301 Commerce St.
Suite 500
Fort Worth, Texas 76102
(817) 390-8200
www.drhorton.com
ANNUAL REPORT
2005
FINANCIAL SUMMARY
(In millions, except for number of homes and per share amounts)
$1,500
$1,200
$900
$600
Net Income
$1,471
$975
$626
$405
$300
$257
$0
2001
2002
2003
2004
2005
$15,000
Revenues
$13,864
$10,841
$8,728
$6,739
$4,456
2001
2002
2003
2004
2005
$15,000
New Home Sales
$14,643
$11,406
$9,162
$6,886
$4,503
$12,000
$9,000
$6,000
$3,000
$0
$12,000
$9,000
$6,000
$3,000
$0
$6,000
$4,800
$3,600
Income Statement Data:
Revenues ........................................
Net income .....................................
Operating Data:
Homes closed .................................
Homes sold .....................................
Percentages of Revenues:
Gross profi t (homebuilding) ...........
SG&A expense (homebuilding) .....
Pre-tax income ...............................
Net income .....................................
Balance Sheet Data:
Inventories ......................................
Total assets .....................................
Notes payable .................................
Stockholders’ equity .......................
Book value per share* ....................
Common shares outstanding* ........
Sales Contract Backlog:
Homes ............................................
Sales value......................................
2005
Years Ended September 30,
2002
2003
2004
2001
$13,863.7 $10,840.8 $8,728.1 $6,738.8 $4,455.5
257.0
1,470.5
626.0
975.1
404.7
51,172
53,232
43,567
45,263
35,934
38,725
29,761
31,491
21,371
22,179
25.6%
9.0%
17.2%
10.6%
23.1%
9.0%
14.6%
9.0%
20.4%
9.6%
11.6%
7.2%
19.0%
9.8%
9.6%
6.0%
19.5%
9.9%
9.2%
5.8%
As of September 30,
2005
2004
2003
2002
2001
$8,486.8 $6,567.4 $5,082.3 $4,343.1 $2,804.4
3,652.2
7,279.4
12,514.8
1,884.3
2,963.2
4,909.6
1,250.2
3,031.3
5,360.4
$5.42
$9.79
$17.13
230.7
309.5
312.9
8,985.2
3,499.2
3,960.7
$12.72
311.4
6,017.5
2,878.3
2,269.9
$7.75
293.0
19,244
9,263
15,488
$5,835.2 $4,568.5 $3,653.4 $2,825.2 $1,933.8
17,184
12,697
2001
2002
2003
2004
2005
*adjusted for the three-for-two-stock splits of April 2002 and January 2004, and the four-for-three-stock split
of March 2005.
Sales Backlog
$5,835
$6,000
Stockholders’ Equity
$5,360
$4,568
$3,653
$2,825
$2,400
$1,934
$1,200
$0
2001
2002
2003
2004
2005
$4,800
$3,600
$2,400
$1,200
$0
$3,961
$3,031
$2,270
$1,250
2001
2002
2003
2004
2005
75%
60%
45%
30%
15%
0%
Homebuilding Leverage Ratio
54% 51%
40% 39%
32%
2001
2002
2003
2004
2005
H O M E B U I L D I N G O P E R A T I O N S
WEST
Bakersfi eld/Lancaster/Palmdale, CA
Fresno/Modesto, CA
Los Angeles County, CA
Oakland/North Bay, CA
Orange County, CA
Riverside/San Bernardino, CA
Sacramento, CA
San Diego County, CA
San Francisco, CA
San Jose/Pleasanton/East Bay, CA
Ventura County, CA
Colorado Springs, CO
Denver, CO
Ft. Collins, CO
Maui, HI
Oahu, HI
Hawaii, HI
Las Vegas, NV
Reno, NV
Albany, OR
Bend, OR
Eugene, OR
Portland, OR
Salt Lake City, UT
Olympia, WA
Seattle/Tacoma, WA
Vancouver, WA
MIDWEST
Chicago, IL
Minneapolis/St. Paul, MN
Kenosha, WI
SOUTHWEST
Phoenix, AZ
Casa Grande, AZ
Tucson, AZ
Albuquerque, NM
Las Cruces, NM
Oklahoma City, OK
Austin, TX
Dallas, TX
Fort Worth, TX
Houston, TX
Killeen/Temple, TX
Laredo, TX
Rio Grande Valley, TX
San Antonio, TX
Waco, TX
MID-ATLANTIC
Delaware Valley, DE
Baltimore, MD
Suburban Washington D.C.
New Jersey
Brunswick, NC
Charlotte, NC
Greensboro/Winston-Salem, NC
Raleigh/Durham, NC
Philadelphia, PA
York/Lancaster, PA
Charleston, SC
Columbia, SC
Greenville, SC
Hilton Head, SC
Myrtle Beach, SC
Northern Virginia, VA
SOUTHEAST
Birmingham, AL
Huntsville, AL
Atlanta, GA
Macon, GA
Savannah, GA
Daytona Beach, FL
Fort Myers/Naples, FL
Jacksonville, FL
Melbourne, FL
Miami/West Palm Beach, FL
Orlando, FL
Tampa, FL
Baton Rouge, LA
Dear Fellow Shareholders:
Fiscal year 2005 was a historic year for our Company, D.R. Horton, Inc., America's Builder. For the
fourth consecutive year, we delivered more new homes in the United States than any other homebuilder,
and we made history by achieving several firsts in the homebuilding industry:
‚ First homebuilder to sell more than 53,000 homes in a fiscal year;
‚ First homebuilder to deliver more than 51,000 homes in a fiscal year;
‚ $1.5 billion in net income, the highest annual earnings in homebuilding history; and
‚ First homebuilder to achieve a $10 billion market capitalization.
Not only were we the #1 homebuilder in America in 2005, but we were also recognized as one of the
best companies in America by several independent organizations through our:
‚ Addition to the S&P 500 Index in July;
‚ Inclusion in the Fortune 500 for the sixth consecutive year, climbing to #138 based on profits
and #203 based on revenues;
‚ Ranking as #6 in 5-Year total return to shareholders among Fortune 500 companies with a 52.9%
annual rate of return;
‚ Ranking as #8 in 10-Year total return to shareholders among Fortune 500 companies with a 35.8%
annual rate of return;
‚ Ranking as #32 and #21 in 5-Year and 10-Year growth in profits among Fortune
500 companies; and
‚ Investment grade senior debt ratings from Moody's Investors Service and Fitch Ratings.
Fiscal 2005 also represented our 28th consecutive record year of growth in revenues and profitability,
in which we set a number of company records that eclipsed the records we had established in fiscal 2004:
‚ Net income of $1.5 billion, a 51% increase;
‚ Diluted earnings per share of $4.62, up 50%;
‚ Revenues of $13.9 billion (51,172 homes delivered), a 28% increase;
‚ Consolidated pre-tax operating margin of 17.2%, up 260 basis points;
‚ New sales orders of $14.6 billion (53,232 homes), up 28%;
‚ Year-end sales backlog of $5.8 billion (19,244 homes), up 28%;
‚ Year-end stockholders' equity of $5.4 billion, up 35%;
‚ Year-end homebuilding leverage ratio (net of cash) of 32.2%, 670 basis points below last
year's 38.9%; and
‚ Return on average stockholders' equity of 31.6%, up 370 basis points.
These impressive results continue our unprecedented track record of consistent, profitable growth,
operational excellence and financial strength. Over the past five years, we have grown our revenues at a
31% compounded annual growth rate and our net income at a 50% compounded annual growth rate,
consistent with our goal of growing our bottom line faster than our top line. Our growth has allowed us to
achieve economies of scale that are unmatched in our industry.
While our historical growth has been impressive, we continue to establish goals for future growth. Our
goal for the remainder of this decade is to grow our revenues at least 10% to 15% annually and grow our
earnings 15% to 20% annually, while maintaining an investment-grade quality balance sheet. Our
achievement of these annual goals will lead us to our goal of becoming the first homebuilder to deliver
100,000 homes in a single year. All of our goals are based on organic growth without acquisitions, although
we will continue to evaluate strategic acquisition opportunities as they arise.
We plan to capitalize on our strong operating margins, cost controls and low-cost overhead structure
to continue to profitably grow our businesses in each of our existing markets and to expand into satellite
markets surrounding our core homebuilding markets. The U.S. homebuilding industry remains fragmented,
and we see significant opportunities to use our scale and operational advantages to continue to profitably
aggregate market share from smaller builders, who generally have lower operating margins and more
limited access to capital. We are focused on taking advantage of these consolidation opportunities to
achieve our growth and profitability goals, regardless of the overall U.S. housing market conditions.
Our unique decentralized and entrepreneurial approach to the homebuilding business has proven to be
the industry-leading model. It has enabled us to grow profitably through all economic cycles, and will help
us accomplish our goals in the future. We are an entrepreneurial company, with a decentralized operating
structure and centralized controls. Our structure is based on the fundamental belief that homebuilding is
truly a local business. We entrust our division management teams with the authority and responsibility to
make the decisions that affect their ability to succeed in their markets, and we expect them to react to
changes in their markets and adjust land positions, product and pricing as necessary to grow profitably. In
many of our markets, we still customize our homes in response to requests from homebuyers, which allows
us to say ""Yes'' to potential homebuyers when other national builders must say ""No.'' While our
homebuilding operations are decentralized, our corporate office provides oversight of what we consider to
be the key risks of our business. These include capital allocation, final approval and funding of all land and
lot purchases, financing, accounting, management reporting and division president incentive plans.
Our decentralized and entrepreneurial business model allows our people to excel, and our people are
ultimately the difference between us and the rest of the industry. We are a team of 9,000 diverse
individuals that work together toward the common goals we have set for ourselves. We live and work
together according to a code we call the ""Hortonisms'' that embodies our core business principles and
values, such as accountability, responsibility, frugality, simplicity, loyalty, humility and mutual respect. We
treat each other as fellow members of the ""Horton family,'' and we have several key programs that
promote this family culture, including a summer camp for children of our employees, financial support for
the families of employees called to active service in the military, natural disaster relief for extended family
members of our employees and a program to provide affordable homes to employees who need help to
realize home ownership. Our key managers are also shareholders through direct stock ownership and
participation in our stock option plans, and we encourage our employees to participate in our employee
stock purchase plan. Because our employees are shareholders as well as entrepreneurs, their decisions are
based on the long-term best interests of the Company.
We appreciate and thank our 9,000 employees for their contributions to our success. We also thank
our thousands of suppliers and subcontractors, who are part of our extended Horton family and are
tremendous partners in our success as America's Builder.
We thank all D.R. Horton shareholders for helping us build a company with a solid foundation and an
exciting future. We continue to believe that our stock valuation has significant upside potential. Our belief
is grounded in the long-term consistent track record of revenue and earnings growth produced by our
decentralized and entrepreneurial business model, combined with our unmatched competitive advantages,
including our size, geographic diversity, operating margins and balance sheet strength.
This past year, we moved our corporate offices back to Fort Worth, Texas, where the Company built,
sold and delivered its first home in 1978. We are glad to be back home, building on our Company's initial
foundation laid 28 years ago and working toward our goal of becoming the first homebuilder to deliver
100,000 homes in a single year.
We look forward to another successful year in fiscal 2006 as the largest and most profitable
homebuilder in America!
Donald R. Horton
Chairman of the Board
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
¥
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2005
or
n
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-14122
D.R. Horton, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
301 Commerce Street, Suite 500
Fort Worth, Texas
(Address of principal executive offices)
75-2386963
(I.R.S. Employer
Identification No.)
76102
(Zip Code)
(817) 390-8200
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
7.5% Senior Notes due 2007
8% Senior Notes due 2009
9.75% Senior Subordinated Notes due 2010
7.875% Senior Notes due 2011
9.375% Senior Subordinated Notes due 2011
8.5% Senior Notes due 2012
The New York Stock Exchange
The New York Stock Exchange
The New York Stock Exchange
The New York Stock Exchange
The New York Stock Exchange
The New York Stock Exchange
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ¥
No n
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 n
No ¥
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 ¥
No n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Û 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's 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. ¥
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes ¥
No n
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes n
No ¥
As of March 31, 2005, the aggregate market value of the outstanding shares held by non-affiliates of the registrant was
approximately $8,321,502,000. Solely for purposes of this calculation, all directors and executive officers were excluded as
affiliates of the registrant.
As of December 1, 2005, there were 315,734,632 shares of Common Stock, par value $.01 per share, issued and
313,081,832 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2006 Annual Meeting of Stockholders are incorporated
herein by reference in Part III.
ITEM 1. BUSINESS
PART I
D.R. Horton, Inc. is the largest homebuilding company in the United States, based on our domestic
homes closed during the twelve months ended September 30, 2005. We construct and sell high quality
single-family homes through our operating divisions in 25 states and 74 metropolitan markets of the
United States, primarily under the name of D.R. Horton, America's Builder. D.R. Horton, Inc. is a
Fortune 500 company, and our common stock is included in the S&P 500 Index and listed on the
New York Stock Exchange under the ticker symbol ""DHI.'' Unless the context otherwise requires, the
terms ""D.R. Horton,'' the ""Company,'' ""we'' and ""our'' used herein refer to D.R. Horton, Inc., a Delaware
corporation, and its predecessors and subsidiaries.
Donald R. Horton began our homebuilding business in 1978. In 1991, we were incorporated in
Delaware to acquire the assets and businesses of our predecessor companies, which were residential home
construction and development companies owned or controlled by Mr. Horton. In 1992, we completed our
initial public offering of our common stock. From inception, we have consistently grown the size of our
company by investing our available capital into our existing homebuilding markets and into start-up
operations in new markets. Additionally, we have acquired numerous other homebuilding companies, the
most recent of which was in 2002, which have strengthened our market position in existing markets and
expanded our geographic presence and product offerings in other markets. The success of our organic
growth strategies and our effective acquisition strategy has enabled us to become the largest homebuilding
company in the United States, a distinction we have maintained for our last four fiscal years. Our homes
generally range in size from 1,000 to 5,000 square feet and range in price from $90,000 to $900,000. For
the year ended September 30, 2005, we closed 51,172 homes with an average closing sales price
approximating $261,400.
Through our financial services operations, we provide mortgage banking and title agency services to
homebuyers in many of our homebuilding markets. DHI Mortgage, our wholly-owned subsidiary, provides
mortgage financing services, principally to purchasers of homes we build and sell. Our subsidiary title
companies serve as title insurance agents by providing title insurance policies, examination and closing
services, primarily to purchasers of homes we build and sell.
Our financial reporting segments consist of homebuilding and financial services. Our homebuilding
operations are by far the most substantial part of our business, comprising approximately 98% of
consolidated revenues and approximately 96% of consolidated income before income taxes in fiscal year
2005. During fiscal 2005, our total consolidated revenues were $13,863.7 million, and our total consolidated
income before income taxes was $2,378.6 million. Our homebuilding segment generates the majority of its
revenues from the sale of completed homes, with a lesser amount from the sale of land and lots. In
addition to building traditional single-family detached homes, the homebuilding segment also builds
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
83%, 84%, and 91% of home sales revenues in fiscal 2005, 2004 and 2003, respectively. Our financial
services segment generates its revenues from originating and selling mortgages and collecting fees for title
insurance and closing services. Financial information, including revenue, pre-tax income and identifiable
assets, for both of our reporting segments is included in our consolidated financial statements.
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. These reports include our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, changes in beneficial
ownership reports on Forms 3, 4, and 5, proxy statements and amendments to such reports. These reports
may be accessed by going to our Internet website and clicking on the ""Investor Relations'' link. We will
also provide these reports in electronic or paper format to our stockholders free of charge upon request
made to our Investor Relations department. Information on our Internet website is not part of this annual
report on Form 10-K.
1
Our principal executive offices are located at 301 Commerce Street, Suite 500, Fort Worth, Texas
76102. Our telephone number is (817) 390-8200, and our Internet website address is www.drhorton.com.
Operating Strategy
Our overall operating strategy is to take advantage of opportunities to grow our homebuilding business
profitably through capturing greater market share, while continuing to maintain a strong balance sheet. We
plan to execute our growth strategy primarily by investing our available capital in our existing
homebuilding markets through our capital allocation process and by entering satellite markets as
opportunities are available. However, we will also evaluate homebuilding acquisition opportunities as they
arise.
We believe that the following specific operating strategies have enabled us to achieve consistent
growth and profitability in the past and will continue to contribute to our future growth and profitability
goals.
Geographic Diversity
From 1978 to late 1987, our homebuilding activities were conducted in the Dallas/Fort Worth area.
We then began diversifying geographically by entering additional markets, both through start-up operations
and acquisitions. We now operate in 25 states and 74 markets. This provides us with geographic
diversification in our homebuilding inventory investments and our sources of revenues and earnings.
We believe our diversification strategy mitigates the effects of local and regional economic cycles and
enhances our growth potential. Typically, we do not invest material amounts of capital in real estate,
including raw land, developed lots, models and speculative homes, or overhead in start-up operations in
new markets, until such markets demonstrate significant growth potential and acceptance of our products.
While we believe there are significant growth opportunities in our existing markets, we also intend to
continue our diversification strategy by seeking to enter new markets, primarily through the opening of
satellite operations in smaller markets near our existing operating divisions. We also continue to evaluate
opportunities to enter new markets or strengthen our presence in our existing markets through acquisitions
of other homebuilding companies. We continually monitor the sales, margins and returns achieved in each
of our markets as part of our evaluation of the use of our capital.
Economies of Scale
We are the largest homebuilding company in the United States in terms of number of homes closed
in fiscal 2005. We are also the largest or one of the five largest builders in many of our markets by the
same measure in fiscal 2005. 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:
‚ Negotiation of volume discounts and rebates from national, regional and local materials suppliers
and lower labor rates from certain subcontractors;
‚ Earlier opportunities on large land parcels, as land sellers may present parcels for sale to us sooner
due to our strong presence in a market;
‚ Efficient land entitlement processes, as we often dedicate full-time staff to work with municipalities
to resolve difficult land and lot entitlement concerns; and
‚ Greater access to and lower cost of capital, due to our strong balance sheet and our lending and
capital markets relationships with national commercial and investment banking institutions.
Our economies of scale have contributed to significant improvements in our homebuilding operating
margins. Our operating margins provide us with operational flexibility to compete for additional market
share in each of our markets and in new satellite markets versus our competitors that have lower operating
margins.
2
Decentralized Operations
We decentralize our homebuilding activities to give more operating flexibility to our local division
presidents. At September 30, 2005, we had 43 separate homebuilding operating divisions, some of which
are in the same market area and some 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, have better information on which to
base decisions regarding local operations. Our division presidents receive performance bonuses based upon
achieving targeted financial and operational measures in their operating divisions.
Operating Division Responsibilities
Each operating division is responsible for:
‚ Site selection, which involves
Ì A feasibility study;
Ì Soil and environmental reviews;
Ì Review of existing zoning and other governmental requirements; and
Ì Review of the need for and extent of offsite work required to meet local building codes;
‚ Negotiating lot option or similar contracts;
‚ Obtaining all necessary land development and home construction approvals;
‚ Overseeing land development;
‚ Selecting building plans and architectural schemes;
‚ Selecting and managing construction subcontractors and suppliers;
‚ Planning and managing homebuilding schedules; and
‚ Developing and implementing marketing plans.
Centralized Controls
We centralize the key risk elements of our homebuilding business through our regional and corporate
offices. We have eight separate homebuilding regional offices. Some of these oversee operations in only
one of our geographic reporting regions, and others oversee operations in more than one geographic
reporting region. Generally, each regional office consists of a region president, legal counsel, a chief
financial officer, a purchasing manager and limited office support staff. Each of our region presidents and
their management teams are responsible for oversight of the operations of up to nine homebuilding
operating divisions, including:
‚ Review and approval of division business plans and budgets;
‚ Review and approval of all land and lot acquisition contracts;
‚ Allocation of inventory investments within corporate guidelines;
‚ Oversight of land and home inventory levels; and
‚ Review of major personnel decisions and division president compensation plans.
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
3
and controls throughout our operations. The corporate office also has primary responsibility for direct
management of certain key risk elements and initiatives through the following centralized functions:
‚ Financing;
‚ Cash management;
‚ Risk and litigation management;
‚ Allocation of capital;
‚ Issuance and monitoring of inventory investment guidelines to regional homebuilding operations;
‚ Environmental assessments of land and lot acquisitions;
‚ Approval and funding of land and lot acquisitions;
‚ Accounting and management reporting;
‚ Internal audit;
‚ Information technology systems;
‚ Administration of payroll and employee benefits;
‚ Negotiation of national purchasing contracts;
‚ Management of major national or regional supply chain initiatives;
‚ Monitoring and analysis of margins, returns and expenses; and
‚ Administration of customer satisfaction surveys and reporting of results.
Cost Management
We control our 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, regions and corporate office. We also minimize advertising costs by participating in promotional
activities sponsored by local real estate brokers and trade associations.
We control construction costs by striving to design our homes efficiently and by obtaining competitive
bids for construction materials and labor. We also negotiate favorable pricing from our primary
subcontractors and suppliers based on the volume of services and products we purchase from them on a
local, regional and national basis. We monitor our construction costs on each house through our purchasing
and construction budgeting systems, and we monitor our inventory levels, margins, returns and expenses
through our management information systems.
Acquisitions
We have recently focused on internal growth and strengthening our balance sheet. However, as an
integral component of our operational strategy, we also evaluate opportunities for strategic acquisitions. We
believe that, in some instances, expanding our operations through the acquisition of existing homebuilding
companies can provide us benefits not found in start-up operations, such as:
‚ Established land positions and inventories;
‚ Existing relationships with municipalities, land owners, developers, subcontractors and suppliers;
‚ Proven product acceptance by homebuyers; and
‚ Immediate impact on our total home closings and revenues, which can provide improved costs in
many parts of the company through volume pricing incentives in some of our national and regional
purchasing contracts.
4
In evaluating potential acquisition candidates, we seek homebuilding companies that have excellent
reputations, track records of profitability and strong management teams. We seek to limit the risks
associated with acquiring such companies by conducting extensive operational, financial and legal due
diligence on each acquisition and by only acquiring homebuilding companies that we believe will have a
positive impact on our earnings within an acceptable period of time. We believe that our acquisition
evaluation and due diligence processes combined with our decentralized operating approach with
centralized controls have contributed to the successful integration of our prior acquisitions.
Markets
We conduct our homebuilding operations in all of the geographic regions, states and markets listed
below, and we conduct our mortgage and title operations in many of these markets as indicated below.
New markets entered in fiscal 2005 are denoted by an asterisk (*).
State
Region/Market
Mid-Atlantic Region
Delaware ÏÏÏÏÏÏÏ Delaware Valley*
Maryland ÏÏÏÏÏÏÏ Baltimore
Suburban Washington D.C.
New Jersey ÏÏÏÏÏ New Jersey
North Carolina ÏÏ Brunswick*
Charlotte
Greensboro/Winston-Salem
Raleigh/Durham
Pennsylvania ÏÏÏÏ Philadelphia
York/Lancaster*
South Carolina ÏÏ Charleston
Columbia
Greenville
Hilton Head
Myrtle Beach
VirginiaÏÏÏÏÏÏÏÏÏ Northern Virginia
Midwest Region
Illinois ÏÏÏÏÏÏÏÏÏ Chicago
Minnesota ÏÏÏÏÏÏ Minneapolis/St. Paul
WisconsinÏÏÏÏÏÏÏ Kenosha*
Southeast Region
AlabamaÏÏÏÏÏÏÏÏ Birmingham
Huntsville
GeorgiaÏÏÏÏÏÏÏÏÏ Atlanta
Macon*
Savannah
Florida ÏÏÏÏÏÏÏÏÏ Daytona Beach
Fort Myers/Naples
Jacksonville
Melbourne*
Miami/West Palm Beach
Orlando
Tampa
Louisiana ÏÏÏÏÏÏÏ Baton Rouge*
ArizonaÏÏÏÏÏÏÏÏÏ Casa Grande
Southwest Region
Phoenix
Tucson
New Mexico ÏÏÏÏ Albuquerque
Las Cruces
Mortgage (M)
Title (T)
State
Region/Market
Mortgage (M)
Title (T)
M,T
M,T
M,T
M,T
M
M
M
M,T
M
OklahomaÏÏÏÏÏÏÏ Oklahoma City*
Texas ÏÏÏÏÏÏÏÏÏÏ Austin
Dallas
Fort Worth
Houston
Killeen/Temple
Laredo
Rio Grande Valley
San Antonio
Waco
West Region
California ÏÏÏÏÏÏÏ Bakersfield/Lancaster/Palmdale M
M
Fresno/Modesto
M
Los Angeles County
M
Oakland/North Bay
M
Orange County
M
Riverside/San Bernardino
M
Sacramento
M
San Diego County
San Francisco
M
San Jose/Pleasanton/East Bay M
M
Ventura County
M
M
M
M
M
M
M,T
M
M
M
M
M
M
M
M
M
Utah ÏÏÏÏÏÏÏÏÏÏÏ Salt Lake City
Washington ÏÏÏÏÏ Olympia*
ColoradoÏÏÏÏÏÏÏÏ Colorado Springs
Seattle/Tacoma
Vancouver
Nevada ÏÏÏÏÏÏÏÏÏ Las Vegas
Hawaii ÏÏÏÏÏÏÏÏÏ Hawaii*
Bend
Eugene
Portland
Oregon ÏÏÏÏÏÏÏÏÏ Albany
Denver
Ft. Collins
Maui*
Oahu
Reno
T
M,T
M,T
M,T
M
M
M
M
M
M
M
M
M,T
M
M,T
M
M
M,T
M
M
M,T
M,T
M,T
M,T
M,T
M,T
M,T
M,T
M
M
M
5
When evaluating new or existing homebuilding markets, we consider the following local, market-
specific factors, among others:
‚ Economic conditions;
‚ Job growth;
‚ Land availability;
‚ Land entitlement and development processes;
‚ New home sales activity;
‚ Competition;
‚ Secondary home sales activity; and
‚ Prevailing housing products, features and pricing.
The major part of our homebuilding operations is in six states. The following were the percentages of
our total homebuilding inventory in those states:
As of September 30,
2005
2004
ArizonaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
California ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ColoradoÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Florida ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Nevada ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Texas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9%
8%
28% 26%
8% 11%
6%
8%
9%
9%
12% 15%
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
74% 75%
Our homebuilding revenues from home sales by geographic region were:
Mid-AtlanticÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MidwestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2003
2005
$
Year Ended September 30,
2004
(In millions)
888.4
643.7
1,041.3
3,012.3
4,905.4
$ 1,087.1
688.9
1,826.5
3,758.1
6,016.0
$ 674.8
513.2
773.9
2,381.5
3,990.7
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$13,376.6
$10,491.1
$8,334.1
For a discussion of net sales orders and homes closed for the years ended September 30, 2005, 2004
and 2003 and sales order backlog as of September 30, 2005, 2004 and 2003, please see ""Management's
Discussion and Analysis of Results of Operations and Financial Condition Ì Results of Operations Ì
Homebuilding.''
6
Our homebuilding revenues from land and lot sales by geographic region were:
2005
Year Ended September 30,
2004
(In millions)
2003
Mid-Atlantic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Midwest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Southeast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SouthwestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
West ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 13.2
3.4
16.5
10.9
208.0
$
1.8
0.2
19.9
13.3
131.7
$
1.6
10.5
21.2
19.1
165.6
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$252.0
$166.9
$218.0
Land Policies
Typically, we acquire land only after we have completed appropriate due diligence and after we have
obtained the rights (""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 lots and land to other developers and homebuilders.
We also enter into land/lot option contracts, in which we obtain the right, but generally not the
obligation, to buy land or lots at predetermined prices on a defined schedule commensurate with
anticipated home closings or planned land development. Our option contracts generally are non-recourse,
which limits our financial exposure to our earnest money deposited with land and lot sellers. This enables
us to control significant land and lot positions with minimal capital investment, which substantially reduces
the risks associated with land ownership and development.
Almost all of our land positions are acquired directly by us. We typically avoid 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 limit our exposure to real estate inventory risks by:
‚ Maintaining approximately a three to four year supply of land/lots controlled (owned and optioned)
based on anticipated future home closing levels;
‚ Closely monitoring local market and demographic trends, housing preferences and related economic
developments, such as new job opportunities, local growth initiatives and personal income trends;
‚ Utilizing land/lot option contracts, where possible;
‚ Limiting the size of acquired land parcels to smaller tracts, where possible;
‚ Generally commencing construction of custom features or optional upgrades on homes under
contract only after the buyer's receipt of mortgage approval and receipt of satisfactory deposits from
the buyer; and
‚ Closely monitoring the number of speculative homes (homes under construction without an
executed sales contract) built in each subdivision.
7
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.
Substantially all of our construction work is performed by subcontractors. Subcontractors typically are
retained for a specific subdivision pursuant to a contract that obligates the subcontractor to complete
construction at an agreed-upon price. Agreements with our subcontractors and suppliers 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 four to six
months.
We typically do not maintain significant inventories of construction materials, except for work in
progress materials for homes under construction. Typically, 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 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 advertise in our local markets as necessary. We advertise in newspapers and real estate trade
publications, as well as with marketing brochures and newsletters. We also use billboards, radio and
television advertising and our Internet website to market the location, price range and availability of our
homes. To minimize advertising costs, we attempt to operate in subdivisions in conspicuous locations that
permit us to take advantage of local traffic patterns. We also believe that model homes play a substantial
role in our marketing efforts, so we expend significant effort to create an attractive atmosphere in our
model homes.
In addition to using model homes, in certain markets we build a limited number of speculative homes
in each subdivision. These homes enhance our marketing and sales efforts to prospective homebuyers who
are relocating to these markets, as well as to independent brokers, who often represent homebuyers
requiring a completed home within 60 days. We determine our speculative homes strategy in each market
based on local market factors, such as new job growth, the number of job relocations, housing demand,
seasonality and our past experience in the market. We determine the number of speculative homes to build
in each subdivision based on our current and planned sales pace, and we seek to monitor and adjust
8
speculative homes inventory on an ongoing basis as conditions warrant. We typically sell a substantial
majority of our speculative homes while they are under construction or immediately following completion.
Our sales contracts require an earnest money deposit of at least $500. The amount of earnest money
required varies between markets and subdivisions, and may significantly exceed $500. Additionally,
customers are generally required to pay additional deposits when they select options or upgrade features for
their homes. Most of our sales contracts stipulate that when customers cancel their contracts with us, we
have the right to retain their earnest money and option deposits; however, our operating divisions
occasionally choose to refund such deposits. Our sales contracts also include a financing contingency which
permits customers to cancel and receive a refund of their deposits if they cannot obtain mortgage financing
at prevailing or specified interest rates within a specified period. Our contracts may include other
contingencies, such as the sale of an existing home. Depending upon market conditions, the sales contracts
used in certain subdivisions may also contain restrictions aimed at limiting purchases of our homes by
speculative investors who plan to purchase our homes and then quickly place the homes up for resale. As a
percentage of gross sales orders, cancellations of sales contracts have generally ranged from 16% to 20%
over the past five years. The length of time between the signing of a sales contract for a home and delivery
of the home to the buyer (closing) averages between three and 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 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 provide our homebuyers with a limited one-year warranty on workmanship and building
materials. 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, we typically provide a supplemental ten-year limited warranty that covers major construction
defects, and some of our suppliers provide manufacturer's warranties on specified products installed in the
home.
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 entire sales transaction for both our homebuyers and our homebuilding operations by
ensuring that mortgage commitments are received and that closings take place in a timely and efficient
manner. DHI Mortgage originates mortgage loans for a substantial portion of our homebuyers and, when
necessary to fulfill the needs of some homebuyers, also brokers loans to third-party lenders who directly
originate the mortgage loans. During the year ended September 30, 2005, approximately 93% of DHI
Mortgage's loan volume related to homes closed by our homebuilding operations, and DHI Mortgage
provided mortgage financing services for approximately 63% of our total homes closed.
For loans that it originates, DHI Mortgage packages and sells the loans and their servicing rights to
third-party investors shortly after origination on a non-recourse or limited recourse basis. 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
We serve as a title insurance agent in selected markets by providing title insurance policies,
examination and closing services to purchasers of homes we build and sell, through our subsidiary title
companies. We currently assume little or no underwriting risk associated with these title policies.
9
Employees
At September 30, 2005, we employed 8,900 persons, of whom 1,540 were sales and marketing
personnel, 2,919 were executive, administrative and clerical personnel, 2,845 were involved in construction
and 1,596 worked in mortgage and title operations. We had fewer than 20 employees covered by collective
bargaining agreements. Employees of some of the subcontractors which we use are represented by labor
unions or are subject to collective bargaining agreements. We believe that our relations with our employees
and subcontractors are good.
Competition
The homebuilding industry is highly competitive. We compete in each of our markets with numerous
other national, regional and local homebuilders for homebuyers, desirable properties, raw materials, skilled
labor and financing. Our homes compete on the basis of quality, price, design, mortgage financing terms
and location. Our financial services business competes with other mortgage lenders, including national,
regional and local mortgage bankers, savings and loan associations and other financial institutions, some of
which have greater access to capital markets and different lending criteria.
Governmental Regulation and Environmental Matters
The homebuilding industry is subject to extensive and complex regulations. We and our
subcontractors must comply with various federal, state and local laws and regulations, including zoning,
density and development requirements, building, environmental, advertising and real estate sales rules and
regulations. These requirements affect the development process, as well as building materials to be used,
building designs and minimum elevation of properties. Our homes are inspected by local authorities where
required, and homes eligible for insurance or guarantees provided by the FHA and VA are subject to
inspection by them. These regulations often provide broad discretion to the administering governmental
authorities. In addition, our new housing developments may be subject to various assessments for schools,
parks, streets and other public improvements.
Our homebuilding operations are also subject to a variety of local, state and federal statutes,
ordinances, rules and regulations concerning protection of health, safety and the environment. The
particular environmental laws for each site vary greatly according to location, environmental condition and
the present and former uses of the site and adjoining properties.
Our mortgage company and title insurance agencies must also comply with various federal and state
laws and regulations. These include eligibility and other requirements for participation in the programs
offered by the FHA, VA, GNMA, Fannie Mae and Freddie Mac. These also include required compliance
with consumer lending and other laws and regulations such as disclosure requirements, prohibitions against
discrimination and real estate settlement procedures. All of these laws and regulations may subject our
operations to examination by the applicable agencies.
Seasonality
We experience seasonal variations in our quarterly operating results and capital requirements.
Historically, more of our sales contracts have been made during the spring and summer months than in
the balance of the year. As a result, we typically have more homes under construction, close more homes
and have greater revenues and operating income in the third and fourth quarters of our fiscal year.
ITEM 1A. RISK FACTORS
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 to which we are
or may become subject. 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.
10
Because of the cyclical nature of our industry, future changes in general economic, real estate construction
or other business conditions could adversely affect our business or our financial results.
Cyclical Industry. The homebuilding industry is cyclical and is significantly affected by changes in
general and local economic conditions, such as:
‚ employment levels;
‚ availability of financing for homebuyers;
‚ interest rates;
‚ consumer confidence;
‚ demographic trends; and
‚ housing demand.
These may occur on a national scale or may affect some of the regions or markets in which we
operate more than others. If adverse conditions affect any of our larger markets, they could have a
proportionately greater impact on us than some other homebuilding companies.
An oversupply of alternatives to new homes, such as rental properties and used or foreclosed homes,
could also depress new home prices and reduce our margins on the sales of new homes.
Risks Related to National Security. Continued military deployments in the Middle East and other
overseas regions, terrorist attacks, other acts of violence or threats to national security, and any
corresponding response by the United States or others, or related domestic or international instability, may
adversely affect general economic conditions or cause a slowdown of the national economy.
Inventory Risks.
Inventory risks can be substantial for our homebuilding business. Our long-term
ability to build homes depends upon our acquiring land suitable for residential building at affordable prices
in locations where our customers want to live. We must anticipate demand for new homes and
continuously seek and make acquisitions of land for replacement and expansion of land inventory within
our current markets and for expansion into new markets. In some markets, this has become more difficult
and costly.
Our current goal is to own or control approximately a three to four year supply of land and building
lots. The risks inherent in controlling or purchasing and developing land increase as consumer demand for
housing decreases. Thus, we may have acquired options on or bought and developed land at a cost we will
not be able to recover fully or on which we cannot build and sell homes profitably. Our deposits for
building lots controlled under option or similar contracts may be put at risk. The market value of
undeveloped land, building lots and housing inventories can also fluctuate significantly as a result of
changing market conditions. We cannot make any assurances that the measures we employ to manage
inventory risks and costs will be successful.
In addition, inventory carrying costs can be significant and can result in reduced margins or losses in a
poorly performing project or market. In the event of significant changes in economic or market conditions,
we may have to sell homes or land for a lower profit margin or at a loss.
Supply Risks. The homebuilding industry has from time to time experienced significant difficulties
that can affect the cost or timing of construction, including:
‚ shortages of qualified trades people;
‚ reliance on local subcontractors, who may be inadequately capitalized;
‚ shortages of materials; and
‚ 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.
11
Risks from Nature. Weather conditions and natural disasters, such as hurricanes, tornadoes,
earthquakes, volcanic activity, droughts, floods and wildfires, 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 disaster.
Possible Consequences. As a result of the foregoing matters, in the future, potential customers may
be less willing or able to buy our homes, or we may take longer or incur more costs to build them. We
may not be able to recapture increased costs by raising prices in many cases because of market conditions
or because we fix our prices in advance of delivery by signing home sales contracts. We may be unable to
change the mix of our home offerings or the affordability of our 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 beyond historical rates as homebuyers cancel or do not honor their
contracts.
Our financial services business is closely related to our homebuilding business as it originates
mortgage loans principally to purchasers of the homes we build. A decrease in the demand for our homes
because of the foregoing matters or an increase in consumer preference for adjustable rate or other
low-margin loans could also adversely affect the financial results of this segment of our business. An
increase in the default rate on the mortgages we originate could adversely affect the pricing we receive
upon the sale of mortgages that we originate in the future.
Future increases in interest rates, reductions in mortgage availability or increases in the effective costs of
owning a home could prevent potential customers from buying our homes and adversely affect our business
or our financial results.
Most of our customers finance their home purchases through lenders providing mortgage financing.
Interest rates have been at historical lows for a significant time. Many homebuyers have also chosen
adjustable rate, interest only or other mortgages that involve initial lower monthly payments. As a result,
new homes have been more affordable. Increases in interest rates or decreases in availability of mortgage
financing, however, could reduce the market for new homes. Potential homebuyers may be less willing or
able to pay the increased monthly costs or to obtain mortgage financing that exposes them to interest rate
changes. Lenders may increase the qualifications needed for mortgages or adjust their terms to address any
increased credit risk. Even if potential customers do not need financing, changes in interest rates and
mortgage availability could make it harder for them to sell their current homes to potential buyers who
need financing. These matters could adversely affect the sales or pricing of our homes and could also
reduce the volume or margins in our financial services business. The impact on our financial services
business could be compounded to the extent we are unable to match interest rates and amounts on loans
we have committed to originate through the various hedging strategies we employ.
In addition, we believe that the availability of FHA and VA mortgage financing is an important factor
in marketing some of our homes. We also believe that the liquidity provided by Fannie Mae and Freddie
Mac to the mortgage industry is important to the housing market. However, the federal government has
recently sought to reduce the size of the home-loan portfolios and operations of these two government-
sponsored enterprises. Any limitations or restrictions on the availability of the financing or on the liquidity
by them could adversely affect interest rates, mortgage financing and our sales of new homes and
mortgage loans.
Significant expenses of owning a home, including mortgage interest expense and real estate taxes,
generally are deductible expenses for an individual's 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 recently, to eliminate or substantially modify these
income tax deductions, the after-tax cost of owning a new home could increase for many of our potential
12
customers. The resulting loss or reduction of homeowner tax deductions, if such tax law changes were
enacted without offsetting provisions, could adversely impact demand for and sales prices of new homes.
Governmental regulations could increase the cost and limit the availability of our development and
homebuilding projects or affect our related financial services operations and adversely affect our business or
financial results.
We are subject to extensive and complex regulations that affect land development and home
construction, including zoning, density restrictions, building design and building standards. These
regulations often provide broad discretion to the administering governmental authorities as to the
conditions we must meet prior to being approved, if approved at all. We are subject to determinations by
these authorities as to the adequacy of water or sewage facilities, roads or other local services. 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 homebuilding.
New housing developments may be subject to various assessments for schools, parks, streets and other
public improvements. These can cause an increase in the effective prices for our homes. In addition,
increases in property tax rates by local governmental authorities, as recently 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.
We also are 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 substantial compliance, remediation and other costs, and can prohibit or severely restrict
development and homebuilding activity in environmentally sensitive regions or areas.
Our financial services operations are also subject to numerous federal, state and local laws and
regulations. These include eligibility requirements for participation in federal loan programs and
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 may limit our ability to provide mortgage financing or title
services to potential purchasers of our homes.
Our substantial debt could adversely affect our financial condition.
We have a significant amount of debt. As of September 30, 2005, our consolidated debt was
$4,909.6 million. In the ordinary course of business, we may incur significant additional debt, to the extent
permitted by our revolving credit facility and our indentures.
Possible Consequences. The amount of our debt could have important consequences. For example, it
could:
‚ limit our ability to obtain future financing for working capital, capital expenditures, acquisitions,
debt service requirements or other requirements;
‚ 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 purposes;
‚ limit our flexibility in planning for, or reacting to, the changes in our business;
‚ place us at a competitive disadvantage because we have more debt than some of our
competitors; and
‚ make us more vulnerable in the event of a downturn in our business or in general economic
conditions.
13
Dependence on Future Performance. Our ability to meet our debt service and other obligations will
depend upon our future financial performance. We are engaged in businesses that are substantially affected
by changes in 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 securities,
the refinancing of debt, or the sale of assets. Changes in prevailing interest rates may affect our ability to
meet our debt service obligations, because borrowings under our credit facilities bear interest at floating
rates and our ""interest rate swap'' agreements fix our interest rate for only a portion of these borrowings.
As of September 30, 2005, the scheduled maturities of principal on our outstanding debt for the
subsequent 12 months totaled $1,270.5 million, including $1,249.5 million in financial services debt that
must be renewed annually. Based on the current level of operations, we believe our cash flow from
operations, available cash, available borrowings under our credit facilities and our ability to access the
capital markets and to refinance or renew our facilities in a timely manner will be adequate to meet our
future cash needs. We cannot, however, make any assurances that in the future our business will generate
sufficient cash flow from operations or that borrowings or access to the capital markets or refinancing or
renewal facilities will be available to us in amounts sufficient to enable us to pay or refinance our
indebtedness or to fund other cash needs.
Indenture and Credit Facility Restrictions. Our revolving credit facility and the indentures governing
most series of our senior and senior subordinated notes impose restrictions on our operations and activities.
The most significant restrictions relate to limits on investments, stock repurchases, cash dividends and
other restricted payments, incurrence of indebtedness, creation of liens and asset dispositions, and require
maintenance of minimum levels of tangible net worth and compliance with other financial covenants. If we
fail to comply with any of these restrictions or covenants, the trustees, the noteholders or the lending
banks, as applicable, could cause our debt to become due and payable prior to maturity. If we do not
maintain our current credit ratings, available credit under our revolving credit facility is subject to
limitations based on specified percentages of the costs of homes, developed lots and lots under
development included in inventory and the amount of other senior, unsecured indebtedness. Under the
most restrictive of the limitations imposed by our indentures and revolving credit agreement, as of
September 30, 2005, we would have been permitted to increase our homebuilding debt by approximately
$2.5 billion. This amount is not intended as an indication of the amount of additional debt we could in fact
obtain.
Change of Control Purchase Options.
If a change of control occurs as defined in the indentures
governing many series of our senior and senior subordinated notes, constituting $2,494.8 million principal
amount in the aggregate, we would be required to offer to purchase such notes at 101% of their principal
amount, together with all accrued and unpaid interest, if any. Moreover, a change of control may also
result in the acceleration of our revolving credit facility. If purchase offers were required under the
indentures for these notes or our revolving credit facility debt were accelerated, we can give no assurance
that we would have sufficient funds to pay the amounts that we would be required to repurchase or repay.
We currently would not have sufficient funds available to purchase all of such outstanding debt upon a
change of control.
Impact of Financial Services Debt. Our financial services business is conducted through subsidiaries
that are not restricted by our indentures or revolving credit facility. The ability of our financial services
segment to provide funds to our homebuilding operations is subject to restrictions in its credit facilities.
These funds will not be available to us in the event of defaults under these facilities. Moreover, our right
to receive assets from these subsidiaries upon liquidation or recapitalization will be subject to the prior
claims of the creditors of these subsidiaries. Our claims 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.
14
Homebuilding is very competitive, and competitive conditions could adversely affect our business or our
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, including those with a sales presence on the Internet, often within
larger subdivisions designed, planned and developed by such homebuilders. The competitive conditions in
the homebuilding industry could result in:
‚ difficulty in acquiring suitable land at acceptable prices;
‚ increased selling incentives;
‚ lower sales or profit margins; or
‚ delays in construction of our homes.
Our financial services business competes with other mortgage lenders, including national, regional and
local mortgage bankers, savings and loan associations and other financial institutions. Mortgage lenders
with greater access to capital markets or different lending criteria may be able to offer more attractive
financing to potential customers.
If we are affected by these competitive conditions at increased levels, our business and financial
results could be adversely affected.
Our future growth may require additional capital, which may not be available.
Our operations require significant amounts of cash. We may be required to seek additional capital,
whether from sales of equity or debt or additional bank borrowings, for the future growth and development
of our business. We can give no assurance as to the availability of such additional capital or, if available,
whether it would be on terms acceptable to us. Moreover, the indentures for most of our outstanding
public debt and the covenants of our revolving credit facility contain provisions that may restrict the debt
we may incur in the future. If we are not successful in obtaining sufficient capital, it could reduce our
sales and may adversely affect our future growth and financial results.
We cannot make any assurances that our growth strategies will be successful.
Since 1993, we have acquired many homebuilding companies. Although we have recently focused on
internal growth, we may make strategic acquisitions of homebuilding companies in the future. Successful
strategic acquisitions require the integration of operations and management and other efforts to realize the
benefits that may be available. Although we believe that we have been successful in doing so in the past,
we can give no assurance that we would be able to identify, acquire and integrate successfully 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. In
addition, acquisitions can expose us to the risk of writing off goodwill related to such acquisitions based on
the subsequent results of the reporting units to which the acquired businesses were assigned. Moreover, we
may not be able to implement successfully our operating and growth strategies within our existing markets.
Homebuilding is subject to warranty and product liability claims in the ordinary course of business that
can be significant.
As a homebuilder, we are subject to home warranty and construction defect claims arising in the
ordinary course of business. As a consequence, we maintain product liability insurance, obtain indemnities
and certificates of insurance from subcontractors generally covering claims related to workmanship and
materials, and create warranty and other reserves for the homes we sell based on historical experience in
our markets and our judgment of the qualitative risks associated with the types of homes built. Because of
the uncertainties inherent to these matters, we cannot provide assurance that our insurance coverage, our
subcontractor arrangements and our reserves will be adequate to address all of our warranty and
15
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 are currently limited and costly. We have
responded to the recent increases in insurance costs and coverage limitations by increasing our self-insured
retentions and claim reserves. There can be no assurance that coverage will not be further restricted and
become more costly.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
In addition to our inventories of land, lots and homes, we own several office buildings totaling
approximately 180,000 square feet and we lease approximately 1,345,000 square feet of office space under
leases expiring through January 2015, in our various operating markets to house our homebuilding and
financial services operating division, region and corporate offices.
ITEM 3. LEGAL PROCEEDINGS
We are involved in lawsuits and other contingencies in the ordinary course of business. Management
believes that, while the ultimate outcome of the contingencies cannot be predicted with certainty, the
ultimate liability, if any, will not have a material adverse effect on our financial position or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S 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 shows the high and low sales prices for our common stock for the periods indicated, as
reported by the NYSE, and dividends declared per common share. The amounts reflect the three-for-two
stock split (effected as a 50% stock dividend) of January 12, 2004 and the four-for-three stock split
(effected as a 331/3% stock dividend) of March 16, 2005.
Year Ended September 30, 2005
Declared
Dividends
High
Low
Year Ended September 30, 2004
Declared
Dividends
High
Low
1st QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2nd Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3rd Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4th Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$31.41
34.58
39.20
42.82
$20.40
27.44
26.83
33.34
$.0600
.0675
.0900
.0900
$22.69
27.38
26.96
25.75
$16.30
18.50
18.47
18.58
$.0350
.0600
.0600
.0600
As of December 1, 2005, the closing price of our common stock on the NYSE was $36.01, and there
were approximately 681 holders of record.
The declaration of 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 general financial condition and
general business conditions. We are required to comply with certain covenants contained in the bank
agreements and many of our senior note and senior subordinated note indentures. The most restrictive of
these requirements allows us to pay cash dividends on our common stock in an amount, on a cumulative
basis, not to exceed 50% of consolidated net income, as defined, subject to certain other adjustments.
Pursuant to the most restrictive of these requirements, at September 30, 2005, we had approximately
$1.4 billion available for the payment of dividends, the acquisition of our common stock and other
restricted payments.
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 2005, 2004 and 2003, we did not sell any securities that were not registered under
the Securities Act of 1933, as amended.
In May 2005, our Board of Directors authorized the repurchase of up to $175.6 million of our
common stock as market conditions or other circumstances may warrant. No repurchases were made
under this authorization during fiscal 2005. In November 2005, our Board of Directors increased the
authorization for repurchases of our common stock to $500 million. The November 2005 authorization
replaced the previous authorization.
17
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 the Consolidated Financial Statements, related
Notes thereto and other financial data elsewhere herein. These historical results are not necessarily
indicative of the results to be expected in the future.
Year Ended September 30,
2005
2004
2002
(In millions, except per share data)
2003
2001
Income Statement Data(1):
Revenues:
Homebuilding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross profit Ó Homebuilding ÏÏÏÏÏÏÏÏ
Income before income taxes:
$13,628.6
235.1
3,488.3
$10,658.0
182.8
2,460.7
$8,552.1
176.0
1,746.3
$6,625.2
113.6
1,260.8
$4,383.6
72.0
856.4
Homebuilding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,273.0
105.6
1,508.2
74.7
Income before cumulative effect of
change in accounting
principle(2)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before cumulative effect of
change in accounting principle
per share(4):
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted(3)(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income per share(4):
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash dividends declared per common
share(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,470.5
1,470.5
975.1
975.1
4.71
4.62
4.71
4.62
3.14
3.09
3.14
3.09
914.7
93.5
626.0
626.0
2.11
1.99
2.11
1.99
591.1
56.4
404.7
404.7
1.51
1.39
1.51
1.39
380.8
27.0
254.9
257.0
1.12
1.07
1.13
1.08
0.3075
0.2150
0.1350
0.0967
0.0604
2005
2004
As of September 30,
2003
(In millions)
2002
2001
Balance Sheet Data(1):
Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 8,486.8
12,514.8
4,909.6
5,360.4
$6,567.4
8,985.2
3,499.2
3,960.7
$5,082.3
7,279.4
2,963.2
3,031.3
$4,343.1
6,017.5
2,878.3
2,269.9
$2,804.4
3,652.2
1,884.3
1,250.2
(1) On February 21, 2002, we acquired Schuler Homes in a merger. The total merger consideration
consisted of 20,079,532 shares (pre-splits) of D.R. Horton common stock, valued at $30.93 per share
(pre-splits); $168.7 million in cash; $802.2 million of assumed Schuler debt, $238.2 million of which
was paid at closing; $218.7 million of assumed trade payables and other liabilities; and $10.8 million
of assumed obligations to the Schuler entities' minority interest holders. Schuler's revenues for the
period February 22, 2002 through September 30, 2002 were $1,246.6 million.
(2) In fiscal 2001, we recorded a cumulative effect of a change in accounting principle of $2.1 million,
net of income taxes of $1.3 million, as an adjustment to net income, related to our adoption of
18
Statement of Financial Accounting Standards No. 133, ""Accounting for Derivative Instruments and
Hedging Activities.''
(3) Beginning in fiscal 2002, pursuant to our adoption of Statement of Financial Accounting Standards
No. 142, we no longer amortize goodwill, but test it for impairment annually. If we had not amortized
goodwill in fiscal 2001, reported net income and diluted net income per share (before cumulative
effect of change in accounting principle and adjusted to reflect the effects of the three-for-two
common stock splits, effected as 50% stock dividends and paid on April 9, 2002 and January 12, 2004,
and the four-for-three common stock split, effected as a 331/3% stock dividend and paid on March 16,
2005) would have been:
Income Before Cumulative Effect of
Change in Accounting Principle
Diluted Income Before Cumulative Effect
of Change in Accounting Principle
per Share
Originally
Reported
Increase
(In millions)
Excluding
Goodwill
Amortization
Including
Goodwill
Amortization
Excluding
Goodwill
Amortization
Increase
2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$254.9
$6.0
$260.9
$1.07
$0.03
$1.10
(4) All basic and diluted income per share amounts and cash dividends declared per share amounts
reflect the effects of the three-for-two stock splits (effected as 50% stock dividends) of April 9, 2002
and January 12, 2004, and the four-for-three stock split (effected as a 331/3% stock dividend) of
March 16, 2005.
(5) The adoption of Emerging Issues Task Force Issue No. 04-8, ""The Effect of Contingently Convertible
Debt on Diluted Earnings per Share'' (EITF 04-8), reduced diluted net income per share by $0.06,
$0.05 and $0.03 for the fiscal years ended September 30, 2003, 2002 and 2001, respectively. See
Note A to the Consolidated Financial Statements for additional details concerning the adoption of
EITF 04-8.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Critical Accounting Policies
General Ì 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,
2005 and 2004, and for the years ended September 30, 2005, 2004 and 2003. 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.
Basis of Presentation Ì Our financial statements include the accounts of D.R. Horton, Inc. and all of
its wholly-owned, majority-owned and controlled subsidiaries. All significant intercompany accounts,
transactions and balances have been eliminated in consolidation. We have also consolidated certain
variable interest entities from which we are purchasing lots under option purchase contracts, under the
requirements of Interpretation No. 46 issued by the Financial Accounting Standards Board (FASB).
Use of Estimates Ì The preparation of financial statements in conformity with GAAP requires us to
make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
Segment Information Ì We report our consolidated financial statements in accordance with
Statement of Financial Accounting Standards (SFAS) No. 131, ""Disclosures about Segments of an
Enterprise and Related Information.'' Our homebuilding operating regions are our operating segments
under SFAS No. 131 and have been aggregated into a single homebuilding reportable segment. Our
homebuilding segment derives the majority of its revenue from constructing and selling single-family
housing in 25 states and 74 markets throughout the United States. Our other operating and reporting
segment is our financial services segment. The financial services segment generates revenue by originating
and selling mortgage loans and by collecting fees for title insurance and closing services in many of the
same markets. We have no foreign subsidiaries or operations.
Revenue Recognition Ì 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 buyer's financing is originated by DHI Mortgage, our wholly-owned mortgage
subsidiary, and the buyer has not made an adequate initial investment as prescribed by SFAS No. 66, the
gross profit on such sales is deferred until the sale of the related mortgage loan to a third-party investor
has been completed. Virtually all of our homebuilding revenues are received in cash within a day or two of
closing. We include amounts in transit from title companies at the end of each reporting period 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 recognize the majority of the revenues associated with our mortgage operations
when the mortgage loans and related servicing rights are sold to third-party investors. Origination fees and
direct origination costs are deferred and recognized as revenues and expenses, respectively, along with the
associated gains and losses on the sales of the loans and related servicing rights, when the loans are sold.
We sell all mortgage loans and related servicing rights to third-party investors.
20
Some of the loans sold by DHI Mortgage are sold with limited recourse provisions. Based on
historical experience, we estimate and record an allowance for losses related to loans sold with recourse. In
the past, such losses have not been significant.
Inventories and Cost of Sales Ì We state inventories at the lower of historical cost or fair value in
accordance with SFAS No. 144. In addition to the costs of direct land acquisition, land development and
home construction, inventory costs include interest, real estate taxes and direct overhead costs incurred
during development and home construction. Applicable direct overhead costs that we incur after
development projects or homes are substantially complete, such as utilities, maintenance, and cleaning, are
charged to selling, general and administrative (SG&A) expense as incurred. All indirect overhead costs,
such as compensation of construction superintendents, sales personnel and division and region
management, advertising and builder's risk insurance are charged to SG&A expense as incurred.
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 project. Any changes to the estimated total
development costs subsequent to the initial home closings in a project are generally allocated on a pro-rata
basis to the remaining homes in the project.
When a home is closed, we generally have not yet paid and recorded all incurred costs necessary to
complete the home. Each month we record as a liability and as a charge to cost of sales the amount we
determine will ultimately be paid related to completed homes that have been closed as of the end of that
month. We compare our home construction budgets to actual recorded costs to determine the additional
costs remaining to be paid on each closed home. We monitor the accuracy of each month's accrual by
comparing actual costs incurred on closed homes in subsequent months to the amount we accrued.
Although actual costs to be paid on closed homes in the future could differ from our current accruals, our
method has historically been consistently accurate.
Each quarter, we review all components of our inventory for the purpose of determining whether
recorded costs and costs required to complete each home or project are recoverable. If our review indicates
that an impairment loss is required under the SFAS No. 144 guidelines, we estimate and record such loss
to cost of sales in that quarter. To date, such impairment losses have been insignificant in the aggregate.
Fair value estimation under SFAS No. 144 involves management estimates of future revenues and costs
and, due to uncertainties in the estimation process, actual results could differ from such estimates.
Consolidation of Variable Interest Entities Ì In January 2003, the FASB issued Interpretation
No. 46, ""Consolidation of Variable Interest Entities'' as amended (FIN 46). FIN 46 provides guidance for
the financial accounting and reporting of interests in certain variable interest entities, which FIN 46
defines as certain business entities that either have equity investors with no voting rights or have equity
investors that do not provide sufficient financial resources for the entities to support their activities.
FIN 46 requires consolidation of such entities by any company that is subject to a majority of the risk of
loss from the entities' activities or is entitled to receive a majority of the entities' residual returns or both,
defined as the primary beneficiary of the variable interest entity.
In the ordinary course of business, we enter into land and lot option purchase contracts in order to
procure land or lots for the construction of homes. Under such option purchase 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. Certain of these deposits are deemed to create a
variable interest in a variable interest entity under the requirements of FIN 46. As such, certain of our
option purchase contracts result in the acquisition of a variable interest in the entity holding the land
parcel under option.
In applying the provisions of FIN 46, we evaluate those land and lot option purchase contracts with
variable interest entities to determine whether we are the primary beneficiary based upon analysis of the
21
variability of the expected gains and losses of 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.
Since we own no equity interest in any of the unaffiliated variable interest entities that we must
consolidate pursuant to FIN 46, we generally have little or no control or influence over the operations of
these entities or their owners. When our requests for financial information are denied by the land sellers,
certain assumptions about the assets and liabilities of such entities are required. In most cases, the fair
value of the assets of the consolidated entities has been assumed to be the remaining contractual purchase
price of the land or lots we are purchasing. In these cases, it is assumed that the entities have no debt
obligations and the only asset recorded is the land or lots we have the option to buy with a related offset
to minority interest for the assumed third party investment in the variable interest entity. Creditors, if any,
of these variable interest entities have no recourse against us.
Warranty Costs Ì We have established warranty reserves by charging cost of sales and crediting a
warranty liability for each home closed. We estimate the amounts charged to be adequate to cover
expected warranty-related costs for materials and labor required under one- and ten-year warranty
obligation periods. The one-year warranty is comprehensive for all parts and labor; the ten-year period is
for major construction defects. Our warranty cost accruals are based upon our historical warranty cost
experience in each market in which we operate and are adjusted as appropriate to reflect qualitative risks
associated with the type of homes we build and the geographic areas in which we build them. Actual
future warranty costs could differ from our currently estimated amounts. A 10% change in the historical
warranty rates used to estimate our warranty accrual would not result in a material change in our accrual.
Insurance Claim Costs Ì We have, and require the majority of our subcontractors to have, general
liability insurance (including construction defect coverage) and workers compensation insurance. These
insurance policies protect us against a portion of our risk of loss from claims, subject to certain self-insured
retentions, deductibles and other coverage limits. In some states where we believe it is too difficult or
expensive for our subcontractors to obtain general liability insurance, we have waived our traditional
subcontractor general liability insurance requirements to obtain lower bids from subcontractors. We
self-insure a portion of our overall risk, partially through the use of a captive insurance entity which issues
a general liability policy to us, naming some subcontractors as additional insureds.
We record expenses and liabilities for costs to cover our self-insured and deductible amounts under
our insurance policies and for any estimated costs of claims and lawsuits in excess of our coverage limits
or not covered by our policies, based on an analysis of our historical claims, which includes an estimate of
construction defect claims incurred but not yet reported. Projection of losses related to these liabilities is
subject to a high degree of variability due to uncertainties such as trends in construction defect claims
relative to our markets and the types of products we build, claim settlement patterns, insurance industry
practices and legal interpretations, among others. Because of the high degree of judgment required in
determining these estimated liability amounts, actual future costs could differ significantly from our
currently estimated amounts. A 10% change in the claim rate or the average cost per claim used to
estimate the self-insured accruals would not result in a material change in our accrual.
Goodwill Ì We adopted SFAS No. 142 at the beginning of fiscal 2002. Under its provisions, we are
no longer permitted to amortize goodwill to earnings. Such amounts are recorded on our balance sheet
under the caption ""Goodwill.'' SFAS No. 142 requires companies to periodically assess recorded goodwill
amounts for the purpose of determining whether any impairments have occurred and need to be recorded.
We have measured the fair value of our reporting units using a discounted cash flow model and
determined that the fair value of our reporting units is greater than their book value and therefore no
impairment of goodwill exists. We regularly evaluate whether events and circumstances have occurred that
indicate the remaining balance of goodwill may not be recoverable. The goodwill assessment procedures
required by SFAS No. 142 require management to make comprehensive estimates of future revenues and
costs. Due to the uncertainties associated with such estimates, actual results could differ from such
estimates.
22
Income Taxes Ì We calculate a provision for income taxes using the asset and liability method, under
which deferred tax assets and liabilities are recognized by identifying the temporary differences arising
from the different treatment of items for tax and accounting purposes. In determining the future tax
consequences of events that have been recognized in our financial statements or tax returns, judgment is
required. 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.
In December 2004, the FASB issued Staff Position 109-1, ""Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004'' (FSP 109-1). The American Jobs Creation Act, which was signed
into law in October 2004, provides a tax deduction on qualified domestic production activities. When fully
phased-in, the deduction will be up to 9% of the lesser of ""qualified production activities income'' or
taxable income. Based on the guidance provided by FSP 109-1, this deduction should be accounted for as
a special deduction under SFAS No. 109 and will reduce tax expense in the period or periods that the
amounts are deductible on the tax return. The tax benefit resulting from the new deduction will be
effective beginning in our first quarter of fiscal year 2006. We are evaluating the impact of this law on our
future financial statements, and we currently estimate the future reduction in our federal income tax rate
to be in the range of 0.50% to 0.75%.
Stock-based Compensation Ì With the approval of our compensation committee, consisting of
independent members of our Board of Directors, we from time to time issue to employees and directors
options to purchase our common stock. The committee approves grants only out of amounts remaining
available for grant from amounts formally authorized by our common stockholders. We typically grant
approved options with exercise prices equal to the market price of our common stock on the date of the
option grant. The majority of the options granted vest ratably over a ten-year period. We account for
options under the provisions of Accounting Principles Board (APB) Opinion No. 25, ""Accounting for
Stock Issued to Employees,'' and, accordingly, recognize no compensation expense for the grants.
SFAS No. 123 ""Accounting for Stock-Based Compensation,'' and SFAS No. 148, ""Accounting for
Stock-Based Compensation Ì Transition and Disclosure, an amendment of FASB Statement No. 123,''
require us to disclose the effects on net income and diluted net income per share had we recorded
compensation expense in accordance with SFAS No. 123. The SFAS No. 123 requirements applied only
to options granted after its effective date.
In December 2004, the FASB issued SFAS No. 123(R), ""Share-Based Payment.'' This statement,
which replaces SFAS No. 123 and supersedes APB Opinion No. 25, requires that companies measure and
recognize compensation expense at an amount equal to the fair value of share-based payments granted
under compensation arrangements. The statement is effective beginning in our first quarter of fiscal year
2006. We have evaluated the impact of the adoption of SFAS No. 123(R), and we have determined that
it will not have a material impact on our consolidated financial position, results of operations or cash flows.
Results of Operations Ì Fiscal Year 2005 Overview
We generated significant increases in revenues and earnings during the fiscal year ended
September 30, 2005, driven primarily by the continued growth of our homebuilding operations and by
significant improvements in homebuilding profit margins.
The demand from first-time and move-up homebuyers in the United States was favorable during
fiscal 2005, as national new home sales remained at a historically high level. Additionally, low mortgage
rates continued to be a positive influence on housing demand during fiscal 2005.
However, we believe that the primary drivers of housing demand were local in nature, related to the
strength of market-specific economic factors such as local job growth, unemployment rates and income
growth. Additionally, we believe that the supply of new homes was significantly affected by local factors,
such as government approval processes and the availability of land and lots suitable for residential
construction. In a number of markets, increasingly difficult and lengthy governmental approval processes
have limited the supply of new housing, which has contributed to new home price appreciation. Due to
23
such local factors, housing demand and supply has varied significantly among markets, which has created
differing competitive dynamics for homebuilders in each individual market. Due in part to these factors,
the overall U.S. homebuilding industry remains highly fragmented. However, the industry consolidation
that began in the early 1990s continued in 2005.
In 2005, we continued to execute our strategy of generating consistent, profitable growth through
gaining market share, increasing capital allocated to strong homebuilding markets and capitalizing on our
national, regional and local scale to improve our material, labor and capital cost structures.
Key financial highlights for our fiscal year ended September 30, 2005 were as follows:
Homebuilding Operations:
‚ Homebuilding revenues increased by 28% in fiscal 2005 and the value of net sales orders grew by
28%.
‚ Homebuilding operating margins increased by 250 basis points during fiscal 2005 due to
improvements in homebuilding gross margins and control of overhead costs.
‚ Homebuilding pre-tax income increased 51% in fiscal 2005, reflecting a 42% increase in
homebuilding gross profit, while overhead costs increased only 28%.
‚ Our sales order backlog at September 30, 2005 was $5.8 billion, a fiscal year-end record and 28%
higher than our backlog at September 30, 2004.
‚ Net homebuilding debt to total capital, which is calculated as homebuilding notes payable net of
cash divided by total capital (homebuilding notes payable net of cash plus stockholders' equity),
was 32.2% at September 30, 2005, an improvement of 670 basis points from the prior year, and an
all-time low for the Company.
Financial Services Operations:
‚ Total financial services revenues increased 29% in fiscal 2005, driven by the growth in our
homebuilding business and an increase in the percentage of our homes closed that were served by
DHI Mortgage compared to fiscal 2004.
‚ Financial services pre-tax income increased by 41% in fiscal 2005, due to increased revenue from
loan production and title closings, leveraging our financial services overhead costs and controlling
our operating costs.
Consolidated Results:
‚ Net income increased 51% in fiscal 2005, due to the significant growth in consolidated revenues
and improvements in homebuilding and financial services operating margins.
‚ Diluted earnings per share increased 50% in fiscal 2005.
‚ The effective income tax rate for fiscal 2005 was 38.2%, as compared to 38.4% in fiscal 2004 and
37.9% in fiscal 2003. The increases in our effective income tax rates in 2005 and 2004 as compared
with 2003 were due primarily to increases in pre-tax income in states with higher state income tax
rates.
Our operating strategy for fiscal 2006 is to take advantage of opportunities to grow our homebuilding
business profitability through capturing greater market share, while continuing to maintain a strong balance
sheet. We plan to execute our growth strategy primarily by investing our available capital in our existing
homebuilding markets through our capital allocation process and entering satellite markets as opportunities
are available. However, we will continue to evaluate homebuilding acquisition opportunities as they arise.
To the extent that additional capital is available in excess of amounts we choose to invest in our
homebuilding operations, we will consider directing such capital toward alternative uses, including stock
24
repurchases, as market conditions or other circumstances may warrant, within the constraints of our
balance sheet leverage targets and the restrictions in our bank agreements and indentures.
Results of Operations Ì Homebuilding
Fiscal Year Ended September 30, 2005 Compared to Fiscal Year Ended September 30, 2004
The following tables set forth key operating and financial data for our homebuilding operations by
geographic region as of and for the fiscal years ended September 30, 2005 and 2004:
Net Sales Orders
Fiscal Years Ended September 30,
Homes Sold
Value (In millions)
Average Selling Price
2005
2004
%
Change
2005
2004
%
Change
2005
2004
Mid-Atlantic ÏÏÏ
MidwestÏÏÏÏÏÏÏ
SoutheastÏÏÏÏÏÏ
Southwest ÏÏÏÏÏ
WestÏÏÏÏÏÏÏÏÏÏ
5,072
3,093
8,181
21,375
15,511
4,032
2,261
6,301
18,146
14,523
26% $ 1,342.7
821.5
37%
2,036.3
30%
4,227.8
18%
6,215.1
7%
$ 1,009.7
634.5
1,375.8
3,086.7
5,299.5
33% $264,700
265,600
29%
248,900
48%
197,800
37%
400,700
17%
$250,400
280,600
218,300
170,100
364,900
%
Change
6%
(5)%
14%
16%
10%
53,232
45,263
18% $14,643.4
$11,406.2
28% $275,100
$252,000
9%
Homes in Backlog
2005
2004
%
Change
Sales Order Backlog
As of September 30,
Value (In millions)
Average Selling Price
2005
2004
%
Change
2005
2004
Mid-Atlantic ÏÏÏÏÏ
MidwestÏÏÏÏÏÏÏÏÏ
SoutheastÏÏÏÏÏÏÏÏ
Southwest ÏÏÏÏÏÏÏ
WestÏÏÏÏÏÏÏÏÏÏÏÏ
2,516
1,361
3,136
7,273
4,958
1,740
45% $ 747.7
861
402.2
58%
908.4
2,987
5%
1,665.0
10%
6,632
2,111.9
4,964 Ì%
$ 492.2
269.7
698.6
1,195.3
1,912.7
52% $297,200
295,500
49%
289,700
30%
228,900
39%
426,000
10%
$282,900
313,200
233,900
180,200
385,300
%
Change
5%
(6)%
24%
27%
11%
19,244
17,184
12% $5,835.2
$4,568.5
28% $303,200
$265,900
14%
Homes Closed
Fiscal Years Ended September 30,
Homes Closed
Value (In millions)
Average Selling Price
2005
2004
%
Change
2005
2004
%
Change
2005
2004
Mid-Atlantic ÏÏÏ
MidwestÏÏÏÏÏÏÏ
SoutheastÏÏÏÏÏÏ
Southwest ÏÏÏÏÏ
WestÏÏÏÏÏÏÏÏÏÏ
4,296
2,593
8,032
20,734
15,517
3,894
2,381
5,137
18,190
13,965
10% $ 1,087.1
688.9
9%
1,826.5
56%
3,758.1
14%
6,016.0
11%
$
888.4
643.7
1,041.3
3,012.3
4,905.4
22% $253,000
265,700
7%
227,400
75%
181,300
25%
387,700
23%
$228,100
270,300
202,700
165,600
351,300
%
Change
11%
(2)%
12%
9%
10%
51,172
43,567
17% $13,376.6
$10,491.1
28% $261,400
$240,800
9%
25
Homebuilding Operating Margin Analysis
Percentages of
Homebuilding
Revenues
Fiscal Years Ended
September 30,
2005
2004
Gross profit Ì Home sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross profit Ì Land/lot salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross profit Ì Total homebuilding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selling, general and administrative expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other (income) expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
25.4%
35.5%
25.6%
9.0%
(0.1)%
16.7%
22.8%
38.5%
23.1%
9.0%
(0.1)%
14.2%
Net sales orders represent the number and dollar value of new sales contracts executed with
customers, net of sales contract cancellations. The value of net sales orders increased 28%, to
$14,643.4 million (53,232 homes) in 2005 from $11,406.2 million (45,263 homes) in 2004. The overall
cancellation rates of the value of new sales contracts in 2005 and 2004 were 19% and 17%, respectively.
The average price of a net sales order in 2005 was $275,100, up 9% from the $252,000 average in 2004.
The number and value of net sales orders increased in all five of our market regions, reflecting the
successful execution of our organic growth strategies and the overall strong demand for our homes in fiscal
2005.
All regions produced double-digit percentage increases in the value of net sales orders during fiscal
2005, led by a 48% increase in the Southeast region resulting from our continued expansion of our
presence in our Florida markets where housing demand is high. The average price of net sales orders
increased in all of our regions except the Midwest, where the average sales price was down 5% due to our
efforts to offer more lower-priced products in the Chicago market. While we continue to increase prices in
the markets where demand for our homes is strongest, we remain focused on ensuring that our core
product offerings and prices in most of our markets remain affordable for our core customers, typically
first-time and move-up homebuyers.
Sales order backlog represents homes under contract but not yet closed at the end of the period.
Some of the contracts in our sales order backlog are subject to contingencies, including mortgage loan
approval, which can result in cancellations. In the past, our backlog has been a reliable indicator of the
level of closings in our two subsequent fiscal quarters, although some contracts in backlog will not result in
closings. Historically, our backlog conversion rates (closings during the quarter divided by beginning of the
quarter backlog), have generally been in the range between 50% and 75%, with the highest quarterly
conversion rate of each fiscal year typically occurring in the fourth quarter.
At September 30, 2005, the value of our backlog of sales orders was $5,835.2 million (19,244 homes),
up 28% from $4,568.5 million (17,184 homes) at September 30, 2004. The average sales price of homes in
backlog was $303,200 at September 30, 2005, up 14% from the $265,900 average at September 30, 2004.
The value of our sales order backlog increased in all five of our market regions, led by increases of 52% in
our Mid-Atlantic region, where we have significantly increased our capital investment, and 49% in our
Midwest region, where sales in our Chicago market were especially strong in 2005. The average selling
price of homes in backlog increased in four of our five market regions, with the largest increases occurring
in our Southeast and Southwest regions, where generally strong demand for our homes allowed us to
increase prices. The average sales price in the Midwest was down 6% due to the strong market acceptance
of recently introduced, more affordably priced products in the Chicago market.
Revenues from home sales increased 28%, to $13,376.6 million (51,172 homes closed) in 2005 from
$10,491.1 million (43,567 homes closed) in 2004. Revenues from home sales increased by more than 20%
and the number of homes closed increased by 10% or more in four of our five market regions. These
results reflect the successful execution of our growth strategies, continued strength in demand for new
26
homes and our homebuilding divisions' ability to efficiently deliver homes in backlog to homebuyers. The
average selling price of homes we closed during 2005 was $261,400, up 9% from $240,800 in 2004. The
average selling price of homes closed increased by 9% or more in four of our five market regions. The
average selling price of homes closed in our Midwest region decreased by 2% due to our offerings of more
affordable products in the Chicago market. Revenues from home sales in fiscal 2005 were reduced by a
$92.2 million deferral of gross profit at September 30, 2005, in accordance with SFAS 66.
Total homebuilding gross profit increased by 42%, to $3,488.3 million in 2005 from $2,460.7 million in
2004. Including sales of both homes and land/lots, total homebuilding gross profit as a percentage of
homebuilding revenues increased 250 basis points, to 25.6% in 2005 from 23.1% in 2004. Gross profit from
home sales as a percentage of home sales revenues increased 260 basis points, to 25.4% in 2005 from
22.8% in 2004. This gross profit improvement is attributable to our ability to increase home prices in many
of our markets; our ongoing efforts to control and reduce construction costs through our local, regional and
national purchasing efforts; our ongoing re-allocation of capital to our more profitable markets and a
decrease in the capitalized interest amortized to cost of sales attributable to our homebuilding leverage
ratio improvement and our debt refinancing efforts over the past two years.
SG&A expenses from homebuilding activities increased by 28%, to $1,226.6 million in 2005 from
$959.0 million in 2004. As a percentage of revenues, SG&A expenses were 9.0% in both years.
Interest incurred related to homebuilding debt increased by 17%, to $277.3 million in 2005 from
$236.7 million in 2004, while our average daily homebuilding debt increased 26% in 2005 from 2004. The
percentage increase in our average homebuilding debt was higher than the percentage increase in our
interest incurred due to the March 2004 restructuring of our unsecured revolving credit facility which
resulted in lower borrowing costs throughout 2005, and due to our efforts over the past two fiscal years to
replace some of our higher interest rate notes with notes bearing lower interest rates.
We capitalize interest costs only to inventory under construction or development. During both fiscal
years, our inventory under construction or development exceeded our interest-bearing debt; therefore, we
capitalized all interest from homebuilding debt except for the unamortized discounts, premiums and fees
related to debt we paid off prior to maturity. Interest amortized to cost of sales decreased by 10%, to
$225.0 million in 2005 from $249.0 million in 2004. This reduction in interest amortized to total cost of
sales is a direct result of the reductions in our homebuilding leverage and our debt refinancing efforts over
the last two years.
Other income, net of other expenses, associated with homebuilding activities was $15.7 million in
2005, compared to $9.9 million in 2004. The major component of other income in both 2005 and 2004 was
the increase in the fair value of our interest rate swaps of $9.5 million and $8.1 million, respectively. Also
included in other income in 2005 and 2004 was interest income of $3.9 million and $2.2 million,
respectively.
27
Fiscal Year Ended September 30, 2004 Compared to Fiscal Year Ended September 30, 2003
The following tables set forth key operating and financial data for our homebuilding operations by
geographic region as of and for the fiscal years ended September 30, 2004 and 2003:
Net Sales Orders
Fiscal Years Ended September 30,
Homes Sold
Value (In millions)
Average Selling Price
2004
2003
%
Change
2004
2003
%
Change
2004
2003
Mid-Atlantic ÏÏÏÏ
MidwestÏÏÏÏÏÏÏÏ
SoutheastÏÏÏÏÏÏÏ
Southwest ÏÏÏÏÏÏ
WestÏÏÏÏÏÏÏÏÏÏÏ
4,032
2,261
6,301
18,146
14,523
3,594
2,067
4,528
15,699
12,837
12% $ 1,009.7
634.5
9%
1,375.8
39%
3,086.7
16%
5,299.5
13%
$ 780.8
553.6
863.3
2,614.7
4,349.9
29% $250,400
280,600
15%
218,300
59%
170,100
18%
364,900
22%
$217,300
267,800
190,700
166,600
338,900
45,263
38,725
17% $11,406.2
$9,162.3
24% $252,000
$236,600
Homes in Backlog
2004
2003
%
Change
Sales Order Backlog
As of September 30,
Value (In millions)
Average Selling Price
2004
2003
%
Change
2004
2003
Mid-Atlantic ÏÏÏÏÏ
MidwestÏÏÏÏÏÏÏÏÏ
SoutheastÏÏÏÏÏÏÏÏ
Southwest ÏÏÏÏÏÏÏ
WestÏÏÏÏÏÏÏÏÏÏÏÏ
1,740
861
2,987
6,632
4,964
1,602
981
1,823
6,676
4,406
9% $ 492.2
269.7
(12)%
64%
698.6
(1)% 1,195.3
13% 1,912.7
$ 370.9
278.9
364.1
1,120.9
1,518.6
33% $282,900
(3)% 313,200
233,900
92%
180,200
7%
385,300
26%
$231,500
284,300
199,700
167,900
344,700
17,184
15,488
11% $4,568.5
$3,653.4
25% $265,900
$235,900
Homes Closed
Fiscal Years Ended September 30,
Homes Closed
Value (In millions)
Average Selling Price
2004
2003
%
Change
2004
2003
%
Change
2004
2003
Mid-Atlantic ÏÏÏÏ
MidwestÏÏÏÏÏÏÏÏ
SoutheastÏÏÏÏÏÏÏ
Southwest ÏÏÏÏÏÏ
WestÏÏÏÏÏÏÏÏÏÏÏ
3,894
2,381
5,137
18,190
13,965
3,245
2,002
4,374
14,209
12,104
20% $
19%
17%
28%
15%
888.4
643.7
1,041.3
3,012.3
4,905.4
$ 674.8
513.2
773.9
2,381.5
3,990.7
32% $228,100
270,300
25%
202,700
35%
165,600
26%
351,300
23%
$208,000
256,300
176,900
167,600
329,700
%
Change
15%
5%
14%
2%
8%
7%
%
Change
22%
10%
17%
7%
12%
13%
%
Change
10%
5%
15%
(1)%
7%
43,567
35,934
21% $10,491.1
$8,334.1
26% $240,800
$231,900
4%
28
Homebuilding Operating Margin Analysis
Gross profit Ì Home sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross profit Ì Land/lot salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross profit Ì Total homebuilding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selling, general and administrative expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other (income) expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percentages of
Homebuilding
Revenues
Fiscal Years Ended
September 30,
2004
22.8%
38.5%
23.1%
9.0%
(0.1)%
14.2%
2003
20.6%
15.3%
20.4%
9.6%
0.2%
10.7%
The value of net sales orders increased 24%, to $11,406.2 million (45,263 homes) in 2004 from
$9,162.3 million (38,725 homes) in 2003. The overall cancellation rates of the value of new sales contracts
in 2004 and 2003 were 17% and 18%, respectively. The average price of a net sales order in 2004 was
$252,000, up 7% from the $236,600 average in 2003. The number of homes sold, value and the average
price of net sales orders increased in each of our market regions during 2004 due to the successful
execution of our growth strategies and generally strong demand for our homes in all of our market regions.
The largest increases in the value of net sales orders occurred in the Southeast and Mid-Atlantic regions,
which was the result of our efforts to significantly increase our presence in our Florida, Virginia and
Maryland markets. The increase in our average selling price reflected our ability to increase prices in the
markets where demand for our homes was strongest in 2004, while we continued our efforts to ensure that
our product offerings and prices in most of our markets remain affordable for our target customers,
typically first-time and move-up homebuyers.
At September 30, 2004, the value of our backlog of sales orders was $4,568.5 million (17,184 homes),
up 25% from $3,653.4 million (15,488 homes) at September 30, 2003. The average sales price of homes in
backlog was $265,900 at September 30, 2004, up 13% from the $235,900 average at September 30, 2003.
The value of our sales order backlog increased in four of our five market regions, led by a 92% increase in
the Southeast region, which was a result of our efforts to significantly increase our presence in our Florida
markets. The average selling price of homes in backlog increased in all of our market regions, reflecting
the generally strong demand for our homes in fiscal 2004 which allowed us to increase prices.
Revenues from home sales increased 26%, to $10,491.1 million (43,567 homes closed) in 2004 from
$8,334.1 million (35,934 homes closed) in 2003. Revenues from home sales increased by more than 20%
in all of our five market regions, and the number of homes closed increased by 15% or more in all market
regions, reflecting the successful execution of our growth strategies and our homebuilding divisions' ability
to efficiently deliver homes in backlog to homebuyers. The average selling price of homes we closed during
2004 was $240,800, up 4% from $231,900 in 2003. The average selling price of homes closed increased in
four of our five market regions, with the largest increases occurring in the Southeast and Mid-Atlantic
regions.
Total homebuilding gross profit increased by 41%, to $2,460.7 million in 2004 from $1,746.3 million in
2003. Including sales of both homes and land/lots, total homebuilding gross profit as a percentage of
homebuilding revenues increased 270 basis points, to 23.1% in 2004 from 20.4% in 2003. Gross profit from
home sales as a percentage of home sales revenues increased 220 basis points, to 22.8% in 2004 from
20.6% in 2003, which was attributable to our ability to increase home prices due to strong demand for our
homes in many of our markets in 2004 and our ongoing efforts to control and reduce construction costs as
we achieve greater economies of scale.
SG&A expenses from homebuilding activities increased by 17%, to $959.0 million in 2004 from
$817.0 million in 2003. As a percentage of revenues, SG&A expenses decreased 60 basis points, to 9.0% in
2004 from 9.6% in 2003. The improvement in SG&A expenses as a percentage of revenues was
29
attributable to our ongoing cost control efforts and our ability to generate higher revenue levels that better
leveraged our existing fixed SG&A expenses in 2004.
Interest incurred related to homebuilding debt decreased by 1%, to $236.7 million in 2004 from
$239.5 million in 2003. Our average homebuilding debt increased 5% in 2004 from 2003; however, we
replaced certain of our higher interest rate notes with notes bearing lower interest rates, and we
restructured and amended our unsecured revolving credit facility, which lowered our interest costs,
resulting in this slight decrease in interest incurred in 2004.
We capitalize interest costs only to inventory under construction or development. During both years,
our inventory under construction or development exceeded our interest-bearing debt; therefore, we
capitalized all interest from homebuilding debt except for the unamortized discounts and fees related to
debt we paid off prior to maturity. Interest amortized to cost of sales increased by 13% to $249.0 million
in 2004 from $219.4 million in 2003. This increase was attributable to a 20% increase in total cost of sales,
partially offset by the effects of the decline in interest incurred.
Other income associated with homebuilding activities was $9.9 million in 2004, compared to other
expense of $9.4 million in 2003. The major component of other income in 2004 was an increase in the fair
value of our interest rate swaps of $8.1 million. The major component of other expense in 2003 was
$11.8 million of minority interests in the income of our consolidated joint ventures.
30
Results of Operations Ì Financial Services
Fiscal Year Ended September 30, 2005 Compared to Fiscal Year Ended September 30, 2004
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,
2005 and 2004:
Fiscal Years Ended September 30,
% Change
2004
2005
Number of first-lien loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Number of homes closed by D.R. Horton ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage capture rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Number of total loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total number of loans originated or brokered by DHI MortgageÏÏÏ
Captive business percentage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans sold by DHI Mortgage to third parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
32,404
51,172
63%
43,581
46,648
93%
35,962
26,387
43,567
61%
30,801
33,621
92%
28,173
23%
17%
41%
39%
28%
Loan origination fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sale of servicing rights and gains from sale of mortgages ÏÏÏÏÏÏÏÏÏ
Other revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Fiscal Years Ended September 30,
% Change
2004
(In millions)
$ 35.4
87.5
23.2
$ 40.0
113.5
32.7
13%
30%
41%
Total mortgage banking revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Title policy premiums, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
186.2
48.9
235.1
147.6
16.8
(34.9)
146.1
36.7
182.8
121.0
5.9
(18.8)
Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$105.6
$ 74.7
27%
33%
29%
22%
185%
86%
41%
Percentages of
Financial
Services
Revenues
Fiscal Years Ended
September 30,
2005
2004
General and administrative expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
62.8%
7.1%
(14.8)%
44.9%
66.2%
3.2%
(10.3)%
40.9%
The volume of loans originated and brokered by our mortgage operations is directly related to the
number and value of homes closed by our homebuilding operations. Total first-lien loans originated or
brokered by DHI Mortgage for our homebuyers increased 23% in fiscal 2005 compared to fiscal 2004,
which was greater than our 17% increase in the number of homes closed because the percentage of total
home closings from our own homebuyers for which DHI Mortgage handled the financing (our mortgage
capture rate) increased to 63% in 2005 from 61% in 2004. Home closings from our own homebuyers
31
constituted 93% of DHI Mortgage loan originations in 2005, compared to 92% in 2004, reflecting DHI
Mortgage's continued focus on supporting the captive business provided by our homebuilding operations.
Sales of loans to third-party investors increased 28% in 2005 as compared to 2004.
Revenues from the financial services segment increased 29%, to $235.1 million in 2005 from
$182.8 million in 2004. The increase in financial services revenues was primarily due to the increase in the
number of mortgage loans originated and sold, while the average mortgage revenues earned per loan sold
remained relatively constant. The majority of the revenues associated with our mortgage operations are
recognized when the mortgage loans and related servicing rights are sold to third-party investors.
General and administrative expenses associated with financial services increased 22%, to
$147.6 million in 2005 from $121.0 million in 2004. As a percentage of financial services revenues, general
and administrative expenses decreased by 340 basis points, to 62.8% in 2005 from 66.2% in 2004. The
improvement in general and administrative expenses as a percentage of financial services revenue was due
primarily to the increase in revenues, which better leveraged our fixed costs in 2005 as compared to 2004,
and was also due to the effective cost control efforts of our financial services operations.
Fiscal Year Ended September 30, 2004 Compared to Fiscal Year Ended September 30, 2003
The following tables set forth key operating and financial data for our financial services operations for
the fiscal years ended September 30, 2004 and 2003:
Fiscal Years Ended September 30,
% Change
2003
2004
Number of first-lien loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Number of homes closed by D.R. Horton ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage capture rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Number of total loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total number of loans originated or brokered by DHI MortgageÏÏÏ
Captive business percentage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans sold by DHI Mortgage to third parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
26,387
43,567
61%
30,801
33,621
92%
28,173
21,744
35,934
61%
23,808
29,169
82%
26,818
21%
21%
29%
15%
5%
Loan origination fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sale of servicing rights and gains from sale of mortgages ÏÏÏÏÏÏÏÏÏ
Other revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004
Fiscal Years Ended September 30,
2003
% Change
(In millions)
$ 33.1
91.5
16.9
$ 35.4
87.5
23.2
7%
(4)%
37%
Total mortgage banking revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Title policy premiums, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
146.1
36.7
182.8
121.0
5.9
(18.8)
141.5
34.5
176.0
98.3
7.4
(23.2)
Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 74.7
$ 93.5
3%
6%
4%
23%
(20)%
(19)%
(20)%
32
Percentages of
Financial
Services
Revenues
Fiscal Years Ended
September 30,
2004
2003
General and administrative expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
66.2%
3.2%
55.9%
4.2%
(10.3)% (13.2)%
53.1%
40.9%
Total first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 21% in
fiscal 2004 compared to fiscal 2003, consistent with our 21% increase in the number of homes closed. The
percentage of total home closings from our own homebuyers which had financing handled by DHI
Mortgage (our mortgage capture rate) was 61% in both years. Home closings from our own homebuyers
constituted 92% of DHI Mortgage loan originations in 2004, compared to 82% in 2003, reflecting a
decrease in the number of refinance loans originated in 2004. Sales of loans to third-party investors
increased 5% in 2004 as compared to 2003.
Revenues from the financial services segment increased 4%, to $182.8 million in 2004 from
$176.0 million in 2003. The increase in financial services revenues was primarily due to an increase in the
number of mortgage loan originations to customers of our homebuilding operations and sold to third-party
investors, offset by a decline in the average mortgage revenues earned per loan sold. The decrease in the
average mortgage revenues earned per loan was primarily due to a shift in the product mix of mortgage
loans originated and sold from higher margin fixed-rate loans to lower margin adjustable-rate loans, and
increased competition due to excess capacity in the mortgage industry, which reduced the margins on all
mortgage loans in 2004.
General and administrative expenses associated with financial services increased 23%, to
$121.0 million in 2004 from $98.3 million in 2003. As a percentage of financial services revenues, general
and administrative expenses increased to 66.2% in 2004 from 55.9% in 2003. The increase in general and
administrative expenses as a percentage of financial services revenue and the related decrease in income
before income taxes were due primarily to the decline in average mortgage revenues earned per loan and
increased costs associated with strengthening our financial services infrastructure to support our growing
homebuilding business and expanding our mortgage operations into California.
Capital Resources and Liquidity
We fund our homebuilding and financial services operations with cash flows from operating activities,
borrowings under our bank credit facilities and the issuance of new debt securities. As we utilize our
capital resources and liquidity to fund the growth of our operations, we have focused on maintaining strong
balance sheet leverage ratios.
At September 30, 2005, our ratio of net homebuilding debt to total capital was 32.2%, an
improvement of 670 basis points from 38.9% at September 30, 2004. Net homebuilding debt to total
capital consists of homebuilding notes payable net of cash divided by total capital (homebuilding notes
payable net of cash plus stockholders' equity). The improvement reflects a 35% increase in stockholders'
equity, while net homebuilding debt increased only 1%. Our operating target range for net homebuilding
debt to total capital is below 45%, so the 32.2% ratio at September 30, 2005 is well below our targeted
operating leverage level. Future fiscal year-end net homebuilding debt to total capital ratios may be higher
than the fiscal 2005 year-end ratio.
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 the business is separately capitalized, its debt is
33
substantially collateralized and our financial services debt is not guaranteed by our parent company or any
of our homebuilding entities. We include cash because of its capital function. For comparison, at
September 30, 2005 and 2004, our ratios of homebuilding debt to total capital were 40.6% and 43.2%,
respectively.
We believe that we will be able to continue to fund our homebuilding and financial services
operations and our future cash needs (including debt maturities) through a combination of our existing
cash resources, cash flows from operations, our existing or renewed credit facilities and the issuance of new
debt securities through the public debt markets.
Homebuilding Capital Resources
Cash Ì At September 30, 2005, our available homebuilding cash and cash equivalents amounted to
$1,111.6 million.
Bank Credit Facility Ì We have a $1.21 billion unsecured revolving credit facility, which includes a
$350 million letter of credit sub-facility, that matures on March 25, 2008. The facility is guaranteed by
substantially all of our wholly-owned subsidiaries other than our financial services subsidiaries. We borrow
funds through the revolving credit facility throughout the year to fund working capital requirements, and
we repay such borrowings with cash generated from our operations and from the issuance of public debt
securities.
We had no outstanding cash borrowings on our homebuilding revolving credit facility at
September 30, 2005 and 2004. Under the debt covenants associated with our revolving credit facility, when
we have fewer than two investment grade senior unsecured debt ratings from Moody's Investors Service,
Fitch Ratings and Standard and Poor's Corporation, our additional homebuilding borrowing capacity under
the facility is limited to the lesser of the unused portion of the facility, $1.09 billion at September 30,
2005, or an amount determined under a borrowing base arrangement. Under the borrowing base limitation,
the sum of our senior debt and the amount drawn on our revolving credit facility may not exceed certain
percentages of the various categories of our unencumbered inventory. At September 30, 2005, the
borrowing base arrangement would have limited our additional borrowing capacity from any source to
$2.5 billion. Effective November 7, 2005, we now have the two required debt ratings, so the borrowing
base limitation is not currently in effect. At September 30, 2005, we were in compliance with all of the
covenants, limitations and restrictions that form a part of our public debt obligations and our bank
revolving credit facility.
We are currently in negotiations to re-finance our revolving credit facility, which we expect will
extend the maturity date and increase the capacity of the facility, lower the interest rate spread we must
pay on borrowings under the facility and slightly revise certain other terms, covenants, limitations and
restrictions under the facility. We expect the new revolving credit facility to be completed and in effect by
December 31, 2005.
Shelf Registration Statements Ì At September 30, 2005, we had the capacity to issue new debt or
equity securities amounting to $3.0 billion under our universal shelf registration statement. Also, at
September 30, 2005, we had the capacity to issue approximately 22.5 million shares of common stock
under our acquisition shelf registration statement, to effect, in whole or in part, possible future business
acquisitions.
Debt Repayments Ì On April 1, 2005, we repaid the $200 million principal amount of our
10.5% senior notes which became due on that date.
On July 15, 2005, we redeemed the $235 million principal amount of our 9.375% senior notes due
2009 at an aggregate redemption price of approximately $246 million, plus accrued interest. The notes
were originally issued by Schuler Homes, Inc. and were assumed by us in our merger with Schuler in
February 2002. Concurrent with the redemption, we recorded interest expense of approximately
$4.4 million, representing the call premium net of the unamortized premium related to the redeemed
notes.
34
Financial Services Capital Resources
Cash Ì At September 30, 2005, we had available financial services cash and cash equivalents of
$38.2 million.
Mortgage Warehouse Loan Facility Ì Our mortgage subsidiary renewed and amended its $300 million
mortgage warehouse loan facility in April 2005, increasing the amount that may be borrowed under the
uncommitted accordion provisions to $150 million and extending its maturity to April 7, 2006. Our
borrowing capacity under this facility is limited to the lesser of the unused portion of the facility, as
adjusted by the accordion provisions or otherwise by agreement of the parties, or an amount determined
under a borrowing base arrangement. Under the borrowing base limitation, the amount drawn on our
mortgage warehouse loan facility may not exceed 98% of all eligible mortgage loans held for sale and
made available to the lenders to secure any borrowings under the facility.
Through amendment to the credit agreement in June 2005, we obtained additional commitments from
our lenders through the accordion provisions that increased the total commitments under the facility to
$450 million. To provide for fiscal year-end closing volume, we obtained temporary commitment increases
of $225 million through amendments to the credit agreement in September 2005, which resulted in a total
capacity of $675 million at September 30, 2005. Through amendments to the credit agreement in October
and November 2005, the commitments under the facility were adjusted to $450 million, effective from
October 28, 2005 through January 15, 2006. On January 16, 2006, the total capacity will return to
$300 million, subject to increase to $450 million should the accordion provisions be implemented again. At
September 30, 2005, we had borrowings of $549.5 million outstanding under the mortgage warehouse
facility.
Commercial Paper Conduit Facility Ì Our mortgage subsidiary also has a $500 million commercial
paper conduit facility (the CP conduit facility), that expires on June 29, 2006. Through amendment to the
credit agreement in June 2005, we increased the capacity available under this facility from $300 million to
$500 million. To provide for fiscal year-end closing volume, we obtained a temporary increase of
$200 million through amendments to the credit agreement in September 2005, which resulted in a total
capacity of $700 million at September 30, 2005. The temporary increase was effective through October 14,
2005 when the capacity decreased to $600 million available through November 10, 2005. Beginning on
November 11, 2005, the total capacity decreased to $500 million. The terms of the facility are renewable
annually by the sponsoring banks. At September 30, 2005, $700 million was drawn under the CP conduit
facility.
In the past, we have been able to renew or extend the mortgage warehouse loan facility and the
CP conduit facility on satisfactory terms prior to their maturities and obtain temporary additional
commitments through amendments of the respective credit agreements during periods of higher than
normal volumes of mortgages held for sale. Although we do not anticipate any problems in renewing or
extending these facilities or obtaining temporary additional commitments in the future, the liquidity of our
financial services business depends upon our continued ability to do so.
The mortgage warehouse loan facility and the CP conduit facility are not guaranteed by either the
parent company or any of the subsidiaries that guarantee our homebuilding debt. Borrowings under both
facilities are secured by certain mortgage loans held for sale. The mortgage loans assigned to secure the
CP conduit facility are used as collateral for asset backed commercial paper issued by multi-seller conduits
in the commercial paper market. At September 30, 2005, our total mortgage loans held for sale were
$1,358.7 million. All mortgage company activities are financed with the mortgage warehouse facility, the
CP conduit facility or internally generated funds. Our mortgage warehouse loan facility and our
CP conduit facility contain financial covenants as to our mortgage subsidiary's minimum required tangible
net worth, its maximum allowable ratio of debt to tangible net worth and its minimum required net
income. Our mortgage subsidiary is in compliance with each of these covenants.
35
Operating Cash Flow Activities
During the year ended September 30, 2005, we used $620.7 million of cash in our operating activities,
as compared to $422.5 million during the prior year. The net cash used in operations in fiscal 2005 and
2004 was the result of cash provided from net income and increases in accounts payable and other
liabilities, offset by cash used to increase residential land, lot and home inventories, mortgage loans held
for sale and other assets, reflecting the growth of our homebuilding and financial services operations.
Among other factors, the variance in operating cash flows from fiscal 2004 to 2005 is a result of our
decision to invest $1.9 billion of cash to fund inventory growth in fiscal 2005, versus a $1.4 billion cash
investment in inventory growth in fiscal 2004.
A large portion of our cash invested in inventories represents purchases of land and lots that will be
used to generate revenues and cash flows in future years. Since we control the amounts and timing of our
investments in land and lots based on our future growth goals and our market opportunities, we believe
that cash flows from operating activities before increases in residential land and lot inventories is currently
a better indicator of our liquidity.
Investing Cash Flow Activities
In fiscal 2005 and 2004, cash used in investing activities represented net purchases of property and
equipment, primarily model home furniture and office equipment. Such purchases partially increase with
our growth, but they are not significant relative to our total assets or cash flows, and they typically do not
vary significantly from year to year.
Financing Cash Flow Activities
The majority of our short-term financing needs are funded with cash generated from operations and
funds available under our homebuilding and financial services credit facilities. Long-term financing needs
are typically funded with the issuance of new senior unsecured debt securities through the public capital
markets. Our homebuilding senior and senior subordinated notes are guaranteed by substantially all of our
wholly-owned subsidiaries other than our financial services subsidiaries.
In October 2004, we issued $250 million of 4.875% senior notes due 2010. We used the proceeds from
this offering for general corporate purposes, including land acquisition and development, home construction
and homebuilding operations and other working capital needs.
In December 2004, we issued $300 million of 5.625% senior notes due 2016. We used the proceeds
from this offering to repay borrowings under the revolving credit facility and for general corporate
purposes.
In February 2005, we issued $300 million of 5.25% senior notes due 2015. We used the proceeds from
this offering to repay borrowings under the revolving credit facility and for general corporate purposes.
In July 2005, we issued $300 million of 5.375% senior notes due 2012. We used the proceeds from
this offering for general corporate purposes, including the repayment of borrowings under the revolving
credit facility and for the early redemption of our 9.375% senior notes due 2009.
During fiscal 2005, our Board of Directors declared one quarterly cash dividend of $0.06 per common
share (split-adjusted), one quarterly cash dividend of $0.0675 per common share (split-adjusted), and two
quarterly cash dividends of $0.09 per common share, the last of which was paid on August 19, 2005 to
stockholders of record on August 5, 2005. On October 6, 2005, our Board of Directors declared a cash
dividend of $0.09 per common share, which was paid on October 31, 2005, to stockholders of record on
October 20, 2005.
Changes in Capital Structure
In December 2003, our Board of Directors declared a three-for-two stock split (effected as a 50%
stock dividend), paid on January 12, 2004 to holders of record of our common stock as of December 22,
36
2003. In February 2005, our Board of Directors declared a four-for-three stock split (effected as a 331/3%
stock dividend), paid on March 16, 2005 to holders of record of our common stock as of March 1, 2005.
In July 2003, the Board of Directors authorized the repurchase of up to $200 million of our common
stock and outstanding debt securities, as market conditions warrant. In May 2005, the Board of Directors
authorized the repurchase of up to $175.6 million of our common stock and up to $200 million of our
outstanding debt securities, representing the amounts then remaining of the 2003 authorization. As of
September 30, 2005, we had $175.6 million remaining of the Board of Directors' authorization for
repurchases of common stock and $200 million remaining of the authorization for repurchases of debt
securities.
On November 17, 2005, our Board of Directors authorized the repurchase of up to $500 million of
our common stock and up to $200 million of outstanding debt securities, replacing the existing common
stock and debt securities repurchase authorization.
Contractual Cash Obligations and Commercial Commitments
Our primary contractual cash obligations for our homebuilding and financial services segments are
payments under short-term and long-term 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 our operating cash flows, our homebuilding and financial services credit facilities and by accessing
the capital markets.
Our future cash requirements for contractual obligations as of September 30, 2005 are presented
below:
Payments Due by Period
Less Than
1 Year
1 Ó 3 Years
3 Ó 5 Years
(In millions)
More Than
5 Years
Total
Homebuilding:
Notes PayableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating Leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase Obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
21.0
22.0
137.2
TotalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 180.2
Financial Services:
Notes PayableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating Leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,249.5
3.3
TotalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,252.8
$218.3
35.3
89.0
$342.6
$ Ì
4.2
$
4.2
$ 986.0
21.0
4.6
$2,444.8
15.2
Ì
$3,670.1
93.5
230.8
$1,011.6
$2,460.0
$3,994.4
$
$
Ì $
0.7
Ì $1,249.5
8.2
Ì
0.7
$
Ì $1,257.7
At September 30, 2005, our homebuilding operations had outstanding letters of credit of
$137.2 million and surety bonds of $1.8 billion, 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.
To meet the financing needs of our customers, our mortgage operations extend interest rate lock
commitments (IRLCs) to borrowers who have applied for loan funding and meet defined credit and
underwriting criteria. Typically, the IRLCs have a duration of less than six months. Some IRLCs are
37
committed immediately to a specific investor through the use of best-efforts whole loan delivery
commitments, while other IRLCs are funded prior to being committed to third-party investors.
We manage interest rate risk related to our uncommitted IRLCs through the use of forward sales of
mortgage-backed securities (FMBS) and the purchase of Eurodollar Futures Contracts (EDFC) on
certain loan types. As of September 30, 2005, our IRLCs totaled $622.8 million, and we had
approximately $143.3 million outstanding of FMBS and EDFC and $492.0 million of best efforts whole
loan delivery commitments related to our IRLCs.
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into land and lot option purchase contracts in order to
procure land or lots for the construction of homes. Lot option contracts enable us to control significant lot
positions with a minimal capital investment and substantially reduce the risks associated with land
ownership and development. At September 30, 2005, we had $287.4 million in deposits to purchase land
and lots with a total remaining purchase price of $5.9 billion, of which only $230.8 million of the
remaining purchase price is subject to specific performance clauses which may require us to purchase the
land or lots upon the land seller meeting certain obligations. Pursuant to FIN 46, we consolidated certain
variable interest entities with assets of $200.4 million.
Land and Lot Position and Homes in Inventory
At September 30, 2005, we controlled approximately 346,000 lots, 55% of which were lots under
option or similar contracts. The following is a summary of our land/lot position at September 30:
Lots owned Ì developed and under development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lots controlled under lot option and similar contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
156,000
190,000
110,000
158,000
Total land/lots controlled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
346,000
268,000
Percentage controlled under option ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
55%
59%
As of September 30,
2004
2005
The total number of homes under construction was approximately 25,000 and 24,000 at
September 30, 2005 and 2004, respectively. Included in homes under construction at the end of both years,
were approximately 1,600 model homes and less than 200 unsold homes that had been completed for more
than six months.
Seasonality
We experience seasonal variations in our quarterly operating results and capital requirements. We
typically have more homes under construction, close more homes and have greater revenues and operating
income in the third and fourth quarters of our fiscal year. In fiscal 2005, 61% of our consolidated revenues
and 63% of our consolidated operating income were attributable to operations in the third and fourth fiscal
quarters. This seasonal activity increases our working capital requirements for our homebuilding operations
during the third and fourth fiscal quarters and increases our funding requirements for the mortgages we
originate in our financial services segment at the end of these quarters. Because the cash generated from
our homebuilding operations during these quarters is not available to our financial services segment, we
have employed the uncommitted accordion provisions of the segment's credit facilities and sought other
temporary commitment increases for this purpose. Any additional temporary financing for our mortgage
operations is typically reduced during the first and second quarters of the succeeding fiscal year as we sell
our related mortgage portfolio. As a result, our results of operations and financial position at the end of the
third and fourth fiscal quarters are not necessarily representative of the balance of our fiscal year.
38
Inflation
We and the homebuilding industry in general may be adversely affected during periods of high
inflation, primarily because of higher land, financing, labor and material construction costs. In addition,
higher mortgage interest rates can significantly affect the affordability of permanent mortgage financing to
prospective homebuyers. We attempt to pass through to our customers any increases in our costs through
increased sales prices and, to date, inflation has not had a material adverse effect on our results of
operations.
Forward-Looking Statements
Certain statements contained in this report, as well as in other materials we have filed or will file with
the Securities and Exchange Commission, statements made by us in periodic press releases and oral
statements 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 management's 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,'' ""projection,'' ""seek,'' ""strategy,'' ""target'' or other words of similar meaning. Any or
all of the forward-looking statements included in this report and in any other of our reports or public
statements may not approximate actual experience, and the expectations derived from them may not be
realized, due to unknown 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:
‚ changes in general economic, real estate and other conditions;
‚ changes in interest rates, the availability of mortgage financing or the effective cost of owning a
home;
‚ the effects of governmental regulations and environmental matters;
‚ our substantial debt;
‚ competitive conditions within our industry;
‚ the availability of capital;
‚ our ability to effect our growth strategies successfully; and
‚ the uncertainties inherent in warranty and product liability claims matters.
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.
Further discussion of these and other risk considerations is provided in Item 1A ""Risk Factors'' under
Part I of this annual report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk on our long term debt. We monitor our exposure to changes in
interest rates and utilize both fixed and variable rate debt. For fixed rate debt, changes in interest rates
generally affect the value of the debt instrument, but not our earnings or cash flows. Conversely, for
variable rate debt, changes in interest rates generally do not impact the fair value of the debt instrument,
but may affect our future earnings and cash flows. We have mitigated our exposure to changes in interest
rates on our variable rate bank debt by entering into interest rate swap agreements to obtain a fixed
interest rate for a portion of the variable rate borrowings. We generally do not have an obligation to prepay
39
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 fixed-rate debt until such time as we are required to refinance, repurchase
or repay such debt.
Our interest rate swaps are not designated as hedges under SFAS No. 133. We are exposed to market
risk associated with changes in the fair values of the swaps, and such changes must be reflected in our
income statements.
Our mortgage company is exposed to interest rate risk associated with its mortgage loan origination
services. 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 investor through the use of
best-efforts whole loan delivery commitments, while other IRLCs are funded prior to being committed to
third-party investors. We manage interest rate risk related to uncommitted IRLCs through the use of
forward sales of mortgage-backed securities (FMBS) and the purchase of Eurodollar Futures Contracts
(EDFC) on certain loan types. FMBS and EDFC related to IRLCs are classified and accounted for as
non-designated derivative instruments, with gains and losses recorded in current earnings. FMBS and
EDFC related to funded, uncommitted loans are designated as fair value hedges, with changes in the value
of the derivative instruments recognized in current earnings, along with changes in the value of the funded,
uncommitted loans. The effectiveness of the fair value hedges is continuously monitored and any
ineffectiveness, which for the years ended September 30, 2005, 2004 and 2003 was not significant, is
recognized in current earnings. At September 30, 2005, FMBS and EDFC to mitigate interest rate risk
related to uncommitted mortgage loans held for sale and uncommitted IRLCs totaled $253.0 million.
Uncommitted IRLCs, the duration of which was less than six months, totaled approximately
$130.8 million, and uncommitted mortgage loans held for sale totaled approximately $88.4 million at
September 30, 2005. At September 30, 2005, the fair value of the FMBS, EDFC and IRLCs was an
insignificant amount.
The following table sets forth, as of September 30, 2005, for our debt obligations, principal cash flows
by scheduled maturity, weighted average interest rates and estimated fair market value. In addition, the
table sets forth the notional amounts, weighted average interest rates and estimated fair market value of
our interest rate swaps. At September 30, 2005, the fair value of the interest rate swaps was a $3.2 million
liability.
2006
Fiscal Year Ending September 30,
2009
2008
2007
2010
($ In millions)
Thereafter
Total
Fair
value @
9/30/05
Debt:
Fixed rate ÏÏÏÏÏÏÏ
Average interest
rateÏÏÏÏÏÏÏÏÏÏÏ
Variable rate ÏÏÏÏÏ
Average interest
rateÏÏÏÏÏÏÏÏÏÏÏ
Interest Rate Swaps:
Variable to fixedÏÏ
Average pay rate
Average receive
rateÏÏÏÏÏÏÏÏÏÏÏ
$
21.0
$218.2
$
0.1
$586.0
$400.0
$2,444.8
$3,670.1
$3,727.1
8.2%
7.6%
8.0%
7.3%
6.9%
$1,249.5
$ Ì $ Ì $ Ì $ Ì $
6.8%
Ì $1,249.5
7.0%
$1,249.5
4.5%
Ì
Ì
Ì
Ì
Ì
4.5%
$ 200.0
$200.0
$200.0
$ Ì $ Ì $
5.1%
5.1%
5.0%
Ì
Ì
Ì $
Ì
Ì $
Ì
3.2
90-day LIBOR
40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Balance Sheets, September 30, 2005 and 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Income for the three years ended September 30, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Stockholders' Equity for the three years ended September 30, 2005 ÏÏÏÏ
Consolidated Statements of Cash Flows for the three years ended September 30, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏ
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Page
42
43
44
45
46
47
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
D.R. Horton, Inc.
We have audited the accompanying consolidated balance sheets of D.R. Horton, Inc. and subsidiaries
as of September 30, 2005 and 2004, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended September 30, 2005. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our 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 audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of D.R. Horton, Inc. and subsidiaries at September 30, 2005 and 2004, and
the consolidated results of their operations and their cash flows for each of the three years in the period
ended September 30, 2005, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of D.R. Horton, Inc.'s internal control over financial reporting as
of September 30, 2005, based on criteria established in Internal Control Ì Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
December 7, 2005 expressed an unqualified opinion thereon.
Fort Worth, Texas
December 7, 2005
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Homebuilding:
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventories:
Construction in progress and finished homes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Residential land and lots Ì developed and under development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Land held for development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated land inventory not owned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property and equipment (net) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnest money deposits and other assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Services:
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans held for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Homebuilding:
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses and other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LIABILITIES
Financial Services:
Accounts payable and other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes payable to financial institutionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued ÏÏÏÏ
Common stock, $.01 par value, 400,000,000 shares authorized, 315,591,668 shares
issued and 312,938,868 shares outstanding at September 30, 2005 and
314,045,820 shares issued and 311,393,020 shares outstanding at
September 30, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, 2,652,800 shares at September 30, 2005 and 2004, at cost ÏÏÏÏÏÏÏÏ
See accompanying notes to consolidated financial statements.
43
As of September 30,
2004
2005
(In millions)
$ 1,111.6
$ 480.1
3,105.9
5,174.3
6.2
200.4
8,486.8
107.2
756.0
578.9
11,040.5
2,878.5
3,529.0
6.2
153.7
6,567.4
91.9
576.6
578.9
8,294.9
38.2
1,358.7
77.4
1,474.3
$12,514.8
37.9
623.3
29.1
690.3
$8,985.2
$
820.7
1,196.9
3,660.1
5,677.7
$ 585.2
756.9
3,006.5
4,348.6
24.0
1,249.5
1,273.5
6,951.2
203.2
16.8
492.7
509.5
4,858.1
166.4
Ì
Ì
3.2
1,624.8
3,791.3
3.1
1,599.2
2,417.3
(58.9)
(58.9)
5,360.4
$12,514.8
3,960.7
$8,985.2
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30,
2003
2004
2005
(In millions, except per share data)
Homebuilding:
Revenues:
Home sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Land/lot salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$13,376.6
252.0
$10,491.1
166.9
$8,334.1
218.0
Cost of sales:
Home sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Land/lot salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9,977.7
162.6
8,094.7
102.6
6,621.2
184.6
13,628.6
10,658.0
8,552.1
Gross profit:
Home sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Land/lot salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selling, general and administrative expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (income) expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Services:
RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10,140.3
8,197.3
6,805.8
3,398.9
89.4
3,488.3
1,226.6
4.4
(15.7)
2,396.4
64.3
2,460.7
959.0
3.4
(9.9)
1,712.9
33.4
1,746.3
817.0
5.2
9.4
2,273.0
1,508.2
914.7
235.1
147.6
16.8
(34.9)
105.6
182.8
121.0
5.9
(18.8)
74.7
176.0
98.3
7.4
(23.2)
93.5
INCOME BEFORE INCOME TAXES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,378.6
908.1
1,582.9
607.8
1,008.2
382.2
NET INCOME ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 1,470.5
Basic net income per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income per common share assuming dilution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
4.71
4.62
Cash dividends declared per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 0.3075
$
$
$
$
975.1
$ 626.0
3.14
3.09
$
$
2.11
1.99
0.215
$ 0.135
See accompanying notes to consolidated financial statements.
44
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Balances at September 30, 2002
(146,505,091 shares)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuances under D.R. Horton, Inc.
employee benefit plans
(40,736 shares) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercise of stock options
(873,353 shares) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of unvested stock
options issued in connection with
an acquisition over remaining
vesting periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash dividends declared ÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock purchases
(2,652,800 shares)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Conversion of convertible notes
Common Additional
Stock
Capital
Unearned
Compensation
Retained
Earnings
Treasury
Stock
(In millions, except common stock share data)
Total
Stockholders'
Equity
$1.5
Ì
$1,349.6
Ì
$(4.4)
Ì
$ 923.2
626.0
$ Ì $2,269.9
626.0
Ì
Ì
Ì
Ì
Ì
Ì
0.9
12.0
Ì
Ì
Ì
Ì
Ì
2.2
Ì
Ì
Ì
Ì
Ì
Ì
(40.1)
Ì
Ì
Ì
Ì
0.9
12.0
2.2
(40.1)
Ì (58.9)
(58.9)
Ì
Ì
219.3
(10,000,040 shares)ÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.1
219.2
Balances at September 30, 2003
(154,766,420 shares)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuances under D.R. Horton, Inc.
employee benefit plans
(64,526 shares) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercise of stock options
(1,033,582 shares)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of unvested stock
options issued in connection with
an acquisition over remaining
vesting periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash dividends declared ÏÏÏÏÏÏÏÏÏÏÏ
Three-for-two stock split
(77,511,368 shares)ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Four-for-three stock split
(78,017,124 shares) paid in
March 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balances at September 30, 2004
(311,393,020 shares)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuances under D.R. Horton, Inc.
employee benefit plans
(95,669 shares) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercise of stock options
(1,450,179 shares)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash dividends declared ÏÏÏÏÏÏÏÏÏÏÏ
Balances at September 30, 2005
$1.6
Ì
$1,581.7
Ì
$(2.2)
Ì
$1,509.1
975.1
$(58.9)
Ì
$3,031.3
975.1
Ì
Ì
Ì
Ì
0.8
0.7
2.5
16.5
Ì
Ì
(0.8)
Ì
Ì
2.2
Ì
Ì
(0.7)
Ì
Ì
Ì
Ì
(66.9)
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
2.5
16.5
2.2
(66.9)
Ì
Ì
$3.1
Ì
$1,599.2
Ì
$ Ì
Ì
$2,417.3
1,470.5
$(58.9)
Ì
$3,960.7
1,470.5
Ì
0.1
Ì
1.9
23.7
Ì
Ì
Ì
Ì
Ì
Ì
(96.5)
Ì
Ì
Ì
1.9
23.8
(96.5)
(312,938,868 shares)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3.2
$1,624.8
$ Ì
$3,791.3
$(58.9)
$5,360.4
See accompanying notes to consolidated financial statements.
45
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of debt premiums, discounts and fees ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in operating assets and liabilities:
2005
Year Ended September 30,
2004
(In millions)
2003
$ 1,470.5
$
975.1
$
626.0
52.8
4.3
49.6
5.9
41.8
4.0
Increase in construction in progress and finished homesÏÏÏÏÏÏÏÏÏÏ
Increase in residential land and lots Ì developed, under
development, and held for development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Increase) decrease in earnest money deposits and other assets ÏÏÏ
Increase in mortgage loans held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase in accounts payable and other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(227.4)
(413.9)
(429.4)
(1,627.8)
(146.9)
(735.4)
589.2
(997.2)
(95.3)
(137.8)
191.1
(56.6)
9.5
(21.4)
249.4
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIESÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(620.7)
(422.5)
423.3
INVESTING ACTIVITIES
Net purchases of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
NET CASH USED IN INVESTING ACTIVITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏ
(68.2)
(68.2)
(55.2)
(55.2)
(48.6)
(48.6)
FINANCING ACTIVITIES
Proceeds from notes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayment of notes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from stock associated with certain employee benefit plans
Cash dividends paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4,060.2
(2,667.8)
Ì
24.8
(96.5)
3,524.1
(3,059.8)
Ì
15.4
(66.9)
2,458.0
(2,266.7)
(58.9)
11.6
(40.1)
NET CASH PROVIDED BY FINANCING ACTIVITIES ÏÏÏÏÏÏÏ
1,320.7
INCREASE (DECREASE) IN CASH ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
631.8
518.0
Cash at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 1,149.8
Supplemental cash flow information:
Interest paid, net of amounts capitalized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Supplemental disclosures of noncash activities:
Conversion of senior notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes payable issued for inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
$
20.6
895.0
412.8
(64.9)
582.9
518.0
8.5
614.4
$
$
$
103.9
478.6
104.3
582.9
12.0
325.0
$
$
$
Ì $
Ì $
219.3
17.8
$
71.9
$
102.3
See accompanying notes to consolidated financial statements.
46
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A Ì SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with U.S. Generally
Accepted Accounting Principles (GAAP) and include the accounts of D. R. Horton, Inc. and its wholly-
owned, majority-owned and controlled subsidiaries (which are referred to as the Company, unless the
context otherwise requires), as well as certain variable interest entities required to be consolidated pursuant
to Interpretation No. 46 issued by the Financial Accounting Standards Board (FASB). All intercompany
balances and transactions have been eliminated in consolidation.
Certain prior year balances have been reclassified to conform to the fiscal 2005 presentation. These
reclassifications had no effect on the Company's financial position, results of operations or cash flows.
Additionally, prior year balances reflect the retroactive application of Emerging Issues Task Force Issue
No. 04-8, ""The Effect of Contingently Convertible Debt on Diluted Earnings per Share'' (EITF 04-8) and
the March 2005 four-for-three stock split.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ materially from those estimates.
Effect of EITF 04-8
In October 2004, the FASB ratified EITF 04-8, which requires that shares underlying contingently
convertible debt be included in diluted earnings per share computations using the if-converted method
regardless of whether the market price trigger, or other contingent features, have been met. The effective
date for EITF 04-8 is for reporting periods ending after December 15, 2004. EITF 04-8 also requires
restatement of earnings per share amounts for prior periods presented during which the instrument was
outstanding. In May 2001, the Company issued 381,113 zero coupon convertible senior notes, which were
converted into shares of its common stock in June 2003. During certain quarters of the year ended
September 30, 2003, the market price trigger was not met and the convertible shares were not included in
the computation of diluted earnings per share. The adoption of EITF 04-8 reduced net income per
common share assuming dilution by $0.06 for the fiscal year ended September 30, 2003.
Stock Splits
In December 2003, the Company's Board of Directors declared a three-for-two stock split (effected as
a 50% stock dividend), paid on January 12, 2004 to common stockholders of record on December 22,
2003. In February 2005, the Company's Board of Directors declared a four-for-three stock split (effected
as a 331/3% stock dividend), paid on March 16, 2005 to common stockholders of record on March 1, 2005.
The earnings per share and cash dividends declared per share for the years ended September 30, 2005,
2004 and 2003 reflect the effects of the stock splits.
Reporting Segments
The Company reports its consolidated financial statements in accordance with Statement of Financial
Accounting Standards (SFAS) No. 131, ""Disclosures about Segments of an Enterprise and Related
Information.'' The Company's homebuilding operating regions are its operating segments under
SFAS No. 131 and have been aggregated into a single homebuilding reportable segment. Homebuilding is
the Company's core business, generating 98% of consolidated revenues and 91% to 96% of consolidated
47
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
income before income taxes in fiscal 2005, 2004 and 2003. The Company's other operating and reporting
segment is its financial services segment.
The Company's homebuilding segment is primarily engaged in the acquisition and development of
land for residential purposes and the construction and sale of residential homes on such land, in 25 states
and 74 markets in the United States. The homebuilding segment generates most of its revenues from the
sale of completed homes, with a lesser amount from the sale of land and lots.
The Company's financial services segment provides mortgage banking and title agency services
principally to customers of the Company's homebuilding segment. The Company does not retain or service
the mortgages that it originates, but, rather, sells the mortgages and related servicing rights to investors.
The financial services segment generates its revenue from originating and selling mortgages and collecting
fees for title insurance agency and closing services.
Assets, liabilities, revenues, expenses and operating income of the Company's reporting segments are
separately presented in the consolidated balance sheets and consolidated statements of income. The
accounting policies of the reporting segments are described throughout this note.
Revenue Recognition
Homebuilding revenue and related profit are generally recognized 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 buyer's
financing is originated by DHI Mortgage, the Company's wholly-owned mortgage subsidiary, and the
buyer has not made an adequate initial investment as prescribed by SFAS No. 66, the gross profit on such
sales is deferred until the sale of the related mortgage loan to a third-party investor has been completed.
Virtually all homebuilding revenues are received in cash within two days of closing.
Financial services revenues associated with the Company's title operations are recognized as closing
services are rendered and title insurance policies are issued, both of which generally occur simultaneously
as each home is closed. The majority of the revenues associated with the Company's mortgage operations
is recognized when the mortgage loans and related servicing rights are sold to third-party investors.
Origination fees and direct origination costs are deferred and recognized as revenues and expenses,
respectively, along with the associated gains and losses on the sales of the loans and related servicing
rights, when the loans are sold. Interest income is accrued from the date a mortgage loan is originated
until the loan is sold.
Some of the loans sold by DHI Mortgage are sold with limited recourse provisions. Based on
historical experience, the Company has estimated and recorded an allowance for losses related to loans
sold with recourse. Such losses have not been significant.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an initial maturity of three months or less
when purchased to be cash equivalents. Amounts in transit from title companies for home closings are
included in cash. Additionally, the Company holds cash that is restricted as to its use. Restricted cash
includes customer deposits that are temporarily restricted in accordance with regulatory requirements, and
cash restricted pursuant to insurance related regulatory requirements. At September 30, 2005 and 2004,
the balances of restricted cash were $29.4 million and $23.1 million, respectively, and are included in other
assets on the Company's balance sheet.
48
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Inventories and Cost of Sales
Finished inventories, inventories under construction or development or held for development are stated
at accumulated costs, unless such costs would not be recovered from the cash flows generated by future
disposition. In this instance, such inventories are measured at fair value, less disposal costs.
Inventory costs include land, land development and home construction costs, as well as interest and
real estate taxes related to property under development and construction. Applicable direct overhead costs
incurred 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
construction superintendents, sales personnel and division and region management, advertising and builder's
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.
Home construction costs are accumulated for each specific home.
The specific identification method is used for the purpose of accumulating home construction costs.
Cost of sales for homes closed includes the specific construction costs of each home, land acquisition and
land development costs allocated to each home, closing costs and sales commissions paid to third parties,
related interest and real estate taxes, and an estimate of future warranty and related costs for the homes
closed.
Each quarter, all components of inventory are reviewed for the purpose of determining whether
recorded costs and costs required to complete each home or project are recoverable. If the review indicates
that an impairment loss is required under SFAS No. 144 guidelines, an estimate of the loss is made and
recorded to cost of sales in that quarter. To date, such impairment losses have been insignificant in the
aggregate.
Interest
The Company capitalizes interest costs to inventory during development and construction. Capitalized
interest is charged to cost of sales as the related inventory is delivered to the buyer. The following table
summarizes the Company's homebuilding interest costs incurred, capitalized, charged to cost of sales and
expensed directly during the years ended September 30, 2005, 2004 and 2003:
Capitalized interest, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest incurred Ì homebuilding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expensed
2005
Year Ended September 30,
2004
(In millions)
$ 168.4
236.7
$ 152.7
277.3
$ 153.5
239.5
2003
Directly Ì homebuilding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortized to cost of sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(4.4)
(225.0)
(3.4)
(249.0)
(5.2)
(219.4)
Capitalized interest, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 200.6
$ 152.7
$ 168.4
Consolidated Land Inventory Not Owned
In January 2003, the FASB issued Interpretation No. 46, ""Consolidation of Variable Interest
Entities'' as amended (FIN 46). FIN 46 provides guidance for the financial accounting and reporting of
interests in certain variable interest entities, which FIN 46 defines as certain business entities that either
have equity investors with no voting rights or have equity investors that do not provide sufficient financial
49
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
resources for the entities to support their activities. FIN 46 requires consolidation of such entities by any
company that is subject to a majority of the risk of loss from the entities' activities or is entitled to receive
a majority of the entities' residual returns or both, defined as the primary beneficiary of the variable
interest entity.
In the ordinary course of its homebuilding business, the Company enters into land and lot option
purchase contracts in order to procure land or lots for the construction of homes. Under such option
purchase contracts, the Company 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 the option deposits are not refundable at the Company's discretion.
Certain of these deposits are deemed to create a variable interest in a variable interest entity under the
requirements of FIN 46. As such, certain of the Company's option purchase contracts result in the
acquisition of a variable interest in the entity holding the land parcel under option.
In applying the provisions of FIN 46, the Company evaluates those land and lot option purchase
contracts with variable interest entities to determine whether the Company is the primary beneficiary
based upon analysis of the variability of the expected gains and losses of the entity. Based on this
evaluation, if the Company is the primary beneficiary of an entity with which the Company has entered
into a land or lot option purchase contract, the variable interest entity is consolidated.
Since the Company owns no equity interest in any of the unaffiliated variable interest entities that it
must consolidate pursuant to FIN 46, the Company generally has little or no control or influence over the
operations of these entities or their owners. When the Company's requests for financial information are
denied by the land sellers, certain assumptions about the assets and liabilities of such entities are required.
In most cases, the fair value of the assets of the consolidated entities have been assumed to be the
remaining contractual purchase price of the land or lots the Company is purchasing. In these cases, it is
assumed that the entities have no debt obligations and the only asset recorded is the land or lots the
Company has the option to buy with a related offset to minority interest for the assumed third party
investment in the variable interest entity.
The consolidation of these variable interest entities added $200.4 million and $153.7 million in land
inventory not owned and minority interests to the Company's balance sheets at September 30, 2005 and
2004, respectively. The Company's obligations related to these land or lot option contracts are guaranteed
by cash deposits totaling $21.3 million and $17.2 million and performance letters of credit, promissory
notes and surety bonds totaling $5.9 million and $3.3 million, as of September 30, 2005 and 2004,
respectively. Creditors, if any, of these variable interest entities have no recourse against the Company.
Including the deposits with the variable interest entities above, the Company has deposits amounting
to $287.4 million to purchase land and lots with a total remaining purchase price of $5.9 billion at
September 30, 2005. For the variable interest entities which are unconsolidated because the Company is
not subject to a majority of the risk of loss or entitled to receive a majority of the entities' residual returns,
the maximum exposure to loss is generally limited to the amounts of the Company's option deposits,
which totaled $217.9 million at September 30, 2005.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Repairs and maintenance
costs are expensed as incurred. Depreciation generally is recorded using the straight-line method over the
estimated useful life of the asset. Depreciable lives for model home furniture typically range from 2 to
3 years, depreciable lives for office furniture and equipment typically range from 2 to 5 years, and
depreciable lives for buildings and improvements typically range from 5 to 20 years. Accumulated
depreciation was $141.3 million and $118.1 million as of September 30, 2005 and 2004, respectively.
50
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Depreciation expense was $52.8 million, $43.7 million and $38.3 million in fiscal 2005, 2004 and 2003,
respectively.
Long-lived Assets
Potential impairments of long-lived assets are reviewed annually or when events and circumstances
warrant an earlier review. In accordance with SFAS No. 144, impairment is determined when estimated
future undiscounted cash flows associated with an asset are less than the asset's carrying value.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over net assets acquired. The Company adopted the
provisions of SFAS No. 142, ""Goodwill and Other Intangible Assets'' effective October 1, 2001. Upon the
adoption of SFAS No. 142, goodwill is subject to an annual impairment test. Other intangible assets
continue to be amortized over their useful lives. Goodwill is reviewed for potential impairment annually or
when events and circumstances warrant an earlier review. Impairment is determined to exist when the
estimated fair value of goodwill is less than its carrying value. The Company performed the required
impairment tests during fiscal 2005, 2004 and 2003 and determined that no goodwill impairment existed.
Accumulated amortization related to goodwill was $38.9 million at September 30, 2005 and 2004.
Amortization of other intangible assets was $3.7 million and $1.2 million in fiscal 2004 and 2003,
respectively. These intangible assets were fully amortized by the end of fiscal 2004, and therefore, their
carrying values were $0 as of September 30, 2004.
Warranty Costs
The Company typically provides its homebuyers a one-year comprehensive limited warranty for all
parts and labor and a ten-year limited warranty for major construction defects. Since the Company
subcontracts its homebuilding work to subcontractors who typically provide it with an indemnity and a
certificate of insurance prior to receiving payments for their work, claims relating to workmanship and
materials are generally the primary responsibility of the subcontractors. Warranty liabilities have been
established by charging cost of sales for each home delivered. The amounts charged are based on
management's estimate of expected warranty-related costs under all unexpired warranty obligation periods.
The Company's warranty liability is based upon historical warranty cost experience in each market in
which it operates and is adjusted as appropriate to reflect qualitative risks associated with the types of
homes built and the geographic areas in which they are built.
The following table sets forth the Company's warranty liability:
September 30,
2005
2004
(In millions)
Warranty liability, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Warranties issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in liabilities for pre-existing warranties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Settlements madeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 96.0
71.2
(2.6)
(43.0)
$ 73.1
54.9
0.3
(32.3)
Warranty liability, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$121.6
$ 96.0
Insurance Claim Costs
The Company has, and requires the majority of its subcontractors to have, general liability insurance
(including construction defect coverage) and workers compensation insurance. These insurance policies
51
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
protect the Company against a portion of its risk of loss from claims, subject to certain self-insured
retentions, deductibles and other coverage limits. In certain states where the Company believes it is too
difficult or expensive for subcontractors to obtain general liability insurance, the Company has waived its
traditional subcontractor general liability insurance requirements to obtain lower bids from subcontractors.
The Company self insures a portion of its overall risk, partially through the use of a captive insurance
entity which issues a general liability policy to the Company, naming certain subcontractors as additional
insureds. The Company records expenses and liabilities for costs to cover its self-insured and deductible
amounts under those policies and for any costs of claims and lawsuits in excess of its coverage limits or
not covered by such policies, based on an analysis of the Company's historical claims, which includes an
estimate of claims incurred but not yet reported. Expenses related to such claims were approximately
$101.2 million, $80.9 million and $43.5 million in fiscal 2005, 2004 and 2003, respectively.
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising expense was approximately
$78.9 million, $64.3 million and $59.3 million in fiscal 2005, 2004 and 2003, respectively.
Income Taxes
The provision for income taxes is calculated using the asset and liability method, under which
deferred tax assets and liabilities are recorded based on the difference between the financial statement and
tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse.
Earnings Per Share
Basic earnings per share is based upon the weighted average number of shares of common stock
outstanding during each year. Diluted earnings per share is based upon the weighted average number of
shares of common stock and dilutive securities outstanding.
On February 5, 2002, each of the Company's 381,113 Zero Coupon Convertible Senior Notes
outstanding first became eligible for conversion into 26.2391 shares of the Company's common stock.
These Convertible Senior Notes were convertible on any date as of which the average closing price of the
Company's common stock for the twenty preceding trading days exceeded the specified threshold of 110%
of the accreted value of each note, divided by the conversion rate. The twenty-day average closing price of
the Company's common stock exceeded the specified threshold at the end of the March 31, 2002 and
June 30, 2002 quarters and for a portion of the quarter ended June 30, 2003. On May 27, 2003, the
Company called the zero coupon convertible senior notes for redemption. The call for redemption gave the
note holders the right to convert their notes into shares of the Company's common stock or to redeem
them for cash at their accreted value as of the redemption date. All of the notes were presented by
June 26, 2003 for conversion into the Company's common stock, and accordingly the Company issued
approximately 10 million shares of common stock in exchange for the notes, whose total accreted value as
of the conversion dates was approximately $214.1 million. In accordance with the requirements of
EITF 04-08 (see ""Effect of EITF 04-8'' above), the shares underlying the Convertible Senior Notes are
included in the denominator for diluted earnings per share for all fiscal quarters that the Convertible
Senior Notes were outstanding. Also, the numerator for diluted earnings per share was increased by tax-
effected interest expense and amortization of issuance costs associated with the Convertible Senior Notes
for all quarters that such notes were outstanding.
52
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The following table sets forth the numerators and denominators used in the computation of basic and
diluted earnings per share. The average share amounts reflect the effects of the three-for-two and four-for-
three stock splits, paid as stock dividends on January 12, 2004 and March 16, 2005, respectively. All
options outstanding during fiscal 2005, 2004, and 2003 were included in the computation of diluted
earnings per share.
2005
Year Ended September 30,
2004
(In millions)
2003
Numerator:
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,470.5
$975.1
$626.0
Effect of dilutive securities:
Interest expense and amortization of issuance costs associated
with zero coupon convertible senior notes, net of applicable
income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
3.1
Numerator for diluted earnings per share after assumed
conversions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,470.5
$975.1
$629.1
Denominator:
Denominator for basic earnings per share Ì weighted average
sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
312.2
310.5
297.0
Effect of dilutive securities:
Zero coupon convertible senior notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employee stock optionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
5.9
Ì
5.5
14.6
4.5
Denominator for diluted earnings per share Ì adjusted weighted
average shares and assumed conversions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
318.1
316.0
316.1
Stock-Based Compensation
The Company may, with the approval of the Compensation Committee of its Board of Directors,
grant stock options for a fixed number of shares to employees. The Company accounts for stock option
grants in accordance with Accounting Principles Board (APB) Opinion No. 25, ""Accounting for Stock
Issued to Employees''. The Company adopted the disclosure-only provisions as specified by the
SFAS No. 123, ""Accounting for Stock-Based Compensation'', as amended by SFAS No. 148,
""Accounting for Stock-Based Compensation Ì Transition and Disclosure.'' The exercise price of the
Company's employee stock options equals the market price of the underlying stock on the date of grant,
and therefore no compensation expense is recognized for the initial grant. SFAS No. 123 and
SFAS No. 148 require disclosure of pro forma net income and pro forma net income per share as if the
fair value based method had been applied in measuring compensation expense for fiscal 2005, 2004 and
2003 for options granted after fiscal 1995.
53
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The following table sets forth the effect on net income and earnings per share as if the fair value
based method had been applied:
Net income as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add: Stock-based employee compensation expense included in
Year Ended September 30,
2005
2003
2004
(In millions, except per share
data)
$975.1
$626.0
$1,470.5
reported net income, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
1.3
1.4
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of tax ÏÏÏÏÏÏÏÏÏ
(7.8)
(7.1)
(5.7)
Pro forma net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,462.7
$969.3
$621.7
Reported basic net income per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro forma basic net income per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reported diluted net income per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro forma diluted net income per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
$
4.71
$ 3.14
$ 2.11
4.69
$ 3.12
$ 2.09
4.62
$ 3.09
$ 1.99
4.61
$ 3.07
$ 1.98
The net income per share amounts presented above reflect the effects of the three-for-two and four-
for-three stock splits paid on January 12, 2004 and March 16, 2005, respectively.
Interest Rate Swaps
The Company entered into two ten-year interest rate swap agreements in 1998 with a major
United States bank under which it receives each quarter the London Inter-Bank Offered Rate
(LIBOR) and pays a fixed amount that averages 5.1% on a total notional amount of $200 million. At the
end of each quarter, the swaps' market value will have changed depending upon the market's current
anticipation of quarterly LIBOR rate levels from the present until the swaps' maturity in 2008. The swaps'
market values generally vary directly with changes in anticipated future LIBOR rates. The swaps do not
qualify as cash-flow hedges under SFAS No. 133, so changes in the swaps' fair value must be recorded in
the consolidated statements of income. The fair values of the interest rate swaps were liabilities to the
Company of $3.2 million at September 30, 2005 and $12.7 million at September 30, 2004, and are
recorded in homebuilding other liabilities. Changes in their fair values are recorded in homebuilding other
income or expense. During the years ended September 30, 2005, 2004 and 2003, the Company had gains
related to the interest rate swaps of $9.5 million, $8.1 million and $1.8 million, respectively.
Mortgage Loans
Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the
underlying property. Loans that have been closed but not committed to a third-party investor are matched
with either forward sales of mortgage backed securities (FMBS) or Eurodollar Futures Contracts
(EDFC) that are designated as fair value hedges. Hedged loans are either committed to third-party
investors within three days of origination or pooled and committed in bulk to third-party investors typically
within 30 days of origination. All loans held for sale are carried at cost adjusted for changes in fair value
after the date of designation of an effective hedge, based on either sale commitments or current market
quotes. Any gain or loss on the sale of loans is recognized at the time of sale. As of September 30, 2005,
the Company had $88.4 million in loans not committed to third-party investors which were hedged with
54
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
$109.7 million of FMBS and EDFC. During the years ended September 30, 2005, 2004 and 2003, the
Company had net gains on sales of loans of $113.5 million, $87.5 million, and $91.5 million, respectively.
The FMBS and EDFC associated with uncommitted, funded loans are designated as fair value hedges
of the risk of changes in the overall fair value of the related loans. Accordingly, changes in the value of
the derivative instruments are recognized in current earnings, as are changes in the value of the loans.
During the fiscal years ended September 30, 2005, 2004 and 2003, the Company's net gains related to the
ineffective portion of its fair value hedging instruments were insignificant. The net gains are included in
financial services revenues.
Loan Commitments
To meet the financing needs of its customers, the Company is party to interest rate lock commitments
(IRLCs) which are extended to borrowers who have applied for loan funding and meet certain defined
credit and underwriting criteria. In accordance with SFAS No. 133 and related Derivatives Implementa-
tion Group conclusions, the Company classifies and accounts for IRLCs as non-designated derivative
instruments at fair value. The effectiveness of the fair value hedges is continuously monitored and any
ineffectiveness, which for the years ended September 30, 2005, 2004 and 2003 was not significant, is
recognized in current earnings. At September 30, 2005 and 2004, the Company's IRLCs totaled
$622.8 million and $562.8 million, respectively.
The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole
loan delivery commitments, forward sales of mortgage-backed securities and the purchase of Eurodollar
futures contracts. These instruments are considered non-designated derivatives and are accounted for at
fair market value with gains and losses recorded in current earnings. As of September 30, 2005, the
Company had approximately $143.3 million outstanding of FMBS and EDFC, and $492.0 million of best
efforts whole loan delivery commitments related to its IRLCs.
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, ""Accounting Changes and Error Corrections.'' This
statement, which replaces APB Opinion No. 20, ""Accounting Changes'' and SFAS No. 3, ""Reporting
Accounting Changes in Interim Financial Statements,'' changes the requirements for the accounting for
and reporting of a change in accounting principle. The statement requires retrospective application of
changes in accounting principle to prior periods' financial statements unless it is impracticable to
determine the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The
adoption of SFAS No. 154 is not expected to have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123(R), ""Share-Based Payment.'' This statement,
which replaces SFAS No. 123 and supersedes APB Opinion No. 25, requires that companies measure and
recognize compensation expense at an amount equal to the fair value of share-based payments granted
under compensation arrangements. The statement is effective beginning in the Company's first quarter of
fiscal year 2006. The Company has evaluated the impact of the adoption of SFAS No. 123(R) and has
determined that it will not have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
In December 2004, the FASB issued Staff Position 109-1, ""Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004'' (FSP 109-1). The American Jobs Creation Act, which was signed
into law in October 2004, provides a tax deduction on qualified domestic production activities. When fully
55
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
phased-in, the deduction will be up to 9% of the lesser of ""qualified production activities income'' or
taxable income. Based on the guidance provided by FSP 109-1, this deduction should be accounted for as
a special deduction under SFAS No. 109 and will reduce tax expense in the period or periods that the
amounts are deductible on the tax return. The tax benefit resulting from the new deduction will be
effective beginning in the Company's first quarter of fiscal year 2006. The Company is evaluating the
impact of this law on its future financial statements and currently estimates the future reduction in its
federal income tax rate to be in the range of 0.50% to 0.75%.
NOTE B Ì NOTES PAYABLE
The Company's notes payable at their principal amounts, net of unamortized discount or premium, as
applicable, consist of the following:
Homebuilding:
Unsecured:
Revolving credit facility due 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10.5% senior notes due 2005, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.5% senior notes due 2007ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5% senior notes due 2009, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8% senior notes due 2009, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9.375% senior notes due 2009, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.875% senior notes due 2010, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9.75% senior subordinated notes due 2010, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.875% senior notes due 2011, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9.375% senior subordinated notes due 2011, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10.5% senior subordinated notes due 2011, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8.5% senior notes due 2012, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.375% senior notes due 2012ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.875% senior notes due 2013ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.875% senior notes due 2013ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.125% senior notes due 2014, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.625% senior notes due 2014, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.25% senior notes due 2015, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.625% senior notes due 2016, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other secured ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
As of September 30,
2004
2005
(In millions)
$
Ì $
Ì
215.0
199.6
384.1
Ì
248.7
149.3
198.8
199.8
150.2
248.4
300.0
200.0
100.0
197.4
248.1
297.8
297.5
25.4
Ì
199.9
215.0
199.5
383.8
242.5
Ì
149.2
198.7
199.8
150.9
248.3
Ì
200.0
100.0
197.2
247.9
Ì
Ì
73.8
$3,660.1
$3,006.5
Financial Services:
Mortgage warehouse facility due 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial paper conduit facility due 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 549.5
700.0
$ 267.7
225.0
$1,249.5
$ 492.7
56
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The Company filed with the Securities and Exchange Commission a universal shelf registration
statement registering $3.0 billion in debt and equity securities effective in September 2005. At
September 30, 2005, the remaining capacity to issue new debt or equity securities amounted to
$3.0 billion.
Maturities of consolidated notes payable, assuming the mortgage warehouse and commercial paper
conduit facilities are not extended or renewed, are $1,270.5 million in 2006, $218.2 million in 2007,
$0.1 million in 2008, $586.0 million in 2009, $400.0 million in 2010 and $2,444.8 million thereafter.
Homebuilding:
The Company has a $1.21 billion unsecured revolving credit facility, which includes a $350 million
letter of credit sub-facility, that matures on March 25, 2008. The Company's borrowing capacity under this
facility is reduced by the amount of letters of credit outstanding. At September 30, 2005, the Company's
borrowing capacity from this facility was $1.09 billion. The facility is guaranteed by substantially all of the
Company's wholly-owned subsidiaries other than its financial services subsidiaries. Borrowings bear daily
interest at rates based upon the London Interbank Offered Rate (LIBOR) plus a spread based upon the
Company's ratio of debt to tangible net worth and its senior unsecured debt rating. In addition to the
stated interest rates, the revolving credit facility requires the Company to pay certain fees. The interest
rates of the unsecured bank debt at September 30, 2005 and 2004 were 5.1% and 3.1%, respectively.
Following is a summary of the key terms of each of the Company's unsecured homebuilding notes
payable outstanding as of September 30, 2005, including the annual effective interest rate of each series of
notes, after giving effect to the amortization of deferred financing costs, discounts and premiums.
Note Payable(1)
Principal
Amount
(In millions)
7.5% seniorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5% senior ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8% senior ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.875% seniorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9.75% senior subordinated ÏÏÏÏÏÏÏÏÏ
7.875% seniorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9.375% senior subordinated ÏÏÏÏÏÏÏÏ
$215.0
$200.0
$385.0
$250.0
$150.0
$200.0
$200.0
Date Issued
Date Due
December 2002
December 1, 2007
January 2004
February 1999
October 2004
January 15, 2009
February 1, 2009
January 15, 2010
September 2000
September 15, 2010
August 2001
March 2001
August 15, 2011
March 15, 2011
10.5% senior subordinated ÏÏÏÏÏÏÏÏÏ
$144.8
Assumed from Schuler
February 2002
July 15, 2011
8.5% seniorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$250.0
April 2002
April 15, 2012
5.375% seniorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.875% seniorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.875% seniorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.125% seniorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.625% seniorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.25% seniorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.625% seniorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$300.0
$200.0
$100.0
$200.0
$250.0
$300.0
$300.0
July 2005
April 2003
June 2003
June 15, 2012
May 1, 2013
July 1, 2013
July 2004
January 15, 2014
September 2004
September 15, 2014
February 2005
February 15, 2015
December 2004
January 15, 2016
No(3)
No(3)
Yes(4)
Yes(4)
57
Redeemable
Prior to
Maturity
Effective
Interest Rate
No(3)
No(3)
No
Yes(4)
No
No
Yes, on or after
March 15,
2006(2)
Yes, on or after
July 15, 2006(2)
Yes, on or after
April 15, 2007(2)
Yes(4)
No(3)
Yes, on or after
July 1,
2008(2)(3)
7.6%
5.3%
8.3%
5.1%
9.9%
8.0%
9.5%
9.6%
8.6%
5.4%
7.0%
5.9%
6.3%
5.8%
5.4%
5.8%
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(1) Interest is payable semi-annually on each of the series of senior and senior subordinated notes.
(2) Each series of notes that is redeemable may be redeemed at a price equal to 100% of the principal
amount plus a premium declining ratably to par over a three-year period beginning on the date
indicated.
(3) The Company may redeem up to 35% of the amount originally issued with the proceeds of public
equity offerings at a redemption price equal to the principal amount, plus a premium and accrued
interest for up to three years after the date of issuance.
(4) The Company may redeem the notes in whole at any time or in part from time to time, at a
redemption price equal to the greater of 100% of their principal amount or the present value of the
remaining scheduled payments on the redemption date, plus in each case, accrued interest.
All series of senior notes are senior obligations of the Company and rank pari passu in right of
payment to all existing and future unsecured indebtedness of the Company, and senior to all existing and
future indebtedness expressly subordinated to them. The senior subordinated notes rank behind all existing
and future senior notes and bank credit facilities. Both the senior and senior subordinated notes are
guaranteed by substantially all of the Company's wholly-owned subsidiaries other than its financial services
subsidiaries. Upon a change of control of the Company, holders of all series of notes issued prior to
October 2004 have the right to require the Company to redeem such notes at a price of 101% of the par
amount, along with accrued and unpaid interest.
On April 1, 2005, the Company repaid the $200 million principal amount of the 10.5% senior notes
which became due on that date.
On July 15, 2005, the Company redeemed the $235 million principal amount of its 9.375% senior
notes due 2009 at an aggregate redemption price of approximately $246 million, plus accrued interest. The
notes were originally issued by Schuler Homes, Inc. and were assumed by the Company in their merger in
February 2002. Concurrent with the redemption, the Company recorded interest expense of approximately
$4.4 million, representing the call premium net of the unamortized premium related to the redeemed
notes.
In May 2005, the Board of Directors authorized the repurchase of up to $200 million of the
Company's outstanding debt securities, all of which was remaining at September 30, 2005. On
November 17, 2005, the Board of Directors authorized the repurchase of up to $200 million of outstanding
debt securities, replacing the existing debt securities repurchase authorization.
The bank credit facilities and many of the indentures for the senior and senior subordinated notes
contain covenants which, taken together, limit investments in inventory, stock repurchases, cash dividends
and other restricted payments, incurrence of indebtedness, asset dispositions and creation of liens, and
require certain levels of tangible net worth. At September 30, 2005, under the most restrictive covenants,
the additional debt the Company could incur was limited to $2.5 billion, in accordance with a limitation in
the bank credit facility that is only applicable when the Company has fewer than two investment grade
debt ratings from three specified rating agencies. Effective November 7, 2005, this limitation on additional
indebtedness is no longer in effect, because the Company received its second investment grade rating.
Additionally, cash dividends paid on or repurchases of the Company's common stock and other restricted
payments are limited to an amount not to exceed, on a cumulative basis, 50% of consolidated net income,
as defined, subject to certain other adjustments. Under the most restrictive of these requirements, the
Company had approximately $1.4 billion available for the payment of dividends and other restricted
payments at September 30, 2005.
The Company uses interest rate swap agreements to help manage a portion of its interest rate
exposure. The agreements convert a notional amount of $200 million from a variable rate to a fixed rate.
58
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
These agreements are cancelable by a third party during periods where LIBOR exceeds 7%. The
agreements expire at dates through September 2008. The Company does not expect non-performance by
the counter-party, a major U.S. bank, and any losses incurred in the event of non-performance are not
expected to be material. Net payments or receipts under these agreements are recorded as adjustments to
interest incurred. As a result of these agreements, the Company's net interest costs were increased by
$4.9 million in 2005 and $7.5 million in 2004 and 2003.
Financial Services:
The Company's mortgage subsidiary renewed and amended its $300 million mortgage warehouse loan
facility in April 2005, increasing the amount that may be borrowed under the uncommitted accordion
provisions to $150 million and extending its maturity to April 7, 2006. The borrowing capacity under this
facility is limited to the lesser of the unused portion of the facility, as adjusted by the accordion provision
or otherwise by amendment of the parties, or an amount determined under a borrowing base arrangement.
Under the borrowing base limitation, the amount drawn on the mortgage warehouse loan facility may not
exceed 98% of all eligible mortgage loans held for sale and made available to the lenders to secure any
borrowings under the facility.
Through amendment to the credit agreement in June 2005, the Company obtained additional
commitments from its lenders through the accordion provisions that increased the total commitments
under the facility to $450 million. Temporary commitment increases of $225 million were obtained through
amendments to the credit agreement in September 2005, resulting in total capacity of $675 million at
September 30, 2005. Through amendments to the credit agreement in October and November 2005, the
commitments under the facility were adjusted to $450 million, effective from October 28, 2005 through
January 15, 2006. On January 16, 2006, the total capacity will return to $300 million, subject to increase
to $450 million should the Company elect to request and obtain additional commitments under the
$150 million accordion provision again.
The mortgage warehouse facility is secured by certain mortgage loans held for sale and is not
guaranteed by D.R. Horton, Inc. or any of the guarantors of its homebuilding debt. Borrowings bear daily
interest at the 30-day LIBOR rate plus a fixed premium. The interest rates of the mortgage warehouse
line payable at September 30, 2005 and 2004 were 4.7% and 2.7%, respectively.
The Company's mortgage subsidiary also has a $500 million commercial paper conduit facility (the
CP conduit facility), that expires on June 29, 2006. Through amendment to the credit agreement in June
2005, the Company increased the capacity available under this facility from $300 million to $500 million.
A temporary increase of $200 million was obtained through amendments to the credit agreement in
September 2005, resulting in a total capacity of $700 million at September 30, 2005. The temporary
increase was effective through October 14, 2005, when the capacity decreased to $600 million available
through November 10, 2005. Beginning on November 11, 2005, the total capacity decreased to
$500 million.
The CP conduit facility is secured by certain mortgage loans held for sale and is not guaranteed by
D.R. Horton, Inc. or any of the guarantors of its homebuilding debt. The mortgage loans assigned to
secure the CP conduit facility are used as collateral for asset backed commercial paper issued by multi-
seller conduits in the commercial paper market. The interest rates of the CP conduit facility at
September 30, 2005 and 2004 were 4.3% and 2.4%, respectively.
NOTE C Ì STOCKHOLDERS' EQUITY
At September 30, 2005, 315,591,668 shares of Common Stock were issued and 312,938,868 shares
were outstanding. No shares of Preferred Stock were issued or outstanding. As of September 30, 2005,
59
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
15,672,273 and 4,556,218 shares of Common Stock were reserved for issuance pursuant to the
D.R. Horton, Inc. Stock Incentive Plans and Employee Stock Purchase Plan, respectively.
On December 1, 2003, the Board of Directors declared a three-for-two common stock split (effected
as a 50% stock dividend), which was paid on January 12, 2004 to stockholders of record on December 22,
2003. On February 15, 2005, the Board of Directors declared a four-for-three common stock split (effected
as a 331/3% stock dividend), which was paid on March 16, 2005 to stockholders of record on March 1,
2005.
The Company has a shelf registration statement with the Securities and Exchange Commission
(SEC) to issue, from time to time, up to 22.5 million shares of registered common stock in connection
with future acquisitions. The Company filed with the SEC a universal shelf registration statement
registering $3.0 billion in debt and equity securities effective in September 2005. At September 30, 2005,
the remaining capacity to issue new debt or equity securities amounted to $3.0 billion.
In May 2005, the Board of Directors authorized the repurchase of up to $175.6 million of the
Company's common stock, all of which was remaining at September 30, 2005. On November 17, 2005,
the Board of Directors authorized the repurchase of up to $500 million of the Company's common stock,
replacing the existing common stock repurchase authorization.
NOTE D Ì PROVISION FOR INCOME TAXES
The provision for income taxes includes the following components:
2005
Year Ended September 30,
2004
(In millions)
2003
Current provision:
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$865.7
127.1
$561.5
96.0
$355.6
48.2
992.8
657.5
403.8
Deferred benefit:
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(72.8)
(11.9)
(45.7)
(4.0)
(19.6)
(2.0)
Total provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$908.1
$607.8
$382.2
(84.7)
(49.7)
(21.6)
60
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. These differences primarily relate to the following:
Deferred tax assets:
Capitalization of inventory costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Warranty and construction defect costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Incentive compensation plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
As of September 30,
2005
2004
(In millions)
$123.1
110.8
27.1
26.1
287.1
22.0
$ 96.1
77.7
16.9
28.5
219.2
38.8
Net deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$265.1
$180.4
The net deferred tax assets are classified in the balance sheet as homebuilding other assets.
The difference between income tax expense and tax computed by applying the federal statutory
income tax rate of 35% to income before taxes is due to the following:
Income taxes at federal statutory rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase (decrease) in tax resulting from:
2005
Year Ended September 30,
2004
(In millions)
$554.0
2003
$352.9
$832.5
State income taxes, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
73.3
2.3
55.5
(1.7)
28.5
0.8
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$908.1
$607.8
$382.2
NOTE E Ì EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for all Company employees who have been with the Company for a
period of six months or more. The Company matches portions of employees' voluntary contributions.
Additional employer contributions in the form of profit sharing are at the discretion of the Company.
Expenses for the plan were $9.2 million, $7.5 million and $6.9 million in fiscal 2005, 2004 and 2003,
respectively.
The Company's Supplemental Executive Retirement Plan (SERP) is a non-qualified deferred
compensation program that provides benefits payable to certain management employees upon retirement,
death, or termination of employment with the Company. Under it, the Company accrues an unfunded
benefit based on a percentage of the eligible employees' salaries, as well as an interest factor based upon a
predetermined formula. The Company's liabilities related to the SERP were $8.4 million and $7.3 million
at September 30, 2005 and 2004, respectively. The Company recorded $1.8 million, $1.5 million and
$0.9 million of expense for this plan in fiscal 2005, 2004 and 2003, respectively.
In June 2002, the Company established a new deferred compensation plan to a select group of
employees. The participating employees designate investments for their contributions; however, the
Company is not required to invest the contributions in the designated investments. The Company's net
liabilities related to the deferred compensation plan were $53.3 million and $28.0 million at September 30,
61
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
2005 and 2004, respectively. The Company records as expense the amount that the employee contributions
would have earned had the funds been invested in the designated investments. The Company recorded
$7.6 million, $2.2 million and $1.3 million of expense for this plan in fiscal 2005, 2004 and 2003,
respectively.
The Company's Employee Stock Purchase Plan provides eligible employees the opportunity to
purchase common stock of the Company at a discounted price of at least 85% of the fair market value of
the stock on the designated dates of purchase. The price may be further discounted depending on the
average fair market value of the stock during the period and certain other criteria. Under the terms of the
plan, the total fair market value of the common stock that an eligible employee may purchase each year is
limited to the lesser of 15% of the employee's annual compensation or $25,000. Under the plan, employees
of the Company purchased 95,669 shares for $1.9 million in fiscal 2005, 86,035 shares for $2.5 million in
fiscal 2004 and 54,315 shares for $0.9 million in fiscal 2003.
The Company Stock Incentive Plans provide for the granting of stock options to certain key
employees of the Company to purchase shares of common stock. Options are granted at exercise prices
which equal the market value of the Company's common stock at the date of the grant. Options generally
expire 10 years after the dates on which they were granted. Options generally vest over periods of 5 to
9.75 years. There were 1,706,629 and 612,247 shares available for future grants under the Plans at
September 30, 2005 and 2004, respectively. The Company issued a three-for-two stock split on January 12,
2004 and a four-for-three stock split on March 16, 2005. The amounts in the following table have been
adjusted to reflect the effects of the stock splits.
Activity under the Company Stock Incentive Plans are:
2005
2004
2003
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options
Stock Options
Outstanding at
beginning of yearÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏ
Canceled ÏÏÏÏÏÏÏÏÏÏÏ
16,733,401
30,000
(1,673,426)
(1,124,331)
$11.06
36.92
5.46
13.96
14,610,313
4,798,666
(1,539,281)
(1,136,297)
$ 6.71
21.60
4.56
8.43
17,572,516
120,000
(1,746,751)
(1,335,452)
$ 6.38
10.26
3.55
6.77
Outstanding at end of
yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
13,965,644
$11.55
16,733,401
$11.06
14,610,313
$ 6.71
Exercisable at end of
yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4,438,303
$ 7.83
4,219,837
$ 5.81
3,960,341
$ 5.11
Exercise prices for options outstanding at September 30, 2005, ranged from $1.94 to $36.92.
62
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The weighted average remaining contractual lives of those options are:
Exercise Price Range
Options
Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contract Life
Less than $4.50 ÏÏÏÏ
$4.50-$9.00 ÏÏÏÏÏÏÏ
More than $9.00 ÏÏÏ
2,132,369
3,716,671
8,116,604
$ 3.37
5.47
16.48
TotalÏÏÏÏÏÏÏÏÏÏÏ
13,965,644
$11.55
2.8
4.0
7.7
6.0
Exercisable
Weighted
Average
Exercise
Price
$ 3.11
5.52
13.80
Options
1,063,153
1,831,223
1,543,927
4,438,303
$ 7.83
Weighted
Average
Remaining
Contract Life
2.1
3.8
7.3
4.6
The weighted average fair value of grants made in fiscal 2005, 2004 and 2003 was $18.42, $12.34 and
$6.06 per share, respectively. All amounts reflect the three-for-two stock split (effected as a 50% stock
dividend) of January 2004 and the four-for-three stock split (effected as a 331/3% dividend) of March
2005.
The fair values of the options granted were estimated on the date of their grant using the Black-
Scholes option pricing model based on the following weighted average assumptions:
2005
2004
2003
Risk free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected life (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.25% 4.38% 4.05%
7.18
6.21
51.34% 57.95% 67.66%
0.98% 1.11% 1.42%
6.63
NOTE F Ì FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments are based on quoted market prices, where
available, or are estimated. Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These estimates are subjective in
nature, involve matters of judgment and therefore, cannot be determined with precision. Estimated fair
values are significantly affected by the assumptions used. The Company's methods and assumptions used
in estimating fair values are described below.
The carrying amounts of cash and cash equivalents, the mortgage warehouse facility, the commercial
paper conduit facility and other secured notes payable as reported in the Company's balance sheets
approximate their fair values due to their short maturity or floating interest rate terms, as applicable.
63
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
For the senior and senior subordinated notes, fair values represent quoted market prices. For the
interest rate swaps, fair values represent market values as determined by the issuer of the swaps based
upon the market's current anticipation of future LIBOR rate levels. For mortgage loans held for sale,
forward sales of mortgage backed securities and interest rate lock commitments, the fair values are
estimated based on quoted market prices for similar financial instruments. The table below sets forth the
carrying values and estimated fair values of the Company's senior and senior subordinated notes, interest
rate swaps, mortgage loans held for sale, forward sales of mortgage backed securities and interest rate lock
commitments.
September 30, 2005
September 30, 2004
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
(In millions)
HOMEBUILDING:
Liabilities
Senior and Senior Subordinated Notes ÏÏÏÏÏÏÏÏ
Interest rate swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3,634.7
3.2
$3,701.7
3.2
$2,932.7
12.7
$3,192.7
12.7
FINANCIAL SERVICES:
Assets
Mortgage loans held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forward sales of mortgage backed securities and
Eurodollar futures contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest rate lock commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,358.7
1,358.7
623.3
623.3
0.7
(0.4)
0.7
(0.4)
(0.3)
0.3
(0.3)
0.3
NOTE G Ì COMMITMENTS AND CONTINGENCIES
The Company is involved in lawsuits and other contingencies in the ordinary course of business.
Management believes that, while the outcome of such contingencies cannot be predicted with certainty,
the liabilities arising from these matters will not have a material adverse effect on the Company's financial
position. However, to the extent the liability arising from the ultimate resolution of any matter exceeds
management's estimates reflected in the recorded liabilities relating to such matter, the Company could
incur additional charges that could be significant.
The Company has recorded liabilities for contingencies occurring in the ordinary course of business,
including warranty and construction defect claims on closed homes, and the expected costs of the self-
insured portion of general liability and workers compensation insurance claims. The Company's estimates
of such liabilities are based on the facts and circumstances of individual pending claims and historical data
and trends, including but not limited to costs relative to revenues, home closings and product types, and
include estimates of the costs of unreported claims related to past operations. These liability estimates are
subject to ongoing revision as the circumstances of individual pending claims and historical data and trends
change. Adjustments to estimated reserves are recorded in the accounting period in which the change in
estimate occurs. The Company's total liabilities for such items were $329.9 million and $223.2 million at
September 30, 2005 and 2004, respectively.
In the ordinary course of business, the Company enters into land and lot option purchase contracts in
order to procure land or lots for the construction of homes. At September 30, 2005, the Company had
cash deposits of $256.7 million, promissory notes of $18.6 million, and letters of credit and surety bonds of
$12.1 million to purchase land and lots with a total remaining purchase price of $5.9 billion. Only
$230.8 million of the $5.9 billion in land lot option purchase contracts contain specific performance clauses
which may require the Company to purchase the land or lots upon the land seller meeting certain
obligations. The majority of land and lots under contract are expected to be purchased within three years.
64
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Additionally, in the normal course of its business activities, the Company provides standby letters of
credit and surety bonds, issued by third parties, to secure performance under various contracts. At
September 30, 2005, outstanding standby letters of credit were $137.2 million and surety bonds were
$1.8 billion. The Company has an additional capacity of $231.0 million for standby letters of credit under
its revolving credit facility.
The Company leases office space and equipment under non-cancelable operating leases. Minimum
annual lease payments under these leases at September 30, 2005 approximate (in millions):
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 25.3
22.7
16.8
12.7
9.0
15.2
$101.7
Rent expense approximated $50.7 million, $33.2 million and $27.7 million for fiscal 2005, 2004 and
2003, respectively.
65
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
NOTE H Ì SUMMARIZED FINANCIAL INFORMATION
All of the Company's senior and senior subordinated notes are fully and unconditionally guaranteed,
on a joint and several basis, by all of the Company's direct and indirect subsidiaries (Guarantor
Subsidiaries), other than financial services subsidiaries and certain other inconsequential subsidiaries
(collectively, Non-Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is wholly-owned. In lieu of
providing separate audited financial statements for the Guarantor Subsidiaries, consolidated condensed
financial statements are presented below. Separate financial statements and other disclosures concerning
the Guarantor Subsidiaries are not presented because management has determined that they are not
material to investors.
Certain balances in the following Consolidating Balance Sheet as of September 30, 2004 and the
Consolidating Statements of Income and Consolidating Statements of Cash Flows for the years ended
September 30, 2004 and 2003 have been revised to conform with the fiscal 2005 presentation. These
revisions primarily consist of separate reporting of investments in subsidiaries and intercompany
receivables/payables in the Consolidating Balance Sheets, separate reporting of equity in income of
subsidiaries and other income/expense in the Consolidating Statements of Income and the reclassification
of equity in income of subsidiaries from cash flows from financing activities to cash flows from operating
activities in the Consolidating Statements of Cash Flows. Such reclassifications on the Statements of Cash
Flows resulted in decreases in operating cash flows and increases in financing cash flows for the
D.R. Horton, Inc. column of $869.7 million and $626.9 million for the years ended September 30, 2004
and 2003, respectively.
Consolidating Balance Sheet
September 30, 2005
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In millions)
ASSETS
Cash and cash equivalents ÏÏ
Investments in subsidiaries ÏÏ
Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property and equipment
(net) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnest money deposits and
other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans held for sale
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intercompany receivables ÏÏÏ
Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
726.6
2,563.4
2,157.4
$ 381.0
Ì
6,113.4
13.8
74.8
364.3
Ì
Ì
3,969.3
$ 9,794.8
369.6
Ì
578.9
Ì
$7,517.7
LIABILITIES & EQUITY
Accounts payable and other
liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intercompany payables ÏÏÏÏÏ
Notes payableÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Liabilities ÏÏÏÏÏÏÏÏÏÏÏ
Minority interests ÏÏÏÏÏÏÏÏÏÏ
Total Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Liabilities & Equity ÏÏ
$
782.4
$1,194.2
Ì 3,893.3
8.1
5,095.6
Ì
2,422.1
$7,517.7
3,652.0
4,434.4
Ì
5,360.4
$ 9,794.8
66
$
42.2
Ì
216.0
18.6
99.5
1,358.7
Ì
Ì
$1,735.0
$
65.0
76.0
1,249.5
1,390.5
203.2
141.3
$1,735.0
Eliminations
Total
$
Ì $ 1,149.8
Ì
8,486.8
(2,563.4)
Ì
Ì
107.2
Ì
Ì
Ì
(3,969.3)
$(6,532.7)
833.4
1,358.7
578.9
Ì
$12,514.8
$
(3,969.3)
Ì
(3,969.3)
Ì
(2,563.4)
$(6,532.7)
Ì $ 2,041.6
Ì
4,909.6
6,951.2
203.2
5,360.4
$12,514.8
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Consolidating Balance Sheet
September 30, 2004
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In millions)
Eliminations
Total
ASSETS
Cash and cash equivalents ÏÏÏÏÏ
Investments in subsidiaries ÏÏÏÏÏ
Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property and equipment (net) ÏÏ
Earnest money deposits and
other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans held for saleÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intercompany receivables ÏÏÏÏÏÏ
$
338.9
2,101.8
1,487.6
16.3
256.3
Ì
Ì
3,282.7
$ 131.6
Ì
4,894.4
58.8
299.8
Ì
578.9
Ì
$ 47.5
Ì
185.4
16.8
49.6
623.3
Ì
Ì
$
(2,101.8)
Ì $ 518.0
Ì
Ì 6,567.4
91.9
Ì
Ì
Ì
Ì
(3,282.7)
605.7
623.3
578.9
Ì
Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 7,483.6
$5,963.5
$922.6
$(5,384.5) $8,985.2
LIABILITIES & EQUITY
Accounts payable and other
liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intercompany payables ÏÏÏÏÏÏÏÏ
Notes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
537.1
$ 772.3
Ì 3,192.1
18.9
2,985.8
Total Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,522.9
3,983.3
Minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Total Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,960.7
1,980.2
$ 49.5
90.6
494.5
634.6
166.4
121.6
$
(3,282.7)
Ì $1,358.9
Ì
Ì 3,499.2
(3,282.7)
4,858.1
Ì
166.4
(2,101.8)
3,960.7
Total Liabilities & Equity ÏÏÏÏÏÏÏ
$ 7,483.6
$5,963.5
$922.6
$(5,384.5) $8,985.2
67
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Consolidating Statement of Income
Year Ended September 30, 2005
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In millions)
Eliminations
Total
Homebuilding:
Revenues:
Home sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Land/lot salesÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2,962.9
121.7
$10,369.1
130.3
Cost of sales:
Home sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Land/lot salesÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross profit:
Home sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Land/lot salesÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selling, general and
administrative expenseÏÏÏÏÏÏ
Equity in income of subsidiaries
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (income) expense ÏÏÏÏÏÏ
Financial services:
RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative
expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,084.6
10,499.4
2,019.2
78.6
2,097.8
943.7
43.1
986.8
7,928.2
84.0
8,012.2
2,440.9
46.3
2,487.2
482.3
(1,864.5)
4.4
(14.0)
720.4
Ì
Ì
(1.8)
2,378.6
1,768.6
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Income before income taxes ÏÏÏ
Provision for income taxes ÏÏÏÏ
2,378.6
908.1
1,768.6
675.3
$
$ 44.6
Ì
44.6
Ì $13,376.6
252.0
Ì
Ì 13,628.6
30.3
Ì
30.3
14.3
Ì
14.3
8.2
Ì
Ì
0.1
6.0
235.1
163.3
16.8
(34.9)
89.9
95.9
36.6
Ì
Ì
9,977.7
162.6
Ì 10,140.3
Ì
Ì
Ì
15.7
1,864.5
Ì
Ì
3,398.9
89.4
3,488.3
1,226.6
Ì
4.4
(15.7)
(1,880.2)
2,273.0
Ì
235.1
(15.7)
Ì
Ì
15.7
147.6
16.8
(34.9)
105.6
(1,864.5)
(711.9)
2,378.6
908.1
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 1,470.5
$ 1,093.3
$ 59.3
$(1,152.6) $ 1,470.5
68
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Consolidating Statement of Income
Year Ended September 30, 2004
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In millions)
Homebuilding:
Revenues:
Home sales ÏÏÏÏÏÏÏÏÏÏÏ
Land/lot salesÏÏÏÏÏÏÏÏÏ
$ 1,885.2
14.9
$8,489.4
152.0
Cost of sales:
Home sales ÏÏÏÏÏÏÏÏÏÏÏ
Land/lot salesÏÏÏÏÏÏÏÏÏ
Gross profit:
Home sales ÏÏÏÏÏÏÏÏÏÏÏ
Land/lot salesÏÏÏÏÏÏÏÏÏ
1,900.1
8,641.4
1,376.6
12.0
1,388.6
508.6
2.9
511.5
6,633.8
90.6
6,724.4
1,855.6
61.4
1,917.0
Selling, general and
administrative expenseÏÏ
342.2
594.7
Equity in income of
subsidiaries ÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏ
Other (income) expense ÏÏ
Financial services:
RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative
expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏ
Other (income) ÏÏÏÏÏÏÏÏÏ
(1,411.8)
3.0
(4.8)
Ì
0.1
(12.4)
1,582.9
1,334.6
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Income before income
taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes
1,582.9
607.8
1,334.6
512.4
$116.5
Ì
116.5
84.3
Ì
84.3
32.2
Ì
32.2
10.2
Ì
0.3
7.3
14.4
182.8
132.9
5.9
(18.8)
62.8
77.2
29.7
Eliminations
Total
$
Ì $10,491.1
166.9
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
10,658.0
8,094.7
102.6
8,197.3
2,396.4
64.3
2,460.7
11.9
959.0
1,411.8
Ì
Ì
Ì
3.4
(9.9)
(1,423.7)
1,508.2
Ì
182.8
(11.9)
Ì
Ì
11.9
121.0
5.9
(18.8)
74.7
(1,411.8)
(542.1)
1,582.9
607.8
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
975.1
$ 822.2
$ 47.5
$ (869.7)
$
975.1
69
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Consolidating Statement of Income
Year Ended September 30, 2003
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In millions)
Eliminations
Total
Homebuilding:
Revenues:
Home sales ÏÏÏÏÏÏÏÏÏÏÏÏ
Land/lot salesÏÏÏÏÏÏÏÏÏÏ
$ 1,296.9
16.6
$6,833.6
199.0
Cost of sales:
Home sales ÏÏÏÏÏÏÏÏÏÏÏÏ
Land/lot salesÏÏÏÏÏÏÏÏÏÏ
Gross profit:
Home sales ÏÏÏÏÏÏÏÏÏÏÏÏ
Land/lot salesÏÏÏÏÏÏÏÏÏÏ
1,313.5
7,032.6
1,033.0
19.0
1,052.0
263.9
(2.4)
261.5
5,440.9
163.2
5,604.1
1,392.7
35.8
1,428.5
Selling, general and
administrative expenseÏÏÏ
260.5
524.0
Equity in income of
subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏ
Other (income) expense ÏÏÏ
Financial services:
RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative
expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏ
Other (income) ÏÏÏÏÏÏÏÏÏÏ
(1,009.7)
3.5
(1.0)
Ì
(0.3)
(4.6)
1,008.2
909.4
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Income before income taxes
Provision for income taxes
1,008.2
382.2
909.4
344.8
$203.6
2.4
206.0
147.7
2.4
150.1
55.9
Ì
55.9
20.8
Ì
2.0
14.6
18.5
176.0
110.0
7.4
(23.2)
81.8
100.3
38.0
$
Ì $8,334.1
218.0
Ì
Ì
8,552.1
(0.4)
Ì
(0.4)
0.4
Ì
0.4
6,621.2
184.6
6,805.8
1,712.9
33.4
1,746.3
11.7
817.0
1,009.7
Ì
0.4
Ì
5.2
9.4
(1,021.4)
914.7
Ì
176.0
(11.7)
Ì
Ì
11.7
98.3
7.4
(23.2)
93.5
(1,009.7)
(382.8)
1,008.2
382.2
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
626.0
$ 564.6
$ 62.3
$ (626.9)
$ 626.0
70
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Consolidating Statement of Cash Flows
Year Ended September 30, 2005
D.R.
Guarantor Non-Guarantor
Horton, Inc. Subsidiaries
Subsidiaries
(In millions)
Eliminations
Total
OPERATING ACTIVITIES
Net cash (used in) provided by
operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏ
(201.8)
282.1
(701.0)
Ì
(620.7)
INVESTING ACTIVITIES
Net purchases of property and
equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash used in investing activities
FINANCING ACTIVITIES
Net change in notes payable ÏÏÏÏÏ
Net change in intercompany
receivables/payables ÏÏÏÏÏÏÏÏÏÏ
Proceeds from stock associated
with certain employee benefit
plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by financing
activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase (decrease) in cash and cash
equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at
(5.4)
(5.4)
(57.7)
(57.7)
(5.1)
(5.1)
Ì
Ì
(68.2)
(68.2)
652.5
(15.2)
755.1
Ì 1,392.4
14.1
40.2
(54.3)
24.8
(96.5)
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
24.8
(96.5)
594.9
25.0
700.8
Ì 1,320.7
387.7
249.4
(5.3)
47.5
Ì
Ì
631.8
518.0
beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
338.9
131.6
Cash and cash equivalents at end of
yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
726.6 $
381.0
$
42.2
$
Ì $ 1,149.8
71
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Consolidating Statement of Cash Flows
Year Ended September 30, 2004
D.R.
Guarantor Non-Guarantor
Horton, Inc. Subsidiaries
Subsidiaries
(In millions)
Eliminations
Total
OPERATING ACTIVITIES
Net cash (used in) operating
activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(320.8)
(23.2)
(78.5)
Ì
(422.5)
INVESTING ACTIVITIES
Net purchases of property and
equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash used in investing activities
FINANCING ACTIVITIES
Net change in notes payable ÏÏÏÏÏ
Net change in intercompany
(9.1)
(9.1)
(41.6)
(41.6)
(4.5)
(4.5)
404.1
(29.8)
90.0
receivables/payables ÏÏÏÏÏÏÏÏÏÏ
120.1
(92.8)
(27.3)
Proceeds from stock associated
with certain employee benefit
plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash (used in) provided by
financing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase (decrease) in cash and cash
equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at
15.4
(66.9)
Ì
Ì
Ì
Ì
472.7
(122.6)
62.7
142.8
(187.4)
(20.3)
beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
196.1
319.0
67.8
Cash and cash equivalents at end of
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
(55.2)
(55.2)
464.3
Ì
15.4
(66.9)
412.8
(64.9)
582.9
yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 338.9
$ 131.6
$
47.5
$ Ì $
518.0
72
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Consolidating Statement of Cash Flows
Year Ended September 30, 2003
D.R.
Guarantor Non-Guarantor
Horton, Inc. Subsidiaries
Subsidiaries
(In millions)
Eliminations
Total
OPERATING ACTIVITIES
Net cash (used in) provided by
operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(75.2)
404.2
99.3
(5.0)
423.3
INVESTING ACTIVITIES
Net purchases of property and
equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash used in investing activities ÏÏ
FINANCING ACTIVITIES
Net change in notes payableÏÏÏÏÏÏÏ
Net change in intercompany
receivables/payables ÏÏÏÏÏÏÏÏÏÏÏ
Purchase of treasury stock ÏÏÏÏÏÏÏÏ
Proceeds from stock associated with
certain employee benefit plans ÏÏÏÏÏ
Cash dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash (used in) provided by
financing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase in cash and cash equivalents
Cash and cash equivalents at
(7.1)
(7.1)
(25.9)
(25.9)
(15.6)
(15.6)
227.1
(17.4)
(18.4)
138.7
(58.9)
11.6
(40.1)
(122.2)
Ì
(21.5)
Ì
Ì
Ì
Ì
Ì
278.4
196.1
(139.6)
238.7
(39.9)
43.8
beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
80.3
24.0
Cash and cash equivalents at end of
Ì
Ì
Ì
5.0
Ì
Ì
Ì
5.0
Ì
Ì
(48.6)
(48.6)
191.3
Ì
(58.9)
11.6
(40.1)
103.9
478.6
104.3
year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 196.1
$ 319.0
$ 67.8
$ Ì $ 582.9
73
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
NOTE I Ì QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations are (in millions, except for per share amounts):
September 30
Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per common share(1) ÏÏÏÏÏÏÏÏ
Diluted earnings per common share(1) ÏÏÏÏÏÏ
$5,096.7
1,263.0
563.8
1.80
1.77
September 30
Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per common share(1) ÏÏÏÏÏÏÏÏ
Diluted earnings per common share(1) ÏÏÏÏÏÏ
$3,510.6
824.5
349.6
1.12
1.11
Fiscal 2005
Three Months Ended
June 30
March 31
$3,370.2
878.8
371.7
1.19
1.17
$2,876.7
719.5
294.0
0.94
0.92
Fiscal 2004
Three Months Ended
June 30
March 31
$2,790.4
625.8
251.3
0.81
0.80
$2,335.3
517.1
188.6
0.61
0.60
December 31
$2,520.1
627.0
241.0
0.77
0.76
December 31
$2,204.5
493.3
185.6
0.60
0.59
(1) All basic and diluted share amounts presented above reflect the effects of the three-for-two stock split
(effected as a 50% stock dividend) of January 12, 2004, and the four-for-three stock split (effected as
a 331/3% stock dividend) of March 16, 2005.
The Company experiences variability in its results of operations from quarter to quarter due to the
seasonal nature of its homebuilding business. Historically, the Company has closed a greater number of
homes in the third and fourth (June and September) fiscal quarters than in the first and second
(December and March) fiscal quarters. As a result, revenues and net income typically have been higher in
the third and fourth quarters of the fiscal year.
Revenues from home sales in the fourth quarter of fiscal 2005 were reduced by a $92.2 million
deferral of gross profit at September 30, 2005, in accordance with SFAS 66 as discussed in the Company's
revenue recognition accounting policies in Note A.
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including the Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as defined in Rule 13aÓ15(e) under the Securities
Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, the
CEO and CFO have concluded that our disclosure controls and procedures were effective in timely
alerting them to material information relating to the Company, including its consolidated subsidiaries,
required to be included in the Company's periodic filings with the Securities and Exchange Commission.
There have been no changes in the Company's internal controls over financial reporting during the quarter
ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Internal control over financial reporting is a process to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles. The
Company's internal controls over financial reporting include those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with U.S. 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 (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company's assets that could have a material effect on the financial statements. Because of its inherent
limitations, internal control over financial reporting is not intended to provide absolute assurance that a
misstatement of our financial statements would be prevented or detected. Also, projections of any
evaluation of internal control 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 internal
control policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control Ì Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management
concluded that the Company's internal control over financial reporting was effective as of September 30,
2005. Ernst & Young LLP, an independent registered public accounting firm, has audited this assessment
of our internal control over financial reporting and their report is included herein.
75
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
D.R. Horton, Inc.
We have audited management's assessment, included in the accompanying Report of Management on
Internal Control over Financial Reporting, that D.R. Horton, Inc. and subsidiaries (the ""Company'')
maintained effective internal control over financial reporting as of September 30, 2005, based on criteria
established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Company's management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company's 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 company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) 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 (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's 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 the effectiveness to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective internal control over
financial reporting as of September 30, 2005, is fairly stated, in all material respects, based on the COSO
criteria. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of September 30, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of D.R. Horton, Inc. and subsidiaries as of
September 30, 2005 and 2004, and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended September 30, 2005 and our report dated
December 7, 2005 expressed an unqualified opinion thereon.
Fort Worth, Texas
December 7, 2005
76
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth under the captions ""Election of Directors'' at
pages 4 through 12, ""Meetings and Committees of the Board'' at pages 33 through 35, ""Section 16(a)
Beneficial Ownership Reporting Compliance'' at page 38, and ""Requesting Documents from the Company''
at page 38, of the registrant's definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to
be held on January 26, 2006 and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption ""Executive Compensation'' at
page 26 through 32 of the registrant's definitive Proxy Statement for the 2006 Annual Meeting of
Stockholders to be held on January 26, 2006 and incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGE-
MENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is set forth under the caption ""Beneficial Ownership of
Common Stock'' at pages 24 through 25 and ""Approve the D.R. Horton, Inc. 2006 Stock Incentive Plan Ì
Securities Authorized for Issuance Under Equity Compensation Plans'' at page 21 of the registrant's
definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on January 26, 2006
and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption ""Executive Compensation Ì
Transactions with Management'' at page 28 of the registrant's definitive Proxy Statement for the 2006
Annual Meeting of Stockholders to be held on January 26, 2006 and incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is set forth under the caption ""Independent Registered Public
Accountants'' at pages 35 through 36 of the registrant's definitive Proxy Statement for the 2006 Annual
Meeting of Stockholders to be held on January 26, 2006 and incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
PART IV
(1). Financial Statements:
See Item 8 above.
(2). Financial Statement Schedules:
Schedules for which provision is made in the applicable accounting regulations of the Securities and
Exchange Commission are omitted because they are not required under the related instructions or are not
77
applicable, or because the required information is shown in the consolidated financial statements or notes
thereto.
(3). and (c) Exhibits:
Exhibit
Number
2.1
2.2
Exhibit
Agreement and Plan of Merger, dated as of December 18, 1997, by and between the Registrant and
Continental Homes Holding Corp. The Registrant agrees to furnish supplementally a copy of
omitted schedules to the SEC upon request(1)
Agreement and Plan of Merger, dated as of October 22, 2001, as amended on November 8, 2001, by
and between the Registrant and Schuler Homes, Inc. The Registrant agrees to furnish supple-
mentally a copy of omitted schedules to the SEC upon request(2)
Amended and Restated Certificate of Incorporation, as amended(3)
3.1
3.1(a) Amendment to Amended and Restated Certificate of Incorporation(3.a)
3.2
4.1
4.2
Amended and Restated Bylaws(4)
See Exhibits 3.1, 3.1(a) and 3.2
Indenture, dated as of June 9, 1997, among the Registrant, the guarantors named therein and
American Stock Transfer & Trust Company, as Trustee(5)
First Supplemental Indenture, dated as of June 9, 1997, among the Registrant, the guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(6)
Second Supplemental Indenture, dated as of September 30, 1997, among the Registrant, the
guarantors named therein and American Stock Transfer & Trust Company, as Trustee(7)
Third Supplemental Indenture, dated as of April 17, 1998, among the Registrant, the guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(8)
Fourth Supplemental Indenture, dated as of April 20, 1998, among the Registrant, the guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(9)
Fifth Supplemental Indenture, dated as of August 31, 1998, among the Registrant, the guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(10)
Sixth Supplemental Indenture, dated as of February 4, 1999, among the Registrant, the guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(11)
Seventh Supplemental Indenture, dated as of August 31, 1999, among the Registrant, the guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(12)
Eighth Supplemental Indenture, dated as of March 21, 2000, among the Registrant, the guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(13)
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11 Ninth Supplemental Indenture, dated as of March 31, 2000, among the Registrant, the guarantors
4.12
4.13
4.14
4.15
4.16
4.17
named therein and American Stock Transfer & Trust Company, as Trustee(14)
Tenth Supplemental Indenture, dated as of June 5, 2000, among the Registrant, the guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(15)
Eleventh Supplemental Indenture, dated as of May 11, 2001, among the Registrant, the guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(16)
Twelfth Supplemental Indenture, dated as of May 21, 2001, among the Registrant, the guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(17)
Thirteenth Supplemental Indenture, dated as of August 15, 2001, among the Registrant, the
guarantors named therein and American Stock Transfer & Trust Company, as Trustee(18)
Fourteenth Supplemental Indenture, dated as of February 21, 2002, among the Registrant, the
guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to
the 8% Senior Notes due 2009 and the 7.875% Senior Notes due 2011(39)
Indenture, dated as of September 11, 2000, among the Registrant, the guarantors named therein and
American Stock Transfer & Trust Company, as Trustee(19)
78
Exhibit
Number
Exhibit
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
4.26
4.27
4.28
4.29
4.30
First Supplemental Indenture, dated as of September 11, 2000, among the Registrant, the
guarantors named therein and American Stock Transfer & Trust Company, as Trustee(20)
Second Supplemental Indenture, dated as of March 12, 2001, among the Registrant, the guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(21)
Third Supplemental Indenture, dated as of May 21, 2001, among the Registrant, the guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(22)
Fourth Supplemental Indenture, dated as of February 21, 2002, among the Registrant, the
guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to
the 9.75% Senior Subordinated Notes due 2010 and 9.375% Senior Subordinated Notes due
2011(40)
Indenture, dated as of June 28, 2001, among Schuler Homes, Inc., the guarantors named therein
and U.S. Bank, N.A., as successor by merger to U.S. Bank Trust National Association, as trustee,
relating to the 10.5% Senior Subordinated Notes due 2011(37)
First Supplemental Indenture, dated as of February 21, 2002, among the Registrant, the guarantors
named therein and U.S. Bank, N.A., as successor by merger to U.S. Bank Trust National
Association, as trustee, relating to the 10.5% Senior Subordinated Notes due 2011(38)
Indenture, dated as of April 11, 2002, among the Registrant, the guarantors named therein and
American Stock Transfer & Trust Company, as trustee, relating to senior debt securities of the
Registrant(41)
First Supplemental Indenture, dated as of April 11, 2002, among the Registrant, the guarantors
named therein and American Stock Transfer & Trust Company, as trustee, relating to the
8.5% Senior Notes due 2012(42)
Registration Rights Agreement, dated as of April 11, 2002, among the Registrant, the guarantors
named therein and Salomon Smith Barney Inc. Banc of America Securities LLC, Credit Lyonnais
Securities (USA) Inc. and Fleet Securities, Inc., relating to the 8.5% Senior Notes due 2012(43)
Fifteenth Supplemental Indenture, dated December 3, 2002, by and among the Company, the
Guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to
the 7.5% Senior Notes due 2007 issued by the Company(49)
Sixteenth Supplemental Indenture, dated April 17, 2003, by and among the Company, the
Guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to
the 6.875% Senior Notes due 2013 issued by the Company(50)
Seventeenth Supplemental Indenture, dated June 25, 2003, by and among the Company, the
Guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to
the 5.875% Senior Notes due 2013 issued by the Company(51)
Eighteenth Supplemental Indenture, dated June 13, 2004, by and among the Company, the
Guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to
the 5.0% Senior Notes due 2009 issued by the Company(57)
4.32
4.31 Nineteenth Supplemental Indenture, dated July 12, 2004, by and among the Company, the
Guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to
the 6.125% Senior Notes due 2014 issued by the Company(58)
Twentieth Supplemental Indenture, dated September 21, 2004, by and among the Company, the
Guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to
the 5.625% Senior Notes due 2014 issued by the Company(59)
Twenty-First Supplemental Indenture, dated October 15, 2004, by and among the Company, the
Guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to
the 4.875% Senior Notes due 2010 issued by the Company(60)
Twenty-Second Supplemental Indenture, dated December 15, 2004, by and among the Company,
the Guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating
to the 5.625% Senior Notes due 2016 of D.R. Horton, Inc.(61)
4.33
4.34
79
Exhibit
Number
4.35
4.36
10.1
10.2
10.2a
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Exhibit
Twenty-Third Supplemental Indenture, dated February 11, 2005, by and among the Company, the
Guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to
the 5.25% Senior Notes due 2015 of D.R. Horton, Inc.(62)
Twenty-Fourth Supplemental Indenture, dated July 7, 2005, by and among the Company, the
Guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to
the 5.375% Senior Notes due 2012 of D.R. Horton, Inc.(66)
Form of Indemnification Agreement between the Registrant and each of its directors and executive
officers and schedules of substantially identical documents(23)
D.R. Horton, Inc. 1991 Stock Incentive Plan, as amended and restated(24)(25)
Amendment No. 1 to 1991 Stock Incentive Plan as amended and restated(25)(26)
Form of Non-Qualified Stock Option Agreement (Term Vesting)(25)(27)
Form of Non-Qualified Stock Option Agreement (Performance Vesting)(25)(28)
Form of Incentive Stock Option Agreement (Term Vesting)(25)(28)
Form of Incentive Stock Option Agreement (Performance Vesting)(25)(28)
Form of Restricted Stock Agreement (Term Vesting)(25)(28)
Form of Restricted Stock Agreement (Performance Vesting)(25)(28)
Form of Stock Appreciation Right Agreement (Term Vesting)(25)(28)
Form of Stock Appreciation Right Agreement (Performance Vesting)(25)(28)
Form of Stock Appreciation Right Notification (Tandem)(25)(28)
Form of Performance Share Notification(25)(28)
Form of Performance Unit Notification(25)(28)
D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 1(25)(29)
D.R. Horton, Inc. Supplemental Executive Retirement Trust No. 1(25)(29)
D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 2(25)(29)
Continental Homes Holding Corp. 1988 Stock Incentive Plan (as amended and restated June 20,
1997)(25)(30)
Restated Continental Homes Holding Corp. 1986 Stock Incentive Plan, and the First Amendment
thereto dated June 17, 1987(25)(31)
Form of Stock Option Agreement pursuant to Continental's 1986 and 1988 Stock Incentive
Plans(25)(32)
The D.R. Horton, Inc. 2000 Incentive Bonus Plan(25)(33)
Form of Incentive Stock Option Agreement for replacement incentive stock options granted to
former employees of Schuler Homes, Inc. pursuant to the D.R. Horton, Inc. 1991 Stock Incentive
Plan, as amended and restated(25)(35)
Form of Non-Qualified Stock Option Agreement for replacement non-qualified stock options
granted to former employees of Schuler Homes, Inc. pursuant to the D.R. Horton, Inc. 1991 Stock
Incentive Plan, as amended and restated(25)(36)
D.R. Horton, Inc. Deferred Compensation Plan, effective as of June 15, 2002(25)(44)
Grantor Trust Agreement, dated June 21, 2002 by and between the Registrant and Wachovia Bank,
National Association, as trustee(45)
Loan Agreement, dated July 9, 2002, among CH Funding LLC, Atlantic Asset Securitization Corp.,
Credit Lyonnais New York Branch and CH Mortgage Company I, Ltd.(46)
Omnibus Amendment, dated August 26, 2002, to Loan Agreement dated July 9, 2002, among CH
Mortgage Company I, Ltd., CH Funding LLC, Atlantic Asset Securitization Corp., Credit Lyonnais
New York Branch and U.S. Bank National Association(47)
80
Exhibit
Number
10.27
10.28
10.29
10.30
10.31
10.32
Exhibit
Second Omnibus Amendment, dated November 25, 2002, to Loan Agreement dated July 9, 2002,
among CH Mortgage Company I, Ltd., CH Funding LLC, Atlantic Asset Securitization Corp.,
Credit Lyonnais New York Branch and U.S. Bank National Association(48)
Third Omnibus Amendment, dated April 18, 2003, among CH Funding, LLC, Atlantic Asset
Securitization Corp., Credit Lyonnaise New York Branch, U.S. Bank National Association and CH
Mortgage Company I Ltd.(52)
Fourth Omnibus Amendment, dated July 25, 2003 among CH Funding, LLC, Atlantic Asset
Securitization Corp., Credit Lyonnaise New York Branch, U.S. Bank National Association and CH
Mortgage Company I, Ltd.(53)
Fifth Omnibus Amendment, dated December 19, 2003 among CH Funding, LLC, Credit Lyonnais
New York Branch, U.S. Bank National Association, Bank One, NA, Lloyds TSB Bank, PLC,
Danske Bank A/S, Cayman Islands Branch and CH Mortgage Company I, Ltd.(54)
Seventh Omnibus Amendment, dated June 29, 2005, among CH Funding, LLC, Atlantic Asset
Securitization Corp., La Fayette Asset Securitization LLC, Falcon Asset Securitization Corpora-
tion, Calyon New York Branch, U.S. Bank National Association, Lloyds TSB Bank PLC, and DHI
Mortgage Company, Ltd and the Lenders thereto(65)
Eighth Omnibus Amendment, dated September 26, 2005, by and among CH Funding, LLC,
Atlantic Asset Securitization Corp., La Fayette Asset Securitization LLC, Falcon Asset Securitiza-
tion Corporation, Calyon New York Branch, U.S. Bank National Association, Lloyds TSB Bank
PLC, and DHI Mortgage Company, Ltd and the Lenders(*)
10.36
10.34
10.35
10.37
10.33 Ninth Omnibus Amendment dated, September 29, 2005, among CH Funding, LLC, Atlantic Asset
Securitization Corp., La Fayette Asset Securitization LLC, Falcon Asset Securitization Corpora-
tion, Calyon New York Branch, U.S. Bank National Association, Lloyds TSB Bank PLC, and DHI
Mortgage Company, Ltd and the Lenders thereto(*)
Amended and Restated Credit Agreement, dated April 9, 2004, by and among DHI Mortgage
Company, Ltd. (f/k/a CH Mortgage Company, Ltd.) and U.S. Bank National Association and the
Lenders thereto(56)
Second Amendment to the Amended and Restated Credit Agreement, dated April 8, 2005, by and
among DHI Mortgage Company, Ltd., U.S. Bank National Association and the Lenders
thereto(63)
Third Amendment to the Amended and Restated Credit Agreement, dated June 23, 2005, by and
among DHI Mortgage Company, Ltd., U.S. Bank National Association and the Lenders
thereto(64)
Fourth Amendment to the Amended and Restated Credit Agreement, dated September 26, 2005 by
and among DHI Mortgage Company, Ltd., U.S. Bank National Association and the Lenders
thereto(*)
Fifth Amendment to the Amended and Restated Credit Agreement, dated September 28, 2005, by
and among DHI Mortgage Company, Ltd., U.S. Bank National Association and the Lenders
thereto(*)
Sixth Amendment to the Amended and Restated Credit Agreement, dated October 28, 2005, by and
among DHI Mortgage Company, Ltd., U.S. Bank National Association and the Lenders thereto(*)
Seventh Amendment to the Amended and Restated Credit Agreement, dated November 30, 2005,
by and among DHI Mortgage Company, Ltd., U.S. Bank National Association and the Lenders
thereto(*)
Amended and Restated Revolving Credit Agreement dated March 25, 2004, entered into by and
among D.R. Horton, Inc., Lenders (as defined in such Credit Agreement) and Bank of America,
N.A., as Administrative Agent and a Letter of Credit Issuer (as defined in such Credit Agree-
ment)(55)
Form of Annual Executive Compensation Notification Ì Chairman and CEO(67)(25)
Executive Compensation Summary Ì Named Executive Officers(68)(25)
Executive Compensation Summary Ì Named Executive Officers (COOs)(69)(25)
10.42
10.43
10.44
10.38
10.40
10.41
10.39
81
Exhibit
Number
12.1
14.1
21.1
23.1
31.1
31.2
32.1
32.2
Exhibit
Statement of Computation of Ratio of Earnings to Fixed Charges(*)
Code of Ethical Conduct for the CEO, CFO and Senior Financial Officers(**)
Subsidiaries of D.R. Horton, Inc.(*)
Consent of Ernst & Young LLP, Fort Worth, Texas(*)
Certificate of Chief Executive Officer provided pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002(*)
Certificate of Chief Financial Officer provided pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002(*)
Certificate provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by the Registrant's Chief Executive Officer(*)
Certificate provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by the Registrant's Chief Financial Officer(*)
* Filed herewith
** Posted to the Company's website at www.drhorton.com under the Corporate Governance link.
(1) Incorporated by reference from Exhibit 2.1 to the Registrant's Registration Statement on Form S-4
(Registration No. 333-44279), filed with the SEC on January 15, 1998.
(2) Incorporated by reference from Exhibit 2.1 to the Registrant's Current Report on Form 8-K, dated
October 22, 2001, filed with the SEC on October 24, 2001; and Exhibit 2.2 to the Registrant's
Current Report on Form 8-K, dated November 8, 2001, filed with the SEC on November 8, 2001.
(3) Incorporated herein by reference from Exhibit 3.1 to the Registrant's Quarterly Report on
Form 10-Q /A for the quarter ended December 31, 2002, dated February 18, 2003 and filed with
the SEC on February 18, 2003.
(3a) Incorporated herein by reference from Exhibit 3.1(a) to the Registrant's Quarterly Report on
Form 10-Q /A for the quarter ended December 31, 2002, dated February 18, 2003 and filed with
the SEC on February 18, 2003.
(4) Incorporated by reference from Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998, filed with the SEC on February 16, 1999.
(5) Incorporated by reference from Exhibit 4.1(a) to the Registrant's Registration Statement on
Form S-3 (No. 333-27521), filed with the SEC on May 21, 1997.
(6) Incorporated by reference from Exhibit 4.1 to the Registrant's Form 8-K/A dated June 6, 1997,
filed with the SEC on June 9, 1997.
(7) Incorporated by reference from Exhibit 4.4 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997, filed with the SEC on December 8, 1997.
(8) Incorporated by reference from Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, filed with SEC on May 14, 1998.
(9) Incorporated by reference from Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, filed with SEC on May 14, 1998.
(10) Incorporated by reference from Exhibit 4.7 to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1998, filed with the SEC on December 10, 1998.
(11) Incorporated by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K, dated
February 2, 1999, filed with the SEC on February 2, 1999.
(12) Incorporated by reference from Exhibit 4.9 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1999, filed with the SEC on December 10, 1999.
(13) Incorporated by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed
with the SEC on March 17, 2000.
82
(14) Incorporated by reference from Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000, filed with the SEC on May 12, 2000.
(15) Incorporated by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed
with the SEC on June 6, 2000.
(16) Incorporated by reference from Exhibit 4.1(a) to the Registrant's Current Report on Form 8-K, filed
with the SEC on May 14, 2001.
(17) Incorporated by reference from Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q, filed
with the SEC on August 14, 2001.
(18) Incorporated by reference from Exhibit 4.1(a) to the Registrant's Current Report on Form 8-K, filed
with the SEC on August 14, 2001.
(19) Incorporated by reference from Exhibit 4.1(a) to the Registrant's Current Report on Form 8-K, filed
with the SEC on September 11, 2000.
(20) Incorporated by reference from Exhibit 4.1(b) to the Registrant's Current Report on Form 8-K,
filed with the SEC on September 11, 2000.
(21) Incorporated by reference from Exhibit 4.1(a) to the Registrant's Current Report on Form 8-K, filed
with the SEC on March 8, 2001.
(22) Incorporated by reference from Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q, for
the quarter ended June 30, 2001, filed with the SEC on August 14, 2001.
(23) Incorporated by reference from Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995, filed with the SEC on November 22, 1995 (file number
1-14122); Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, filed with the SEC on August 6, 1998; and Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001, filed with the SEC on May 15, 2001.
(24) Incorporated herein by reference from Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002, dated August 13, 2002 and filed with the SEC on
August 13, 2002.
(25) Management contract or compensatory plan arrangement.
(26) Incorporated herein by reference from Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002, dated August 13, 2002 and filed with the SEC on
August 13, 2002.
(27) Incorporated by reference from Exhibit 10.3 to the Registrant's Registration Statement on Form S-1
(Registration No. 3-81856), filed with the SEC on July 22, 1994.
(28) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, filed with the SEC on March 29, 1993.
(29) Incorporated by reference from the Registrant's Transitional Report on Form 10-K for the period
from January 1, 1993 to September 30, 1993, filed with the SEC on December 28, 1993 (file
number 1-14122).
(30) Incorporated by reference from Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998, filed with the SEC on August 6, 1998.
(31) Incorporated by reference from Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998, filed with the SEC on August 6, 1998.
(32) Incorporated by reference from Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998, filed with the SEC on August 6, 1998.
(33) Incorporated by reference from Exhibit A to the Registrant's Proxy Statement, filed with the SEC
on December 10, 1999.
(34) Reserved.
83
(35) Incorporated herein by reference from Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002, dated May 15, 2002 and filed with the SEC on
May 15, 2002.
(36) Incorporated herein by reference from Exhibit 10.5 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002, dated May 15, 2002 and filed with the SEC on
May 15, 2002.
(37) Incorporated herein by reference from Exhibit 4.10 to Schuler Homes, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001. The SEC file number for Schuler Homes, Inc. is
0-32461.
(38) Incorporated herein by reference from Exhibit 4.12 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002, dated May 15, 2002 and filed with the SEC on
May 15, 2002.
(39) Incorporated herein by reference from Exhibit 4.13 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002, dated May 15, 2002 and filed with the SEC on
May 15, 2002.
(40) Incorporated herein by reference from Exhibit 4.14 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002, dated May 15, 2002 and filed with the SEC on
May 15, 2002.
(41) Incorporated herein by reference from Exhibit 4.16 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002, dated May 15, 2002 and filed with the SEC on
May 15, 2002.
(42) Incorporated herein by reference from Exhibit 4.17 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002, dated May 15, 2002 and filed with the SEC on
May 15, 2002.
(43) Incorporated herein by reference from Exhibit 4.18 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002, dated May 15, 2002 and filed with the SEC on
May 15, 2002.
(44) Incorporated herein by reference from Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002, dated August 13, 2002 and filed with the SEC on
August 13, 2002.
(45) Incorporated herein by reference from Exhibit 10.34 to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 2002 and filed with the SEC on December 13, 2002.
(46) Incorporated herein by reference from Exhibit 10.41 to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 2002 and filed with the SEC on December 13, 2002.
(47) Incorporated herein by reference from Exhibit 10.42 to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 2002 and filed with the SEC on December 13, 2002.
(48) Incorporated herein by reference from Exhibit 10.43 to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 2002 and filed with the SEC on December 13, 2002.
(49) Incorporated by reference from Exhibit 4.1 to the Company's Form 8-K dated November 22, 2002
and filed with the SEC on December 2, 2002.
(50) Incorporated by reference from Exhibit 4.1 to the Company's Form 8-K dated April 11, 2003 and
filed with the SEC on April 17, 2003.
(51) Incorporated by reference from Exhibit 4.1 to the Company's Form 8-K dated June 18, 2003 and
filed with the SEC on June 24, 2003.
(52) Incorporated herein by reference from Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 dated August 14, 2003 and filed with the SEC on
August 14, 2003.
84
(53) Incorporated herein by reference from Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003, dated August 14, 2003 and filed with the SEC on
August 14, 2003.
(54) Incorporated herein by reference from Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 2003, dated February 6, 2004 and filed with the
SEC on February 6, 2004.
(55) Incorporated herein by reference from Exhibit 99.2 to the Registrant's Current Report on Form 8-K
dated March 29, 2004 and filed with the SEC on March 30, 2004.
(56) Incorporated herein by reference from Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004, dated May 7, 2004 and filed with the SEC on
May 10, 2004.
(57) Incorporated herein by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K
dated January 6, 2004 and filed with the SEC on January 12, 2004.
(58) Incorporated herein by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K
dated July 6, 2004 and filed with the SEC on July 9, 2004.
(59) Incorporated herein by reference from Exhibit 4.1 to the Registrant's Annual Report on Form 8-K
dated September 14, 2004 and filed with the SEC on September 17, 2004.
(60) Incorporated herein by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K
dated October 7, 2004 and filed with the SEC on October 14, 2004.
(61) Incorporated herein by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K
dated December 8, 2004 and filed with the SEC on December 14, 2004.
(62) Incorporated herein by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K
dated February 4, 2005 and filed with the SEC on February 10, 2005.
(63) Incorporated herein by reference from Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2005 and filed with the SEC on May 4, 2005.
(64) Incorporated herein by reference from Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2005 and filed with the SEC on August 9, 2005.
(65) Incorporated herein by reference from Exhibit 10.3 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2005 and filed with the SEC on August 9, 2005.
(66) Incorporated herein by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K
dated June 29, 2005 and filed with the SEC on July 6, 2005.
(67) Incorporated herein by reference from Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2005 and filed with the SEC on May 4, 2005.
(68) Incorporated herein by reference from Exhibit 10.3 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2005 and filed with the SEC on May 4, 2005.
(69) Incorporated herein by reference from Exhibit 10.4 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2005 and filed with the SEC on August 9, 2005.
85
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
D.R. HORTON, INC.
By
/s/ DONALD J. TOMNITZ
Donald J. Tomnitz,
Vice Chairman, Chief Executive Officer
and President
Date: December 13, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ DONALD R. HORTON
Donald R. Horton
/s/ DONALD J. TOMNITZ
Donald J. Tomnitz
/s/ BILL W. WHEAT
Bill W. Wheat
/s/ BRADLEY S. ANDERSON
Bradley S. Anderson
/s/ MICHAEL R. BUCHANAN
Michael R. Buchanan
/s/ RICHARD I. GALLAND
Richard I. Galland
/s/ MICHAEL W. HEWATT
Michael W. Hewatt
/s/ FRANCINE I. NEFF
Francine I. Neff
Chairman of the Board
December 13, 2005
Vice Chairman, Chief Executive
Officer, President, and Director
(Principal Executive Officer)
December 13, 2005
Chief Financial Officer,
Executive Vice President and
Director (Principal Financial
Officer and Principal
Accounting Officer)
December 13, 2005
Director
December 13, 2005
Director
December 13, 2005
Director
December 13, 2005
Director
December 13, 2005
Director
December 13, 2005
86
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CORPORATE INFORMATION
D.R. Horton, Inc. (the ""Company''), the largest homebuilder in the United States, constructs and sells
high quality single-family homes ranging in price from $90,000 to $900,000. The Company operates in
25 states and 74 markets in the Mid-Atlantic, Midwest, Southeast, Southwest, and West regions of the
United States, primarily under the name of D. R. Horton, America's Builder. For the year ended September
30, 2005, the Company closed 51,172 homes with an average sales price of approximately $261,400. Founded
in 1978, D.R. Horton, Inc. is a Fortune 500 company, and its common stock is included in the S&P 500
Index and is listed on the New York Stock Exchange under the ticker symbol ""DHI.''
THE BOARD OF DIRECTORS
Donald R. Horton
Chairman
Donald J. Tomnitz
Vice Chairman, President and
Chief Executive Officer
Bill W. Wheat
Executive Vice President and
Chief Financial Officer
Bradley S. Anderson
Senior Vice President of
CB Richard Ellis, Inc.(1)(2)(3)
Michael R. Buchanan
Former National Managing Director, Real Estate
Group, Bank of America(1)(2)(3)
Richard I. Galland
Former Chief Executive Officer and Chairman of
Fina, Inc.(1)(2)(3)
Michael W. Hewatt
Owner of Hewatt & Associates, CPAs(1)(3)
Francine I. Neff
Former Treasurer of the United States(1)(2)(3)
Annual Meeting
January 26, 2006
At the Corporate Offices of
D.R. Horton, Inc.
301 Commerce Street
Fort Worth, Texas 76102
Public Debt Ratings
Senior:
BBB¿ Fitch Ratings
Baa3 Moody's Investors Service
BB° Standard & Poor's Corporation
Senior Subordinated:
BB° Fitch Ratings
Ba1 Moody's Investors Service
BB¿ Standard & Poor's Corporation
Form 10-K
The Annual Report on Form 10-K of
D.R. Horton, Inc. may be accessed through the
""Investor Relations'' link on our website, or a
copy is available upon request to our Investor
Relations department at our corporate
headquarters.
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Nominating and Governance Committee
Member
Website
Visit us at www.drhorton.com
Certifications
Transfer Agent and Registrar
American Stock Transfer & Trust Co.
59 Maiden Lane
New York, NY 10038
(800) 937-5449
Investor Relations
Stacey H. Dwyer
D.R. Horton, Inc.
301 Commerce Street, Suite 500
Fort Worth, Texas 76102
(817) 390-8200
Because our common stock is listed on the
New York Stock Exchange (NYSE), our chief
executive officer is required to make, and he has
made, an annual certification to the NYSE stating
that he was not aware of any violation by D.R.
Horton, Inc. of the corporate governance listing
standards of the NYSE. The last certification to
that effect was made as of February 24, 2005. The
Company filed the CEO and CFO certifications
required under Section 302 of the Sarbanes-Oxley
Act of 2002 with the Securities and Exchange
Commission as exhibits to its Annual Report on
Form 10-K for the year ended September 30,
2005.
FINANCIAL SUMMARY
(In millions, except for number of homes and per share amounts)
Net Income
$1,471
$975
$626
$405
$1,500
$1,200
$900
$600
$300
$257
$0
Years Ended September 30,
2005
2004
2003
2002
2001
Income Statement Data:
Revenues ........................................
$13,863.7 $10,840.8 $8,728.1 $6,738.8 $4,455.5
Net income .....................................
1,470.5
975.1
626.0
404.7
257.0
2001
2002
2003
2004
2005
Operating Data:
Homes closed .................................
Homes sold .....................................
51,172
53,232
43,567
45,263
35,934
38,725
29,761
31,491
21,371
22,179
$15,000
Revenues
Percentages of Revenues:
$13,864
$10,841
Gross profi t (homebuilding) ...........
25.6%
23.1%
20.4%
19.0%
19.5%
SG&A expense (homebuilding) .....
Pre-tax income ...............................
Net income .....................................
9.0%
17.2%
10.6%
9.0%
9.6%
14.6%
11.6%
9.0%
7.2%
9.8%
9.6%
6.0%
9.9%
9.2%
5.8%
$8,728
$6,739
$4,456
2001
2002
2003
2004
2005
Balance Sheet Data:
As of September 30,
2005
2004
2003
2002
2001
Inventories ......................................
$8,486.8 $6,567.4 $5,082.3 $4,343.1 $2,804.4
Total assets .....................................
12,514.8
8,985.2
7,279.4
6,017.5
3,652.2
Notes payable .................................
4,909.6
3,499.2
2,963.2
2,878.3
1,884.3
Stockholders’ equity .......................
5,360.4
3,960.7
3,031.3
2,269.9
1,250.2
Book value per share* ....................
Common shares outstanding* ........
$17.13
$12.72
312.9
311.4
$9.79
309.5
$7.75
293.0
$5.42
230.7
Sales Contract Backlog:
Homes ............................................
19,244
17,184
15,488
12,697
9,263
Sales value......................................
$5,835.2 $4,568.5 $3,653.4 $2,825.2 $1,933.8
*adjusted for the three-for-two-stock splits of April 2002 and January 2004, and the four-for-three-stock split
$15,000
New Home Sales
$14,643
$11,406
$9,162
$6,886
$4,503
2001
2002
2003
2004
2005
of March 2005.
Sales Backlog
$5,835
$6,000
Stockholders’ Equity
$5,360
Homebuilding Leverage Ratio
$4,568
$3,653
$2,825
$2,400
$1,934
$4,800
$3,600
$2,400
$1,200
$0
$3,031
$2,270
$1,250
$3,961
54% 51%
40% 39%
32%
2001
2002
2003
2004
2005
2001
2002
2003
2004
2005
2001
2002
2003
2004
2005
75%
60%
45%
30%
15%
0%
$12,000
$9,000
$6,000
$3,000
$0
$12,000
$9,000
$6,000
$3,000
$0
$6,000
$4,800
$3,600
$1,200
$0
H O M E B U I L D I N G O P E R A T I O N S
WEST
Bakersfi eld/Lancaster/Palmdale, CA
Fresno/Modesto, CA
Los Angeles County, CA
Oakland/North Bay, CA
Orange County, CA
Riverside/San Bernardino, CA
Sacramento, CA
San Diego County, CA
San Francisco, CA
San Jose/Pleasanton/East Bay, CA
Ventura County, CA
Colorado Springs, CO
Denver, CO
Ft. Collins, CO
Maui, HI
Oahu, HI
Hawaii, HI
Las Vegas, NV
Reno, NV
Albany, OR
Bend, OR
Eugene, OR
Portland, OR
Salt Lake City, UT
Olympia, WA
Seattle/Tacoma, WA
Vancouver, WA
MIDWEST
Chicago, IL
Minneapolis/St. Paul, MN
Kenosha, WI
SOUTHWEST
Phoenix, AZ
Casa Grande, AZ
Tucson, AZ
Albuquerque, NM
Las Cruces, NM
Oklahoma City, OK
Austin, TX
Dallas, TX
Fort Worth, TX
Houston, TX
Killeen/Temple, TX
Laredo, TX
Rio Grande Valley, TX
San Antonio, TX
Waco, TX
MID-ATLANTIC
Delaware Valley, DE
Baltimore, MD
Suburban Washington D.C.
New Jersey
Brunswick, NC
Charlotte, NC
Greensboro/Winston-Salem, NC
Raleigh/Durham, NC
Philadelphia, PA
York/Lancaster, PA
Charleston, SC
Columbia, SC
Greenville, SC
Hilton Head, SC
Myrtle Beach, SC
Northern Virginia, VA
SOUTHEAST
Birmingham, AL
Huntsville, AL
Atlanta, GA
Macon, GA
Savannah, GA
Daytona Beach, FL
Fort Myers/Naples, FL
Jacksonville, FL
Melbourne, FL
Miami/West Palm Beach, FL
Orlando, FL
Tampa, FL
Baton Rouge, LA
301 Commerce St.
Suite 500
Fort Worth, Texas 76102
(817) 390-8200
www.drhorton.com
ANNUAL REPORT
2005