e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended September 30,
2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-14122
D.R. Horton, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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75-2386963
(I.R.S. Employer
Identification No.)
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301 Commerce Street, Suite 500
Fort Worth, Texas
(Address of principal
executive offices)
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76102
(Zip
Code)
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(817) 390-8200
Registrants telephone number, including area code
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $.01 per share
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The New York Stock Exchange
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9.75% Senior Subordinated Notes due 2010
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The New York Stock Exchange
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7.875% Senior Notes due 2011
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The New York Stock Exchange
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2.00% Convertible Senior Notes due 2014
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The New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting company
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of March 31, 2009, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was approximately $2,802,403,000 based on the closing
price as reported on the New York Stock Exchange.
As of November 16, 2009, there were 321,325,269 shares
of the registrants common stock, par value $.01 per share,
issued and 317,670,036 shares outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for
the 2010 Annual Meeting of Stockholders are incorporated herein
by reference in Part III.
D.R.
HORTON, INC. AND SUBSIDIARIES
2009 ANNUAL REPORT ON
FORM 10-K
TABLE OF CONTENTS
PART I
D.R. Horton, Inc. is one of the largest homebuilding companies
in the United States. We construct and sell high quality homes
through our operating divisions in 27 states and 75
metropolitan markets of the United States, primarily under
the name of D.R. Horton, Americas Builder. We are a
Fortune 500 company, and our common stock is included in
the S&P 500 Index and listed on the New York Stock Exchange
under the ticker symbol DHI. Unless the context
otherwise requires, the terms D.R. Horton, the
Company, we and our used
herein refer to D.R. Horton, Inc., a Delaware corporation, and
its predecessors and subsidiaries.
Donald R. Horton began our homebuilding business in 1978. In
1991, we were incorporated in Delaware to acquire the assets and
businesses of our predecessor companies, which were residential
home construction and development companies owned or controlled
by Mr. Horton. In 1992, we completed our initial public
offering of our common stock. The growth of our company over the
years was achieved by investing available capital into our
existing homebuilding markets and into
start-up
operations in new markets. Additionally, we acquired other
homebuilding companies, which strengthened our market position
in existing markets and expanded our geographic presence and
product offerings in other markets. Our homes generally range in
size from 1,000 to 4,000 square feet and in price from
$90,000 to $700,000. The current downturn in our industry has
resulted in a substantial decrease in the size of our operations
during the last three fiscal years as we have reacted to the
significantly weakened market for new homes. For the year ended
September 30, 2009, we closed 16,703 homes with an average
closing sales price of approximately $213,400.
Through our financial services operations, we provide mortgage
financing and title agency services to homebuyers in many of our
homebuilding markets. DHI Mortgage, our wholly-owned subsidiary,
provides mortgage financing services principally to the
purchasers of homes we build. We generally do not retain or
service the mortgages we originate but, rather, seek to sell the
mortgages and related servicing rights to third-party
purchasers. DHI Mortgage originates loans in accordance with
purchaser guidelines and historically has sold substantially all
of its mortgage production within 30 days of origination.
Our subsidiary title companies serve as title insurance agents
by providing title insurance policies, examination and closing
services, primarily to the purchasers of our homes.
Our financial reporting segments consist of six homebuilding
segments and a financial services segment. Our homebuilding
operations are the most substantial part of our business,
comprising approximately 99% of consolidated revenues, which
were $3.7 billion in fiscal 2009. Our homebuilding
operations generate most of their revenues from the sale of
completed homes, with a lesser amount from the sale of land and
lots. In addition to building traditional single-family detached
homes, we also build attached homes, such as town homes,
duplexes, triplexes and condominiums (including some mid-rise
buildings), which share common walls and roofs. The sale of
detached homes generated approximately 81%, 77%, and 81% of home
sales revenues in fiscal 2009, 2008 and 2007, respectively. Our
financial services segment generates its revenues from
originating and selling mortgages and collecting fees for title
insurance agency and closing services.
We make available, as soon as reasonably practicable, on our
Internet website all of our reports required to be filed with
the Securities and Exchange Commission (SEC). These reports
include our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
beneficial ownership reports on Forms 3, 4, and 5, proxy
statements and amendments to such reports. These reports are
available in the Investor Relations section of our
Internet website. We will also provide these reports in
electronic or paper format to our stockholders free of charge
upon request made to our Investor Relations department. Our SEC
filings are also available to the public over the Internet at
the SECs website at www.sec.gov, and the public may read
and copy any document we file at the SECs public reference
room located at 100 F Street NE, Washington, D.C.
20549. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
room.
1
Our principal executive offices are located at 301 Commerce
Street, Suite 500, Fort Worth, Texas 76102. Our
telephone number is
(817) 390-8200,
and our Internet website address is www.drhorton.com.
Information on our Internet website is not part of this annual
report on
Form 10-K.
Operating
Strategy
For the greatest part of our companys existence, we
maintained significant
year-over-year
growth and profitability. We achieved this growth through an
operating strategy focused on capturing greater market share,
while also maintaining a strong balance sheet. To execute our
strategy, we invested available capital in our existing
homebuilding markets and opportunistically entered new markets.
We also actively evaluated homebuilding acquisition
opportunities as they arose, some of which resulted in
acquisitions and contributed to our growth.
Due to the progressive and substantial weakening of demand in
our homebuilding markets over the past three years, we have
experienced declines in revenues and gross profit, sustained
significant asset impairment charges and incurred losses in
fiscal 2007, 2008 and 2009. We believe the long-term
fundamentals which support housing demand, namely population
growth and household formation, remain positive. In the near
term, however, it is not possible to predict how long the weak
market conditions will persist and if the homebuilding industry
will experience further deterioration or if conditions will
stabilize and then begin to improve. During the downturn we have
aggressively reduced inventory levels and increased our cash
balances. We have been successful in generating substantial cash
flow from operations primarily through inventory reductions and
from the receipt of a tax refund from a loss carryback. We have
also increased our cash balance by accessing the capital
markets. While we will continue to conservatively manage our
business, we believe this increase in our liquidity provides us
with flexibility in determining the appropriate operating
strategy for each of our communities and markets to strike the
best balance between cash flow generation and potential profit.
Geographic
Diversity
From 1978 to late 1987, our homebuilding activities were
conducted in the Dallas/Fort Worth area. We then began
diversifying geographically by entering additional markets, both
through
start-up
operations and acquisitions. We now operate in 27 states
and 75 markets. This provides us with geographic diversification
in our homebuilding inventory investments and our sources of
revenues and earnings. We believe our diversification strategy
helps to mitigate the effects of local and regional economic
cycles and enhances our long-term potential.
Economies
of Scale
We are one of the largest homebuilding companies in the United
States in terms of number of homes closed in fiscal 2009. By the
same measure, we are also one of the five largest builders in
many of our markets in fiscal 2009. We believe that our
national, regional and local scale of operations has provided us
with benefits that may not be available in the same degree to
some other smaller homebuilders, such as:
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Negotiation of volume discounts and rebates from national,
regional and local materials suppliers and lower labor rates
from certain subcontractors;
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Enhanced leverage of our general and administrative activities,
which allows us greater flexibility to compete for greater
market share in each of our markets; and
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Greater access to and lower cost of capital, due to our strong
balance sheet and our lending and capital markets relationships.
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Decentralized
Operations
We decentralize our homebuilding activities to give operating
flexibility to our local division presidents on certain key
operating decisions. At September 30, 2009, we had 31
separate homebuilding operating divisions, many of which operate
in more than one market area. Generally, each operating division
consists of
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a division president; land entitlement, acquisition and
development personnel; a sales manager and sales personnel; a
construction manager and construction superintendents; customer
service personnel; a controller; a purchasing manager and office
staff. We believe that division presidents and their management
teams, who are familiar with local conditions, generally have
better information on which to base decisions regarding their
operations. Our division presidents receive performance bonuses
based upon achieving targeted financial and operational measures
in their operating divisions.
Operating
Division Responsibilities
Each operating division is responsible for:
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Site selection, which involves
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A feasibility study;
Soil and environmental reviews;
Review of existing zoning and other governmental
requirements; and
Review of the need for and extent of offsite work
required to meet local building codes;
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Negotiating lot option or similar contracts;
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Obtaining all necessary land development and home construction
approvals;
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Overseeing land development;
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Selecting building plans and architectural schemes;
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Selecting and managing construction subcontractors and suppliers;
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Planning and managing homebuilding schedules;
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Developing and implementing marketing plans; and
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Coordinating post closing customer service and warranty repairs.
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Centralized
Controls
We centralize the key risk elements of our homebuilding business
through our regional and corporate offices. We have four
separate homebuilding regional offices. Generally, each regional
office consists of a region president, legal counsel, a chief
financial officer, a purchasing manager and limited office
support staff. Each of our region presidents and their
management teams are responsible for oversight of the operations
of up to nine homebuilding operating divisions, including:
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Review and approval of division business plans and budgets;
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Review of all land and lot acquisition contracts;
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Oversight of land and home inventory levels; and
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Review of major personnel decisions and division president
compensation plans.
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Our corporate executives and corporate office departments are
responsible for establishing our operational policies and
internal control standards and for monitoring compliance with
established policies and controls throughout our operations. The
corporate office also has primary responsibility for direct
management of certain key risk elements and initiatives through
the following centralized functions:
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Financing;
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Cash management;
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Risk and litigation management;
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Allocation of capital;
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Issuance and monitoring of inventory investment guidelines to
our operating divisions;
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Environmental assessments of land and lot acquisitions;
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Approval and funding of land and lot acquisitions;
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Accounting and management reporting;
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Internal audit;
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Information technology systems;
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Administration of payroll and employee benefits;
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Negotiation of national purchasing contracts;
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Management of major national or regional supply chain
initiatives;
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Monitoring and analysis of margins, returns and
expenses; and
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Administration of customer satisfaction surveys and reporting of
results.
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Cost
Management
We control overhead costs by centralizing certain administrative
and accounting functions and by closely monitoring the number of
administrative personnel and management positions in our
operating divisions, as well as in our regional and corporate
offices. We also minimize advertising costs by participating in
promotional activities sponsored by local real estate brokers.
We control construction costs by striving to design our homes
efficiently and by obtaining competitive bids for construction
materials and labor. We also seek to negotiate favorable pricing
from our primary subcontractors and suppliers based on the
volume of services and products we purchase from them on a
local, regional and national basis. We monitor our construction
costs on each house through our purchasing and construction
budgeting systems, and we monitor our inventory levels, margins,
returns and expenses through our management information systems.
Acquisitions
As negative market conditions in the housing industry persist,
we remain committed to maintaining our strong balance sheet and
liquidity. However, we will continue to evaluate opportunities
for strategic acquisitions. We believe that the current housing
industry downturn may provide us selected opportunities to
enhance our operations through the acquisition of existing
homebuilding companies at attractive valuations. In certain
instances, such acquisitions can provide us benefits not found
in start-up
operations, such as: established land positions and inventories;
and existing relationships with municipalities, land owners,
developers, subcontractors and suppliers. We have sought to
limit the risks associated with acquiring other companies by
conducting extensive operational, financial and legal due
diligence on each acquisition and by only acquiring homebuilding
companies that we believe have a positive impact on our earnings
within an acceptable period of time.
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Markets
We conduct our homebuilding operations in all of the geographic
regions, states and markets listed below, and we conduct our
mortgage and title operations in many of these markets. Our
homebuilding operating divisions are aggregated into six
reporting segments, also referred to as reporting regions, which
comprise the markets below. Our financial statements contain
additional information regarding segment performance.
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State
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Reporting Region/Market
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East Region
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Delaware
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Central Delaware
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Delaware Shore
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Georgia
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Savannah
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Maryland
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Baltimore
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Suburban Washington, D.C.
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New Jersey
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North New Jersey
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South New Jersey
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North Carolina
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Brunswick County
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Charlotte
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Greensboro/Winston-Salem
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Raleigh/Durham
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Pennsylvania
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Lancaster
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Philadelphia
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South Carolina
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Charleston
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Columbia
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Hilton Head
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Myrtle Beach
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Virginia
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Northern Virginia
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Midwest Region
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Colorado
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Colorado Springs
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Denver
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Fort Collins
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Illinois
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Chicago
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Minnesota
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Minneapolis/St. Paul
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Wisconsin
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Kenosha
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Southeast Region
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Alabama
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Birmingham
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Mobile
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Florida
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Daytona Beach
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Fort Myers/Naples
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Jacksonville
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Melbourne
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Miami/West Palm Beach
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Orlando
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Pensacola
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Sarasota County
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Tampa
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Georgia
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Atlanta
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Macon
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State
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Reporting Region/Market
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South Central Region
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Louisiana
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Baton Rouge
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Lafayette
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Mississippi
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Mississippi Gulf Coast
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Oklahoma
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Oklahoma City
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Texas
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Austin
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Dallas
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Fort Worth
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Houston
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Killeen/Temple/Waco
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Laredo
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Rio Grande Valley
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San Antonio
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Southwest Region
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Arizona
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Phoenix
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Tucson
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New Mexico
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Albuquerque
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Las Cruces
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West Region
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California
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Bay Area
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Central Valley
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Imperial Valley
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Los Angeles County
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Riverside/San Bernardino
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Sacramento
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San Diego County
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Ventura County
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Hawaii
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Hawaii
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Maui
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Oahu
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Idaho
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Boise
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Nevada
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Las Vegas
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Laughlin
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Reno
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Oregon
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Albany
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Central Oregon
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Portland
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Utah
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Salt Lake City
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Washington
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Eastern Washington
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Seattle/Tacoma
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Vancouver
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5
When evaluating new or existing homebuilding markets for
purposes of capital allocation, we consider the local,
market-specific factors, including among others:
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Economic conditions;
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Employment levels and job growth;
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Median income level of potential homebuyers;
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Local housing affordability and typical mortgage products
utilized;
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Market for homes at entry-level price point;
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Availability of land and lots on acceptable terms;
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Land entitlement and development processes;
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New and secondary home sales activity;
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Competition; and
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Prevailing housing products, features, cost and pricing.
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Land
Policies
We acquire land after we have completed appropriate due
diligence and generally after we have obtained the rights (known
as entitlements) to begin development or construction work
resulting in an acceptable number of residential lots. Before we
acquire lots or tracts of land, we will, among other things,
complete a feasibility study, which includes soil tests,
independent environmental studies and other engineering work,
and evaluate the status of necessary zoning and other
governmental entitlements required to develop and use the
property for home construction. Although we purchase and develop
land primarily to support our homebuilding activities, we also
sell land and lots to other developers and homebuilders where we
have excess land and lot positions.
We also enter into land/lot option contracts, in which we obtain
the right, but generally not the obligation, to buy land or lots
at predetermined prices on a defined schedule commensurate with
anticipated home closings or planned land development. Our
option contracts generally are non-recourse, which limits our
financial exposure to our earnest money deposited with land and
lot sellers and any preacquisition due diligence costs incurred
by us. This enables us to control land and lot positions with
limited capital investment, which substantially reduces the
risks associated with land ownership and development.
Almost all of our land and lot positions are acquired directly
by us. We have avoided entering into joint venture arrangements
due to their increased costs and complexity, as well as the loss
of operational control inherent in such arrangements. We are a
party to a very small number of joint ventures that were
acquired through acquisitions of other homebuilders. All of
these joint ventures are consolidated in our financial
statements.
We attempt to mitigate our exposure to real estate inventory
risks by:
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Managing our supply of land/lots controlled (owned and optioned)
in each market based on anticipated future home closing levels;
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Monitoring local market and demographic trends, housing
preferences and related economic developments, such as new job
opportunities, local growth initiatives and personal income
trends;
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Utilizing land/lot option contracts, where possible;
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Seeking to acquire developed lots which are substantially ready
for home construction;
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Limiting the size of acquired land parcels to smaller tracts,
where possible;
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Generally commencing construction of custom features or optional
upgrades on homes under contract only after the buyers
receipt of mortgage approval and receipt of satisfactory
deposits from the buyer; and
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Monitoring and managing the number of speculative homes (homes
under construction without an executed sales contract) built in
each subdivision.
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The benefits of this strategy have been limited by the sustained
weak conditions in the homebuilding industry over the past three
fiscal years.
Construction
Our home designs are selected or prepared in each of our markets
to appeal to local tastes and preferences of homebuyers in each
community. We also offer optional interior and exterior features
to allow homebuyers to enhance the basic home design and to
allow us to generate additional revenues from each home sold. We
have adjusted our product offerings to address affordability
issues, which have become increasingly important in the current
weak market conditions.
Substantially all of our construction work is performed by
subcontractors. Subcontractors typically are retained for a
specific subdivision pursuant to a contract that obligates the
subcontractor to complete construction at an
agreed-upon
price. Agreements with the subcontractors and suppliers we use
generally are negotiated for each subdivision. We compete with
other homebuilders for qualified subcontractors, raw materials
and lots in the markets where we operate. We employ construction
superintendents to monitor homes under construction, participate
in major design and building decisions, coordinate the
activities of subcontractors and suppliers, review the work of
subcontractors for quality and cost controls and monitor
compliance with zoning and building codes. In addition, our
construction superintendents play a significant role in working
with our homebuyers by assisting with option selection and home
modification decisions, educating buyers on the construction
process and instructing buyers on post-closing home maintenance.
Construction time for our homes depends on the weather,
availability of labor, materials and supplies, size of the home,
and other factors. We typically complete the construction of a
home within three to six months.
We typically do not maintain significant inventories of
construction materials, except for work in progress materials
for homes under construction. Generally, the construction
materials used in our operations are readily available from
numerous sources. We have contracts exceeding one year with
certain suppliers of our building materials that are cancelable
at our option with a 30 day notice. In recent years, we
have not experienced delays in construction due to shortages of
materials or labor that have materially affected our
consolidated operating results.
Marketing
and Sales
We market and sell our homes through commissioned employees and
independent real estate brokers. We typically conduct home sales
from sales offices located in furnished model homes in each
subdivision, and we typically do not offer our model homes for
sale until the completion of a subdivision. Our sales personnel
assist prospective homebuyers by providing them with floor
plans, price information, tours of model homes and assisting
them with the selection of options and other custom features. We
train and inform our sales personnel as to the availability of
financing, construction schedules, and marketing and advertising
plans. As our customers are typically first-time or
move-up
homebuyers, we attempt to adjust our product mix and pricing
within our homebuilding markets to keep our homes affordable. As
market conditions warrant, we may provide potential homebuyers
with one or more of a variety of incentives, including discounts
and free upgrades, to be competitive in a particular market. Due
to the weak industry conditions of the past three fiscal years,
we have offered an increased level of incentives to homebuyers.
We advertise in our local markets as necessary through
newspapers, marketing brochures, newsletters and email or other
electronic means to prospective homebuyers and real estate
brokers. We also use billboards, radio and television
advertising and our Internet website to market the location,
price range and availability of
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our homes. To minimize advertising costs, we attempt to operate
in subdivisions in conspicuous locations that permit us to take
advantage of local traffic patterns. We also believe that model
homes play a substantial role in our marketing efforts, so we
expend significant effort to create an attractive atmosphere in
our model homes.
In addition to using model homes, we build a limited number of
speculative homes in each subdivision. These homes enhance our
marketing and sales efforts to prospective homebuyers who are
relocating to these markets, as well as to independent brokers,
who often represent homebuyers requiring a completed home within
a short time frame. We determine our speculative homes strategy
in each market based on local market factors, such as new job
growth, the number of job relocations, housing demand,
seasonality, current sales contract cancellation trends and our
past experience in the market. We determine the number of
speculative homes to build in each subdivision based on our
current and planned sales pace, and we monitor and adjust
speculative home inventory on an ongoing basis as conditions
warrant. We typically have sold a substantial majority of our
speculative homes while they are under construction or soon
after completion; however, the significant weakness in our
housing markets and related high cancellation rates during
recent years had caused our speculative home inventory to remain
higher than our target levels. During fiscal 2009, we were able
to reduce both total and speculative homes in inventory from the
prior year levels. We do expect to maintain a level of
speculative home inventory in our markets which will be based on
our expectations of future sales and closings volume. We believe
these speculative homes help to provide us with opportunities to
sell additional homes at a profit, reduce our inventory of owned
lots and generate positive cash flows.
Our sales contracts require an earnest money deposit of at least
$500. The amount of earnest money required varies between
markets and subdivisions, and may significantly exceed $500.
Additionally, customers are generally required to pay additional
deposits when they select options or upgrade features for their
homes. Most of our sales contracts stipulate that when customers
cancel their contracts with us, we have the right to retain
their earnest money and option deposits; however, our operating
divisions occasionally choose to refund such deposits. Our sales
contracts also include a financing contingency which permits
customers to cancel and receive a refund of their deposits if
they cannot obtain mortgage financing at prevailing or specified
interest rates within a specified period. Our contracts may
include other contingencies, such as the sale of an existing
home. As a percentage of gross sales orders, cancellations of
sales contracts in fiscal 2009 were 30%. While this reflects an
improvement from the prior year, our cancellation rate continues
to be significantly higher than our historical rate of
approximately 20% before the current downturn in the
homebuilding industry, reflecting the continuing weak housing
market conditions. The length of time between the signing of a
sales contract for a home and delivery of the home to the buyer
(closing) is generally from two to six months.
Customer
Service and Quality Control
Our operating divisions are responsible for pre-closing quality
control inspections and responding to customers
post-closing needs. We believe that a prompt and courteous
response to homebuyers needs during and after construction
reduces post-closing repair costs, enhances our reputation for
quality and service and ultimately leads to significant repeat
and referral business from the real estate community and
homebuyers. We typically provide our homebuyers with a ten-year
limited warranty for major defects in structural elements such
as framing components and foundation systems, a two-year limited
warranty on major mechanical systems, and a one-year limited
warranty on other construction components. The subcontractors
who perform the actual construction also provide us with
warranties on workmanship and are generally prepared to respond
to us and the homeowner promptly upon request. In addition, some
of our suppliers provide manufacturers warranties on
specified products installed in the home.
Sales
Order Backlog
At September 30, 2009, the value of our backlog of sales
orders was $1,142.0 million (5,628 homes), a decrease of 5%
from $1,207.4 million (5,297 homes) at September 30,
2008. The average sales price of homes in backlog was $202,900
at September 30, 2009, down 11% from the $227,900 average
at September 30, 2008. Sales order backlog represents homes
under contract but not yet closed at the end of the period. Many
of the contracts in our sales order backlog are subject to
contingencies, including mortgage loan approval and
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buyers selling their existing homes, which can result in
cancellations. A portion of the contracts in backlog will not
result in closings due to cancellations. Substantially all of
the closings from our sales backlog at September 30, 2009
are scheduled for fiscal year 2010. Further discussion of our
backlog is provided in Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations under Part II of this annual report on
Form 10-K.
Customer
Mortgage Financing
We provide mortgage financing services principally to purchasers
of our homes in the majority of our homebuilding markets through
our wholly-owned subsidiary, DHI Mortgage. DHI Mortgage
coordinates and expedites the sales transaction by ensuring that
mortgage commitments are received and that closings take place
in a timely and efficient manner. DHI Mortgage originates
mortgage loans for a substantial portion of our homebuyers and,
when necessary to fulfill the needs of some homebuyers, also
brokers loans to third-party lenders who directly originate the
mortgage loans. During the year ended September 30, 2009,
approximately 83% of DHI Mortgages loan volume related to
homes closed by our homebuilding operations, and DHI Mortgage
provided mortgage financing services for approximately 67% of
our total homes closed.
To limit the risks associated with our mortgage operations, DHI
Mortgage only originates loan products that it believes may be
sold to third-party purchasers. DHI Mortgage generally packages
and sells the loans and their servicing rights to third-party
purchasers shortly after origination with limited recourse
provisions. In markets where we currently do not provide
mortgage financing, we work with a variety of mortgage lenders
that make available to homebuyers a range of mortgage financing
programs.
Title Services
Through our subsidiary title companies, we serve as a title
insurance agent in selected markets by providing title insurance
policies, examination and closing services to the purchasers of
homes we build and sell. We currently assume little or no
underwriting risk associated with these title policies.
Employees
At September 30, 2009, we employed 2,926 persons, of
whom 695 were sales and marketing personnel, 981 were executive,
administrative and clerical personnel, 648 were involved in
construction and 602 worked in mortgage and title operations. We
had fewer than 10 employees covered by collective
bargaining agreements. Employees of some of the subcontractors
which we use are represented by labor unions or are subject to
collective bargaining agreements. We believe that our relations
with our employees and subcontractors are good.
Competition
The homebuilding industry is highly competitive. We compete in
each of our markets with numerous other national, regional and
local homebuilders for homebuyers, desirable properties, raw
materials, skilled labor and financing. We also compete with
resales of existing homes and with the rental housing market.
Our homes compete on the basis of quality, price, design,
mortgage financing terms and location. In the current weak
housing conditions, competition among homebuilders has greatly
intensified, especially as to pricing and incentives, as
builders attempt to maximize sales volume despite the weakness
in housing demand. The current market conditions have also led
to a large number of foreclosed homes being offered for sale,
which has increased competition for homebuyers and affected
pricing. Our financial services business competes with other
mortgage lenders, including national, regional and local
mortgage bankers and other financial institutions, some of which
have greater access to capital, different lending criteria and
potentially broader product offerings.
Governmental
Regulation and Environmental Matters
The homebuilding industry is subject to extensive and complex
regulations. We and the subcontractors we use must comply with
various federal, state and local laws and regulations, including
zoning, density and
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development requirements, building, environmental, advertising
and real estate sales rules and regulations. These requirements
affect the development process, as well as building materials to
be used, building designs and minimum elevation of properties.
Our homes are inspected by local authorities where required, and
homes eligible for insurance or guarantees provided by the
Federal Housing Administration (FHA) and the Veterans
Administration (VA) are subject to inspection by them. These
regulations often provide broad discretion to the administering
governmental authorities. In addition, our new housing
developments may be subject to various assessments for schools,
parks, streets and other public improvements.
Our homebuilding operations are also subject to a variety of
local, state and federal statutes, ordinances, rules and
regulations concerning protection of health, safety and the
environment. The particular environmental laws for each site
vary greatly according to location, environmental condition and
the present and former uses of the site and adjoining properties.
Our mortgage company and title insurance agencies must also
comply with various federal and state laws and regulations.
These include eligibility and other requirements for
participation in the programs offered by the FHA, VA, Government
National Mortgage Association (GNMA), Federal National Mortgage
Association (Fannie Mae) and Federal Home Loan Mortgage
Corporation (Freddie Mac). These also include required
compliance with consumer lending and other laws and regulations
such as disclosure requirements, prohibitions against
discrimination and real estate settlement procedures. All of
these laws and regulations may subject our operations to
examination by the applicable agencies.
Seasonality
We have typically experienced seasonal variations in our
quarterly operating results and capital requirements. Prior to
the current downturn in the homebuilding industry, we generally
had more homes under construction, closed more homes and had
greater revenues and operating income in the third and fourth
quarters of our fiscal year. This seasonal activity increased
our working capital requirements for our homebuilding operations
during the third and fourth fiscal quarters and increased our
funding requirements for the mortgages we originated in our
financial services segment at the end of these quarters. As a
result of seasonal activity, our quarterly results of operations
and financial position at the end of a particular fiscal quarter
are not necessarily representative of the balance of our fiscal
year.
In contrast to our typical seasonal results, due to the weakness
in homebuilding market conditions during the past three years,
we have incurred consolidated operating losses each quarter
since the third quarter of fiscal 2007. During these periods,
the challenging market conditions caused declines in sales
volume, pricing and margins that mitigated our historical
seasonal variations. Although we may experience our typical
historical seasonal pattern in the future, given the current
market conditions, we can make no assurances as to when or
whether this pattern will recur.
Discussion of our business and operations included in this
annual report on
Form 10-K
should be read together with the risk factors set forth below.
They describe various risks and uncertainties we are or may
become subject to, many of which are difficult to predict or
beyond our control. These risks and uncertainties, together with
other factors described elsewhere in this report, have the
potential to affect our business, financial condition, results
of operations, cash flows, strategies or prospects in a material
and adverse manner.
The
homebuilding industry is undergoing a significant downturn, and
its duration and ultimate severity are uncertain. A continuation
or further deterioration in industry conditions or in the
broader economic conditions could have additional adverse
effects on our business and financial results.
The downturn in the homebuilding industry is in its fourth year,
and it has become one of the most severe housing downturns in
U.S. history. The significant declines in the demand for
new homes, the significant oversupply of homes on the market and
the significant reductions in the availability of financing for
homebuyers that have marked the downturn are continuing. We have
experienced material reductions in our
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home sales and homebuilding revenues, and we have incurred
material inventory and goodwill impairments and other
write-offs. It is not clear when these trends will reverse or
when we will return to profitability.
Our ability to respond to the downturn has been limited by
adverse industry and economic conditions. The significant amount
of home mortgage foreclosures has increased supply and driven
down prices, making the purchase of a foreclosed home an
attractive alternative to purchasing a new home. Homebuilders
have responded to declining sales and increased cancellation
rates with significant concessions, further adding to the price
declines. With the decline in the values of homes and in the
ability of some homeowners to make their mortgage payments, the
credit markets have been significantly disrupted, putting
strains on many households and businesses. In the face of these
conditions, the overall economy has weakened significantly, with
high unemployment levels and substantially reduced consumer
spending and confidence. As a result, demand for new homes
remains at historically low levels.
These challenging conditions are complex and interrelated. We
cannot predict their duration or ultimate severity. Nor can we
provide assurance that our responses to the homebuilding
downturn or the governments attempts to address the
troubles in the overall economy will be successful.
Additionally, we cannot predict the timing or effect of the
winding down or possible withdrawal of government intervention
or support.
The
continuing constriction of the credit markets could limit our
ability to access capital and increase our costs of
capital.
During this downturn in the homebuilding industry, we have
relied principally on the positive operating cash flow we have
generated to meet our working capital needs and repay
outstanding indebtedness. We generated substantial operating
cash flow during this time. However, the downturn and the
constriction of the credit markets have reduced the other
sources of liquidity available to us and increased our costs of
capital.
In May 2009, we voluntarily terminated our $1.65 billion
unsecured revolving credit facility. Although we had no cash
borrowings outstanding under the facility during fiscal 2009,
the borrowing base limitations applicable to the facility had
reduced availability significantly, and we believed that seeking
an amendment to the facility for relief from these limitations
would have increased the costs of borrowing, reduced the overall
credit commitment available under the facility and possibly
involved additional restrictions on us. We have since relied on
short-term arrangements with some of the lenders for the letters
of credit we require in our business. A new line of credit,
should we decide to pursue one, may be difficult to obtain on
favorable terms in the current circumstances of our business and
the overall economy. It would also likely involve additional
financing costs and restrictions on our business. Not having a
line in place could reduce our flexibility in responding to or
taking advantage of changing conditions in the homebuilding
industry or require us to use our own cash resources in doing so.
Our financial services segment uses a $100 million mortgage
repurchase facility to finance many of the loans it originates.
The facility must be renewed annually, and the current facility
expires in March 2010. A continuation of current market
conditions could make the renewal more difficult or could result
in an increase in the cost of the facility or a decrease in its
committed availability. Such conditions may also make it more
difficult or costly to sell the mortgages that we originate.
As of September 30, 2009, we had $308.4 million of
debt maturing in the next 12 months. We believe we can meet
these and our other capital requirements with our existing cash
resources and future cash flows and, if required, other sources
of financing that we anticipate will be available to us.
However, we can provide no assurance that we will continue to be
able to do so, particularly if current industry or economic
conditions continue or deteriorate further. The future effects
on our business, liquidity and financial results of these
conditions could be material and adverse, both in ways described
above and in other ways that we do not currently foresee.
We use letters of credit and surety bonds to secure our
performance under various construction and land development
agreements, escrow agreements, financial guarantees and other
arrangements. Should our future performance or economic
conditions make these more difficult to obtain or more costly,
our business or financial results could be adversely affected.
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The
reduction in availability of mortgage financing has adversely
affected our business, and the duration and ultimate severity of
the effects are uncertain.
During the last three fiscal years, the mortgage lending
industry has experienced significant instability, beginning with
increased defaults on subprime loans and other nonconforming
loans and compounded by expectations of increasing interest
payment requirements and further defaults. This in turn resulted
in a decline in the market value of many mortgage loans and
related securities. Lenders, regulators and others questioned
the adequacy of lending standards and other credit requirements
for several loan products and programs offered in recent years.
Credit requirements tightened, and investor demand for mortgage
loans and mortgage-backed securities declined. The deterioration
in credit quality has caused almost all lenders to eliminate
subprime mortgages and most other loan products that are not
eligible for sale to Fannie Mae or Freddie Mac or loans that do
not meet FHA and VA requirements. Fewer loan products, tighter
loan qualifications and a reduced willingness of lenders to make
loans in turn have made it more difficult for many buyers to
finance the purchase of our homes. These factors have served to
reduce the pool of qualified homebuyers and made it more
difficult to sell to first-time and
move-up
buyers which have long made up a substantial part of our
customers. These reductions in demand have adversely affected
our business and financial results, and the duration and
severity of the effects are uncertain.
We believe that the liquidity provided by Fannie Mae and Freddie
Mac to the mortgage industry has been very important to the
housing market. These entities have required substantial
injections of capital from the federal government and may
require additional government support in the future. Any
reduction in the availability of the financing provided by these
institutions could adversely affect interest rates, mortgage
availability and our sales of new homes and mortgage loans.
We believe that the purchases of mortgage-backed securities by
the Federal Reserve System (the Fed) have helped to keep
mortgage interest rates low during much of fiscal 2009. The Fed
has announced their intention to end these purchases in early
2010. This action will likely lead to higher mortgage interest
rates which would adversely impact our sales of homes.
Because of the decline in the availability of other mortgage
products, FHA and VA mortgage financing support has become a
more important factor in marketing our homes. The American
Housing Rescue and Foreclosure Prevention Act of 2008, however,
increased a buyers down payment requirement for FHA
insured loans. Additionally, under revised guidelines currently
projected to become effective in December 2009, guidelines on
FHA insured loans on condominiums will become significantly more
restrictive. In addition, increased demands on the FHA have
resulted in a reduction of its cash reserves. These factors or
further increases in down payment requirements or limitations or
restrictions on the availability of FHA and VA financing support
could adversely affect interest rates, mortgage availability and
our sales of new homes and mortgage loans.
In recent years many of our homebuyers used down payment
assistance programs, which allowed them to receive gift funds
from non-profit corporations as a down payment. Homebuilders had
been a source of funding for these programs. However, the
American Housing Rescue and Foreclosure Prevention Act of 2008
eliminated seller-funded down payment assistance on FHA-insured
loans approved on or after October 1, 2008. With the
elimination of these gift fund programs, these customers have
been required to seek other down payment programs or other
sources for 100% financing, such as that offered by the United
States Department of Agriculture (USDA). There can be no
assurance that such alternative programs will continue to be
available or will be as attractive to our customers as the
programs previously offered, which could cause our sales to
suffer.
In February 2009, the American Recovery and Reinvestment Act of
2009 was enacted into law. This legislation included a federal
tax credit for qualified first-time homebuyers purchasing a
principal residence on or after January 1, 2009 and before
December 1, 2009. In November 2009, this credit was
expanded to be available to more homebuyers and extended until
June 2010. Our sales in future periods may be adversely affected
when this tax credit expires.
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Even if potential customers do not need financing, changes in
the availability of mortgage products may make it harder for
them to sell their current homes to potential buyers who need
financing.
If interest rates increase, the costs of owning a home will be
affected and could result in further reductions in the demand
for our homes.
In addition, the recently proposed Restoring American Financial
Stability Act of 2009 contains provisions that require companies
that sell products like mortgage-backed securities to retain at
least 10% of the credit risk of the underlying assets. If this
or other attempts to impose more risk on mortgage securitizers
are enacted, the pricing and availability of mortgage products
our customers rely on to purchase our homes may be adversely
affected. Similarly, to the extent any future legislation
attempts to enact credit risk retention requirements on mortgage
originators, the risk profile of our financial services business
and its support of our homebuilding business could be adversely
affected.
Our
strategies in responding to the adverse conditions in the
homebuilding industry have had limited success, and the
continued implementation of these and other strategies may not
be successful.
While we have been successful in generating positive operating
cash flow and reducing our inventories in the last three fiscal
years, we have done so at significantly reduced gross profit
levels and have incurred significant asset impairment charges.
These contributed to the net losses we recognized during these
periods. Also, during this time, notwithstanding our sales
strategies, we continued to experience an elevated rate of sales
contract cancellations. We believe that the increase in the
cancellation rate is largely due to reduced homebuyer
confidence, due principally to continued price declines, the
growing number of foreclosures and continuing job losses in the
economy. A more restrictive mortgage lending environment and the
inability of some buyers to sell their existing homes have also
impacted cancellations. Many of these factors, which affect new
sales and cancellation rates, are beyond our control. It is
uncertain how long the reduction in sales and the increased
level of cancellations will continue. If these conditions
continue for a protracted period, it is not clear whether our
strategies will succeed in maintaining or increasing our sales
volume or our current margins.
A
return of inflation could adversely affect our business and
financial results, particularly in a period of oversupply of
homes.
Inflation can adversely affect us by increasing costs of land,
materials and labor. In the event of a return of inflation, we
may seek to increase the sales prices of homes in order to
maintain satisfactory margins. However, a continuation of the
oversupply of homes relative to demand may make this difficult.
In addition, inflation is often accompanied by higher interest
rates, which have a negative impact on housing demand. In such
an environment, we may not be able to raise home prices
sufficiently to keep up with the rate of inflation and our
margins could decrease. Moreover, with inflation, the costs of
capital increase, and the purchasing power of our cash resources
can decline. Current or future efforts by the government to
stimulate the economy may increase the risk of significant
inflation and its adverse impact on our business or financial
results.
The
homebuilding industry is cyclical and affected by changes in
general economic, real estate or other business conditions that
could adversely affect our business or financial
results.
The homebuilding industry is cyclical and is significantly
affected by changes in industry conditions, as well as in
general and local economic conditions, such as:
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employment levels;
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availability of financing for homebuyers;
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interest rates;
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consumer confidence;
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levels of new and existing homes for sale;
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demographic trends; and
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housing demand.
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These may occur on a national scale, like the current downturn,
or may affect some of the regions or markets in which we operate
more than others. When adverse conditions affect any of our
larger markets, they could have a proportionately greater impact
on us than on some other homebuilding companies. Our operations
in previously strong markets, particularly California, Florida,
Nevada and Arizona, have more adversely affected our financial
results than our other markets in the current downturn.
An oversupply of alternatives to new homes, including foreclosed
homes, homes held for sale by investors and speculators, other
existing homes and rental properties, can also reduce our
ability to sell new homes and depress new home prices and reduce
our margins on the sales of new homes. High levels of
foreclosures not only contribute to additional inventory
available for sale, but also reduce appraisal valuations for new
homes, potentially resulting in lower sales prices.
Weather conditions and natural disasters, such as hurricanes,
tornadoes, earthquakes, wildfires, volcanic activity, droughts,
and floods, can harm our homebuilding business. These can delay
home closings, adversely affect the cost or availability of
materials or labor, or damage homes under construction. The
climates and geology of many of the states in which we operate,
including California, Florida and Texas, where we have some of
our larger operations, present increased risks of adverse
weather or natural disasters in part because of their cyclically
recurring nature there.
Continued military deployments in the Middle East and other
overseas regions, terrorist attacks, other acts of violence or
threats to national security, and any corresponding response by
the United States or others, or related domestic or
international instability, may adversely affect general economic
conditions or cause a slowdown of the economy.
As a result of the foregoing matters, potential customers may be
less willing or able to buy our homes. Because of current
industry and economic conditions, we have not been able to
increase the sale prices of our homes. In the future, our
pricing strategies may also be limited by market conditions. We
may be unable to change the mix of our home offerings, reduce
the costs of the homes we build or offer more affordable homes
to maintain our margins or satisfactorily address changing
market conditions in other ways. In addition, cancellations of
home sales contracts in backlog may increase as homebuyers
choose to not honor their contracts.
Our financial services business is closely related to our
homebuilding business, as it originates mortgage loans
principally to purchasers of the homes we build. A decrease in
the demand for our homes because of the foregoing matters may
also adversely affect the financial results of this segment of
our business. An increase in the default rate on the mortgages
we originate may adversely affect our ability to sell the
mortgages or the pricing we receive upon the sale of mortgages
or may increase our repurchase or other obligations for previous
originations. During fiscal 2009 we increased our reserves
related to mortgages we have sold. Because of the uncertainties
inherent to these matters, actual future obligations could
differ significantly from our currently estimated amounts.
The
risks associated with our land and lot inventory could adversely
affect our business or financial results.
Inventory risks are substantial for our homebuilding business.
The risks inherent in controlling or purchasing and developing
land increase as consumer demand for housing decreases. Thus, we
may have acquired options on or bought and developed land at a
cost we will not be able to recover fully or on which we cannot
build and sell homes profitably. Our deposits for building lots
controlled under option or similar contracts may be put at risk.
The value of undeveloped land, building lots and housing
inventories can also fluctuate significantly as a result of
changing market conditions. In addition, inventory carrying
costs can be significant and can result in reduced margins or
losses in a poorly performing community or market. In the
present weak market conditions, we have sold homes and land for
lower margins or at a loss and we have recorded significant
inventory impairment charges.
Historically, our goals for years of supply for ownership and
control of land and building lots were based on
managements expectations for future volume growth. In
light of the much weaker market conditions encountered since
fiscal 2006, we significantly slowed our purchases of
undeveloped land and our
14
development spending on land we own and made substantial land
and lot sales as part of our strategy to reduce our inventory to
better match our reduced rate of production. We also terminated
numerous land option contracts and wrote off earnest money
deposits and pre-acquisition costs related to these option
contracts. Because future market conditions are uncertain, we
cannot provide assurance that these measures will be successful
in managing our future inventory risks. Our flexibility in
responding to changes in market conditions may have been reduced
as the amount of our land and lot positions controlled by option
and similar contracts has declined.
Supply
shortages and other risks related to demand for building
materials and skilled labor could increase our costs and delay
deliveries.
The homebuilding industry has from time to time experienced
significant difficulties that can affect the cost or timing of
construction, including:
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difficulty in acquiring land suitable for residential building
at affordable prices in locations where our potential customers
want to live;
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shortages of qualified trades people;
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reliance on local subcontractors, manufacturers and distributors
who may be inadequately capitalized;
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shortages of materials; and
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volatile increases in the cost of materials, particularly
increases in the price of lumber, drywall and cement, which are
significant components of home construction costs.
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These may cause us to take longer or incur more costs to build
our homes and adversely affect our revenues and margins.
Increases
in the costs of owning a home could prevent potential customers
from buying our homes and adversely affect our business or
financial results.
Significant expenses of owning a home, including mortgage
interest and real estate taxes, generally are deductible
expenses for an individuals federal, and in some cases
state, income taxes, subject to various limitations under
current tax law and policy. If the federal government or a state
government changes its income tax laws, as has been discussed
from time to time, to eliminate or substantially modify these
income tax deductions, the after-tax cost of owning a new home
would increase for many of our potential customers. The
resulting loss or reduction of homeowner tax deductions, if such
tax law changes were enacted without offsetting provisions,
would adversely impact demand for and sales prices of new homes.
In addition, increases in property tax rates by local
governmental authorities, as experienced in response to reduced
federal and state funding, can adversely affect the ability of
potential customers to obtain financing or their desire to
purchase new homes.
Governmental
regulations could increase the cost and limit the availability
of our development and homebuilding projects and adversely
affect our business or financial results.
We are subject to extensive and complex regulations that affect
land development and home construction, including zoning,
density restrictions, building design and building standards.
These regulations often provide broad discretion to the
administering governmental authorities as to the conditions we
must meet prior to being approved, if approved at all. We are
subject to determinations by these authorities as to the
adequacy of water or sewage facilities, roads or other local
services. New housing developments may also be subject to
various assessments for schools, parks, streets and other public
improvements. In addition, in many markets government
authorities have implemented no growth or growth control
initiatives. Any of these can limit, delay or increase the costs
of development or home construction.
We are also subject to a variety of local, state and federal
laws and regulations concerning protection of health, safety and
the environment. The impact of environmental laws varies
depending upon the prior uses of
15
the building site or adjoining properties and may be greater in
areas with less supply where undeveloped land or desirable
alternatives are less available. These matters may result in
delays, may cause us to incur substantial compliance,
remediation, mitigation and other costs, and can prohibit or
severely restrict development and homebuilding activity in
environmentally sensitive regions or areas.
Governmental
regulation of our financial services operations could adversely
affect our business or financial results.
Our financial services operations are subject to numerous
federal, state and local laws and regulations. These include
eligibility requirements for participation in federal loan
programs, compliance with consumer lending and similar
requirements such as disclosure requirements, prohibitions
against discrimination and real estate settlement procedures.
They may also subject our operations to examination by the
applicable agencies. These factors may limit our ability to
provide mortgage financing or title services to potential
purchasers of our homes.
The turmoil caused by the increasing number of defaults in
subprime and other mortgages has encouraged consumer lawsuits
and the investigation of financial services industry practices
by governmental authorities. These investigations could include
the examination of consumer lending practices, sales of
mortgages to financial institutions and other investors and the
practices in the financial services segments of homebuilding
companies. We are unable to assess whether these governmental
inquiries will result in changes in government regulation,
homebuilding industry practices or adversely affect the costs or
potential profitability of homebuilding companies.
Homebuilding
is subject to home warranty and construction defect claims in
the ordinary course of business that can be
significant.
As a homebuilder, we are subject to home warranty and
construction defect claims arising in the ordinary course of
business. As a consequence, we maintain product liability
insurance, obtain indemnities and certificates of insurance from
subcontractors generally covering claims related to workmanship
and materials, and create warranty and other reserves for the
homes we sell based on historical experience in our markets and
our judgment of the qualitative risks associated with the types
of homes built. Because of the uncertainties inherent to these
matters, we cannot provide assurance that our insurance
coverage, our subcontractor arrangements and our reserves will
be adequate to address all of our warranty and construction
defect claims in the future. Contractual indemnities can be
difficult to enforce, we may be responsible for applicable
self-insured retentions and some types of claims may not be
covered by insurance or may exceed applicable coverage limits.
Additionally, the coverage offered by and the availability of
product liability insurance for construction defects is
currently limited and costly. We have responded to increases in
insurance costs and coverage limitations in recent years by
increasing our self-insured retentions and claim reserves. There
can be no assurance that coverage will not be further restricted
or become more costly.
Our
substantial debt could adversely affect our financial
condition.
We have a significant amount of debt. As of September 30,
2009, our consolidated debt was $3,277.3 million. As of
September 30, 2009, the scheduled maturities of principal
on our outstanding debt for the subsequent 12 months
totaled $308.4 million. The indentures from our senior,
senior convertible and senior subordinated notes do not restrict
the incurrence of future unsecured debt, and they permit
significant amounts of secured debt. We do not currently have a
revolving credit facility for our homebuilding operations. If we
choose to enter into a new line of credit agreement, it may
limit the amount of debt we could incur.
Possible Consequences. The amount and the
maturities of our debt could have important consequences. For
example, they could:
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require us to dedicate a substantial portion of our cash flow
from operations to payment of our debt and reduce our ability to
use our cash flow for other operating or investing purposes;
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limit our flexibility in planning for, or reacting to, the
changes in our business;
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16
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limit our ability to obtain future financing for working
capital, capital expenditures, acquisitions, debt service
requirements or other requirements;
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place us at a competitive disadvantage because we have more debt
than some of our competitors; and
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make us more vulnerable to downturns in our business or general
economic conditions.
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Dependence on Future Performance. Our ability
to meet our debt service and other obligations will depend, in
part, upon our future financial performance. Our future results
are subject to the risks and uncertainties described in this
report. These have been compounded by the current industry and
economic conditions. Our revenues and earnings vary with the
level of general economic activity in the markets we serve. Our
businesses are also affected by financial, political, business
and other factors, many of which are beyond our control. The
factors that affect our ability to generate cash can also affect
our ability to raise additional funds for these purposes through
the sale of debt or equity, the refinancing of debt, or the sale
of assets.
Mortgage Repurchase Facility and Other
Restrictions. The mortgage repurchase facility
for our financial services subsidiaries requires the maintenance
of a minimum level of tangible net worth, a maximum allowable
ratio of debt to tangible net worth and a minimum level of
liquidity by our financial services subsidiaries. A failure to
comply with these requirements could allow the lending bank to
terminate the availability of funds to the financial services
subsidiaries or cause their debt to become due and payable prior
to maturity. Any difficulty experienced in complying with these
covenants could make the renewal of the facility more difficult
or costly.
In addition, the indentures governing our senior notes and
senior subordinated notes impose restrictions on the creation of
secured debt and liens.
As a result of terminating our revolving credit facility, we are
no longer subject to the restrictions on our operations and
activities that it imposed on us. However, if we decide to enter
into another revolving credit agreement, it is likely that we
will again become subject to these types of provisions, which
may be more restrictive than those found in our previous
facility.
Changes in Debt Ratings. In fiscal 2008, all
three of the agencies that rate our senior unsecured debt
lowered our ratings to a level below investment grade, and these
agencies have since lowered our ratings even further. The cost
of debt capital has increased and could increase more with
further lowering of our debt ratings. The further lowering of
our debt ratings could also make accessing the public capital
markets more difficult and expensive.
Change of Control Purchase Options. If a
change of control occurs as defined in the indentures governing
many series of our senior and senior subordinated notes, which
constituted $1.0 billion principal amount in the aggregate
as of September 30, 2009, we would be required to offer to
purchase these notes at 101% of their principal amount, together
with all accrued and unpaid interest, if any. If a fundamental
change, including a change of control, occurs as defined in the
indenture governing our convertible senior notes, which
constituted $500 million principal amount as of
September 30, 2009, we would be required to offer to
purchase these notes at par, together with all accrued and
unpaid interest, if any. If purchase offers were required under
the indentures for these notes, we can give no assurance that we
would have sufficient funds to pay the amounts that we would be
required to purchase.
Impact of Financial Services Debt. Our
financial services business is conducted through subsidiaries
that are not restricted by our indentures. The ability of our
financial services subsidiaries to provide funds to our
homebuilding operations, however, is subject to restrictions in
their mortgage repurchase facility. These funds would not be
available to us upon the occurrence and during the continuance
of defaults under this facility. Moreover, our right to receive
assets from these subsidiaries upon liquidation or
recapitalization will be subject to the prior claims of the
creditors of these subsidiaries. Any claims we may have to funds
from this segment would be subordinate to subsidiary
indebtedness to the extent of any security for such indebtedness
and to any indebtedness otherwise recognized as senior to our
claims.
17
Homebuilding
and financial services are very competitive, and competitive
conditions could adversely affect our business or financial
results.
The homebuilding industry is highly competitive. Homebuilders
compete not only for homebuyers, but also for desirable
properties, financing, raw materials and skilled labor. We
compete with other local, regional and national homebuilders,
often within larger subdivisions designed, planned and developed
by such homebuilders. We also compete with existing home sales,
foreclosures and rental properties. The competitive conditions
in the homebuilding industry can result in:
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lower sales;
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lower selling prices;
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increased selling incentives;
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lower profit margins;
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impairments in the value of inventory, goodwill and other assets;
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difficulty in acquiring suitable land, raw materials, and
skilled labor at acceptable prices or terms; or
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delays in construction of our homes.
|
Our financial services business competes with other mortgage
lenders, including national, regional and local mortgage banks
and other financial institutions. Mortgage lenders with greater
access to capital or different lending criteria may be able to
offer more attractive financing to potential customers.
When we are affected by these competitive conditions, our
business and financial results could be adversely affected. In
the current downturn in the homebuilding industry, the reactions
of our competitors may have reduced the effectiveness of our
efforts to achieve pricing stability and reduce our inventory
levels.
We
cannot make any assurances that any future growth strategies
will be successful or not expose us to additional
risks.
Although we focused on internal growth for several years before
the downturn in the homebuilding industry, we may make strategic
acquisitions of homebuilding companies or their assets in the
future. Successful strategic acquisitions can require the
integration of operations and management and other efforts to
realize the benefits that may be available. Although we believe
that we have been successful in the past, we can give no
assurance that we would be able to successfully identify,
acquire and integrate strategic acquisitions in the future.
Acquisitions can result in the dilution of existing stockholders
if we issue our common stock as consideration or reduce our
liquidity or increase our debt if we fund them with cash. The
impact on liquidity may be increased because we do not currently
have a revolving credit facility. In addition, acquisitions can
expose us to valuation risks, including the risk of writing off
goodwill or impairing inventory and other assets related to such
acquisitions. The risk of goodwill and other asset impairments
increases during a cyclical housing downturn when our
profitability may decline, as evidenced by the goodwill and
other asset impairment charges we recognized in recent years. In
addition, we may not be able to implement successfully our
operating or internal growth strategies within our existing
markets. In the uncertain current market conditions, asset
acquisitions involve a risk that the markets involved
subsequently deteriorate. Conversely, if we delay an acquisition
until we believe the market uncertainties are resolved, the
potential competitive advantages of the acquisition may be
limited.
We may
not realize our deferred income tax asset.
As of September 30, 2009, we have a net deferred income tax
asset of $1,124.4 million, against which we have provided a
valuation allowance of $1,124.4 million. The realization of
the deferred income tax asset is dependent upon the taxable
income available in current statutory carryback periods,
reversals of existing taxable temporary differences, tax
planning strategies and our ability to generate taxable income
within the statutory carryforward periods. Based on our
assessment, the realization of all of our deferred income tax
asset
18
is dependent upon the generation of future taxable income during
the statutory carryforward periods in which the related
temporary differences become deductible.
The accounting for deferred income taxes is based upon estimates
of future results, and the valuation allowance may be increased
or decreased as conditions change or if we are unable to
implement certain tax planning strategies. Differences between
the anticipated and actual outcomes of these future tax
consequences could have a material impact on our consolidated
results of operations or financial position. Changes in tax laws
also affect actual tax results and the valuation of deferred
income tax assets over time.
The
utilization of our tax losses could be substantially limited if
we experienced an ownership change as defined in the Internal
Revenue Code.
We have experienced continuing losses that have produced net
operating losses and unrealized built-in losses for income tax
purposes. These have the potential to reduce future income tax
obligations if we become profitable in the future. However,
Section 382 of the Internal Revenue Code contains rules
that limit the ability of a company that undergoes an ownership
change to utilize its net operating loss carryforwards and
certain built-in losses recognized in years after the ownership
change. Under the rules, such an ownership change is generally
any change in ownership of more than 50% of its stock within a
rolling three-year period, as calculated in accordance with the
rules. The rules generally operate by focusing on changes in
ownership among stockholders considered by the rules as owning
directly or indirectly 5% or more of the stock of the company
and any change in ownership arising from new issuances of stock
by the company.
If we undergo an ownership change for purposes of
Section 382 as a result of future transactions involving
our common stock, our ability to use any of our net operating
loss carryforwards, tax credit carryforwards or net unrealized
built-in losses at the time of ownership change would be subject
to the limitations of Section 382 on their use against
future taxable income. The limitation may affect the amount of
our deferred income tax asset and, depending on the limitation,
a significant portion of our built-in losses, any net operating
loss carryforwards or tax credit carryforwards could expire
before we would be able to use them. This could adversely affect
our financial position, results of operations and cash flow.
We believe that we have not experienced such an ownership change
as of September 30, 2009; however, the amount by which our
ownership may change in the future could be affected by
purchases and sales of stock by 5% stockholders and the
conversion of our outstanding senior convertible notes, over
which we have no control, and new issuances of stock by us,
should we choose to do so. In August 2009, our board of
directors adopted a Section 382 rights agreement as a
measure intended to deter such an ownership change in order to
preserve these tax attributes. The Section 382 rights
agreement, however, may not prevent an ownership change.
Moreover, it will expire by its terms in 2010 if it is not
approved when we submit it to our stockholders for their
approval. In addition, while the Section 382 rights
agreement is in effect, it could discourage or prevent a merger,
tender offer, proxy contest or accumulations of substantial
blocks of shares for which some stockholders might receive a
premium above market value. It could also adversely affect the
liquidity of the market for our shares.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
|
None.
In addition to our inventories of land, lots and homes, we own
several office buildings totaling approximately
258,000 square feet, and we lease approximately
974,000 square feet of office space under leases expiring
through May 2015. These properties are located in our various
operating markets to house our homebuilding and financial
services operating divisions and our regional and corporate
offices.
19
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ITEM 3.
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LEGAL
PROCEEDINGS
|
We are involved in lawsuits and other contingencies in the
ordinary course of business. While the outcome of such
contingencies cannot be predicted with certainty, we believe
that the liabilities arising from these matters will not have a
material adverse effect on our consolidated financial position,
results of operations or cash flows. However, to the extent the
liability arising from the ultimate resolution of any matter
exceeds our estimates reflected in the recorded reserves
relating to such matter, we could incur additional charges that
could be significant.
On June 15, 2007, a putative class action, John R.
Yeatman, et al. v. D.R. Horton, Inc., et al., was filed
by one of our customers against us and our affiliated mortgage
company subsidiary in the United States District Court for the
Southern District of Georgia. The complaint sought certification
of a class alleged to include persons who, within the year
preceding the filing of the suit, purchased a home from us and
obtained a mortgage for such purchase from our affiliated
mortgage company subsidiary. The complaint alleged that we
violated Section 8 of the Real Estate Settlement Procedures
Act by effectively requiring our homebuyers to use our
affiliated mortgage company to finance their home purchases by
offering certain discounts and incentives. The action sought
damages in an unspecified amount and injunctive relief. On
April 23, 2008, the Court ruled on our motion to dismiss
and dismissed this complaint with prejudice. The plaintiffs
appealed the decision. On September 1, 2009, the 11th
Circuit Court of Appeals issued its mandate affirming the trial
courts dismissal of the plaintiffs complaint. The
plaintiffs have until December 1, 2009 to seek Supreme
Court review; however, we have received no indication from the
plaintiffs whether any further appeals are planned.
On March 24, 2008, a putative class action, James
Wilson, et al. v. D.R. Horton, Inc., et al., was filed
by five customers of Western Pacific Housing, Inc., one of our
wholly-owned subsidiaries, against us, Western Pacific Housing,
Inc., and our affiliated mortgage company subsidiary, in the
United States District Court for the Southern District of
California. The complaint sought certification of a class
alleged to include persons who, within the four years preceding
the filing of the suit, purchased a home from us, or any of our
subsidiaries, and obtained a mortgage for such purchase from our
affiliated mortgage company subsidiary. The complaint alleged
that we violated Section 1 of the Sherman Antitrust Act and
Sections 16720, 17200 and 17500 of the California Business
and Professions Code by effectively requiring our homebuyers to
apply for a loan through our affiliated mortgage company. In
June 2009 the complaint was amended to limit the putative class
to California customers only and the claims asserted were
limited to alleged violations of the California Business and
Professions Code. The complaint alleges that the homebuyers were
either deceived about loan costs charged by our affiliated
mortgage company or coerced into using our affiliated mortgage
company, or both, and that discounts and incentives offered by
us or our subsidiaries to buyers who obtained financing from our
affiliated mortgage company were illusory. The action seeks
treble damages in an unspecified amount and injunctive relief.
We believe the claims alleged in this action are without merit
and will defend them vigorously. However, as the action is still
in its early stages, we are unable to express an opinion as to
the likelihood of an unfavorable outcome or the amount of
damages, if any.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None.
20
PART II
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ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock is listed on the New York Stock Exchange (NYSE)
under the symbol DHI. The following table sets
forth, for the periods indicated, the range of high and low
sales prices for our common stock, as reported by the NYSE, and
the quarterly cash dividends declared per common share.
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Year Ended September 30, 2009
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Year Ended September 30, 2008
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Declared
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Declared
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High
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Low
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Dividends
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High
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Low
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Dividends
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1st Quarter
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$
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13.40
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$
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3.79
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$
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0.0375
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$
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15.18
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$
|
10.15
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$
|
0.15
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2nd Quarter
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11.35
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5.72
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0.0375
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17.80
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9.78
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0.15
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3rd Quarter
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13.74
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8.53
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0.0375
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17.95
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10.74
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0.075
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4th Quarter
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13.90
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8.26
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0.0375
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15.46
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8.93
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0.075
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As of November 16, 2009, the closing price of our common
stock on the NYSE was $12.31, and there were approximately 584
holders of record.
The declaration of future cash dividends is at the discretion of
our Board of Directors and will depend upon, among other things,
future earnings, cash flows, capital requirements, our financial
condition and general business conditions. We reduced the amount
of our quarterly dividend during the third quarter of fiscal
2008, and we have further reduced our dividend amount during the
first quarter of fiscal 2009.
The information required by this item with respect to equity
compensation plans is set forth under Item 12 of this
annual report on
Form 10-K
and is incorporated herein by reference.
During fiscal years 2009, 2008 and 2007, we did not sell any
securities that were not registered under the Securities Act of
1933, as amended.
In November 2008, our Board of Directors authorized the
repurchase of up to $100 million of our common stock. The
authorization is effective from December 1, 2008 to
November 30, 2009. We made no repurchases of common stock
under the share repurchase program during fiscal 2009, and
therefore, all of the $100 million authorization was
remaining at September 30, 2009. Upon expiration of the
November 2008 authorization, our Board of Directors has
authorized the repurchase of up to $100 million of our
common stock through November 30, 2010.
In August 2009, to preserve the tax benefits of our net
operating losses and unrealized built-in losses, our Board of
Directors adopted a rights agreement as a measure intended to
deter an ownership change as defined by Internal Revenue Code
Section 382. On August 19, 2009, our Board of
Directors declared a dividend of one preferred share purchase
right for each outstanding share of our common stock. The
dividend was paid on August 31, 2009 to stockholders of
record on August 31, 2009.
21
Stock
Performance Graph
The following graph illustrates the cumulative total stockholder
return on D.R. Horton common stock for the last five fiscal
years through September 30, 2009, compared to the S&P
500 Index and the S&P 500 Homebuilding Index. The
comparison assumes a hypothetical investment in D.R. Horton
common stock and in each of the foregoing indices of $100 at
September 30, 2004, and assumes that all dividends were
reinvested. Shareholder returns over the indicated period are
based on historical data and should not be considered indicative
of future shareholder returns. The graph and related disclosure
in no way reflect our forecast of future financial performance.
Comparison
of Five-Year Cumulative Total Return
Among D.R. Horton, Inc., S&P 500 Index and S&P 500
Homebuilding Index
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Year Ended September 30,
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2004
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2005
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2006
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2007
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2008
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2009
|
D.R. Horton, Inc.
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$
|
100.00
|
|
|
$
|
147.32
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|
|
$
|
99.00
|
|
|
$
|
54.45
|
|
|
$
|
57.31
|
|
|
$
|
51.06
|
|
|
|
|
|
|
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|
S&P 500 Index
|
|
$
|
100.00
|
|
|
$
|
112.25
|
|
|
$
|
124.36
|
|
|
$
|
144.81
|
|
|
$
|
112.99
|
|
|
$
|
105.18
|
|
|
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S&P 500 Homebuilding Index
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$
|
100.00
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$
|
143.29
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|
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$
|
103.78
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|
|
$
|
52.74
|
|
|
$
|
44.63
|
|
|
$
|
37.38
|
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22
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ITEM 6.
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SELECTED
FINANCIAL DATA
|
The following selected consolidated financial data are derived
from our Consolidated Financial Statements. The data should be
read in conjunction with Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Item 1A, Risk Factors,
Item 8, Financial Statements and Supplementary
Data, and all other financial data contained in this
annual report on
Form 10-K.
These historical results are not necessarily indicative of the
results to be expected in the future.
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|
|
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|
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Year Ended September 30,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
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(In millions, except per share data)
|
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Operating Data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Homebuilding
|
|
$
|
3,603.9
|
|
|
$
|
6,518.6
|
|
|
$
|
11,088.8
|
|
|
$
|
14,760.5
|
|
|
$
|
13,628.6
|
|
Financial Services
|
|
|
53.7
|
|
|
|
127.5
|
|
|
|
207.7
|
|
|
|
290.8
|
|
|
|
235.1
|
|
Gross profit (loss) Homebuilding
|
|
|
65.2
|
|
|
|
(1,763.2
|
)
|
|
|
603.7
|
|
|
|
3,342.2
|
|
|
|
3,488.3
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
|
(536.8
|
)
|
|
|
(2,666.9
|
)
|
|
|
(1,020.0
|
)
|
|
|
1,878.7
|
|
|
|
2,273.0
|
|
Financial Services
|
|
|
(15.5
|
)
|
|
|
35.1
|
|
|
|
68.8
|
|
|
|
108.4
|
|
|
|
105.6
|
|
Provision for (benefit from) income taxes
|
|
|
(7.0
|
)
|
|
|
1.8
|
|
|
|
(238.7
|
)
|
|
|
753.8
|
|
|
|
908.1
|
|
Net income (loss)
|
|
|
(545.3
|
)
|
|
|
(2,633.6
|
)
|
|
|
(712.5
|
)
|
|
|
1,233.3
|
|
|
|
1,470.5
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(1.72
|
)
|
|
|
(8.34
|
)
|
|
|
(2.27
|
)
|
|
|
3.94
|
|
|
|
4.71
|
|
Diluted
|
|
|
(1.72
|
)
|
|
|
(8.34
|
)
|
|
|
(2.27
|
)
|
|
|
3.90
|
|
|
|
4.62
|
|
Cash dividends declared per common share
|
|
|
0.15
|
|
|
|
0.45
|
|
|
|
0.60
|
|
|
|
0.44
|
|
|
|
0.3075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In millions)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
3,663.0
|
|
|
$
|
4,683.2
|
|
|
$
|
9,343.5
|
|
|
$
|
11,343.1
|
|
|
$
|
8,486.8
|
|
Total assets
|
|
|
6,756.6
|
|
|
|
7,950.6
|
|
|
|
11,556.3
|
|
|
|
14,820.7
|
|
|
|
12,514.8
|
|
Notes payable
|
|
|
3,277.3
|
|
|
|
3,748.4
|
|
|
|
4,376.8
|
|
|
|
6,078.6
|
|
|
|
4,909.6
|
|
Stockholders equity
|
|
|
2,259.6
|
|
|
|
2,834.3
|
|
|
|
5,586.9
|
|
|
|
6,452.9
|
|
|
|
5,360.4
|
|
23
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Results
of Operations Fiscal Year 2009 Overview
During fiscal 2009, conditions within the homebuilding industry
remained challenging. The decline in demand for new homes
continues to be reflected in the volume of our net sales orders,
which was 20% lower than in fiscal 2008. Although our net sales
orders in the fourth quarter of fiscal 2009 were 26% higher than
in the fourth quarter of fiscal 2008, they were 21% and 52%
lower than in the fourth quarter of fiscal 2007 and 2006,
respectively. These results suggest the severe declines in our
net sales orders experienced in recent years may be moderating.
However, we expect overall demand for new homes to remain at
very low levels for some time, and efforts to improve our net
sales order volume will be challenging. The value of our sales
order backlog at September 30, 2009 was 5% lower than a
year ago.
During the slowdown in the homebuilding industry, the factors
hurting demand for new homes have been pervasive across the
United States. High inventory levels of available homes,
elevated cancellation rates, low sales absorption rates and
overall weak consumer confidence have persisted. The effects of
these factors have been magnified by reduced availability of
credit in the mortgage markets, severe shortages of liquidity in
the financial markets and high levels of home foreclosures. High
levels of foreclosures not only contribute to additional
inventory available for sale, but also reduce appraisal
valuations for new homes, potentially resulting in lower sales
prices. The overall economy has weakened significantly and was
in a recession during fiscal 2009 marked by high unemployment
levels and substantially reduced consumer spending and
confidence. The turmoil in the housing market during the last
three years and the recent weakness in the economy have resulted
in drastic price reductions in our homes and continued
compression in our gross margins. However, these price
reductions have caused housing to become more affordable, which
may lead to increased demand in the future when other market
conditions improve.
We continue to remain cautious regarding our outlook for the
homebuilding industry. We believe that challenging housing
market conditions will persist for some time and that the timing
of a sustainable recovery in the housing market remains unclear.
Our outlook incorporates several factors, including continued
margin pressure from sales price reductions and incentives;
continued high levels of homes available for sale; weak demand
from new home consumers; the scheduled expiration of the
first-time homebuyer federal tax credit in June 2010; the
announced end of the Federal Reserve Systems open market
purchases of mortgage-backed securities in 2010; continued high
sales cancellations; significant restrictions on the
availability of certain mortgage products and increased
underwriting requirements for home financing as a result of the
continuing constriction of credit in the mortgage markets.
Partially mitigating these negative industry factors are some
favorable aspects of our performance in the second half of
fiscal 2009, in which our year over year net sales comparisons
improved, our sales order cancellation rates have declined and
we were successful in reducing our inventory of completed homes.
Due to the challenging market conditions discussed above, we
have continued to evaluate our homebuilding and financial
services assets for recoverability. Our significant assets,
excluding cash, and those whose recoverability are most impacted
by market conditions include inventory, earnest money deposits
and pre-acquisition costs related to land and lot option
contracts, tax assets, both on amounts reflected as deferred and
as a receivable, and owned mortgage loans, which collectively
comprised 90% of our total non-cash assets at September 30,
2009. Our evaluations reflected our expectation of continued
challenges in the homebuilding industry, and our belief that
these challenging conditions will persist for some time. Based
on our evaluations, during fiscal 2009 we recorded inventory
impairment charges of $377.8 million, wrote-off earnest
money deposits and pre-acquisition costs related to land and lot
option contracts we no longer plan to pursue of
$29.9 million and recorded additional reserves for losses
of $33.2 million associated with mortgage loans held in
portfolio and the limited recourse provisions on previously sold
mortgage loans and $14.9 million related to mortgage
reinsurance activities. While these impairment charges and
write-offs are less than amounts recognized in each of the prior
two years, they reflect the continued weakness in market
conditions. We will evaluate whether further impairment charges,
valuation adjustments or write-offs are necessary on these
assets in the coming quarters. Additional discussion of these
evaluations and charges is presented below.
24
Strategy
We believe the long-term fundamentals which support housing
demand, namely population growth and household formation, remain
positive. In the near term, however, it is not possible to
predict how long the negative effects of the current market
conditions will persist and if the homebuilding industry will
experience further deterioration from these levels or if
conditions will begin to improve. During the downturn we have
aggressively reduced our inventory levels and increased our cash
balances. We have been successful in generating substantial cash
flow from operations primarily through inventory reductions and
from the receipt of a tax refund from a loss carryback. We have
also increased our cash balance by accessing the capital
markets. While we will continue to conservatively manage our
business, this increase in our liquidity provides us with
flexibility in determining the appropriate operating strategy
for each of our communities and markets to strike the best
balance between cash flow generation and potential profit. With
this flexibility, we are committed to the following initiatives
related to our operating strategy in the current homebuilding
business environment:
|
|
|
|
|
Maintaining a strong cash balance and overall liquidity position.
|
|
|
|
Managing the sales prices and level of sales incentives on our
homes as necessary to optimize the balance of sales volumes,
returns and cash flows.
|
|
|
|
Entering into new finished lot option contracts to purchase
finished lots in an attempt to increase sales volumes and
profitability.
|
|
|
|
Renegotiating existing finished lot option contracts to reduce
our lot costs and better match the scheduled purchases with new
home demand in the community.
|
|
|
|
Limiting our land development spending or suspending development
in communities that require substantial investments of time or
capital resources.
|
|
|
|
Managing our inventory of homes under construction by starting
construction on unsold homes to take advantage of market
opportunities, while monitoring the aging of unsold homes and
aggressively marketing our unsold, completed homes in inventory.
|
|
|
|
Decreasing our cost of goods purchased from both vendors and
subcontractors.
|
|
|
|
Modifying our product offerings to provide more affordable homes.
|
|
|
|
Controlling our SG&A infrastructure to match production
levels.
|
These initiatives allowed us to generate significant cash flows
from operations during the downturn. Although we cannot provide
any assurances that these initiatives will be successful in the
future, we expect that our operating strategy will allow us to
continue to maintain a strong balance sheet and liquidity
position in fiscal 2010.
Key
Results
Key financial results as of and for our fiscal year ended
September 30, 2009, as compared to fiscal 2008, were as
follows:
Homebuilding
Operations:
|
|
|
|
|
Homebuilding revenues decreased 45% to $3.6 billion.
|
|
|
|
Homes closed decreased 37% to 16,703 homes and the average
selling price of those homes decreased 9% to $213,400.
|
|
|
|
Net sales orders decreased 20% to 17,034 homes.
|
|
|
|
Sales order backlog decreased 5% to $1.1 billion.
|
|
|
|
Home sales gross margins increased 190 basis points to
13.1%.
|
25
|
|
|
|
|
Inventory impairments and land option cost write-offs were
$407.7 million, compared to $2.5 billion.
|
|
|
|
Homebuilding SG&A expense decreased 34% to
$523.0 million, but increased as a percentage of
homebuilding revenues by 240 basis points to 14.5%.
|
|
|
|
Homebuilding pre-tax loss was $536.8 million, compared to a
pre-tax loss of $2.7 billion.
|
|
|
|
Homes in inventory declined by 800 to 11,600.
|
|
|
|
Owned lots declined by 9,500 to 89,500.
|
|
|
|
Homebuilding debt decreased by $336.3 million to
$3.2 billion.
|
|
|
|
Net homebuilding debt to total capital decreased 730 basis
points to 36.3%, and gross homebuilding debt to total capital
increased 310 basis points to 58.7%.
|
|
|
|
Homebuilding cash was $1.9 billion, compared to
$1.4 billion.
|
Financial
Services Operations:
|
|
|
|
|
Total financial services revenues, net of recourse and
reinsurance expenses, decreased 58% to $53.7 million.
|
|
|
|
Financial services pre-tax loss was $15.5 million, compared
to pre-tax income of $35.1 million.
|
|
|
|
Financial services debt decreased by $134.8 million to
$68.7 million.
|
Consolidated
Results:
|
|
|
|
|
Net loss per share was $1.72, compared to net loss per share of
$8.34.
|
|
|
|
Net loss was $545.3 million, compared to a net loss of
$2.6 billion.
|
|
|
|
Stockholders equity decreased 20% to $2.3 billion.
|
|
|
|
Net cash provided by operations was $1.1 billion, compared
to $1.9 billion.
|
Results
of Operations Homebuilding
Our operating segments are our 31 homebuilding operating
divisions, which we aggregate into six reporting segments. These
reporting segments, which we also refer to as reporting regions,
have homebuilding operations located in the following states:
|
|
|
East:
|
|
Delaware, Georgia (Savannah only), Maryland, New Jersey, North
Carolina, Pennsylvania, South Carolina and Virginia
|
Midwest:
|
|
Colorado, Illinois, Minnesota and Wisconsin
|
Southeast:
|
|
Alabama, Florida and Georgia
|
South Central:
|
|
Louisiana, Mississippi, Oklahoma and Texas
|
Southwest:
|
|
Arizona and New Mexico
|
West:
|
|
California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington
|
26
Fiscal
Year Ended September 30, 2009 Compared to Fiscal Year Ended
September 30, 2008
The following tables and related discussion set forth key
operating and financial data for our homebuilding operations by
reporting segment as of and for the fiscal years ended
September 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Orders (1)
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
Net Homes Sold
|
|
|
Value (In millions)
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
East
|
|
|
1,519
|
|
|
|
1,602
|
|
|
|
(5
|
)%
|
|
$
|
353.7
|
|
|
$
|
396.3
|
|
|
|
(11
|
)%
|
|
$
|
232,900
|
|
|
$
|
247,400
|
|
|
|
(6
|
)
|
%
|
Midwest
|
|
|
1,198
|
|
|
|
1,633
|
|
|
|
(27
|
)%
|
|
|
323.5
|
|
|
|
425.3
|
|
|
|
(24
|
)%
|
|
|
270,000
|
|
|
|
260,400
|
|
|
|
4
|
|
%
|
Southeast
|
|
|
3,107
|
|
|
|
3,235
|
|
|
|
(4
|
)%
|
|
|
560.8
|
|
|
|
637.6
|
|
|
|
(12
|
)%
|
|
|
180,500
|
|
|
|
197,100
|
|
|
|
(8
|
)
|
%
|
South Central
|
|
|
6,074
|
|
|
|
7,266
|
|
|
|
(16
|
)%
|
|
|
1,045.9
|
|
|
|
1,293.3
|
|
|
|
(19
|
)%
|
|
|
172,200
|
|
|
|
178,000
|
|
|
|
(3
|
)
|
%
|
Southwest
|
|
|
1,849
|
|
|
|
2,982
|
|
|
|
(38
|
)%
|
|
|
314.9
|
|
|
|
551.6
|
|
|
|
(43
|
)%
|
|
|
170,300
|
|
|
|
185,000
|
|
|
|
(8
|
)
|
%
|
West
|
|
|
3,287
|
|
|
|
4,533
|
|
|
|
(27
|
)%
|
|
|
899.6
|
|
|
|
1,373.1
|
|
|
|
(34
|
)%
|
|
|
273,700
|
|
|
|
302,900
|
|
|
|
(10
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,034
|
|
|
|
21,251
|
|
|
|
(20
|
)%
|
|
$
|
3,498.4
|
|
|
$
|
4,677.2
|
|
|
|
(25
|
)%
|
|
$
|
205,400
|
|
|
$
|
220,100
|
|
|
|
(7
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Order Cancellations
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
Cancelled Sales Orders
|
|
|
Value (In millions)
|
|
|
Cancellation Rate (2)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
East
|
|
|
478
|
|
|
|
1,138
|
|
|
$
|
113.0
|
|
|
$
|
269.6
|
|
|
|
24
|
%
|
|
|
42
|
%
|
Midwest
|
|
|
240
|
|
|
|
464
|
|
|
|
64.8
|
|
|
|
140.3
|
|
|
|
17
|
%
|
|
|
22
|
%
|
Southeast
|
|
|
1,321
|
|
|
|
2,069
|
|
|
|
244.5
|
|
|
|
469.0
|
|
|
|
30
|
%
|
|
|
39
|
%
|
South Central
|
|
|
2,980
|
|
|
|
4,381
|
|
|
|
500.8
|
|
|
|
751.9
|
|
|
|
33
|
%
|
|
|
38
|
%
|
Southwest
|
|
|
962
|
|
|
|
3,742
|
|
|
|
175.4
|
|
|
|
766.6
|
|
|
|
34
|
%
|
|
|
56
|
%
|
West
|
|
|
1,207
|
|
|
|
2,378
|
|
|
|
357.3
|
|
|
|
851.3
|
|
|
|
27
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,188
|
|
|
|
14,172
|
|
|
$
|
1,455.8
|
|
|
$
|
3,248.7
|
|
|
|
30
|
%
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net sales orders represent the number and dollar value of new
sales contracts executed with customers, net of sales contract
cancellations. |
|
(2) |
|
Cancellation rate represents the number of cancelled sales
orders divided by gross sales orders. |
Net
Sales Orders
The value of net sales orders decreased 25%, to
$3,498.4 million (17,034 homes) in 2009 from
$4,677.2 million (21,251 homes) in 2008. The number of net
sales orders decreased 20% in fiscal 2009 compared to fiscal
2008. We believe the most significant factors contributing to
the slowing of demand for new homes in most of our markets
include a continued high level of homes for sale, which includes
foreclosed homes for sale; a decrease in the availability of
mortgage financing for many potential homebuyers; the continued
uncertainty in the financial markets and a decline in homebuyer
consumer confidence. Many prospective homebuyers continue to
approach the purchase decision tentatively due to concern over
their ability to sell an existing home or obtain mortgage
financing, the general uncertainty surrounding the housing
market, increasing unemployment and weakness in the overall
economy. However, these factors have led to lower home prices
and improved affordability, which combined with various
homebuyer tax incentives and low mortgage interest rates, have
served to partially offset some of the market softness. We
continue to manage our sales incentives and pricing on a
community by community basis in an attempt to optimize the
27
balance of sales volumes, profits, returns and cash flows.
However, the factors above, combined with the continued pricing
responses of our competitors, have limited the impact of our
pricing efforts on sales.
In comparing fiscal 2009 to fiscal 2008, the value of net sales
orders decreased in all of our market regions. In most market
regions, these decreases were due to a decrease in the number of
homes sold in the respective regions, and to a lesser extent, to
a decline in the average selling price of those homes. In the
East and Southeast regions where decreases in the number of
homes sold were not as large as other regions, the decline in
average selling price was a greater contributor to the decrease
in the value of net sales orders.
Although the volume of our net sales orders decreased 20% in
fiscal 2009, much of the decline was attributable to our results
in the first half of the year. In the third and fourth quarters
of fiscal 2009, the volume of our net sales orders decreased by
7% and increased by 26%, respectively, compared to the same
periods of fiscal 2008. We expect our volume of sales orders in
the first quarter of fiscal 2010 to improve over the prior year;
however, they will likely decline from the levels achieved in
the third and fourth quarters of fiscal 2009 due to seasonal
fluctuations and the originally scheduled expiration of the
first-time homebuyer tax credit at November 30, 2009 which
may have served to accelerate demand in recent periods. These
results suggest the severe declines in our net sales orders
experienced in recent years may be moderating somewhat.
The average price of our net sales orders decreased 7%, to
$205,400 in 2009 from $220,100 in 2008. The average price of our
net sales orders decreased in five of our six market regions,
due primarily to price reductions and increased incentives
implemented to attempt to achieve an appropriate sales
absorption pace. As the inventory of existing homes for sale,
which includes a substantial number of foreclosed homes, has
continued to be high, we have adjusted our pricing to remain
competitive with comparable existing home sales prices. We have
also adjusted our product mix, geographic mix and pricing within
our homebuilding markets in an effort to keep our core product
offerings affordable for our target customer base, typically
first-time and
move-up
homebuyers, which has also contributed to the decrease in
average selling price.
Our annual sales order cancellation rate (cancelled sales orders
divided by gross sales orders for the period) was 30% in fiscal
2009, compared to 40% in fiscal 2008. While an improvement from
the prior year, this elevated cancellation rate reflects the
ongoing challenges in most of our homebuilding markets,
including the inability of many prospective homebuyers to sell
their existing homes, the erosion of buyer confidence and the
tight credit conditions in the mortgage markets. We anticipate
that cancellation rates will remain elevated and may continue to
fluctuate significantly until market conditions improve.
In July 2008, Congress passed and the President signed into law
H.R. 3221, which includes the American Housing Rescue and
Foreclosure Prevention Act of 2008. Among other
provisions, this law eliminated seller-funded down payment
assistance on FHA insured loans approved on or after
October 1, 2008. Of our total home closings in fiscal 2008,
approximately 25% were funded with mortgage loans whereby the
homebuyer used a seller-financed down payment assistance
program. While we seek other down payment assistance and
mortgage financing alternatives for our buyers, the elimination
of the seller-financed down payment assistance programs has had
a negative impact on our sales and revenues in fiscal 2009
relative to fiscal 2008.
In February 2009, the American Recovery and Reinvestment Act of
2009 was enacted into law. This legislation included a federal
tax credit for qualified first-time homebuyers purchasing a
principal residence on or after January 1, 2009 and before
December 1, 2009. In November 2009, this credit was
expanded to be available to more homebuyers and extended until
June 2010. Our sales in future periods may be adversely affected
when this tax credit expires.
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Order Backlog
|
|
|
|
As of September 30,
|
|
|
|
Homes in Backlog
|
|
|
|
Value (In millions)
|
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
East
|
|
|
559
|
|
|
|
487
|
|
|
|
15
|
|
%
|
|
$
|
126.6
|
|
|
$
|
118.2
|
|
|
|
7
|
|
%
|
|
$
|
226,500
|
|
|
$
|
242,700
|
|
|
|
(7
|
)%
|
Midwest
|
|
|
389
|
|
|
|
328
|
|
|
|
19
|
|
%
|
|
|
105.0
|
|
|
|
91.6
|
|
|
|
15
|
|
%
|
|
|
269,900
|
|
|
|
279,300
|
|
|
|
(3
|
)%
|
Southeast
|
|
|
969
|
|
|
|
783
|
|
|
|
24
|
|
%
|
|
|
179.0
|
|
|
|
165.7
|
|
|
|
8
|
|
%
|
|
|
184,700
|
|
|
|
211,600
|
|
|
|
(13
|
)%
|
South Central
|
|
|
2,328
|
|
|
|
1,999
|
|
|
|
16
|
|
%
|
|
|
397.5
|
|
|
|
359.4
|
|
|
|
11
|
|
%
|
|
|
170,700
|
|
|
|
179,800
|
|
|
|
(5
|
)%
|
Southwest
|
|
|
526
|
|
|
|
812
|
|
|
|
(35
|
)
|
%
|
|
|
91.4
|
|
|
|
170.6
|
|
|
|
(46
|
)
|
%
|
|
|
173,800
|
|
|
|
210,100
|
|
|
|
(17
|
)%
|
West
|
|
|
857
|
|
|
|
888
|
|
|
|
(3
|
)
|
%
|
|
|
242.5
|
|
|
|
301.9
|
|
|
|
(20
|
)
|
%
|
|
|
283,000
|
|
|
|
340,000
|
|
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,628
|
|
|
|
5,297
|
|
|
|
6
|
|
%
|
|
$
|
1,142.0
|
|
|
$
|
1,207.4
|
|
|
|
(5
|
)
|
%
|
|
$
|
202,900
|
|
|
$
|
227,900
|
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Order Backlog
Sales order backlog represents homes under contract but not yet
closed at the end of the period. Many of the contracts in our
sales order backlog are subject to contingencies, including
mortgage loan approval and buyers selling their existing homes,
which can result in cancellations. A portion of the contracts in
backlog will not result in closings due to cancellations, which
during the current housing downturn have been substantial. At
September 30, 2009, the value of our backlog of sales
orders was $1,142.0 million (5,628 homes), a decrease of 5%
from $1,207.4 million (5,297 homes) at September 30,
2008. The average sales price of homes in backlog was $202,900
at September 30, 2009, down 11% from the $227,900 average
at September 30, 2008. The
year-over-year
increase in home sales activity in the fourth quarter
contributed to modest increases in the value of our sales order
backlog in four of our six market regions. However, the value of
our backlog decreased significantly in our Southwest region,
particularly in our Phoenix market, and in our West region,
particularly in our Northern California market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes Closed and Home Sales
Revenue
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
Homes Closed
|
|
|
Value (In millions)
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
East
|
|
|
1,447
|
|
|
|
2,309
|
|
|
|
(37
|
)%
|
|
$
|
345.3
|
|
|
$
|
584.8
|
|
|
|
(41
|
)%
|
|
$
|
238,600
|
|
|
$
|
253,300
|
|
|
|
(6
|
)%
|
Midwest
|
|
|
1,137
|
|
|
|
1,905
|
|
|
|
(40
|
)%
|
|
|
310.0
|
|
|
|
525.8
|
|
|
|
(41
|
)%
|
|
|
272,600
|
|
|
|
276,000
|
|
|
|
(1
|
)%
|
Southeast
|
|
|
2,921
|
|
|
|
3,650
|
|
|
|
(20
|
)%
|
|
|
547.5
|
|
|
|
781.6
|
|
|
|
(30
|
)%
|
|
|
187,400
|
|
|
|
214,100
|
|
|
|
(12
|
)%
|
South Central
|
|
|
5,745
|
|
|
|
7,960
|
|
|
|
(28
|
)%
|
|
|
1,007.7
|
|
|
|
1,430.1
|
|
|
|
(30
|
)%
|
|
|
175,400
|
|
|
|
179,700
|
|
|
|
(2
|
)%
|
Southwest
|
|
|
2,135
|
|
|
|
5,309
|
|
|
|
(60
|
)%
|
|
|
394.2
|
|
|
|
1,066.5
|
|
|
|
(63
|
)%
|
|
|
184,600
|
|
|
|
200,900
|
|
|
|
(8
|
)%
|
West
|
|
|
3,318
|
|
|
|
5,263
|
|
|
|
(37
|
)%
|
|
|
958.9
|
|
|
|
1,775.5
|
|
|
|
(46
|
)%
|
|
|
289,000
|
|
|
|
337,400
|
|
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,703
|
|
|
|
26,396
|
|
|
|
(37
|
)%
|
|
$
|
3,563.6
|
|
|
$
|
6,164.3
|
|
|
|
(42
|
)%
|
|
$
|
213,400
|
|
|
$
|
233,500
|
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
Sales Revenue
Revenues from home sales decreased 42%, to $3,563.6 million
(16,703 homes closed) in 2009 from $6,164.3 million (26,396
homes closed) in 2008. The average selling price of homes closed
during 2009 was $213,400, down 9% from the $233,500 average in
2008. In fiscal 2009, home sales revenues decreased
significantly in all of our market regions, reflecting the
continued weak demand and resulting decline in net sales order
volume and pricing experienced during the year.
The number of homes closed in 2009 decreased 37% due to
decreases in all of our market regions. As conditions change in
the housing markets in which we operate, our ongoing level of
net sales orders will determine the number of home closings and
amount of revenue we will generate.
29
Revenues from home sales in fiscal 2009 and 2008 were increased
by $3.1 million and $26.8 million, respectively, from
changes in deferred profit. The home sales profit related to our
mortgage loans held for sale is deferred in instances where a
buyer finances a home through our wholly-owned mortgage company
and has not made an adequate initial or continuing investment.
The decline in the change in revenues from the prior year is due
to the reduced availability of the mortgage types whose use
generally resulted in the profit deferral. As of
September 30, 2009, the balance of deferred profit related
to such mortgage loans held for sale was $2.7 million,
compared to $5.8 million at September 30, 2008.
Homebuilding
Operating Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentages of Related Revenues
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Gross profit Home sales
|
|
|
13.1
|
|
%
|
|
|
11.2
|
|
%
|
Gross profit Land/lot sales
|
|
|
13.4
|
|
%
|
|
|
8.5
|
|
%
|
Effect of inventory impairments and land option cost write-offs
on
total homebuilding gross profit
|
|
|
(11.3
|
)
|
%
|
|
|
(38.1
|
)
|
%
|
Gross profit (loss) Total homebuilding
|
|
|
1.8
|
|
%
|
|
|
(27.0
|
)
|
%
|
Selling, general and administrative expense
|
|
|
14.5
|
|
%
|
|
|
12.1
|
|
%
|
Goodwill impairment
|
|
|
|
|
%
|
|
|
1.2
|
|
%
|
Interest expense
|
|
|
2.7
|
|
%
|
|
|
0.6
|
|
%
|
(Gain) on early retirement of debt
|
|
|
(0.1
|
)
|
%
|
|
|
|
|
%
|
Other (income)
|
|
|
(0.4
|
)
|
%
|
|
|
(0.1
|
)
|
%
|
Loss before income taxes
|
|
|
(14.9
|
)
|
%
|
|
|
(40.9
|
)
|
%
|
Home
Sales Gross Profit
Gross profit from home sales decreased by 32%, to
$467.5 million in 2009, from $691.2 million in 2008,
and, as a percentage of home sales revenues, increased
190 basis points, to 13.1%. Approximately 230 basis
points of the increase in the home sales gross profit percentage
was a result of the average cost of our homes declining by more
than our average selling prices, caused by a greater portion of
our closings occurring in our South Central region, which has
experienced more stable housing conditions than our other
regions, and the effects of prior inventory impairments on homes
closed during the current year. Approximately 50 basis
points of the increase was due to a decrease in the amortization
of capitalized interest and property taxes as a percentage of
homes sales revenues resulting from reductions in our interest
and property taxes incurred and capitalized over the past year.
These increases were partially offset by a decrease of
30 basis points due to the recognition of a lesser amount
of previously deferred gross profit during the current year
compared to the prior year and by 60 basis points due to an
increase in actual and estimated warranty and construction
defect costs. The increase in estimated warranty costs was due
in part to a current year adjustment to our estimated warranty
liability related to estimated costs to remedy homes which we
have found to or suspect may contain allegedly defective drywall
manufactured in China (Chinese Drywall) in two of our markets.
Also, we have experienced increases in our construction defect
claims self-insured retentions, resulting in additional reserves
for estimated claims.
Future changes in gross profit percentages are substantially
dependent on our future need for the use of sales incentives and
price adjustments to generate an adequate volume of home
closings and cannot be predicted in the current housing market.
Land
Sales Revenue and Gross Profit
Land sales revenues decreased 89% to $40.3 million in 2009,
from $354.3 million in 2008. Of the $40.3 million of
revenues in fiscal 2009, $26.9 million related to land sale
transactions in the fourth quarter of
30
fiscal 2008 for which recognition of the revenue had been
deferred due to the terms of the sale. The gross profit
percentage from land sales increased to 13.4% in 2009, from 8.5%
in 2008. The fluctuations in revenues and gross profit
percentages from land sales are a function of how we manage our
inventory levels in various markets. We generally purchase land
and lots with the intent to build and sell homes on them;
however, we occasionally purchase land that includes
commercially zoned parcels which we typically sell to commercial
developers, and we also sell residential lots or land parcels to
manage our land and lot supply. Land and lot sales occur at
unpredictable intervals and varying degrees of profitability.
Therefore, the revenues and gross profit from land sales can
fluctuate significantly from period to period. During the fourth
quarter of fiscal 2008, we sold a significant amount of land and
lots through numerous transactions to generate cash flows,
reduce our future carrying costs and land development
obligations, and lower our inventory supply in certain markets.
Consummating these transactions during fiscal 2008 allowed us to
monetize a large portion of our deferred tax assets through a
loss carryback to fiscal 2006 resulting in a substantial tax
refund. As of September 30, 2009, we had $15.1 million
of land held for sale which we expect to sell in the next
twelve months.
31
Inventory
Impairments and Land Option Cost Write-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Option
|
|
|
|
|
|
|
|
|
|
Land Option
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
Inventory
|
|
|
Cost
|
|
|
|
|
|
Inventory
|
|
|
Write-Offs
|
|
|
|
|
|
|
Impairments
|
|
|
Write-Offs
|
|
|
Total
|
|
|
Impairments
|
|
|
(Recoveries)
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
East
|
|
$
|
54.3
|
|
|
$
|
10.6
|
|
|
$
|
64.9
|
|
|
$
|
256.2
|
|
|
$
|
32.2
|
|
|
$
|
288.4
|
|
Midwest
|
|
|
46.3
|
|
|
|
8.4
|
|
|
|
54.7
|
|
|
|
161.8
|
|
|
|
1.5
|
|
|
|
163.3
|
|
Southeast
|
|
|
36.7
|
|
|
|
1.3
|
|
|
|
38.0
|
|
|
|
448.4
|
|
|
|
9.1
|
|
|
|
457.5
|
|
South Central
|
|
|
17.0
|
|
|
|
3.0
|
|
|
|
20.0
|
|
|
|
67.2
|
|
|
|
5.2
|
|
|
|
72.4
|
|
Southwest
|
|
|
36.5
|
|
|
|
2.9
|
|
|
|
39.4
|
|
|
|
264.9
|
|
|
|
65.8
|
|
|
|
330.7
|
|
West
|
|
|
187.0
|
|
|
|
3.7
|
|
|
|
190.7
|
|
|
|
1,174.1
|
|
|
|
(1.9
|
)
|
|
|
1,172.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
377.8
|
|
|
$
|
29.9
|
|
|
$
|
407.7
|
|
|
$
|
2,372.6
|
|
|
$
|
111.9
|
|
|
$
|
2,484.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Values of Potentially Impaired and Impaired
Communities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of Communities with Impairment Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded at September 30, 2009
|
|
|
|
|
|
|
Inventory with
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
Total
|
|
|
Impairment Indicators
|
|
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Carrying
|
|
|
Number of
|
|
|
Prior to
|
|
|
|
|
|
|
Communities (1)
|
|
|
Communities (1)
|
|
|
Value
|
|
|
Communities (1)
|
|
|
Impairment
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
(Values in millions)
|
|
|
|
|
|
|
|
|
East
|
|
|
129
|
|
|
|
17
|
|
|
$
|
157.8
|
|
|
|
4
|
|
|
$
|
85.1
|
|
|
$
|
45.9
|
|
Midwest
|
|
|
50
|
|
|
|
19
|
|
|
|
143.0
|
|
|
|
7
|
|
|
|
47.8
|
|
|
|
32.8
|
|
Southeast
|
|
|
205
|
|
|
|
27
|
|
|
|
97.5
|
|
|
|
15
|
|
|
|
40.9
|
|
|
|
29.8
|
|
South Central
|
|
|
279
|
|
|
|
31
|
|
|
|
106.2
|
|
|
|
4
|
|
|
|
17.7
|
|
|
|
14.2
|
|
Southwest
|
|
|
84
|
|
|
|
21
|
|
|
|
104.3
|
|
|
|
8
|
|
|
|
53.0
|
|
|
|
36.2
|
|
West
|
|
|
152
|
|
|
|
46
|
|
|
|
354.3
|
|
|
|
20
|
|
|
|
176.8
|
|
|
|
87.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
899
|
|
|
|
161
|
|
|
$
|
963.1
|
|
|
|
58
|
|
|
$
|
421.3
|
|
|
$
|
246.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Values of Potentially Impaired and Impaired
Communities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of Communities with Impairment Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded at September 30, 2008
|
|
|
|
|
|
|
Inventory with
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
Total
|
|
|
Impairment Indicators
|
|
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Carrying
|
|
|
Number of
|
|
|
Prior to
|
|
|
|
|
|
|
Communities (1)
|
|
|
Communities (1)
|
|
|
Value
|
|
|
Communities (1)
|
|
|
Impairment
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
(Values in millions)
|
|
|
|
|
|
|
|
|
East
|
|
|
105
|
|
|
|
46
|
|
|
$
|
436.9
|
|
|
|
19
|
|
|
$
|
163.8
|
|
|
$
|
79.0
|
|
Midwest
|
|
|
62
|
|
|
|
20
|
|
|
|
204.8
|
|
|
|
9
|
|
|
|
93.6
|
|
|
|
58.4
|
|
Southeast
|
|
|
176
|
|
|
|
78
|
|
|
|
485.5
|
|
|
|
37
|
|
|
|
241.7
|
|
|
|
153.7
|
|
South Central
|
|
|
241
|
|
|
|
57
|
|
|
|
207.1
|
|
|
|
15
|
|
|
|
38.1
|
|
|
|
30.5
|
|
Southwest
|
|
|
79
|
|
|
|
25
|
|
|
|
237.1
|
|
|
|
15
|
|
|
|
158.7
|
|
|
|
105.7
|
|
West
|
|
|
178
|
|
|
|
80
|
|
|
|
614.8
|
|
|
|
32
|
|
|
|
271.9
|
|
|
|
175.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
841
|
|
|
|
306
|
|
|
$
|
2,186.2
|
|
|
|
127
|
|
|
$
|
967.8
|
|
|
$
|
603.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A community may consist of land held for development,
residential land and lots developed and under development, and
construction in progress and finished homes. A particular
community often includes inventory in more than one category.
Further, a community may contain multiple parcels with varying
product types (e.g. entry level and
move-up
single family detached, as well as attached product types). Some
communities do not have any homes under construction nor
finished homes, and no current home sales efforts or activity. |
32
Inventory
Impairments and Land Option Cost Write-offs
During fiscal 2009, when we performed our quarterly inventory
impairment analyses, the assumptions utilized reflected our
cautious outlook for the broader homebuilding industry and our
markets, both of which impact our business. This outlook
incorporates our belief that housing market conditions may
continue to deteriorate, and that challenging conditions will
persist. Our impairment evaluation as of September 30, 2009
occurred after the end of the spring/summer selling season and
was based on our latest operating plans for our projects into
fiscal 2010, and reflects the anticipated expiration of
government support efforts for the homebuilding industry, such
as the tax credit and Fed purchases of mortgage-backed
securities, in the coming year. Accordingly, our impairment
evaluation as of September 30, 2009 again indicated a
significant number of communities with impairment indicators.
Communities with a combined carrying value of
$963.1 million as of September 30, 2009, had
indicators of potential impairment and were evaluated for
impairment. The analysis of the large majority of these
communities assumed that sales prices in future periods will be
equal to or lower than current sales order prices in each
community, or in comparable communities, in order to generate an
acceptable absorption rate. For a minority of communities that
we do not intend to develop or operate in current market
conditions, slight increases over current sales prices were
assumed. While it is difficult to determine a timeframe for a
given community in the current market conditions, we estimated
the remaining lives of these communities to range from six
months to in excess of ten years. Through this evaluation
process, we determined that communities with a carrying value of
$421.3 million as of September 30, 2009, the largest
portion of which was in the West region, were impaired. As a
result, during the fourth quarter of fiscal 2009, we recorded
impairment charges of $174.9 million to reduce the carrying
value of the impaired communities to their estimated fair value,
as compared to $988.9 million in the same period of the
prior year. The fourth quarter charges combined with impairment
charges recorded earlier in the year resulted in total inventory
impairment charges of $377.8 million and
$2,372.6 million during fiscal 2009 and 2008, respectively.
In performing our quarterly inventory impairment analyses during
fiscal 2009, we utilized a range of discount rates for
communities of 14% to 20% which reflects an increase from the
range of 12% to 18% we would have used for these communities in
fiscal 2008. The increased discount rates reflect our estimate
of the increased level of market risk present in the
homebuilding and related mortgage lending industries. The impact
of the increase in the discount rates on the current quarter and
fiscal 2009 inventory impairment charges was an increase of
$9.9 million and $18.9 million, respectively.
We perform our impairment analysis based on total inventory at
the community level. When an impairment charge for a community
is determined, the charge is then allocated to each lot in the
community in the same manner as land and development costs are
allocated to each lot. The inventory within each community is
categorized as construction in progress and finished homes,
residential land and lots developed and under development, and
land held for development, based on the stage of production or
plans for future development. During fiscal 2009, approximately
85% of the impairment charges were recorded to residential land
and lots and land held for development, and approximately 15% of
the charges were recorded to construction in progress and
finished homes inventory, compared to 79% and 21%, respectively,
in fiscal 2008.
Of the remaining $541.8 million carrying value of
communities with impairment indicators which were determined not
to be impaired at September 30, 2009, the largest
concentrations were in California (21%), Texas (16%), Illinois
(9%), Florida (9%) and Arizona (8%). It is possible that our
estimate of undiscounted cash flows from these communities may
change and could result in a future need to record impairment
charges to adjust the carrying value of these assets to their
estimated fair value. There are several factors which could lead
to changes in the estimates of undiscounted future cash flows
for a given community. The most significant of these include
pricing and incentive levels actually realized by the community,
the rate at which the homes are sold and the costs incurred to
construct the homes. The pricing and incentive levels are often
inter-related with sales pace within a community such that a
price reduction can be expected to increase the sales pace.
Further, both of these factors are heavily influenced by the
competitive pressures facing a given community from both new
homes and existing homes which may result from foreclosures. If
conditions in the broader economy, homebuilding industry or
specific markets in which we operate worsen beyond current
expectations, and as we re-evaluate specific community pricing
and incentives, construction and development plans, and our
overall land sale strategies, we may be required to evaluate
additional communities or re-
33
evaluate previously impaired communities for potential
impairment. These evaluations may result in additional
impairment charges.
Based on our quarterly reviews of land and lot option contracts,
we have written off earnest money deposits and pre-acquisition
costs related to land and lot option contracts which we no
longer plan to pursue. During fiscal 2009 and 2008, we wrote off
$29.9 million and $111.9 million, respectively, of
earnest money deposits and pre-acquisition costs related to land
option contracts. At September 30, 2009, outstanding
earnest money deposits and pre-acquisition costs associated with
our portfolio of land and lot option purchase contracts totaled
$9.4 million and $8.1 million, respectively. The
largest concentrations of these balances were in the South
Central (53%) and West (25%) regions. If the current weak
homebuilding market conditions persist and we are unable to
successfully renegotiate certain land or lot purchase contracts
or our sales volumes do not justify additional land or lot
purchases, we may write off additional earnest money deposits
and pre-acquisition costs.
The inventory impairment charges and write-offs of earnest money
deposits and pre-acquisition costs reduced total homebuilding
gross profit as a percentage of homebuilding revenues by
approximately 1,130 basis points in fiscal 2009, compared
to 3,810 basis points in the fiscal 2008.
Selling,
General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities decreased by
$268.8 million, or 34%, to $523.0 million in 2009 from
$791.8 million in 2008. As homebuilding revenues declined
at a faster pace than SG&A expense, when expressed as a
percentage of homebuilding revenues, SG&A expense increased
240 basis points, to 14.5% in 2009 from 12.1% in 2008. The
largest component of our homebuilding SG&A expense is
employee compensation and related costs, which represented 52%
and 53% of SG&A costs in 2009 and 2008, respectively. These
costs decreased $145.7 million, or 35%, to
$272.2 million in 2009 from $417.9 million in 2008.
This decrease was largely due to our continued efforts to align
the number of employees to match our current and anticipated
home closing levels, as well as a decrease in incentive
compensation. Our homebuilding operations employed approximately
2,300 and 3,100 employees at September 30, 2009 and
2008, respectively. Most other SG&A cost components also
decreased in fiscal 2009 as compared to fiscal 2008, as a result
of our efforts to reduce all costs throughout the company. The
most substantial decreases occurred in advertising and
depreciation.
We continue to adjust our SG&A infrastructure to support
our expected closings volume; however, we cannot make assurances
that our actions will permit us to maintain or improve upon the
current SG&A expense as a percentage of revenues. It
becomes more difficult to reduce SG&A expense as the size
of our operations decreases. If revenues continue to decrease
and we are unable to sufficiently adjust our SG&A, future
SG&A expense as a percentage of revenues may increase
further.
Interest
Incurred
We capitalize homebuilding interest costs to inventory during
active development and construction. Due to our inventory
reduction strategies and slowing or suspending land development
in certain communities, our inventory under active development
and construction (active inventory) has been lower
than our debt level and a portion of our interest incurred must
be expensed. We expensed $95.7 million of homebuilding
interest during fiscal 2009, compared to $39.0 million of
interest during fiscal 2008 since the ratio of our active
inventory to debt declined during that period.
Interest amortized to cost of sales, excluding interest written
off with inventory impairment charges, was 3.9% of total home
and land/lot cost of sales in both 2009 and 2008. Interest
incurred is related to the average level of our homebuilding
debt outstanding during the period. Comparing fiscal 2009 with
fiscal 2008, interest incurred related to homebuilding debt
decreased 17% to $196.8 million, primarily due to an 11%
decrease in our average homebuilding debt.
34
Gain/Loss
on Early Retirement of Debt
During fiscal 2009, in addition to repaying maturing senior
notes, we repurchased a total of $380.3 million principal
amount of various issues of our senior notes prior to their
maturity. These notes were repurchased primarily through
unsolicited transactions for an aggregate purchase price of
$368.0 million, plus accrued interest. We recognized a gain
of $11.5 million related to these repurchases, which
represents the difference between the principal amount of the
notes and the aggregate purchase price, less any unamortized
discounts and fees. Partially offsetting this gain was a
$7.6 million loss resulting from the write-off of
unamortized fees in connection with the early termination of our
revolving credit facility in May 2009. These transactions
resulted in a net gain of $3.9 million during fiscal 2009.
The loss on early retirement of debt of $2.6 million during
fiscal 2008 was primarily due to the write-off of unamortized
fees associated with reducing the size of our revolving credit
facility in June 2008.
Other
Income
Other income, net of other expenses, associated with
homebuilding activities was $12.8 million in 2009, compared
to $9.1 million in 2008. The largest component of other
income in both years was interest income.
Goodwill
In performing our annual impairment analysis as of
September 30, 2009, we estimated the fair value of our
operating segments utilizing the expected present values of
future cash flows. As a result of this analysis, we determined
that our goodwill balance of $15.9 million, all of which
relates to our South Central reporting segment, was not impaired
based on the estimated fair value of the reporting segment
exceeding the carrying value of the reporting segment. During
fiscal 2008, we recorded a goodwill impairment charge of
$79.4 million, all of which related to our Southwest
reporting segment.
The goodwill assessment procedures require us to make
comprehensive estimates of future revenues and costs. Due to the
uncertainties associated with such estimates, actual results
could differ from such estimates.
Homebuilding
Results by Reporting Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
% of
|
|
|
|
|
|
|
Income (Loss)
|
|
|
% of
|
|
|
|
|
|
|
Homebuilding
|
|
|
Before
|
|
|
Region
|
|
|
|
Homebuilding
|
|
|
Before
|
|
|
Region
|
|
|
|
|
|
|
Revenues
|
|
|
Income Taxes (1)
|
|
|
Revenues
|
|
|
|
Revenues
|
|
|
Income Taxes (1)
|
|
|
Revenues
|
|
|
|
|
|
|
(In millions)
|
|
|
East
|
|
$
|
347.1
|
|
|
$
|
(95.3
|
)
|
|
|
(27.5
|
)
|
%
|
|
$
|
589.9
|
|
|
$
|
(332.5
|
)
|
|
|
(56.4
|
)%
|
|
|
|
|
Midwest
|
|
|
314.5
|
|
|
|
(104.4
|
)
|
|
|
(33.2
|
)
|
%
|
|
|
546.7
|
|
|
|
(184.3
|
)
|
|
|
(33.7
|
)%
|
|
|
|
|
Southeast
|
|
|
570.8
|
|
|
|
(72.4
|
)
|
|
|
(12.7
|
)
|
%
|
|
|
820.8
|
|
|
|
(507.7
|
)
|
|
|
(61.9
|
)%
|
|
|
|
|
South Central
|
|
|
1,010.2
|
|
|
|
6.1
|
|
|
|
0.6
|
|
%
|
|
|
1,452.2
|
|
|
|
(9.0
|
)
|
|
|
(0.6
|
)%
|
|
|
|
|
Southwest
|
|
|
396.8
|
|
|
|
(45.7
|
)
|
|
|
(11.5
|
)
|
%
|
|
|
1,170.9
|
|
|
|
(366.7
|
)
|
|
|
(31.3
|
)%
|
|
|
|
|
West
|
|
|
964.5
|
|
|
|
(225.1
|
)
|
|
|
(23.3
|
)
|
%
|
|
|
1,938.1
|
|
|
|
(1,266.7
|
)
|
|
|
(65.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,603.9
|
|
|
$
|
(536.8
|
)
|
|
|
(14.9
|
)
|
%
|
|
$
|
6,518.6
|
|
|
$
|
(2,666.9
|
)
|
|
|
(40.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Expenses maintained at the corporate level are allocated to each
segment based on the segments average inventory. These
expenses consist primarily of capitalized interest and property
taxes, which are amortized to cost of sales, and the expenses
related to operating our corporate office. |
East Region Homebuilding revenues decreased
41% in 2009 compared to 2008, primarily due to a 37% decrease in
the number of homes closed, with the largest decreases in our
New Jersey and Carolina markets. The region reported a loss
before income taxes of $95.3 million in 2009, compared to a
loss of $332.5 million in 2008. The losses were due in part
to inventory impairment charges and earnest money and
35
pre-acquisition cost write-offs totaling $64.9 million and
$288.4 million in fiscal 2009 and 2008, respectively. The
regions gross profit from home sales as a percentage of
home sales revenue (home sales gross profit percentage)
increased 390 basis points in fiscal 2009 compared to
fiscal 2008. The increase was a result of the average cost of
our homes declining by more than the average selling prices due
to the effects of prior inventory impairments on homes closed
during 2009.
Midwest Region Homebuilding revenues
decreased 42% in 2009 compared to 2008, primarily due to a 40%
decrease in the number of homes closed, with the largest
decreases in our Denver market. The region reported a loss
before income taxes of $104.4 million in 2009, compared to
a loss of $184.3 million in 2008. The losses were due in
part to inventory impairment charges and earnest money and
pre-acquisition cost write-offs totaling $54.7 million and
$163.3 million in fiscal 2009 and 2008, respectively. The
regions home sales gross profit percentage decreased
540 basis points in fiscal 2009 compared to fiscal 2008.
The decrease was a result of lower margins in our Chicago and
Denver markets, as well as higher warranty costs on previously
closed homes in our Denver market. Additionally, our revenues
declined at a greater rate than our SG&A expense, which
also contributed to the loss before income taxes in 2009.
Southeast Region Homebuilding revenues
decreased 30% in 2009 compared to 2008, primarily due to a 20%
decrease in the number of homes closed, as well as a 12%
decrease in the average selling price of those homes. The region
reported a loss before income taxes of $72.4 million in
2009, compared to a loss of $507.7 million in 2008. The
losses were due in part to inventory impairment charges and
earnest money and pre-acquisition cost write-offs totaling
$38.0 million and $457.5 million in fiscal 2009 and
2008, respectively. The regions home sales gross profit
percentage increased 340 basis points in fiscal 2009
compared to fiscal 2008. The increase was a result of the
average cost of our homes declining by more than the average
selling prices due to the effects of prior inventory impairments
on homes closed during 2009, and was partially offset by
estimated warranty costs related to homes in one market in
Florida which we have found to or suspect may contain Chinese
Drywall.
South Central Region Homebuilding revenues
decreased 30% in 2009 compared to 2008, due to a 28% decrease in
the number of homes closed. The region reported income before
income taxes of $6.1 million in fiscal 2009, compared to a
loss before income taxes of $9.0 million in fiscal 2008.
The improvement was due in part to a decrease in inventory
impairment charges and earnest money and pre-acquisition cost
write-offs, which were $20.0 million and $72.4 million
in fiscal 2009 and 2008, respectively. The regions home
sales gross profit percentage increased 50 basis points in
fiscal 2009 compared to fiscal 2008 due to the effects of prior
inventory impairments on homes closed during 2009. These
improvements were partially offset by our SG&A expenses
decreasing at a slower rate, 23%, than our homebuilding revenues.
Southwest Region Homebuilding revenues
decreased 66% in 2009 compared to 2008, due to a 60% decrease in
the number of homes closed, primarily in our Phoenix market, as
well as decreases in the average selling price of homes in the
region. The region reported a loss before income taxes of
$45.7 million in 2009, compared to a loss of
$366.7 million in 2008. The losses were due in part to
inventory impairment charges and earnest money and
pre-acquisition cost write-offs totaling $39.4 million and
$330.7 million in fiscal 2009 and 2008, respectively. In
fiscal 2008, goodwill impairment charges of $79.4 million
also contributed to the loss. The regions revenues
declined at a greater rate than its SG&A expense, which
also contributed to the loss before income taxes in 2009. The
regions home sales gross profit percentage increased
110 basis points in fiscal 2009 compared to fiscal 2008 due
to the effects of prior inventory impairments on homes closed
during 2009.
West Region Homebuilding revenues decreased
50% in 2009 compared to 2008, due to a 37% decrease in the
number of homes closed, as well as a 14% decrease in the average
selling price of those homes. The largest decreases in homes
closed occurred in our Northern California markets. The region
reported a loss before income taxes of $225.1 million in
2009, compared to a loss of $1.3 billion in 2008. The
losses were due in part to inventory impairment charges and
earnest money and pre-acquisition cost write-offs totaling
$190.7 million and $1.2 billion in fiscal 2009 and
2008, respectively. The regions home sales gross profit
percentage increased 450 basis points in fiscal 2009
compared to fiscal 2008. The increase was a result of the
36
average cost of our homes declining by more than the average
selling prices due to the effects of prior inventory impairments
on homes closed during 2009.
Fiscal
Year Ended September 30, 2008 Compared to Fiscal Year Ended
September 30, 2007
The following tables set forth key operating and financial data
for our homebuilding operations by reporting segment as of and
for the fiscal years ended September 30, 2008 and 2007. We
have restated the 2007 amounts between reporting segments to
conform to the current year presentation, reflecting the change
in our reporting segments which occurred in fiscal 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Orders (1)
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
Net Homes Sold
|
|
|
|
Value (In millions)
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
East
|
|
|
1,602
|
|
|
|
3,085
|
|
|
|
(48
|
)
|
%
|
|
$
|
396.3
|
|
|
$
|
792.3
|
|
|
|
(50
|
)%
|
|
$
|
247,400
|
|
|
$
|
256,800
|
|
|
|
(4
|
)
|
%
|
Midwest
|
|
|
1,633
|
|
|
|
3,065
|
|
|
|
(47
|
)
|
%
|
|
|
425.3
|
|
|
|
887.0
|
|
|
|
(52
|
)%
|
|
|
260,400
|
|
|
|
289,400
|
|
|
|
(10
|
)
|
%
|
Southeast
|
|
|
3,235
|
|
|
|
5,206
|
|
|
|
(38
|
)
|
%
|
|
|
637.6
|
|
|
|
1,130.4
|
|
|
|
(44
|
)%
|
|
|
197,100
|
|
|
|
217,100
|
|
|
|
(9
|
)
|
%
|
South Central
|
|
|
7,266
|
|
|
|
9,740
|
|
|
|
(25
|
)
|
%
|
|
|
1,293.3
|
|
|
|
1,723.5
|
|
|
|
(25
|
)%
|
|
|
178,000
|
|
|
|
177,000
|
|
|
|
1
|
|
%
|
Southwest
|
|
|
2,982
|
|
|
|
6,017
|
|
|
|
(50
|
)
|
%
|
|
|
551.6
|
|
|
|
1,140.7
|
|
|
|
(52
|
)%
|
|
|
185,000
|
|
|
|
189,600
|
|
|
|
(2
|
)
|
%
|
West
|
|
|
4,533
|
|
|
|
6,574
|
|
|
|
(31
|
)
|
%
|
|
|
1,373.1
|
|
|
|
2,556.7
|
|
|
|
(46
|
)%
|
|
|
302,900
|
|
|
|
388,900
|
|
|
|
(22
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,251
|
|
|
|
33,687
|
|
|
|
(37
|
)
|
%
|
|
$
|
4,677.2
|
|
|
$
|
8,230.6
|
|
|
|
(43
|
)%
|
|
$
|
220,100
|
|
|
$
|
244,300
|
|
|
|
(10
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Order Cancellations
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
Cancelled Sales Orders
|
|
|
Value (In millions)
|
|
|
Cancellation Rate(2)
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
East
|
|
|
1,138
|
|
|
|
1,577
|
|
|
$
|
269.6
|
|
|
$
|
407.6
|
|
|
|
42
|
%
|
|
|
34
|
%
|
Midwest
|
|
|
464
|
|
|
|
1,002
|
|
|
|
140.3
|
|
|
|
307.5
|
|
|
|
22
|
%
|
|
|
25
|
%
|
Southeast
|
|
|
2,069
|
|
|
|
3,049
|
|
|
|
469.0
|
|
|
|
742.3
|
|
|
|
39
|
%
|
|
|
37
|
%
|
South Central
|
|
|
4,381
|
|
|
|
5,111
|
|
|
|
751.9
|
|
|
|
885.8
|
|
|
|
38
|
%
|
|
|
34
|
%
|
Southwest
|
|
|
3,742
|
|
|
|
5,244
|
|
|
|
766.6
|
|
|
|
1,234.2
|
|
|
|
56
|
%
|
|
|
47
|
%
|
West
|
|
|
2,378
|
|
|
|
4,259
|
|
|
|
851.3
|
|
|
|
1,718.0
|
|
|
|
34
|
%
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,172
|
|
|
|
20,242
|
|
|
$
|
3,248.7
|
|
|
$
|
5,295.4
|
|
|
|
40
|
%
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net sales orders represent the number and dollar value of new
sales contracts executed with customers, net of sales contract
cancellations. |
|
(2) |
|
Cancellation rate represents the number of cancelled sales
orders divided by gross sales orders. |
Net
Sales Orders
The value of net sales orders decreased 43%, to
$4,677.2 million (21,251 homes) in 2008 from
$8,230.6 million (33,687 homes) in 2007, reflecting the
continued reduction of demand for new homes in most homebuilding
markets during fiscal 2008. Factors that contributed to the
slowing of demand included a high level of new and existing
homes for sale, which included foreclosed homes for sale, a
decrease in the availability of mortgage financing for many
potential homebuyers which was further impacted by the
uncertainty in the financial markets and a decline in homebuyer
consumer confidence.
In comparing fiscal 2008 to fiscal 2007, the value of net sales
orders decreased significantly in all six of our market regions.
These decreases were primarily due to substantially similar
decreases in the number of
37
homes sold in the respective region. Particularly in our West
region, the decline in average selling price also contributed to
the decline in the value of net sales orders.
The average price of our net sales orders decreased 10%, to
$220,100 in 2008 from $244,300 in 2007. The average price of our
net sales orders decreased significantly in our West region, and
to a lesser extent in our Midwest and Southeast regions, due
primarily to price reductions and increased incentives in our
California, Las Vegas, Denver and Florida markets. In general,
our pricing is dependent on the demand for our homes, and
declines in our average selling prices during fiscal 2008 were
due in large part to increases in the use of price reductions
and sales incentives in order to attempt to achieve an
appropriate sales absorption pace. Further, as the inventory of
existing homes for sale, which included an increasing number of
foreclosed homes, continued to be high, it led to the need to
ensure our pricing was competitive with comparable existing home
sales prices.
Our annual cancellation rate was 40% in fiscal 2008, compared to
38% in fiscal 2007. Our cancellation rate in the fourth quarter
of fiscal 2008 was 47%, which was primarily attributable to
cancellations in our Southwest region, particularly in our
Arizona markets. These elevated cancellation rates reflect the
challenges encountered in most of our homebuilding markets,
including the inability of many prospective homebuyers to sell
their existing homes, the continued erosion of buyer confidence
and further credit tightening in the mortgage markets. The
impact of the credit tightening became apparent in our
cancellation rates in late fiscal 2007 and into fiscal 2008 as
the mortgage products many buyers had selected were no longer
available or the buyers could no longer qualify due to stricter
underwriting guidelines. The shortage of liquidity in the
financial markets during fiscal 2008 further restricted the
availability of credit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Order Backlog
|
|
|
|
|
As of September 30,
|
|
|
|
|
Homes in Backlog
|
|
|
|
Value (In millions)
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
East
|
|
|
487
|
|
|
|
1,194
|
|
|
|
(59
|
)
|
%
|
|
$
|
118.2
|
|
|
$
|
306.6
|
|
|
|
(61
|
)%
|
|
$
|
242,700
|
|
|
$
|
256,800
|
|
|
|
(5
|
)
|
%
|
Midwest
|
|
|
328
|
|
|
|
600
|
|
|
|
(45
|
)
|
%
|
|
|
91.6
|
|
|
|
192.1
|
|
|
|
(52
|
)%
|
|
|
279,300
|
|
|
|
320,200
|
|
|
|
(13
|
)
|
%
|
Southeast
|
|
|
783
|
|
|
|
1,198
|
|
|
|
(35
|
)
|
%
|
|
|
165.7
|
|
|
|
309.6
|
|
|
|
(46
|
)%
|
|
|
211,600
|
|
|
|
258,400
|
|
|
|
(18
|
)
|
%
|
South Central
|
|
|
1,999
|
|
|
|
2,693
|
|
|
|
(26
|
)
|
%
|
|
|
359.4
|
|
|
|
496.2
|
|
|
|
(28
|
)%
|
|
|
179,800
|
|
|
|
184,300
|
|
|
|
(2
|
)
|
%
|
Southwest
|
|
|
812
|
|
|
|
3,139
|
|
|
|
(74
|
)
|
%
|
|
|
170.6
|
|
|
|
685.5
|
|
|
|
(75
|
)%
|
|
|
210,100
|
|
|
|
218,400
|
|
|
|
(4
|
)
|
%
|
West
|
|
|
888
|
|
|
|
1,618
|
|
|
|
(45
|
)
|
%
|
|
|
301.9
|
|
|
|
704.4
|
|
|
|
(57
|
)%
|
|
|
340,000
|
|
|
|
435,400
|
|
|
|
(22
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,297
|
|
|
|
10,442
|
|
|
|
(49
|
)
|
%
|
|
$
|
1,207.4
|
|
|
$
|
2,694.4
|
|
|
|
(55
|
)%
|
|
$
|
227,900
|
|
|
$
|
258,000
|
|
|
|
(12
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Order Backlog
At September 30, 2008, the value of our backlog of sales
orders was $1,207.4 million (5,297 homes), a decrease of
55% from $2,694.4 million (10,442 homes) at
September 30, 2007. The average sales price of homes in
backlog was $227,900 at September 30, 2008, down 12% from
the $258,000 average at September 30, 2007. The value of
our sales order backlog decreased significantly across all of
our market regions, reflecting the severity and geographic reach
of the national housing downturn.
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes Closed and Home Sales
Revenue
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
Homes Closed
|
|
|
|
Value (In millions)
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
East
|
|
|
2,309
|
|
|
|
4,119
|
|
|
|
(44
|
)
|
%
|
|
$
|
584.8
|
|
|
$
|
1,072.9
|
|
|
|
(45
|
)%
|
|
$
|
253,300
|
|
|
$
|
260,500
|
|
|
|
(3
|
)
|
%
|
Midwest
|
|
|
1,905
|
|
|
|
3,502
|
|
|
|
(46
|
)
|
%
|
|
|
525.8
|
|
|
|
1,037.1
|
|
|
|
(49
|
)%
|
|
|
276,000
|
|
|
|
296,100
|
|
|
|
(7
|
)
|
%
|
Southeast
|
|
|
3,650
|
|
|
|
6,156
|
|
|
|
(41
|
)
|
%
|
|
|
781.6
|
|
|
|
1,454.6
|
|
|
|
(46
|
)%
|
|
|
214,100
|
|
|
|
236,300
|
|
|
|
(9
|
)
|
%
|
South Central
|
|
|
7,960
|
|
|
|
11,260
|
|
|
|
(29
|
)
|
%
|
|
|
1,430.1
|
|
|
|
2,005.2
|
|
|
|
(29
|
)%
|
|
|
179,700
|
|
|
|
178,100
|
|
|
|
1
|
|
%
|
Southwest
|
|
|
5,309
|
|
|
|
8,149
|
|
|
|
(35
|
)
|
%
|
|
|
1,066.5
|
|
|
|
1,839.2
|
|
|
|
(42
|
)%
|
|
|
200,900
|
|
|
|
225,700
|
|
|
|
(11
|
)
|
%
|
West
|
|
|
5,263
|
|
|
|
8,184
|
|
|
|
(36
|
)
|
%
|
|
|
1,775.5
|
|
|
|
3,312.2
|
|
|
|
(46
|
)%
|
|
|
337,400
|
|
|
|
404,700
|
|
|
|
(17
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,396
|
|
|
|
41,370
|
|
|
|
(36
|
)
|
%
|
|
$
|
6,164.3
|
|
|
$
|
10,721.2
|
|
|
|
(43
|
)%
|
|
$
|
233,500
|
|
|
$
|
259,200
|
|
|
|
(10
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
Sales Revenue
Revenues from home sales decreased 43%, to $6,164.3 million
(26,396 homes closed) in 2008 from $10,721.2 million
(41,370 homes closed) in 2007. The average selling price of
homes closed during 2008 was $233,500, down 10% from $259,200 in
2007. During fiscal 2008, home sales revenues decreased
significantly in all of our market regions, reflecting continued
weak demand and the resulting decline in net sales order volume
and pricing during the year. The number of homes closed in 2008
decreased 36% due to decreases in all of our market regions.
Revenues from home sales in fiscal 2008 and 2007 were increased
by $26.8 million and $58.0 million, respectively, from
changes in deferred profit. As of September 30, 2008, the
balance of deferred profit was $5.8 million, compared to
$32.6 million at September 30, 2007. The decline was
mainly due to the reduced availability of the mortgage types
whose use generally resulted in the profit deferral.
Homebuilding
Operating Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
Percentages of
|
|
|
|
|
Related Revenues
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Gross profit Home sales
|
|
|
11.2
|
%
|
|
|
17.2
|
|
%
|
Gross profit Land/lot sales
|
|
|
8.5
|
%
|
|
|
22.9
|
|
%
|
Effect of inventory impairments and land option cost write-offs
on
total homebuilding gross profit
|
|
|
(38.1
|
)%
|
|
|
(12.0
|
)
|
%
|
Gross profit (loss) Total homebuilding
|
|
|
(27.0
|
)%
|
|
|
5.4
|
|
%
|
Selling, general and administrative expense
|
|
|
12.1
|
%
|
|
|
10.3
|
|
%
|
Goodwill impairment
|
|
|
1.2
|
%
|
|
|
4.3
|
|
%
|
Interest expense
|
|
|
0.6
|
%
|
|
|
|
|
%
|
Loss on early retirement of debt
|
|
|
|
%
|
|
|
0.1
|
|
%
|
Other (income)
|
|
|
(0.1
|
)%
|
|
|
|
|
%
|
Loss before income taxes
|
|
|
(40.9
|
)%
|
|
|
(9.2
|
)
|
%
|
Home
Sales Gross Profit
Gross profit from home sales decreased by 63%, to
$691.2 million in 2008, from $1,848.9 million in 2007,
and, as a percentage of home sales revenues, decreased
600 basis points, to 11.2%. The primary factor reducing our
home sales gross profit margin was the difficult market
conditions discussed above, which narrowed the range between our
selling prices and costs of our homes in most of our markets,
causing a
39
decline of approximately 430 basis points in home sales
gross profit as a percentage of home sales revenues. Due to the
sales environment in many of our markets, we offered a variety
of incentives and price concessions, which affected our gross
profit margin by reducing the selling price of the home or
increasing the cost of the home without a proportional increase
in the selling price. We also offered greater discounts and
incentives to sell our inventory of completed homes, which was
at a higher than desired level. This strategy helped reduce our
completed homes in inventory, but also contributed to a decline
in our home sales gross profit. Additionally, our home sales
gross margin decreased approximately 210 basis points due
to an increase in the amortization of capitalized interest and
property taxes as a percentage of home sales revenues, and
10 basis points due to the recognition of a lesser amount
of previously deferred gross profit during 2008 compared to
2007. These decreases were partially offset by an improvement of
50 basis points due to a decrease in warranty and
construction defect expenses as a percentage of home sales
revenues.
Land
Sales Revenue and Gross Profit
Land sales revenues decreased 4% to $354.3 million in 2008,
from $367.6 million in 2007. The gross profit percentage
from land sales decreased to 8.5% in 2008, from 22.9% in 2007.
Due to the significant decline in demand for new homes, we
reduced our expectations of future home closing volumes, as well
as our expected need for land and lots in the future.
Consequently, during the fourth quarter of fiscal 2008, we sold
a significant amount of land and lots through numerous
transactions to generate cash flows, reduce our future carrying
costs and land development obligations, and lower our inventory
supply in certain markets. Consummating these transactions
during fiscal 2008 allowed us to monetize a larger portion of
our deferred tax assets through a loss carryback to fiscal 2006
resulting in an increase in our expected tax refund. The terms
of certain of these land and lot sales, primarily related to our
continuing involvement with the properties, resulted in the
deferral of the recognition of the sale transaction in some
cases. Consequently, $21.7 million of inventory, reflecting
its fair value, was recorded as a component of inventory not
owned.
40
Inventory
Impairments and Land Option Cost Write-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
Land Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
Land Option
|
|
|
|
|
|
|
Inventory
|
|
|
Write-Offs
|
|
|
|
|
|
|
Inventory
|
|
|
Cost
|
|
|
|
|
|
|
Impairments
|
|
|
(Recoveries)
|
|
|
Total
|
|
|
|
Impairments
|
|
|
Write-Offs
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
East
|
|
$
|
256.2
|
|
|
$
|
32.2
|
|
|
$
|
288.4
|
|
|
|
$
|
72.3
|
|
|
$
|
9.2
|
|
|
$
|
81.5
|
|
Midwest
|
|
|
161.8
|
|
|
|
1.5
|
|
|
|
163.3
|
|
|
|
|
152.8
|
|
|
|
14.5
|
|
|
|
167.3
|
|
Southeast
|
|
|
448.4
|
|
|
|
9.1
|
|
|
|
457.5
|
|
|
|
|
181.6
|
|
|
|
28.6
|
|
|
|
210.2
|
|
South Central
|
|
|
67.2
|
|
|
|
5.2
|
|
|
|
72.4
|
|
|
|
|
10.4
|
|
|
|
14.2
|
|
|
|
24.6
|
|
Southwest
|
|
|
264.9
|
|
|
|
65.8
|
|
|
|
330.7
|
|
|
|
|
25.6
|
|
|
|
1.2
|
|
|
|
26.8
|
|
West
|
|
|
1,174.1
|
|
|
|
(1.9
|
)
|
|
|
1,172.2
|
|
|
|
|
779.5
|
|
|
|
39.6
|
|
|
|
819.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,372.6
|
|
|
$
|
111.9
|
|
|
$
|
2,484.5
|
|
|
|
$
|
1,222.2
|
|
|
$
|
107.3
|
|
|
$
|
1,329.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Values of Potentially Impaired and Impaired
Communities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of Communities with Impairment Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded at September 30, 2008
|
|
|
|
|
|
|
Inventory with
|
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
Total
|
|
|
Impairment Indicators
|
|
|
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Carrying
|
|
|
|
Number of
|
|
|
Prior to
|
|
|
|
|
|
|
Communities (1)
|
|
|
Communities (1)
|
|
|
Value
|
|
|
|
Communities (1)
|
|
|
Impairment
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
(Values in millions)
|
|
|
|
|
|
|
|
|
East
|
|
|
105
|
|
|
|
46
|
|
|
$
|
436.9
|
|
|
|
|
19
|
|
|
$
|
163.8
|
|
|
$
|
79.0
|
|
Midwest
|
|
|
62
|
|
|
|
20
|
|
|
|
204.8
|
|
|
|
|
9
|
|
|
|
93.6
|
|
|
|
58.4
|
|
Southeast
|
|
|
176
|
|
|
|
78
|
|
|
|
485.5
|
|
|
|
|
37
|
|
|
|
241.7
|
|
|
|
153.7
|
|
South Central
|
|
|
241
|
|
|
|
57
|
|
|
|
207.1
|
|
|
|
|
15
|
|
|
|
38.1
|
|
|
|
30.5
|
|
Southwest
|
|
|
79
|
|
|
|
25
|
|
|
|
237.1
|
|
|
|
|
15
|
|
|
|
158.7
|
|
|
|
105.7
|
|
West
|
|
|
178
|
|
|
|
80
|
|
|
|
614.8
|
|
|
|
|
32
|
|
|
|
271.9
|
|
|
|
175.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
841
|
|
|
|
306
|
|
|
$
|
2,186.2
|
|
|
|
|
127
|
|
|
$
|
967.8
|
|
|
$
|
603.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Values of Potentially Impaired and Impaired
Communities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of Communities with Impairment Charges
|
|
|
|
|
|
|
Inventory with
|
|
|
|
Recorded at September 30, 2007
|
|
|
|
|
|
|
Impairment Indicators
|
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Carrying
|
|
|
|
Number of
|
|
|
Prior to
|
|
|
|
|
|
|
Communities (1)
|
|
|
Communities (1)
|
|
|
Value
|
|
|
|
Communities (1)
|
|
|
Impairment
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
(Values in millions)
|
|
|
|
|
|
|
|
|
East
|
|
|
131
|
|
|
|
32
|
|
|
$
|
210.0
|
|
|
|
|
5
|
|
|
$
|
27.9
|
|
|
$
|
21.7
|
|
Midwest
|
|
|
77
|
|
|
|
19
|
|
|
|
101.0
|
|
|
|
|
9
|
|
|
|
41.7
|
|
|
|
34.2
|
|
Southeast
|
|
|
191
|
|
|
|
53
|
|
|
|
573.1
|
|
|
|
|
18
|
|
|
|
152.6
|
|
|
|
110.0
|
|
South Central
|
|
|
286
|
|
|
|
39
|
|
|
|
219.0
|
|
|
|
|
8
|
|
|
|
35.4
|
|
|
|
25.3
|
|
Southwest
|
|
|
89
|
|
|
|
16
|
|
|
|
278.6
|
|
|
|
|
2
|
|
|
|
11.9
|
|
|
|
9.7
|
|
West
|
|
|
225
|
|
|
|
74
|
|
|
|
1,240.7
|
|
|
|
|
49
|
|
|
|
671.0
|
|
|
|
461.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
999
|
|
|
|
233
|
|
|
$
|
2,622.4
|
|
|
|
|
91
|
|
|
$
|
940.5
|
|
|
$
|
662.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A community may consist of land held for development,
residential land and lots developed and under development, and
construction in progress and finished homes. A particular
community often includes inventory in more than one category.
Further, a community may contain multiple parcels with varying
product types (e.g. entry level and
move-up
single family detached, as well as attached product types). Some
communities do not have any homes under construction nor
finished homes, and no current home sales efforts or activity. |
41
Inventory
Impairments and Land Option Cost Write-offs
During fiscal 2008, when we performed our quarterly inventory
impairment analyses, the assumptions utilized reflected our
outlook for the homebuilding industry and its impact on our
business. This outlook incorporated our belief that housing
market conditions might continue to deteriorate, and that these
challenging conditions would persist for some time. Accordingly,
our impairment evaluation as of September 30, 2008 again
indicated a significant number of communities with impairment
indicators. Communities with a combined carrying value of
$2,186.2 million as of September 30, 2008, had
indicators of potential impairment and were evaluated for
impairment. The analysis of each of these communities generally
assumed that sales prices in future periods would be equal to or
lower than current sales order prices in each community or for
comparable communities in order to generate an acceptable
absorption rate. While it is difficult to determine a timeframe
for a given community in the current market conditions, we
estimated the remaining lives of these communities to range from
six months to in excess of ten years. Through this evaluation
process, we determined that communities with a carrying value of
$967.8 million as of September 30, 2008, the largest
portions of which were in the West and Southeast regions, were
impaired. As a result, during the fourth quarter of fiscal 2008,
we recorded impairment charges of $364.7 million to reduce
the carrying value of the impaired communities to their
estimated fair value.
Due to the significant decline in demand for new homes, we
reduced our expectations of future home closing volumes, as well
as our expected need for land and lots in the future.
Consequently, during the fourth quarter of fiscal 2008, we sold
a significant amount of land and lots. In connection with these
land and lot sales, we recorded impairment charges of
$624.2 million to reduce the $814.4 million carrying
value of this inventory to its net realizable value. Including
impairments related to land sales, impairment charges during the
fourth quarter of fiscal 2008 totaled $988.9 million, as
compared to $278.3 million in the prior year period. The
fourth quarter charges combined with impairment charges recorded
earlier in the year resulted in total inventory impairment
charges of $2,372.6 million and $1,222.2 million
during fiscal 2008 and 2007, respectively. During fiscal 2008,
excluding impairments related to land sales, approximately 79%
of the impairment charges were recorded to residential land and
lots and land held for development, and approximately 21% of the
charges were recorded to residential construction in progress
and finished homes inventory, compared to 74% and 26%,
respectively, in fiscal 2007.
During fiscal 2008 and 2007, we wrote off $111.9 million
and $107.3 million, respectively, of earnest money deposits
and pre-acquisition costs related to land option purchase
contracts which we determined we would not pursue. The inventory
impairment charges and write-offs of earnest money deposits and
pre-acquisition costs reduced total homebuilding gross profit as
a percentage of homebuilding revenues by approximately
3,810 basis points in fiscal 2008, compared to
1,200 basis points in fiscal 2007.
Selling,
General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities decreased by
$349.7 million, or 31%, to $791.8 million in 2008 from
$1,141.5 million in 2007. As a percentage of homebuilding
revenues, SG&A expense increased 180 basis points, to
12.1% in 2008 from 10.3% in 2007, due to a decrease in revenues.
The largest component of our homebuilding SG&A expense is
employee compensation and related costs, which represented 53%
and 59% of SG&A costs in 2008 and 2007, respectively. Those
costs decreased $254.2 million, or 38%, to
$417.9 million in 2008 from $672.2 million in 2007,
largely due to our continued efforts to align the number of
employees to match our home closing levels, as well as a
decrease in incentive compensation, which is primarily based on
profitability. Our homebuilding operations employed
approximately 3,100 and 5,100 employees at
September 30, 2008 and 2007, respectively.
Interest
Incurred
We capitalize homebuilding interest costs to inventory during
development and construction. During fiscal 2007, our active
inventory exceeded our debt levels; therefore, we capitalized
all interest from homebuilding debt. However, due to our
inventory reduction strategies, slowing or suspending land
development in certain communities and limiting the construction
of unsold homes, our active inventory was lower than our debt
level
42
during much of fiscal 2008. As a result, we expensed
$39.0 million of homebuilding interest incurred during
fiscal 2008.
Interest amortized to cost of sales, excluding interest written
off with inventory impairment charges, was 3.9% of total home
and land/lot cost of sales in 2008, compared to 2.4% in 2007.
The increase in the rate of interest amortized to cost of sales
was primarily due to a greater decline in our home closings
volume as compared to the decline in our interest incurred
during the year, and a more rapid reduction in our active
inventory levels than our interest incurred over the time period
in which fiscal 2008 closings were active versus the prior year
closings.
Interest incurred is directly related to the average level of
our homebuilding debt outstanding during the period. Comparing
fiscal 2008 with fiscal 2007, interest incurred related to
homebuilding debt decreased by 22%, to $236.7 million,
primarily due to a 23% decrease in our average homebuilding debt.
Loss
on Early Retirement of Debt
In fiscal 2008, we recorded a loss on early retirement of debt
of $2.6 million, which was primarily due to the write-off
of unamortized fees associated with reducing the size of our
revolving credit facility in June 2008. In fiscal 2007, in
connection with the early retirement of our 8.5% senior
notes due 2012, we recorded a loss of $12.1 million for the
call premium and the unamortized discount and fees related to
the redeemed notes.
Other
Income
Other income, net of other expenses, associated with
homebuilding activities was $9.1 million in 2008, compared
to $4.0 million in 2007. The increase in other income in
fiscal 2008 was primarily due to an increase in interest income.
Goodwill
Impairments
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
East
|
|
$
|
|
|
|
$
|
39.4
|
|
Midwest
|
|
|
|
|
|
|
48.5
|
|
Southeast
|
|
|
|
|
|
|
11.5
|
|
South Central
|
|
|
|
|
|
|
|
|
Southwest
|
|
|
79.4
|
|
|
|
|
|
West
|
|
|
|
|
|
|
374.7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79.4
|
|
|
$
|
474.1
|
|
|
|
|
|
|
|
|
|
|
Goodwill
In performing our annual impairment analysis as of
September 30, 2008, we estimated the fair value of our
operating segments utilizing the expected present values of
future cash flows. As a result of this analysis, we determined
that our goodwill balance related to each operating segment in
our Southwest reporting segment was impaired. Consequently,
during the fourth quarter, we recorded a goodwill impairment
charge of $79.4 million. As of September 30, 2008, our
remaining goodwill balance was $15.9 million, all of which
related to our South Central reporting segment.
During fiscal 2007, we recorded goodwill impairment charges of
$474.1 million, primarily related to our West reporting
segment. As of September 30, 2007, allocation of our
remaining goodwill balance of $95.3 million was as follows:
South Central $15.9 million and Southwest
$79.4 million.
43
Homebuilding
Results by Reporting Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
Homebuilding
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
% of
|
|
|
|
|
|
|
Income (Loss)
|
|
|
% of
|
|
|
|
|
Homebuilding
|
|
|
Before
|
|
|
Region
|
|
|
|
Homebuilding
|
|
|
Before
|
|
|
Region
|
|
|
|
|
Revenues
|
|
|
Income Taxes (1)
|
|
|
Revenues
|
|
|
|
Revenues
|
|
|
Income Taxes (1)
|
|
|
Revenues
|
|
|
|
|
(In millions)
|
|
|
|
East
|
|
$
|
589.9
|
|
|
$
|
(332.5
|
)
|
|
|
(56.4
|
)
|
%
|
|
$
|
1,092.0
|
|
|
$
|
(66.1
|
)
|
|
|
(6.1
|
)
|
%
|
Midwest
|
|
|
546.7
|
|
|
|
(184.3
|
)
|
|
|
(33.7
|
)
|
%
|
|
|
1,111.5
|
|
|
|
(205.3
|
)
|
|
|
(18.5
|
)
|
%
|
Southeast
|
|
|
820.8
|
|
|
|
(507.7
|
)
|
|
|
(61.9
|
)
|
%
|
|
|
1,478.3
|
|
|
|
(131.6
|
)
|
|
|
(8.9
|
)
|
%
|
South Central
|
|
|
1,452.2
|
|
|
|
(9.0
|
)
|
|
|
(0.6
|
)
|
%
|
|
|
2,009.9
|
|
|
|
122.2
|
|
|
|
6.1
|
|
%
|
Southwest
|
|
|
1,170.9
|
|
|
|
(366.7
|
)
|
|
|
(31.3
|
)
|
%
|
|
|
1,882.0
|
|
|
|
192.9
|
|
|
|
10.2
|
|
%
|
West
|
|
|
1,938.1
|
|
|
|
(1,266.7
|
)
|
|
|
(65.4
|
)
|
%
|
|
|
3,515.1
|
|
|
|
(932.1
|
)
|
|
|
(26.5
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,518.6
|
|
|
$
|
(2,666.9
|
)
|
|
|
(40.9
|
)
|
%
|
|
$
|
11,088.8
|
|
|
$
|
(1,020.0
|
)
|
|
|
(9.2
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Expenses maintained at the corporate level are allocated to each
segment based on the segments average inventory. These
expenses consist primarily of capitalized interest and property
taxes, which are amortized to cost of sales, and the expenses
related to operating our corporate office. |
East Region Homebuilding revenues decreased
46% in 2008 compared to 2007, primarily due to a 44% decrease in
the number of homes closed, as well as a slight decrease in the
average selling price of those homes. The region reported a loss
before income taxes of $332.5 million in 2008, compared to
a loss of $66.1 million in 2007. The losses were primarily
due to inventory impairment charges and earnest money and
pre-acquisition cost write-offs totaling $288.4 million and
$81.5 million in fiscal 2008 and 2007, respectively. In
fiscal 2008, inventory impairment charges included
$42.7 million of impairments related to fourth quarter land
sales. In fiscal 2007, goodwill impairment charges of
$39.4 million also contributed to the loss. A decrease in
the regions gross profit from home sales as a percentage
of home sales revenue (home sales gross profit percentage) of
930 basis points in 2008 compared to 2007 also contributed
to the increase in loss before income taxes. The home sales
gross profit percentage declined in most of the regions
markets, many of which had very high sales cancellations
resulting in unsold homes we aggressively priced to sell.
Despite implementing significant cost control measures, our
revenues declined at a greater rate (46%) than our SG&A
expense (29%), which also contributed to the loss before income
taxes in this region.
Midwest Region Homebuilding revenues
decreased 51% in 2008 compared to 2007, primarily due to a 46%
decrease in the number of homes closed, as well as a 7% decrease
in the average selling price of those homes. The region reported
a loss before income taxes of $184.3 million in 2008,
compared to a loss of $205.3 million in 2007. The losses
were primarily due to a decline in revenues and inventory
impairment charges and earnest money and pre-acquisition cost
write-offs totaling $163.3 million and $167.3 million
in fiscal 2008 and 2007, respectively, while the regions
home sales gross profit percentage remained relatively flat. In
fiscal 2008, inventory impairment charges included
$33.6 million of impairments related to fourth quarter land
sales. In fiscal 2007, goodwill impairment charges of
$48.5 million also contributed to the loss. Despite
implementing significant cost control measures, our revenues
declined at a greater rate (51%) than our SG&A expense
(31%), which also contributed to the loss before income taxes in
this region.
Southeast Region Homebuilding revenues
decreased 44% in 2008 compared to 2007, primarily due to a 41%
decrease in the number of homes closed, as well as a 9% decrease
in the average selling price of those homes. The region reported
a loss before income taxes of $507.7 million in 2008,
compared to a loss of $131.6 million in 2007. The losses
were primarily due to inventory impairment charges and earnest
money and pre-acquisition cost write-offs totaling
$457.5 million and $210.2 million in fiscal 2008 and
2007, respectively. In fiscal 2008, inventory impairment charges
included $116.7 million of impairments related to fourth
quarter land sales. In fiscal 2007, goodwill impairment charges
of $11.5 million also contributed to the loss. A decrease
in the regions home sales gross profit percentage of
990 basis points in 2008 compared to 2007 also contributed
to the increase in loss before income taxes. The home sales
gross profit percentage
44
declines in our Florida markets had the greatest impact on the
overall decreases. The Florida markets experienced rapid price
increases in previous years which encouraged speculation in
residential real estate, creating an environment that has shown
not to be sustainable. The tightening in the mortgage
environment, high cancellation rates and existing homes for sale
by investors led to increased inventory levels, requiring price
reductions and increased levels of sales incentives to compete
for the reduced pool of qualified buyers, resulting in
substantial gross profit declines.
South Central Region Homebuilding revenues
decreased 28% in 2008 compared to 2007, due to a 29% decrease in
the number of homes closed. The region reported a loss before
income taxes of $9.0 million in 2008, compared to income
before income taxes of $122.2 million in 2007. The loss in
fiscal 2008 was primarily due to inventory impairment charges
and earnest money and pre-acquisition cost write-offs totaling
$72.4 million in fiscal 2008, compared to
$24.6 million in 2007. In fiscal 2008, inventory impairment
charges included $29.1 million of impairments related to
fourth quarter land sales. In addition, the regions home
sales gross profit percentage decreased 130 basis points in
2008 compared to 2007. The decline in home sales gross profit
was largely due to softening in the San Antonio market,
where inventories of new and existing homes had increased,
resulting in increased levels of sales incentives being offered
by builders. The majority of the regions inventory
impairment charges were also in the San Antonio market.
Southwest Region Homebuilding revenues
decreased 38% in 2008 compared to 2007, due to a 35% decrease in
the number of homes closed, as well as an 11% decrease in the
average selling price of those homes. The region reported a loss
before income taxes of $366.7 million in 2008, compared to
income before income taxes of $192.9 million in 2007. The
loss in fiscal 2008 was primarily due to inventory impairment
charges and earnest money and pre-acquisition cost write-offs
totaling $330.7 million, compared to $26.8 million in
2007. In fiscal 2008, inventory impairment charges included
$155.4 million of impairments related to fourth quarter
land sales. A decrease in the regions home sales gross
profit percentage of 720 basis points in 2008 compared to
2007, which was largely due to declines in our Phoenix market,
also contributed to the reduction in income before income taxes.
The Phoenix market experienced rapid price increases in previous
years which encouraged speculation in residential real estate,
creating an environment that has shown not to be sustainable.
The tightening in the mortgage environment, high cancellation
rates and existing homes for sale by investors led to increased
inventory levels, requiring price reductions and increased
levels of sales incentives to compete for the reduced pool of
qualified buyers, resulting in substantial gross profit
declines. The increased number of foreclosed homes offered for
sale in Phoenix added further pressure to sales prices. In
fiscal 2008, goodwill impairment charges of $79.4 million
also contributed to the loss.
West Region Homebuilding revenues decreased
45% in 2008 compared to 2007, due to a 36% decrease in the
number of homes closed, as well as a 17% decrease in the average
selling price of those homes. The region reported a loss before
income taxes of $1.3 billion in 2008, compared to a loss of
$932.1 million in 2007. The losses were primarily due to
inventory impairment charges and earnest money and
pre-acquisition cost write-offs totaling $1.2 billion and
$819.1 million in fiscal 2008 and 2007, respectively. The
majority of the inventory impairments related to communities in
our California and Las Vegas markets. In fiscal 2008, inventory
impairment charges included $246.7 million of impairments
related to fourth quarter land sales. In fiscal 2007, goodwill
impairment charges of $374.7 million contributed to the
loss in fiscal 2007. A decrease in the regions home sales
gross profit percentage of 920 basis points in 2008
compared to 2007 also contributed to the increase in loss before
income taxes. Although all of the regions markets have
experienced weak market conditions, the home sales gross profit
percentage decline in our California and Las Vegas markets had
the greatest impact on the overall decreases for the region. The
California and Las Vegas markets experienced rapid, significant
home price increases in previous years which contributed to
gross profit increases in 2005 and continued elevated gross
profits in 2006, but these price increases also strained housing
affordability for many potential homebuyers there. Credit
tightening in the mortgage markets also significantly limited
the availability of many mortgage products used extensively by
California and Las Vegas homebuyers in previous years. Increased
levels of sales incentives and home price reductions were
typical in these markets, as builders attempted to increase
demand for homes to reduce high inventory levels and to address
affordability concerns, resulting in substantial gross profit
declines. The increased number of foreclosed homes offered for
sale in California and Las Vegas added further pressure to sales
prices.
45
Results
of Operations Financial Services
Fiscal
Year Ended September 30, 2009 Compared to Fiscal Year Ended
September 30, 2008
The following tables set forth key operating and financial data
for our financial services operations, comprising DHI Mortgage
and our subsidiary title companies, for the fiscal years ended
September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
Number of first-lien loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers
|
|
|
11,147
|
|
|
|
16,134
|
|
|
|
(31
|
)%
|
Number of homes closed by D.R. Horton
|
|
|
16,703
|
|
|
|
26,396
|
|
|
|
(37
|
)%
|
DHI Mortgage capture rate
|
|
|
67%
|
|
|
|
61%
|
|
|
|
|
|
Number of total loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers
|
|
|
11,245
|
|
|
|
16,458
|
|
|
|
(32
|
)%
|
Total number of loans originated or brokered by DHI Mortgage
|
|
|
13,481
|
|
|
|
17,797
|
|
|
|
(24
|
)%
|
Captive business percentage
|
|
|
83%
|
|
|
|
92%
|
|
|
|
|
|
Loans sold by DHI Mortgage to third parties
|
|
|
13,991
|
|
|
|
17,928
|
|
|
|
(22
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Loan origination fees
|
|
$
|
18.6
|
|
|
$
|
24.9
|
|
|
|
(25
|
)%
|
Sale of servicing rights and gains from sale of mortgages
|
|
|
56.8
|
|
|
|
91.0
|
|
|
|
(38
|
)%
|
Recourse expense
|
|
|
(33.2
|
)
|
|
|
(21.9
|
)
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of servicing rights and gains from sale of mortgages, net
|
|
|
23.6
|
|
|
|
69.1
|
|
|
|
(66
|
)%
|
Other revenues
|
|
|
8.3
|
|
|
|
12.1
|
|
|
|
(31
|
)%
|
Reinsurance expense
|
|
|
(14.9
|
)
|
|
|
(4.9
|
)
|
|
|
204
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues, net
|
|
|
(6.6
|
)
|
|
|
7.2
|
|
|
|
(192
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage operations revenues
|
|
|
35.6
|
|
|
|
101.2
|
|
|
|
(65
|
)%
|
Title policy premiums, net
|
|
|
18.1
|
|
|
|
26.3
|
|
|
|
(31
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
53.7
|
|
|
|
127.5
|
|
|
|
(58
|
)%
|
General and administrative expense
|
|
|
78.1
|
|
|
|
100.1
|
|
|
|
(22
|
)%
|
Interest expense
|
|
|
1.5
|
|
|
|
3.7
|
|
|
|
(59
|
)%
|
Interest and other (income)
|
|
|
(10.4
|
)
|
|
|
(11.4
|
)
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
(15.5
|
)
|
|
$
|
35.1
|
|
|
|
(144
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services Operating Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentages of Financial
|
|
|
Services Revenues,
|
|
|
Excluding the Effects of
|
|
|
Recourse Expense and Reinsurance Expense
|
|
|
Fiscal Year Ended
|
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
Recourse expense and reinsurance expense
|
|
|
47.2
|
|
%
|
|
|
17.4
|
|
%
|
General and administrative expense
|
|
|
76.7
|
|
%
|
|
|
64.9
|
|
%
|
Interest expense
|
|
|
1.5
|
|
%
|
|
|
2.4
|
|
%
|
Interest and other (income)
|
|
|
(10.2
|
)
|
%
|
|
|
(7.4
|
)
|
%
|
Income (loss) before income taxes
|
|
|
(15.2
|
)
|
%
|
|
|
22.7
|
|
%
|
46
Mortgage
Loan Activity
The volume of loans originated and brokered by our mortgage
operations is directly related to the number and value of homes
closed by our homebuilding operations. Total first-lien loans
originated or brokered by DHI Mortgage for our homebuyers
decreased by 31% in fiscal 2009 compared to fiscal 2008,
corresponding to the decrease in the number of homes closed of
37%. The percentage decrease in loans originated was less than
the percentage decrease in homes closed due to an increase in
our mortgage capture rate (the percentage of total home closings
by our homebuilding operations for which DHI Mortgage handled
the homebuyers financing), to 67% in 2009, from 61% in
2008.
Home closings from our homebuilding operations constituted 83%
of DHI Mortgage loan originations in 2009, compared to 92% in
2008, reflecting DHI Mortgages continued focus on
supporting the captive business provided by our homebuilding
operations. The relatively lower captive percentage in the
current year reflects an increase in refinancing activity as
existing homeowners have taken advantage of the recent decline
in mortgage interest rates.
The number of loans sold to third-party purchasers decreased by
22% in 2009 as compared to 2008. The decrease was primarily due
to the decrease in the number of mortgage loans originated.
Consistent with fiscal 2008, originations during fiscal 2009
continued to predominantly be eligible for sale to Fannie Mae,
Freddie Mac, or GNMA (Agency-eligible). In fiscal
2009, approximately 99% of DHI Mortgage production and 98% of
mortgage loans held for sale on September 30, 2009 were
Agency-eligible.
Financial
Services Revenues and Expenses
Revenues from the financial services segment decreased 58%, to
$53.7 million in 2009 from $127.5 million in 2008. The
decrease was primarily due to the decrease in the number of
mortgage loans originated and sold, as well as an increase in
recourse expense related to future loan repurchase obligations,
which is a component of gains from sale of mortgages, and
increases in the loss reserves for reinsured loans, which is a
component of other revenues. Charges related to recourse
obligations were $33.2 million in fiscal 2009, compared to
$21.9 million in fiscal 2008. The increase in recourse
expense is a result of increasing our loan loss reserves during
fiscal 2009 due to increased expectations for loan repurchases
and related losses caused by additional repurchase requests
arising under the limited recourse provisions. The calculation
of our required repurchase loss reserve is based upon an
analysis of repurchase requests received, our actual repurchases
and losses through the disposition of such, discussions with our
mortgage purchasers and analysis of the mortgages we originated.
While we believe that we have adequately reserved for losses on
known and projected repurchase requests, if actual repurchases
or if the losses incurred resolving those repurchases exceed our
expectations, additional recourse expense may be incurred. Also,
a subsidiary of ours reinsured a portion of private mortgage
insurance written on loans originated by DHI Mortgage in prior
years. Charges to increase reserves for expected losses on the
reinsured loans were $14.9 million and $4.9 million
during fiscal 2009 and 2008, respectively.
Additionally, revenues during fiscal 2008 included the
recognition of an additional $8.8 million of revenues
related to the adoption of the FASBs authoritative
guidance for written loan commitments which was adopted on
January 1, 2008. The guidance requires that the expected
net future cash flows related to the associated servicing of a
loan are included in the measurement of all written loan
commitments that are accounted for at fair value through
earnings at the time of commitment. The effect of this guidance
in fiscal 2009 was a $4.3 million decrease in revenues.
General and administrative (G&A) expense associated with
financial services decreased 22%, to $78.1 million in 2009
from $100.1 million in 2008. The largest component of our
financial services G&A expense is employee compensation and
related costs, which represented 75% and 71% of G&A costs
in 2009 and 2008, respectively. These costs decreased 18%, to
$58.3 million in 2009 from $70.8 million in 2008, as
we have continued to align the number of employees with current
and anticipated loan origination and title service levels. Our
financial services operations employed approximately 600 and
700 employees at September 30, 2009 and 2008,
respectively.
47
As a percentage of financial services revenues, excluding the
effects of recourse expense and reinsurance expense, G&A
expense increased to 76.7% in 2009, from 64.9% in 2008. The
increase was primarily due to the reduction in revenue resulting
from the decrease in mortgage loan volume during fiscal 2009, as
well as higher revenues in the prior year due to the adoption of
the authoritative guidance for written loan commitments.
Fluctuations in financial services G&A expense as a
percentage of revenues can be expected to occur as some expenses
are not directly related to mortgage loan volume or to changes
in the amount of revenue earned.
48
Fiscal
Year Ended September 30, 2008 Compared to Fiscal Year Ended
September 30, 2007
The following tables set forth key operating and financial data
for our financial services operations for the fiscal years ended
September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2008
|
|
2007
|
|
% Change
|
|
Number of first-lien loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers
|
|
|
16,134
|
|
|
|
27,411
|
|
|
|
(41
|
)%
|
Number of homes closed by D.R. Horton
|
|
|
26,396
|
|
|
|
41,370
|
|
|
|
(36
|
)%
|
DHI Mortgage capture rate
|
|
|
61%
|
|
|
|
66%
|
|
|
|
|
|
Number of total loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers
|
|
|
16,458
|
|
|
|
34,394
|
|
|
|
(52
|
)%
|
Total number of loans originated or brokered by DHI Mortgage
|
|
|
17,797
|
|
|
|
36,180
|
|
|
|
(51
|
)%
|
Captive business percentage
|
|
|
92%
|
|
|
|
95%
|
|
|
|
|
|
Loans sold by DHI Mortgage to third parties
|
|
|
17,928
|
|
|
|
36,147
|
|
|
|
(50
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
(In millions)
|
|
Loan origination fees
|
|
$
|
24.9
|
|
|
$
|
43.5
|
|
|
|
(43
|
)%
|
Sale of servicing rights and gains from sale of mortgages
|
|
|
91.0
|
|
|
|
123.8
|
|
|
|
(26
|
)%
|
Recourse expense
|
|
|
(21.9
|
)
|
|
|
(26.0
|
)
|
|
|
(16
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of servicing rights and gains from sale of mortgages, net
|
|
|
69.1
|
|
|
|
97.8
|
|
|
|
(29
|
)%
|
Other revenues
|
|
|
12.1
|
|
|
|
24.3
|
|
|
|
(50
|
)%
|
Reinsurance expense
|
|
|
(4.9
|
)
|
|
|
(0.2
|
)
|
|
|
2,350
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues, net
|
|
|
7.2
|
|
|
|
24.1
|
|
|
|
(70
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage operations revenues
|
|
|
101.2
|
|
|
|
165.4
|
|
|
|
(39
|
)%
|
Title policy premiums, net
|
|
|
26.3
|
|
|
|
42.3
|
|
|
|
(38
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
127.5
|
|
|
|
207.7
|
|
|
|
(39
|
)%
|
General and administrative expense
|
|
|
100.1
|
|
|
|
153.8
|
|
|
|
(35
|
)%
|
Interest expense
|
|
|
3.7
|
|
|
|
23.6
|
|
|
|
(84
|
)%
|
Interest and other (income)
|
|
|
(11.4
|
)
|
|
|
(38.5
|
)
|
|
|
(70
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
35.1
|
|
|
$
|
68.8
|
|
|
|
(49
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services Operating Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentages of Financial
|
|
|
Services Revenues,
|
|
|
Excluding the Effects of
|
|
|
Recourse Expense and Reinsurance Expense
|
|
|
Fiscal Year Ended
|
|
|
September 30,
|
|
|
2008
|
|
2007
|
|
Recourse expense and reinsurance expense
|
|
|
17.4
|
|
%
|
|
|
11.2
|
|
%
|
General and administrative expense
|
|
|
64.9
|
|
%
|
|
|
65.8
|
|
%
|
Interest expense
|
|
|
2.4
|
|
%
|
|
|
10.1
|
|
%
|
Interest and other (income)
|
|
|
(7.4
|
)
|
%
|
|
|
(16.5
|
)
|
%
|
Income before income taxes
|
|
|
22.7
|
|
%
|
|
|
29.4
|
|
%
|
49
Mortgage
Loan Activity
Total first-lien loans originated or brokered by DHI Mortgage
for our homebuyers decreased by 41% in fiscal 2008 compared to
fiscal 2007, corresponding to the decrease in the number of
homes closed of 36%. The percentage decrease in loans originated
was greater than the percentage decrease in homes closed due to
a decline in our mortgage capture rate to 61% in 2008, from 66%
in 2007, as DHI Mortgage reduced the number of homebuilding
markets it supports.
Home closings from our homebuilding operations constituted 92%
of DHI Mortgage loan originations in 2008, compared to 95% in
2007, reflecting DHI Mortgages continued focus on
supporting the captive business provided by our homebuilding
operations. The number of loans sold to third-party purchasers
decreased by 50% in 2008 as compared to 2007. The decrease was
primarily due to the decrease in the number of mortgage loans
originated.
During fiscal 2007, the market for certain non-traditional
mortgage loans changed substantially, resulting in the reduced
availability of some loan products that had previously been
available to borrowers. The affected loan products were
generally characterized by high combined
loan-to-value
ratios in combination with less required documentation than
traditional mortgage loans. Such loan products declined
substantially as a percentage of total originations during
fiscal 2007, primarily in the third and fourth quarters. As a
percentage of total loans originated, originations of
traditional conforming, conventional loans and FHA or VA insured
loans increased significantly during the fourth quarter of
fiscal 2007, to approximately 90%, corresponding to the
reduction in non-traditional mortgage loans. Consistent with the
second half of fiscal 2007, originations during fiscal 2008
continued to be predominantly traditional conforming,
conventional loans and FHA or VA insured loans.
Financial
Services Revenues and Expenses
Revenues from the financial services segment decreased 39%, to
$127.5 million in 2008 from $207.7 million in 2007.
The decrease was primarily due to the decrease in the number of
mortgage loans originated and sold, although during fiscal 2008,
the effect of decreased loan volume was partially offset by the
recognition of an additional $8.8 million of revenues
related to the adoption of the FASBs authoritative
guidance for written loan commitments on January 1, 2008.
Additionally, we increased our loan loss reserve from
$24.6 million at September 30, 2007, to
$30.5 million at September 30, 2008 to provide for
estimated losses predominantly on loans held in portfolio and
loans held for sale. Charges related to recourse obligations
declined to $21.9 million in fiscal 2008 from
$26.0 million in fiscal 2007. Recourse expense is a
component of gains from sale of mortgages.
G&A expense associated with financial services decreased
35%, to $100.1 million in 2008 from $153.8 million in
2007. The largest component of our financial services G&A
expense is employee compensation and related costs, which
represented 71% and 75% of G&A costs in 2008 and 2007,
respectively. These costs decreased 38%, to $70.8 million
in 2008 from $114.9 million in 2007, as we have continued
to align the number of employees with current and anticipated
loan origination and title service levels. Our financial
services operations employed approximately 700 and
1,100 employees at September 30, 2008 and 2007,
respectively.
As a percentage of financial services revenues, excluding the
effects of recourse expense and reinsurance expense, G&A
expense decreased to 64.9% in 2008, from 65.8% in 2007. The
decrease was primarily due to the effect of the additional
revenue recognized upon adopting the authoritative guidance for
written loan commitments in fiscal 2008, largely offset by the
reduction in revenue resulting from the decrease in mortgage
loan volume during fiscal 2008. Fluctuations in financial
services G&A expense as a percentage of revenues can be
expected to occur as some expenses are not directly related to
mortgage loan volume or to changes in the amount of revenue
earned.
Interest expense is directly related to the average level of our
financial services debt outstanding during the period. Comparing
fiscal 2008 with fiscal 2007, interest expense related to
financial services debt decreased by 84%, to $3.7 million,
primarily due to an 87% decrease in our average financial
services debt.
50
Interest and other income decreased 70%, to $11.4 million
in 2008 from $38.5 million in 2007, primarily due to the
decreased volume of loan originations.
Results
of Operations Consolidated
Fiscal
Year Ended September 30, 2009 Compared to Fiscal Year Ended
September 30, 2008
Loss
before Income Taxes
Loss before income taxes for fiscal 2009 was
$552.3 million, compared to $2,631.8 million for
fiscal 2008. The decrease in our consolidated loss was primarily
due to significantly lower inventory impairment charges during
fiscal 2009, as well as a decrease in our SG&A expense.
These improvements were slightly offset by a decrease in the
amount of our home sales gross profit due to a reduction in
revenues. Further deterioration of market conditions in the
homebuilding industry and related availability of mortgage
financing may further negatively impact our financial results,
and may also result in further asset impairment charges against
income in future periods.
Income
Taxes
In fiscal 2009, we recorded a benefit from income taxes of
$7.0 million, which relates primarily to adjustments to the
tax provision recorded for fiscal year 2008 resulting from the
finalization and filing of the tax return for that year. In
fiscal 2008, we recorded a provision for income taxes of
$1.8 million. We do not have meaningful effective tax rates
in these years because of losses from operations before taxes,
the impact of valuation allowances on our net deferred tax
assets and impairment of nondeductible goodwill.
We had income tax receivables of $293.1 million and
$676.2 million at September 30, 2009 and 2008,
respectively. In December 2008, we received a federal income tax
refund of $621.7 million with respect to our
2008 year. We received $113.0 million of the
$293.1 million receivable in the form of a tax refund
during October 2009. A substantial portion of the remaining tax
receivable at September 30, 2009 is due to the carryback of
federal tax losses generated in fiscal 2009 that can be carried
back against fiscal 2007 taxable income. We also had
$11.1 million of income tax receivables for state operating
loss carrybacks at September 30, 2009.
At September 30, 2009, we had a federal net operating loss
carryforward of $422 million that will expire in fiscal
2029 and tax benefits for state net operating loss carryforwards
of $81.4 million that expire (beginning at various times
depending on the tax jurisdiction) from fiscal 2013 to fiscal
2029. We also had minimum tax credit carryforwards of
$17.6 million that carry no expiration date.
At September 30, 2009 and 2008, we had net deferred tax
assets of $1,124.4 million and $1,174.8 million,
respectively, offset by valuation allowances of
$1,124.4 million and $961.3 million, respectively.
Differences between the anticipated and actual outcomes of these
future tax consequences could have a material impact on our
consolidated results of operations or financial position.
Changes in existing tax laws also affect actual tax results and
the valuation of deferred tax assets over time.
On November 6, 2009, the Worker, Homeownership, and
Business Assistance Act of 2009 was enacted into law and amended
Section 172 of the Internal Revenue Code to allow the net
operating loss realized in one or the other of tax years 2008 or
2009 (our fiscal 2009 or 2010) to be carried back up to
five years (previously limited to a two-year carryback). We are
evaluating the impact of this legislative change. We will be
able to carry back either fiscal 2009 or 2010 taxable losses
five years and receive a refund of previously paid federal
income taxes in excess of that recognized in the
September 30, 2009 consolidated balance sheet. We currently
anticipate that such additional refund will approximate
$200 million and will likely be recognized in our financial
statements as a reduction of our valuation allowance for
deferred tax assets in the first quarter of fiscal 2010.
The benefits of our net operating loss and minimum tax credit
carryforwards, as well as our unrealized built-in losses, would
be reduced or potentially eliminated if we experienced an
ownership change as defined by Internal Revenue Code
Section 382 (Section 382). We do not believe we have
experienced such an
51
ownership change as of September 30, 2009; however, the
amount by which our ownership may change in the future could be
affected by purchases and sales of stock by 5% stockholders and
the conversion of our outstanding convertible senior notes, over
which we have no control. In August 2009, our Board of Directors
adopted a Section 382 rights agreement as a measure
intended to deter such an ownership change in order to preserve
these tax attributes. The Section 382 rights agreement,
however, may not prevent an ownership change. Moreover, it will
expire by its terms in 2010 if it is not approved when we submit
it to our stockholders for their approval.
During fiscal 2009 and 2008, we recognized interest and
penalties with respect to income taxes of $3.0 million and
$4.0 million, respectively, in our consolidated statements
of operations, and at September 30, 2009 and 2008, our
total accrued interest and penalties relating to unrecognized
income tax benefits was $6.2 million and $4.9 million,
respectively. As of September 30, 2009 and 2008, our total
unrecognized income tax benefits were $24.0 million and
$18.7 million, respectively. Unrecognized tax benefits are
the differences between a tax position taken, or expected to be
taken in a tax return, and the benefit recognized for accounting
purposes. The total amount of unrecognized tax benefits includes
interest, penalties, and the tax benefit relating to the
deductibility of interest and state income taxes. All tax
positions, if recognized, would affect our effective income tax
rate. We do not expect the total amount of unrecognized tax
benefits to significantly decrease or increase within twelve
months of the current reporting date.
We are subject to federal income tax and to income tax in
multiple states. The statute of limitations for our major tax
jurisdictions remains open for examination for fiscal years 2006
through 2009. We are currently being audited by various states.
The IRS concluded its examination of our tax returns for 2004
and 2005 in February 2009 which resulted in the assessment of
$7.5 million of additional federal and state income tax and
interest.
Fiscal
Year Ended September 30, 2008 Compared to Fiscal Year Ended
September 30, 2007
Loss
before Income Taxes
Loss before income taxes for fiscal 2008 was
$2,631.8 million, compared to $951.2 million for
fiscal 2007. The increase in our consolidated loss was primarily
due to significantly higher inventory impairment charges during
fiscal 2008 and a decrease in the amount of our home sales gross
profit due to a reduction in revenues. These improvements were
partially offset by decreases in goodwill impairment charges and
SG&A expense during fiscal 2008.
Income
Taxes
Due to the challenging market conditions in the homebuilding
industry, we recorded significant impairment charges for both
inventory and goodwill during fiscal 2007 and 2008, and were in
a three-year cumulative pre-tax loss position for fiscal years
2006 through 2008. While we had a long history of profitable
operations prior to the downturn in the homebuilding industry,
the cumulative loss position was significant negative evidence
in assessing the recoverability of our deferred tax assets.
Therefore, in fiscal 2008 we recorded a valuation allowance on
our deferred tax assets, representing those deferred tax asset
amounts for which ultimate realization is dependent upon the
generation of future taxable income during the periods in which
the related temporary differences become deductible.
During fiscal 2008, particularly in the fourth quarter, we sold
a significant amount of land and lots through numerous
transactions to generate cash flows, reduce our future carrying
costs and land development obligations, and lower our inventory
supply in certain markets to match our expectations of future
demand. These transactions, combined with the results of all of
our operations in this difficult housing environment, generated
a net operating tax loss that was carried back to fiscal 2006
and resulted in a federal income tax refund. Consequently, we
recorded a $676.2 million federal income tax receivable
relating to the net operating loss carryback refund claim at
September 30, 2008.
In fiscal 2008, the provision for income taxes was
$1.8 million, which reflects the effect of the
establishment of the deferred tax asset valuation allowance as
discussed above. In fiscal 2007, the benefit from
52
income taxes was $238.7 million, corresponding to the loss
before income taxes for the year. Our effective tax rate for
fiscal 2008 differs from the statutory rate, primarily because
of the establishment of the valuation allowance.
Overview
of Capital Resources and Liquidity
We have historically funded our homebuilding and financial
services operations with cash flows from operating activities,
borrowings under our bank credit facilities and the issuance of
new debt securities. In light of the challenging homebuilding
market conditions experienced over the past few years, we have
been operating with a primary focus to generate cash flows
through reductions in assets. The generation of cash flow has
allowed us to increase our liquidity and strengthen our balance
sheet and has placed us in a position to be able to invest in
market opportunities as they arise. We do not expect to generate
as much cash from asset reductions in fiscal 2010 as we have in
the past three fiscal years. Depending upon future homebuilding
market conditions and our expectations for such, we may use a
portion of our cash balances to increase our assets. We intend
to maintain adequate liquidity and balance sheet strength, and
we will continue to evaluate opportunities to access the capital
markets as they become available.
At September 30, 2009, our ratio of net homebuilding debt
to total capital was 36.3%, a decrease of 730 basis points
from 43.6% at September 30, 2008. Net homebuilding debt to
total capital consists of homebuilding notes payable net of cash
divided by total capital net of cash (homebuilding notes payable
net of cash plus stockholders equity). The decrease in our
ratio of net homebuilding debt to total capital at
September 30, 2009 as compared with the ratio a year
earlier was primarily due to our higher cash balance resulting
from generating cash flows from operations and lower debt
balance resulting from retiring maturing senior notes and
repurchasing senior notes, which was partially offset by the
decrease in retained earnings. Our ratio of net homebuilding
debt to total capital remains within our target operating range
of below 45%. We believe that our strong balance sheet and
liquidity position will allow us to be flexible in reacting to
changing market conditions. However, future period-end net
homebuilding debt to total capital ratios may be higher than the
36.3% ratio achieved at September 30, 2009.
We believe that the ratio of net homebuilding debt to total
capital is useful in understanding the leverage employed in our
homebuilding operations and comparing us with other
homebuilders. We exclude the debt of our financial services
business because it is separately capitalized and its obligation
under its repurchase agreement is substantially collateralized
and not guaranteed by our parent company or any of our
homebuilding entities. Because of its capital function, we
include homebuilding cash as a reduction of our homebuilding
debt and total capital. For comparison to our ratios of net
homebuilding debt to capital above, at September 30, 2009
and 2008, our ratios of homebuilding debt to total capital,
without netting cash balances, were 58.7% and 55.6%,
respectively.
Historically, we used our $1.65 billion unsecured revolving
credit facility as a partial source of funding for our
homebuilding operations. However, as we have generated
substantial cash flows from operations and accumulated a
significant cash balance, we had not borrowed under the
revolving credit facility since January 2008. We had continued
to pay fees associated with the unused capacity under the
facility since that time despite our expectation that we would
not borrow under the facility in the near term. Additionally,
the financial covenants and borrowing base arrangement under the
revolving credit facility imposed restrictions on our operations
and activities. In early fiscal 2009, the borrowing base
arrangement had limited our additional borrowing capacity to an
amount well below the unused capacity, and the margin by which
we had complied with the tangible net worth covenant had
declined. In order to modify the financial covenants and achieve
more capacity under our borrowing base arrangement, an amendment
to the facility would have been required. Based on discussions
with the lenders, any amendment to the facility would have
likely substantially reduced the total amount of the facility
and would have possibly required the funding of a cash
collateral account while increasing some of the costs associated
with the facility. Consequently, in accordance with the
provisions of the agreement governing the revolving credit
facility, we voluntarily terminated the facility in May 2009.
53
We believe that we will be able to fund our working capital
needs for our homebuilding and financial services operations, as
well as our debt obligations, through existing cash resources
and the cash flows we currently expect to generate in the near
term through the receipt of tax refunds during fiscal 2010, our
mortgage repurchase facility and, for the longer term, the
issuance of new debt or equity securities through the public
capital markets as market conditions may permit.
Homebuilding
Capital Resources
Cash and Cash Equivalents At
September 30, 2009, we had available homebuilding cash and
cash equivalents of $1.9 billion.
Bank Credit Facility In May 2009, we
voluntarily terminated our $1.65 billion unsecured
revolving credit facility, which had included a
$1.0 billion letter of credit
sub-facility,
in accordance with the provisions of the agreement governing the
facility. There were no cash borrowings and $61.0 million
of standby letters of credit outstanding on the facility at the
time of termination. As a result of the termination, we
recognized $7.6 million of loss on early retirement of debt
related to the write-off of unamortized fees in fiscal 2009.
There were no penalties incurred in connection with the early
termination of the revolving credit facility. Concurrent with
the termination, we entered into secured letter of credit
agreements with the three banks that had issued letters of
credit under the revolving credit facility. The effect of these
agreements was to remove the outstanding letters of credit from
the facility, which required us to deposit cash, in an amount
approximating the balance of letters of credit outstanding, as
collateral with the issuing banks. At September 30, 2009,
the amount of cash restricted for this purpose totaled
$53.3 million and is included in homebuilding restricted
cash on our consolidated balance sheet.
The revolving credit facility imposed restrictions on our
operations and activities by requiring us to maintain certain
levels of leverage, tangible net worth and components of
inventory. As a result of the termination of the facility, these
restrictions are no longer in effect.
Recently Issued Public Unsecured Debt In May
2009, we issued $500 million principal amount of 2%
convertible senior notes due May 15, 2014, with interest
payable semi-annually. Holders of the 2% convertible senior
notes may convert all or any portion of their notes at their
option at any time prior to maturity. The initial conversion
rate for the notes is 76.5697 shares of our common stock
per $1,000 principal amount of senior notes, equivalent to an
initial conversion price of approximately $13.06 per share of
our common stock. The conversion rate is subject to adjustment
in certain events but will not be adjusted for accrued interest,
including any additional interest. Upon conversion of a
2% senior note, we will pay or deliver, as the case may be,
cash, shares of our common stock or a combination thereof at our
election. We may not redeem the notes prior to the maturity
date. The annual effective interest rate of the notes is 2.6%,
after giving effect to the amortization of deferred financing
costs.
The indentures governing our senior notes and senior
subordinated notes impose restrictions on the creation of
secured debt and liens. At September 30, 2009, we were in
compliance with all of the limitations and restrictions that
form a part of the public debt obligations.
Shelf Registration Statements We have an
automatically effective universal shelf registration statement
filed with the SEC in September 2009, registering debt and
equity securities which we may issue from time to time in
amounts to be determined.
Financial
Services Capital Resources
Cash and Cash Equivalents At
September 30, 2009, the amount of financial services cash
and cash equivalents was $34.5 million.
Mortgage Repurchase Facility Our mortgage
subsidiary entered into a mortgage sale and repurchase agreement
(the mortgage repurchase facility) on March 28,
2008. The mortgage repurchase facility, which is accounted for
as a secured financing, provides financing and liquidity to DHI
Mortgage by facilitating purchase transactions in which DHI
Mortgage transfers eligible loans to the counterparties against
the transfer of funds by the counterparties, thereby becoming
purchased loans. DHI Mortgage then has the right and
54
obligation to repurchase the purchased loans upon their sale to
third-party purchasers in the secondary market or within
specified time frames from 45 to 120 days in accordance
with the terms of the mortgage repurchase facility. On
March 5, 2009, through an amendment to the repurchase
agreement and transfer of the rights of each of the
counterparties to one counterparty, the capacity of the facility
was reduced from $275 million to $75 million, with a
provision allowing an increase in the capacity to
$100 million during the last five business days of a fiscal
quarter and the first seven business days of the following
fiscal quarter. Additionally, the amendment eliminated the
minimum required net income covenant and extended the maturity
date of the facility to March 4, 2010. On
September 23, 2009, the repurchase agreement was further
amended to increase the capacity of the facility from
$75 million to $100 million, with a provision allowing
an increase in the capacity to $125 million during the last
five business days of a fiscal quarter and the first seven
business days of the following fiscal quarter.
As of September 30, 2009, $214.6 million of mortgage
loans held for sale were pledged under the repurchase
arrangement, with a carrying value of $213.0 million. DHI
Mortgage has the option to fund a portion of its repurchase
obligations in advance. As a result of advance paydowns totaling
$131.5 million, DHI Mortgage had an obligation of
$68.7 million outstanding under the mortgage repurchase
facility at September 30, 2009 at a 4.5% interest rate.
The mortgage repurchase facility is not guaranteed by either
D.R. Horton, Inc. or any of the subsidiaries that guarantee our
homebuilding debt. The facility contains financial covenants as
to the mortgage subsidiarys minimum required tangible net
worth, its maximum allowable ratio of debt to tangible net worth
and its minimum required liquidity. These covenants are measured
and reported monthly. At September 30, 2009, our mortgage
subsidiary was in compliance with all of the conditions and
covenants of the mortgage repurchase facility.
In the past, we have been able to renew or extend our mortgage
credit facilities on satisfactory terms prior to their
maturities, and obtain temporary additional commitments through
amendments to the credit agreements during periods of higher
than normal volumes of mortgages held for sale. The liquidity of
our financial services business depends upon its continued
ability to renew and extend the mortgage repurchase facility or
to obtain other additional financing in sufficient capacities. A
successful refinancing in the future is not assured.
Operating
Cash Flow Activities
During the year ended September 30, 2009, net cash provided
by our operating activities was $1.1 billion, compared to
$1.9 billion during the prior year. During fiscal 2009, a
significant portion of the net cash provided by our operating
activities was due to a federal income tax refund of
$621.7 million, resulting from the carryback of our fiscal
2008 net operating loss to fiscal 2006. Also, we continued
to generate cash flows from operations by reducing our
inventories during the current year. The net cash provided by
our operating activities during the past three fiscal years has
resulted in substantial liquidity and allows the flexibility to
determine the appropriate operating strategy for each of our
communities and to take advantage of opportunities in the
market. While we have substantially slowed our purchases of
undeveloped land and our development spending on land we own, we
are purchasing or contracting to purchase finished lots in many
markets in an attempt to drive sales and home closings volume
and return to profitability. During this effort, we also plan to
continue to manage our inventories by monitoring the aging of
unsold homes and aggressively marketing our unsold, completed
homes in inventory. As we work towards these goals, we expect to
generate less cash flow from asset reductions than we have over
the past three fiscal years. Depending upon future homebuilding
market conditions and our expectations for such, we may use a
portion of our cash balances to increase our assets.
Another significant source of operating cash flows in fiscal
2009 was the decrease in mortgage loans held for sale of
$131.3 million during the year. The decrease in mortgage
loans held for sale was due to a decrease in the number of loans
originated during the fourth quarter of fiscal 2009 compared to
the fourth quarter of fiscal 2008. We expect to use cash to fund
an increase in mortgage loans held for sale in quarters when our
homebuilding closings grow. However, in periods when home
closings are flat or decline as compared to prior
55
periods, or if our mortgage capture rate declines, the amount of
net cash used may be reduced and we may generate positive cash
flows from reductions in the balances of mortgage loans held for
sale as we did in fiscal 2009.
Investing
Cash Flow Activities
During fiscal 2009 and 2008, we used $6.2 million and
$6.6 million, respectively, to invest in purchases of
property and equipment, primarily model home furniture and
office equipment. These purchases are not significant relative
to our total assets or cash flows, and have declined in recent
quarters due to the decrease in the size of our operations.
Additionally, the increase in restricted cash was due to the
cash collateralization of our outstanding letters of credit
during fiscal 2009.
Financing
Cash Flow Activities
In fiscal 2009, the majority of our short-term financing needs
have been funded with cash generated from operations and
borrowings available under our financial services credit
facility. Long-term financing needs of our homebuilding
operations have been generally funded with the issuance of new
senior unsecured debt securities through the public capital
markets. In May 2009, we issued $500 million principal
amount of 2% convertible senior notes due 2014. During fiscal
2009, we repaid the remaining $155.2 million principal
amount of our 5% senior notes and the remaining
$297.7 million principal amount of our 8% senior notes
which were due in January and February, respectively. These
repayments of public unsecured debt were made from our cash
balances on hand. Also during fiscal 2009, primarily through
unsolicited transactions, we repurchased a total of
$380.3 million principal amount of various issues of senior
notes for an aggregate purchase price of $368.0 million,
plus accrued interest. Our homebuilding senior, convertible
senior and senior subordinated notes are guaranteed by
substantially all of our wholly-owned subsidiaries other than
our financial services subsidiaries and certain insignificant
subsidiaries.
During fiscal 2009, our Board of Directors approved four
quarterly cash dividends of $0.0375 per common share, the last
of which was paid on August 28, 2009 to stockholders of
record on August 18, 2009. During fiscal 2008, cash
dividends of $0.15 per common share were paid in the first and
second quarters, followed by cash dividends of $0.075 in the
third and fourth quarters. On November 19, 2009, our Board
of Directors approved a cash dividend of $0.0375 per common
share, payable on December 15, 2009, to stockholders of
record on December 4, 2009. The declaration of future cash
dividends is at the discretion of our Board of Directors and
will depend upon, among other things, future earnings, cash
flows, capital requirements, our financial condition and general
business conditions.
Changes
in Capital Structure
In November 2008, our Board of Directors authorized the
repurchase of up to $100 million of our common stock and
the repurchase of up to $500 million of debt securities.
The authorizations are effective from December 1, 2008 to
November 30, 2009. Repurchases of senior notes through
September 30, 2009 reduced the debt repurchase
authorization to $222.6 million. Upon expiration of the
November 2008 authorization, our Board of Directors has
authorized the repurchase of up to $100 million of our
common stock and the repurchase of up to $500 million of
debt securities. The new authorizations are effective from
December 1, 2009 to November 30, 2010.
On February 9, 2009, the Compensation Committee of our
Board of Directors granted stock options to our executive
officers, other officers and certain of our employees, and our
Board of Directors granted stock options to our outside
directors, to purchase approximately 6.1 million shares of
our common stock, at a price of $9.03 per share, the closing
market price of our common stock on the date of grant.
In May 2009, we voluntarily terminated our $1.65 billion
unsecured revolving credit facility in accordance with the
provisions of the agreement governing the facility.
In May 2009, we issued $500 million principal amount of 2%
convertible senior notes due May 15, 2014, with interest
payable semi-annually.
56
In August 2009, to preserve the tax benefits of our net
operating losses and unrealized built-in losses, our Board of
Directors adopted a rights agreement as a measure intended to
deter an ownership change as defined by Internal Revenue Code
Section 382. On August 19, 2009, our Board of
Directors declared a dividend of one preferred share purchase
right for each outstanding share of our common stock. The
dividend was paid on August 31, 2009 to stockholders of
record on August 31, 2009.
In October 2009, through unsolicited transactions, we
repurchased $1.2 million principal amount of our
9.75% senior notes due 2010 and $6.5 million principal
amount of our 5.625% senior notes due 2016.
In fiscal 2008 and 2009, our primary non-operating uses of our
available capital were the repayment of debt, dividend payments
and the cash collateralization of our outstanding letters of
credit. We continue to evaluate our alternatives for future
non-operating sources and uses of our available capital,
including the amounts of debt repayments, dividend payments and
the level of our cash balances, based on market conditions and
other circumstances, and within the constraints of our balance
sheet leverage targets and our liquidity targets.
Contractual
Cash Obligations, Commercial Commitments and Off-Balance Sheet
Arrangements
Our primary contractual cash obligations for our homebuilding
and financial services segments are payments under our debt
agreements and lease payments under operating leases. Purchase
obligations of our homebuilding segment represent specific
performance requirements under lot option purchase agreements
that may require us to purchase land contingent upon the land
seller meeting certain obligations. We expect to fund our
contractual obligations in the ordinary course of business
through a combination of our existing cash resources, cash flows
generated from operations, renewed or amended mortgage
repurchase facilities and, if needed or believed advantageous,
the issuance of new debt or equity securities through the public
capital markets as market conditions may permit.
Our future cash requirements for contractual obligations as of
September 30, 2009 are presented below:
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Payments Due by Period
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Less Than
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|
|
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|
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More Than
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|
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Total
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1 Year
|
|
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1 - 3 Years
|
|
|
3 - 5 Years
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|
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5 Years
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|
|
(In millions)
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|
|
Homebuilding:
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|
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|
|
|
|
|
|
|
|
|
|
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Notes Payable Principal (1)
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$
|
3,215.7
|
|
|
$
|
239.7
|
|
|
$
|
632.8
|
|
|
$
|
1,245.5
|
|
|
$
|
1,097.7
|
|
Notes Payable Interest (1)
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|
|
734.4
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|
|
171.8
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|
|
283.2
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|
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201.9
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|
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77.5
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Operating Leases
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43.5
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|
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16.6
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|
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16.7
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|
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8.6
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|
|
1.6
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Purchase Obligations
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5.3
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|
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5.3
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|
|
|
|
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|
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|
|
Totals
|
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$
|
3,998.9
|
|
|
$
|
433.4
|
|
|
$
|
932.7
|
|
|
$
|
1,456.0
|
|
|
$
|
1,176.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
Financial Services:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable Principal (2)
|
|
$
|
68.7
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|
|
$
|
68.7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Notes Payable Interest (2)
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|
|
3.1
|
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|
|
3.1
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|
|
|
|
|
|
|
|
|
|
|
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Operating Leases
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|
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2.0
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|
|
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1.3
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|
|
0.7
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|
|
|
|
|
|
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|
|
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Totals
|
|
$
|
73.8
|
|
|
$
|
73.1
|
|
|
$
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0.7
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|
|
$
|
|
|
|
$
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
(1) |
|
Homebuilding notes payable represent principal and interest
payments due on our senior, convertible senior and senior
subordinated notes and our secured notes. |
|
(2) |
|
Financial services notes payable represent principal and
interest payments due on our mortgage subsidiarys
repurchase facility. The interest obligation associated with
this variable rate facility is based on its effective rate of
4.5% and principal balance outstanding at September 30,
2009. |
At September 30, 2009, our homebuilding operations had
outstanding letters of credit of $52.0 million, all of
which were cash collateralized, and surety bonds of
$1.1 billion, issued by third parties, to secure
57
performance under various contracts. We expect that our
performance obligations secured by these letters of credit and
bonds will generally be completed in the ordinary course of
business and in accordance with the applicable contractual
terms. When we complete our performance obligations, the related
letters of credit and bonds are generally released shortly
thereafter, leaving us with no continuing obligations. We have
no material third-party guarantees.
Our mortgage subsidiary enters into various commitments related
to the lending activities of our mortgage operations. Further
discussion of these commitments is provided in Item 7A
Quantitative and Qualitative Disclosures About Market
Risk under Part II of this annual report on
Form 10-K.
In the ordinary course of business, we enter into land and lot
option purchase contracts to procure land or lots for the
construction of homes. Lot option contracts enable us to control
significant lot positions with limited capital investment and
substantially reduce the risks associated with land ownership
and development. Within the land and lot option purchase
contracts in force at September 30, 2009, there were a
limited number of contracts, representing $5.3 million of
remaining purchase price, subject to specific performance
clauses which may require us to purchase the land or lots upon
the land sellers meeting their obligations. Also, we
consolidated certain variable interest entities for which we are
deemed to be the primary beneficiary, with assets of
$6.5 million related to some of our outstanding land and
lot option purchase contracts. Creditors, if any, of these
variable interest entities have no recourse against us.
Additionally, we recorded $7.8 million of land inventory
not owned related to some of our outstanding land and lot option
purchase contracts that were determined to represent financing
arrangements. Further discussion of our land option contracts is
provided in the Land and Lot Position and Homes in
Inventory section that follows.
Land and
Lot Position and Homes in Inventory
The following is a summary of our land and lot position and
homes in inventory at September 30, 2009 and 2008:
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|
|
|
|
|
|
|
|
|
|
As of September 30,
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|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Lots
|
|
|
|
|
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|
|
|
|
Lots
|
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|
|
|
|
|
|
|
|
|
|
Controlled
|
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|
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|
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|
|
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|
|
Controlled
|
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|
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|
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|
|
|
|
|
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Under Lot
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Total
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Under Lot
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Total
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|
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|
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Option and
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|
Land/Lots
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|
Homes
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Option and
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|
Land/Lots
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|
Homes
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|
Land/Lots
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Similar
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Owned and
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in
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Land/Lots
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Similar
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Owned and
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|
in
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|
Owned
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Contracts
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Controlled
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|
Inventory
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|
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Owned
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Contracts
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Controlled
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Inventory
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East
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11,000
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|
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6,000
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|
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17,000
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|
|
|
1,400
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|
|
|
12,000
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6,000
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|
|
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18,000
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|
|
|
1,100
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Midwest
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|
|
6,500
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|
|
|
500
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|
|
|
7,000
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|
|
|
800
|
|
|
|
8,000
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|
|
|
1,000
|
|
|
|
9,000
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|
|
|
1,100
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|
Southeast
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|
|
21,000
|
|
|
|
6,500
|
|
|
|
27,500
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|
|
|
2,200
|
|
|
|
23,000
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|
|
|
6,000
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|
|
|
29,000
|
|
|
|
2,300
|
|
South Central
|
|
|
22,500
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|
|
|
9,500
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|
|
|
32,000
|
|
|
|
4,400
|
|
|
|
25,000
|
|
|
|
9,000
|
|
|
|
34,000
|
|
|
|
3,700
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|
Southwest
|
|
|
6,000
|
|
|
|
1,000
|
|
|
|
7,000
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|
|
|
1,100
|
|
|
|
6,000
|
|
|
|
1,000
|
|
|
|
7,000
|
|
|
|
1,900
|
|
West
|
|
|
22,500
|
|
|
|
3,000
|
|
|
|
25,500
|
|
|
|
1,700
|
|
|
|
25,000
|
|
|
|
3,000
|
|
|
|
28,000
|
|
|
|
2,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,500
|
|
|
|
26,500
|
|
|
|
116,000
|
|
|
|
11,600
|
|
|
|
99,000
|
|
|
|
26,000
|
|
|
|
125,000
|
|
|
|
12,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77%
|
|
|
|
23%
|
|
|
|
100%
|
|
|
|
|
|
|
|
79%
|
|
|
|
21%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009, we owned or controlled approximately
116,000 lots, compared to approximately 125,000 lots at
September 30, 2008. Of the 116,000 total lots, we
controlled approximately 26,500 lots (23%), with a total
remaining purchase price of approximately $864.2 million,
through land and lot option purchase contracts with a total of
$34.8 million in earnest money deposits. Our lots
controlled included approximately 8,100 optioned lots with a
remaining purchase price of approximately $257.2 million
and secured by deposits totaling $25.4 million, for which
we do not expect to exercise our option to purchase the land or
lots, but the contract has not yet been terminated.
Consequently, we have written off the deposits related to these
contracts, resulting in a net earnest money deposit balance of
$9.4 million at September 30, 2009.
We had a total of approximately 11,600 homes in inventory,
including approximately 1,100 model homes at September 30,
2009, compared to approximately 12,400 homes in inventory,
including approximately 1,500
58
model homes at September 30, 2008. Of our total homes in
inventory, approximately 5,800 and 6,900 were unsold at
September 30, 2009 and 2008, respectively. At
September 30, 2009, approximately 2,200 of our unsold homes
were completed, of which approximately 800 homes had been
completed for more than six months. At September 30, 2008,
approximately 3,100 of our unsold homes were completed, of which
approximately 1,100 homes had been completed for more than six
months.
Our current strategy is to take advantage of market
opportunities by entering into new finished lot option contracts
to purchase finished lots in selected communities in an attempt
to increase sales volumes and profitability. We plan to continue
to manage our inventory of homes under construction by starting
construction on unsold homes in certain markets, while
monitoring the aging of unsold homes and aggressively marketing
our unsold, completed homes in inventory.
Seasonality
We have typically experienced seasonal variations in our
quarterly operating results and capital requirements. Prior to
the current downturn in the homebuilding industry, we generally
had more homes under construction, closed more homes and had
greater revenues and operating income in the third and fourth
quarters of our fiscal year. This seasonal activity increased
our working capital requirements for our homebuilding operations
during the third and fourth fiscal quarters and increased our
funding requirements for the mortgages we originated in our
financial services segment at the end of these quarters. As a
result of seasonal activity, our quarterly results of operations
and financial position at the end of a particular fiscal quarter
are not necessarily representative of the balance of our fiscal
year.
In contrast to our typical seasonal results, due to the weakness
in homebuilding market conditions during the past three years,
we have incurred consolidated operating losses each quarter
since the third quarter of fiscal 2007. During these periods,
the challenging market conditions caused declines in sales
volume, pricing and margins that mitigated our historical
seasonal variations. Although we may experience our typical
historical seasonal pattern in the future, given the current
market conditions, we can make no assurances as to when or
whether this pattern will recur.
Inflation
We and the homebuilding industry in general may be adversely
affected during periods of high inflation, primarily because of
higher land, financing, labor and material construction costs.
In addition, higher mortgage interest rates can significantly
affect the affordability of permanent mortgage financing to
prospective homebuyers. We attempt to pass through to our
customers any increases in our costs through increased sales
prices. However, during periods of soft housing market
conditions, we may not be able to offset our cost increases with
higher selling prices.
Forward-Looking
Statements
Some of the statements contained in this report, as well as in
other materials we have filed or will file with the SEC,
statements made by us in periodic press releases and oral
statements we make to analysts, stockholders and the press in
the course of presentations about us, may be construed as
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, Section 21E
of the Securities Exchange Act of 1934 and the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements are based on managements beliefs as well as
assumptions made by, and information currently available to,
management. These forward-looking statements typically include
the words anticipate, believe,
consider, estimate, expect,
forecast, goal, intend,
objective, plan, predict,
projection, seek, strategy,
target or other words of similar meaning. Any or all
of the forward-looking statements included in this report and in
any other of our reports or public statements may not
approximate actual experience, and the expectations derived from
them may not be realized, due to risks, uncertainties and other
factors. As a
59
result, actual results may differ materially from the
expectations or results we discuss in the forward-looking
statements. These risks, uncertainties and other factors
include, but are not limited to:
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|
|
the continuing downturn in the homebuilding industry, including
further deterioration in industry or broader economic conditions;
|
|
|
|
the continuing constriction of the credit markets, which could
limit our ability to access capital and increase our costs of
capital;
|
|
|
|
the reduction in availability of mortgage financing and
potential increases in mortgage interest rates;
|
|
|
|
the limited success of our strategies in responding to adverse
conditions in the industry;
|
|
|
|
a return of an inflationary environment;
|
|
|
|
changes in general economic, real estate, construction and other
business conditions;
|
|
|
|
the risks associated with our inventory ownership position in
changing market conditions;
|
|
|
|
supply risks for land, materials and labor;
|
|
|
|
changes in the costs of owning a home;
|
|
|
|
the effects of governmental regulations and environmental
matters on our homebuilding operations;
|
|
|
|
the effects of governmental regulations on our financial
services operations;
|
|
|
|
the uncertainties inherent in home warranty and construction
defect claims matters;
|
|
|
|
our substantial debt and our ability to comply with related debt
covenants, restrictions and limitations;
|
|
|
|
competitive conditions within our industry;
|
|
|
|
our ability to effect any future growth strategies successfully;
|
|
|
|
our ability to realize our deferred tax asset; and
|
|
|
|
our utilization of our tax losses could be substantially limited
if we experienced an ownership change as defined in the Internal
Revenue Code.
|
We undertake no obligation to publicly update or revise 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 and risk factors that
have the potential to affect us is contained in Item 1A,
Risk Factors under Part I of this annual report
on
Form 10-K.
Critical
Accounting Policies
General A comprehensive enumeration of the
significant accounting policies of D.R. Horton, Inc. and
subsidiaries is presented in Note A to the accompanying
financial statements as of September 30, 2009 and 2008, and
for the years ended September 30, 2009, 2008 and 2007. Each
of our accounting policies has been chosen based upon current
authoritative literature that collectively comprises
U.S. Generally Accepted Accounting Principles (GAAP). In
instances where alternative methods of accounting are
permissible under GAAP, we have chosen the method that most
appropriately reflects the nature of our business, the results
of our operations and our financial condition, and have
consistently applied those methods over each of the periods
presented in the financial statements. The Audit Committee of
our Board of Directors has reviewed and approved the accounting
policies selected.
Use of Estimates The preparation of financial
statements in conformity with GAAP requires us to make estimates
and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results
could differ materially from those estimates.
60
Revenue Recognition We generally recognize
homebuilding revenue and related profit at the time of the
closing of a sale, when title to and possession of the property
are transferred to the buyer. In situations where the
buyers financing is originated by DHI Mortgage, our
wholly-owned mortgage subsidiary, and the buyer has not made an
adequate initial or continuing investment, the profit is
deferred until the sale of the related mortgage loan to a
third-party purchaser has been completed. Sales of land are
evaluated and profit is deferred until the full accrual method
criteria are met. We include proceeds from home closings held
for our benefit at title companies in homebuilding cash. When we
execute sales contracts with our homebuyers, or when we require
advance payment from homebuyers for custom changes, upgrades or
options related to their homes, we record the cash deposits
received as liabilities until the homes are closed or the
contracts are canceled. We either retain or refund to the
homebuyer deposits on canceled sales contracts, depending upon
the applicable provisions of the contract or other circumstances.
We recognize financial services revenues associated with our
title operations as closing services are rendered and title
insurance policies are issued, both of which generally occur
simultaneously as each home is closed. We transfer substantially
all underwriting risk associated with title insurance policies
to third-party insurers. Origination fees and direct origination
costs are deferred and recognized as revenues and expenses,
respectively, along with the associated gains and losses on the
sales of the loans, when the loans are sold to third-party
purchasers. The expected net future cash flows related to the
associated servicing of a loan are included in the measurement
of all written loan commitments that are accounted for at fair
value through earnings at the time of commitment. We generally
do not retain or service the mortgages that we originate but,
rather, seek to sell the mortgages and related servicing rights
to third-party purchasers. Interest income is earned from the
date a mortgage loan is originated until the loan is sold.
Effective October 1, 2008, we adopted the FASBs
authoritative guidance related to the fair value option for
financial assets, which has been applied to all loans originated
on or after October 1, 2008. These mortgage loans held for
sale are initially recorded at fair value based on either sale
commitments or current market quotes and are adjusted for
subsequent changes in fair value until the loan is sold. While
our risk management policies with respect to interest rate risk
and fair value changes in mortgage loans held for sale have not
changed, the effect of this standard alleviated the complex
documentation requirements to account for these instruments as
designated fair value accounting hedges under the previous
authoritative guidance. Additionally, the recognition of net
origination costs and fees associated with mortgage loans
originated on or after October 1, 2008 are no longer
deferred until the time of sale. There were no required
cumulative adjustments to retained earnings because we chose to
continue to account for mortgage loans held for sale originated
prior to October 1, 2008 at the lower of cost or market.
The implementation of this standard did not have a material
impact on our consolidated financial position, results of
operations or cash flows.
Some mortgage loans are sold with limited recourse provisions.
Based on historical experience, discussions with our mortgage
purchasers, analysis of the mortgages we originated and current
housing and credit market conditions, we estimate and record a
loss reserve for mortgage loans held in portfolio and mortgage
loans held for sale, as well as known and projected mortgage
loan repurchase requests. A 20% increase in the amount of
expected mortgage loan repurchases and the expected losses on
mortgage loan repurchases would result in an increase of
approximately $7.8 million in our reserve for expected
mortgage loan repurchases, while a 20% decrease in the amount of
expected mortgage loan repurchases and the expected losses on
mortgage loan repurchases would result in a decrease of
approximately $7.0 million in our reserve for expected
mortgage loan repurchases.
Inventories and Cost of Sales Inventory
includes the costs of direct land acquisition, land development
and home construction, capitalized interest, real estate taxes
and direct overhead costs incurred during development and home
construction. Applicable direct overhead costs that we incur
after development projects or homes are substantially complete,
such as utilities, maintenance, and cleaning, are charged to
SG&A expense as incurred. All indirect overhead costs, such
as compensation of sales personnel and division and region
management, advertising and builders risk insurance are
charged to SG&A expense as incurred.
Land and development costs are typically allocated to individual
residential lots on a pro-rata basis, and the costs of
residential lots are transferred to construction in progress
when home construction begins. We use
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the specific identification method for the purpose of
accumulating home construction costs. Cost of sales for homes
closed includes the specific construction costs of each home and
all applicable land acquisition, land development and related
costs (both incurred and estimated to be incurred) based upon
the total number of homes expected to be closed in each
community. Any changes to the estimated total development costs
subsequent to the initial home closings in a community are
generally allocated on a pro-rata basis to the remaining homes
in the community.
When a home is closed, we generally have not yet paid and
recorded all incurred costs necessary to complete the home. Each
month we record as a liability and as a charge to cost of sales
the amount we determine will ultimately be paid related to
completed homes that have been closed as of the end of that
month. We compare our home construction budgets to actual
recorded costs to determine the additional costs remaining to be
paid on each closed home. We monitor the accuracy of each
months accrual by comparing actual costs incurred on
closed homes in subsequent months to the amount previously
accrued. Although actual costs to be paid in the future on
previously closed homes could differ from our current accruals,
historically, differences in amounts have not been significant.
Each quarter, we review our inventory for the purpose of
determining whether recorded costs and costs required to
complete each home or community are recoverable. If the review
indicates that an impairment loss is required, an estimate of
the loss is made and recorded to cost of sales in that quarter.
Land inventory and related communities under development are
reviewed for potential write-downs when impairment indicators
are present. We generally review our inventory at the community
level and the inventory within each community may be categorized
as land held for development, residential land and lots
developed and under development, and construction in progress
and finished homes, based on the stage of production or plans
for future development. A particular community often includes
inventory in more than one category. In certain situations,
inventory may be analyzed separately for impairment purposes
based on its product type (e.g. single family homes evaluated
separately from condominium parcels). In reviewing each of our
communities, we determine if impairment indicators exist on
inventory held and used by analyzing a variety of factors
including, but not limited to, the following:
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gross margins on homes closed in recent months;
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projected gross margins on homes sold but not closed;
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projected gross margins based on community budgets;
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trends in gross margins, average selling prices or cost of sales;
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sales absorption rates; and
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performance of other communities in nearby locations.
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If indicators of impairment are present for a community, we
perform an analysis to determine if the undiscounted cash flows
estimated to be generated by those assets are less than their
carrying amounts, and if so, impairment charges are required to
be recorded if the fair value of such assets is less than their
carrying amounts. These estimates of cash flows are
significantly impacted by community specific factors including
estimates of the amounts and timing of future revenues and
estimates of the amount of land development, materials and labor
costs which, in turn, may be impacted by the following local
market conditions:
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supply and availability of new and existing homes;
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location and desirability of our communities;
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variety of product types offered in the area;
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pricing and use of incentives by us and our competitors;
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alternative uses for our land or communities such as the sale of
land, finished lots or home sites to third parties;
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amount of land and lots we own or control in a particular market
or
sub-market; and
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local economic and demographic trends.
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For those assets deemed to be impaired, the impairment to be
recognized is measured as the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Our
determination of fair value is primarily based on discounting
the estimated cash flows at a rate commensurate with the
inherent risks associated with the assets and related estimated
cash flow streams. When an impairment charge for a community is
determined, the charge is then allocated to each lot in the
community in the same manner as land and development costs are
allocated to each lot. The inventory within each community is
categorized as construction in progress and finished homes,
residential land and lots developed and under development, and
land held for development, based on the stage of production or
plans for future development.
We generally do not purchase land for resale. However, when we
own land or communities under development that no longer fit
into our development and construction plans and we determine
that the best use of the asset is the sale of the asset, the
project is accounted for as land held for sale, assuming the
land held for sale criteria are met. We record land held for
sale at the lesser of its carrying value or fair value less
estimated costs to sell. In performing impairment evaluation for
land held for sale, we consider several factors including, but
not limited to, prices for land in recent comparable sales
transactions, market analysis studies, which include the
estimated price a willing buyer would pay for the land and
recent legitimate offers received. If the estimated fair value
less costs to sell an asset is less than the current carrying
value, the asset is written down to its estimated fair value
less costs to sell.
Impairment charges are also recorded on finished homes in
substantially completed communities when events or circumstances
indicate that the carrying values are greater than the fair
values less estimated costs to sell these homes.
The key assumptions relating to the valuations are impacted by
local market economic conditions and the actions of competitors,
and are inherently uncertain. Due to uncertainties in the
estimation process, actual results could differ from such
estimates. Our quarterly assessments reflect managements
estimates and we continue to monitor the fair value of
held-for-sale
assets through the disposition date.
Land and Lot Option Purchase Contracts In the
ordinary course of our homebuilding business, we enter into land
and lot option purchase contracts to procure land or lots for
the construction of homes. Under these contracts, we will fund a
stated deposit in consideration for the right, but not the
obligation, to purchase land or lots at a future point in time
with predetermined terms. Under the terms of the option purchase
contracts, many of our option deposits are not refundable at our
discretion.
Option deposits and pre-acquisition costs we incur related to
our land and lot option purchase contracts are capitalized if
all of the following conditions have been met: (1) the
costs are directly identifiable with the specific property;
(2) the costs would be capitalized if the property were
already acquired; and (3) acquisition of the property is
probable, meaning we are actively seeking and have the ability
to acquire the property, and there is no indication that the
property is not available for sale. We also consider the
following when determining if the acquisition of the property is
probable: (1) changes in market conditions subsequent to
contracting for the purchase of the land; (2) current
contract terms, including per lot price and required purchase
dates; and (3) our current land position in the given
market or
sub-market.
Option deposits and capitalized pre-acquisition costs are
expensed to cost of sales when we believe it is probable that we
will no longer acquire the land or lots under option and will
not be able to recover these costs through other means.
We also evaluate our land and lot option purchase contracts for
the financial accounting and reporting of interests in certain
variable interest entities, which are defined as certain
business entities that either have equity investors with voting
rights disproportionate to their ownership interests, or have
equity investors that do not provide sufficient financial
resources for the entities to support their activities. The
guidance requires consolidation of such entities by any company
that is subject to a majority of the risk of loss from the
entities activities or is entitled to receive a majority
of the entities residual returns or both, defined as the
primary beneficiary of the variable interest entity.
Certain of our option purchase contracts result in the creation
of a variable interest in the entity holding the land parcel
under option. We evaluate those land and lot option purchase
contracts with variable interest
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entities to determine whether we are the primary beneficiary
based upon analysis of the variability of the expected gains and
losses of the entity. The expected gains and losses are
primarily determined by the amount of deposit required by the
contract, the time period or term of the contract, and by
analyzing the volatility in home sales prices as well as
development and entitlement risk in each specific market. Based
on this evaluation, if we are the primary beneficiary of an
entity with which we have entered into a land or lot option
purchase contract, the variable interest entity is consolidated.
Since we own no equity interest in any of the unaffiliated
variable interest entities that we must consolidate, we
generally have little or no control or influence over the
operations of these entities or their owners. When our requests
for financial information are denied by the land sellers,
certain assumptions about the assets and liabilities of such
entities are required. In most cases, the fair value of the
assets of the consolidated entities has been assumed to be the
remaining contractual purchase price of the land or lots we are
purchasing. In these cases, it is assumed that the entities have
no debt obligations and the only asset recorded is the land or
lots we have the option to buy with a related offset to minority
interest for the assumed third-party investment in the variable
interest entity. Creditors, if any, of these variable interest
entities have no recourse against us.
Fair Value Measurements Effective
October 1, 2008, we adopted the FASBs authoritative
guidance for fair value measurements of certain financial
instruments. The guidance defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. Fair value is defined as the exchange
(exit) price that would be received for an asset or paid to
transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction
between market participants on the measurement date. This
guidance establishes a three-level hierarchy for fair value
measurements based upon the inputs to the valuation of an asset
or liability. Observable inputs are those which can be easily
seen by market participants while unobservable inputs are
generally developed internally, utilizing managements
estimates and assumptions.
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Level 1 Valuation is based on quoted prices in
active markets for identical assets and liabilities.
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Level 2 Valuation is determined from quoted
prices for similar assets or liabilities in active markets,
quoted prices for identical or similar instruments in markets
that are not active, or by model-based techniques in which all
significant inputs are observable in the market.
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Level 3 Valuation is derived from model-based
techniques in which at least one significant input is
unobservable and based on our own estimates about the
assumptions that market participants would use to value the
asset or liability.
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When available, we use quoted market prices in active markets to
determine fair value. We consider the principal market and
nonperformance risk associated with our counterparties when
determining the fair value measurements. Fair value measurements
are used for IRLCs, mortgage loans held for sale, other mortgage
loans and hedging instruments.
Goodwill Goodwill represents the excess of
purchase price over net assets acquired. We test goodwill for
potential impairment annually as of September 30 or more
frequently if an event occurs or circumstances change that
indicate the remaining balance of goodwill may not be
recoverable. In analyzing the potential impairment of goodwill,
the guidance prescribes a two-step process that begins with the
estimation of the fair value of the reporting units. The fair
value is estimated primarily utilizing the present values of
expected future cash flows. If the results of the first step
indicate that impairment potentially exists, the second step is
performed to measure the amount of the impairment, if any.
Impairment is determined to exist when the estimated fair value
of goodwill is less than its carrying value.
Warranty Costs We typically provide our
homebuyers with a ten-year limited warranty for major defects in
structural elements such as framing components and foundation
systems, a two-year limited warranty on major mechanical
systems, and a one-year limited warranty on other construction
components. Since we subcontract our homebuilding work to
subcontractors who typically provide us with an indemnity and a
certificate of insurance prior to receiving payments for their
work, claims relating to workmanship and materials are generally
the primary responsibility of the subcontractors. Warranty
liabilities have been
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established by charging cost of sales for each home delivered.
The amounts charged are based on managements estimate of
expected warranty-related costs under all unexpired warranty
obligation periods. Our warranty liability is based upon
historical warranty cost experience in each market in which we
operate and is adjusted as appropriate to reflect qualitative
risks associated with the types of homes we build and the
geographic areas in which we build them. Actual future warranty
costs could differ from our currently estimated amounts. A 10%
change in the historical warranty rates used to estimate our
warranty accrual would not result in a material change in our
accrual.
Insurance Claim Costs and Self-Insurance We
have, and require the majority of the subcontractors we use to
have, general liability insurance which includes construction
defect coverage. Our general liability insurance policies
protect us against a portion of our risk of loss from
construction defect and other claims and lawsuits, subject to
self-insured retentions and other coverage limits. For policy
years ended June 30, 2004 through 2009, we are self-insured
for up to $22.5 million of the aggregate claims incurred,
at which point our excess loss insurance begins, depending on
the policy year. Once we have satisfied the annual aggregate
limits, we are self-insured for the first $10,000 to
$1.5 million for each claim occurrence, depending on the
policy year. For policy years 2009 and 2010, we are self-insured
for up to $22.5 million and $20.0 million,
respectively, of the aggregate claims incurred and for up to
$0.5 million of each claim occurrence thereafter.
In some states where we believe it is too difficult or expensive
for our subcontractors to obtain general liability insurance, we
have waived our traditional subcontractor general liability
insurance requirements to obtain lower costs from
subcontractors. In these states, we purchase insurance policies
from either third-party carriers or our wholly-owned captive
insurance subsidiary that provide coverage to us, and names
certain subcontractors as additional insureds. The policies
issued by our captive insurance subsidiary represent self
insurance of these risks by us; however, for policy years after
April 2007, the captive insurance subsidiary has acquired
$15.0 million of reinsurance coverage for the annual loss
exposure in excess of $10.0 million with a third-party
insurer.
Also, we are self-insured for the deductible amounts under our
workers compensation insurance policies. The deductibles
vary by policy year, but in no years exceed $0.5 million
per occurrence. The deductible for the 2009 and 2010 policy
years is $0.5 million per occurrence.
We record expenses and liabilities related to the costs for
exposures related to workers compensation, construction
defects and claims and lawsuits incurred in the ordinary course
of business, including employment matters, personal injury
claims, land development issues and contract disputes. Also, we
record expenses and liabilities for any estimated costs of
potential construction defect claims and lawsuits (including
expected legal costs), based on an analysis of our historical
claims, which includes an estimate of construction defect claims
incurred but not yet reported. Related to the exposures for
actual construction defect claims and estimates of construction
defect claims incurred but not yet reported and other legal
claims and lawsuits incurred in the ordinary course of business,
we estimate and record insurance receivables for these matters
under applicable insurance policies when recovery is probable.
Additionally, we may have the ability to recover a portion of
our legal expenses from our subcontractors when we have been
named as an additional insured on their insurance policies. The
expenses, liabilities and receivables are subject to a high
degree of variability due to uncertainties such as trends in
construction defect claims relative to our markets and the types
of products we build, claim settlement patterns, insurance
industry practices and legal interpretations, among others. A
10% increase in the claim rate and the average cost per claim
used to estimate the self-insured accruals would result in an
increase of approximately $128.7 million in our accrual and
a $62.4 million increase in our receivable resulting in
additional expense of $66.3 million, while a 10% decrease
in the claim rate and the average cost per claim would result in
a decrease of approximately $93.2 million in our accrual
and a $61.4 million decrease in our receivable resulting in
a reduction in our expense of $31.8 million.
Income Taxes We calculate a provision for, or
benefit from, income taxes using the asset and liability method,
under which deferred tax assets and liabilities are recorded
based on the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse. A reduction in the carrying amounts of deferred tax
assets by a
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valuation allowance is required, if, based on the available
evidence, it is more likely than not that such assets will not
be realized. Accordingly, we periodically assess the need to
establish valuation allowances for deferred tax assets based on
the more-likely-than-not realization threshold criterion. In the
assessment for a valuation allowance, appropriate consideration
is given to all positive and negative evidence related to the
realization of the deferred tax assets. This assessment
considers, among other matters, the taxable income available in
current statutory carryback periods; reversals of existing
taxable temporary differences; tax planning strategies; the
nature, frequency and severity of current and cumulative losses;
the duration of statutory carryforward periods; our historical
experience in generating operating profits; and expectations for
future profitability. In making such judgments, significant
weight is given to evidence that can be objectively verified. A
cumulative loss in recent years is significant negative evidence
in considering whether deferred tax assets are realizable and
also restricts the amount of reliance on projections of future
taxable income to support the recovery of deferred tax assets.
The accounting for deferred taxes is based upon estimates of
future results. Differences between the anticipated and actual
outcomes of these future tax consequences could have a material
impact on our consolidated results of operations or financial
position. Changes in existing tax laws also affect actual tax
results and the valuation of deferred tax assets over time.
Interest and penalties related to unrecognized tax benefits are
recognized in the financial statements as a component of the
income tax provision. Significant judgment is required to
evaluate uncertain tax positions. We evaluate our uncertain tax
positions on a quarterly basis. Our evaluations are based upon a
number of factors, including changes in facts or circumstances,
changes in tax law, correspondence with tax authorities during
the course of audits and effective settlement of audit issues.
Changes in the recognition or measurement of uncertain tax
positions could result in material increases or decreases in our
income tax expense in the period in which we make the change.
Stock-based Compensation From time to time,
the compensation committee of our board of directors authorizes
the issuance of options to purchase our common stock to
employees and directors. The committee approves grants only out
of amounts remaining available for grant from amounts formally
authorized by our common stockholders. We typically grant
approved options with exercise prices equal to the market price
of our common stock on the date of the option grant. The
majority of the options granted vest ratably over a ten-year
period.
We measure and recognize compensation expense at an amount equal
to the fair value of share-based payments granted under
compensation arrangements for all awards granted or modified
after October 1, 2005, using the modified prospective
method. Compensation expense for any unvested stock option
awards outstanding as of October 1, 2005 is recognized on a
straight-line basis over the remaining vesting period. We
calculate the fair value of stock options using the
Black-Scholes option pricing model. Determining the fair value
of share-based awards at the grant date requires judgment in
developing assumptions, which involve a number of variables.
These variables include, but are not limited to, the expected
stock price volatility over the term of the awards, the expected
dividend yield and expected stock option exercise behavior. In
addition, we also use judgment in estimating the number of
share-based awards that are expected to be forfeited.
Recent
Accounting Pronouncements
In September 2006, the FASB issued authoritative guidance for
fair value measurements, which defines fair value, establishes a
framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. In February 2008, the
FASB issued authoritative guidance which allows for the delay of
the effective date of the guidance for fair value measurements
for one year for all nonfinancial assets and liabilities, except
those that are recognized or disclosed at fair value in the
financial statements on a recurring basis. We adopted the
provisions of the guidance for financial assets and liabilities
effective October 1, 2008, and its adoption did not have a
material impact on our consolidated financial position, results
of operations or cash flows. The provisions of the guidance for
nonfinancial assets and liabilities is effective for us
beginning October 1, 2009. The adoption of this guidance
will not have a material impact on our consolidated financial
position, results of operations or cash flows.
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In December 2007, the FASB issued authoritative guidance for
noncontrolling interests, which clarifies the accounting for
noncontrolling interests and establishes accounting and
reporting standards for the noncontrolling interest in a
subsidiary, including classification as a component of equity.
The guidance is effective for us beginning October 1, 2009.
The adoption of this guidance will not have a material impact on
our consolidated financial position, results of operations or
cash flows.
In December 2007, the FASB revised the authoritative guidance
for business combinations, which establishes principles and
requirements for recognizing and measuring identifiable assets
and goodwill acquired, liabilities assumed, and any
noncontrolling interest in the acquiree. The revised guidance
also provides disclosure requirements to enable users of the
financial statements to evaluate the nature and financial
effects of the business combination. The guidance is effective
for us beginning October 1, 2009, and is to be applied
prospectively. The adoption of this guidance will not have a
material impact on our consolidated financial position, results
of operations or cash flows.
In May 2008, the FASB revised the authoritative guidance for
accounting for financial guarantee insurance contracts, which
requires that an insurance entity recognize a claim liability
prior to an event of default (insured event) when there is
evidence that credit deterioration has occurred in an insured
financial obligation. The guidance also clarifies the
application of prior authoritative guidance to financial
guarantee insurance contracts and expands disclosure
requirements surrounding such contracts. The guidance is
effective for us beginning October 1, 2009. The adoption of
this guidance will not have a material impact on our
consolidated financial position, results of operations or cash
flows.
In May 2008, the FASB issued authoritative guidance for
accounting for debt with conversion options, which specifies
that issuers of such instruments should separately account for
the liability and equity components in a manner that will
reflect the entitys nonconvertible debt borrowing rate
when interest cost is recognized in subsequent periods. The
guidance is effective for us in the first quarter of fiscal
2010, and will require us to restate our fiscal 2009 results.
The restatement will require us to record the debt component of
our 2% convertible senior notes at its fair value on the date of
issuance of the notes, assuming no conversion features. The
remaining value of the equity component of the 2% convertible
senior notes will be recorded as a reduction in the carrying
value of the notes and an increase to additional
paid-in-capital.
The reduction in the carrying value of the notes and the fees
related to the notes will be amortized as interest incurred and
expensed or capitalized to inventory over the remaining life of
the notes. Assuming the provisions of this guidance had been
applied at the date of issuance, the amount of the reduction in
the carrying value of the notes would have been
$140.5 million and the increase in additional
paid-in-capital
would have been approximately $136.7 million, net of tax,
and we would have incurred an additional $8.2 million of
interest of which $4.5 million would have been recognized
as interest expense in fiscal 2009 and $3.7 million would
have been capitalized to inventory as of September 30,
2009. The additional interest expense recognized due to the
restatement will increase our diluted net loss per share for the
year ended September 30, 2009 by $0.01.
In June 2009, the FASB revised the authoritative guidance for
accounting for transfers of financial assets, which requires
enhanced disclosures regarding transfers of financial assets,
including securitization transactions, and continuing exposure
to the related risks. The guidance eliminates the concept of a
qualifying special-purpose entity and changes the requirements
for derecognizing financial assets. The guidance is effective
for us beginning October 1, 2010. We are currently
evaluating the impact of adopting this guidance; however, it is
not expected to have a material impact on our consolidated
financial position, results of operations or cash flows.
In June 2009, the FASB revised the authoritative guidance for
consolidating variable interest entities, which changes how a
company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a
company is required to consolidate an entity is based on, among
other things, an entitys purpose and design and a
companys ability to direct the activities of the entity
that most significantly impact the entitys economic
performance. The guidance is effective for us beginning
October 1, 2010. We are currently evaluating the impact the
adoption of this guidance will have on our consolidated
financial statements.
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In June 2009, the FASB issued authoritative guidance
establishing the FASB Accounting Standards Codification as the
source of authoritative accounting principles recognized by the
FASB to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with
U.S. GAAP. The guidance is effective for financial
statements issued for interim and annual periods ending after
September 15, 2009 and therefore, is now effective for us.
The adoption of this guidance did not impact our consolidated
financial position, results of operations or cash flows.
In August 2009, the FASB issued Accounting Standards Update
(ASU)
No. 2009-5,
Fair Value Measurements and Disclosures (Topic
820) Measuring Liabilities at Fair Value,
amending ASC 820 to provide additional guidance to clarify the
measurement of liabilities at fair value in the absence of
observable market information. ASU
No. 2009-05
is effective for us beginning October 1, 2009. The adoption
of this guidance is not expected to have a material impact on
our consolidated financial position, results of operations or
cash flows.
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ITEM 7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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We are subject to interest rate risk on our long-term debt. We
monitor our exposure to changes in interest rates and utilize
both fixed and variable rate debt. For fixed rate debt, changes
in interest rates generally affect the value of the debt
instrument, but not our 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 our
future earnings and cash flows. We generally do 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 our cash flows related to our
fixed-rate debt until such time as we are required to refinance,
repurchase or repay such debt.
We are exposed to interest rate risk associated with our
mortgage loan origination services. We manage interest rate risk
through the use of forward sales of mortgage-backed securities
(MBS), Eurodollar Futures Contracts (EDFC) and put options on
MBS and EDFC. Use of the term hedging instruments in
the following discussion refers to these securities
collectively, or in any combination. We do not enter into or
hold derivatives for trading or speculative purposes.
Interest rate lock commitments (IRLCs) are extended to borrowers
who have applied for loan funding and who meet defined credit
and underwriting criteria. Typically, the IRLCs have a duration
of less than six months. Some IRLCs are committed immediately to
a specific purchaser through the use of best-efforts whole loan
delivery commitments, while other IRLCs are funded prior to
being committed to third-party purchasers. The hedging
instruments related to IRLCs are classified and accounted for as
derivative instruments in an economic hedge, with gains and
losses recognized in current earnings. Hedging instruments
related to funded, uncommitted loans are accounted for at fair
value, with changes recognized in current earnings, along with
changes in the fair value of the funded, uncommitted loans. The
fair value change related to the hedging instruments generally
offsets the fair value change in the uncommitted loans and the
fair value change, which for the year ended September 30,
2009 was not significant, is recognized in current earnings.
Prior to October 1, 2008, the effectiveness of the fair
value hedge was monitored and any ineffectiveness, which for the
years ended September 30, 2008 and 2007 was not
significant, was recognized in current earnings. At
September 30, 2009, hedging instruments used to mitigate
interest rate risk related to uncommitted mortgage loans held
for sale and uncommitted IRLCs totaled $279.3 million.
Uncommitted IRLCs, the duration of which are generally less than
six months, totaled approximately $267.9 million, and
uncommitted mortgage loans held for sale totaled approximately
$45.5 million at September 30, 2009.
At September 30, 2009, we had $27.5 million in EDFC
options and MBS which were acquired as part of a program to
potentially offer homebuyers a below market interest rate on
their home financing. These hedging instruments and the related
commitments are accounted for at fair value with gains and
losses recognized in current earnings. These gains and losses
for the years ended September 30, 2009, 2008 and 2007 were
not material.
The following table sets forth principal cash flows by scheduled
maturity, weighted average interest rates and estimated fair
value of our debt obligations as of September 30, 2009. The
interest rate for our variable
68
rate debt represents the interest rate on our mortgage
repurchase facility. Because the mortgage repurchase facility is
effectively secured by certain mortgage loans held for sale
which are typically sold within 60 days, its outstanding
balance is included as a variable rate maturity in the most
current period presented.
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Fair
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Value at
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Fiscal Year Ending September 30,
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September 30,
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2010
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2011
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2012
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2013
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2014
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Thereafter
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Total
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2009
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(In millions)
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Debt:
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Fixed rate
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$
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239.7
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|
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$
|
376.6
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|
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$
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256.2
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|
|
$
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295.5
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|
|
$
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950.0
|
|
|
$
|
1,097.7
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|
|
$
|
3,215.7
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|
|
$
|
3,224.7
|
|
Average interest rate
|
|
|
7.1
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%
|
|
|
7.0
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%
|
|
|
5.4
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%
|
|
|
6.7
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%
|
|
|
4.2
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%
|
|
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6.0
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%
|
|
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5.7
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%
|
|
|
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Variable rate
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$
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68.7
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|
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$
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|
|
|
$
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|
|
|
$
|
|
|
|
$
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|
|
|
$
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|
|
|
$
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68.7
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|
|
$
|
68.7
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Average interest rate
|
|
|
4.5
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%
|
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|
|
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4.5
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%
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69
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of D.R. Horton, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations,
stockholders equity, and cash flows present fairly, in all
material respects, the financial position of D.R. Horton, Inc.
and its subsidiaries (the Company) at September 30, 2009
and 2008 and the results of their operations and their cash
flows for each of the two years in the period ended
September 30, 2009 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
September 30, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial
reporting, included in Managements Report on Internal
Control over Financial Reporting appearing under Item 9A.
Our responsibility is to express opinions on these financial
statements and on the Companys internal control over
financial reporting based on our integrated audits. We conducted
our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Fort Worth, Texas
November 20, 2009
70
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of D.R. Horton, Inc.
We have audited the accompanying consolidated statements of
operations, stockholders equity, and cash flows of D.R.
Horton, Inc. and subsidiaries (the Company) for the
year ended September 30, 2007. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
results of operations of D.R. Horton, Inc. and subsidiaries and
their cash flows for the year ended September 30, 2007, in
conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
Fort Worth, Texas
November 26, 2007,
except for Note M, as to which the date is
November 25, 2008
71
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
D.R.
HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
ASSETS
|
Homebuilding:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,922.8
|
|
|
$
|
1,355.6
|
|
Restricted cash
|
|
|
55.2
|
|
|
|
2.0
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Construction in progress and finished homes
|
|
|
1,444.9
|
|
|
|
1,681.6
|
|
Residential land and lots developed and under
development
|
|
|
1,641.3
|
|
|
|
2,409.6
|
|
Land held for development
|
|
|
562.5
|
|
|
|
531.7
|
|
Land inventory not owned
|
|
|
14.3
|
|
|
|
60.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,663.0
|
|
|
|
4,683.2
|
|
Income taxes receivable
|
|
|
293.1
|
|
|
|
676.2
|
|
Deferred income taxes, net of valuation allowance of
$1,124.4 million
and $961.3 million at September 30, 2009 and 2008,
respectively
|
|
|
|
|
|
|