (income) .................................... -- -- (1,416) -- -- (1,416)
---------- ---------- --------- --------- ---------- -----------
-- -- 4,256 -- -- 4,256
---------- ---------- --------- --------- ---------- -----------
Income before income taxes ........................ 76,361 74,760 4,256 (892) (78,124) 76,361
Provision for income taxes ........................ 28,636 28,035 1,596 (334) (29,297) 28,636
---------- ---------- --------- --------- ---------- -----------
Income before cumulative effect of change
in accounting principle .......................... 47,725 46,725 2,660 (558) (48,827) 47,725
Cumulative effect of change in accounting
principle, net of income taxes ................... 2,136 -- -- -- -- 2,136
---------- ---------- --------- --------- ---------- -----------
Net income ........................................ $ 49,861 $ 46,725 $ 2,660 $ (558) $ (48,827) $ 49,861
========== ========== ========= ========= ========== ===========
-14-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
NOTE H - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Cash Flows
Three Months Ended December 31, 2001
Non-Guarantor
Subsidiaries
------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------- ------------- ---------- ------- ------------ ----------
(In thousands)
OPERATING ACTIVITIES
Net income ........................................... $ 73,428 $ 66,990 $ 6,201 $ (2,566) $ (70,625) $ 73,428
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ....................... 631 4,216 347 123 -- 5,317
Amortization of debt premiums and fees .............. 2,272 -- -- -- -- 2,272
Changes in operating assets and liabilities:
(Increase) decrease in inventories ................. (48,505) (123,889) -- 504 (57) (171,947)
(Increase) decrease in earnest money deposits and
other assets ...................................... (3,560) (3,878) (533) 4,857 (4,217) (7,331)
Increase in mortgage loans held for sale ........... -- -- (11,040) -- -- (11,040)
Increase (decrease) in accounts payable and other
liabilities ....................................... (10,268) (44,074) (2,315) 172 23 (56,462)
--------- ---------- --------- --------- ---------- ----------
Net cash provided by (used in) operating activities .. 13,998 (100,635) (7,340) 3,090 (74,876) (165,763)
--------- ---------- --------- --------- ---------- ----------
INVESTING ACTIVITIES
Net (purchases) dispositions of property and
equipment ........................................... (1,772) (5,214) (177) 127 -- (7,036)
Distributions from venture capital entities .......... -- -- -- 500 -- 500
--------- ---------- --------- --------- ---------- ----------
Net cash provided by (used in) investing activities .. (1,772) (5,214) (177) 627 -- (6,536)
--------- ---------- --------- --------- ---------- ----------
FINANCING ACTIVITIES
Net change in notes payable .......................... (2,123) (4,684) (27,855) (4,294) 4,294 (34,662)
Increase (decrease) in intercompany payables ......... (9,764) (19,540) 38,301 311 (9,308) --
Proceeds from stock associated with certain
employee benefit plans .............................. 17 -- -- -- -- 17
Proceeds from exercise of stock options .............. 3,489 -- -- -- -- 3,489
Cash dividends/distributions paid .................... (3,845) (79,890) -- -- 79,890 (3,845)
--------- ---------- --------- --------- ---------- ----------
Net cash provided by (used in) financing activities .. (12,226) (104,114) 10,446 (3,983) 74,876 (35,001)
--------- ---------- --------- --------- ---------- ----------
Increase (decrease) in cash ............................ -- (209,963) 2,929 (266) -- (207,300)
Cash at beginning of period ............................ -- 230,481 6,975 1,824 -- 239,280
--------- ---------- --------- --------- ---------- ----------
Cash at end of period .................................. $ -- $ 20,518 $ 9,904 $ 1,558 $ -- $ 31,980
========= ========== ========= ========= ========== ==========
-15-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
NOTE H - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Cash Flows
Three Months Ended December 31, 2000
Non-Guarantor
Subsidiaries
------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------ ------------- -------- --------- ------------ ---------
(In thousands)
OPERATING ACTIVITIES
Net income ......................................... $ 49,861 $ 47,265 $ 2,120 $ (558) $ (48,827) $ 49,861
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ..................... 416 5,185 283 108 -- 5,992
Amortization of debt premiums and fees ............ 598 -- -- -- -- 598
Changes in operating assets and liabilities:
Increase in inventories ........................... (45,217) (106,323) -- (3,238) (13) (154,791)
(Increase) decrease in earnest money deposits and
other assets ..................................... (510) (2,946) (1,616) 1,013 (2,224) (6,283)
Decrease in mortgage loans held for sale .......... -- -- 23,322 -- -- 23,322
Increase (decrease) in accounts payable and other
liabilities ...................................... 13,596 (103,351) (4,284) 2,267 90,744 (1,028)
---------- ---------- --------- -------- --------- ----------
Net cash provided by (used in) operating
activities ........................................ 18,744 (160,170) 19,825 (408) 39,680 (82,329)
---------- ---------- --------- -------- --------- ----------
INVESTING ACTIVITIES
Net purchases of property and equipment ............ (444) (2,171) (348) (216) -- (3,179)
Investments in venture capital entities ............ -- -- -- (2,022) -- (2,022)
Cash paid for acquisitions ......................... -- (1,364) -- -- -- (1,364)
---------- ---------- --------- -------- --------- ----------
Net cash used in investing activities .............. (444) (3,535) (348) (2,238) -- (6,565)
---------- ---------- --------- -------- --------- ----------
FINANCING ACTIVITIES
Net change in notes payable ........................ 134,402 (19,083) (20,570) (2,206) 2,206 94,749
Increase (decrease) in intercompany payables ....... (173,847) 268,743 6,666 4,824 (106,386) --
Proceeds from stock associated with certain
employee benefit plans ............................ 66 -- -- -- -- 66
Proceeds from exercise of stock options ............ 3,384 -- -- -- -- 3,384
Cash dividends/distributions paid .................. (2,702) (64,500) -- -- 64,500 (2,702)
---------- ---------- --------- -------- --------- ----------
Net cash provided by (used in) financing
activities ........................................ (38,697) 185,160 (13,904) 2,618 (39,680) 95,497
---------- ---------- --------- -------- --------- ----------
Increase (decrease) in cash .......................... (20,397) 21,455 5,573 (28) -- 6,603
Cash at beginning of period .......................... 20,397 40,349 10,727 1,052 -- 72,525
---------- ---------- --------- -------- --------- ----------
Cash at end of period ................................ $ -- $ 61,804 $ 16,300 $ 1,024 $ -- $ 79,128
========== ========== ========= ======== ========= ==========
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONSOLIDATED
D. R. Horton, Inc. and subsidiaries (the "Company") provide homebuilding
activities in 20 states and 38 markets through its 45 homebuilding divisions.
Through its financial services segment, the Company also provides mortgage
banking and title agency services in many of these same markets.
Three Months Ended December 31, 2001 Compared to Three Months Ended December 31,
2000
Consolidated revenues for the three months ended December 31, 2001, increased
30.7%, to $1,160.0 million, from $887.7 million for the comparable period of
2000, primarily due to increases in both homebuilding and financial services
revenues. Part of the increase in homebuilding revenues was attributable to
$100.5 million in revenues generated by Fortress-Florida, acquired in May, 2001,
and Emerald Builders, acquired in July, 2001.
Income before income taxes for the three months ended December 31, 2001,
increased 53.9%, to $117.5 million, from $76.4 million for the comparable period
of 2000. As a percentage of revenues, income before income taxes for the three
months ended December 31, 2001, increased 1.5 percentage points, to 10.1%, from
8.6% for the comparable period of 2000. The increase was due to a 1.0 percentage
point increase in homebuilding income before income taxes as a percentage of
revenues and a 16.0 percentage point increase for financial services.
The consolidated provision for income taxes increased 53.9%, to $44.1 million
for the three months ended December 31, 2001, from $28.6 million for the same
period of 2000, due to the corresponding increase in income before income taxes.
The effective income tax rate was 37.5% for both periods.
RESULTS OF OPERATIONS - HOMEBUILDING
The following tables set forth certain operating and financial data for the
Company's homebuilding activities:
Percentages of
Homebuilding Revenues
---------------------
Three Months Ended
December 31,
-------------------
2001 2000
-------- --------
Costs and expenses:
Cost of sales ........................................ 79.9% 80.5%
Selling, general and administrative expense .......... 10.4 10.5
Interest expense ..................................... 0.1 0.3
-------- --------
Total costs and expenses .............................. 90.4 91.3
Other expense ......................................... 0.3 0.4
-------- --------
Income before income taxes ............................ 9.3% 8.3%
======== ========
Homes Closed Three Months Ended December 31,
-----------------------------------------
2001 2000
------------------- -------------------
Homes Homes
Closed Revenues Closed Revenues
-------- -------- -------- --------
($'s in millions)
Mid-Atlantic ................. 595 $ 125.1 595 $ 133.9
Midwest ...................... 463 118.7 488 118.7
Southeast .................... 888 154.9 565 100.2
Southwest .................... 2,571 432.6 1,792 288.5
West ......................... 1,174 294.4 850 214.8
-------- -------- -------- --------
5,691 $1,125.7 4,290 $ 856.1
======== ======== ======== ========
-17-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net New Sales Contracts Three Months Ended December 31,
-----------------------------------------
2001 2000
------------------- -------------------
Homes Homes
Sold $ Sold $
-------- -------- -------- --------
($'s in millions)
Mid-Atlantic ................. 628 $ 128.1 550 $ 128.4
Midwest ...................... 388 96.9 326 80.1
Southeast .................... 735 118.3 548 98.0
Southwest .................... 2,332 379.2 1,679 277.8
West ......................... 1,061 298.9 1,126 316.0
-------- -------- -------- --------
5,144 $1,021.4 4,229 $ 900.3
======== ======== ======== ========
Sales Contract Backlog December 31, 2001 December 31, 2000
------------------- -------------------
Homes $ Homes $
-------- -------- -------- --------
($'s in millions)
Mid-Atlantic ................. 855 $ 193.3 778 $ 202.0
Midwest ...................... 843 241.0 738 186.8
Southeast .................... 1,311 216.9 970 175.6
Southwest .................... 3,996 684.6 3,076 540.8
West ......................... 1,711 493.7 1,765 475.9
-------- -------- -------- --------
8,716 $1,829.5 7,327 $1,581.1
======== ======== ======== ========
The Company's market regions consist of the following markets:
Mid-Atlantic Charleston, Charlotte, Columbia, Greensboro, Greenville, Hilton
Head, Maryland-D.C., Myrtle Beach, New Jersey, Raleigh/Durham,
Richmond, Virginia-D.C. and Williamsburg
Midwest Chicago, Louisville and Minneapolis/St. Paul
Southeast Atlanta, Birmingham, Fort Myers/Naples, Jacksonville,
Miami/West Palm Beach and Orlando
Southwest Albuquerque, Austin, Dallas, Fort Worth, Houston, Killeen,
Phoenix, San Antonio and Tucson
West Denver, Las Vegas, Los Angeles, Portland, Sacramento, Salt Lake
City and San Diego
Three Months Ended December 31, 2001 Compared to Three Months Ended December 31,
2000
Revenues from homebuilding activities increased 29.9%, to $1,135.0 million
(5,691 homes closed) for the three months ended December 31, 2001, from $873.6
million (4,290 homes closed) for the comparable period of 2000. Revenues from
home sales increased in three of the Company's five market regions, with
percentage increases ranging from 37.1% in the West region to 54.6% in the
Southeast. Home sales revenues declined 6.6% in the Mid-Atlantic region and
remained unchanged in the Midwest. The increases in total homebuilding revenues
and revenues from home sales were due to strong housing demand throughout the
majority of the Company's markets and the acquisitions of the assets of
Fortress-Florida and Emerald Builders during fiscal 2001. In divisions where the
Company operated throughout both periods, home sales revenues increased 20.0%,
to $1,026.6 million (5,095 homes closed) for the three months ended December 31,
2001 from $855.3 million (4,285 homes closed) for the comparable period of 2000.
The average selling price of homes closed during the three months ended December
31, 2001 was $197,800, down 0.9% from $199,600 for the same period in 2000. The
decrease in average selling price was due primarily to changes in the mix of
homes closed and the effects of the Fortress-Florida and Emerald Builders
acquisitions.
Net new sales contracts increased 21.6% to 5,144 (valued at $1,021.4 million)
for the three months ended December 31, 2001, from 4,229 (valued at $900.3
million) for the same period of 2000. Net new sales contracts increased in four
of the Company's five market regions, with percentage increases ranging from
14.2% in the Mid-Atlantic region to 38.9% in the Southwest. Net new sales
contracts declined 5.8% in the West region, due primarily to a temporary
shortage of lots available for sale in the Denver market. In divisions where the
-18-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company operated throughout both periods, net new sales contracts increased
8.4%, to 4,579 (valued at $930.7 million) for the three months ended December
31, 2001, from 4,223 (valued at $899.4 million) for the comparable period of
2000. The average price of a net new sales contract in the three months ended
December 31, 2001 was $198,600, down 6.7% from the $212,900 average in the
comparable period of 2000. The decrease in average selling price was due to an
increased emphasis on attracting first-time home buyers in several of our
markets and the effects of the Fortress-Florida and Emerald Builders
acquisitions.
At December 31, 2001, the value of the Company's backlog of sales contracts was
$1,829.5 million (8,716 homes), up 15.7% from $1,581.1 million (7,327 homes) at
December 31, 2000. In divisions where the Company operated throughout both
periods, the value of the Company's backlog of sales contracts increased 5.2% to
$1,662.3 million (7,713 homes), from $1,580.2 million (7,321 homes). The average
sales price of homes in sales backlog was $209,900 at December 31, 2001, down
2.7% from the $215,800 average at December 31, 2000, due to changes in the mix
of homes sold and the effects of the Fortress-Florida and Emerald Builders
acquisitions. The average sales price of homes in backlog typically is higher
than the average sales price of closed homes because it takes longer to
construct more expensive homes.
Cost of sales increased by 28.9%, to $906.8 million for the three months ended
December 31, 2001, from $703.3 million for the comparable period of 2000. The
increase in cost of sales was primarily attributable to the increase in
revenues. Cost of home sales as a percentage of home sales revenues declined 0.8
percentage points, to 79.8% for the three months ended December 31, 2001, from
80.6% for the comparable period of 2000, due to the Company's continuing ability
to selectively raise prices in certain lot-constrained markets and to reduce
material costs through its national purchasing program. This decline in cost of
home sales as a percentage of revenues caused total homebuilding cost of sales
to decline by 0.6 percentage points to 79.9% of total homebuilding revenues,
from 80.5% for the comparable period of 2000.
Selling, general and administrative (SG&A) expenses from homebuilding activities
increased by 28.9%, to $118.4 million in the three months ended December 31,
2001, from $91.9 million in the comparable period of 2000. As a percentage of
homebuilding revenues, SG&A expenses decreased to 10.4% for the three months
ended December 31, 2001, from 10.5% for the comparable period of 2000, due
primarily to the fact that, with the adoption of Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" on October
1, 2001, no goodwill was amortized in the three months ended December 31, 2001.
Interest expense associated with homebuilding activities decreased to $1.2
million in the three months ended December 31, 2001 from $2.9 million in the
comparable period of 2000. As a percentage of homebuilding revenues,
homebuilding interest expense was 0.1% for the three months ended December 31,
2001, down from 0.3% in the comparable period of 2000. During both periods, the
Company expensed the portion of incurred interest and other financing costs
which could not be charged to inventory. The Company follows a policy of
capitalizing interest only on inventory under construction or development.
Capitalized interest and other financing costs are included in cost of sales at
the time of home closings.
Other expense associated with homebuilding activities was $2.6 million in the
three months ended December 31, 2001, compared to $3.3 million in the comparable
period of 2000. The expense in the three months ended December 31, 2001, is
primarily due to write-downs to estimated fair value of the carrying amounts of
the Company's investments in start-up and emerging growth companies, offset in
part by an increase in the fair value of the Company's interest rate swap
agreements during the quarter. During the quarter ended December 31, 2000, the
expense was due to a decrease in the fair value of the Company's interest rate
swap agreements and a write-down to estimated fair value of the carrying amounts
of the Company's investments in start-up and emerging growth companies.
-19-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - FINANCIAL SERVICES
The following table summarizes financial and other information for the Company's
financial services operations:
Three Months Ended
December 31,
------------------------
2001 2000
---------- ----------
($ in Thousands)
Number of loans originated ................................. 4,423 2,337
---------- ----------
Loan origination fees ...................................... $ 4,643 $ 2,646
Sale of servicing rights and gains from sale of mortgages .. 13,061 6,826
Other revenues ............................................. 1,739 1,272
---------- ----------
Total mortgage banking revenues ............................ 19,443 10,744
Title policy premiums, net ................................. 5,479 3,365
---------- ----------
Total revenues ............................................. 24,922 14,109
Selling, general and administrative expense ................ 15,123 10,137
Interest expense ........................................... 1,336 1,132
Interest/other (income) .................................... (3,044) (1,416)
---------- ----------
Income before income taxes ................................. $ 11,507 $ 4,256
========== ==========
Three Months Ended December 31, 2001 Compared to Three Months Ended December 31,
2000
Revenues from the financial services segment increased 76.6%, to $24.9 million
in the three months ended December 31, 2001, from $14.1 million in the
comparable period of 2000. The increase in financial services revenues was due
to the rapid expansion of the Company's mortgage loan and title services
provided to customers of the Company's homebuilding segment and the effects of
the Emerald acquisition. Selling, general and administrative expenses associated
with financial services increased 49.2%, to $15.1 million in the three months
ended December 31, 2001, from $10.1 million in the comparable period of 2000. As
a percentage of financial services revenues, selling, general and administrative
expenses decreased by 11.1 percentage points, to 60.7% in the three months ended
December 31, 2001, from 71.8% in the comparable period in 2000, due primarily to
the increase in revenues absorbing fixed costs.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company had available cash and cash equivalents of
$32.0 million. Inventories (including finished homes, construction in progress,
and developed residential lots and other land) at December 31, 2001, had
increased by $175.7 million since September 30, 2001, due to a general increase
in business activity and the expansion of operations in the Company's market
areas. The inventory increase was financed largely with available cash and by
retaining earnings. The Company's ratio of homebuilding notes payable to total
capital at December 31, 2001, decreased by 1.4 percentage points, to 56.2% from
57.6% at September 30, 2001. The stockholders' equity to total assets ratio
increased 1.9 percentage points, to 36.1% at December 31, 2001, from 34.2% at
September 30, 2001.
At December 31, 2001, the Company had an $825 million, unsecured revolving
credit facility, consisting of a $775 million four-year revolving loan and a
$50 million four-year letter of credit facility, that was scheduled to mature in
April, 2002. The Company refinanced the old revolving credit facility on January
31, 2002. The new, replacement facility will total $795 million after the merger
with Schuler Homes, Inc. is closed in February, 2002, and includes $125 million
which may be used for letters of credit. The new facility matures in January,
2006, and is guaranteed by substantially all of the Company's subsidiaries other
than its financial services subsidiaries. At December 31, 2001, the Company had
outstanding homebuilding debt of $1,699.9 million. Under the debt covenants
associated with the old revolving credit facility, at December 31, 2001, the
Company had additional homebuilding borrowing capacity of $879.2 million,
including $775.0 million available capacity under the old revolving credit
facility. The Company has entered into multi-year interest rate swap agreements,
aggregating a notional amount of $200 million, that fix the interest rate on a
-20-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
portion of the variable rate revolving credit facility.
The Company currently estimates that its total cash requirement to complete the
Schuler merger will be approximately $330 million, which includes the cash
consideration to be paid to Schuler Homes stockholders, merger costs, and the
repayment of the Schuler Homes revolving credit facility. In addition, the
holders of $500 million principal amount of Schuler's outstanding senior and
senior subordinated notes will have the right to require the Company to
repurchase their notes at 101% of the principal amount of the notes. At February
1, 2002, market "bid" prices of the Schuler notes ranged from 102.5% to 105.5%
of the principal amounts outstanding. If the Company is required to repurchase
any of the outstanding notes, it currently has the ability to do so either with
existing cash resources and borrowing capacity under the new revolving credit
facility, or by accessing the capital markets at rates less than those borne by
the refinanced notes.
In the normal course of business, the Company provides standby letters of credit
and performance bonds, issued by third parties, to secure performance under
various contracts. At December 31, 2001, outstanding standby letters of credit
and performance bonds, the majority of which mature in less than one year, were
$75.6 million and $456.9 million, respectively.
At December 31, 2001, the financial services segment had mortgage loans held for
sale of $233.9 million and loan commitments for $100.3 million at fixed rates.
The Company hedges the interest rate market risk on these mortgage loans held
for sale and loan commitments through the use of best-efforts whole loan
delivery commitments, mandatory forward commitments to sell mortgage-backed
securities and the purchase of options on financial instruments.
The financial services segment has a $155 million, one-year bank warehouse
facility that matures on August 13, 2002, and is secured by mortgage loans held
for sale. The warehouse facility is not guaranteed by the parent company. As of
December 31, 2001, $154.8 million had been drawn under this facility.
Substantially all of the mortgage company activities are financed under the
warehouse facility.
The Company's rapid growth and acquisition strategy require significant amounts
of cash. It is anticipated that future home construction, lot and land purchases
and acquisitions will be funded through internally generated funds, existing and
future credit facilities and the issuance of new debt or equity securities. At
December 31, 2001, under currently effective shelf registration statements, the
Company has approximately 8.0 million shares issuable to effect, in whole or in
part, possible future acquisitions and the capacity to issue new debt or equity
securities amounting to $350 million. In the future, the Company intends to
continue to maintain effective shelf registration statements that will
facilitate access to the capital markets.
On October 4, 2001, the Company's Board of Directors declared a quarterly cash
dividend of $0.05 per common share, which was paid on October 26, 2001 to
stockholders of record on October 20, 2001. On January 24, 2002, the Company's
Board of Directors declared a quarterly cash dividend of $0.06 per common share,
which is payable on February 15, 2002 to stockholders of record on February 5,
2002.
In 1999 and 2000, the Company entered into three separate limited partnership
agreements with the purpose of investing in start-up and emerging growth
companies whose technology and business plans have the potential of permitting
the Company to leverage its size, expertise and customer base in the
homebuilding industry. The Company originally authorized investment of up to
$125 million in such companies over a four-year period. In January 2001, the
original $125 million authorization was reduced to the $31.3 million that had
been invested in such companies as of that date. The investments are
concentrated in e-commerce businesses that serve the homebuilding, real estate
and financial service industries, as well as in businesses whose strategic focus
allows for the diversification of the Company's operations. As of December 31,
2001, the carrying value of the Company's investments in such companies,
reported in homebuilding other assets, amounted to $5.0 million.
Except for the Schuler merger, ordinary expenditures for the construction of
homes, and the acquisition of land and lots for development and sale of homes,
at December 31, 2001, the Company had no material commitments for capital
expenditures.
-21-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
Certain statements contained in this report, as well as in other materials we
have filed or will file with the Securities and Exchange Commission, statements
made by us in periodic press releases and oral statements made by Company
officials to analysts, stockholders and the press in the course of presentations
about the Company, may be construed as "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. Any or all of the
forward-looking statements included in this report and in any other reports or
public statements of the Company are subject to risks, uncertainties and other
factors, many of which are outside of the Company's control, that could cause
actual results to differ materially from the results discussed in and
anticipated by the forward-looking statements. The following risks and
uncertainties relevant to our business include factors we believe could
adversely affect us. Other factors beyond those listed could also adversely
affect us.
- Changes in general economic, real estate and other business conditions
- Changes in interest rates and the availability of mortgage financing
- Governmental regulations and environmental matters
- The Company's substantial leverage
- Competitive conditions within the homebuilding industry
- The availability of capital
- The Company's ability to effect its growth strategies successfully
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. However, any
further disclosures made on related subjects in subsequent reports on Forms
10-K, 10-Q and 8-K should be consulted. Additional information about issues that
could lead to material changes in performance is contained in the Company's
annual report on Form 10-K, which is filed with the Securities and Exchange
Commission.
-22-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to interest rate risk on its long term debt. The Company
monitors its exposure to changes in interest rates and utilizes both fixed and
variable rate debt. For fixed rate debt, changes in interest rates generally
affect the value of the debt instrument, but not the Company's earnings or cash
flows. Conversely, for variable rate debt, changes in interest rates generally
do not impact the fair value of the debt instrument, but may affect the
Company's future earnings and cash flows. The Company has mitigated its exposure
to changes in interest rates on its variable rate bank debt by entering into
interest rate swap agreements to obtain a fixed interest rate for a portion of
the variable rate borrowings. The Company generally does not have an obligation
to prepay fixed-rate debt prior to maturity and, as a result, interest rate risk
and changes in fair value would not have a significant impact on the Company's
fixed-rate debt until such time as the Company is required to refinance,
repurchase or repay such debt.
The Company's interest rate swaps were not designated as hedges under Statement
of Financial Accounting Standards No. 133 when it was adopted on October 1,
2000. Since their maturities and other terms did not match the related debt,
they were determined to be ineffective hedges (as defined by the Statement).
Therefore, the Company is exposed to market risk associated with changes in the
fair values of the swaps, since any such changes must be reflected in the
Company's income statements.
The Company's financial services segment is exposed to interest rate risk
associated with its mortgage loan production activities. Mortgage loans are
funded at fixed interest rates before they are committed to specific investors
and interest rate lock commitments (IRLC's) are extended to borrowers who have
applied for loan funding and who meet certain defined credit and underwriting
criteria. Forward commitments to sell mortgage-backed securities are designated
as fair value hedges of the risk of changes in the overall fair value of funded
loans. The effectiveness of the fair value hedge is continuously monitored and
any ineffectiveness, which for the three months ended December 31, 2001, was not
significant, is recognized in current earnings. The IRLC's are classified and
accounted for as non-designated derivative instruments with gains and losses
recorded in current earnings. Interest rate risk associated with IRLC's is
managed through the use of best-efforts whole loan delivery commitments, forward
commitments to sell mortgage-backed securities and the purchase of options on
financial instruments. These instruments are considered non-designated
derivatives and are accounted for at fair market value with gains and losses
recorded in current earnings. At December 31, 2001, total forward commitments to
mitigate interest rate risk related to funded loans and IRLC's were
approximately $84.5 million, the duration of which was less than six months.
The following table shows, as of December 31, 2001, the Company's long term debt
obligations, principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair market value. In addition, the table shows the
notional amounts, weighted average interest rates and estimated fair market
value of the Company's interest rate swaps.
Nine Months
Ended Fair
Sep. 30, Year ended September 30, market
---------- -------------------------------------------------- value at
2002 2003 2004 2005 2006 Thereafter Total 12/31/01
------ ------ ------ ------- ------- ---------- ------- --------
($'s in millions)
Debt:
Fixed rate ................. $44.4 $16.8 $153.7 $200.9 $150.5 $1,317.5 $1,883.8 $1,765.4
Average interest rate ...... 7.37% 6.08% 8.71% 10.83% 10.18% 7.80% 8.42% --
Variable rate .............. $154.8 -- -- -- -- -- $154.8 $154.8
Average interest rate ...... 2.87% -- -- -- -- -- 2.87% --
Interest Rate Swaps:
Variable to fixed .......... $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 -- ($9.2)
Average pay rate ........... 5.10% 5.10% 5.10% 5.10% 5.10% 5.07% -- --
Average receive rate ....... 90-day LIBOR
-23-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Description
2.1 Agreement and Plan of Merger, dated as of October 22, 2001,
as amended on November 8, 2001, by and between the Company
and Schuler Homes, Inc., is incorporated by reference from
Exhibit 2.1 to the Company's Current Report on Form 8-K,
dated October 22, 2001, filed with the Securities and
Exchange Commission on October 24, 2001; and Exhibit 2.2 to
the Company's Current Report on Form 8-K, dated November 8,
2001, filed with the Commission on November 8, 2001. The
Company agrees to furnish supplementally a copy of omitted
schedules to the Commission upon request.
10.1 Revolving Credit Agreement, dated as of January 31, 2002,
by and among D.R. Horton, Bank of America, N.A., as
administrative agent and letter of credit issuer, and the
lenders named therein, is incorporated by reference from
Exhibit 10.1 to the Company's Current Report on Form 8-K,
dated January 31, 2002, filed with the Commission February
1, 2002.
(b) Reports on Form 8-K.
On October 24, 2001, the Company filed a Current Report on Form 8-K, dated
October 22, 2001, (Items 5 and 7) announcing that it had entered into an
Agreement and Plan of Merger with Schuler Homes, Inc., a Delaware corporation,
dated as of October 22, 2001, pursuant to which Schuler Homes, Inc. would be
merged into D.R. Horton, Inc. A copy of the Merger Agreement was filed as an
Exhibit.
On November 8, 2001, the Company filed a Current Report on Form 8-K (Items 5 and
7), which announced that the Company and Schuler Homes, Inc. had executed an
amendment to the Agreement and Plan of Merger dated as of October 22, 2001. The
amendment was dated November 8, 2001 and filed as an Exhibit.
-24-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
D.R. HORTON, INC.
Date: February 14, 2001 By /s/ SAMUEL R. FULLER
--------------------------------------------
Samuel R. Fuller, on behalf of D.R. Horton, Inc.
and as Executive Vice President, Treasurer and
Chief Financial Officer (Principal Financial and
Accounting Officer)
-25-