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,
2011
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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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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 þ 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.
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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, 2011, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was approximately $3,389,825,000 based on the closing
price as reported on the New York Stock Exchange.
As of November 10, 2011, there were 323,250,170 shares of
the registrants common stock, par value $.01 per share,
issued and 316,050,099 shares outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for
the 2012 Annual Meeting of Stockholders are incorporated herein
by reference in Part III.
D.R.
HORTON, INC. AND SUBSIDIARIES
2011 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 homes through our
operating divisions in 25 states and 73 metropolitan
markets of the United States, primarily under the name of D.R.
Horton, Americas Builder. 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. Our companys growth 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 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 $600,000. The current downturn in our industry has
resulted in a substantial decrease in the size of our operations
during the last five fiscal years as we have adapted to the
significantly weakened new homes market. For the year ended
September 30, 2011, we closed 16,695 homes with an average
closing sales price of approximately $212,200.
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 98% of consolidated revenues, which
totaled $3.6 billion in fiscal 2011. 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 88%, 86%, and 81% of home
sales revenues in fiscal 2011, 2010 and 2009, respectively. Our
financial services segment generates its revenues from
originating and selling mortgages and collecting fees for title
insurance agency and closing services.
Available
Information
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 can
be found on the Investors page of our website under
SEC Filings and include our annual and quarterly
reports on
Form 10-K
and 10-Q
(including related filings in XBRL format), current reports on
Form 8-K,
beneficial ownership reports on Forms 3, 4, and 5, proxy
statements and amendments to such reports. Our SEC filings are
also available to the public on 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. Further
information on the operation of the public reference room can be
obtained by calling the SEC at
1-800-SEC-0330.
In addition to our SEC filings, our corporate governance
documents, including our Code of Ethical Conduct for the CEO,
CFO and Senior Financial Officers, are available on the
Investors page of our
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website under Corporate Governance. Our stockholders
may also obtain these documents in paper format free of charge
upon request made to our Investor Relations department.
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 contained on our website is not incorporated by
reference into this annual report on
Form 10-K
unless expressly noted.
Operating
Strategy and Structure
For a substantial 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.
For the past five years, conditions in the homebuilding industry
have been challenging. During this time, we have reduced our
SG&A cost structure, rebid the costs in our homes,
redesigned our product to be more efficient to build, reduced
our homes under construction to more closely match current
demand and enforced very conservative land and lot inventory
investment guidelines. We have generated significant cash from
operations by reducing our land inventory, our homes under
construction and our mortgage loans held for sale, and from
income tax refunds. We used this cash to reduce our outstanding
notes payable and to increase our cash balances. As a result of
all of these actions, we have a strong liquidity position and
have improved our balance sheet leverage, both on a gross and
net basis, from the beginning of the housing downturn. We will
continue to conservatively manage our business, and our
liquidity and balance sheet strength provide 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 inception to 1987, our homebuilding activities were
conducted in the Dallas/Fort Worth area. We then
diversified geographically by entering additional markets, both
through
start-up
operations and acquisitions. We now operate in 25 states
and 73 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 the largest homebuilding company in the United States in
terms of number of homes closed in fiscal 2011. By the same
measure, we are also one of the five largest builders in many of
our markets in fiscal 2011. 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, 2011, we had 29
separate homebuilding operating divisions, many of which operate
in more than one market area. Generally, each operating division
consists of 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 related to 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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Selecting land development subcontractors and ensuring their
work meets our contracted scopes;
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Selecting building plans and architectural schemes;
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Selecting construction subcontractors and ensuring their work
meets our contracted scopes;
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Planning and managing homebuilding schedules;
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Developing and implementing local 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 certain 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
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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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Monitoring and analysis of margins, expenses and
profitability; 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 seek to efficiently manage our advertising
costs by directing many of our promotional activities toward
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 as well as our inventory levels, margins,
expenses and profitability through our management information
systems.
Acquisitions
We are committed to maintaining our strong balance sheet and
liquidity position; however, we will continue to evaluate
opportunities for strategic acquisitions or expansions of our
operations. We believe that the current housing industry
downturn may provide us selected opportunities to enhance our
operations through the acquisition of existing homebuilding
companies or distressed real estate properties 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 seek to limit the
risks associated with acquiring other companies and distressed
real estate properties by conducting extensive operational,
financial and legal due diligence on each acquisition and by
performing financial analysis to determine that each acquisition
will have a positive impact on our earnings within an acceptable
period of time.
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Markets
We conduct our homebuilding operations in 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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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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Charlotte
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Fayetteville
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Greensboro/Winston-Salem
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Jacksonville
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Raleigh/Durham
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Wilmington
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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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Greenville
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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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Southeast Region
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Alabama
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Birmingham
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Mobile
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Montgomery
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Tuscaloosa
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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/Vero Beach
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Miami/West Palm Beach
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Orlando
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Pensacola/Panama City
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Tampa/Sarasota
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Georgia
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Atlanta
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Middle Georgia
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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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New Mexico
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Las Cruces
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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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El Paso
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Fort Worth
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Houston
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Killeen/Temple/Waco
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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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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 County
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Sacramento
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San Bernardino County
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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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Reno
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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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Seattle/Tacoma
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Vancouver
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When evaluating new or existing homebuilding markets for
purposes of capital allocation, we consider 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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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 our targeted price points;
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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 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 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 pre-acquisition 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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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
continually adjust our product offerings to address our
customers expectations for affordability, home size and
features.
Substantially all of our construction work is performed by
subcontractors. Subcontractors typically are selected after a
competitive bidding process and 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.
We market our homes and communities to prospective homebuyers
and real estate brokers in our local markets through electronic
media, including email, social networking sites and our company
Internet website, as well as brochures, flyers, newsletters and
promotional events. We also use billboards, radio, television
and newspaper advertising as necessary in each local market. To
minimize advertising costs, we attempt to operate in
subdivisions in conspicuous locations that permit us to take
advantage of local traffic patterns. We believe
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that model homes play a substantial role in our marketing
efforts and therefore expend significant effort to create an
attractive atmosphere in our model homes.
We also build a limited number of speculative homes in most of
our subdivisions. 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 and supply, seasonality, current
sales contract cancellation trends and our past experience in
the market. We expect to maintain a level of speculative home
inventory in our markets based on our current and planned sales
pace, and we monitor and adjust speculative home inventory on an
ongoing basis as conditions warrant. Speculative homes help to
provide us with opportunities to sell additional homes at a
profit and generate positive returns and cash flows on our
inventory of owned lots.
Our sales contracts require an earnest money deposit which
varies in amount among our markets and subdivisions.
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 the deposit. Our sales
contracts also include a financing contingency which permits
customers to cancel and receive a refund of their deposit 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 2011 were 27%, compared to 26% in
fiscal 2010. 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, 2011, the value of our backlog of sales
orders was $1,036.2 million (4,854 homes), an increase of
22% from $850.8 million (4,128 homes) at September 30,
2010. The average sales price of homes in backlog was $213,500
at September 30, 2011, up 4% from the $206,100 average at
September 30, 2010. 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. Substantially all of the homes in
our sales backlog at September 30, 2011 are scheduled to
close in fiscal year 2012. 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.
8
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.
During the year ended September 30, 2011, approximately 85%
of DHI Mortgages loan volume related to homes closed by
our homebuilding operations, and DHI Mortgage provided mortgage
financing services for approximately 61% of our total homes
closed.
To limit the risks associated with our mortgage operations, DHI
Mortgage originates loan products that we believe can be sold to
third-party purchasers. DHI Mortgage generally 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 primarily 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, 2011, we employed 3,010 persons, of
whom 804 were sales and marketing personnel, 959 were executive,
administrative and clerical personnel, 619 were involved in
construction and 628 worked in mortgage and title operations. We
believe that our relations with our employees are good.
Competition
The homebuilding industry is highly competitive. We compete with
numerous other national, regional and local homebuilders for
homebuyers, desirable properties, raw materials, skilled labor,
employees, management talent 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. Our competition remains
intense with other homebuilders, especially as to pricing and
incentives. Additionally, the large number of foreclosed homes
being offered for sale creates competition for homebuyers and
negatively affects pricing. Our financial services business
competes with other mortgage lenders, including national,
regional and local mortgage bankers and other financial
institutions, many 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 development requirements, building,
environmental, advertising, labor and real estate sales rules
and regulations. These regulations and 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.
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Our mortgage company and title insurance agencies must 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 (Ginnie Mae), 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. These laws
and regulations 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 which began to
affect our seasonal patterns in fiscal 2007, 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.
Although the weakness in homebuilding market conditions
mitigated our historical seasonal variations in recent years,
our home closings and income before income taxes were higher in
the second half of fiscal 2011 than in the first half of the
year. However, given the current uncertain outlook for market
conditions we can make no assurances as to whether this pattern
will continue beyond the current fiscal year.
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. Continued
weakness 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 fifth 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, oversupply of homes on the market and reductions in
the availability of financing for homebuyers that have marked
the downturn are continuing. During the downturn, we have
experienced material reductions in our home sales and
homebuilding revenues, and we have incurred material asset
impairments and write-offs.
Our ability to respond to the downturn has been limited by
adverse industry and economic conditions. The significant number
of home mortgage foreclosures has increased supply and driven
down prices, making the purchase of a foreclosed home an
alternative to purchasing a new home as well as negatively
affecting appraisal comparisons for mortgage financing.
Homebuilders have responded to declining sales and increased
cancellation rates with significant concessions. With the
decline in the values of homes and the inability 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 remained very weak, 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.
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Constriction
of the credit markets could limit our ability to access capital
and increase our costs of capital.
During the downturn in the homebuilding industry, we generated
substantial operating cash flow, and we have relied principally
on our cash on hand to meet our working capital needs and repay
outstanding indebtedness. The downturn and the constriction of
the credit markets have reduced some of the other sources of
liquidity available to us. There likely will be periods when
financial market upheaval will limit our ability to access the
public debt markets or obtain bank financing, or doing so will
increase our cost of capital.
Our mortgage subsidiary, DHI Mortgage, uses a mortgage
repurchase facility to finance many of the loans it originates.
The facility must be renewed annually, and the current facility
expires in March 2012. 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.
We believe we can meet our capital requirements in the next
12 months with our existing cash resources. 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.
The
reduction in availability of mortgage financing has adversely
affected our business, and the duration and ultimate severity of
the effects are uncertain.
Over the last five fiscal years, the mortgage lending industry
has experienced significant change and contraction. Credit
requirements have tightened and investor demand for mortgage
loans and mortgage-backed securities has been limited to
securities backed by Fannie Mae, Freddie Mac or Ginnie Mae. This
has made it more difficult for many buyers to finance the
purchase of our homes, thus reducing the pool of qualified
homebuyers. These reductions in demand have adversely affected
our business and financial results, and the duration and
severity of these effects remain uncertain.
We believe that the liquidity provided by Fannie Mae, Freddie
Mac and Ginnie Mae to the mortgage industry has been very
important to the housing market. Fannie Mae and Freddie Mac have
required substantial injections of capital from the federal
government and may require additional government support in the
future. In addition, increased lending volume and losses insured
by the FHA have resulted in a reduction of its insurance fund.
Any reduction in the availability of the financing provided by
these institutions could adversely affect interest rates,
mortgage availability and sales of new homes and mortgage loans.
The FHA insures mortgage loans that generally have lower credit
requirements and as a result, continue to be a particularly
important source for financing the sale of our homes. In the
last three years, more restrictive guidelines have been placed
on FHA insured loans, affecting minimum down payment and
availability for condominium financing. In the near future,
further restrictions are expected on FHA insured loans,
including but not limited to additional limitations on
seller-paid closing costs and concessions. This or any other
restriction may negatively affect the availability or
affordability of FHA financing, which could adversely affect our
ability to sell homes.
While the use of down payment assistance programs by our
homebuyers has decreased significantly, some of our customers
still utilize 100% financing through programs offered by the VA
and United States Department of Agriculture (USDA). There can be
no assurance that these programs or other programs will continue
to be available or will be as attractive to our customers as the
programs currently offered, which could negatively affect our
sales.
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The mortgage loans originated by our financial services
operation are sold to third-party purchasers. An entity which
has historically purchased a substantial volume of mortgage
loans from us has recently announced that they are exiting this
line of business. If we are unable to sell to additional viable
purchasers in the marketplace, our ability to originate and sell
mortgage loans at competitive prices could be limited which
would negatively affect our profitability.
Even if potential customers do not need financing, changes in
the availability of mortgage products may make it more difficult
for them to sell their current homes to potential buyers who
need financing.
Mortgage rates are currently at historically low levels. 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.
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.
We have been successful in increasing our liquidity by
generating positive operating cash flow and reducing our
leverage during the downturn. However, during this time,
notwithstanding our sales strategies, we continued to experience
a low level of sales demand and an elevated rate of sales
contract cancellations. We believe this is largely due to
reduced homebuyer confidence, due principally to the weak
economy and the continuing high level of unemployment. A more
restrictive mortgage lending environment and the inability of
some buyers to sell their existing homes have also impacted our
sales orders. Many of these factors, which affect new sales and
cancellation rates, are beyond our control. It is uncertain how
long the low sales level and elevated 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.
Our
business and financial results could be adversely affected by
significant inflation or deflation.
Inflation can adversely affect us by increasing costs of land,
materials and labor. In the event of a return of significant
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, significant 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.
Alternatively, a significant period of deflation could cause a
decrease in overall spending and borrowing levels. This could
lead to a further deterioration in economic conditions,
including an increase in the rate of unemployment. Deflation
could also cause the value of our inventories to decline or
reduce the value of existing homes below the related mortgage
loan balance, which could potentially increase the supply of
existing homes and have a negative impact on our results of
operations.
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 changes
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 our regions or markets 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, 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 and the amount that can be financed, 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.
Continued military deployments to foreign 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 weak industry
and economic conditions, we have generally not been able to
increase the sale prices of our homes in recent years. In the
future, our pricing strategies may also be limited by market
conditions. We may be unable to further 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 due to any of the
factors discussed above.
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. We establish reserves related to mortgages we have
sold; however, actual future obligations related to these
mortgages 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 or
lots at a cost we will not be able to recover fully, or on which
we cannot build and sell homes profitably. As a result, our
deposits for building lots controlled under option or similar
contracts may be put at risk. The value of our owned 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. During the current economic downturn, we
have sold homes and land for lower margins or at a loss and we
have recorded significant inventory impairment charges.
Our levels of owned and controlled land and building lots are
based on managements expectations for future volume
growth. In light of the much weaker market conditions
encountered since fiscal 2006, we have
13
significantly slowed our purchases of undeveloped land and our
development spending on land we own. We made substantial land
and lot sales in fiscal 2008. Throughout the downturn, 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.
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 factors 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 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 development or construction 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 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
14
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.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (H.R.4173) was signed into law. This legislation
provides for a number of new requirements relating to
residential mortgage lending practices, many of which are to be
developed further by implementing rules. These include, among
others, minimum standards for mortgages and lender practices in
making mortgages, limitations on certain fees and incentive
arrangements, retention of credit risk and remedies for
borrowers in foreclosure proceedings. The effect of such
provisions on our financial services business will depend on the
rules that are ultimately enacted. Key decisions that have yet
to be made concern the characteristics of mortgages that would
be exempt from risk retention, how risk retention requirements
will be implemented and how derivative trading will be impacted.
These factors could restrict the availability of and increase
the cost of mortgage credit in addition to increasing the
general and administrative costs within our financial services
operations.
The turmoil caused by the increasing number of defaults and
resulting foreclosures 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 current
foreclosure processes or other practices in the financial
services segments of homebuilding companies. We are unable to
assess whether these governmental inquiries will result in
changes in regulations, homebuilding industry practices or
adversely affect the costs and 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, and we obtain indemnities and certificates of
insurance from subcontractors covering claims related to their
workmanship and materials. We establish 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
debt obligations could adversely affect our financial
condition.
As of September 30, 2011, our consolidated debt was
$1,704.6 million. As of September 30, 2011, other than
the expiration of the mortgage repurchase facility in March
2012, there are no scheduled maturities of principal on our
outstanding public debt during the next 12 months. The
indentures governing our senior and convertible senior notes do
not restrict the incurrence of future unsecured debt, and they
permit significant
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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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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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In addition, the magnitude of our debt and the restrictions
imposed by the instruments governing these obligations expose us
to additional risks, including:
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 mortgage subsidiary 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 mortgage subsidiary. 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, although 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 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 their 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.
The indentures governing our senior notes impose restrictions on
the creation of secured debt and liens.
Changes in Debt Ratings. Our senior unsecured
debt is currently rated at below investment grade. Any lowering
of our debt ratings could make entering into a new line of
credit agreement or accessing the public capital markets more
difficult
and/or more
expensive.
Change of Control Purchase Options. If a
change of control occurs as defined in the indentures governing
$455.5 million principal amount of our senior notes as of
September 30, 2011, 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, 2011, we would be required to offer to
purchase these notes at par, together with all accrued
16
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.
Potential Future Restrictions. We do not
currently have a revolving line of credit in place. However, if
we decide to enter into a revolving credit agreement in the
future, it is likely that we would become subject to further
restrictions on our operations and activities.
Homebuilding
and financial services are very competitive industries, 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 negatively impact our sales
volumes, selling prices and incentive levels, reduce our profit
margins, and cause impairments in the value of our inventory or
other assets. Competition can also hurt our ability to acquire
suitable land, raw materials and skilled labor at acceptable
prices or terms, or cause delays in the 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.
Our homebuilding and financial services businesses compete with
other companies, both from within and outside of these
industries, to attract and retain highly skilled and experienced
employees, managers and executives. Competition for the services
of these individuals will likely increase substantially as
business conditions begin to stabilize or improve in the
homebuilding and financial services industries or in the general
economy. If we are unable to attract and retain key employees,
managers or executives, our business could be adversely impacted.
We
cannot make any assurances that any future growth strategies
will be successful or not expose us to additional
risks.
Although we have focused on internal growth in recent years, we
may in the future make strategic acquisitions of homebuilding
companies or their assets. Successful strategic acquisitions
require the integration of operations and management. 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 successfully implement 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 may
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, 2011, we have a net deferred income tax
asset of $848.5 million, against which we have provided a
valuation allowance of $848.5 million. The realization of
all or a portion of our deferred income tax asset is dependent
upon the generation of future taxable income during the
statutory carryforward periods and in the jurisdictions in which
the related temporary differences become deductible.
17
The accounting for deferred income 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 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 tax net operating losses through
fiscal 2011 and have potential unrealized built-in losses. These
tax net operating losses have the potential to reduce future
income tax obligations if we realize taxable income 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, both the amount of and 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. In addition, these limitations may affect the
expiration date of a portion of our built-in losses, any net
operating loss carryforwards or tax credit carryforwards, and we
may not be able to use them before they expire. This could
adversely affect our financial position, results of operations
and cash flow.
We do not believe we have experienced such an ownership change
as of September 30, 2011; however, the amount by which our
ownership may change in the future is affected by purchases and
sales of stock by 5% stockholders; the potential conversion of
our outstanding convertible senior notes and our decision as to
whether to settle any such conversions completely or partially
in stock; and new issuances of stock by us.
18
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
In addition to our inventories of land, lots and homes, we own
several office buildings totaling approximately
260,000 square feet, and we lease approximately
720,000 square feet of office space under leases expiring
through October 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.
|
|
ITEM 3.
|
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.
In October 2010, the California Regional Water Quality Control
Board (Control Board), Los Angeles Region, notified
a subsidiary (the Subsidiary) of the Company of its
intention to assess a penalty against the Subsidiary regarding a
previously issued notice of violation (NOV). The NOV
related to a National Pollutant Discharge Elimination System
permit (the Permit) obtained on the
Subsidiarys behalf in 2003 to develop a project in
California. Without admitting any wrongdoing, the Subsidiary has
settled this matter and paid an assessed penalty of
approximately $172,500.
In August 2011, the Wage and Hour Division (WHD) of
the U.S. Department of Labor notified the Company that it
was initiating an investigation to determine the Companys
compliance with the Fair Labor Standards Act (FLSA)
and, to the extent applicable, other laws enforced by WHD. The
Company believes that its business practices are in compliance
with the FLSA and other applicable laws enforced by WHD. At this
time, the Company cannot predict the outcome of this
investigation, nor can it reasonably estimate the potential
costs that may be associated with its eventual resolution.
Consequently, the Company has not recorded any associated
liabilities in the accompanying balance sheet.
19
PART II
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2011
|
|
Year Ended September 30, 2010
|
|
|
|
|
|
|
Declared
|
|
|
|
|
|
Declared
|
|
|
High
|
|
Low
|
|
Dividends
|
|
High
|
|
Low
|
|
Dividends
|
|
1st Quarter
|
|
$
|
12.30
|
|
|
$
|
9.77
|
|
|
$
|
0.0375
|
|
|
$
|
13.00
|
|
|
$
|
9.69
|
|
|
$
|
0.0375
|
|
2nd Quarter
|
|
|
13.50
|
|
|
|
11.19
|
|
|
|
0.0375
|
|
|
|
13.53
|
|
|
|
10.87
|
|
|
|
0.0375
|
|
3rd Quarter
|
|
|
12.68
|
|
|
|
10.62
|
|
|
|
0.0375
|
|
|
|
15.44
|
|
|
|
9.82
|
|
|
|
0.0375
|
|
4th Quarter
|
|
|
12.55
|
|
|
|
8.82
|
|
|
|
0.0375
|
|
|
|
11.38
|
|
|
|
9.41
|
|
|
|
0.0375
|
|
As of November 10, 2011, the closing price of our common
stock on the NYSE was $11.66, and there were approximately 517
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.
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 2011, 2010 and 2009, we did not sell any
equity securities that were not registered under the Securities
Act of 1933, as amended.
In July 2010, our Board of Directors authorized the repurchase
of up to $100 million of our common stock effective through
July 31, 2011. During June 2011, we repurchased
3,544,838 shares of our common stock at a total cost of
$38.6 million, resulting in a remaining authorization of
$61.4 million. On August 1, 2011, our Board of
Directors authorized the repurchase of up to $100 million
of our common stock effective through July 31, 2012. All of
the $100 million authorization was remaining at
September 30, 2011.
20
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, 2011, 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, 2006, 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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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
D.R. Horton, Inc.
|
|
$
|
100.00
|
|
|
$
|
54.99
|
|
|
$
|
57.89
|
|
|
$
|
51.58
|
|
|
$
|
50.93
|
|
|
$
|
41.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Index
|
|
$
|
100.00
|
|
|
$
|
116.44
|
|
|
$
|
90.85
|
|
|
$
|
84.58
|
|
|
$
|
93.17
|
|
|
$
|
94.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Homebuilding Index
|
|
$
|
100.00
|
|
|
$
|
50.82
|
|
|
$
|
43.01
|
|
|
$
|
36.02
|
|
|
$
|
33.42
|
|
|
$
|
23.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This performance graph shall not be deemed to be incorporated by
reference into our SEC filings and should not constitute
soliciting material or otherwise be considered filed under the
Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended.
21
|
|
ITEM 6.
|
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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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
(In millions, except per share data)
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
$
|
3,549.6
|
|
|
$
|
4,309.7
|
|
|
$
|
3,603.9
|
|
|
$
|
6,518.6
|
|
|
$
|
11,088.8
|
|
Financial Services
|
|
|
87.2
|
|
|
|
90.5
|
|
|
|
53.7
|
|
|
|
127.5
|
|
|
|
207.7
|
|
Gross profit (loss) Homebuilding
|
|
|
526.3
|
|
|
|
682.1
|
|
|
|
65.2
|
|
|
|
(1,763.2
|
)
|
|
|
603.7
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
|
(7.0
|
)
|
|
|
78.1
|
|
|
|
(541.3
|
)
|
|
|
(2,666.9
|
)
|
|
|
(1,020.0
|
)
|
Financial Services
|
|
|
19.1
|
|
|
|
21.4
|
|
|
|
(15.5
|
)
|
|
|
35.1
|
|
|
|
68.8
|
|
Income tax (benefit) expense
|
|
|
(59.7
|
)
|
|
|
(145.6
|
)
|
|
|
(7.0
|
)
|
|
|
1.8
|
|
|
|
(238.7
|
)
|
Net income (loss)
|
|
|
71.8
|
|
|
|
245.1
|
|
|
|
(549.8
|
)
|
|
|
(2,633.6
|
)
|
|
|
(712.5
|
)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.23
|
|
|
|
0.77
|
|
|
|
(1.73
|
)
|
|
|
(8.34
|
)
|
|
|
(2.27
|
)
|
Diluted
|
|
|
0.23
|
|
|
|
0.77
|
|
|
|
(1.73
|
)
|
|
|
(8.34
|
)
|
|
|
(2.27
|
)
|
Cash dividends declared per common share
|
|
|
0.15
|
|
|
|
0.15
|
|
|
|
0.15
|
|
|
|
0.45
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In millions)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
3,449.7
|
|
|
$
|
3,449.0
|
|
|
$
|
3,666.7
|
|
|
$
|
4,683.2
|
|
|
$
|
9,343.5
|
|
Total assets
|
|
|
5,358.4
|
|
|
|
5,938.6
|
|
|
|
6,756.8
|
|
|
|
7,950.6
|
|
|
|
11,556.3
|
|
Notes payable (1)
|
|
|
1,704.6
|
|
|
|
2,171.8
|
|
|
|
3,145.3
|
|
|
|
3,748.4
|
|
|
|
4,376.8
|
|
Total equity
|
|
|
2,623.5
|
|
|
|
2,622.9
|
|
|
|
2,400.6
|
|
|
|
2,864.8
|
|
|
|
5,655.3
|
|
|
|
|
(1)
|
|
Includes both homebuilding notes
payable and the amount outstanding on our mortgage repurchase
facility.
|
22
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Results
of Operations Fiscal Year 2011 Overview
In fiscal 2011, conditions within the homebuilding industry
remained challenging. Although the overall level of new home
demand declined from the prior year as a result of the
expiration of the federal homebuyer tax credit in April 2010, we
saw some improvement in our net sales orders during the last
half of fiscal 2011 compared to the last half of fiscal 2010.
The number and value of our net sales orders were 2% and 8%
higher, respectively, during the last six months of fiscal 2011
than in the comparable period of fiscal 2010, and were 7% and
13% higher, respectively, in the last three months of fiscal
2011 than in the comparable period of fiscal 2010. In addition,
during fiscal 2011 we experienced a more traditional demand
pattern in our net sales orders, which sequentially increased
from the first quarter to the second quarter, remained at a
consistent level in the third quarter, then slowed in our fourth
quarter. These results suggest that overall demand for new homes
may be stabilizing, but we expect that demand is likely to
remain at low levels for some time.
Our level of home closings in fiscal 2011 was essentially the
same level that we achieved in fiscal 2009. However, our pre-tax
income increased from fiscal 2009 to fiscal 2011 by
$569 million. While $397 million of the increase was
due to reductions in inventory impairments and land option cost
write-offs and mortgage recourse and reinsurance expenses
recognized in fiscal 2011 compared to fiscal 2009, the remaining
increase of $172 million reflects the results of our
strategies to open new communities, improve gross margins,
adjust our SG&A costs to current revenue levels and reduce
our outstanding debt levels and related interest expense.
Despite the continued low level of demand for new homes and the
weak homebuilding industry conditions, our strong balance sheet
and liquidity position is allowing us to invest in market
opportunities as they arise. We believe we are well-positioned
for an eventual housing recovery. We will continue to adjust our
business strategies as necessary based on housing demand in each
of our markets. Our future results could be negatively impacted
by prolonged weakness in the economy, continued high levels of
unemployment, a significant increase in mortgage interest rates
or further tightening of mortgage lending standards.
We have evaluated our homebuilding and financial services assets
for recoverability. Our assets whose recoverability is most
impacted by market conditions include inventory, earnest money
deposits and pre-acquisition costs related to land and lot
option contracts, tax assets and owned mortgage loans. These
assets collectively represented approximately 90% of our total
assets, excluding cash and marketable securities, at
September 30, 2011. Our evaluations incorporated our
expectation of continued challenges in the homebuilding
industry. Based on our evaluations, during fiscal 2011, we
recorded inventory impairment charges of $37.3 million,
wrote-off earnest money deposits and pre-acquisition costs
related to land and lot option contracts we no longer plan to
pursue of $8.1 million (net of recoveries), incurred
charges of $11.6 million associated with mortgage loans
held in portfolio and the limited recourse provisions on
previously sold mortgage loans and incurred charges of
$1.8 million related to mortgage reinsurance activities.
23
Strategy
It is difficult in the near term to predict if current
homebuilding industry conditions will improve or if they will
deteriorate. During the industry downturn, we generated
significant cash flow from operations which we primarily used to
increase our cash balances and reduce our outstanding debt. Our
liquidity and reduced leverage provide us 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. Our operating strategy
continues to include the following initiatives:
|
|
|
|
|
Maintaining a strong cash balance and overall liquidity position.
|
|
|
|
Managing the sales prices and level of sales incentives on our
homes to optimize the balance of sales volumes, profits, returns
on inventory investments and cash flows.
|
|
|
|
Entering into lot option contracts to purchase finished lots to
potentially increase sales volumes and profitability.
|
|
|
|
Renegotiating existing lot option contracts to reduce lot costs
and to better match the scheduled lot purchases with new home
demand in each community.
|
|
|
|
Limiting land acquisition and development spending, especially
in communities that require substantial investments of time or
capital resources.
|
|
|
|
Managing our inventory of homes under construction by
selectively starting construction on unsold homes to capture new
home demand, while monitoring the number and aging of unsold
homes and aggressively marketing unsold, completed homes in
inventory.
|
|
|
|
Decreasing the cost of goods purchased from both vendors and
subcontractors.
|
|
|
|
Modifying product offerings and pricing to meet consumer demand
in each of our markets.
|
|
|
|
Controlling our SG&A infrastructure to match production
levels.
|
Although we cannot provide any assurances that these initiatives
will be successful, if market conditions do not deteriorate, we
expect that our operating strategy will allow us to continue to
achieve profitability while maintaining a strong balance sheet
and liquidity position in fiscal 2012.
24
Key
Results
Key financial results as of and for our fiscal year ended
September 30, 2011, as compared to fiscal 2010, were as
follows:
Homebuilding
Operations:
|
|
|
|
|
Homebuilding revenues decreased 18% to $3.5 billion.
|
|
|
|
Homes closed decreased 20% to 16,695 homes, while the average
selling price of those homes increased 3% to $212,200.
|
|
|
|
Net sales orders decreased 10% to 17,421 homes.
|
|
|
|
Sales order backlog increased 22% to $1.0 billion.
|
|
|
|
Home sales gross margins decreased 120 basis points to
16.1%.
|
|
|
|
Inventory impairments and land option cost write-offs were
$45.4 million, compared to $64.7 million.
|
|
|
|
Homebuilding SG&A expense decreased 8% to
$480.0 million, but increased as a percentage of
homebuilding revenues by 140 basis points to 13.5%.
|
|
|
|
Interest expensed directly and amortized to cost of sales
decreased 32% to $141.3 million.
|
|
|
|
Homebuilding pre-tax loss was $7.0 million, compared to
pre-tax income of $78.1 million.
|
|
|
|
Homes in inventory were 10,500, compared to 9,500.
|
|
|
|
Owned and optioned lots totaled 112,700, compared to 119,400.
|
|
|
|
Homebuilding debt was $1.6 billion, decreasing from
$2.1 billion.
|
|
|
|
Net homebuilding debt to total capital was 18.0%, up
190 basis points and gross homebuilding debt to total
capital was 37.7%, an improvement of 660 basis points.
|
|
|
|
Homebuilding cash and marketable securities totaled
$1.0 billion, compared to $1.6 billion.
|
Financial
Services Operations:
|
|
|
|
|
Total financial services revenues, net of recourse and
reinsurance expenses, decreased 4% to $87.2 million from
$90.5 million.
|
|
|
|
Financial services pre-tax income was $19.1 million,
compared to $21.4 million.
|
Consolidated
Results:
|
|
|
|
|
Consolidated pre-tax income was $12.1 million, compared to
$99.5 million.
|
|
|
|
Net income was $71.8 million, compared to
$245.1 million.
|
|
|
|
Diluted earnings per share was $0.23, compared to $0.77.
|
|
|
|
Total equity was $2.6 billion, essentially unchanged from
the balance at September 30, 2010.
|
|
|
|
Net cash provided by operations was $14.9 million, compared
to $709.4 million.
|
25
Results
of Operations Homebuilding
Our operating segments are our 29 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 and Minnesota
|
|
|
|
Southeast:
|
|
Alabama, Florida and Georgia
|
|
|
|
South Central:
|
|
Louisiana, New Mexico (Las Cruces only), Oklahoma and Texas
|
|
|
|
Southwest:
|
|
Arizona and New Mexico
|
|
|
|
West:
|
|
California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington
|
Fiscal
Year Ended September 30, 2011 Compared to Fiscal Year Ended
September 30, 2010
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, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Orders (1)
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
Net Homes Sold
|
|
|
|
Value (In millions)
|
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
|
East
|
|
|
2,066
|
|
|
|
2,027
|
|
|
|
2
|
|
%
|
|
$
|
482.6
|
|
|
$
|
469.0
|
|
|
|
3
|
|
%
|
|
$
|
233,600
|
|
|
$
|
231,400
|
|
|
|
1
|
|
%
|
Midwest
|
|
|
1,005
|
|
|
|
1,045
|
|
|
|
(4
|
)
|
%
|
|
|
272.0
|
|
|
|
296.0
|
|
|
|
(8
|
)
|
%
|
|
|
270,600
|
|
|
|
283,300
|
|
|
|
(4
|
)
|
%
|
Southeast
|
|
|
4,019
|
|
|
|
3,892
|
|
|
|
3
|
|
%
|
|
|
776.1
|
|
|
|
728.7
|
|
|
|
7
|
|
%
|
|
|
193,100
|
|
|
|
187,200
|
|
|
|
3
|
|
%
|
South Central
|
|
|
6,169
|
|
|
|
7,375
|
|
|
|
(16
|
)
|
%
|
|
|
1,092.2
|
|
|
|
1,273.4
|
|
|
|
(14
|
)
|
%
|
|
|
177,000
|
|
|
|
172,700
|
|
|
|
2
|
|
%
|
Southwest
|
|
|
1,284
|
|
|
|
1,785
|
|
|
|
(28
|
)
|
%
|
|
|
239.6
|
|
|
|
315.3
|
|
|
|
(24
|
)
|
%
|
|
|
186,600
|
|
|
|
176,600
|
|
|
|
6
|
|
%
|
West
|
|
|
2,878
|
|
|
|
3,251
|
|
|
|
(11
|
)
|
%
|
|
|
865.1
|
|
|
|
928.6
|
|
|
|
(7
|
)
|
%
|
|
|
300,600
|
|
|
|
285,600
|
|
|
|
5
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,421
|
|
|
|
19,375
|
|
|
|
(10
|
)
|
%
|
|
$
|
3,727.6
|
|
|
$
|
4,011.0
|
|
|
|
(7
|
)
|
%
|
|
$
|
214,000
|
|
|
$
|
207,000
|
|
|
|
3
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Order Cancellations
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Sales Orders
|
|
|
Value (In millions)
|
|
|
Cancellation Rate (2)
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
East
|
|
|
689
|
|
|
|
581
|
|
|
$
|
146.7
|
|
|
$
|
127.2
|
|
|
|
25
|
%
|
|
|
22
|
%
|
Midwest
|
|
|
177
|
|
|
|
250
|
|
|
|
45.9
|
|
|
|
68.7
|
|
|
|
15
|
%
|
|
|
19
|
%
|
Southeast
|
|
|
1,531
|
|
|
|
1,409
|
|
|
|
275.1
|
|
|
|
250.0
|
|
|
|
28
|
%
|
|
|
27
|
%
|
South Central
|
|
|
2,763
|
|
|
|
3,076
|
|
|
|
470.3
|
|
|
|
514.1
|
|
|
|
31
|
%
|
|
|
29
|
%
|
Southwest
|
|
|
639
|
|
|
|
677
|
|
|
|
109.9
|
|
|
|
115.1
|
|
|
|
33
|
%
|
|
|
27
|
%
|
West
|
|
|
769
|
|
|
|
789
|
|
|
|
233.5
|
|
|
|
227.3
|
|
|
|
21
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,568
|
|
|
|
6,782
|
|
|
$
|
1,281.4
|
|
|
$
|
1,302.4
|
|
|
|
27
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Net sales orders represent the
number and dollar value of new sales contracts executed with
customers (gross sales orders), net of cancelled sales orders.
|
|
(2)
|
|
Cancellation rate represents the
number of cancelled sales orders divided by gross sales orders.
|
26
Net
Sales Orders
The value of net sales orders decreased 7%, to
$3,727.6 million (17,421 homes) in 2011 from
$4,011.0 million (19,375 homes) in 2010. The number of net
sales orders decreased 10% in fiscal 2011 compared to fiscal
2010. Sales order volume during the first part of fiscal 2010
benefitted from the federal homebuyer tax credit. During the
last half of fiscal 2011, the number and value of our net sales
orders were 2% and 8% higher, respectively, than in the last
half of fiscal 2010.
In comparing fiscal 2011 to fiscal 2010, the value and volume of
net sales orders decreased in most of our market regions, with
much of the volume decrease resulting from the expiration of the
federal homebuyer tax credit. The volume decline in our
Southwest region also reflected weaker market conditions in all
of its markets, combined with a reduction in the number of
active communities in the current year. Our East and Southeast
regions experienced slight increases in net sales orders as a
result of operating more communities in the current fiscal year.
Fluctuations in the value of net sales orders were primarily due
to the change in the number of homes sold in each respective
region and, to a lesser extent, to small fluctuations in the
average selling price of those homes. Our future sales volumes
will depend on the strength of the overall economy, employment
levels and our ability to successfully implement our operating
strategies in each of our markets.
The average price of our net sales orders in 2011 was $214,000,
an increase of 3% from the $207,000 average in 2010. The largest
percentage increases were in our Southwest and West regions and
were primarily due to opening new communities and adjusting our
product mix, with higher priced communities representing more of
our sales. We continue to adjust our product mix, geographic mix
and pricing within our homebuilding markets to respond to market
conditions.
Our annual sales order cancellation rate (cancelled sales orders
divided by gross sales orders for the period) was 27% in fiscal
2011, compared to 26% in fiscal 2010. This cancellation rate
continues to be above historical levels and is reflective of low
consumer confidence and tight mortgage lending standards. The
return of our cancellation rate to historical levels depends
largely on the strength of the overall economy and our ability
to successfully implement our operating strategies in each of
our markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Order Backlog
|
|
|
|
|
As of September 30,
|
|
|
|
|
Homes in Backlog
|
|
|
|
Value (In millions)
|
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
|
East
|
|
|
606
|
|
|
|
472
|
|
|
|
28
|
|
%
|
|
$
|
147.6
|
|
|
$
|
103.4
|
|
|
|
43
|
|
%
|
|
$
|
243,600
|
|
|
$
|
219,100
|
|
|
|
11
|
|
%
|
Midwest
|
|
|
288
|
|
|
|
247
|
|
|
|
17
|
|
%
|
|
|
80.6
|
|
|
|
70.1
|
|
|
|
15
|
|
%
|
|
|
279,900
|
|
|
|
283,800
|
|
|
|
(1
|
)
|
%
|
Southeast
|
|
|
1,285
|
|
|
|
812
|
|
|
|
58
|
|
%
|
|
|
246.9
|
|
|
|
162.5
|
|
|
|
52
|
|
%
|
|
|
192,100
|
|
|
|
200,100
|
|
|
|
(4
|
)
|
%
|
South Central
|
|
|
1,710
|
|
|
|
1,691
|
|
|
|
1
|
|
%
|
|
|
309.5
|
|
|
|
297.3
|
|
|
|
4
|
|
%
|
|
|
181,000
|
|
|
|
175,800
|
|
|
|
3
|
|
%
|
Southwest
|
|
|
426
|
|
|
|
405
|
|
|
|
5
|
|
%
|
|
|
76.6
|
|
|
|
71.9
|
|
|
|
7
|
|
%
|
|
|
179,800
|
|
|
|
177,500
|
|
|
|
1
|
|
%
|
West
|
|
|
539
|
|
|
|
501
|
|
|
|
8
|
|
%
|
|
|
175.0
|
|
|
|
145.6
|
|
|
|
20
|
|
%
|
|
|
324,700
|
|
|
|
290,600
|
|
|
|
12
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,854
|
|
|
|
4,128
|
|
|
|
18
|
|
%
|
|
$
|
1,036.2
|
|
|
$
|
850.8
|
|
|
|
22
|
|
%
|
|
$
|
213,500
|
|
|
$
|
206,100
|
|
|
|
4
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
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
have been substantial during the recent housing downturn.
Our homes in backlog increased 18% at September 30, 2011
from the prior year, with significant increases in our East,
Midwest and Southeast regions. The number of homes in backlog in
these regions benefited from more active communities and
improved third and fourth quarter sales as compared with the
same periods of the prior year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes Closed and Home Sales
Revenue
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
Homes Closed
|
|
|
|
Value (In millions)
|
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
|
East
|
|
|
1,932
|
|
|
|
2,114
|
|
|
|
(9
|
)
|
%
|
|
$
|
438.4
|
|
|
$
|
492.2
|
|
|
|
(11
|
)
|
%
|
|
$
|
226,900
|
|
|
$
|
232,800
|
|
|
|
(3
|
)
|
%
|
Midwest
|
|
|
964
|
|
|
|
1,187
|
|
|
|
(19
|
)
|
%
|
|
|
261.5
|
|
|
|
330.9
|
|
|
|
(21
|
)
|
%
|
|
|
271,300
|
|
|
|
278,800
|
|
|
|
(3
|
)
|
%
|
Southeast
|
|
|
3,546
|
|
|
|
4,049
|
|
|
|
(12
|
)
|
%
|
|
|
691.8
|
|
|
|
745.2
|
|
|
|
(7
|
)
|
%
|
|
|
195,100
|
|
|
|
184,000
|
|
|
|
6
|
|
%
|
South Central
|
|
|
6,150
|
|
|
|
8,046
|
|
|
|
(24
|
)
|
%
|
|
|
1,080.0
|
|
|
|
1,378.8
|
|
|
|
(22
|
)
|
%
|
|
|
175,600
|
|
|
|
171,400
|
|
|
|
2
|
|
%
|
Southwest
|
|
|
1,263
|
|
|
|
1,872
|
|
|
|
(33
|
)
|
%
|
|
|
234.8
|
|
|
|
329.7
|
|
|
|
(29
|
)
|
%
|
|
|
185,900
|
|
|
|
176,100
|
|
|
|
6
|
|
%
|
West
|
|
|
2,840
|
|
|
|
3,607
|
|
|
|
(21
|
)
|
%
|
|
|
835.8
|
|
|
|
1,025.5
|
|
|
|
(18
|
)
|
%
|
|
|
294,300
|
|
|
|
284,300
|
|
|
|
4
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,695
|
|
|
|
20,875
|
|
|
|
(20
|
)
|
%
|
|
$
|
3,542.3
|
|
|
$
|
4,302.3
|
|
|
|
(18
|
)
|
%
|
|
$
|
212,200
|
|
|
$
|
206,100
|
|
|
|
3
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
Sales Revenue
Revenues from home sales decreased 18%, to $3,542.3 million
(16,695 homes closed) in 2011 from $4,302.3 million (20,875
homes closed) in 2010. The average selling price of homes closed
during 2011 was $212,200, up 3% from the $206,100 average in
2010 which reflects a change in product mix rather than broad
price appreciation. During fiscal 2011, home sales revenues
decreased in all of our market regions, resulting from decreases
in the number of homes closed.
The number of homes closed in fiscal 2011 decreased 20% due to
decreases in all of our market regions. The federal homebuyer
tax credit helped stimulate demand for new homes during the
prior year and following its expiration we experienced a
significant decline in demand for our homes as reflected in our
current year results. 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.
28
Homebuilding
Operating Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentages of
|
|
|
|
|
Related Revenues
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
Gross profit Home sales
|
|
|
16.1
|
|
%
|
|
|
17.3
|
|
%
|
Gross profit Land/lot sales
|
|
|
5.5
|
|
%
|
|
|
37.8
|
|
%
|
Effect of inventory impairments and land option cost write-offs
on
total homebuilding gross profit
|
|
|
(1.3
|
)
|
%
|
|
|
(1.5
|
)
|
%
|
Gross profit Total homebuilding
|
|
|
14.8
|
|
%
|
|
|
15.8
|
|
%
|
Selling, general and administrative expense
|
|
|
13.5
|
|
%
|
|
|
12.1
|
|
%
|
Interest expense
|
|
|
1.4
|
|
%
|
|
|
2.0
|
|
%
|
Loss on early retirement of debt, net
|
|
|
0.3
|
|
%
|
|
|
0.1
|
|
%
|
Other (income)
|
|
|
(0.2
|
)
|
%
|
|
|
(0.2
|
)
|
%
|
Income (loss) before income taxes
|
|
|
(0.2
|
)
|
%
|
|
|
1.8
|
|
%
|
Home
Sales Gross Profit
Gross profit from home sales decreased by 23%, to
$571.3 million in 2011, from $744.0 million in 2010,
and, as a percentage of home sales revenues, decreased
120 basis points, to 16.1%. The reduction in gross profit
from home sales was primarily due to the increased levels of
incentives and discounts needed to sell homes in the current
year, which narrowed the range between our selling prices and
costs of our homes in most of our markets. The prior year
benefitted from the federal homebuyer tax credit, which created
demand for our homes without the need for us to provide as many
incentives and discounts.
To the extent we utilize sales incentives and price adjustments
to increase the level of home closings, gross profit percentages
will continue to be impacted.
Land
Sales Revenue
Land sales revenues decreased slightly to $7.3 million in
2011, from $7.4 million in 2010. Fluctuations in revenues
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 fluctuate from period
to period. As of September 30, 2011, we had
$26.3 million of land held for sale that we expect to sell
in the next twelve months.
Inventory
Impairments and Land Option Cost Write-offs
During fiscal 2011, when we performed our quarterly inventory
impairment analyses by reviewing the performance and outlook for
all of our communities, the assumptions utilized reflected our
expectation of continued challenging conditions and
uncertainties in the homebuilding industry and in our markets.
As we continue to evaluate the strength of the economy (measured
largely in terms of job growth), the level of underlying demand
for new homes and our operating performance, the level of
impairments in future quarters will fluctuate and may increase.
As of September 30, 2011, we evaluated communities with a
combined carrying value of $391.5 million for impairment.
The analysis of the 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, some 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.
In performing this analysis, we utilized a range of discount
rates for communities of
29
12% to 18%. Through this evaluation process, we determined that
communities with a carrying value of $37.1 million as of
September 30, 2011, were impaired. As a result, during the
fourth quarter of fiscal 2011, we recorded impairment charges of
$10.2 million to reduce the carrying value of the impaired
communities to their estimated fair value, as compared to
$29.1 million of impairment charges in the same period of
2010. The fourth quarter charges combined with impairment
charges recorded earlier in the year resulted in total inventory
impairment charges of $37.3 million and $62.3 million
during fiscal 2011 and 2010, respectively.
We generally 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
2011, approximately 78% of the impairment charges were recorded
to residential land and lots and land held for development, and
approximately 22% of the charges were recorded to construction
in progress and finished homes inventory, compared to 93% and
7%, respectively, in fiscal 2010.
Of the remaining $354.4 million carrying value of
communities which were determined not to be impaired at
September 30, 2011, the largest concentrations were in
California (23%), Illinois (16%), Arizona (11%), Florida (10%)
and Texas (9%). 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 develop the
lots and construct the homes. The pricing and incentive levels
are often inter-related with sales pace within a community, such
that a price reduction can typically 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, some of which may result
from foreclosures. If conditions in the broader economy,
homebuilding industry or specific markets in which we operate
worsen, 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-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 contracts for land or lots which are not
expected to be acquired. During fiscal 2011 and 2010, we wrote
off $8.1 million and $2.4 million, respectively, of
earnest money deposits and pre-acquisition costs related to land
option contracts. At September 30, 2011, outstanding
earnest money deposits associated with our portfolio of land and
lot option purchase contracts totaled $14.6 million and
pre-acquisition costs related to these contracts totaled
$9.6 million.
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 130 basis points in fiscal 2011, compared to
150 basis points in fiscal 2010.
30
Inventory
Impairments and Land Option Cost Write-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Land Option
|
|
|
|
|
|
|
Land Option
|
|
|
|
|
|
Cost
|
|
|
|
|
Inventory
|
|
Cost
|
|
|
|
Inventory
|
|
Write-Offs
|
|
|
|
|
Impairments
|
|
Write-Offs
|
|
Total
|
|
Impairments
|
|
(Recoveries)
|
|
Total
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
East
|
|
$
|
3.5
|
|
|
$
|
1.1
|
|
|
$
|
4.6
|
|
|
$
|
9.0
|
|
|
$
|
(0.4
|
)
|
|
$
|
8.6
|
|
Midwest
|
|
|
0.1
|
|
|
|
0.8
|
|
|
|
0.9
|
|
|
|
21.9
|
|
|
|
0.1
|
|
|
|
22.0
|
|
Southeast
|
|
|
15.8
|
|
|
|
1.6
|
|
|
|
17.4
|
|
|
|
17.0
|
|
|
|
0.5
|
|
|
|
17.5
|
|
South Central
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
0.7
|
|
|
|
13.3
|
|
|
|
0.7
|
|
|
|
14.0
|
|
Southwest
|
|
|
4.4
|
|
|
|
0.3
|
|
|
|
4.7
|
|
|
|
0.6
|
|
|
|
|
|
|
|
0.6
|
|
West
|
|
|
13.3
|
|
|
|
3.8
|
|
|
|
17.1
|
|
|
|
0.5
|
|
|
|
1.5
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37.3
|
|
|
$
|
8.1
|
|
|
$
|
45.4
|
|
|
$
|
62.3
|
|
|
$
|
2.4
|
|
|
$
|
64.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Values of Communities Evaluated for Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2011
|
|
|
|
|
|
|
|
|
Analysis of Communities with Impairment Charges
|
|
|
|
|
|
|
|
|
Recorded at September 30, 2011
|
|
|
|
|
Communities Evaluated
|
|
|
|
Inventory
|
|
|
|
|
Total
|
|
for Impairment
|
|
|
|
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
|
|
|
214
|
|
|
|
13
|
|
|
$
|
65.1
|
|
|
|
3
|
|
|
$
|
6.7
|
|
|
$
|
5.3
|
|
Midwest
|
|
|
62
|
|
|
|
7
|
|
|
|
70.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast
|
|
|
344
|
|
|
|
18
|
|
|
|
59.7
|
|
|
|
4
|
|
|
|
17.1
|
|
|
|
11.1
|
|
South Central
|
|
|
309
|
|
|
|
9
|
|
|
|
30.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southwest
|
|
|
71
|
|
|
|
13
|
|
|
|
48.3
|
|
|
|
4
|
|
|
|
8.5
|
|
|
|
6.3
|
|
West
|
|
|
181
|
|
|
|
19
|
|
|
|
117.2
|
|
|
|
2
|
|
|
|
4.8
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,181
|
|
|
|
79
|
|
|
$
|
391.5
|
|
|
|
13
|
|
|
$
|
37.1
|
|
|
$
|
26.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Values of Communities Evaluated for Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010
|
|
|
|
|
|
|
|
|
Analysis of Communities with Impairment Charges
|
|
|
|
|
|
|
|
|
Recorded at September 30, 2010
|
|
|
|
|
Communities Evaluated
|
|
|
|
Inventory
|
|
|
|
|
Total
|
|
for Impairment
|
|
|
|
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
|
|
|
181
|
|
|
|
7
|
|
|
$
|
69.9
|
|
|
|
1
|
|
|
$
|
4.4
|
|
|
$
|
2.8
|
|
Midwest
|
|
|
60
|
|
|
|
13
|
|
|
|
94.1
|
|
|
|
3
|
|
|
|
11.3
|
|
|
|
6.4
|
|
Southeast
|
|
|
308
|
|
|
|
12
|
|
|
|
42.7
|
|
|
|
2
|
|
|
|
11.8
|
|
|
|
2.8
|
|
South Central
|
|
|
324
|
|
|
|
19
|
|
|
|
64.1
|
|
|
|
6
|
|
|
|
31.0
|
|
|
|
18.0
|
|
Southwest
|
|
|
89
|
|
|
|
8
|
|
|
|
36.5
|
|
|
|
1
|
|
|
|
1.2
|
|
|
|
0.9
|
|
West
|
|
|
181
|
|
|
|
13
|
|
|
|
102.5
|
|
|
|
1
|
|
|
|
3.4
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,143
|
|
|
|
72
|
|
|
$
|
409.8
|
|
|
|
14
|
|
|
$
|
63.1
|
|
|
$
|
34.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 have no homes under construction, finished homes, or
current home sales efforts or activity.
|
31
Selling,
General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities decreased 8% to
$480.0 million in 2011 from $523.2 million in 2010. As
a percentage of homebuilding revenues, SG&A expense
increased 140 basis points, to 13.5% in 2011 from 12.1% in
2010. The largest component of our homebuilding SG&A
expense is employee compensation and related costs, which
represented 60% and 58% of SG&A costs in 2011 and 2010,
respectively. These costs decreased by 6%, to
$286.5 million in 2011 from $304.0 million in 2010,
primarily due to a decline in the level of incentive
compensation and to a lesser extent, to a decline in the number
of employees. Our homebuilding operations employed approximately
2,380 and 2,500 employees at September 30, 2011 and
2010, respectively. A reduction in advertising costs also
contributed to the decline in SG&A expenses.
We continually attempt 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 has become more difficult to reduce SG&A
expense as the size of our operations has decreased. If revenues
decrease and we are unable to sufficiently adjust our SG&A,
future SG&A expense as a percentage of revenues will
increase.
Interest
Incurred
Homebuilding interest costs are incurred on our homebuilding
debt outstanding during the period. Comparing fiscal 2011 with
fiscal 2010, interest incurred related to homebuilding debt
decreased 25% to $130.2 million, primarily due to a 26%
decrease in our average homebuilding debt.
We capitalize homebuilding interest to inventory during active
development and construction. Due to the decrease in the size of
our operations, our inventory under active development and
construction has been lower than our debt level; therefore, a
portion of our interest incurred is expensed. We expensed
$50.5 million of homebuilding interest during fiscal 2011,
compared to $86.3 million of interest during fiscal 2010.
The reduction in interest expensed in the current year is a
result of a decline in interest incurred during the year.
Interest amortized to cost of sales, excluding interest written
off with inventory impairment charges, declined to 3.0% of total
home and land/lot cost of sales in fiscal 2011 from 3.4% in 2010
as a result of more home closings on acquired finished lots and
decreases in construction times.
Loss
on Early Retirement of Debt
During fiscal 2011, in addition to repaying maturing senior
notes, we retired $319.2 million principal amount of our
senior notes prior to their maturity, compared to
$822.2 million in fiscal 2010. As a result of the early
retirement of these notes, we recognized net losses of
$10.8 million and $4.9 million in fiscal 2011 and
2010, respectively, which represent the difference between the
principal amount of the notes and the aggregate purchase price
plus any unamortized discounts and fees. The net loss in fiscal
2011 includes a loss of $6.3 million for the call premium
and write-off of unamortized fees related to the early
redemption of the 5.375% senior notes due 2012. The net
loss in fiscal 2010 includes a loss of $2.0 million for the
call premium and write-off of unamortized fees related to the
early redemption of the 5.875% senior notes due 2013.
Other
Income
Other income, net of other expenses, associated with
homebuilding activities was $8.0 million in 2011, compared
to $10.4 million in 2010. The largest component of other
income in both years was interest income.
Goodwill
In performing our annual goodwill impairment analysis as of
September 30, 2011 and 2010, we determined that our
goodwill balance of $15.9 million, all of which relates to
our South Central reporting segment, was not impaired.
32
Homebuilding
Results by Reporting Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
|
|
|
|
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
|
|
$
|
438.5
|
|
|
$
|
(13.5
|
)
|
|
|
(3.1
|
)
|
%
|
|
$
|
492.3
|
|
|
$
|
(6.3
|
)
|
|
|
(1.3
|
)
|
%
|
Midwest
|
|
|
261.5
|
|
|
|
(13.7
|
)
|
|
|
(5.2
|
)
|
%
|
|
|
331.0
|
|
|
|
(31.3
|
)
|
|
|
(9.5
|
)
|
%
|
Southeast
|
|
|
696.8
|
|
|
|
(19.9
|
)
|
|
|
(2.9
|
)
|
%
|
|
|
747.6
|
|
|
|
(7.5
|
)
|
|
|
(1.0
|
)
|
%
|
South Central
|
|
|
1,081.0
|
|
|
|
52.4
|
|
|
|
4.8
|
|
%
|
|
|
1,383.5
|
|
|
|
83.4
|
|
|
|
6.0
|
|
%
|
Southwest
|
|
|
234.8
|
|
|
|
(3.8
|
)
|
|
|
(1.6
|
)
|
%
|
|
|
329.7
|
|
|
|
12.0
|
|
|
|
3.6
|
|
%
|
West
|
|
|
837.0
|
|
|
|
(8.5
|
)
|
|
|
(1.0
|
)
|
%
|
|
|
1,025.6
|
|
|
|
27.8
|
|
|
|
2.7
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,549.6
|
|
|
$
|
(7.0
|
)
|
|
|
(0.2
|
)
|
%
|
|
$
|
4,309.7
|
|
|
$
|
78.1
|
|
|
|
1.8
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Expenses maintained at the
corporate level consist primarily of interest and property
taxes, which are capitalized and amortized to cost of sales or
expensed directly, and the expenses related to operating our
corporate office. The amortization of capitalized interest and
property taxes is allocated to each segment based on the
segments revenue, while interest expense and those
expenses associated with the corporate office are allocated to
each segment based on the segments inventory balances.
|
East Region Homebuilding revenues decreased
11% in 2011 compared to 2010, primarily due to decreases in the
number of homes closed in the majority of the regions
markets. The largest decrease in closings volume occurred in our
New Jersey and Charlotte markets. The region reported a loss
before income taxes of $13.5 million in 2011, compared to a
loss of $6.3 million in 2010, primarily as a result of
declines in revenue and gross profit. Inventory impairment
charges and earnest money and pre-acquisition cost write-offs
were $4.6 million and $8.6 million in fiscal 2011 and
2010, respectively. Gross profit from home sales as a percentage
of home sales revenue (home sales gross profit percentage)
decreased 200 basis points in fiscal 2011 compared to
fiscal 2010 due to the increased use of incentives to sell homes
and weakening market conditions during the current year.
Although total SG&A expenses in fiscal 2011 decreased from
the prior year, they increased as a percentage of homebuilding
revenues by 120 basis points in 2011.
Midwest Region Homebuilding revenues
decreased 21% in 2011 compared to 2010, primarily due to
decreases in the number of homes closed in all of the
regions markets. The region reported a loss before income
taxes of $13.7 million in 2011, compared to a loss of
$31.3 million in 2010. The improvement in the current year
was primarily a result of fewer inventory impairment charges and
earnest money and pre-acquisition cost write-offs, which were
$0.9 million in fiscal 2011, compared to $22.0 million
in fiscal 2010. However, weak conditions persisted in the
Chicago market which again contributed substantially to the
regions loss. Home sales gross profit percentage decreased
190 basis points in fiscal 2011 compared to fiscal 2010 due
to weakening market conditions compared to the prior year.
Although total SG&A expenses in fiscal 2011 decreased from
the prior year, they increased as a percentage of homebuilding
revenues by 110 basis points in 2011.
Southeast Region Homebuilding revenues
decreased 7% in 2011 compared to 2010, due to a decrease in the
number of homes closed, partially offset by an increase in the
average selling price of those homes. The region reported a loss
before income taxes of $19.9 million in fiscal 2011
compared to a loss of $7.5 million in fiscal 2010,
primarily as a result of declines in revenue and gross profit.
These results generally reflected softening across most markets
from the expiration of the federal homebuyer tax credit, as well
as more challenging conditions in the Orlando market. Inventory
impairment charges and earnest money and pre-acquisition cost
write-offs were $17.4 million and $17.5 million in
fiscal 2011 and 2010, respectively. Home sales gross profit
percentage decreased 110 basis points in fiscal 2011
compared to fiscal 2010 due to increased warranty costs in our
Orlando and Pensacola markets. As a percentage of homebuilding
revenues, total SG&A expenses increased 110 basis
points in fiscal 2011.
33
South Central Region Homebuilding revenues
decreased 22% in 2011 compared to 2010, primarily due to
decreases in the number of homes closed in all of the
regions markets, partially offset by an increase in the
average selling prices of those homes. While we continued to be
profitable in all markets in the region, overall the region
reported a decline in income before income taxes to
$52.4 million in fiscal 2011, from $83.4 million in
fiscal 2010. The reduced income was the result of closing fewer
homes with the expiration of the federal homebuyer tax credit,
leading to declines in revenue and gross profit. Inventory
impairment charges and earnest money and pre-acquisition cost
write-offs were $0.7 million and $14.0 million in
fiscal 2011 and 2010, respectively. Home sales gross profit
percentage decreased 100 basis points in fiscal 2011
compared to fiscal 2010 due to lower margins in the majority of
the regions markets, caused by an increase in construction
and lot costs as a percentage of revenues. Although total
SG&A expenses in fiscal 2011 decreased from the prior year,
they increased as a percentage of homebuilding revenues by
150 basis points in 2011. Our central Texas, Dallas and
Houston markets continue to be the most profitable in the region.
Southwest Region Homebuilding revenues
decreased 29% in 2011 compared to 2010, due to decreases in the
number of homes closed in all of the regions markets,
partially offset by an increase in the average selling price of
those homes. The region reported a loss before income taxes of
$3.8 million fiscal 2011, compared to income before income
taxes of $12.0 million in fiscal 2010, primarily as a
result of declines in revenue and gross profit in all of its
markets, with Phoenix experiencing the worst conditions. Home
sales gross profit percentage decreased 200 basis points in
fiscal 2011 compared to fiscal 2010, primarily as a result of
the increased use of incentives to sell homes and weakening
market conditions in all of the regions markets. Also
contributing to the decrease in gross profit percentage in the
current year, inventory impairment charges and earnest money and
pre-acquisition cost write-offs increased to $4.7 million,
from $0.6 million in the prior year. Although total
SG&A expenses in fiscal 2011 decreased from the prior year,
they increased as a percentage of homebuilding revenues by
170 basis points in 2011.
West Region Homebuilding revenues decreased
18% in 2011 compared to 2010, due to decreases in the number of
homes closed in all of the regions markets, partially
offset by an increase in the average selling price of those
homes. The Seattle market continued to generate the highest
profits, while the inland, central California markets again did
not achieve profitability. The region reported a loss before
income taxes of $8.5 million in fiscal 2011, compared to
income before income taxes of $27.8 million in fiscal 2010,
primarily as a result of a decline in revenue and increased
impairment charges. Inventory impairment charges and earnest
money and pre-acquisition cost write-offs were
$17.1 million in fiscal 2011, compared to $2.0 million
in fiscal 2010. Home sales gross profit percentage decreased
40 basis points in fiscal 2011 compared to fiscal 2010.
Although total SG&A expenses in fiscal 2011 decreased from
the prior year, they increased as a percentage of homebuilding
revenues by 150 basis points in 2011.
34
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, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
Lots
|
|
|
|
|
|
|
|
|
|
|
|
Lots
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlled
|
|
|
|
|
|
|
|
|
|
|
|
Controlled
|
|
|
|
|
|
|
|
|
|
|
|
|
Under Lot
|
|
|
Total
|
|
|
|
|
|
|
|
|
Under Lot
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Option and
|
|
|
Land/Lots
|
|
|
Homes
|
|
|
|
|
|
Option and
|
|
|
Land/Lots
|
|
|
Homes
|
|
|
|
Land/Lots
|
|
|
Similar
|
|
|
Owned and
|
|
|
in
|
|
|
Land/Lots
|
|
|
Similar
|
|
|
Owned and
|
|
|
in
|
|
|
|
Owned
|
|
|
Contracts (1)
|
|
|
Controlled
|
|
|
Inventory
|
|
|
Owned
|
|
|
Contracts (1)
|
|
|
Controlled
|
|
|
Inventory
|
|
|
East
|
|
|
9,900
|
|
|
|
4,700
|
|
|
|
14,600
|
|
|
|
1,300
|
|
|
|
10,600
|
|
|
|
4,900
|
|
|
|
15,500
|
|
|
|
1,300
|
|
Midwest
|
|
|
5,300
|
|
|
|
500
|
|
|
|
5,800
|
|
|
|
600
|
|
|
|
6,000
|
|
|
|
600
|
|
|
|
6,600
|
|
|
|
700
|
|
Southeast
|
|
|
22,500
|
|
|
|
9,200
|
|
|
|
31,700
|
|
|
|
2,600
|
|
|
|
24,000
|
|
|
|
11,300
|
|
|
|
35,300
|
|
|
|
1,900
|
|
South Central
|
|
|
21,700
|
|
|
|
9,700
|
|
|
|
31,400
|
|
|
|
3,500
|
|
|
|
21,300
|
|
|
|
9,300
|
|
|
|
30,600
|
|
|
|
3,100
|
|
Southwest
|
|
|
5,300
|
|
|
|
1,100
|
|
|
|
6,400
|
|
|
|
900
|
|
|
|
5,700
|
|
|
|
1,300
|
|
|
|
7,000
|
|
|
|
900
|
|
West
|
|
|
21,100
|
|
|
|
1,700
|
|
|
|
22,800
|
|
|
|
1,600
|
|
|
|
22,100
|
|
|
|
2,300
|
|
|
|
24,400
|
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,800
|
|
|
|
26,900
|
|
|
|
112,700
|
|
|
|
10,500
|
|
|
|
89,700
|
|
|
|
29,700
|
|
|
|
119,400
|
|
|
|
9,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76%
|
|
|
|
24%
|
|
|
|
100%
|
|
|
|
|
|
|
|
75%
|
|
|
|
25%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes approximately 8,000 and
7,300 lots at September 30, 2011 and 2010, respectively,
representing lots controlled under lot option contracts for
which we do not expect to exercise our option to purchase the
land or lots, but the underlying contract has yet to be
terminated. We have reserved the deposits related to these
contracts.
|
At September 30, 2011, we owned or controlled approximately
112,700 lots, compared to approximately 119,400 lots at
September 30, 2010. Of the 112,700 total lots, we
controlled approximately 26,900 lots (24%), with a total
remaining purchase price of approximately $918.7 million,
through land and lot option purchase contracts with a total of
$14.6 million in earnest money deposits. At
September 30, 2011, approximately 22,500 of our owned lots
were finished.
We had a total of approximately 10,500 homes in inventory,
including approximately 1,100 model homes at September 30,
2011, compared to approximately 9,500 homes in inventory,
including approximately 1,200 model homes at September 30,
2010. Of our total homes in inventory, approximately 5,600 and
5,200 were unsold at September 30, 2011 and 2010,
respectively. At September 30, 2011, approximately 2,800 of
our unsold homes were completed, of which approximately 600
homes had been completed for more than six months. At
September 30, 2010, approximately 3,200 of our unsold homes
were completed, of which approximately 800 homes had been
completed for more than six months.
Our current strategy is to take advantage of market
opportunities by entering into new lot option contracts to
purchase finished lots in selected communities to potentially
increase sales volumes and profitability. We will attempt to
renegotiate existing lot option contracts as necessary to reduce
our lot costs and better match the scheduled lot purchases with
new home demand in each community. We also manage our inventory
of homes under construction by selectively starting construction
on unsold homes to capture new home demand, while monitoring the
number and aging of unsold homes and aggressively marketing our
unsold, completed homes in inventory.
35
Fiscal
Year Ended September 30, 2010 Compared to Fiscal Year Ended
September 30, 2009
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, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Orders (1)
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
Net Homes Sold
|
|
|
|
Value (In millions)
|
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
East
|
|
|
2,027
|
|
|
|
1,519
|
|
|
|
33
|
|
%
|
|
$
|
469.0
|
|
|
$
|
353.7
|
|
|
|
33
|
|
%
|
|
$
|
231,400
|
|
|
$
|
232,900
|
|
|
|
(1
|
)
|
%
|
Midwest
|
|
|
1,045
|
|
|
|
1,198
|
|
|
|
(13
|
)
|
%
|
|
|
296.0
|
|
|
|
323.5
|
|
|
|
(9
|
)
|
%
|
|
|
283,300
|
|
|
|
270,000
|
|
|
|
5
|
|
%
|
Southeast
|
|
|
3,892
|
|
|
|
3,107
|
|
|
|
25
|
|
%
|
|
|
728.7
|
|
|
|
560.8
|
|
|
|
30
|
|
%
|
|
|
187,200
|
|
|
|
180,500
|
|
|
|
4
|
|
%
|
South Central
|
|
|
7,375
|
|
|
|
6,172
|
|
|
|
19
|
|
%
|
|
|
1,273.4
|
|
|
|
1,060.6
|
|
|
|
20
|
|
%
|
|
|
172,700
|
|
|
|
171,800
|
|
|
|
1
|
|
%
|
Southwest
|
|
|
1,785
|
|
|
|
1,751
|
|
|
|
2
|
|
%
|
|
|
315.3
|
|
|
|
300.2
|
|
|
|
5
|
|
%
|
|
|
176,600
|
|
|
|
171,400
|
|
|
|
3
|
|
%
|
West
|
|
|
3,251
|
|
|
|
3,287
|
|
|
|
(1
|
)
|
%
|
|
|
928.6
|
|
|
|
899.6
|
|
|
|
3
|
|
%
|
|
|
285,600
|
|
|
|
273,700
|
|
|
|
4
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,375
|
|
|
|
17,034
|
|
|
|
14
|
|
%
|
|
$
|
4,011.0
|
|
|
$
|
3,498.4
|
|
|
|
15
|
|
%
|
|
$
|
207,000
|
|
|
$
|
205,400
|
|
|
|
1
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Order Cancellations
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
Cancelled Sales Orders
|
|
|
Value (In millions)
|
|
|
Cancellation Rate (2)
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
East
|
|
|
581
|
|
|
|
478
|
|
|
$
|
127.2
|
|
|
$
|
113.0
|
|
|
|
22
|
%
|
|
|
24
|
%
|
Midwest
|
|
|
250
|
|
|
|
240
|
|
|
|
68.7
|
|
|
|
64.8
|
|
|
|
19
|
%
|
|
|
17
|
%
|
Southeast
|
|
|
1,409
|
|
|
|
1,321
|
|
|
|
250.0
|
|
|
|
244.5
|
|
|
|
27
|
%
|
|
|
30
|
%
|
South Central
|
|
|
3,076
|
|
|
|
3,029
|
|
|
|
514.1
|
|
|
|
509.0
|
|
|
|
29
|
%
|
|
|
33
|
%
|
Southwest
|
|
|
677
|
|
|
|
913
|
|
|
|
115.1
|
|
|
|
167.2
|
|
|
|
27
|
%
|
|
|
34
|
%
|
West
|
|
|
789
|
|
|
|
1,207
|
|
|
|
227.3
|
|
|
|
357.3
|
|
|
|
20
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,782
|
|
|
|
7,188
|
|
|
$
|
1,302.4
|
|
|
$
|
1,455.8
|
|
|
|
26
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Net sales orders represent the
number and dollar value of new sales contracts executed with
customers (gross sales orders), net of cancelled sales orders.
|
|
(2)
|
|
Cancellation rate represents the
number of cancelled sales orders divided by gross sales orders.
|
Net
Sales Orders
The value of net sales orders increased 15%, to
$4,011.0 million (19,375 homes) in 2010 from
$3,498.4 million (17,034 homes) in 2009. The number of net
sales orders increased 14% in fiscal 2010 compared to fiscal
2009. These results were impacted by increased levels of
affordability resulting from lower home sales prices, declines
in the number of new homes available for sale, a low mortgage
interest rate environment, and the federal governments
monetary and fiscal policies and programs, including the federal
homebuyer tax credit, which accelerated sales demand during the
first half of the year. Although these results reflected
improvement over the prior year, the significant decline in
demand subsequent to the expiration of the federal tax credit
indicated that market conditions remained weak.
In comparing fiscal 2010 to fiscal 2009, the value of net sales
orders increased in most of our market regions, with the largest
percentage increases occurring in our East, Southeast and South
Central regions resulting from new communities in the Carolinas,
Florida and Texas, as well as lower cancellation rates achieved
in these regions. Conversely, our Midwest region experienced a
13% decline in net sales orders, due to weak demand in our
Chicago market. Fluctuations in the value of net sales orders
were primarily due to the change in the number of homes sold in
each respective region, and to a much lesser extent, small
fluctuations
36
in the average selling price of those homes. The average price
of our net sales orders in 2010 was $207,000, an increase of 1%
from the $205,400 average in 2009.
Our annual sales order cancellation rate was 26% in fiscal 2010,
compared to 30% in fiscal 2009. While an improvement from the
prior year, this elevated cancellation rate was still above
historical levels, reflecting the challenges in most of our
homebuilding markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Order Backlog
|
|
|
|
|
As of September 30,
|
|
|
|
|
Homes in Backlog
|
|
|
|
Value (In millions)
|
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
East
|
|
|
472
|
|
|
|
559
|
|
|
|
(16
|
)
|
%
|
|
$
|
103.4
|
|
|
$
|
126.6
|
|
|
|
(18
|
)
|
%
|
|
$
|
219,100
|
|
|
$
|
226,500
|
|
|
|
(3
|
)
|
%
|
Midwest
|
|
|
247
|
|
|
|
389
|
|
|
|
(37
|
)
|
%
|
|
|
70.1
|
|
|
|
105.0
|
|
|
|
(33
|
)
|
%
|
|
|
283,800
|
|
|
|
269,900
|
|
|
|
5
|
|
%
|
Southeast
|
|
|
812
|
|
|
|
969
|
|
|
|
(16
|
)
|
%
|
|
|
162.5
|
|
|
|
179.0
|
|
|
|
(9
|
)
|
%
|
|
|
200,100
|
|
|
|
184,700
|
|
|
|
8
|
|
%
|
South Central
|
|
|
1,691
|
|
|
|
2,362
|
|
|
|
(28
|
)
|
%
|
|
|
297.3
|
|
|
|
402.6
|
|
|
|
(26
|
)
|
%
|
|
|
175,800
|
|
|
|
170,400
|
|
|
|
3
|
|
%
|
Southwest
|
|
|
405
|
|
|
|
492
|
|
|
|
(18
|
)
|
%
|
|
|
71.9
|
|
|
|
86.3
|
|
|
|
(17
|
)
|
%
|
|
|
177,500
|
|
|
|
175,400
|
|
|
|
1
|
|
%
|
West
|
|
|
501
|
|
|
|
857
|
|
|
|
(42
|
)
|
%
|
|
|
145.6
|
|
|
|
242.5
|
|
|
|
(40
|
)
|
%
|
|
|
290,600
|
|
|
|
283,000
|
|
|
|
3
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,128
|
|
|
|
5,628
|
|
|
|
(27
|
)
|
%
|
|
$
|
850.8
|
|
|
$
|
1,142.0
|
|
|
|
(25
|
)
|
%
|
|
$
|
206,100
|
|
|
$
|
202,900
|
|
|
|
2
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Order Backlog
Our homes in backlog at September 30, 2010 declined 27%
from the prior year as a result of closing homes at a greater
rate than our sales pace during the latter half of the year and
the effects of the federal homebuyer tax credit that was in
effect at September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes Closed and Home Sales
Revenue
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
Homes Closed
|
|
|
|
Value (In millions)
|
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
East
|
|
|
2,114
|
|
|
|
1,447
|
|
|
|
46
|
|
%
|
|
$
|
492.2
|
|
|
$
|
345.3
|
|
|
|
43
|
|
%
|
|
$
|
232,800
|
|
|
$
|
238,600
|
|
|
|
(2
|
)
|
%
|
Midwest
|
|
|
1,187
|
|
|
|
1,137
|
|
|
|
4
|
|
%
|
|
|
330.9
|
|
|
|
310.0
|
|
|
|
7
|
|
%
|
|
|
278,800
|
|
|
|
272,600
|
|
|
|
2
|
|
%
|
Southeast
|
|
|
4,049
|
|
|
|
2,921
|
|
|
|
39
|
|
%
|
|
|
745.2
|
|
|
|
547.5
|
|
|
|
36
|
|
%
|
|
|
184,000
|
|
|
|
187,400
|
|
|
|
(2
|
)
|
%
|
South Central
|
|
|
8,046
|
|
|
|
5,835
|
|
|
|
38
|
|
%
|
|
|
1,378.8
|
|
|
|
1,022.1
|
|
|
|
35
|
|
%
|
|
|
171,400
|
|
|
|
175,200
|
|
|
|
(2
|
)
|
%
|
Southwest
|
|
|
1,872
|
|
|
|
2,045
|
|
|
|
(8
|
)
|
%
|
|
|
329.7
|
|
|
|
379.8
|
|
|
|
(13
|
)
|
%
|
|
|
176,100
|
|
|
|
185,700
|
|
|
|
(5
|
)
|
%
|
West
|
|
|
3,607
|
|
|
|
3,318
|
|
|
|
9
|
|
%
|
|
|
1,025.5
|
|
|
|
958.9
|
|
|
|
7
|
|
%
|
|
|
284,300
|
|
|
|
289,000
|
|
|
|
(2
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,875
|
|
|
|
16,703
|
|
|
|
25
|
|
%
|
|
$
|
4,302.3
|
|
|
$
|
3,563.6
|
|
|
|
21
|
|
%
|
|
$
|
206,100
|
|
|
$
|
213,400
|
|
|
|
(3
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
Sales Revenue
Revenues from home sales increased 21%, to $4,302.3 million
(20,875 homes closed) in 2010 from $3,563.6 million (16,703
homes closed) in 2009. The average selling price of homes closed
during 2010 was $206,100, down 3% from the $213,400 average in
2009. During fiscal 2010, home sales revenues increased in most
of our market regions, with significant increases in our East,
Southeast and South Central markets. These increases resulted
from increases in the number of homes closed.
The number of homes closed in 2010 increased 25% due to
increases in five of our six market regions. The increase in
home closings reflects the impact of the first-time
homebuyers federal tax credit, which initially required
buyers to close on their home purchase transaction by
June 30, 2010. We believe this helped stimulate demand for
homes that could close during the first nine months of fiscal
2010. We also believe that our operating strategy of selectively
starting construction on unsold homes, which made additional
housing inventory available to close by June 30, 2010, led
to increased home closings volume by better capturing this
37
demand. The Southwest region had an 8% decrease in homes closed
due to both weak demand in the Phoenix market and our prior year
efforts to reduce completed home inventories in that market.
|
|
|
|
|
|
|
|
|
|
|
Homebuilding Operating Margin
Analysis
|
|
|
|
|
Percentages of
|
|
|
|
|
Related Revenues
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
Gross profit Home sales
|
|
|
17.3
|
|
%
|
|
|
13.1
|
|
%
|
Gross profit Land/lot sales
|
|
|
37.8
|
|
%
|
|
|
13.4
|
|
%
|
Effect of inventory impairments and land option cost write-offs
on total homebuilding gross profit
|
|
|
(1.5
|
)
|
%
|
|
|
(11.3
|
)
|
%
|
Gross profit Total homebuilding
|
|
|
15.8
|
|
%
|
|
|
1.8
|
|
%
|
Selling, general and administrative expense
|
|
|
12.1
|
|
%
|
|
|
14.5
|
|
%
|
Interest expense
|
|
|
2.0
|
|
%
|
|
|
2.8
|
|
%
|
Loss (gain) on early retirement of debt, net
|
|
|
0.1
|
|
%
|
|
|
(0.1
|
)
|
%
|
Other (income)
|
|
|
(0.2
|
)
|
%
|
|
|
(0.4
|
)
|
%
|
Income (loss) before income taxes
|
|
|
1.8
|
|
%
|
|
|
(15.0
|
)
|
%
|
Home
Sales Gross Profit
Gross profit from home sales increased by 59%, to
$744.0 million in 2010, from $467.5 million in 2009,
and, as a percentage of home sales revenues, increased
420 basis points, to 17.3%. Approximately 350 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 largely by a reduction
in our construction costs on homes closed during fiscal 2010.
The reduction in construction costs primarily resulted from
changes in product design, as well as cost reductions obtained
from our suppliers and
sub-contractors
in prior periods. In addition, the increase in home sales gross
profit was partially due to our efforts beginning in fiscal 2009
to acquire lot positions in new communities and construct and
close houses from these new projects. Homes closed on these
acquired finished lots yielded higher gross profits than those
on land and lots acquired in prior years. Approximately
70 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 over the year, as well
as more closings occurring on acquired finished lots, rather
than internally developed lots.
Land
Sales Revenue
Land sales revenues decreased 82% to $7.4 million in 2010,
from $40.3 million in 2009. Of the $40.3 million of
revenues in fiscal 2009, $26.9 million related to land sale
transactions in the fourth quarter of fiscal 2008 for which
recognition of the revenue had been deferred due to the terms of
the sale.
Inventory
Impairments and Land Option Cost Write-offs
During fiscal 2010, when we performed our quarterly inventory
impairment analyses by reviewing the performance and outlook for
all of our communities, the assumptions utilized reflected our
expectation of continued challenging conditions and
uncertainties in the homebuilding industry and in our markets.
As of September 30, 2010, we evaluated communities with a
combined carrying value of $409.8 million for impairment.
In performing this analysis, we utilized a range of discount
rates for communities of 14% to 20%. Through this evaluation
process, we determined that communities with a carrying value of
$63.1 million as of September 30, 2010, were impaired.
As a result, during the fourth quarter of fiscal 2010, we
recorded impairment charges of $29.1 million to reduce the
carrying value of the impaired communities to their estimated
fair value, as compared to $174.9 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
38
charges of $62.3 million and $377.8 million during
fiscal 2010 and 2009, respectively. During fiscal 2010,
approximately 93% of the impairment charges were recorded to
residential land and lots and land held for development, and
approximately 7% of the charges were recorded to construction in
progress and finished homes inventory, compared to 85% and 15%,
respectively, in fiscal 2009.
During fiscal 2010 and 2009, we wrote off $2.4 million and
$29.9 million, respectively, of earnest money deposits and
pre-acquisition costs related to land option contracts. 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 150 basis points in fiscal 2010, compared to
1,130 basis points in fiscal 2009.
Inventory
Impairments and Land Option Cost Write-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Land Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
|
|
Land Option
|
|
|
|
|
|
|
Inventory
|
|
|
Write-Offs
|
|
|
|
|
|
Inventory
|
|
|
Cost
|
|
|
|
|
|
|
Impairments
|
|
|
(Recoveries)
|
|
|
Total
|
|
|
Impairments
|
|
|
Write-Offs
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
East
|
|
$
|
9.0
|
|
|
$
|
(0.4
|
)
|
|
$
|
8.6
|
|
|
$
|
54.3
|
|
|
$
|
10.6
|
|
|
$
|
64.9
|
|
Midwest
|
|
|
21.9
|
|
|
|
0.1
|
|
|
|
22.0
|
|
|
|
46.3
|
|
|
|
8.4
|
|
|
|
54.7
|
|
Southeast
|
|
|
17.0
|
|
|
|
0.5
|
|
|
|
17.5
|
|
|
|
36.7
|
|
|
|
1.3
|
|
|
|
38.0
|
|
South Central
|
|
|
13.3
|
|
|
|
0.7
|
|
|
|
14.0
|
|
|
|
17.0
|
|
|
|
3.0
|
|
|
|
20.0
|
|
Southwest
|
|
|
0.6
|
|
|
|
|
|
|
|
0.6
|
|
|
|
36.5
|
|
|
|
2.9
|
|
|
|
39.4
|
|
West
|
|
|
0.5
|
|
|
|
1.5
|
|
|
|
2.0
|
|
|
|
187.0
|
|
|
|
3.7
|
|
|
|
190.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62.3
|
|
|
$
|
2.4
|
|
|
$
|
64.7
|
|
|
$
|
377.8
|
|
|
$
|
29.9
|
|
|
$
|
407.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Values of Communities Evaluated for Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of Communities with Impairment Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded at September 30, 2010
|
|
|
|
|
|
|
Communities Evaluated
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
Total
|
|
|
for Impairment
|
|
|
|
|
|
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
|
|
|
181
|
|
|
|
7
|
|
|
$
|
69.9
|
|
|
|
1
|
|
|
$
|
4.4
|
|
|
$
|
2.8
|
|
Midwest
|
|
|
60
|
|
|
|
13
|
|
|
|
94.1
|
|
|
|
3
|
|
|
|
11.3
|
|
|
|
6.4
|
|
Southeast
|
|
|
308
|
|
|
|
12
|
|
|
|
42.7
|
|
|
|
2
|
|
|
|
11.8
|
|
|
|
2.8
|
|
South Central
|
|
|
324
|
|
|
|
19
|
|
|
|
64.1
|
|
|
|
6
|
|
|
|
31.0
|
|
|
|
18.0
|
|
Southwest
|
|
|
89
|
|
|
|
8
|
|
|
|
36.5
|
|
|
|
1
|
|
|
|
1.2
|
|
|
|
0.9
|
|
West
|
|
|
181
|
|
|
|
13
|
|
|
|
102.5
|
|
|
|
1
|
|
|
|
3.4
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,143
|
|
|
|
72
|
|
|
$
|
409.8
|
|
|
|
14
|
|
|
$
|
63.1
|
|
|
$
|
34.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Carrying
Values of Communities Evaluated for Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of Communities with Impairment Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded at September 30, 2009
|
|
|
|
|
|
|
Communities Evaluated
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
Total
|
|
|
for Impairment
|
|
|
|
|
|
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
|
|
|
288
|
|
|
|
34
|
|
|
|
110.8
|
|
|
|
4
|
|
|
|
17.7
|
|
|
|
14.2
|
|
Southwest
|
|
|
75
|
|
|
|
18
|
|
|
|
99.7
|
|
|
|
8
|
|
|
|
53.0
|
|
|
|
36.2
|
|
West
|
|
|
152
|
|
|
|
46
|
|
|
|
354.3
|
|
|
|
20
|
|
|
|
176.8
|
|
|
|
87.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
899
|
|
|
|
161
|
|
|
$
|
963.1
|
|
|
|
58
|
|
|
$
|
421.3
|
|
|
$
|
246.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 have no homes under construction, finished homes, or
current home sales efforts or activity.
|
Selling,
General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities increased
slightly to $523.2 million in 2010 from $523.0 million
in 2009. As a percentage of homebuilding revenues, SG&A
expense decreased 240 basis points, to 12.1% in 2010 from
14.5% in 2009. The largest component of our homebuilding
SG&A expense is employee compensation and related costs,
which represented 58% and 55% of SG&A costs in 2010 and
2009, respectively. These costs increased by 6%, to
$304.0 million in 2010 from $287.2 million in 2009.
Our homebuilding operations employed approximately 2,500 and
2,300 employees at September 30, 2010 and 2009,
respectively.
Interest
Incurred
Comparing fiscal 2010 with fiscal 2009, interest incurred
related to homebuilding debt decreased 16% to
$173.2 million, primarily due to a 19% decrease in our
average homebuilding debt. We expensed $86.3 million of
homebuilding interest during fiscal 2010, compared to
$100.2 million of interest during fiscal 2009. Interest
amortized to cost of sales, excluding interest written off with
inventory impairment charges, was 3.4% of total home and
land/lot cost of sales in 2010, compared to 3.9% in 2009.
Loss/Gain
on Early Retirement of Debt
We retired $822.2 million principal amount of our senior
and senior subordinated notes prior to their maturity during
fiscal 2010, compared to $380.3 million in fiscal 2009.
Related to the early retirement of these notes, we recognized a
net loss of $4.9 million in fiscal 2010 and a net gain of
$11.5 million in fiscal 2009. The loss in fiscal 2010
includes a loss of $2.0 million for the call premium and
write-off of unamortized fees related to the early redemption of
our 5.875% senior notes due 2013. The gain in fiscal 2009
was partially offset by a $7.6 million loss related to the
early termination of our revolving credit facility in May 2009.
Other
Income
Other income, net of other expenses, associated with
homebuilding activities was $10.4 million in 2010, compared
to $12.8 million in 2009. The largest component of other
income in both years was interest income.
40
Goodwill
In performing our annual goodwill impairment analysis as of
September 30, 2010 and 2009, we determined that our
goodwill balance of $15.9 million, all of which relates to
our South Central reporting segment, was not impaired.
Homebuilding
Results by Reporting Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
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
|
|
$
|
492.3
|
|
|
$
|
(6.3
|
)
|
|
|
(1.3
|
)
|
%
|
|
$
|
347.1
|
|
|
$
|
(95.9
|
)
|
|
|
(27.6
|
)
|
%
|
Midwest
|
|
|
331.0
|
|
|
|
(31.3
|
)
|
|
|
(9.5
|
)
|
%
|
|
|
314.5
|
|
|
|
(104.9
|
)
|
|
|
(33.4
|
)
|
%
|
Southeast
|
|
|
747.6
|
|
|
|
(7.5
|
)
|
|
|
(1.0
|
)
|
%
|
|
|
570.8
|
|
|
|
(73.2
|
)
|
|
|
(12.8
|
)
|
%
|
South Central
|
|
|
1,383.5
|
|
|
|
83.4
|
|
|
|
6.0
|
|
%
|
|
|
1,024.6
|
|
|
|
4.9
|
|
|
|
0.5
|
|
%
|
Southwest
|
|
|
329.7
|
|
|
|
12.0
|
|
|
|
3.6
|
|
%
|
|
|
382.4
|
|
|
|
(45.8
|
)
|
|
|
(12.0
|
)
|
%
|
West
|
|
|
1,025.6
|
|
|
|
27.8
|
|
|
|
2.7
|
|
%
|
|
|
964.5
|
|
|
|
(226.4
|
)
|
|
|
(23.5
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,309.7
|
|
|
$
|
78.1
|
|
|
|
1.8
|
|
%
|
|
$
|
3,603.9
|
|
|
$
|
(541.3
|
)
|
|
|
(15.0
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Expenses maintained at the
corporate level consist primarily of interest and property
taxes, which are capitalized and amortized to cost of sales or
expensed directly, and the expenses related to operating our
corporate office. The amortization of capitalized interest and
property taxes is allocated to each segment based on the
segments revenue, while interest expense and those
expenses associated with the corporate office are allocated to
each segment based on the segments inventory balances.
|
East Region Homebuilding revenues increased
42% in 2010 compared to 2009, primarily due to an increase in
the number of homes closed, with the largest increases occurring
in our New Jersey and Carolina markets. The region reported a
loss before income taxes of $6.3 million in 2010, compared
to a loss of $95.9 million in 2009. The results were due in
part to inventory impairment charges and earnest money and
pre-acquisition cost write-offs totaling $8.6 million and
$64.9 million in fiscal 2010 and 2009, 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 2010 compared to
fiscal 2009. The increase was a result of a reduction in the
construction costs of our homes closed during fiscal 2010. Also,
a reduction in the regions SG&A expenses as a
percentage of homebuilding revenues contributed 420 basis
points to the regions improvement in loss before income
taxes as a percentage of homebuilding revenues, as the
regions additional closing volume helped leverage these
SG&A expenses.
Midwest Region Homebuilding revenues
increased 5% in 2010 compared to 2009, primarily due to
increases in the number of homes closed in all of the
regions markets. The region reported a loss before income
taxes of $31.3 million in 2010, compared to a loss of
$104.9 million in 2009. The results were due in part to
inventory impairment charges and earnest money and
pre-acquisition cost write-offs totaling $22.0 million and
$54.7 million in fiscal 2010 and 2009, respectively.
Substantially all of our fiscal 2010 impairments for this region
related to projects in our Chicago market. The regions
home sales gross profit percentage increased 920 basis
points in fiscal 2010 compared to fiscal 2009. The increase was
a result of higher margins primarily in our Chicago and Denver
markets. The Denver market also benefitted from lower warranty
costs on previously closed homes. In fiscal 2010, a reduction in
the regions SG&A expenses as a percentage of
homebuilding revenues contributed 280 basis points to the
regions improvement in loss before income taxes as a
percentage of homebuilding revenues.
Southeast Region Homebuilding revenues
increased 31% in 2010 compared to 2009, primarily due to an
increase in the number of homes closed, with the largest
increases occurring in our central Florida and Atlanta markets.
The region reported a loss before income taxes of
$7.5 million in fiscal 2010 compared to a
41
loss of $73.2 million in fiscal 2009. The results were due
in part to inventory impairment charges and earnest money and
pre-acquisition cost write-offs totaling $17.5 million and
$38.0 million in fiscal 2010 and 2009, respectively. The
regions home sales gross profit percentage increased
460 basis points in fiscal 2010 compared to fiscal 2009.
The increase was a result of higher margins on homes closed in
the majority of the regions markets, led by our south and
central Florida markets. The increase in homes sales gross
profit percentage was a result of construction costs declining
at a faster rate than the decline in average selling price on
homes closed during fiscal 2010. Also contributing to the
increase in home sales gross profit are our efforts since the
beginning of fiscal 2009 to acquire lot positions in new
communities and construct and close houses from these new
projects. Homes closed on these acquired finished lots were
generally yielding higher gross profits than those on land and
lots acquired in prior years. In fiscal 2010, a reduction in the
regions SG&A expenses as a percentage of homebuilding
revenues contributed 250 basis points to the regions
improvement in income before income taxes as a percentage of
homebuilding revenues as the regions additional closing
volume helped leverage these SG&A expenses.
South Central Region Homebuilding revenues
increased 35% in 2010 compared to 2009, primarily due to an
increase in the number of homes closed, with the largest
increases occurring in our Central Texas, Houston and
Dallas/Fort Worth markets. The region reported income
before income taxes of $83.4 million in fiscal 2010,
compared to income of $4.9 million in fiscal 2009. The
improvement was due in large part to the increase in revenue,
combined with the regions home sales gross profit
percentage increasing 290 basis points in fiscal 2010
compared to fiscal 2009 due to higher margins on homes closed in
the majority of the regions markets. These higher margins
were primarily attributable to reductions in construction costs
of our homes. Additionally, a decrease in inventory impairment
charges and earnest money and pre-acquisition cost write-offs,
which were $14.0 million in fiscal 2010 compared to
$20.0 million in fiscal 2009, contributed to the
regions increase in income before income taxes.
Southwest Region Homebuilding revenues
decreased 14% in 2010 compared to 2009, due to a decrease in the
number of homes closed and in the average selling price of those
homes. The decreases in revenues and homes closed were due to
continuing weakness in the Phoenix market. The region reported
income before income taxes of $12.0 million in 2010,
compared to a loss before income taxes of $45.8 million in
2009. The loss in 2009 was due in large part to inventory
impairment charges and earnest money and pre-acquisition cost
write-offs totaling $39.4 million. The regions home
sales gross profit percentage increased 330 basis points in
fiscal 2010 compared to fiscal 2009. The increase was a result
of the average cost of the regions homes declining by more
than the average selling prices, driven in large part by
reductions in home construction costs. In addition, the increase
in home sales gross profit is partially due to our recent
efforts to acquire lot positions in new communities and
construct and close houses from these projects. In fiscal 2010,
a reduction in the regions SG&A expenses, both in
absolute terms and as a percentage of homebuilding revenues,
also contributed to the improvement in income before income
taxes.
West Region Homebuilding revenues increased
6% in 2010 compared to 2009, due to an increase in the number of
homes closed, which was partially offset by a decrease in the
average selling price of those homes. The largest increases in
homes closed occurred in our Seattle and Southern California
markets. The region reported income before income taxes of
$27.8 million in 2010, compared to a loss before income
taxes of $226.4 million in 2009. The loss in 2009 was due
in large part to inventory impairment charges and earnest money
and pre-acquisition cost write-offs totaling
$190.7 million, compared to $2.0 million in 2010. The
regions home sales gross profit percentage increased
400 basis points in fiscal 2010 compared to fiscal 2009.
The increase was a result of higher margins on homes closed in
the majority of the regions markets, driven in large part
by reductions in home construction costs. In fiscal 2010, a
reduction in the regions SG&A expenses as a
percentage of homebuilding revenues contributed 260 basis
points to the regions improvement in income before income
taxes as a percentage of homebuilding revenues, as a result of
absolute reductions in SG&A expenses, as well as the
additional revenue providing more leverage against these costs.
42
Results
of Operations Financial Services
Fiscal
Year Ended September 30, 2011 Compared to Fiscal Year Ended
September 30, 2010
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, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2011
|
|
2010
|
|
% Change
|
|
Number of first-lien loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers
|
|
|
10,262
|
|
|
|
12,679
|
|
|
|
(19
|
)%
|
Number of homes closed by D.R. Horton
|
|
|
16,695
|
|
|
|
20,875
|
|
|
|
(20
|
)%
|
DHI Mortgage capture rate
|
|
|
61%
|
|
|
|
61%
|
|
|
|
|
|
Number of total loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers
|
|
|
10,343
|
|
|
|
12,754
|
|
|
|
(19
|
)%
|
Total number of loans originated or brokered by DHI Mortgage
|
|
|
12,118
|
|
|
|
14,146
|
|
|
|
(14
|
)%
|
Captive business percentage
|
|
|
85%
|
|
|
|
90%
|
|
|
|
|
|
Loans sold by DHI Mortgage to third parties
|
|
|
11,888
|
|
|
|
14,001
|
|
|
|
(15
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2011
|
|
2010
|
|
% Change
|
|
|
|
|
(In millions)
|
|
|
|
Loan origination fees
|
|
$
|
18.3
|
|
|
$
|
17.7
|
|
|
|
3
|
%
|
Sale of servicing rights and gains from sale of mortgages
|
|
|
53.2
|
|
|
|
59.6
|
|
|
|
(11
|
)%
|
Recourse expense
|
|
|
(11.6
|
)
|
|
|
(13.7
|
)
|
|
|
(15
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of servicing rights and gains from sale of mortgages, net
|
|
|
41.6
|
|
|
|
45.9
|
|
|
|
(9
|
)%
|
Other revenues
|
|
|
9.2
|
|
|
|
6.8
|
|
|
|
35
|
%
|
Reinsurance expense
|
|
|
(1.8
|
)
|
|
|
(1.9
|
)
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues, net
|
|
|
7.4
|
|
|
|
4.9
|
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage operations revenues
|
|
|
67.3
|
|
|
|
68.5
|
|
|
|
(2
|
)%
|
Title policy premiums, net
|
|
|
19.9
|
|
|
|
22.0
|
|
|
|
(10
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
87.2
|
|
|
|
90.5
|
|
|
|
(4
|
)%
|
General and administrative expense
|
|
|
76.3
|
|
|
|
77.2
|
|
|
|
(1
|
)%
|
Interest expense
|
|
|
1.4
|
|
|
|
1.9
|
|
|
|
(26
|
)%
|
Interest and other (income)
|
|
|
(9.6
|
)
|
|
|
(10.0
|
)
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
19.1
|
|
|
$
|
21.4
|
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services Operating Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentages of
|
|
|
Financial Services Revenues (1)
|
|
|
Fiscal Year Ended September 30,
|
|
|
2011
|
|
2010
|
|
Recourse and reinsurance expense
|
|
|
13.3
|
|
%
|
|
|
14.7
|
|
%
|
General and administrative expense
|
|
|
75.8
|
|
%
|
|
|
72.8
|
|
%
|
Interest expense
|
|
|
1.4
|
|
%
|
|
|
1.8
|
|
%
|
Interest and other (income)
|
|
|
(9.5
|
)
|
%
|
|
|
(9.4
|
)
|
%
|
Income before income taxes
|
|
|
19.0
|
|
%
|
|
|
20.2
|
|
%
|
|
|
|
(1)
|
|
Excludes the effects of recourse
and reinsurance charges on financial services revenues
|
43
Mortgage
Loan Activity
The volume of loans originated and brokered by our mortgage
operations is directly related to the number of homes closed by
our homebuilding operations. Total first-lien loans originated
or brokered by DHI Mortgage for our homebuyers decreased by 19%
in fiscal 2011 compared to fiscal 2010, corresponding to the 20%
decrease in the number of homes closed. Our mortgage capture
rate (the percentage of total home closings by our homebuilding
operations for which DHI Mortgage handled the homebuyers
financing) was 61% in both years.
Home closings from our homebuilding operations constituted 85%
of DHI Mortgage loan originations in 2011, compared to 90% in
2010, 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 a higher level of refinancing and new
mortgage loan originations from non-homebuilding sources than in
the prior year.
The number of loans sold to third-party purchasers decreased by
15% in 2011 compared to 2010, consistent with the decrease in
the number of loans originated of 14% between the years.
Virtually all of the mortgage loans originated during fiscal
2011 and mortgage loans held for sale on September 30, 2011
were eligible for sale to the Federal National Mortgage
Association (Fannie Mae), Federal Home Loan Mortgage Corporation
(Freddie Mac) or Government National Mortgage Association
(Ginnie Mae). Approximately 89% of the mortgage loans sold by
DHI Mortgage during fiscal 2011 were sold to two major financial
institutions pursuant to their loan purchase agreements. Late in
fiscal 2011, one of these financial institutions announced their
intention to exit their correspondent lending business and will
no longer purchase loans from us beyond December 2011. We have
been negotiating with other institutions to establish new loan
purchase agreements. With the combination of selling to
potential new purchasers and increasing sales volumes to our
existing purchasers, we expect to be able to continue to
originate and sell mortgage loans at our current volumes. If we
are unable to sell our mortgages to these or other purchasers,
our ability to originate and sell mortgage loans could be
significantly reduced and the profitability of our financial
services operations would be negatively impacted.
Financial
Services Revenues and Expenses
Revenues from the financial services segment decreased 4%
overall, to $87.2 million in 2011 from $90.5 million
in 2010. Revenues from the sale of servicing rights and gains
from sale of mortgages decreased 11% as a result of a 15%
decrease in the volume of loans sold. Loan origination fees
increased 3%, despite a 14% decrease in loans originated, due to
small changes in pricing structure implemented during the
current year.
Charges related to recourse obligations decreased 15%, to
$11.6 million in fiscal 2011 from $13.7 million in
fiscal 2010. 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 loans or requests, 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 either actual
repurchases or the losses incurred resolving those repurchases
exceed our expectations, additional recourse expense may be
incurred. Additionally, a subsidiary of ours reinsured a portion
of the 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 $1.8 million
and $1.9 million during fiscal 2011 and 2010, respectively.
Financial services general and administrative (G&A) expense
was $76.3 million in 2011, decreasing slightly from
$77.2 million in 2010. As a percentage of financial
services revenues (excluding the effects of recourse and
reinsurance expense), G&A expense increased to 75.8% in
2011, from 72.8% in 2010. The increase was due to the reduction
in revenues resulting from the decrease in mortgage loan volume
compared to the prior year. 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.
44
Fiscal
Year Ended September 30, 2010 Compared to Fiscal Year Ended
September 30, 2009
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, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
Number of first-lien loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers
|
|
|
12,679
|
|
|
|
11,147
|
|
|
|
14
|
%
|
Number of homes closed by D.R. Horton
|
|
|
20,875
|
|
|
|
16,703
|
|
|
|
25
|
%
|
DHI Mortgage capture rate
|
|
|
61%
|
|
|
|
67%
|
|
|
|
|
|
Number of total loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers
|
|
|
12,754
|
|
|
|
11,245
|
|
|
|
13
|
%
|
Total number of loans originated or brokered by DHI Mortgage
|
|
|
14,146
|
|
|
|
13,481
|
|
|
|
5
|
%
|
Captive business percentage
|
|
|
90%
|
|
|
|
83%
|
|
|
|
|
|
Loans sold by DHI Mortgage to third parties
|
|
|
14,001
|
|
|
|
13,991
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
Loan origination fees
|
|
$
|
17.7
|
|
|
$
|
18.6
|
|
|
|
(5
|
)
|
%
|
Sale of servicing rights and gains from sale of mortgages
|
|
|
59.6
|
|
|
|
56.8
|
|
|
|
5
|
|
%
|
Recourse expense
|
|
|
(13.7
|
)
|
|
|
(33.2
|
)
|
|
|
(59
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of servicing rights and gains from sale of mortgages, net
|
|
|
45.9
|
|
|
|
23.6
|
|
|
|
94
|
|
%
|
Other revenues
|
|
|
6.8
|
|
|
|
8.3
|
|
|
|
(18
|
)
|
%
|
Reinsurance expense
|
|
|
(1.9
|
)
|
|
|
(14.9
|
)
|
|
|
(87
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues, net
|
|
|
4.9
|
|
|
|
(6.6
|
)
|
|
|
174
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage operations revenues
|
|
|
68.5
|
|
|
|
35.6
|
|
|
|
92
|
|
%
|
Title policy premiums, net
|
|
|
22.0
|
|
|
|
18.1
|
|
|
|
22
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
90.5
|
|
|
|
53.7
|
|
|
|
69
|
|
%
|
General and administrative expense
|
|
|
77.2
|
|
|
|
78.1
|
|
|
|
(1
|
)
|
%
|
Interest expense
|
|
|
1.9
|
|
|
|
1.5
|
|
|
|
27
|
|
%
|
Interest and other (income)
|
|
|
(10.0
|
)
|
|
|
(10.4
|
)
|
|
|
(4
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
21.4
|
|
|
$
|
(15.5
|
)
|
|
|
238
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services Operating Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentages of
|
|
|
Financial Services Revenues (1)
|
|
|
Fiscal Year Ended September 30,
|
|
|
2010
|
|
2009
|
|
Recourse and reinsurance expense
|
|
|
14.7
|
|
%
|
|
|
47.2
|
|
%
|
General and administrative expense
|
|
|
72.8
|
|
%
|
|
|
76.7
|
|
%
|
Interest expense
|
|
|
1.8
|
|
%
|
|
|
1.5
|
|
%
|
Interest and other (income)
|
|
|
(9.4
|
)
|
%
|
|
|
(10.2
|
)
|
%
|
Income (loss) before income taxes
|
|
|
20.2
|
|
%
|
|
|
(15.2
|
)
|
%
|
|
|
|
(1)
|
|
Excludes the effects of recourse
and reinsurance charges on financial services revenues
|
45
Mortgage
Loan Activity
Total first-lien loans originated or brokered by DHI Mortgage
for our homebuyers increased by 14% in fiscal 2010 compared to
fiscal 2009, corresponding to the 25% increase in the number of
homes closed. The percentage increase in loans originated was
lower than the percentage increase in the number of homes closed
by our homebuilding operations due to a decrease in our mortgage
capture rate to 61% in 2010, from 67% in 2009.
Home closings from our homebuilding operations constituted 90%
of DHI Mortgage loan originations in 2010, compared to 83% in
2009, reflecting DHI Mortgages continued focus on
supporting the captive business provided by our homebuilding
operations. The relatively higher captive percentage in 2010
reflects a lower level of refinancing activity than in 2009.
The number of loans sold to third-party purchasers was virtually
the same in 2010 as compared to 2009, while the number of loans
originated increased by 5%. Virtually all of the mortgage loans
originated during fiscal 2010 and mortgage loans held for sale
on September 30, 2010 were Agency-eligible. Approximately
86% of the mortgage loans sold by DHI Mortgage during fiscal
2010 were sold to two major financial institutions pursuant to
their loan purchase agreements.
Financial
Services Revenues and Expenses
Revenues from the financial services segment increased 69%, to
$90.5 million in 2010 from $53.7 million in 2009. Loan
origination fees decreased 5%, to $17.7 million in 2010
from $18.6 million in 2009, while the number of loans
originated increased 5% during the same period. Loan origination
fees recorded in fiscal 2009 benefitted from the adoption of the
Financial Accounting Standards Boards (FASB) authoritative
guidance for fair value measurements of certain financial
instruments, which resulted in the recognition of
$2.4 million of loan origination fees and $5.0 million
of general and administrative (G&A) costs related to prior
period loan originations. Revenues from the sale of servicing
rights and gains from sale of mortgages increased 5%, to
$59.6 million in 2010, from $56.8 million in 2009.
Charges related to recourse obligations were $13.7 million
in fiscal 2010, compared to $33.2 million in fiscal 2009.
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 $1.9 million and
$14.9 million during fiscal 2010 and 2009, respectively.
Financial services G&A expense decreased 1%, to
$77.2 million in 2010 from $78.1 million in 2009, but
increased 6% when excluding $5.0 million of compensation
costs recognized in fiscal 2009 upon the adoption of the
FASBs authoritative guidance for fair value measurements
as discussed above. The largest component of our financial
services G&A expense is employee compensation and related
costs, which represented 78% and 75% of G&A costs in 2010
and 2009, respectively. Excluding the $5.0 million
adjustment discussed above, these costs increased 14%, to
$60.5 million in 2010 from $53.3 million in 2009. The
increase in the current year relates to an increase in the
number of financial services employees to approximately 700 at
September 30, 2010, from 600 at September 30, 2009 to
support our increased volume and more stringent mortgage
purchaser underwriting guidelines.
As a percentage of financial services revenues, excluding the
effects of recourse and reinsurance expense, G&A expense
decreased to 72.8% in 2010, from 76.7% in 2009. The decrease was
primarily due to the adoption in 2009 of the FASBs
authoritative guidance for fair value measurements of certain
financial instruments as discussed above, partially offset by
additional costs incurred to support more stringent mortgage
purchaser underwriting guidelines.
46
Results
of Operations Consolidated
Fiscal
Year Ended September 30, 2011 Compared to Fiscal Year Ended
September 30, 2010
Income
before Income Taxes
Income before income taxes for fiscal 2011 was
$12.1 million, compared to $99.5 million for fiscal
2010. The difference in our operating results for 2011 compared
to a year ago is primarily due to a lower volume of homes closed
which resulted in lower revenues.
Income
Taxes
In fiscal 2011, our income tax benefit was $59.7 million,
compared to a benefit of $145.6 million in 2010. The income
tax benefit in fiscal 2011 was due to the reduction of our
accrual for unrecognized tax benefits and corresponding interest
by $61.4 million, partially offset by an accrual for state
income taxes of $1.7 million. In fiscal 2010, a tax law
change regarding net operating loss (NOL) carrybacks resulted in
an income tax benefit of $208.3 million, which was
partially offset by an increase in unrecognized tax benefits and
state income tax expense. We do not have meaningful effective
tax rates in these years because our net deferred tax assets are
offset fully by a valuation allowance.
We had income taxes receivable of $12.4 million and
$16.0 million at September 30, 2011 and 2010,
respectively. The income taxes receivable at September 30,
2011 relates to federal tax refunds we expect to receive.
At September 30, 2011, we had federal NOL carryforwards of
$436.2 million that expire in fiscal 2030 and 2031. Also at
September 30, 2011, we had tax benefits for state NOL
carryforwards of $88.7 million that expire (beginning at
various times depending on the tax jurisdiction) from fiscal
2013 to fiscal 2031. At September 30, 2011, we had federal
tax credit carryforwards of $3.2 million that expire in
fiscal years 2029 through 2031.
At September 30, 2011 and 2010, we had net deferred tax
assets of $848.5 million and $902.6 million,
respectively, offset by valuation allowances of
$848.5 million and $902.6 million, respectively. The
realization of our deferred tax assets ultimately depends upon
the existence of sufficient taxable income in future periods. We
continue to analyze the positive and negative evidence in
determining the need for a valuation allowance with respect to
our deferred tax assets on a jurisdictional basis. A significant
part of the negative evidence we consider comes from our
continued three-year cumulative pre-tax loss position, which was
$445 million at the end of fiscal 2011. Currently, this
loss is largely the result of pre-tax losses incurred in fiscal
2009. The valuation allowance could be reduced in future periods
when we are no longer in a three-year cumulative pre-tax loss
position and if there is sufficient evidence to support a
conclusion that it is not needed for some portion or all of our
deferred tax assets. Realization of a significant portion of our
deferred tax assets for state NOL carryforwards is more unlikely
than the remaining deferred tax assets due to the need to
generate a substantially higher level of taxable income prior to
the expirations of the various state carryforward periods which
expire sooner than our federal NOL carryforwards. The accounting
for deferred taxes is based upon estimates of future results.
Differences between the anticipated and actual outcomes of these
future results could have a material impact on our consolidated
results of operations or financial position.
Unrecognized tax benefits are the differences between tax
positions taken or expected to be taken in a tax return and the
benefits recognized for accounting purposes. At
September 30, 2011 and 2010, all tax positions, if
recognized, would affect our annual effective tax rate. The
total amount of unrecognized tax benefits was $16.3 million
and $65.0 million as of September 30, 2011 and 2010,
respectively. The decrease in unrecognized tax benefits resulted
from us receiving a favorable result from the Internal Revenue
Service (IRS) on a ruling request concerning the capitalization
of inventory costs and a reduction in our accrual for state
income tax issues.
47
We classify interest expense and penalties on income taxes as
income tax expense. During fiscal 2011 and 2010, we recognized
interest expense (benefit) related to unrecognized tax benefits
of ($12.7) million and $11.6 million, respectively, in
our consolidated statements of operations. At September 30,
2011 and 2010, our total accrued interest expense relating to
unrecognized tax benefits was $5.1 million and
$17.8 million, respectively, and there were no accrued
penalties. As a result of our full valuation allowance on our
net deferred tax assets, all accrued interest expense would
affect our annual effective tax rate if the associated tax
positions were recognized.
A reduction of $2.5 million in the amount of unrecognized
tax benefits and accrued interest with respect to state issues
is reasonably possible within the next 12 months and would
result in an income tax benefit in our consolidated statement of
operations.
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 2004
through 2011. We are currently being audited by the IRS for
fiscal years 2006 and 2007, and by various states. Our federal
NOL refunds from fiscal 2008 and 2009 are subject to
Congressional Joint Committee review.
Fiscal
Year Ended September 30, 2010 Compared to Fiscal Year Ended
September 30, 2009
Income
(Loss) before Income Taxes
Income before income taxes for fiscal 2010 was
$99.5 million, compared to a loss before income taxes of
$556.8 million for fiscal 2009. The difference in our
operating results for 2010 compared to 2009 is primarily due to
increased revenue from the higher volume of homes closed, a
higher gross profit from home sales revenues and lower inventory
impairment charges.
Income
Taxes
Income tax benefit in fiscal 2010 was $145.6 million,
compared to a benefit of $7.0 million in 2009. A tax law
change enacted during fiscal 2010 allowed us to carry back our
fiscal 2009 NOL five years. This resulted in a benefit from
income taxes of $208.3 million during fiscal 2010, which
was partially offset by an increase in unrecognized tax benefits
and state income tax expense. We do not have meaningful
effective tax rates in these years because of the valuation
allowances on our deferred tax assets.
We had income taxes receivable of $16.0 million and
$293.1 million at September 30, 2010 and 2009,
respectively, related to federal and state NOL carrybacks and
amended returns. At September 30, 2010 and 2009, we had net
deferred income tax assets of $902.6 million and
$1,073.9 million, respectively, offset by valuation
allowances of $902.6 million and $1,073.9 million,
respectively.
Overview
of Capital Resources and Liquidity
We have historically funded our homebuilding and financial
services operations with cash flows from operating activities,
borrowings under bank credit facilities and the issuance of new
debt securities. During the past few years, we have generated
cash flows through reductions in assets, as well as through
profitable operations. Our cash generation has also benefitted
from income tax refunds. The generation of cash flow has allowed
us to increase our liquidity and strengthen our balance sheet,
providing us with the operational flexibility to invest in
market opportunities as they arise and adjust to future
homebuilding market conditions and our expectations for these
conditions. 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, 2011, our ratio of net homebuilding debt
to total capital was 18.0%, an increase of 190 basis points
from 16.1% at September 30, 2010. Net homebuilding debt to
total capital consists of homebuilding notes payable net of cash
and marketable securities divided by total capital net of cash
and marketable securities (homebuilding notes payable net of
cash and marketable securities plus total equity). The increase
in our ratio of net homebuilding debt to total capital at
September 30, 2011 as compared to the ratio a year earlier
was due to a decrease in cash, the effect of which was largely
offset by a reduction in our debt balance. While the challenging
conditions persist in the homebuilding industry, we intend to
maintain a ratio
48
of net homebuilding debt to total capital below our historic
target operating range of 45%. However, future period-end net
homebuilding debt to total capital ratios may be higher than the
18.0% ratio achieved at September 30, 2011.
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 our homebuilding cash and marketable securities 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, 2011 and 2010, our ratios of
homebuilding debt to total capital, without netting cash and
marketable securities balances, were 37.7% and 44.3%,
respectively.
We believe that we will be able to fund our near-term working
capital needs and debt obligations from existing cash resources
and our mortgage repurchase facility. For our longer-term
capital requirements, we will evaluate the need to issue new
debt or equity securities through the public capital markets or
obtain additional bank financing as market conditions may permit.
Homebuilding
Capital Resources
Cash and Cash Equivalents At
September 30, 2011, we had available homebuilding cash and
cash equivalents of $715.5 million.
Marketable Securities At September 30,
2011, we had marketable securities of $297.6 million. Our
marketable securities consist of U.S. Treasury securities,
government agency securities, corporate debt securities and
certificates of deposit.
Secured Letter of Credit Agreements We have
secured letter of credit agreements which require us to deposit
cash, in an amount approximating the balance of letters of
credit outstanding, as collateral with the issuing banks. At
September 30, 2011 and 2010, the amount of cash restricted
for this purpose totaled $47.5 million and
$52.6 million, respectively, and is included in
homebuilding restricted cash on our consolidated balance sheets.
Public Unsecured Debt The indentures
governing our senior notes impose restrictions on the creation
of secured debt and liens. At September 30, 2011, we were
in compliance with all of the limitations and restrictions that
form a part of the public debt obligations.
Shelf Registration Statement 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, 2011, the amount of financial services cash
and cash equivalents was $17.1 million.
Mortgage Repurchase Facility Our mortgage
subsidiary, DHI Mortgage, has a mortgage repurchase facility
that is accounted for as a secured financing. The mortgage
repurchase facility 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 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. The total capacity of the
facility was $150 million for the period from June 29,
2011 through October 20, 2011, after which time it was
reduced to $100 million. The maturity date of the facility
is March 4, 2012.
As of September 30, 2011, $251.5 million of mortgage
loans held for sale were pledged under the mortgage repurchase
facility. These mortgage loans had a collateral value of
$236.3 million. DHI Mortgage
49
has the option to fund a portion of its repurchase obligations
in advance. As a result of advance paydowns totaling
$119.8 million, DHI Mortgage had an obligation of
$116.5 million outstanding under the mortgage repurchase
facility at September 30, 2011 at a 3.8% annual 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, 2011, DHI Mortgage
was in compliance with all of the conditions and covenants of
the mortgage repurchase facility.
In the past, our mortgage subsidiary has been able to renew or
extend its mortgage credit facility on satisfactory terms prior
to its maturity, and obtain temporary additional commitments
through amendments to the credit agreement 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.
Operating
Cash Flow Activities
During fiscal 2011, net cash provided by our operating
activities was $14.9 million, compared to
$709.4 million during fiscal 2010. During the prior year, a
significant portion of the net cash provided by our operating
activities was due to federal income tax refunds and the profit
we generated during the year. The net cash provided by our
operating activities during the past few years has resulted in
substantial liquidity. This liquidity gives us the flexibility
to determine the appropriate operating strategy for each of our
communities and to take advantage of opportunities in the
market. We have limited our purchases of undeveloped land and
our development spending on land we own to generally smaller
projects or phases which yield finished lot quantities in line
with expected near-term home production. Additionally, we are
purchasing or contracting to purchase finished lots in many
markets to potentially increase sales and home closing volumes
and return to sustainable profitability. Depending upon future
homebuilding market conditions and our expectations for these
conditions, we may use a portion of our cash balances to
increase our inventories.
Investing
Cash Flow Activities
During fiscal 2011, net cash used in our investing activities
was $19.3 million, compared to $318.0 million in 2010.
During the current year, $300.1 million was used to
purchase marketable securities, and proceeds from the sale or
maturity of securities during the year totaled
$292.5 million. In the prior year, $328.0 million was
used to purchase marketable securities, and proceeds from the
sale of securities totaled $27.7 million. Additionally, in
fiscal 2011 and 2010 we used $16.3 million and
$19.2 million, respectively, to invest in purchases of
property and equipment, primarily model home furniture and
office equipment. These purchases are generally not significant
relative to our total assets or cash flows. Also affecting our
investing cash flows are changes in restricted cash, which
decreased $4.6 million and $1.5 million in fiscal 2011
and 2010, respectively. Changes in restricted cash are primarily
due to fluctuations in the balance of our outstanding letters of
credit.
Financing
Cash Flow Activities
During the last three years, most 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 historically been funded with the issuance of
senior unsecured debt securities through the public capital
markets. During fiscal 2011, we repaid, through maturities,
redemptions and repurchases, a total of $495.4 million
principal amount of various issues of senior notes for an
aggregate purchase price of $505.3 million, plus accrued
interest. During fiscal 2010, we repaid, through maturities,
redemptions and repurchases, a total of $1,016.3 million
principal amount of various issues of senior notes for an
aggregate purchase price of $1,018.2 million, plus accrued
interest. During fiscal 2011, we also used cash for the
repurchase of our common stock as discussed below.
50
Consistent with dividends paid in fiscal 2009 and 2010, our
Board of Directors approved four quarterly cash dividends of
$0.0375 per common share during fiscal 2011. The last of these
was paid on August 24, 2011 to stockholders of record on
August 12, 2011. On November 10, 2011, our Board of
Directors approved a cash dividend of $0.0375 per common share,
payable on December 13, 2011, to stockholders of record on
December 2, 2011. 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
On August 1, 2011, our Board of Directors authorized the
repurchase of up to $500 million of debt securities and
$100 million of our common stock effective through
July 31, 2012. At September 30, 2011,
$422.9 million of the debt authorization was remaining and
all of the common stock authorization was remaining.
In October 2011, through unsolicited transactions, we
repurchased $10.8 million principal amount of our
6.5% senior notes due 2016, which further reduced the debt
repurchase authorization.
During the third quarter of fiscal 2011, we repurchased
3,544,838 shares of our common stock at a total cost of
$38.6 million.
In recent years, our primary non-operating use of available
capital has been to repay debt, and in fiscal 2011 we also made
limited stock repurchases at prices we believe to be attractive.
We continue to evaluate our alternatives for future
non-operating sources and uses of our available capital,
including debt repayments, dividend payments or common stock
repurchases, while considering the overall level of our cash
balances 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.
51
Our future cash requirements for contractual obligations as of
September 30, 2011 are presented below:
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Payments Due by Period
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Less Than
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More Than
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Total
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1 Year
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1 - 3 Years
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3 - 5 Years
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5 Years
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(In millions)
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Homebuilding:
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Notes Payable Principal (1)
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$
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1,672.7
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$
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5.8
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$
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955.5
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$
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711.4
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$
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Notes Payable Interest (1)
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271.0
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81.7
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135.4
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53.9
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Operating Leases
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28.6
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12.4
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13.8
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2.4
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Purchase Obligations
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8.2
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7.1
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1.1
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Totals
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$
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1,980.5
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$
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107.0
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$
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1,105.8
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$
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767.7
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$
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Financial Services:
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Notes Payable Principal (2)
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$
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116.5
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$
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116.5
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$
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$
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$
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Notes Payable Interest (2)
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4.4
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4.4
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Operating Leases
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1.4
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0.9
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0.4
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0.1
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Totals
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$
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122.3
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$
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121.8
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$
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0.4
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$
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0.1
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$
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(1)
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Homebuilding notes payable
represent principal and interest payments due on our senior,
convertible senior and secured notes.
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(2)
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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
annual effective rate of 3.8% and principal balance outstanding
at September 30, 2011.
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At September 30, 2011, our homebuilding operations had
outstanding letters of credit of $46.9 million, all of
which were cash collateralized, and surety bonds of
$689.2 million, issued by third parties, to secure
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.
We enter into land and lot option purchase contracts to acquire
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 at September 30, 2011, there were
a limited number of contracts, representing $8.2 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. Further discussion
of our land option contracts is provided in the Land and
Lot Position and Homes in Inventory section included
herein.
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.
52
Although the weakness in homebuilding market conditions
mitigated our historical seasonal variations in recent years,
our home closings and income before income taxes were higher in
the second half of fiscal 2011 than in the first half of the
year. However, given the current uncertain outlook for market
conditions we can make no assurances as to whether this pattern
will continue beyond the current fiscal year.
Inflation
We 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
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, will 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 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;
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the continuing constriction of the credit markets, which could
limit our ability to access capital and increase our costs of
capital;
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the reduction in availability of mortgage financing, increases
in mortgage interest rates and the effects of government
programs;
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the limited success of our strategies in responding to adverse
conditions in the industry;
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the impact of an inflationary or deflationary environment;
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changes in general economic, real estate and other business
conditions;
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the risks associated with our inventory ownership position in
changing market conditions;
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supply risks for land, materials and labor;
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changes in the costs of owning a home;
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the effects of governmental regulations and environmental
matters on our homebuilding operations;
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the effects of governmental regulation on our financial services
operations;
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the uncertainties inherent in home warranty and construction
defect claims matters;
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our substantial debt and our ability to comply with related debt
covenants, restrictions and limitations;
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competitive conditions within our industry;
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our ability to effect any future growth strategies successfully;
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our ability to realize our deferred income tax asset; and
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our ability to utilize our tax losses, which could be
substantially limited if we experienced an ownership change as
defined in the Internal Revenue Code.
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53
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, 2011 and 2010, and
for the years ended September 30, 2011, 2010 and 2009. 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.
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. Any profit on land
sales 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. We typically elect the fair value
option for our mortgage loan originations. 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. Net
origination costs and fees associated with mortgage loans are
recognized at the time of origination. 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 originated
mortgages; rather, we 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.
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% or 40% increase in the amount of
expected mortgage loan repurchases and expected losses on
mortgage loan repurchases would result in an increase of
approximately $3.8 million or $8.2 million,
respectively, in our reserve for expected mortgage loan
repurchases.
Marketable Securities We invest a portion of
our cash on hand by purchasing marketable securities with
maturities in excess of three months. We consider our investment
portfolio to be
available-for-sale.
Accordingly, these investments are recorded at fair value. At
the end of a reporting period, unrealized gains and losses on
these investments, net of tax, are recorded in accumulated other
comprehensive income (loss) on
54
the consolidated balance sheet. Gains and losses realized upon
the sale of marketable securities are determined by specific
identification and are included in homebuilding other income.
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. 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, division and region management, and the costs
of 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 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 allocated on a pro-rata basis
to the homes in the community benefiting from the relevant
development activity, which generally relates to the remaining
homes in the community.
When a home is closed, we generally have not paid all incurred
costs necessary to complete the home. 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. 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 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, differences in amounts historically have not
been significant.
Each quarter, we review our inventory to determine whether
recorded costs and any estimated 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 is categorized as
land held for development, residential land and lots developed
and under development,
and/or
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
55
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 typically 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 the 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 asset 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 We
enter into land and lot option purchase contracts to acquire
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
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 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
56
(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 property under option and will not be
able to recover these costs through other means.
Certain of our option purchase contracts result in the creation
of a variable interest in the entity holding the land parcel
under option. We determine if we are the primary beneficiary of
the variable interest entity based on our ability to control
both (1) the activities of a variable interest entity that
most significantly impact the entitys economic performance
and (2) the obligation to absorb losses of the entity or
the right to receive benefits from the entity. 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.
Creditors, if any, of these variable interest entities have no
recourse against us.
Fair Value Measurements The FASBs
authoritative guidance for fair value measurements establishes a
three-level hierarchy based upon the inputs to the valuation
model of an asset or liability. The fair value hierarchy and its
application to our assets and liabilities, is as follows:
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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, if applicable. Fair
value measurements are used for our marketable securities,
mortgage loans held for sale, interest rate lock commitments
(IRLCs) and other derivative instruments on a recurring basis,
and are used for inventories, other mortgage loans and real
estate owned on a nonrecurring basis, when events and
circumstances indicate that the carrying value may not be
recoverable.
Goodwill In September 2011, we early adopted
the FASBs authoritative guidance which allows an entity to
assess qualitatively whether it is necessary to perform step one
of the two-step annual goodwill impairment test. If an entity
believes, as a result of its qualitative assessment, that it is
more likely than not that the fair value of a reporting unit
exceeds its carrying amount, the two-step goodwill impairment
test is not required. We performed a qualitative assessment of
goodwill at September 30, 2011, and determined that the
two-step process was not necessary.
Warranty Claims 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 construction work to
subcontractors who typically provide 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 are 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 and Legal Claims We record expenses
and liabilities related to the costs for exposures related to
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
57
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 related to these claims
are subject to a high degree of variability due to uncertainties
such as trends in construction defect claims relative to our
markets, 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
$121.9 million in our accrual and a $81.8 million
increase in our receivable resulting in additional expense of
$40.1 million, while a 10% decrease in the claim rate and
the average cost per claim would result in a decrease of
approximately $94.4 million in our accrual and a
$61.1 million decrease in our receivable resulting in a
reduction in our expense of $33.3 million.
Income Taxes We calculate our income tax
expense (benefit) using the asset and liability method, under
which deferred tax assets and liabilities are recorded based on
the tax consequences of temporary differences between the
financial statement amounts of assets and liabilities and their
tax bases, and of tax loss and credit carryforwards. In
assessing the realizability of deferred tax assets, we consider
whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is primarily dependent upon
the generation of future taxable income during the periods and
in the jurisdictions in which those temporary differences become
deductible. In determining the future tax consequences of events
that have been recognized in our financial statements or tax
returns, judgment is required. The accounting for deferred taxes
is based upon an estimate 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 income
tax expense. 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 out of
amounts remaining available for grant from amounts formally
authorized by our common stockholders. Options are granted at
exercise prices which equal the market value of our common stock
at the date of the grant. Generally, the options vest over
periods of 3 to 9.75 years and expire 10 years after
the dates on which they were granted.
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.
58
Recent
Accounting Pronouncements
In January 2010, the FASB issued ASU
2010-06,
Improving Disclosures about Fair Value Measurements,
which requires additional disclosures about transfers between
Levels 1 and 2 of the fair value hierarchy and disclosures
about purchases, sales, issuances and settlements in the roll
forward of activity in Level 3 fair value measurements.
This guidance was effective for us in fiscal 2010, except for
the Level 3 activity disclosures, which are effective for
fiscal years beginning after December 15, 2010. The
adoption of this guidance, which is related to disclosure only,
did not and will not have a material impact on our consolidated
financial position, results of operations or cash flows.
In April 2011, the FASB issued ASU
2011-02,
A Creditors Determination of Whether a Restructuring
Is a Troubled Debt Restructuring, which clarifies when a
loan modification or restructuring is considered a troubled debt
restructuring. In determining whether a loan modification
represents a troubled debt restructuring, a creditor must
separately conclude that the restructuring constitutes a
concession and that the debtor is experiencing financial
difficulties. The guidance was effective for us on July 1,
2011 and is to be applied retrospectively to the beginning of
the annual period of adoption. The adoption of this guidance did
not have a material impact on our consolidated financial
position, results of operations or cash flows.
In April 2011, the FASB issued ASU
2011-03,
Reconsideration of Effective Control for Repurchase
Agreements. This guidance amends the sale accounting
requirement concerning a transferors ability to repurchase
transferred financial assets even in the event of default by the
transferee, which typically is facilitated in a repurchase
agreement by the presence of a collateral maintenance provision.
This guidance is effective prospectively for new transfers and
existing transactions that are modified in the first interim or
annual period beginning on or after December 15, 2011. The
adoption of this guidance is not expected to have a material
impact on our consolidated financial position, results of
operations or cash flows.
In May 2011, the FASB issued ASU
2011-04,
Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs, which
provides a consistent definition of fair value and ensures that
the fair value measurement and disclosure requirements are
similar between U.S. GAAP and International Financial
Reporting Standards (IFRS). The guidance changes certain fair
value measurement principles and expands the disclosure
requirements particularly for Level 3 fair value
measurements. The guidance is effective for us beginning
January 1, 2012 and is to be applied prospectively. The
adoption of this guidance, which relates primarily to
disclosure, is not expected to have a material impact on our
consolidated financial position, results of operations or cash
flows.
In June 2011, the FASB issued ASU
2011-05,
Presentation of Comprehensive Income, which requires
that an entity report comprehensive income in either a single
continuous statement of comprehensive income which contains two
sections, net income and other comprehensive income, or in two
separate but continuous statements. As permitted, we elected to
early adopt this guidance and did so in the current quarter. The
adoption of this guidance, which relates to presentation only,
did not have a material impact on our consolidated financial
position, results of operations or cash flows.
In September 2011, the FASB issued ASU
2011-08,
Intangibles Goodwill and Other, which
gives an entity the option to first assess qualitative factors
to determine whether it is necessary to perform the current
two-step goodwill impairment test. If an entity believes, as a
result of its qualitative assessment, that it is more likely
than not that the fair value of a reporting unit is less than
its carrying amount, the two-step goodwill impairment test is
required. As permitted, we elected to early adopt this guidance
in the current quarter. The adoption of this guidance did not
impact our consolidated financial position, results of
operations or cash flows.
59
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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. Except in very limited
circumstances, we 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 years ended September 30,
2011, 2010 and 2009 was not significant, is recognized in
current earnings. At September 30, 2011, hedging
instruments used to mitigate interest rate risk related to
uncommitted mortgage loans held for sale and uncommitted IRLCs
totaled $257.0 million. Uncommitted IRLCs totaled
approximately $196.1 million, and uncommitted mortgage
loans held for sale totaled approximately $80.9 million at
September 30, 2011.
The following table sets forth principal cash flows by scheduled
maturity, weighted average interest rates and estimated fair
value of our debt obligations as of September 30, 2011. The
interest rate for our variable rate debt represents the interest
rate on our mortgage repurchase facility. Because the mortgage
repurchase facility is effectively secured by certain mortgage
loans held for sale which are typically sold within
60 days, its outstanding balance is included as a variable
rate maturity in the most current period presented.
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Fair
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Value at
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Fiscal Year Ending September 30,
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September 30,
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2012
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2013
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2014
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2015
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2016
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Thereafter
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Total
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2011
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(In millions)
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Debt:
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Fixed rate
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$
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5.8
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$
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171.7
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$
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783.8
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$
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157.7
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$
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553.7
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$
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$
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1,672.7
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$
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1,673.9
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Average interest rate
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7.6%
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7.0%
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8.2%
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5.4%
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6.4%
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7.2%
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Variable rate
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$
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116.5
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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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116.5
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$
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116.5
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Average interest rate
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3.8%
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3.8%
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60
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 and
comprehensive income (loss), total equity, and cash flows
present fairly, in all material respects, the financial position
of D.R. Horton, Inc. and its subsidiaries at September 30,
2011 and 2010 and the results of their operations and their cash
flows for each of the three years in the period ended
September 30, 2011 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, 2011, 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 17, 2011
61
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
D.R.
HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In millions)
|
|
|
ASSETS
|
Homebuilding:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
715.5
|
|
|
$
|
1,282.6
|
|
Marketable securities,
available-for-sale
|
|
|
297.6
|
|
|
|
297.7
|
|
Restricted cash
|
|
|
49.1
|
|
|
|
53.7
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Construction in progress and finished homes
|
|
|
1,369.2
|
|
|
|
1,286.0
|
|
Residential land and lots developed and under
development
|
|
|
1,370.7
|
|
|
|
1,406.1
|
|
Land held for development
|
|
|
709.8
|
|
|
|
749.3
|
|
Land inventory not owned
|
|
|
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,449.7
|
|
|
|
3,449.0
|
|
Income taxes receivable
|
|
|
12.4
|
|
|
|
16.0
|
|
Deferred income taxes, net of valuation allowance of
$848.5 million
and $902.6 million at September 30, 2011 and 2010,
respectively
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
57.6
|
|
|
|
60.5
|
|
Other assets
|
|
|
398.4
|
|
|
|
434.8
|
|
Goodwill
|
|
|
15.9
|
|
|
|
15.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,996.2
|
|
|
|
5,610.2
|
|
|
|
|
|
|
|
|
|
|
Financial Services:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
17.1
|
|
|
|
26.7
|
|
Mortgage loans held for sale
|
|
|
294.1
|
|
|
|
253.8
|
|
Other assets
|
|
|
51.0
|
|
|
|
47.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
362.2
|
|
|
|
328.4
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,358.4
|
|
|
$
|
5,938.6
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Homebuilding:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
154.0
|
|
|
$
|
135.1
|
|
Accrued expenses and other liabilities
|
|
|
829.8
|
|
|
|
957.2
|
|
Notes payable
|
|
|
1,588.1
|
|
|
|
2,085.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,571.9
|
|
|
|
3,177.6
|
|
|
|
|
|
|
|
|
|
|
Financial Services:
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities
|
|
|
46.5
|
|
|
|
51.6
|
|
Mortgage repurchase facility
|
|
|
116.5
|
|
|
|
86.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163.0
|
|
|
|
138.1
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,734.9
|
|
|
|
3,315.7
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note K)
|
|
|
|
|
|
|
|
|
|
EQUITY
|
Preferred stock, $.10 par value, 30,000,000 shares
authorized, no shares issued
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 1,000,000,000 shares
authorized, 323,243,170 shares issued
and 316,043,099 shares outstanding at September 30,
2011 and 322,478,467 shares issued
and 318,823,234 shares outstanding at September 30,
2010
|
|
|
3.2
|
|
|
|
3.2
|
|
Additional paid-in capital
|
|
|
1,917.0
|
|
|
|
1,894.8
|
|
Retained earnings
|
|
|
834.6
|
|
|
|
810.6
|
|
Treasury stock, 7,200,071 shares and 3,655,233 shares
at September 30, 2011 and 2010, respectively, at cost
|
|
|
(134.3
|
)
|
|
|
(95.7
|
)
|
Accumulated other comprehensive income
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,620.6
|
|
|
|
2,613.2
|
|
Noncontrolling interests
|
|
|
2.9
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
2,623.5
|
|
|
|
2,622.9
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
5,358.4
|
|
|
$
|
5,938.6
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
62
D.R.
HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(In millions, except per share data)
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales
|
|
$
|
3,542.3
|
|
|
$
|
4,302.3
|
|
|
$
|
3,563.6
|
|
Land/lot sales
|
|
|
7.3
|
|
|
|
7.4
|
|
|
|
40.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,549.6
|
|
|
|
4,309.7
|
|
|
|
3,603.9
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales
|
|
|
2,971.0
|
|
|
|
3,558.3
|
|
|
|
3,096.1
|
|
Land/lot sales
|
|
|
6.9
|
|
|
|
4.6
|
|
|
|
34.9
|
|
Inventory impairments and land option cost write-offs
|
|
|
45.4
|
|
|
|
64.7
|
|
|
|
407.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,023.3
|
|
|
|
3,627.6
|
|
|
|
3,538.7
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales
|
|
|
571.3
|
|
|
|
744.0
|
|
|
|
467.5
|
|
Land/lot sales
|
|
|
0.4
|
|
|
|
2.8
|
|
|
|
5.4
|
|
Inventory impairments and land option cost write-offs
|
|
|
(45.4
|
)
|
|
|
(64.7
|
)
|
|
|
(407.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
526.3
|
|
|
|
682.1
|
|
|
|
65.2
|
|
Selling, general and administrative expense
|
|
|
480.0
|
|
|
|
523.2
|
|
|
|
523.0
|
|
Interest expense
|
|
|
50.5
|
|
|
|
86.3
|
|
|
|
100.2
|
|
Loss (gain) on early retirement of debt, net
|
|
|
10.8
|
|
|
|
4.9
|
|
|
|
(3.9
|
)
|
Other (income)
|
|
|
(8.0
|
)
|
|
|
(10.4
|
)
|
|
|
(12.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.0
|
)
|
|
|
78.1
|
|
|
|
(541.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of recourse and reinsurance expense
|
|
|
87.2
|
|
|
|
90.5
|
|
|
|
53.7
|
|
General and administrative expense
|
|
|
76.3
|
|
|
|
77.2
|
|
|
|
78.1
|
|
Interest expense
|
|
|
1.4
|
|
|
|
1.9
|
|
|
|
1.5
|
|
Interest and other (income)
|
|
|
(9.6
|
)
|
|
|
(10.0
|
)
|
|
|
(10.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.1
|
|
|
|
21.4
|
|
|
|
(15.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
12.1
|
|
|
|
99.5
|
|
|
|
(556.8
|
)
|
Income tax benefit
|
|
|
(59.7
|
)
|
|
|
(145.6
|
)
|
|
|
(7.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
71.8
|
|
|
$
|
245.1
|
|
|
$
|
(549.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain related to
available-for-sale
securities
|
|
|
(0.2
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
71.6
|
|
|
$
|
245.4
|
|
|
$
|
(549.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$
|
0.23
|
|
|
$
|
0.77
|
|
|
$
|
(1.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share assuming dilution
|
|
$
|
0.23
|
|
|
$
|
0.77
|
|
|
$
|
(1.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
63
D.R.
HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF TOTAL EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
Paid-in
|
|
Retained
|
|
Treasury
|
|
Comprehensive
|
|
Non-controlling
|
|
Total
|
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
Stock
|
|
Income
|
|
Interests
|
|
Equity
|
|
|
(In millions, except common stock share data)
|
|
|