ANNUAL REPORT
2010
FINANCIAL SUMMARY
(In millions, except for number of homes and per share amounts)
Revenues
$16,000
$15,051
$12,000
$11,297
Income Statement Data:
Revenues .................................................
Pre-tax operating income (loss)(1)............
Net income (loss) ....................................
Year Ended September 30,
2010
2009
2008
2007
2006
$4,400.2 $3,657.6 $6,646.1 $11,296.5 $15,051.3
852.4
2,258.0
(712.5) 1,233.3
(149.1)
(67.9)
(549.8) (2,633.6)
164.2
245.1
$6,646
$3,658
$4,400
Operating Data:
Homes closed ..........................................
Homes sold..............................................
20,875
19,375
16,703
17,034
26,396
21,251
41,370
33,687
53,099
51,980
$8,000
$4,000
$0
$(2,000)
$(3,000)
$2,000
$1,000
$0
$(1,000)
$(2,000)
$8,000
$6,000
$4,000
$2,000
$0
2006
2007
2008
2009
2010
Net Income (Loss)
$1,233
$2,000
$1,000
$0
$245
$(1,000)
$ (713)
$ (550)
$ (2,634)
2006
2007
2008
2009
2010
Cash Flow from Operations
$1,877
$1,356
Percentages of Revenues:
Gross profi t - Home sales ........................
Gross profi t (loss) - Total homebuilding ..
SG&A expense - Homebuilding .............
Pre-tax operating income (loss)(1)............
Net income (loss) ....................................
17.3%
15.8%
12.1%
3.7%
5.6%
13.1 %
1.8 %
14.5 %
(4.1)%
(15.0)%
11.2 %
(27.0)%
12.1 %
(1.0)%
(39.6)%
17.2 %
5.4 %
10.3 %
7.5 %
(6.3)%
24.0 %
22.6 %
9.9 %
15.0 %
8.2 %
September 30,
2010
2009
2008
2007
2006
Balance Sheet Data:
Cash and marketable securities(2) ............
Inventories ...............................................
Total assets ..............................................
Notes payable ..........................................
Total equity(3) ...........................................
Book value per share ...............................
Common shares outstanding ...................
$1,607.0 $1,957.3 $1,387.3
$269.6
$587.6
9,343.5 11,343.1
4,683.2
3,666.7
7,950.6 11,556.3 14,820.7
6,756.8
6,078.6
4,376.8
3,748.4
3,145.3
6,558.0
5,655.3
2,864.8
2,400.6
$20.94
$17.96
$9.05
$7.56
313.2
314.9
316.7
317.5
3,449.0
5,938.6
2,171.8
2,622.9
$8.23
318.8
$1,141
$709
Sales Order Backlog:
Homes .....................................................
Sales value ..............................................
4,128
18,125
5,297
$850.8 $1,142.0 $1,207.4 $2,694.4 $5,185.1
10,442
5,628
$(1,191)
2006
2007
2008
2009
2010
(1) Pre-tax income (loss) before charges for asset impairments and land option cost write-offs.
(2) Includes cash, cash equivalents and marketable securities.
(3) Total equity represents total stockholders’ equity plus noncontrolling interests.
(4) Homebuilding leverage ratio represents homebuilding notes payable net of cash and marketable securities
divided by total capital net of cash and marketable securities (homebuilding notes payable net of cash and
marketable securities plus total equity).
Total Notes Payable
Total Equity(3)
Homebuilding Leverage Ratio
(4)
$6,079
$4,377
$3,748
$3,145
$2,172
2006
2007
2008
2009
2010
$8,000
$6,000
$4,000
$2,000
$0
$6,558
$5,655
$2,865
$2,401
$2,623
2006
2007
2008
2009
2010
50%
40%
30%
20%
10%
0%
40% 40%
43%
33%
16%
2006
2007
2008
2009
2010
Dear Fellow Shareholders:
On behalf of the entire D.R. Horton team, I am pleased to report that we were profitable in fiscal 2010,
which was another challenging year in the homebuilding industry. Also, for our 9th consecutive fiscal year, we
closed more homes than any other homebuilder in the United States. During the first half of the year, we took
advantage of housing demand spurred by the federal homebuyer tax credit by offering more affordable new
homes in more communities, which produced increases in our home sales, closings and profits. As we
expected, demand decreased after the tax credit expired, and we reduced our inventories in response to the
lower sales level. Overall economic conditions were weak and the long U.S. housing recession persisted
throughout the year, as high unemployment, low consumer confidence, reduced availability of credit in the
mortgage markets and elevated levels of available homes for sale continued to inhibit the ability and
willingness of potential homebuyers to purchase new homes.
Our company made significant progress during fiscal 2010. Most importantly, we returned to profitability
by generating pre-tax income of $99.5 million and net income of $245.1 million in fiscal 2010. We gained
market share and increased our homebuilding revenues by 20%, as we invested in our business by opening
additional new home communities. As of September 30, 2010, we were selling homes in 17% more
communities than a year earlier. Our new communities generated higher margins than our existing
communities, and we realized further reductions in our construction costs, both of which contributed to a
substantial improvement in our homebuilding gross margin. Controlling overhead costs has long been a
hallmark of D.R. Horton, and we were able to leverage our selling, general and administrative costs, keeping
them flat with the prior year while supporting a 20% increase in our revenues.
We generated positive cash flows from operations for the fourth consecutive year and ended the year in a
strong liquidity position, with cash and marketable securities of $1.6 billion. We also fortified our balance
sheet by reducing our homebuilding debt by $1.0 billion and improving our net homebuilding debt to total
capital ratio to a record low of 16.1%. These achievements put our company in the enviable position of having
the flexibility to take advantage of profitable growth opportunities in the current weak housing market and in
the future housing recovery.
As we look to fiscal 2011, we expect another challenging year. The fundamental drivers of new home
demand, which are the overall economy, job growth and consumer confidence, are still very weak. We also
expect the levels of home foreclosure activity and homes available for sale to remain high, while mortgage
lending standards will likely remain very stringent. Additionally, we do not expect any further government
stimulus that would increase housing demand similar to the tax credits that were in effect this past year. These
factors could negatively impact our revenues and operating margins in fiscal 2011 compared to the levels we
achieved in fiscal 2010. However, we believe that our profitable operations, our focus on offering affordable
homes and our expertise with first-time homebuyers, who represent the largest consumer segment of U.S. new
home demand, will allow us to gain market share in the current housing market and to outperform other
homebuilders during the eventual housing recovery.
We will continue to approach our business and each of our markets with realism, and we will adjust our
strategy and tactics as necessary to remain profitable and maintain a strong balance sheet and liquidity
position. Our current operating strategy remains consistent:
(cid:129) Offer affordable homes targeted to first-time homebuyers through our existing and new communities;
(cid:129) Manage our inventory of owned lots and homes in line with sales demand;
(cid:129) Identify and control residential lots through low-risk option purchase contracts;
(cid:129) Limit our capital outlays for raw land purchases and development costs;
(cid:129) Control our costs of construction;
(cid:129) Adjust our SG&A costs to match production levels; and
(cid:129) Reduce our outstanding debt.
We expect that these actions will continue to provide us with the flexibility to take advantage of
profitable growth opportunities, even in a weak overall housing market. Our ongoing goal is to continue to be
a leader in the homebuilding industry in terms of operating profitability and balance sheet strength.
We appreciate and thank our employees, suppliers and subcontractors for their efforts this year, which
helped our company achieve profitability and outperform the homebuilding industry. We must continue to
work to improve the efficiency and effectiveness of our operations each day to build on our achievements and
position our company for the future. We also thank all D.R. Horton shareholders for your support and belief in
the future of our company. We believe that our business and our stock valuation have upside potential, based
on our strong competitive advantages, which include our extensive experience with first-time homebuyers,
geographic diversity, low overhead cost structure, economies of scale, liquidity position and balance sheet
strength. We will leverage these strengths to meet the ongoing challenges in the marketplace and to build on
the profitable foundation we established this year.
Donald R. Horton
Chairman of the Board
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
¥
n
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2010
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-14122
D.R. Horton, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(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
7.875% Senior Notes due 2011
2.00% Convertible Senior Notes due 2014
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
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¥
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
No n
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes ¥
No n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer ¥
Smaller reporting company n
Non-accelerated filer n
Accelerated filer n
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes n
As of March 31, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
No ¥
approximately $3,656,034,000 based on the closing price as reported on the New York Stock Exchange.
As of November 10, 2010, there were 322,533,842 shares of the registrant’s common stock, par value $.01 per share, issued and
318,878,609 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2011 Annual Meeting of Stockholders are incorporated herein by reference in
Part III.
D.R. HORTON, INC. AND SUBSIDIARIES
2010 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3.
Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4.
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . .
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 8.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . .
ITEM 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 14.
Page
1
10
19
19
19
19
20
22
23
63
65
110
110
110
111
111
111
111
111
ITEM 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112
119
PART IV
ITEM 1. BUSINESS
PART I
D.R. Horton, Inc. is one of the largest homebuilding companies in the United States. We construct and
sell homes through our operating divisions in 26 states and 72 metropolitan markets of the United States,
primarily under the name of D.R. Horton, America’s Builder. Our common stock is included in the S&P 500
Index and listed on the New York Stock Exchange under the ticker symbol “DHI.” Unless the context
otherwise requires, the terms “D.R. Horton,” the “Company,” “we” and “our” used herein refer to D.R.
Horton, Inc., a Delaware corporation, and its predecessors and subsidiaries.
Donald R. Horton began our homebuilding business in 1978. In 1991, we were incorporated in Delaware
to acquire the assets and businesses of our predecessor companies, which were residential home construction
and development companies owned or controlled by Mr. Horton. In 1992, we completed our initial public
offering of our common stock. The growth of our company over the years was achieved by investing available
capital into our existing homebuilding markets and into start-up operations in new markets. Additionally, we
acquired other homebuilding companies, which strengthened our position in existing markets and expanded
our geographic presence and product offerings in other markets. Our homes generally range in size from 1,000
to 4,000 square feet and in price from $90,000 to $700,000. The current downturn in our industry has resulted
in a substantial decrease in the size of our operations during the last four fiscal years as we have reacted to the
significantly weakened market for new homes. For the year ended September 30, 2010, we closed 20,875
homes with an average closing sales price of approximately $206,100.
Through our financial services operations, we provide mortgage financing and title agency services to
homebuyers in many of our homebuilding markets. DHI Mortgage, our wholly-owned subsidiary, provides
mortgage financing services principally to the purchasers of homes we build. We generally do not retain or
service the mortgages we originate but, rather, seek to sell the mortgages and related servicing rights to third-
party purchasers. DHI Mortgage originates loans in accordance with purchaser guidelines and historically has
sold substantially all of its mortgage production within 30 days of origination. Our subsidiary title companies
serve as title insurance agents by providing title insurance policies, examination and closing services, primarily
to the purchasers of our homes.
Our financial reporting segments consist of six homebuilding segments and a financial services segment.
Our homebuilding operations are the most substantial part of our business, comprising approximately 98% of
consolidated revenues, which totaled $4.4 billion in fiscal 2010. Our homebuilding operations generate most of
their revenues from the sale of completed homes, with a lesser amount from the sale of land and lots. In
addition to building traditional single-family detached homes, we also build attached homes, such as town
homes, duplexes, triplexes and condominiums (including some mid-rise buildings), which share common walls
and roofs. The sale of detached homes generated approximately 86%, 81%, and 77% of home sales revenues
in fiscal 2010, 2009 and 2008, respectively. Our financial services segment generates its revenues from
originating and selling mortgages and collecting fees for title insurance agency and closing services.
We make available, as soon as reasonably practicable, on our Internet website all of our reports required to
be filed with the Securities and Exchange Commission (SEC). These reports include our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, beneficial ownership reports on
Forms 3, 4, and 5, proxy statements and amendments to such reports. These reports are available in the
“Investors” section of our Internet website. We will also provide these reports in electronic or paper format to
our stockholders free of charge upon request made to our Investor Relations department. Our SEC filings are
also available to the public on the SEC’s website at www.sec.gov, and the public may read and copy any
document we file at the SEC’s public reference room located at 100 F Street NE, Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room.
Our principal executive offices are located at 301 Commerce Street, Suite 500, Fort Worth, Texas 76102.
Our telephone number is (817) 390-8200, and our Internet website address is www.drhorton.com. Information
on our Internet website is not part of this annual report on Form 10-K.
1
Operating Strategy and Structure
For a substantial part of our company’s existence, we maintained significant year-over-year growth and
profitability. We achieved this growth through an operating strategy focused on capturing greater market share,
while also maintaining a strong balance sheet. To execute our strategy, we invested available capital in our
existing homebuilding markets and opportunistically entered new markets. We also actively evaluated
homebuilding acquisition opportunities as they arose, some of which resulted in acquisitions and contributed to
our growth.
During the past four years, conditions in the homebuilding industry have been challenging. Although we
believe the long-term fundamental factors that support housing demand remain positive, it is not possible to
predict when current conditions will improve or if they will deteriorate from current levels. During the current
downturn we have increased our cash balances by generating substantial cash flow from operations, primarily
through reductions in inventory and mortgage loans held for sale, the receipt of tax refunds and by accessing
the capital markets. While we will continue to conservatively manage our business, our increased liquidity
provides us with flexibility in determining the appropriate operating strategy for each of our communities and
markets to strike the best balance between cash flow generation and potential profit.
Geographic Diversity
From 1978 to late 1987, our homebuilding activities were conducted in the Dallas/Fort Worth area. We
then began diversifying geographically by entering additional markets, both through start-up operations and
acquisitions. We now operate in 26 states and 72 markets. This provides us with geographic diversification in
our homebuilding inventory investments and our sources of revenues and earnings. We believe our
diversification strategy helps to mitigate the effects of local and regional economic cycles and enhances our
long-term potential.
Economies of Scale
We are the largest homebuilding company in the United States in terms of number of homes closed in
fiscal 2010. By the same measure, we are also one of the five largest builders in many of our markets in fiscal
2010. 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:
(cid:129) Negotiation of volume discounts and rebates from national, regional and local materials suppliers and
lower labor rates from certain subcontractors;
(cid:129) Enhanced leverage of our general and administrative activities, which allows us greater flexibility to
compete for greater market share in each of our markets; and
(cid:129) Greater access to and lower cost of capital, due to our strong balance sheet and our lending and capital
markets relationships.
Decentralized Operations
We decentralize our homebuilding activities to give operating flexibility to our local division presidents
on certain key operating decisions. At September 30, 2010, we had 33 separate homebuilding operating
divisions, many of which operate in more than one market area. Generally, each operating division consists of
a division president; land entitlement, acquisition and development personnel; a sales manager and sales
personnel; a construction manager and construction superintendents; customer service personnel; a controller;
a purchasing manager and office staff. We believe that division presidents and their management teams, who
are familiar with local conditions, generally have better information on which to base decisions regarding their
operations. Our division presidents receive performance bonuses based upon achieving targeted financial and
operational measures in their operating divisions.
2
Operating Division Responsibilities
Each operating division is responsible for:
(cid:129) Site selection, which involves
— A feasibility study;
— Soil and environmental reviews;
— Review of existing zoning and other governmental requirements; and
— Review of the need for and extent of offsite work required to meet local building codes;
(cid:129) Negotiating lot option or similar contracts;
(cid:129) Obtaining all necessary land development and home construction approvals;
(cid:129) Overseeing land development;
(cid:129) Selecting building plans and architectural schemes;
(cid:129) Selecting and managing construction subcontractors and suppliers;
(cid:129) Planning and managing homebuilding schedules;
(cid:129) Developing and implementing local marketing plans; and
(cid:129) Coordinating post closing customer service and warranty repairs.
Centralized Controls
We centralize the key risk elements of our homebuilding business through our regional and corporate
offices. We have four separate homebuilding regional offices. Generally, each regional office consists of a
region president, legal counsel, a chief financial officer, a purchasing manager and limited office support staff.
Each of our region presidents and their management teams are responsible for oversight of the operations of
up to eleven homebuilding operating divisions, including:
(cid:129) Review and approval of division business plans and budgets;
(cid:129) Review of all land and lot acquisition contracts;
(cid:129) Oversight of land and home inventory levels; and
(cid:129) 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 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:
(cid:129) Financing;
(cid:129) Cash management;
(cid:129) Risk and litigation management;
(cid:129) Allocation of capital;
(cid:129) Issuance and monitoring of inventory investment guidelines to our operating divisions;
(cid:129) Environmental assessments of land and lot acquisitions;
(cid:129) Approval and funding of land and lot acquisitions;
(cid:129) Accounting and management reporting;
3
(cid:129) Internal audit;
(cid:129) Information technology systems;
(cid:129) Administration of payroll and employee benefits;
(cid:129) Negotiation of national purchasing contracts;
(cid:129) Management of major national or regional supply chain initiatives;
(cid:129) Monitoring and analysis of margins, returns and expenses; and
(cid:129) Administration of customer satisfaction surveys and reporting of results.
Cost Management
We control overhead costs by centralizing certain administrative and accounting functions and by closely
monitoring the number of administrative personnel and management positions in our operating divisions, as
well as in our regional and corporate offices. We also seek to efficiently manage our advertising costs by
directing many of our promotional activities toward local real estate brokers.
We control construction costs by striving to design our homes efficiently and by obtaining competitive
bids for construction materials and labor. We also seek to negotiate favorable pricing from our primary
subcontractors and suppliers based on the volume of services and products we purchase from them on a local,
regional and national basis. We monitor our construction costs on each house as well as our inventory levels,
margins, returns and expenses through our management information systems.
Acquisitions
As negative market conditions in the housing industry persist, we remain committed to maintaining our
strong balance sheet and liquidity position. However, we will continue to evaluate opportunities for strategic
acquisitions or expansions of our operations. We believe that the current housing industry downturn may
provide us selected opportunities to enhance our operations through the acquisition of existing homebuilding
companies or distressed real estate properties at attractive valuations. In certain instances, such acquisitions
can provide us benefits not found in start-up operations, such as: established land positions and inventories;
and existing relationships with municipalities, land owners, developers, subcontractors and suppliers. We seek
to limit the risks associated with acquiring other companies and distressed real estate properties by conducting
extensive operational, financial and legal due diligence on each acquisition and by performing financial
analysis to determine that each acquisition will have a positive impact on our earnings within an acceptable
period of time.
4
Markets
We conduct our homebuilding operations in all of the geographic regions, states and markets listed below,
and we conduct our mortgage and title operations in many of these markets. Our homebuilding operating
divisions are aggregated into six reporting segments, also referred to as reporting regions, which comprise the
markets below. Our financial statements contain additional information regarding segment performance.
State
Reporting Region/Market
State
Reporting Region/Market
South Central Region
East Region
Delaware . . . . . . . . . . . . . . . . . Central Delaware
Georgia . . . . . . . . . . . . . . . . . . Savannah
Maryland . . . . . . . . . . . . . . . . Baltimore
Suburban Washington, D.C.
New Jersey . . . . . . . . . . . . . . . North New Jersey
South New Jersey
North Carolina . . . . . . . . . . . . . Brunswick County
Charlotte
Greensboro/Winston-Salem
Raleigh/Durham
Pennsylvania . . . . . . . . . . . . . . Lancaster
Philadelphia
South Carolina . . . . . . . . . . . . . Charleston
Columbia
Greenville
Hilton Head
Myrtle Beach
Virginia . . . . . . . . . . . . . . . . . . Northern Virginia
Midwest Region
Colorado . . . . . . . . . . . . . . . . . Colorado Springs
Denver
Fort Collins
Illinois . . . . . . . . . . . . . . . . . . Chicago
Minnesota . . . . . . . . . . . . . . . . Minneapolis/St. Paul
Wisconsin . . . . . . . . . . . . . . . . Kenosha
Louisiana . . . . . . . . . . . . . . . . Baton Rouge
Lafayette
New Mexico . . . . . . . . . . . . . . . Las Cruces
Oklahoma . . . . . . . . . . . . . . . . Oklahoma City
Texas . . . . . . . . . . . . . . . . . . . Austin
Dallas
Fort Worth
Houston
Killeen/Temple/Waco
Rio Grande Valley
San Antonio
Southwest Region
Arizona . . . . . . . . . . . . . . . . . . Phoenix
Tucson
New Mexico . . . . . . . . . . . . . . . Albuquerque
California . . . . . . . . . . . . . . . . Bay Area
West Region
Central Valley
Imperial Valley
Los Angeles County
Riverside County
Sacramento
San Bernardino County
San Diego County
Ventura County
Southeast Region
Hawaii
. . . . . . . . . . . . . . . . . . Hawaii
Alabama . . . . . . . . . . . . . . . . . Birmingham
Mobile
Florida . . . . . . . . . . . . . . . . . . Daytona Beach
Fort Myers/Naples
Jacksonville
Melbourne
Miami/West Palm Beach
Orlando
Pensacola
Sarasota County
Tampa
Georgia . . . . . . . . . . . . . . . . . . Atlanta
Macon
Maui
Oahu
Idaho . . . . . . . . . . . . . . . . . . . Boise
Nevada . . . . . . . . . . . . . . . . . . Las Vegas
Oregon . . . . . . . . . . . . . . . . . . Albany
Reno
Central Oregon
Portland
Utah . . . . . . . . . . . . . . . . . . . . Salt Lake City
Washington . . . . . . . . . . . . . . . Seattle/Tacoma
Vancouver
5
When evaluating new or existing homebuilding markets for purposes of capital allocation, we consider
local, market-specific factors, including among others:
(cid:129) Economic conditions;
(cid:129) Employment levels and job growth;
(cid:129) Median income level of potential homebuyers;
(cid:129) Local housing affordability and typical mortgage products utilized;
(cid:129) Market for homes at entry-level price point;
(cid:129) Availability of land and lots on acceptable terms;
(cid:129) Land entitlement and development processes;
(cid:129) New and secondary home sales activity;
(cid:129) Competition; and
(cid:129) Prevailing housing products, features, cost and pricing.
Land Policies
We acquire land after we have completed due diligence and generally after we have obtained the rights
(known as entitlements) to begin development or construction work resulting in an acceptable number of
residential lots. Before we acquire lots or tracts of land, we will, among other things, complete a feasibility
study, which includes soil tests, independent environmental studies and other engineering work, and evaluate
the status of necessary zoning and other governmental entitlements required to develop and use the property
for home construction. Although we purchase and develop land primarily to support our homebuilding
activities, we also sell land and lots to other developers and homebuilders where we have excess land and lot
positions.
We also enter into land/lot option contracts, in which we obtain the right, but generally not the obligation,
to buy land or lots at predetermined prices on a defined schedule commensurate with anticipated home
closings or planned land development. Our option contracts generally are non-recourse, which limits our
financial exposure to our earnest money deposited with land and lot sellers and any preacquisition due
diligence costs incurred by us. This enables us to control land and lot positions with limited capital
investment, which substantially reduces the risks associated with land ownership and development.
Almost all of our land and lot positions are acquired directly by us. We have avoided entering into joint
venture arrangements due to their increased costs and complexity, as well as the loss of operational control
inherent in such arrangements. We are a party to a very small number of joint ventures that were acquired
through acquisitions of other homebuilders. All of these joint ventures are consolidated in our financial
statements.
We attempt to mitigate our exposure to real estate inventory risks by:
(cid:129) Managing our supply of land/lots controlled (owned and optioned) in each market based on anticipated
future home closing levels;
(cid:129) Monitoring local market and demographic trends, housing preferences and related economic
developments, such as new job opportunities, local growth initiatives and personal income trends;
(cid:129) Utilizing land/lot option contracts, where possible;
(cid:129) Seeking to acquire developed lots which are substantially ready for home construction;
(cid:129) Limiting the size of acquired land parcels to smaller tracts, where possible;
6
(cid:129) 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
(cid:129) Monitoring and managing the number of speculative homes (homes under construction without an
executed sales contract) built in each subdivision.
The benefits of this strategy have been limited by the sustained weak conditions in the homebuilding
industry over the past four fiscal years.
Construction
Our home designs are selected or prepared in each of our markets to appeal to local tastes and
preferences of homebuyers in each community. We also offer optional interior and exterior features to allow
homebuyers to enhance the basic home design and to allow us to generate additional revenues from each
home sold. We have adjusted our product offerings to address affordability issues, which have become
increasingly important in the current weak market conditions.
Substantially all of our construction work is performed by subcontractors. Subcontractors typically are
retained for a specific subdivision pursuant to a contract that obligates the subcontractor to complete
construction at an agreed-upon price. Agreements with the subcontractors and suppliers we use generally are
negotiated for each subdivision. We compete with other homebuilders for qualified subcontractors, raw
materials and lots in the markets where we operate. We employ construction superintendents to monitor homes
under construction, participate in major design and building decisions, coordinate the activities of
subcontractors and suppliers, review the work of subcontractors for quality and cost controls and monitor
compliance with zoning and building codes. In addition, our construction superintendents play a significant
role in working with our homebuyers by assisting with option selection and home modification decisions,
educating buyers on the construction process and instructing buyers on post-closing home maintenance.
Construction time for our homes depends on the weather, availability of labor, materials and supplies,
size of the home, and other factors. We typically complete the construction of a home within three to six
months.
We typically do not maintain significant inventories of construction materials, except for work in progress
materials for homes under construction. Generally, the construction materials used in our operations are
readily available from numerous sources. We have contracts exceeding one year with certain suppliers of our
building materials that are cancelable at our option with a 30 day notice. In recent years, we have not
experienced delays in construction due to shortages of materials or labor that have materially affected our
consolidated operating results.
Marketing and Sales
We market and sell our homes through commissioned employees and independent real estate brokers. We
typically conduct home sales from sales offices located in furnished model homes in each subdivision, and we
typically do not offer our model homes for sale until the completion of a subdivision. Our sales personnel
assist prospective homebuyers by providing them with floor plans, price information, tours of model homes
and assisting them with the selection of options and other custom features. We train and inform our sales
personnel as to the availability of financing, construction schedules, and marketing and advertising plans. As
our customers are typically first-time or move-up homebuyers, we attempt to adjust our product mix and
pricing within our homebuilding markets to keep our homes affordable. As market conditions warrant, we may
provide potential homebuyers with one or more of a variety of incentives, including discounts and free
upgrades, to be competitive in a particular market. Due to the weak industry conditions of the past four fiscal
years, we have offered an increased level of incentives to homebuyers.
We advertise in our local markets as necessary through newspapers, marketing brochures, newsletters and
email or other electronic means to prospective homebuyers and real estate brokers. We also use billboards,
radio and television advertising and our Internet website to market the location, price range and availability of
7
our homes. To minimize advertising costs, we attempt to operate in subdivisions in conspicuous locations that
permit us to take advantage of local traffic patterns. We also believe that model homes play a substantial role
in our marketing efforts, so we expend significant effort to create an attractive atmosphere in our model
homes.
In addition to using model homes, we build a limited number of speculative homes in each subdivision.
These homes enhance our marketing and sales efforts to prospective homebuyers who are relocating to these
markets, as well as to independent brokers, who often represent homebuyers requiring a completed home
within a short time frame. We determine our speculative homes strategy in each market based on local market
factors, such as new job growth, the number of job relocations, housing demand and supply, seasonality,
current sales contract cancellation trends and our past experience in the market. We determine the number of
speculative homes to build in each subdivision based on our current and planned sales pace, and we monitor
and adjust speculative home inventory on an ongoing basis as conditions warrant. The significant weakness in
our housing markets and related high cancellation rates during recent years had caused our speculative home
inventory to remain higher than our target levels. During fiscal 2010, we were able to reduce both total and
speculative homes in inventory from the prior year levels. We expect to maintain a level of speculative home
inventory in our markets that will be based on our expectations of future sales and closings volume. We
believe these speculative homes help to provide us with opportunities to sell additional homes at a profit,
reduce our inventory of owned lots and generate positive cash flows.
Our sales contracts require an earnest money deposit of at least $500. The amount of earnest money
required varies between markets and subdivisions, and may significantly exceed $500. Additionally, customers
are generally required to pay additional deposits when they select options or upgrade features for their homes.
Most of our sales contracts stipulate that when customers cancel their contracts with us, we have the right to
retain their earnest money and option deposits; however, our operating divisions occasionally choose to refund
such deposits. Our sales contracts also include a financing contingency which permits customers to cancel and
receive a refund of their deposits if they cannot obtain mortgage financing at prevailing or specified interest
rates within a specified period. Our contracts may include other contingencies, such as the sale of an existing
home. As a percentage of gross sales orders, cancellations of sales contracts in fiscal 2010 were 26%,
compared to 30% in fiscal 2009. While this reflects an improvement from the prior year, our cancellation rate
continues to be significantly higher than our historical rate before the current downturn in the homebuilding
industry, reflecting the continuing weak housing market conditions. The length of time between the signing of
a sales contract for a home and delivery of the home to the buyer (closing) is generally from two to six
months.
Customer Service and Quality Control
Our operating divisions are responsible for pre-closing quality control inspections and responding to
customers’ post-closing needs. We believe that a prompt and courteous response to homebuyers’ needs during
and after construction reduces post-closing repair costs, enhances our reputation for quality and service and
ultimately leads to significant repeat and referral business from the real estate community and homebuyers.
We typically provide our homebuyers with a ten-year limited warranty for major defects in structural elements
such as framing components and foundation systems, a two-year limited warranty on major mechanical
systems, and a one-year limited warranty on other construction components. The subcontractors who perform
the actual construction also provide us with warranties on workmanship and are generally prepared to respond
to us and the homeowner promptly upon request. In addition, some of our suppliers provide manufacturer’s
warranties on specified products installed in the home.
Sales Order Backlog
At September 30, 2010, the value of our backlog of sales orders was $850.8 million (4,128 homes), a
decrease of 25% from $1,142.0 million (5,628 homes) at September 30, 2009. The average sales price of
homes in backlog was $206,100 at September 30, 2010, up 2% from the $202,900 average at September 30,
2009. Sales order backlog represents homes under contract but not yet closed at the end of the period. Many
of the contracts in our sales order backlog are subject to contingencies, including mortgage loan approval and
8
buyers selling their existing homes, which can result in cancellations. A portion of the contracts in backlog
will not result in closings due to cancellations. Substantially all of the homes in our sales backlog at
September 30, 2010 are scheduled to close in fiscal year 2011. Further discussion of our backlog is provided
in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under
Part II of this annual report on Form 10-K.
Customer Mortgage Financing
We provide mortgage financing services principally to purchasers of our homes in the majority of our
homebuilding markets through our wholly-owned subsidiary, DHI Mortgage. DHI Mortgage coordinates and
expedites the sales transaction by ensuring that mortgage commitments are received and that closings take
place in a timely and efficient manner. DHI Mortgage originates mortgage loans for a substantial portion of
our homebuyers and, when necessary to fulfill the needs of some homebuyers, also brokers loans to third-party
lenders who directly originate the mortgage loans. During the year ended September 30, 2010, approximately
90% of DHI Mortgage’s loan volume related to homes closed by our homebuilding operations, and DHI
Mortgage provided mortgage financing services for approximately 61% of our total homes closed.
To limit the risks associated with our mortgage operations, DHI Mortgage only originates loan products
that it believes may be sold to third-party purchasers. DHI Mortgage generally sells the loans and their
servicing rights to third-party purchasers shortly after origination with limited recourse provisions. In markets
where we currently do not provide mortgage financing, we work with a variety of mortgage lenders that make
available to homebuyers a range of mortgage financing programs.
Title Services
Through our subsidiary title companies, we serve as a title insurance agent in selected markets by
providing title insurance policies, examination and closing services to the purchasers of homes we build and
sell. We currently assume little or no underwriting risk associated with these title policies.
Employees
At September 30, 2010, we employed 3,214 persons, of whom 860 were sales and marketing personnel,
1,001 were executive, administrative and clerical personnel, 678 were involved in construction and 675
worked in mortgage and title operations. We had fewer than 10 employees covered by collective bargaining
agreements. Employees of some of the subcontractors that we use are represented by labor unions or are
subject to collective bargaining agreements. We believe that our relations with our employees and
subcontractors are good.
Competition
The homebuilding industry is highly competitive. We compete in each of our markets with numerous
other national, regional and local homebuilders for homebuyers, desirable properties, raw materials, skilled
labor and financing. We also compete with resales of existing homes and with the rental housing market. Our
homes compete on the basis of quality, price, design, mortgage financing terms and location. In the current
weak housing market, competition among homebuilders has greatly intensified, especially as to pricing and
incentives, as builders attempt to maximize sales volume despite the weak housing demand. The current
market conditions have also led to a large number of foreclosed homes being offered for sale, which has
increased competition for homebuyers and affected pricing. Our financial services business competes with
other mortgage lenders, including national, regional and local mortgage bankers and other financial
institutions, some of which have greater access to capital, different lending criteria and potentially broader
product offerings.
Governmental Regulation and Environmental Matters
The homebuilding industry is subject to extensive and complex regulations. We and the subcontractors we
use must comply with various federal, state and local laws and regulations, including zoning, density and
9
development requirements, building, environmental, advertising and real estate sales rules and regulations.
These regulations and requirements affect the development process, as well as building materials to be used,
building designs and minimum elevation of properties. Our homes are inspected by local authorities where
required, and homes eligible for insurance or guarantees provided by the Federal Housing Administration
(FHA) and the Veterans Administration (VA) are subject to inspection by them. These regulations often
provide broad discretion to the administering governmental authorities. In addition, our new housing
developments may be subject to various assessments for schools, parks, streets and other public improvements.
Our homebuilding operations are also subject to a variety of local, state and federal statutes, ordinances,
rules and regulations concerning protection of health, safety and the environment. The particular
environmental laws for each site vary greatly according to location, environmental condition and the present
and former uses of the site and adjoining properties.
Our mortgage company and title insurance agencies must also comply with various federal and state laws
and regulations. These include eligibility and other requirements for participation in the programs offered by
the FHA, VA, Government National Mortgage Association (GNMA), Federal National Mortgage Association
(Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). These also include required
compliance with consumer lending and other laws and regulations such as disclosure requirements,
prohibitions against discrimination and real estate settlement procedures. All of these laws and regulations
may subject our operations to examination by the applicable agencies.
Seasonality
We have typically experienced seasonal variations in our quarterly operating results and capital
requirements. Prior to the current downturn in the homebuilding industry, we generally had more homes under
construction, closed more homes and had greater revenues and operating income in the third and fourth
quarters of our fiscal year. This seasonal activity increased our working capital requirements for our
homebuilding operations during the third and fourth fiscal quarters and increased our funding requirements for
the mortgages we originated in our financial services segment at the end of these quarters. As a result of
seasonal activity, our quarterly results of operations and financial position at the end of a particular fiscal
quarter are not necessarily representative of the balance of our fiscal year.
In contrast to our typical seasonal results, the weakness in homebuilding market conditions during the
past four years has mitigated our historical seasonal variations. Also, in fiscal 2010 the expiration of the
federal homebuyer tax credit impacted the timing of our construction activities, home sales and closing
volumes. Although we may experience our typical historical seasonal pattern in the future, given the current
market conditions, we can make no assurances as to when or whether this pattern will recur.
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 we are or may
become subject to, many of which are difficult to predict or beyond our control. These risks and uncertainties,
together with other factors described elsewhere in this report, have the potential to affect our business,
financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.
The homebuilding industry is undergoing a significant downturn, and its duration and ultimate severity are
uncertain. Continued weakness or further deterioration in industry conditions or in the broader economic
conditions could have additional adverse effects on our business and financial results.
The downturn in the homebuilding industry is in its fourth year, and it has become one of the most severe
housing downturns in U.S. history. The significant declines in the demand for new homes, oversupply of
homes on the market and reductions in the availability of financing for homebuyers that have marked the
downturn are continuing. During the downturn, we have experienced material reductions in our home sales
and homebuilding revenues, and we have incurred material inventory and goodwill impairments and other
write-offs.
10
Our ability to respond to the downturn has been limited by adverse industry and economic conditions.
The significant number of home mortgage foreclosures has increased supply and driven down prices, making
the purchase of a foreclosed home an attractive alternative to purchasing a new home. Homebuilders have
responded to declining sales and increased cancellation rates with significant concessions, further adding to the
price declines. With the decline in the values of homes and the inability of some homeowners to make their
mortgage payments, the credit markets have been significantly disrupted, putting strains on many households
and businesses. In the face of these conditions, the overall economy has remained very weak, with high
unemployment levels and substantially reduced consumer spending and confidence. As a result, demand for
new homes remains at historically low levels.
These challenging conditions are complex and interrelated. We cannot predict their duration or ultimate
severity. Nor can we provide assurance that our responses to the homebuilding downturn or the government’s
attempts to address the troubles in the overall economy will be successful.
Constriction of the credit markets could limit our ability to access capital and increase our costs of capital.
During the downturn in the homebuilding industry, we have relied principally on our positive operating
cash flow to meet our working capital needs and repay outstanding indebtedness. We generated substantial
operating cash flow during this time. However, the downturn and the constriction of the credit markets have
reduced the other sources of liquidity available to us. While the public debt markets are currently accessible
today at historically favorable rates, there were periods during the downturn where accessing the public debt
markets would have increased our cost of capital.
In May 2009, we voluntarily terminated our $1.65 billion unsecured revolving credit facility. We have
since relied on short-term arrangements with some of the former lenders under the terminated facility for the
letters of credit we require in our business. A new line of credit, should we decide to pursue one, may be
difficult to obtain on favorable terms in the current circumstances of our business and the overall economy. It
would also likely involve additional financing costs and restrictions on our business. Our not having a line in
place could reduce our flexibility in responding to or taking advantage of changing conditions in the
homebuilding industry or require us to use our own cash resources in doing so.
Our mortgage subsidiary, DHI Mortgage, uses a $100 million mortgage repurchase facility to finance
many of the loans it originates. The facility must be renewed annually, and the current facility expires in
March 2011. A continuation of current market conditions could make the renewal more difficult or could
result in an increase in the cost of the facility or a decrease in its committed availability. Such conditions may
also make it more difficult or costly to sell the mortgages that we originate.
As of September 30, 2010, we had $296.4 million of debt maturing in the next 12 months. We believe we
can meet these and our other capital requirements with our existing cash resources and future cash flows and,
if required, other sources of financing that we anticipate will be available to us. However, we can provide no
assurance that we will continue to be able to do so, particularly if current industry or economic conditions
continue or deteriorate further. The future effects on our business, liquidity and financial results of these
conditions could be material and adverse, both in ways described above and in other ways that we do not
currently foresee.
We use letters of credit and surety bonds to secure our performance under various construction and land
development agreements, escrow agreements, financial guarantees and other arrangements. Should our future
performance or economic conditions make these more difficult to obtain or more costly, our business or
financial results could be adversely affected.
The reduction in availability of mortgage financing has adversely affected our business, and the duration
and ultimate severity of the effects are uncertain.
Over the last four fiscal years, the mortgage lending industry has experienced significant change and
contraction. Credit requirements have tightened and investor demand for mortgage loans and mortgage-backed
securities has been limited to securities backed by Fannie Mae, Freddie Mac or Ginnie Mae. This has made it
11
more difficult for many buyers to finance the purchase of our homes, thus reducing the pool of qualified
homebuyers. These reductions in demand have adversely affected our business and financial results, and the
duration and severity of these effects remain uncertain.
We believe that the liquidity provided by Fannie Mae, Freddie Mac and Ginnie Mae to the mortgage
industry has been very important to the housing market. Fannie Mae and Freddie Mac have required
substantial injections of capital from the federal government and may require additional government support in
the future. In addition, increased lending volume and losses insured by the FHA have resulted in a reduction
of its cash reserves. Any reduction in the availability of the financing provided by these institutions could
adversely affect interest rates, mortgage availability and sales of new homes and mortgage loans.
The FHA insures mortgage loans that generally have lower loan payment requirements and as a result,
continue to be a particularly important source for financing the sale of our homes. In the last two years, more
restrictive guidelines have been placed on FHA insured loans, affecting minimum down payment and
availability for condominium financing. In the near future, further restrictions are expected on FHA insured
loans, including but not limited to limitations on seller-paid closing costs and concessions. This or any other
restriction may negatively affect the availability or affordability of FHA financing, which could adversely
affect our ability to sell homes.
While the use of down payment assistance programs by our homebuyers has decreased significantly,
some of our customers still utilize 100% financing through programs offered by the VA and United States
Department of Agriculture (USDA). There can be no assurance that these programs or other programs will
continue to be available or will be as attractive to our customers as the programs currently offered, which
could negatively affect our sales.
Even if potential customers do not need financing, changes in the availability of mortgage products may
make it more difficult for them to sell their current homes to potential buyers who need financing.
Mortgage rates are currently at historically low levels. If interest rates increase, the costs of owning a
home will be affected and could result in further reductions in the demand for our homes.
Our strategies in responding to the adverse conditions in the homebuilding industry have had limited
success, and the continued implementation of these and other strategies may not be successful.
While we have been successful in generating positive operating cash flow and reducing our inventories in
the last four fiscal years, we have done so at reduced revenue and gross profit levels and have incurred
significant asset impairment charges, resulting in pre-tax losses. Also, during this time, notwithstanding our
sales strategies, we continued to experience an elevated rate of sales contract cancellations. We believe that the
increase in the cancellation rate is largely due to reduced homebuyer confidence, due principally to the weak
economy and the continuing high level of unemployment. A more restrictive mortgage lending environment
and the inability of some buyers to sell their existing homes have also impacted cancellations. Many of these
factors, which affect new sales and cancellation rates, are beyond our control. It is uncertain how long the
reduction in sales and the increased level of cancellations will continue. If these conditions continue for a
protracted period, it is not clear whether our strategies will succeed in maintaining or increasing our sales
volume or our current margins.
Our business and financial results could be adversely affected by significant inflation or deflation.
Inflation can adversely affect us by increasing costs of land, materials and labor. In the event of a return
of inflation, we may seek to increase the sales prices of homes in order to maintain satisfactory margins.
However, a continuation of the oversupply of homes relative to demand may make this difficult. In addition,
significant inflation is often accompanied by higher interest rates, which have a negative impact on housing
demand. In such an environment, we may not be able to raise home prices sufficiently to keep up with the rate
of inflation and our margins could decrease. Moreover, with inflation, the costs of capital increase and the
purchasing power of our cash resources can decline. Current or future efforts by the government to stimulate
12
the economy may increase the risk of significant inflation and its adverse impact on our business or financial
results.
Alternatively, a significant period of deflation could cause a decrease in overall spending and borrowing
levels. This could lead to a further deterioration in economic conditions, including an increase in the rate of
unemployment. Deflation could also cause the value of our inventories to decline or reduce the value of
existing homes below the related mortgage loan balance, which could potentially increase the supply of
existing homes and have a negative impact on our results of operations.
The homebuilding industry is cyclical and affected by changes in general economic, real estate or other
business conditions that could adversely affect our business or financial results.
The homebuilding industry is cyclical and is significantly affected by changes in industry conditions, as
well as changes in general and local economic conditions, such as:
(cid:129) employment levels;
(cid:129) availability of financing for homebuyers;
(cid:129) interest rates;
(cid:129) consumer confidence;
(cid:129) levels of new and existing homes for sale;
(cid:129) demographic trends; and
(cid:129) housing demand.
These may occur on a national scale, like the current downturn, or may affect some of our regions or
markets more than others. When adverse conditions affect any of our larger markets, they could have a
proportionately greater impact on us than on some other homebuilding companies. Our operations in
previously strong markets, particularly California, Florida, Nevada and Arizona, have more adversely affected
our financial results than our other markets in the current downturn.
An oversupply of alternatives to new homes, including foreclosed homes, homes held for sale by
investors and speculators, other existing homes and rental properties, can also reduce our ability to sell new
homes, depress new home prices and reduce our margins on the sales of new homes. High levels of
foreclosures not only contribute to additional inventory available for sale, but also reduce appraisal valuations
for new homes and the amount that can be financed, potentially resulting in lower sales prices.
Weather conditions and natural disasters, such as hurricanes, tornadoes, earthquakes, wildfires, volcanic
activity, droughts, and floods, can harm our homebuilding business. These can delay home closings, adversely
affect the cost or availability of materials or labor, or damage homes under construction. The climates and
geology of many of the states in which we operate, including California, Florida and Texas, where we have
some of our larger operations, present increased risks of adverse weather or natural disasters.
Continued military deployments in the Middle East and other overseas regions, terrorist attacks, other acts
of violence or threats to national security and any corresponding response by the United States or others, or
related domestic or international instability may adversely affect general economic conditions or cause a
slowdown of the economy.
As a result of the foregoing matters, potential customers may be less willing or able to buy our homes.
Because of current industry and economic conditions, we have not been able to increase the sale prices of our
homes. In the future, our pricing strategies may also be limited by market conditions. We may be unable to
further change the mix of our home offerings, reduce the costs of the homes we build or offer more affordable
homes to maintain our margins or satisfactorily address changing market conditions in other ways. In addition,
cancellations of home sales contracts in backlog may increase as homebuyers choose to not honor their
contracts due to any of the factors discussed above.
13
Our financial services business is closely related to our homebuilding business, as it originates mortgage
loans principally to purchasers of the homes we build. A decrease in the demand for our homes because of the
foregoing matters may also adversely affect the financial results of this segment of our business. An increase
in the default rate on the mortgages we originate may adversely affect our ability to sell the mortgages or the
pricing we receive upon the sale of mortgages or may increase our repurchase or other obligations for
previous originations. We establish reserves related to mortgages we have sold; however, actual future
obligations related to these mortgages could differ significantly from our currently estimated amounts.
The risks associated with our land and lot inventory could adversely affect our business or financial results.
Inventory risks are substantial for our homebuilding business. The risks inherent in controlling or
purchasing and developing land increase as consumer demand for housing decreases. Thus, we may have
acquired options on or bought and developed land or lots at a cost we will not be able to recover fully, or on
which we cannot build and sell homes profitably. As a result, our deposits for building lots controlled under
option or similar contracts may be put at risk. The value of our owned undeveloped land, building lots and
housing inventories can also fluctuate significantly as a result of changing market conditions. In addition,
inventory carrying costs can be significant and can result in reduced margins or losses in a poorly performing
community or market. During the current economic downturn, we have sold homes and land for lower margins
or at a loss and we have recorded significant inventory impairment charges.
Our goals for years of supply for ownership and control of land and building lots are based on
management’s expectations for future volume growth. In light of the much weaker market conditions
encountered since fiscal 2006, we have significantly slowed our purchases of undeveloped land and our
development spending on land we own. We made substantial land and lot sales in fiscal 2008. Throughout the
downturn, we also terminated numerous land option contracts and wrote off earnest money deposits and pre-
acquisition costs related to these option contracts. Because future market conditions are uncertain, we cannot
provide assurance that these measures will be successful in managing our future inventory risks.
Supply shortages and other risks related to demand for building materials and skilled labor could increase
our costs and delay deliveries.
The homebuilding industry has from time to time experienced significant difficulties that can affect the
cost or timing of construction, including:
(cid:129) difficulty in acquiring land suitable for residential building at affordable prices in locations where our
potential customers want to live;
(cid:129) shortages of qualified trades people;
(cid:129) reliance on local subcontractors, manufacturers and distributors who may be inadequately capitalized;
(cid:129) shortages of materials; and
(cid:129) 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.
These factors may cause us to take longer or incur more costs to build our homes and adversely affect
our revenues and margins.
Increases in the costs of owning a home could prevent potential customers from buying our homes and
adversely affect our business or financial results.
Significant expenses of owning a home, including mortgage interest and real estate taxes, generally are
deductible expenses for an 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 from time to time, to eliminate or substantially modify these income
tax deductions, the after-tax cost of owning a new home would increase for many of our potential customers.
14
The loss or reduction of homeowner tax deductions, if such tax law changes were enacted without offsetting
provisions, would adversely impact demand for and sales prices of new homes.
In addition, increases in property tax rates by local governmental authorities, as experienced in response
to reduced federal and state funding, can adversely affect the ability of potential customers to obtain financing
or their desire to purchase new homes.
Governmental regulations could increase the cost and limit the availability of our development and
homebuilding projects and adversely affect our business or financial results.
We are subject to extensive and complex regulations that affect land development and home construction,
including zoning, density restrictions, building design and building standards. These regulations often provide
broad discretion to the administering governmental authorities as to the conditions we must meet prior to
development or construction being approved, if approved at all. We are subject to determinations by these
authorities as to the adequacy of water or sewage facilities, roads or other local services. New housing
developments may also be subject to various assessments for schools, parks, streets and other public
improvements. In addition, in many markets government authorities have implemented no growth or growth
control initiatives. Any of these can limit, delay or increase the costs of development or home construction.
We are also subject to a variety of local, state and federal laws and regulations concerning protection of
health, safety and the environment. The impact of environmental laws varies depending upon the prior uses of
the building site or adjoining properties and may be greater in areas with less supply where undeveloped land
or desirable alternatives are less available. These matters may result in delays, may cause us to incur
substantial compliance, remediation, mitigation and other costs, and can prohibit or severely restrict
development and homebuilding activity in environmentally sensitive regions or areas.
Governmental regulation of our financial services operations could adversely affect our business or
financial results.
Our financial services operations are subject to numerous federal, state and local laws and regulations.
These include eligibility requirements for participation in federal loan programs, compliance with consumer
lending and similar requirements such as disclosure requirements, prohibitions against discrimination and real
estate settlement procedures. They may also subject our operations to examination by the applicable agencies.
These factors may limit our ability to provide mortgage financing or title services to potential purchasers of
our homes.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R.4173) was signed
into law. This legislation provides for a number of new requirements relating to residential mortgage lending
practices, many of which are to be developed further by implementing rules. These include, among others,
minimum standards for mortgages and lender practices in making mortgages, limitations on certain fees,
retention of credit risk, prohibition of certain tying arrangements and remedies for borrowers in foreclosure
proceedings. The effect of such provisions on our financial services business will depend on the rules that are
ultimately enacted.
The turmoil caused by the increasing number of defaults and resulting foreclosures has encouraged
consumer lawsuits and the investigation of financial services industry practices by governmental authorities.
These investigations could include the examination of consumer lending practices, sales of mortgages to
financial institutions and other investors, and current foreclosure processes or other practices in the financial
services segments of homebuilding companies. We are unable to assess whether these governmental inquiries
will result in changes in regulations, homebuilding industry practices or adversely affect the costs and
potential profitability of homebuilding companies.
15
Homebuilding is subject to home warranty and construction defect claims in the ordinary course of
business that can be significant.
As a homebuilder, we are subject to home warranty and construction defect claims arising in the ordinary
course of business. As a consequence, we maintain product liability insurance, obtain indemnities and
certificates of insurance from subcontractors generally covering claims related to workmanship and materials.
We establish warranty and other reserves for the homes we sell based on historical experience in our markets
and our judgment of the qualitative risks associated with the types of homes built. Because of the uncertainties
inherent to these matters, we cannot provide assurance that our insurance coverage, our subcontractor
arrangements and our reserves will be adequate to address all of our warranty and construction defect claims
in the future. Contractual indemnities can be difficult to enforce, we may be responsible for applicable self-
insured retentions and some types of claims may not be covered by insurance or may exceed applicable
coverage limits. Additionally, the coverage offered by and the availability of product liability insurance for
construction defects is currently limited and costly. We have responded to increases in insurance costs and
coverage limitations in recent years by increasing our self-insured retentions and claim reserves. There can be
no assurance that coverage will not be further restricted or become more costly.
Our substantial debt could adversely affect our financial condition.
We have a significant amount of debt. As of September 30, 2010, our consolidated debt was
$2,171.8 million. As of September 30, 2010, the scheduled maturities of principal on our outstanding debt for
the subsequent 12 months totaled $296.4 million. The indentures governing our senior and convertible senior
notes do not restrict the incurrence of future unsecured debt, and they permit significant amounts of secured
debt. We do not currently have a revolving credit facility for our homebuilding operations. If we choose to
enter into a new line of credit agreement, it may limit the amount of debt we could incur.
Possible Consequences. The amount and the maturities of our debt could have important consequences.
For example, they could:
(cid:129) require us to dedicate a substantial portion of our cash flow from operations to payment of our debt and
reduce our ability to use our cash flow for other operating or investing purposes;
(cid:129) limit our flexibility in planning for, or reacting to, the changes in our business;
(cid:129) limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt
service requirements or other requirements;
(cid:129) place us at a competitive disadvantage because we have more debt than some of our competitors; and
(cid:129) make us more vulnerable to downturns in our business or general economic conditions.
In addition, the magnitude of our debt and the restrictions imposed by the instruments governing these
obligations expose us to additional risks, including:
Dependence on Future Performance. Our ability to meet our debt service and other obligations will
depend, in part, upon our future financial performance. Our future results are subject to the risks and
uncertainties described in this report. These have been compounded by the current industry and economic
conditions. Our revenues and earnings vary with the level of general economic activity in the markets we
serve. Our businesses are also affected by financial, political, business and other factors, many of which are
beyond our control. The factors that affect our ability to generate cash can also affect our ability to raise
additional funds for these purposes through the sale of debt or equity, the refinancing of debt, or the sale of
assets.
Mortgage Repurchase Facility and Other Restrictions. The mortgage repurchase facility for our
financial services subsidiaries requires the maintenance of a minimum level of tangible net worth, a maximum
allowable ratio of debt to tangible net worth and a minimum level of liquidity by our financial services
subsidiaries. A failure to comply with these requirements could allow the lending bank to terminate the
availability of funds to the financial services subsidiaries or cause their debt to become due and payable prior
16
to maturity. Any difficulty experienced in complying with these covenants could make the renewal of the
facility more difficult or costly.
In addition, although our financial services business is conducted through subsidiaries that are not restricted
by our indentures, the ability of our financial services subsidiaries to provide funds to our homebuilding
operations is subject to restrictions in their mortgage repurchase facility. These funds would not be available to
us upon the occurrence and during the continuance of defaults under this facility. Moreover, our right to receive
assets from these subsidiaries upon their liquidation or recapitalization will be subject to the prior claims of the
creditors of these subsidiaries. Any claims we may have to funds from this segment would be subordinate to
subsidiary indebtedness to the extent of any security for such indebtedness and to any indebtedness otherwise
recognized as senior to our claims.
The indentures governing our senior notes impose restrictions on the creation of secured debt and liens.
Changes in Debt Ratings.
In fiscal 2008, all three of the agencies that rate our senior unsecured debt
lowered our ratings to a level below investment grade, and these agencies have since lowered our ratings
further. Any additional lowering of our debt ratings could make entering into a new line of credit agreement or
accessing the public capital markets more difficult and/or more expensive.
Change of Control Purchase Options.
If a change of control occurs as defined in the indentures
governing $587.8 million principal amount of our senior notes as of September 30, 2010, we would be
required to offer to purchase these notes at 101% of their principal amount, together with all accrued and
unpaid interest, if any. If a fundamental change, including a change of control, occurs as defined in the
indenture governing our convertible senior notes, which constituted $500 million principal amount as of
September 30, 2010, we would be required to offer to purchase these notes at par, together with all accrued
and unpaid interest, if any. If purchase offers were required under the indentures for these notes, we can give
no assurance that we would have sufficient funds to pay the amounts that we would be required to purchase.
Potential Future Restrictions. As a result of terminating our revolving credit facility, we are no longer
subject to the restrictions on our operations and activities that it imposed on us. However, if we decide to
enter into another revolving credit agreement, it is likely that we will again become subject to these types of
provisions, which may be more restrictive than those found in our previous facility.
Homebuilding and financial services are very competitive industries, and competitive conditions could
adversely affect our business or financial results.
The homebuilding industry is highly competitive. Homebuilders compete not only for homebuyers, but
also for desirable properties, financing, raw materials and skilled labor. We compete with other local, regional
and national homebuilders, often within larger subdivisions designed, planned and developed by such
homebuilders. We also compete with existing home sales, foreclosures and rental properties. The competitive
conditions in the homebuilding industry can result in:
(cid:129) lower sales;
(cid:129) lower selling prices;
(cid:129) increased selling incentives;
(cid:129) lower profit margins;
(cid:129) impairments in the value of inventory, goodwill and other assets;
(cid:129) difficulty in acquiring suitable land, raw materials, and skilled labor at acceptable prices or terms; or
(cid:129) delays in construction of our homes.
Our financial services business competes with other mortgage lenders, including national, regional and
local mortgage banks and other financial institutions. Mortgage lenders with greater access to capital or
different lending criteria may be able to offer more attractive financing to potential customers.
17
These competitive conditions could adversely affect our business and financial results. In the current
downturn in the homebuilding industry, the reactions of our competitors may have reduced the effectiveness of
our efforts to achieve pricing stability and reduce our inventory levels.
We cannot make any assurances that any future growth strategies will be successful or not expose us to
additional risks.
Although we focused on internal growth for several years before the downturn in the homebuilding
industry, we may in the future make strategic acquisitions of homebuilding companies or their assets.
Successful strategic acquisitions require the integration of operations and management. Although we believe
that we have been successful in the past, we can give no assurance that we would be able to successfully
identify, acquire and integrate strategic acquisitions in the future. Acquisitions can result in the dilution of
existing stockholders if we issue our common stock as consideration, or reduce our liquidity or increase our
debt if we fund them with cash. The impact on liquidity may be increased because we do not currently have a
revolving credit facility. In addition, acquisitions can expose us to valuation risks, including the risk of writing
off goodwill or impairing inventory and other assets related to such acquisitions. The risk of goodwill and
other asset impairments increases during a cyclical housing downturn when our profitability may decline, as
evidenced by the goodwill and other asset impairment charges we recognized in recent years. In addition, we
may not be able to successfully implement our operating or internal growth strategies within our existing
markets. In the uncertain current market conditions, asset acquisitions involve a risk that the markets involved
may subsequently deteriorate. Conversely, if we delay an acquisition until we believe the market uncertainties
are resolved, the potential competitive advantages of the acquisition may be limited.
We may not realize our deferred income tax asset.
As of September 30, 2010, we have a net deferred income tax asset of $902.6 million, against which we
have provided a valuation allowance of $902.6 million. The realization of our deferred income tax asset is
dependent upon the generation of future taxable income during the statutory carryforward periods in which the
related temporary differences become deductible.
The accounting for deferred income taxes is based upon estimates of future results. Differences between
the anticipated and actual outcomes of these future tax consequences could have a material impact on our
consolidated results of operations or financial position. Changes in tax laws also affect actual tax results and
the valuation of deferred income tax assets over time.
The utilization of our tax losses could be substantially limited if we experienced an ownership change as
defined in the Internal Revenue Code.
We have experienced continuing tax net operating losses through fiscal 2010 and have potential
unrealized built-in losses. These tax net operating losses have the potential to reduce future income tax
obligations if we realize taxable income in the future. However, Section 382 of the Internal Revenue Code
contains rules that limit the ability of a company that undergoes an ownership change to utilize its net
operating loss carryforwards and certain built-in losses recognized in years after the ownership change. Under
the rules, such an ownership change is generally any change in ownership of more than 50% of its stock
within a rolling three-year period, as calculated in accordance with the rules. The rules generally operate by
focusing on changes in ownership among stockholders considered by the rules as owning directly or indirectly
5% or more of the stock of the company and any change in ownership arising from new issuances of stock by
the company.
If we undergo an ownership change for purposes of Section 382 as a result of future transactions
involving our common stock, both the amount of and our ability to use any of our net operating loss
carryforwards, tax credit carryforwards or net unrealized built-in losses at the time of ownership change would
be subject to the limitations of Section 382. In addition, these limitations may affect the expiration date of a
portion of our built-in losses, any net operating loss carryforwards or tax credit carryforwards, and we may not
18
be able to use them before they expire. This could adversely affect our financial position, results of operations
and cash flow.
We do not believe we have experienced such an ownership change as of September 30, 2010; however,
the amount by which our ownership may change in the future is affected by purchases and sales of stock by
5% stockholders; the potential conversion of our outstanding convertible senior notes and our decision as to
whether to settle any such conversions completely or partially in stock; and new issuances of stock by us.
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 250,000 square feet, and we lease approximately 915,000 square feet of office space under
leases expiring through October 2015. These properties are located in our various operating markets to house
our homebuilding and financial services operating divisions and our regional and corporate offices.
ITEM 3. LEGAL PROCEEDINGS
We are involved in lawsuits and other contingencies in the ordinary course of business. While the
outcome of such contingencies cannot be predicted with certainty, we believe that the liabilities arising from
these matters will not have a material adverse effect on our consolidated financial position, results of
operations or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter
exceeds our estimates reflected in the recorded reserves relating to such matter, we could incur additional
charges that could be significant.
ITEM 4. RESERVED
19
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 sets forth, for the periods indicated, the range of high and low sales prices for our common
stock, as reported by the NYSE, and the quarterly cash dividends declared per common share.
Year Ended September 30, 2010
Declared
Dividends
High
Low
Year Ended September 30, 2009
Declared
Dividends
High
Low
1st Quarter . . . . . . . . . . . . . . . . . . . . $13.00
13.53
2nd Quarter . . . . . . . . . . . . . . . . . . . .
15.44
3rd Quarter . . . . . . . . . . . . . . . . . . . .
11.38
4th Quarter . . . . . . . . . . . . . . . . . . . .
$ 9.69
10.87
9.82
9.41
$0.0375
0.0375
0.0375
0.0375
$13.40
11.35
13.74
13.90
$3.79
5.72
8.53
8.26
$0.0375
0.0375
0.0375
0.0375
As of November 10, 2010, the closing price of our common stock on the NYSE was $12.05, and there
were approximately 549 holders of record.
The declaration of future cash dividends is at the discretion of our Board of Directors and will depend
upon, among other things, future earnings, cash flows, capital requirements, our financial condition and
general business conditions.
The information required by this item with respect to equity compensation plans is set forth under
Item 12 of this annual report on Form 10-K and is incorporated herein by reference.
During fiscal years 2010, 2009 and 2008, we did not sell any equity securities that were not registered
under the Securities Act of 1933, as amended.
In November 2009, our Board of Directors authorized the repurchase of up to $100 million of our
common stock. The authorization was renewed in July 2010 and is effective through July 31, 2011. We made
no repurchases of common stock under the share repurchase program during fiscal 2010; therefore, all of the
$100 million authorization was remaining at September 30, 2010.
20
Stock Performance Graph
The following graph illustrates the cumulative total stockholder return on D.R. Horton common stock for
the last five fiscal years through September 30, 2010, compared to the S&P 500 Index and the S&P 500
Homebuilding Index. The comparison assumes a hypothetical investment in D.R. Horton common stock and in
each of the foregoing indices of $100 at September 30, 2005, and assumes that all dividends were reinvested.
Shareholder returns over the indicated period are based on historical data and should not be considered
indicative of future shareholder returns. The graph and related disclosure in no way reflect our forecast of
future financial performance.
Comparison of Five-Year Cumulative Total Return
Among D.R. Horton, Inc., S&P 500 Index and S&P 500 Homebuilding Index
$150
$100
$50
$0
Sep 05
Sep 06
Sep 07
Sep 08
Sep 09
Sep 10
D.R. Horton, Inc.
S&P 500 Index
S&P 500 Homebuilding Index
Year Ended September 30,
2005
2006
2007
2008
2009
2010
D.R. Horton, Inc. . . . . . . . . . . . . . . . . . . . . . . . $100.00 $ 67.20 $ 36.96 $ 38.90
$34.66
$ 34.23
S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . $100.00 $110.79 $129.00 $100.65
S&P 500 Homebuilding Index . . . . . . . . . . . . . . $100.00 $ 72.43 $ 36.81 $ 31.15
$93.70
$26.09
$103.22
$ 24.20
This performance graph shall not be deemed to be incorporated by reference into our SEC filings and
should not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.
21
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our Consolidated Financial
Statements. The data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” Item 1A, “Risk Factors,” Item 8, “Financial Statements and
Supplementary Data,” and all other financial data contained in this annual report on Form 10-K. These
historical results are not necessarily indicative of the results to be expected in the future.
2010
Year Ended September 30,
2009
2007
(In millions, except per share data)
2008
2006
Operating Data:
Revenues:
Homebuilding . . . . . . . . . . . . . . . . $4,309.7
90.5
Financial Services . . . . . . . . . . . . .
$3,603.9
53.7
$ 6,518.6
127.5
$11,088.8
207.7
$14,760.5
290.8
Gross profit (loss) —
Homebuilding . . . . . . . . . . . . . . . .
682.1
65.2
(1,763.2)
603.7
3,342.2
Income (loss) before income taxes:
Homebuilding . . . . . . . . . . . . . . . .
Financial Services . . . . . . . . . . . . .
78.1
21.4
(541.3)
(15.5)
(2,666.9)
35.1
(1,020.0)
68.8
Provision for (benefit from)
income taxes . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . .
Net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per
common share . . . . . . . . . . . . . . . .
(145.6)
245.1
(7.0)
(549.8)
1.8
(2,633.6)
(238.7)
(712.5)
0.77
0.77
0.15
(1.73)
(1.73)
(8.34)
(8.34)
(2.27)
(2.27)
0.15
0.45
0.60
1,878.7
108.4
753.8
1,233.3
3.94
3.90
0.44
2010
2009
2008
2007
2006
September 30,
(In millions)
Balance Sheet Data:
Inventories . . . . . . . . . . . . . . . . . . . . . $3,449.0
5,938.6
Total assets . . . . . . . . . . . . . . . . . . . . .
2,171.8
Notes payable (1) . . . . . . . . . . . . . . . .
2,622.9
Total equity (2) . . . . . . . . . . . . . . . . . .
$3,666.7
6,756.8
3,145.3
2,400.6
$4,683.2
7,950.6
3,748.4
2,864.8
$ 9,343.5
11,556.3
4,376.8
5,655.3
$11,343.1
14,820.7
6,078.6
6,558.0
(1) Includes both homebuilding notes payable and the amount outstanding on our mortgage repurchase facility.
(2) In accordance with the Financial Accounting Standards Board’s authoritative guidance for noncontrolling interests,
which was adopted at the beginning of fiscal 2010, noncontrolling interests are now presented as a component of
equity rather than as a liability. All prior period total equity amounts have been revised to include noncontrolling
interests.
22
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations — Fiscal Year 2010 Overview
In fiscal 2010, conditions within the homebuilding industry remained challenging, primarily due to weak
overall economic conditions, high unemployment and low consumer confidence. Demand for new homes
improved while the federal homebuyer tax credit was in effect, but decreased sharply once the tax credit
expired. Our net sales orders for fiscal 2010 were 14% higher than in fiscal 2009; however, much of the
year-over-year increase was attributable to our results in the first half of the year before the federal homebuyer
tax credit expired. Subsequent to its expiration, our net sales orders in the third and fourth quarters of fiscal
2010 were 3% and 21% lower, respectively, than in the comparable prior year periods. These results suggest
that efforts to improve our net sales order volume will be challenging and that overall demand for new homes
is likely to remain at very low levels for some time.
During the ongoing slowdown in the homebuilding industry that began in 2006, numerous factors have
hurt demand for new homes on a pervasive and persistent basis across the United States. These factors include
high inventory levels of available homes, elevated sales order cancellation rates, low sales absorption rates and
overall weak consumer confidence. The effects of these factors have been magnified by reduced availability of
credit in the mortgage markets and high levels of home foreclosures. High levels of foreclosures not only
contribute to additional inventory available for sale, but also reduce appraisal valuations for new homes,
potentially resulting in lower sales prices. The overall economy remains weak, with a high level of
unemployment, substantially reduced consumer spending and low levels of consumer confidence. The turmoil
in the housing market has resulted in substantial price reductions in our homes during the course of the
slowdown.
In the first half of fiscal 2010 there were indications of some stabilization of housing market conditions.
The factors supporting the improved conditions included increased levels of affordability resulting from lower
home sales prices; declines in the number of new homes available for sale; a low mortgage interest rate
environment; and the federal government’s monetary and fiscal policies and programs, including the federal
homebuyer tax credit, which encouraged home ownership and home purchases. These market conditions
supported our strategy of opening new communities via lot option contracts and starting construction on more
unsold homes to provide affordable housing and capture demand from first-time and move-up homebuyers.
Having additional housing inventory available to close before the expiration of the federal tax credit resulted
in significant increases in our net sales orders during the first half of fiscal 2010 from the comparable prior
year period. During fiscal 2010, our homes closed and our gross profit as a percentage of home sales revenues
increased from fiscal 2009, which resulted in pre-tax income of $99.5 million in 2010 compared to a pre-tax
loss of $556.8 million in 2009.
The decline in demand subsequent to the expiration of the tax credit indicates that market conditions in
the homebuilding industry are weak and the timing of a sustainable recovery remains uncertain. We are
maintaining our cautious outlook for the homebuilding industry, and will adjust our operating strategy as
necessary as we continually assess the level of underlying demand for new homes in our communities.
However, we presently expect that our level of home sales, closings and profitability will be lower in fiscal
2011 than fiscal 2010.
Our future results could be negatively impacted by prolonged weakness in the economy, continued high
levels of unemployment, a significant increase in mortgage interest rates or further tightening of mortgage
lending standards.
Due to these uncertain market conditions, we have continued to evaluate our homebuilding and financial
services assets for recoverability. Our assets whose recoverability is most impacted by market conditions
include inventory, earnest money deposits and pre-acquisition costs related to land and lot option contracts, tax
assets and owned mortgage loans. These assets collectively represented approximately 89% of our total assets,
excluding cash and marketable securities, at September 30, 2010. Our evaluations reflected our expectation of
continued challenges in the homebuilding industry. Based on our evaluations, during fiscal 2010 we recorded
23
inventory impairment charges of $62.3 million, wrote-off earnest money deposits and pre-acquisition costs
related to land and lot option contracts we no longer plan to pursue of $2.4 million, recorded additional
reserves for losses of $13.7 million associated with mortgage loans held in portfolio and the limited recourse
provisions on previously sold mortgage loans and increased the reserve related to mortgage reinsurance
activities by $1.9 million. Inventory impairment charges and write-offs of earnest money deposits and pre-
acquisition costs declined in fiscal 2010 from prior years, reflecting an improvement in gross profit from home
closings during fiscal 2010 compared to prior years. We will evaluate whether further impairment charges,
valuation adjustments or write-offs are necessary on these assets in the coming quarters. Additional discussion
of these evaluations and charges is presented below.
Strategy
We believe the long-term fundamental factors which support housing demand, namely population growth
and household formation, remain positive. In the near term, however, it is not possible to predict if current
homebuilding industry conditions will improve or if they will deteriorate from current levels. During the
downturn we have increased our cash balances by generating cash flow from operations, primarily through
reductions in inventory and mortgage loans held for sale, the receipt of tax refunds and by accessing the
capital markets. While we will continue to conservatively manage our business, our increased liquidity
provides us with flexibility in determining the appropriate operating strategy for each of our communities and
markets to strike the best balance between cash flow generation and potential profit. With this flexibility, we
are committed to continuing the following initiatives related to our operating strategy in the current
homebuilding business environment:
(cid:129) Maintaining a strong cash balance and overall liquidity position.
(cid:129) Managing the sales prices and level of sales incentives on our homes as necessary to optimize the
balance of sales volumes, profits, returns on inventory investments and cash flows.
(cid:129) Entering into new lot option contracts to purchase finished lots to potentially increase sales volumes
and profitability.
(cid:129) Renegotiating existing lot option contracts to reduce our lot costs and better match the scheduled lot
purchases with new home demand in each community.
(cid:129) Limiting land development spending, especially in communities that require substantial investments of
time or capital resources.
(cid:129) Managing our inventory of homes under construction by selectively starting construction on unsold
homes to capture new home demand, while monitoring the number and aging of unsold homes and
aggressively marketing unsold, completed homes in inventory.
(cid:129) Decreasing the cost of goods purchased from both vendors and subcontractors.
(cid:129) Modifying product offerings to provide more affordable homes.
(cid:129) Controlling our SG&A infrastructure to match production levels.
These initiatives allowed us to generate significant cash flows from operations during the downturn and to
achieve improved operating results during fiscal 2010. Although we cannot provide any assurances that these
initiatives will be successful in the future, we expect that our operating strategy will allow us to continue to
maintain a strong balance sheet and liquidity position in fiscal 2011.
24
Key Results
Key financial results as of and for our fiscal year ended September 30, 2010, as compared to fiscal 2009,
were as follows:
Homebuilding Operations:
(cid:129) Homebuilding revenues increased 20% to $4.3 billion.
(cid:129) Homes closed increased 25% to 20,875 homes while the average selling price of those homes decreased
3% to $206,100.
(cid:129) Net sales orders increased 14% to 19,375 homes.
(cid:129) Sales order backlog decreased 25% to $850.8 million.
(cid:129) Home sales gross margins increased 420 basis points to 17.3%.
(cid:129) Inventory impairments and land option cost write-offs were $64.7 million, compared to $407.7 million.
(cid:129) Homebuilding SG&A expense decreased slightly to $522.0 million, and as a percentage of
homebuilding revenues decreased by 240 basis points to 12.1%.
(cid:129) Homebuilding pre-tax income was $78.1 million, compared to a pre-tax loss of $541.3 million.
(cid:129) Homes in inventory declined by 2,100 to 9,500.
(cid:129) Total owned and optioned lot position increased by 10,700 to 119,400.
(cid:129) Homebuilding debt decreased by $1.0 billion to $2.1 billion through maturities, early redemptions and
open market purchases.
(cid:129) Net homebuilding debt to total capital decreased 1,640 basis points to 16.1%, and gross homebuilding
debt to total capital decreased 1,190 basis points to 44.3%.
(cid:129) Homebuilding cash and marketable securities totaled $1.6 billion, compared to $1.9 billion.
Financial Services Operations:
(cid:129) Total financial services revenues, net of recourse and reinsurance expenses, increased to $90.5 million
from $53.7 million.
(cid:129) Financial services pre-tax income was $21.4 million, compared to a pre-tax loss of $15.5 million.
Consolidated Results:
(cid:129) Diluted earnings per share was $0.77, compared to net loss per share of $1.73.
(cid:129) Net income was $245.1 million, compared to net loss of $549.8 million.
(cid:129) Total equity increased to $2.6 billion, from $2.4 billion.
(cid:129) Net cash provided by operations was $709.4 million, compared to $1.1 billion.
25
Results of Operations — Homebuilding
Our operating segments are our 33 homebuilding operating divisions, which we aggregate into six
reporting segments. These reporting segments, which we also refer to as reporting regions, have homebuilding
operations located in the following states:
East:
Delaware, Georgia (Savannah only), Maryland, New Jersey, North Carolina,
Pennsylvania, South Carolina and Virginia
Midwest:
Colorado, Illinois, Minnesota and Wisconsin
Southeast:
Alabama, Florida and Georgia
South Central: Louisiana, New Mexico (Las Cruces only), Oklahoma and Texas
Southwest:
Arizona and New Mexico
West:
California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington
During the fourth quarter of fiscal 2010, a change in the composition of our operating divisions required
that the Las Cruces, New Mexico market, previously included in our Southwest reporting segment, now be
included in our South Central reporting segment. Consequently, throughout this discussion, we have restated
the prior year amounts between segments to conform to the current year presentation.
Fiscal Year Ended September 30, 2010 Compared to Fiscal Year Ended September 30, 2009
The following tables and related discussion set forth key operating and financial data for our homebuilding
operations by reporting segment as of and for the fiscal years ended September 30, 2010 and 2009.
Net Sales Orders (1)
Fiscal Year Ended September 30,
Net Homes Sold
Value (In millions)
Average Selling Price
2010
2009
%
Change
2010
2009
%
Change
2010
2009
%
Change
. . . . . . . . . . . . . . . 2,027
East
. . . . . . . . . . . . 1,045
Midwest
Southeast . . . . . . . . . . . . 3,892
South Central . . . . . . . . . 7,375
Southwest . . . . . . . . . . . 1,785
West . . . . . . . . . . . . . . . 3,251
1,519
1,198
3,107
6,172
1,751
3,287
33 % $ 469.0
296.0
(13)%
25 %
728.7
19 % 1,273.4
315.3
2 %
928.6
(1)%
$ 353.7
323.5
560.8
1,060.6
300.2
899.6
33 % $231,400 $232,900
270,000
(9)% 283,300
180,500
30 % 187,200
171,800
20 % 172,700
171,400
5 % 176,600
273,700
3 % 285,600
19,375 17,034
14 % $4,011.0
$3,498.4
15 % $207,000 $205,400
(1)%
5 %
4 %
1 %
3 %
4 %
1 %
Sales Order Cancellations
Fiscal Year Ended September 30,
Cancelled
Sales Orders
Value (In millions)
2010
581
East . . . . . . . . . . . . . . . . . . . . .
Midwest . . . . . . . . . . . . . . . . . .
250
Southeast . . . . . . . . . . . . . . . . . 1,409
South Central . . . . . . . . . . . . . . 3,076
677
Southwest. . . . . . . . . . . . . . . . .
789
West . . . . . . . . . . . . . . . . . . . .
6,782
2009
478
240
1,321
3,029
913
1,207
7,188
2010
$ 127.2
68.7
250.0
514.1
115.1
227.3
$1,302.4
2009
$ 113.0
64.8
244.5
509.0
167.2
357.3
$1,455.8
Cancellation Rate (2)
2010
2009
22%
19%
27%
29%
27%
20%
26%
24%
17%
30%
33%
34%
27%
30%
(1) Net sales orders represent the number and dollar value of new sales contracts executed with customers (gross sales
orders), net of cancelled sales orders.
(2) Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.
26
Net Sales Orders
The value of net sales orders increased 15%, to $4,011.0 million (19,375 homes) in 2010 from
$3,498.4 million (17,034 homes) in 2009. The number of net sales orders increased 14% in fiscal 2010
compared to fiscal 2009. These results were impacted by increased levels of affordability resulting from lower
home sales prices, recent declines in the number of new homes available for sale, a low mortgage interest rate
environment, and the federal government’s monetary and fiscal policies and programs, including the federal
homebuyer tax credit, which accelerated sales demand during the first half of the year. Although these results
reflect improvement over the prior year and suggest the severe declines in our net sales orders experienced in
recent years may be moderating, the significant decline in demand subsequent to the expiration of the federal
tax credit indicates that market conditions are weak and the timing of a sustainable housing recovery remains
uncertain.
In comparing fiscal 2010 to fiscal 2009, the value of net sales orders increased in most of our market
regions, with the largest percentage increases occurring in our East, Southeast and South Central regions
resulting from new communities in the Carolinas, Florida and Texas, as well as lower cancellation rates
achieved in these regions. Conversely, our Midwest region experienced a 13% decline in net sales orders, due
to continued weak demand in our Chicago market. Fluctuations in the value of net sales orders were primarily
due to the change in the number of homes sold in each respective region, and to a much lesser extent, small
fluctuations in the average selling price of those homes. Our sales volumes in the future will depend on the
strength of the overall economy, employment levels and our ability to successfully implement our operating
strategies in each of our markets.
The average price of our net sales orders in 2010 was $207,000, an increase of 1% from the $205,400
average in 2009. We will continue our efforts to offer affordable product offerings to our target customer base
and will seek to adjust our product mix, geographic mix and pricing within our homebuilding markets to meet
market conditions.
Our annual sales order cancellation rate (cancelled sales orders divided by gross sales orders for the
period) was 26% in fiscal 2010, compared to 30% in fiscal 2009. This cancellation rate continues to be above
historical levels. Our ability to reduce it to historical levels depends largely on the strength of the overall
economy and our ability to successfully implement our operating strategies in each of our markets. We
anticipate that cancellation rates will continue to fluctuate significantly until there is sustained stability in
market conditions.
Sales Order Backlog
As of September 30,
Homes in Backlog
Value (In millions)
Average Selling Price
2010
2009
%
Change
2010
2009
%
Change
2010
2009
%
Change
472
247
812
559
. . . . . . . . . . . . . . .
East
389
Midwest
. . . . . . . . . . . .
Southeast . . . . . . . . . . . .
969
South Central . . . . . . . . . 1,691 2,362
492
Southwest . . . . . . . . . . .
857
West . . . . . . . . . . . . . . .
405
501
(16)% $103.4
(37)%
70.1
(16)% 162.5
(28)% 297.3
(18)%
71.9
(42)% 145.6
$ 126.6
105.0
179.0
402.6
86.3
242.5
(18)% $219,100 $226,500
269,900
(33)% 283,800
184,700
(9)% 200,100
170,400
(26)% 175,800
175,400
(17)% 177,500
283,000
(40)% 290,600
4,128 5,628
(27)% $850.8
$1,142.0
(25)% $206,100 $202,900
27
(3)%
5 %
8 %
3 %
1 %
3 %
2 %
Sales Order Backlog
Sales order backlog represents homes under contract but not yet closed at the end of the period. Many of
the contracts in our sales order backlog are subject to contingencies, including mortgage loan approval and
buyers selling their existing homes, which can result in cancellations. A portion of the contracts in backlog
will not result in closings due to cancellations, which during the recent housing downturn have been
substantial.
Our homes in backlog at September 30, 2010 declined 27% from the prior year as a result of closing
homes at a greater rate than our sales pace during the latter half of the year and the effects of the federal
homebuyer tax credit that was in effect at September 30, 2009. Given our lower level of backlog at the
beginning of fiscal 2011 as compared to the level at the beginning of fiscal 2010, we expect that our 2011 first
quarter closings and revenues will be lower than in the prior year. Additionally, should the sales trends of the
second half of fiscal 2010 continue into the first half of fiscal 2011, our full year closings and revenues will
likely be lower in 2011 than 2010.
Homes Closed and Home Sales Revenue
Fiscal Year Ended September 30,
Homes Closed
Value (In millions)
Average Selling Price
2010
2009
%
Change
2010
2009
%
Change
2010
2009
%
Change
. . . . . . . . . . . .
East
. . . . . . . . .
Midwest
Southeast . . . . . . . . .
South Central . . . . . .
Southwest . . . . . . . .
West . . . . . . . . . . . .
2,114
1,187
4,049
8,046
1,872
3,607
1,447
1,137
2,921
5,835
2,045
3,318
46 % $ 492.2
330.9
4 %
39 %
745.2
38 % 1,378.8
(8)%
329.7
9 % 1,025.5
$ 345.3
310.0
547.5
1,022.1
379.8
958.9
43 % $232,800 $238,600
272,600
7 % 278,800
187,400
36 % 184,000
175,200
35 % 171,400
185,700
(13)% 176,100
289,000
7 % 284,300
20,875
16,703
25 % $4,302.3
$3,563.6
21 % $206,100 $213,400
(2)%
2 %
(2)%
(2)%
(5)%
(2)%
(3)%
Home Sales Revenue
Revenues from home sales increased 21%, to $4,302.3 million (20,875 homes closed) in 2010 from
$3,563.6 million (16,703 homes closed) in 2009. The average selling price of homes closed during 2010 was
$206,100, down 3% from the $213,400 average in 2009. During fiscal 2010, home sales revenues increased in
most of our market regions, with significant increases in our East, Southeast and South Central markets. These
increases resulted from increases in the number of homes closed.
The number of homes closed in 2010 increased 25% due to increases in five of our six market regions.
The increase in home closings reflects the impact of the first-time homebuyer’s federal tax credit, which
initially required buyers to close on their home purchase transaction by June 30, 2010. We believe this helped
stimulate demand for homes that could close during the first nine months of fiscal 2010. We also believe that
our operating strategy of selectively starting construction on unsold homes, which made additional housing
inventory available to close by June 30, 2010, led to increased home closings volume by better capturing this
demand. The Southwest region had an 8% decrease in homes closed due to both weak demand in the Phoenix
market and our prior year efforts to reduce completed home inventories in that market. As conditions change
in the housing markets in which we operate, our ongoing level of net sales orders will determine the number
of home closings and amount of revenue we will generate.
28
Homebuilding Operating Margin Analysis
Percentages of
Related Revenues
Fiscal Year Ended
September 30,
2010
2009
Gross profit — Home sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit — Land/lot sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of inventory impairments and land option cost write-offs on
total homebuilding gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit — Total homebuilding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on early retirement of debt, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.3 %
37.8 %
(1.5)%
15.8 %
12.1 %
2.0 %
0.1 %
(0.2)%
1.8 %
13.1 %
13.4 %
(11.3)%
1.8 %
14.5 %
2.8 %
(0.1)%
(0.4)%
(15.0)%
Home Sales Gross Profit
Gross profit from home sales increased by 59%, to $744.0 million in 2010, from $467.5 million in 2009,
and, as a percentage of home sales revenues, increased 420 basis points, to 17.3%. Approximately 350 basis
points of the increase in the home sales gross profit percentage was a result of the average cost of our homes
declining by more than our average selling prices, caused largely by a reduction in our construction costs on
homes closed during the current year. The reduction in construction costs primarily results from changes in
product design, as well as cost reductions obtained from our suppliers and sub-contractors in prior periods. In
addition, the increase in home sales gross profit is partially due to our efforts beginning in fiscal 2009 to
acquire lot positions in new communities and construct and close houses from these new projects. Homes
closed on these recently acquired finished lots yielded higher gross profits than those on land and lots acquired
in prior years. Approximately 70 basis points of the increase was due to a decrease in the amortization of
capitalized interest and property taxes as a percentage of homes sales revenues, resulting from reductions in
our interest and property taxes incurred over the past year, as well as more closings occurring on acquired
finished lots, rather than internally developed lots.
Future changes in gross profit percentages are impacted by the use of sales incentives and price
adjustments to generate an adequate volume of home closings. We expect our gross profit percentage to
decline in the first half of fiscal 2011 due to current weak housing market conditions.
Land Sales Revenue
Land sales revenues decreased 82% to $7.4 million in 2010, from $40.3 million in 2009. Of the
$40.3 million of revenues in fiscal 2009, $26.9 million related to land sale transactions in the fourth quarter of
fiscal 2008 for which recognition of the revenue had been deferred due to the terms of the sale. Fluctuations
in revenues from land sales are a function of how we manage our inventory levels in various markets. We
generally purchase land and lots with the intent to build and sell homes on them; however, we occasionally
purchase land that includes commercially zoned parcels which we typically sell to commercial developers, and
we also sell residential lots or land parcels to manage our land and lot supply. Land and lot sales occur at
unpredictable intervals and varying degrees of profitability. Therefore, the revenues and gross profit from land
sales fluctuate from period to period. As of September 30, 2010, we had $3.3 million of land held for sale that
we expect to sell in the next twelve months.
29
Inventory Impairments and Land Option Cost Write-offs
Fiscal Year Ended September 30,
2010
Land Option
Cost
Write-Offs
(Recoveries)
2009
Land Option
Cost
Write-Offs
Total
Inventory
Impairments
(In millions)
$
$
(0.4)
0.1
0.5
0.7
—
1.5
$
2.4
$
8.6
22.0
17.5
14.0
0.6
2.0
64.7
$
$
54.3
46.3
36.7
17.0
36.5
187.0
$ 377.8
$
10.6
8.4
1.3
3.0
2.9
3.7
29.9
Inventory
Impairments
$
$
9.0
21.9
17.0
13.3
0.6
0.5
62.3
$
Total
64.9
54.7
38.0
20.0
39.4
190.7
$ 407.7
East . . . . . . . . . . . . . . . . . . . .
Midwest . . . . . . . . . . . . . . . . .
Southeast . . . . . . . . . . . . . . . .
South Central . . . . . . . . . . . . .
Southwest . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
West
Carrying Values of Potentially Impaired and Impaired Communities
At September 30, 2010
East . . . . . . . . . . . .
Midwest . . . . . . . . .
Southeast . . . . . . . .
South Central . . . . .
Southwest . . . . . . . .
. . . . . . . . . . .
West
Total
Number of
Communities (1)
181
60
308
324
89
181
1,143
Analysis of Communities with Impairment Charges
Recorded at September 30, 2010
Inventory with
Impairment Indicators
Number of
Communities (1)
Carrying
Value
Number of
Communities (1)
(Values in millions)
Inventory
Carrying Value
Prior to
Impairment
7
13
12
19
8
13
72
$
69.9
94.1
42.7
64.1
36.5
102.5
$
1
3
2
6
1
1
$ 409.8
14
$
4.4
11.3
11.8
31.0
1.2
3.4
63.1
Fair Value
$
$
2.8
6.4
2.8
18.0
0.9
3.1
34.0
Carrying Values of Potentially Impaired and Impaired Communities
At September 30, 2009
East . . . . . . . . . . . .
Midwest . . . . . . . . .
Southeast . . . . . . . .
South Central . . . . .
Southwest . . . . . . . .
. . . . . . . . . . .
West
Total
Number of
Communities (1)
129
50
205
288
75
152
899
Analysis of Communities with Impairment Charges
Recorded at September 30, 2009
Inventory with
Impairment Indicators
Number of
Communities (1)
Carrying
Value
Number of
Communities (1)
(Values in millions)
17
19
27
34
18
46
161
$ 157.8
143.0
97.5
110.8
99.7
354.3
$ 963.1
4
7
15
4
8
20
58
Inventory
Carrying Value
Prior to
Impairment
Fair Value
$
85.1
47.8
40.9
17.7
53.0
176.8
$
45.9
32.8
29.8
14.2
36.2
87.5
$ 421.3
$ 246.4
(1) A community may consist of land held for development, residential land and lots developed and under development,
and construction in progress and finished homes. A particular community often includes inventory in more than one
category. Further, a community may contain multiple parcels with varying product types (e.g. entry level and move-up
single family detached, as well as attached product types). Some communities have no homes under construction,
finished homes, or current home sales efforts or activity.
30
Inventory Impairments and Land Option Cost Write-offs
During fiscal 2010, when we performed our quarterly inventory impairment analyses, the assumptions
utilized reflected our expectation of continued challenging conditions and uncertainties in the homebuilding
industry and in our markets. As we continue to evaluate the strength of the economy (measured largely in
terms of job growth), the level of underlying demand for new homes and our operating performance, the level
of impairments in future quarters will likely fluctuate and may increase. Our impairment evaluation as of
September 30, 2010 indicated communities with a combined carrying value of $409.8 million had indicators
of potential impairment, and these communities were evaluated for impairment. The analysis of the large
majority of these communities assumed that sales prices in future periods will be equal to or lower than
current sales order prices in each community, or in comparable communities, in order to generate an
acceptable absorption rate. For a minority of communities that we do not intend to develop or operate in
current market conditions, slight increases over current sales prices were assumed. While it is difficult to
determine a timeframe for a given community in the current market conditions, we estimated the remaining
lives of these communities to range from six months to in excess of ten years. In performing this analysis, we
utilized a range of discount rates for communities of 14% to 20%. Through this evaluation process, we
determined that communities with a carrying value of $63.1 million as of September 30, 2010, were impaired.
As a result, during the fourth quarter of fiscal 2010, we recorded impairment charges of $29.1 million to
reduce the carrying value of the impaired communities to their estimated fair value, as compared to
$174.9 million in the same period of the prior year. The fourth quarter charges combined with impairment
charges recorded earlier in the year resulted in total inventory impairment charges of $62.3 million and
$377.8 million during fiscal 2010 and 2009, respectively.
We perform our impairment analysis based on total inventory at the community level. When an
impairment charge for a community is determined, the charge is then allocated to each lot in the community
in the same manner as land and development costs are allocated to each lot. The inventory within each
community is categorized as construction in progress and finished homes, residential land and lots developed
and under development, and land held for development, based on the stage of production or plans for future
development. During fiscal 2010, approximately 93% of the impairment charges were recorded to residential
land and lots and land held for development, and approximately 7% of the charges were recorded to
construction in progress and finished homes inventory, compared to 85% and 15%, respectively, in fiscal 2009.
Of the remaining $346.7 million carrying value of communities with impairment indicators which were
determined not to be impaired at September 30, 2010, the largest concentrations were in California (22%),
Illinois (17%), Arizona (10%), Texas (9%), Florida (9%) and New Jersey (8%). It is possible that our estimate
of undiscounted cash flows from these communities may change and could result in a future need to record
impairment charges to adjust the carrying value of these assets to their estimated fair value. There are several
factors which could lead to changes in the estimates of undiscounted future cash flows for a given community.
The most significant of these include pricing and incentive levels actually realized by the community, the rate
at which the homes are sold and the costs incurred to develop the lots and construct the homes. The pricing
and incentive levels are often inter-related with sales pace within a community, such that a price reduction can
be expected to increase the sales pace. Further, both of these factors are heavily influenced by the competitive
pressures facing a given community from both new homes and existing homes, some of which may result
from foreclosures. If conditions worsen in the broader economy, homebuilding industry or specific markets in
which we operate, and as we re-evaluate specific community pricing and incentives, construction and
development plans, and our overall land sale strategies, we may be required to evaluate additional
communities or re-evaluate previously impaired communities for potential impairment. These evaluations may
result in additional impairment charges.
Based on our quarterly reviews of land and lot option contracts, we have written off earnest money
deposits and pre-acquisition costs related to contracts for land or lots which are not expected to be acquired.
During fiscal 2010 and 2009, we wrote off $2.4 million and $29.9 million, respectively, of earnest money
deposits and pre-acquisition costs related to land option contracts. At September 30, 2010, outstanding earnest
money deposits and pre-acquisition costs associated with our portfolio of land and lot option purchase
contracts totaled $13.3 million and $11.0 million, respectively.
31
The inventory impairment charges and write-offs of earnest money deposits and pre-acquisition costs
reduced total homebuilding gross profit as a percentage of homebuilding revenues by approximately 150 basis
points in fiscal 2010, compared to 1,130 basis points in fiscal 2009.
Selling, General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities decreased slightly to $522.0 million in 2010 from
$523.0 million in 2009. As a percentage of homebuilding revenues, SG&A expense decreased 240 basis
points, to 12.1% in 2010 from 14.5% in 2009. The largest component of our homebuilding SG&A expense is
employee compensation and related costs, which represented 58% and 55% of SG&A costs in 2010 and 2009,
respectively. These costs increased by 6%, to $304.0 million in 2010 from $287.2 million in 2009. Our
homebuilding operations employed approximately 2,500 and 2,300 employees at September 30, 2010 and
2009, respectively.
A portion of compensation expense relates to our long-term incentive bonus program, which provides for
the Compensation Committee of our Board of Directors to award performance units to our Chairman of the
Board and our Chief Executive Officer. The actual number of performance units earned is based upon our
level of achievement on defined performance metrics as compared to our peer group. The earned award will
have a value equal to the number of earned units multiplied by the closing price of our common stock at the
end of the performance period and may be paid in cash, equity or a combination of both. The Compensation
Committee has the discretion to reduce the final payout on the performance units from the amount earned.
Performance units were granted in 2008 and 2009 with 33-month performance periods ending on
September 30, 2010 and 2011, respectively. Our liability for these awards has been based on our performance
against the peer group, the elapsed portion of the performance period and our stock price as of each reporting
date, and previously assumed no future reduction of the earned value of the performance units by the
Compensation Committee. Because the values of the earned performance units are dependent on our
performance and our common stock price, and because the final amount can be reduced at the discretion of
the Compensation Committee, this liability has been subject to a high degree of volatility.
Subsequent to September 30, 2010, the Compensation Committee exercised its discretion and reduced the
amount earned under the 2008 performance unit grant to $4.9 million and expects to limit the amount which
may be earned under the 2009 performance unit grant to approximately $4.1 million. The liability related to
the 2008 and 2009 performance unit grants was $9.0 million and $11.3 million at September 30, 2010 and
September 30, 2009, respectively. Compensation expense (benefit) related to these grants were ($2.3) million
and $7.7 million for fiscal 2010 and 2009, respectively.
We continually attempt to adjust our SG&A infrastructure to support our expected closings volume;
however, we cannot make assurances that our actions will permit us to maintain or improve upon the current
SG&A expense as a percentage of revenues. It has become more difficult to reduce SG&A expense as the size
of our operations has decreased. If revenues decrease and we are unable to sufficiently adjust our SG&A,
future SG&A expense as a percentage of revenues will increase.
Interest Incurred
We capitalize homebuilding interest costs to inventory during active development and construction. Due
to the decrease in the size of our operations, our inventory under active development and construction has
been lower than our debt level; therefore, a portion of our interest incurred must be expensed. We expensed
$86.3 million of homebuilding interest during fiscal 2010, compared to $100.2 million of interest during fiscal
2009.
Interest amortized to cost of sales, excluding interest written off with inventory impairment charges, was
3.4% of total home and land/lot cost of sales in 2010, compared to 3.9% in 2009. Interest incurred is related
to the average level of our homebuilding debt outstanding during the period. Comparing fiscal 2010 with fiscal
2009, interest incurred related to homebuilding debt decreased 16% to $173.2 million, primarily due to a 19%
decrease in our average homebuilding debt.
32
Gain/Loss on Early Retirement of Debt
We retired $822.2 million principal amount of our senior and senior subordinated notes prior to their
maturity during fiscal 2010, compared to $380.3 million in fiscal 2009. Related to the early retirement of these
notes, we recognized a net loss of $4.9 million in fiscal 2010 and a net gain of $11.5 million in fiscal 2009,
which represents the difference between the principal amount of the notes and the aggregate purchase price,
less any unamortized discounts and fees. The loss in fiscal 2010 includes a loss of $2.0 million for the call
premium related to the early redemption of our 5.875% senior notes due 2013. The gain in fiscal 2009 was
partially offset by a $7.6 million loss related to the early termination of our revolving credit facility in May
2009.
Other Income
Other income, net of other expenses, associated with homebuilding activities was $9.2 million in 2010,
compared to $12.8 million in 2009. The largest component of other income in both years was interest income.
Goodwill
In performing our annual goodwill impairment analysis, we estimate the fair value of our operating
segments utilizing the present values of expected future cash flows. As a result of the analysis performed as of
September 30, 2010 and 2009, we determined that the fair value of our operating segments was greater than
their carrying value and therefore, no impairment of goodwill existed. As of September 30, 2010 and 2009,
our goodwill balance was $15.9 million, all of which related to our South Central reporting segment. The
goodwill assessment procedures require management to make comprehensive estimates of future revenues and
costs. Due to the uncertainties associated with such estimates, actual results could differ from these estimates.
Homebuilding Results by Reporting Region
Fiscal Year Ended September 30,
2010
Homebuilding
Income (Loss)
Before
Income Taxes (1)
Homebuilding
Revenues
% of
Region
Revenues
Homebuilding
Revenues
2009
Homebuilding
Income (Loss)
Before
Income Taxes (1)
% of
Region
Revenues
East . . . . . . . . . . . . . . . . . . . .
Midwest . . . . . . . . . . . . . . . . .
Southeast . . . . . . . . . . . . . . . .
South Central . . . . . . . . . . . . .
Southwest . . . . . . . . . . . . . . . .
West. . . . . . . . . . . . . . . . . . . .
$ 492.3
331.0
747.6
1,383.5
329.7
1,025.6
$4,309.7
$ (6.3)
(31.3)
(7.5)
83.4
12.0
27.8
$ 78.1
(In millions)
(1.3)% $ 347.1
314.5
(9.5)%
(1.0)%
570.8
6.0 % 1,024.6
382.4
3.6 %
964.5
2.7 %
1.8 % $3,603.9
$ (95.9)
(104.9)
(73.2)
4.9
(45.8)
(226.4)
$(541.3)
(27.6)%
(33.4)%
(12.8)%
0.5 %
(12.0)%
(23.5)%
(15.0)%
(1) Expenses maintained at the corporate level consist primarily of interest and property taxes, which are capitalized and
amortized to cost of sales or expensed directly, and the expenses related to operating our corporate office. The
amortization of capitalized interest and property taxes is allocated to each segment based on the segment’s revenue,
while the interest expensed directly and those expenses associated with the corporate office are allocated to each
segment based on the segment’s average inventory.
East Region — Homebuilding revenues increased 42% in 2010 compared to 2009, primarily due to an
increase in the number of homes closed, with the largest increases occurring in our New Jersey and Carolina
markets. The region reported a loss before income taxes of $6.3 million in 2010, compared to a loss of
$95.9 million in 2009. The results were due in part to inventory impairment charges and earnest money and
pre-acquisition cost write-offs totaling $8.6 million and $64.9 million in fiscal 2010 and 2009, respectively.
The region’s gross profit from home sales as a percentage of home sales revenue (home sales gross profit
percentage) increased 390 basis points in fiscal 2010 compared to fiscal 2009. The increase was a result of a
33
reduction in the construction costs of our homes closed during fiscal 2010. Also, a reduction in the region’s
SG&A expenses as a percentage of homebuilding revenues contributed 420 basis points to the region’s
improvement in loss before income taxes as a percentage of homebuilding revenues, as the region’s additional
closing volume helped leverage these SG&A expenses.
Midwest Region — Homebuilding revenues increased 5% in 2010 compared to 2009, primarily due to
increases in the number of homes closed in all of the region’s markets. The region reported a loss before
income taxes of $31.3 million in 2010, compared to a loss of $104.9 million in 2009. The results were due in
part to inventory impairment charges and earnest money and pre-acquisition cost write-offs totaling
$22.0 million and $54.7 million in fiscal 2010 and 2009, respectively. The region’s home sales gross profit
percentage increased 920 basis points in fiscal 2010 compared to fiscal 2009. The increase was a result of
higher margins primarily in our Chicago and Denver markets. The Denver market also benefitted from lower
warranty costs on previously closed homes. In fiscal 2010, a reduction in the region’s SG&A expenses as a
percentage of homebuilding revenues contributed 280 basis points to the region’s improvement in loss before
income taxes as a percentage of homebuilding revenues. Although these results reflect improvement over the
prior year, we experienced a significant decline in net sales orders in this region during recent quarters. This
decline was due to continued weak demand in our Chicago market, and we expect conditions in this market to
remain challenging in the near-term. Substantially all of our fiscal 2010 impairments for this region related to
projects in our Chicago market.
Southeast Region — Homebuilding revenues increased 31% in 2010 compared to 2009, primarily due to
an increase in the number of homes closed, with the largest increases occurring in our central Florida and
Atlanta markets. The region reported a loss before income taxes of $7.5 million in fiscal 2010 compared to a
loss of $73.2 million in fiscal 2009. The results were due in part to inventory impairment charges and earnest
money and pre-acquisition cost write-offs totaling $17.5 million and $38.0 million in fiscal 2010 and 2009,
respectively. The region’s home sales gross profit percentage increased 460 basis points in fiscal 2010
compared to fiscal 2009. The increase was a result of higher margins on homes closed in the majority of the
region’s markets, led by our south and central Florida markets. The increase in homes sales gross profit
percentage was a result of construction costs declining at a faster rate than the decline in average selling price
on homes closed during fiscal 2010. Also contributing to the increase in home sales gross profit are our efforts
since the beginning of fiscal 2009 to acquire lot positions in new communities and construct and close houses
from these new projects. Homes closed on these recently acquired finished lots are generally yielding higher
gross profits than those on land and lots acquired in prior years. In fiscal 2010, a reduction in the region’s
SG&A expenses as a percentage of homebuilding revenues contributed 250 basis points to the region’s
improvement in income before income taxes as a percentage of homebuilding revenues as the region’s
additional closing volume helped leverage these SG&A expenses.
South Central Region — Homebuilding revenues increased 35% in 2010 compared to 2009, primarily due
to an increase in the number of homes closed, with the largest increases occurring in our Central Texas,
Houston and Dallas/Fort Worth markets. The region reported income before income taxes of $83.4 million in
fiscal 2010, compared to income of $4.9 million in fiscal 2009. The improvement was due in large part to the
increase in revenue, combined with the region’s home sales gross profit percentage increasing 290 basis points
in fiscal 2010 compared to fiscal 2009 due to higher margins on homes closed in the majority of the region’s
markets. These higher margins were primarily attributable to reductions in construction costs of our homes.
Additionally, a decrease in inventory impairment charges and earnest money and pre-acquisition cost write-
offs, which were $14.0 million in fiscal 2010 compared to $20.0 million in fiscal 2009, contributed to the
region’s increase in income before income taxes.
Southwest Region — Homebuilding revenues decreased 14% in 2010 compared to 2009, due to a decrease
in the number of homes closed and in the average selling price of those homes. The decreases in revenues and
homes closed were due to continuing weakness in the Phoenix market. The region reported income before
income taxes of $12.0 million in 2010, compared to a loss before income taxes of $45.8 million in 2009. The
loss in 2009 was due in large part to inventory impairment charges and earnest money and pre-acquisition cost
write-offs totaling $39.4 million. The region’s home sales gross profit percentage increased 330 basis points in
fiscal 2010 compared to fiscal 2009. The increase was a result of the average cost of the region’s homes
34
declining by more than the average selling prices, driven in large part by reductions in home construction
costs. In addition, the increase in home sales gross profit is partially due to our recent efforts to acquire lot
positions in new communities and construct and close houses from these projects. In fiscal 2010, a reduction
in the region’s SG&A expenses, both in absolute terms and as a percentage of homebuilding revenues, also
contributed to the improvement in income before income taxes.
West Region — Homebuilding revenues increased 6% in 2010 compared to 2009, due to an increase in
the number of homes closed, which was partially offset by a decrease in the average selling price of those
homes. The largest increases in homes closed occurred in our Seattle and Southern California markets. The
region reported income before income taxes of $27.8 million in 2010, compared to a loss before income taxes
of $226.4 million in 2009. The loss in 2009 was due in large part to inventory impairment charges and earnest
money and pre-acquisition cost write-offs totaling $190.7 million, compared to $2.0 million in 2010. The
region’s home sales gross profit percentage increased 400 basis points in fiscal 2010 compared to fiscal 2009.
The increase was a result of higher margins on homes closed in the majority of the region’s markets, driven in
large part by reductions in home construction costs. In fiscal 2010, a reduction in the region’s SG&A expenses
as a percentage of homebuilding revenues contributed 260 basis points to the region’s improvement in income
before income taxes as a percentage of homebuilding revenues, as a result of absolute reductions in SG&A
expenses, as well as the additional revenue providing more leverage against these costs.
Land and Lot Position and Homes in Inventory
The following is a summary of our land and lot position and homes in inventory at September 30, 2010
and 2009:
As of September 30,
2010
Lots
Controlled
Under Lot
Option and
Similar
Contracts (1)
4,900
600
11,300
9,300
1,300
2,300
29,700
Land/Lots
Owned
10,600
6,000
24,000
21,300
5,700
22,100
89,700
Total
Land/Lots
Owned and
Controlled
15,500
6,600
35,300
30,600
7,000
24,400
119,400
Homes
in
Inventory
Land/Lots
Owned
1,300
700
1,900
3,100
900
1,600
9,500
10,800
6,700
21,000
22,600
5,700
22,400
89,200
2009
Lots
Controlled
Under Lot
Option and
Similar
Contracts (1)
2,200
200
5,200
8,900
1,000
2,000
Total
Land/Lots
Owned and
Controlled
Homes
in
Inventory
13,000
6,900
26,200
31,500
6,700
24,400
1,400
800
2,200
4,500
1,000
1,700
19,500
108,700
11,600
75%
25%
100%
82%
18%
100%
East . . . . . . . . . . . .
Midwest . . . . . . . . .
Southeast . . . . . . . .
South Central . . . . .
Southwest . . . . . . . .
. . . . . . . . . . .
West
(1) Excludes approximately 7,300 and 7,000 lots at September 30, 2010 and 2009, respectively, representing lots
controlled under lot option contracts for which we do not expect to exercise our option to purchase the land or lots,
and have reserved the deposits related to these contracts but the underlying contract has not yet been terminated.
At September 30, 2010, we owned or controlled approximately 119,400 lots, compared to approximately
108,700 lots at September 30, 2009. Of the 119,400 total lots, we controlled approximately 29,700 lots (25%),
which have a total remaining purchase price of approximately $963.9 million, through land and lot option
purchase contracts with a total of $13.3 million in earnest money deposits. At September 30, 2010,
approximately 22,800 of our owned lots were finished.
We had a total of approximately 9,500 homes in inventory, including approximately 1,200 model homes
at September 30, 2010, compared to approximately 11,600 homes in inventory, including approximately 1,100
model homes at September 30, 2009. Of our total homes in inventory, approximately 5,200 and 5,800 were
unsold at September 30, 2010 and 2009, respectively. At September 30, 2010, approximately 3,200 of our
unsold homes were completed, of which approximately 800 homes had been completed for more than six
35
months. At September 30, 2009, approximately 2,200 of our unsold homes were completed, of which
approximately 800 homes had been completed for more than six months.
Our current strategy is to take advantage of market opportunities by entering into new lot option contracts
to purchase finished lots in selected communities to potentially increase sales volumes and profitability. We
will attempt to renegotiate existing lot option contracts as necessary to reduce our lot costs and better match
the scheduled lot purchases with new home demand in each community. We also manage our inventory of
homes under construction by selectively starting construction on unsold homes to capture new home demand,
while monitoring the number and aging of unsold homes and aggressively marketing our unsold, completed
homes in inventory.
Fiscal Year Ended September 30, 2009 Compared to Fiscal Year Ended September 30, 2008
The following tables set forth key operating and financial data for our homebuilding operations by
reporting segment as of and for the fiscal years ended September 30, 2009 and 2008. We have restated the
2009 and 2008 amounts between reporting segments to conform to the current year presentation, reflecting the
change in our reporting segments that occurred in fiscal 2010.
Net Sales Orders (1)
Fiscal Year Ended September 30,
Net Homes Sold
Value (In millions)
Average Selling Price
2009
2008
%
Change
2009
2008
%
Change
2009
2008
East . . . . . . . . . . . . . . .
Midwest . . . . . . . . . . . .
Southeast . . . . . . . . . . .
South Central . . . . . . . .
Southwest
. . . . . . . . . .
West . . . . . . . . . . . . . .
1,519
1,198
3,107
6,172
1,751
3,287
1,602
1,633
3,235
7,357
2,891
4,533
(5)% $ 353.7
323.5
(27)%
(4)%
560.8
(16)% 1,060.6
300.2
(39)%
899.6
(27)%
$ 396.3
425.3
637.6
1,308.8
536.1
1,373.1
(11)% $232,900 $247,400
260,400
(24)% 270,000
197,100
(12)% 180,500
177,900
(19)% 171,800
185,400
(44)% 171,400
302,900
(34)% 273,700
%
Change
(6)%
4 %
(8)%
(3)%
(8)%
(10)%
17,034
21,251
(20)% $3,498.4 $4,677.2
(25)% $205,400 $220,100
(7)%
Sales Order Cancellations
Fiscal Year Ended September 30,
Cancelled
Sales Orders
Value (In millions)
Cancellation
Rate (2)
2009
478
240
1,321
3,029
913
1,207
7,188
2008
1,138
464
2,069
4,443
3,680
2,378
14,172
2009
2008
2009
2008
$ 113.0
64.8
244.5
509.0
167.2
357.3
$1,455.8
$ 269.6
140.3
469.0
763.0
755.5
851.3
$3,248.7
24%
17%
30%
33%
34%
27%
30%
42%
22%
39%
38%
56%
34%
40%
. . . . . . . . . . . . . . . . . . . .
East
Midwest
. . . . . . . . . . . . . . . . .
Southeast . . . . . . . . . . . . . . . . .
South Central . . . . . . . . . . . . . .
Southwest . . . . . . . . . . . . . . . .
West . . . . . . . . . . . . . . . . . . . .
(1) Net sales orders represent the number and dollar value of new sales contracts executed with customers (gross sales
orders), net of cancelled sales orders.
(2) Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.
Net Sales Orders
The value of net sales orders decreased 25%, to $3,498.4 million (17,034 homes) in 2009 from
$4,677.2 million (21,251 homes) in 2008. The number of net sales orders decreased 20% in fiscal 2009
compared to fiscal 2008. Factors that contributed to the slowing of demand for new homes in most of our
36
markets included a high level of homes for sale, which included foreclosed homes for sale; a decrease in the
availability of mortgage financing for many potential homebuyers; the continued uncertainty in the financial
markets and a decline in homebuyer consumer confidence. However, these factors led to lower home prices
and improved affordability, which combined with various homebuyer tax incentives and low mortgage interest
rates, served to partially offset some of the market softness.
In comparing fiscal 2009 to fiscal 2008, the value of net sales orders decreased in all of our market
regions. In most market regions, these decreases were due to a decrease in the number of homes sold in the
respective regions, and to a lesser extent, to a decline in the average selling price of those homes. In the East
and Southeast regions where decreases in the number of homes sold were not as large as other regions, the
decline in average selling price was a greater contributor to the decrease in the value of net sales orders.
The average price of our net sales orders decreased 7%, to $205,400 in 2009 from $220,100 in 2008. The
average price of our net sales orders decreased in five of our six market regions, due primarily to price
reductions and increased incentives implemented to attempt to achieve an appropriate sales absorption pace.
As the inventory of existing homes for sale, which included a substantial number of foreclosed homes,
continued to be high, we adjusted our pricing to remain competitive with comparable existing home sales
prices. We also adjusted our product mix, geographic mix and pricing within our homebuilding markets in an
effort to keep our core product offerings affordable for our target customer base, typically first-time and
move-up homebuyers, which also contributed to the decrease in average selling price.
Our annual sales order cancellation rate was 30% in fiscal 2009, compared to 40% in fiscal 2008. While
an improvement from the prior year, this elevated cancellation rate reflects the challenges in most of our
homebuilding markets, including the inability of many prospective homebuyers to sell their existing homes,
the erosion of buyer confidence and the tight credit conditions in the mortgage markets.
In July 2008, the “American Housing Rescue and Foreclosure Prevention Act of 2008” was enacted into
law. Among other provisions, this law eliminated seller-funded down payment assistance on FHA insured
loans approved on or after October 1, 2008. Of our total home closings in fiscal 2008, approximately 25%
were funded with mortgage loans whereby the homebuyer used a seller-financed down payment assistance
program. While we sought other down payment assistance and mortgage financing alternatives for our buyers,
the elimination of the seller-financed down payment assistance programs had a negative impact on our sales
and revenues in fiscal 2009 relative to fiscal 2008.
In February 2009, the American Recovery and Reinvestment Act of 2009 was enacted into law. This
legislation included a federal tax credit for qualified first-time homebuyers purchasing a principal residence on
or after January 1, 2009 and before December 1, 2009. In November 2009, this credit was expanded to be
available to more homebuyers and extended until June 2010.
Sales Order Backlog
As of September 30,
Homes in Backlog
Value (In millions)
Average Selling Price
2009
2008
%
Change
2009
2008
%
Change
2009
2008
%
Change
559
389
969
487
East . . . . . . . . . . . . . .
328
Midwest . . . . . . . . . . .
Southeast
783
. . . . . . . . . .
South Central. . . . . . . . 2,362 2,025
786
Southwest . . . . . . . . . .
888
West . . . . . . . . . . . . . .
492
857
15 % $ 126.6
105.0
19 %
179.0
24 %
402.6
17 %
86.3
(37)%
242.5
(3)%
$ 118.2
91.6
165.7
364.0
166.0
301.9
7 % $226,500 $242,700
279,300
15 % 269,900
211,600
8 % 184,700
179,800
11 % 170,400
211,200
(48)% 175,400
340,000
(20)% 283,000
(7)%
(3)%
(13)%
(5)%
(17)%
(17)%
5,628 5,297
6 % $1,142.0
$1,207.4
(5)% $202,900 $227,900
(11)%
Sales Order Backlog
At September 30, 2009, the value of our backlog of sales orders was $1,142.0 million (5,628 homes), a
decrease of 5% from $1,207.4 million (5,297 homes) at September 30, 2008. The average sales price of homes
37
in backlog was $202,900 at September 30, 2009, down 11% from the $227,900 average at September 30,
2008. The year-over-year increase in home sales activity in the fourth quarter contributed to modest increases
in the value of our sales order backlog in four of our six market regions. However, the value of our backlog
decreased significantly in our Southwest region, particularly in our Phoenix market, and in our West region,
particularly in our Northern California market.
Homes Closed and Home Sales Revenue
Fiscal Year Ended September 30,
Homes Closed
Value (In millions)
Average Selling Price
2009
2008
%
Change
2009
2008
%
Change
2009
2008
%
Change
. . . . . . . . . . . .
East
Midwest
. . . . . . . . .
Southeast . . . . . . . . .
South Central . . . . . .
Southwest . . . . . . . .
West . . . . . . . . . . . .
1,447
1,137
2,921
5,835
2,045
3,318
2,309
1,905
3,650
8,061
5,208
5,263
(37)% $ 345.3
310.0
(40)%
547.5
(20)%
(28)% 1,022.1
379.8
(61)%
958.9
(37)%
$ 584.8
525.8
781.6
1,447.6
1,049.0
1,775.5
(41)% $238,600 $253,300
276,000
(41)% 272,600
214,100
(30)% 187,400
179,600
(29)% 175,200
201,400
(64)% 185,700
337,400
(46)% 289,000
(6)%
(1)%
(12)%
(2)%
(8)%
(14)%
16,703
26,396
(37)% $3,563.6
$6,164.3
(42)% $213,400 $233,500
(9)%
Home Sales Revenue
Revenues from home sales decreased 42%, to $3,563.6 million (16,703 homes closed) in 2009 from
$6,164.3 million (26,396 homes closed) in 2008. The average selling price of homes closed during 2009 was
$213,400, down 9% from the $233,500 average in 2008. In fiscal 2009, home sales revenues decreased
significantly in all of our market regions, reflecting the continued weak demand and resulting decline in net
sales order volume and pricing experienced during the year. The number of homes closed in 2009 decreased
37% due to decreases in all of our market regions.
Revenues from home sales in fiscal 2009 and 2008 were increased by $3.1 million and $26.8 million,
respectively, from changes in deferred profit. As of September 30, 2009, the balance of deferred profit was
$2.7 million, compared to $5.8 million at September 30, 2008.
Homebuilding Operating Margin Analysis
Gross profit — Home sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit — Land/lot sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of inventory impairments and land option cost write-offs on total
homebuilding gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit (loss) — Total homebuilding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) on early retirement of debt
Other (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38
Percentages of
Related Revenues
Fiscal Year Ended
September 30,
2009
2008
13.1 %
13.4 %
11.2 %
8.5 %
(11.3)%
1.8 %
14.5 %
— %
2.8 %
(0.1)%
(0.4)%
(15.0)%
(38.1)%
(27.0)%
12.1 %
1.2 %
0.6 %
— %
(0.1)%
(40.9)%
Home Sales Gross Profit
Gross profit from home sales decreased by 32%, to $467.5 million in 2009, from $691.2 million in 2008,
and, as a percentage of home sales revenues, increased 190 basis points, to 13.1%. Approximately 230 basis
points of the increase in the home sales gross profit percentage was a result of the average cost of our homes
declining by more than our average selling prices, caused by a greater portion of our closings occurring in our
South Central region, which had experienced more stable housing conditions than our other regions, and the
effects of prior inventory impairments on homes closed during fiscal 2009. Approximately 50 basis points of
the increase was due to a decrease in the amortization of capitalized interest and property taxes as a
percentage of homes sales revenues resulting from reductions in our interest and property taxes incurred over
fiscal 2009. These increases were partially offset by a decrease of 30 basis points due to the recognition of a
lesser amount of previously deferred gross profit during fiscal 2009 compared to fiscal 2008 and by 60 basis
points due to an increase in actual and estimated warranty and construction defect costs. The increase in
estimated warranty costs was due in part to a fiscal 2009 adjustment to our estimated warranty liability related
to estimated costs to remedy homes which we had found to or suspected might contain allegedly defective
drywall manufactured in China (Chinese Drywall) in two of our markets. Also, we experienced increases in
our construction defect claims self-insured retentions, resulting in additional reserves for estimated claims.
Land Sales Revenue
Land sales revenues decreased 89% to $40.3 million in 2009, from $354.3 million in 2008. Of the
$40.3 million of revenues in fiscal 2009, $26.9 million related to land sale transactions in the fourth quarter of
fiscal 2008 for which recognition of the revenue had been deferred due to the terms of the sale. During the
fourth quarter of fiscal 2008, we sold a significant amount of land and lots through numerous transactions to
generate cash flows, reduce our future carrying costs and land development obligations, and lower our
inventory supply in certain markets. Consummating these transactions during fiscal 2008 allowed us to
monetize a large portion of our deferred tax assets through a loss carryback to fiscal 2006 resulting in a
substantial tax refund.
39
Inventory Impairments and Land Option Cost Write-offs
Fiscal Year Ended September 30,
2009
Inventory
Impairments
Land Option
Cost
Write-Offs
East . . . . . . . . . . . . . . . . . . . . . . . . .
Midwest. . . . . . . . . . . . . . . . . . . . . .
Southeast . . . . . . . . . . . . . . . . . . . . .
South Central . . . . . . . . . . . . . . . . . .
Southwest
. . . . . . . . . . . . . . . . . . . .
West . . . . . . . . . . . . . . . . . . . . . . . .
$
54.3
46.3
36.7
17.0
36.5
187.0
$
$ 377.8
$
10.6
8.4
1.3
3.0
2.9
3.7
29.9
Total
Inventory
Impairments
(In millions)
$
64.9
54.7
38.0
20.0
39.4
190.7
$ 256.2
161.8
448.4
67.2
264.9
1,174.1
2008
Land Option
Cost
Write-Offs
(Recoveries)
Total
$
32.2
1.5
9.1
5.2
65.8
(1.9)
$ 288.4
163.3
457.5
72.4
330.7
1,172.2
$ 407.7
$2,372.6
$ 111.9
$2,484.5
Carrying Values of Potentially Impaired and Impaired Communities
At September 30, 2009
Analysis of Communities with Impairment Charges
Recorded at September 30, 2009
Total
Number of
Communities (1)
Inventory with
Impairment Indicators
Number of
Communities (1)
Carrying
Value
Number of
Communities (1)
(Values in millions)
Inventory
Carrying Value
Prior to
Impairment
Fair Value
129
50
205
288
75
152
899
17
19
27
34
18
46
161
$ 157.8
143.0
97.5
110.8
99.7
354.3
$ 963.1
4
7
15
4
8
20
58
$
85.1
47.8
40.9
17.7
53.0
176.8
$
45.9
32.8
29.8
14.2
36.2
87.5
$ 421.3
$ 246.4
East . . . . . . . . . . . .
Midwest . . . . . . . . .
Southeast . . . . . . . .
South Central . . . . .
Southwest . . . . . . . .
. . . . . . . . . . .
West
Carrying Values of Potentially Impaired and Impaired Communities
At September 30, 2008
Analysis of Communities with Impairment Charges
Recorded at September 30, 2008
Total
Number of
Communities (1)
Inventory with
Impairment Indicators
Number of
Communities (1)
Carrying
Value
Number of
Communities (1)
(Values in millions)
105
62
176
248
72
178
841
46
20
78
58
24
80
306
$ 436.9
204.8
485.5
208.7
235.5
614.8
$2,186.2
19
9
37
15
15
32
127
Inventory
Carrying Value
Prior to
Impairment
$ 163.8
93.6
241.7
38.1
158.7
271.9
$ 967.8
Fair Value
$
79.0
58.4
153.7
30.5
105.7
175.8
$ 603.1
East . . . . . . . . . . . .
Midwest . . . . . . . . .
Southeast. . . . . . . . .
South Central . . . . . .
Southwest . . . . . . . .
West . . . . . . . . . . . .
(1) A community may consist of land held for development, residential land and lots developed and under development,
and construction in progress and finished homes. A particular community often includes inventory in more than one
category. Further, a community may contain multiple parcels with varying product types (e.g. entry level and move-up
single family detached, as well as attached product types). Some communities have no homes under construction,
finished homes, or current home sales efforts or activity.
40
Inventory Impairments and Land Option Cost Write-offs
During fiscal 2009, when we performed our quarterly inventory impairment analyses, the assumptions
utilized reflected our cautious outlook for the broader homebuilding industry and our markets, both of which
impact our business. This outlook incorporated our belief that housing market conditions might continue to
deteriorate, and that challenging conditions would persist. Our impairment evaluation as of September 30, 2009
occurred after the end of the spring/summer selling season and was based on our latest operating plans for our
projects into fiscal 2010, and reflected the anticipated expiration of government support efforts for the
homebuilding industry, such as the tax credit and Fed purchases of mortgage-backed securities, in the
subsequent year. Accordingly, our impairment evaluation as of September 30, 2009 again indicated a significant
number of communities with impairment indicators. Communities with a combined carrying value of
$963.1 million as of September 30, 2009, had indicators of potential impairment and were evaluated for
impairment. Through this evaluation process, we determined that communities with a carrying value of
$421.3 million as of September 30, 2009, the largest portion of which was in the West region, were impaired.
As a result, during the fourth quarter of fiscal 2009, we recorded impairment charges of $174.9 million to
reduce the carrying value of the impaired communities to their estimated fair value, as compared to
$988.9 million in the same period of the prior year. The fourth quarter charges combined with impairment
charges recorded earlier in the year resulted in total inventory impairment charges of $377.8 million and
$2,372.6 million during fiscal 2009 and 2008, respectively. In performing our quarterly inventory impairment
analyses during fiscal 2009, we utilized a range of discount rates for communities of 14% to 20% which was
increased from the range of 12% to 18% we would have used for these communities in fiscal 2008. The
increased discount rates reflected our estimate of the increased level of market risk present in the homebuilding
and related mortgage lending industries. The impact of the increase in the discount rates on the fourth quarter
and fiscal 2009 inventory impairment charges was an increase of $9.9 million and $18.9 million, respectively.
During fiscal 2009, approximately 85% of the impairment charges were recorded to residential land and lots
and land held for development, and approximately 15% of the charges were recorded to construction in
progress and finished homes inventory, compared to 79% and 21%, respectively, in fiscal 2008.
During fiscal 2009 and 2008, we wrote off $29.9 million and $111.9 million, respectively, of earnest
money deposits and pre-acquisition costs related to option contracts for land or lots which are not expected to
be acquired. The inventory impairment charges and write-offs of earnest money deposits and pre-acquisition
costs reduced total homebuilding gross profit as a percentage of homebuilding revenues by approximately
1,130 basis points in fiscal 2009, compared to 3,810 basis points in the fiscal 2008.
Selling, General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities decreased by $268.8 million, or 34%, to $523.0 million in
2009 from $791.8 million in 2008. As homebuilding revenues declined at a faster pace than SG&A expense,
when expressed as a percentage of homebuilding revenues, SG&A expense increased 240 basis points, to
14.5% in 2009 from 12.1% in 2008. The largest component of our homebuilding SG&A expense is employee
compensation and related costs, which represented 55% and 52% of SG&A costs in 2009 and 2008,
respectively. These costs decreased $125.7 million, or 30%, to $287.2 million in 2009 from $412.9 million in
2008. This decrease was largely due to our efforts to align the number of employees to match our home
closing levels, as well as a decrease in incentive compensation. Our homebuilding operations employed
approximately 2,300 and 3,100 employees at September 30, 2009 and 2008, respectively. Most other SG&A
cost components also decreased in fiscal 2009 as compared to fiscal 2008, as a result of our efforts to reduce
all costs throughout the company. The most substantial decreases occurred in advertising and depreciation.
Interest Incurred
We capitalize homebuilding interest costs to inventory during active development and construction. Due to
our inventory reduction strategies and slowing or suspending land development in certain communities, our active
inventory during fiscal 2009 and 2008 was lower than our debt level; therefore, a portion of our interest incurred
was expensed. We expensed $100.2 million of homebuilding interest during fiscal 2009, compared to $39.0 million
of interest during fiscal 2008 since the ratio of our active inventory to debt declined during that period.
41
Interest amortized to cost of sales, excluding interest written off with inventory impairment charges, was
3.9% of total home and land/lot cost of sales in both 2009 and 2008. Interest incurred is related to the average
level of our homebuilding debt outstanding during the period. Comparing fiscal 2009 with fiscal 2008, interest
incurred related to homebuilding debt decreased 13% to $205.0 million, primarily due to a 13% decrease in
our average homebuilding debt.
Gain/Loss on Early Retirement of Debt
During fiscal 2009, in addition to repaying maturing senior notes, we repurchased a total of $380.3 million
principal amount of various issues of our senior notes prior to their maturity for an aggregate purchase price of
$368.0 million, plus accrued interest. We recognized a gain of $11.5 million related to these repurchases, which
was partially offset by a loss of $7.6 million related to the early termination of our revolving credit facility in
May 2009. These transactions resulted in a net gain of $3.9 million during fiscal 2009.
The loss on early retirement of debt of $2.6 million during fiscal 2008 was primarily due to the write-off
of unamortized fees associated with reducing the size of our revolving credit facility in June 2008.
Other Income
Other income, net of other expenses, associated with homebuilding activities was $12.8 million in 2009,
compared to $9.1 million in 2008. The largest component of other income in both years was interest income.
Goodwill
In performing our annual goodwill impairment analysis as of September 30, 2009, we determined that our
goodwill balance of $15.9 million, all of which relates to our South Central reporting segment, was not
impaired. As a result of the analysis performed as of September 30, 2008, we recorded a goodwill impairment
charge of $79.4 million, all of which related to our Southwest reporting segment.
Homebuilding Results by Reporting Region
Fiscal Year Ended September 30,
2009
Homebuilding
Income (Loss)
Before
Income Taxes (1)
Homebuilding
Revenues
% of
Region
Revenues
Homebuilding
Revenues
(In millions)
(27.6)% $ 589.9
546.7
(33.4)%
820.8
(12.8)%
0.5 % 1,469.7
(12.0)% 1,153.4
(23.5)% 1,938.1
2008
Homebuilding
Income (Loss)
Before
Income Taxes (1)
% of
Region
Revenues
$ (332.5)
(184.3)
(507.7)
(6.1)
(369.6)
(1,266.7)
(56.4)%
(33.7)%
(61.9)%
(0.4)%
(32.0)%
(65.4)%
$(541.3)
(15.0)% $6,518.6
$(2,666.9)
(40.9)%
East . . . . . . . . . . . . . . . . . . . .
Midwest . . . . . . . . . . . . . . . . .
Southeast . . . . . . . . . . . . . . . .
South Central . . . . . . . . . . . . .
Southwest . . . . . . . . . . . . . . . .
West. . . . . . . . . . . . . . . . . . . .
$ 347.1
314.5
570.8
1,024.6
382.4
964.5
$3,603.9
$ (95.9)
(104.9)
(73.2)
4.9
(45.8)
(226.4)
(1) Expenses maintained at the corporate level consist primarily of interest and property taxes, which are capitalized and
amortized to cost of sales or expensed directly, and the expenses related to operating our corporate office. The
amortization of capitalized interest and property taxes is allocated to each segment based on the segment’s revenue,
while the interest expensed directly and those expenses associated with the corporate office are allocated to each
segment based on the segment’s average inventory.
East Region — Homebuilding revenues decreased 41% in 2009 compared to 2008, primarily due to a
37% decrease in the number of homes closed, with the largest decreases in our New Jersey and Carolina
markets. The region reported a loss before income taxes of $95.9 million in 2009, compared to a loss of
$332.5 million in 2008. The losses were due in part to inventory impairment charges and earnest money and
42
pre-acquisition cost write-offs totaling $64.9 million and $288.4 million in fiscal 2009 and 2008, respectively.
The region’s home sales gross profit percentage increased 390 basis points in fiscal 2009 compared to fiscal
2008. The increase was a result of the average cost of our homes declining by more than the average selling
prices due to the effects of prior inventory impairments on homes closed during 2009.
Midwest Region — Homebuilding revenues decreased 42% in 2009 compared to 2008, primarily due to a
40% decrease in the number of homes closed, with the largest decreases in our Denver market. The region
reported a loss before income taxes of $104.9 million in 2009, compared to a loss of $184.3 million in 2008.
The losses were due in part to inventory impairment charges and earnest money and pre-acquisition cost
write-offs totaling $54.7 million and $163.3 million in fiscal 2009 and 2008, respectively. The region’s home
sales gross profit percentage decreased 540 basis points in fiscal 2009 compared to fiscal 2008. The decrease
was a result of lower margins in our Chicago and Denver markets, as well as higher warranty costs on
previously closed homes in our Denver market. Additionally, our revenues declined at a greater rate than our
SG&A expenses, which also contributed to the loss before income taxes in 2009.
Southeast Region — Homebuilding revenues decreased 30% in 2009 compared to 2008, primarily due to
a 20% decrease in the number of homes closed, as well as a 12% decrease in the average selling price of
those homes. The region reported a loss before income taxes of $73.2 million in 2009, compared to a loss of
$507.7 million in 2008. The losses were due in part to inventory impairment charges and earnest money and
pre-acquisition cost write-offs totaling $38.0 million and $457.5 million in fiscal 2009 and 2008, respectively.
The region’s home sales gross profit percentage increased 340 basis points in fiscal 2009 compared to fiscal
2008. The increase was a result of the average cost of our homes declining by more than the average selling
prices due to the effects of prior inventory impairments on homes closed during 2009, and was partially offset
by estimated warranty costs related to homes in one market in Florida which we had found to or suspected
may contain Chinese Drywall.
South Central Region — Homebuilding revenues decreased 30% in 2009 compared to 2008, due to a 28%
decrease in the number of homes closed. The region reported income before income taxes of $4.9 million in
fiscal 2009, compared to a loss before income taxes of $6.1 million in fiscal 2008. The improvement was due
in part to a decrease in inventory impairment charges and earnest money and pre-acquisition cost write-offs,
which were $20.0 million and $72.4 million in fiscal 2009 and 2008, respectively. The region’s home sales
gross profit percentage increased 40 basis points in fiscal 2009 compared to fiscal 2008 due to the effects of
prior inventory impairments on homes closed during 2009. These improvements were partially offset by our
SG&A expenses decreasing at a slower rate, 22%, than our homebuilding revenues.
Southwest Region — Homebuilding revenues decreased 67% in 2009 compared to 2008, due to a 61%
decrease in the number of homes closed, primarily in our Phoenix market, as well as decreases in the average
selling price of homes in the region. The region reported a loss before income taxes of $45.8 million in 2009,
compared to a loss of $369.6 million in 2008. The losses were due in part to inventory impairment charges and
earnest money and pre-acquisition cost write-offs totaling $39.4 million and $330.7 million in fiscal 2009 and
2008, respectively. In fiscal 2008, goodwill impairment charges of $79.4 million also contributed to the loss. The
region’s revenues declined at a greater rate than its SG&A expenses, which also contributed to the loss before
income taxes in 2009. The region’s home sales gross profit percentage increased 110 basis points in fiscal 2009
compared to fiscal 2008 due to the effects of prior inventory impairments on homes closed during 2009.
West Region — Homebuilding revenues decreased 50% in 2009 compared to 2008, due to a 37% decrease
in the number of homes closed, as well as a 14% decrease in the average selling price of those homes. The
largest decreases in homes closed occurred in our Northern California markets. The region reported a loss
before income taxes of $226.4 million in 2009, compared to a loss of $1.3 billion in 2008. The losses were
due in part to inventory impairment charges and earnest money and pre-acquisition cost write-offs totaling
$190.7 million and $1.2 billion in fiscal 2009 and 2008, respectively. The region’s home sales gross profit
percentage increased 450 basis points in fiscal 2009 compared to fiscal 2008. The increase was a result of the
average cost of our homes declining by more than the average selling prices due to the effects of prior
inventory impairments on homes closed during 2009.
43
Results of Operations — Financial Services
Fiscal Year Ended September 30, 2010 Compared to Fiscal Year Ended September 30, 2009
The following tables set forth key operating and financial data for our financial services operations,
comprising DHI Mortgage and our subsidiary title companies, for the fiscal years ended September 30, 2010
and 2009:
Fiscal Year Ended September 30,
2010
% Change
2009
Number of first-lien loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers . . . . . . . . . . . . . . . . .
Number of homes closed by D.R. Horton . . . . . . . . . . . . . . . . . . . . .
DHI Mortgage capture rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of total loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers . . . . . . . . . . . . . . . . .
Total number of loans originated or brokered by DHI Mortgage . . . .
Captive business percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans sold by DHI Mortgage to third parties . . . . . . . . . . . . . . . . . .
12,679
20,875
61%
12,754
14,146
90%
14,001
11,147
16,703
67%
11,245
13,481
83%
13,991
14%
25%
13%
5%
—%
Fiscal Year Ended September 30,
2010
% Change
2009
Loan origination fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17.7
59.6
Sale of servicing rights and gains from sale of mortgages. . . . . . . . . .
(13.7)
Recourse expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45.9
. . . .
6.8
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1.9)
Reinsurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.9
Other revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of servicing rights and gains from sale of mortgages, net
(In millions)
$ 18.6
56.8
(33.2)
23.6
8.3
(14.9)
(6.6)
Total mortgage operations revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
Title policy premiums, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68.5
22.0
90.5
77.2
1.9
(10.0)
35.6
18.1
53.7
78.1
1.5
(10.4)
(5)%
5%
(59)%
94%
(18)%
(87)%
174%
92%
22%
69%
(1)%
27%
(4)%
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21.4
$(15.5)
238%
Financial Services Operating Margin Analysis
Recourse and reinsurance expense . . . . . . . . . . . . . . . . . . . . .
General and administrative expense . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other (income) . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . .
Percentages of
Financial Services Revenues (1)
Fiscal Year Ended September 30,
2010
14.7 %
72.8 %
1.8 %
(9.4)%
20.2 %
2009
47.2 %
76.7 %
1.5 %
(10.2)%
(15.2)%
(1) Excludes the effects of recourse and reinsurance charges on financial services revenues
44
Mortgage Loan Activity
The volume of loans originated and brokered by our mortgage operations is directly related to the number
of homes closed by our homebuilding operations. Total first-lien loans originated or brokered by DHI
Mortgage for our homebuyers increased by 14% in fiscal 2010 compared to fiscal 2009, corresponding to the
25% increase in the number of homes closed. The percentage increase in loans originated was lower than the
percentage increase in the number of homes closed by our homebuilding operations due to a decrease in our
mortgage capture rate (the percentage of total home closings by our homebuilding operations for which DHI
Mortgage handled the homebuyers’ financing), to 61% in 2010, from 67% in 2009.
Home closings from our homebuilding operations constituted 90% of DHI Mortgage loan originations in
2010, compared to 83% in 2009, reflecting DHI Mortgage’s continued focus on supporting the captive
business provided by our homebuilding operations. The relatively higher captive percentage in the current year
reflects a lower level of refinancing activity than in the prior year.
The number of loans sold to third-party purchasers was virtually the same in 2010 as compared to 2009,
while the number of loans originated increased by 5%. Loans are typically sold within 30 days of origination.
Fluctuations in the volume of loans sold for a given period may not correspond to the change in loan
origination volume because of the timing of loan sales, which for any quarter generally represents the loans
originated in the last month of the prior quarter plus the first two months of the current quarter. Virtually all
of the mortgage loans originated during fiscal 2010 and mortgage loans held for sale on September 30, 2010
were eligible for sale to Fannie Mae, Freddie Mac or GNMA (“Agency-eligible”). Approximately 86% of the
mortgage loans sold by DHI Mortgage during fiscal 2010 were sold to two major financial institutions
pursuant to their loan purchase agreements with DHI Mortgage. If we are unable to sell our mortgages to
these or other purchasers, our ability to originate and sell mortgage loans could be significantly reduced and
the profitability of our financial services operations would be negatively impacted.
Financial Services Revenues and Expenses
Revenues from the financial services segment increased 69%, to $90.5 million in 2010 from
$53.7 million in 2009. Loan origination fees decreased 5%, to $17.7 million in 2010 from $18.6 million in
2009, while the number of loans originated increased 5% during the same period. The decrease in loan
origination fees during 2010 relates to the adoption of the Financial Accounting Standards Board’s (FASB)
authoritative guidance for fair value measurements of certain financial instruments on October 1, 2008. The
authoritative guidance requires net origination costs and fees associated with mortgage loans to be recognized
at origination and no longer deferred until the time of sale. Therefore, during fiscal 2009, we recognized
$2.4 million of loan origination fees and $5.0 million of general and administrative (G&A) costs related to
prior period loan originations. Revenues from the sale of servicing rights and gains from sale of mortgages
increased 5%, to $59.6 million in 2010, from $56.8 million in 2009. Charges related to recourse obligations
were $13.7 million in fiscal 2010, compared to $33.2 million in fiscal 2009. The calculation of our required
repurchase loss reserve is based upon an analysis of repurchase requests received, our actual repurchases and
losses through the disposition of such loans, discussions with our mortgage purchasers and analysis of the
mortgages we originated. While we believe that we have adequately reserved for losses on known and
projected repurchase requests, if either actual repurchases or the losses incurred resolving those repurchases
exceed our expectations, additional recourse expense may be incurred. Also, a subsidiary of ours reinsured a
portion of private mortgage insurance written on loans originated by DHI Mortgage in prior years. Charges to
increase reserves for expected losses on the reinsured loans were $1.9 million and $14.9 million during fiscal
2010 and 2009, respectively.
Financial services G&A expense decreased 1%, to $77.2 million in 2010 from $78.1 million in 2009, but
increased 6% when excluding $5.0 million of compensation costs recognized in fiscal 2009 upon the adoption
of the FASB’s authoritative guidance for fair value measurements as discussed above. The largest component
of our financial services G&A expense is employee compensation and related costs, which represented 78%
and 75% of G&A costs in 2010 and 2009, respectively. Excluding the $5.0 million adjustment discussed
45
above, these costs increased 14%, to $60.5 million in 2010 from $53.3 million in 2009. The increase in the
current year relates to an increase in the number of financial services employees to approximately 700 at
September 30, 2010, from 600 at September 30, 2009 to support our increased volume and more stringent
mortgage purchaser underwriting guidelines.
As a percentage of financial services revenues, excluding the effects of recourse and reinsurance expense,
G&A expense decreased to 72.8% in 2010, from 76.7% in 2009. The decrease was primarily due to the
adoption in 2009 of the FASB’s authoritative guidance for fair value measurements of certain financial
instruments as discussed above, partially offset by additional costs incurred to support more stringent mortgage
purchaser underwriting guidelines. Fluctuations in financial services G&A expense as a percentage of revenues
can be expected to occur as some expenses are not directly related to mortgage loan volume or to changes in
the amount of revenue earned.
46
Fiscal Year Ended September 30, 2009 Compared to Fiscal Year Ended September 30, 2008
The following tables set forth key operating and financial data for our financial services operations,
comprising DHI Mortgage and our subsidiary title companies, for the fiscal years ended September 30, 2009
and 2008:
Fiscal Year Ended September 30,
2009
% Change
2008
Number of first-lien loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers . . . . . . . . . . . . . . . . .
Number of homes closed by D.R. Horton . . . . . . . . . . . . . . . . . . . . .
DHI Mortgage capture rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of total loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers . . . . . . . . . . . . . . . . .
Total number of loans originated or brokered by DHI Mortgage . . . .
Captive business percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans sold by DHI Mortgage to third parties . . . . . . . . . . . . . . . . . .
11,147
16,703
67%
11,245
13,481
83%
13,991
16,134
26,396
61%
16,458
17,797
92%
17,928
(31)%
(37)%
(32)%
(24)%
(22)%
Fiscal Year Ended September 30,
2009
% Change
2008
Loan origination fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18.6
56.8
Sale of servicing rights and gains from sale of mortgages . . . . . . . . .
(33.2)
Recourse expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.6
Sale of servicing rights and gains from sale of mortgages, net . . . .
8.3
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14.9)
Reinsurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6.6)
Other revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In millions)
$ 24.9
91.0
(21.9)
69.1
12.1
(4.9)
7.2
Total mortgage operations revenues. . . . . . . . . . . . . . . . . . . . . . . . . .
Title policy premiums, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense. . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.6
18.1
53.7
78.1
1.5
(10.4)
101.2
26.3
127.5
100.1
3.7
(11.4)
(25)%
(38)%
52 %
(66)%
(31)%
204 %
(192)%
(65)%
(31)%
(58)%
(22)%
(59)%
(9)%
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $(15.5)
$ 35.1
(144)%
Financial Services Operating Margin Analysis
Percentages of
Financial Services Revenues (1)
Fiscal Year Ended September 30,
2009
2008
Recourse and reinsurance expense . . . . . . . . . . . . . . . . . . .
General and administrative expense . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other (income) . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . .
47.2 %
76.7 %
1.5 %
(10.2)%
(15.2)%
17.4 %
64.9 %
2.4 %
(7.4)%
22.7 %
(1) Excludes the effects of recourse and reinsurance charges on financial services revenues
47
Mortgage Loan Activity
Total first-lien loans originated or brokered by DHI Mortgage for our homebuyers decreased by 31% in
fiscal 2009 compared to fiscal 2008, corresponding to the 37% decrease in the number of homes closed. The
percentage decrease in loans originated was lower than the percentage decrease in homes closed due to an
increase in our mortgage capture rate to 67% in 2009, from 61% in 2008.
Home closings from our homebuilding operations constituted 83% of DHI Mortgage loan originations in
2009, compared to 92% in 2008, reflecting DHI Mortgage’s continued focus on supporting the captive
business provided by our homebuilding operations. The relatively lower captive percentage in 2009 reflects an
increase in refinancing activity as existing homeowners took advantage of the decline in mortgage interest
rates.
The number of loans sold to third-party purchasers decreased by 22% in 2009 as compared to 2008. The
decrease was primarily due to the decrease in the number of mortgage loans originated. Consistent with fiscal
2008, originations during fiscal 2009 continued to predominantly be Agency-eligible. In fiscal 2009,
approximately 99% of DHI Mortgage production and 98% of mortgage loans held for sale on September 30,
2009 were Agency-eligible.
Financial Services Revenues and Expenses
Revenues from the financial services segment decreased 58%, to $53.7 million in 2009 from
$127.5 million in 2008. The decrease was primarily due to the decrease in the number of mortgage loans
originated and sold, as well as an increase in recourse expense related to future loan repurchase obligations
and increases in the loss reserves for reinsured loans. Charges related to recourse obligations were
$33.2 million in fiscal 2009, compared to $21.9 million in fiscal 2008. The increase in recourse expense is a
result of increasing our loan loss reserves during fiscal 2009 due to increased expectations for loan
repurchases and related losses caused by additional repurchase requests arising under the limited recourse
provisions. Also, a subsidiary of ours reinsured a portion of private mortgage insurance written on loans
originated by DHI Mortgage in prior years. Charges to increase reserves for expected losses on the reinsured
loans were $14.9 million and $4.9 million during fiscal 2009 and 2008, respectively.
Additionally, revenues during fiscal 2008 included the recognition of an additional $8.8 million of
revenues related to the adoption of the FASB’s authoritative guidance for written loan commitments which
was adopted on January 1, 2008. The guidance requires that the expected net future cash flows related to the
associated servicing of a loan are included in the measurement of all written loan commitments that are
accounted for at fair value through earnings at the time of commitment. The effect of this guidance in fiscal
2009 was a $4.3 million decrease in revenues.
Financial services G&A expense decreased 22%, to $78.1 million in 2009 from $100.1 million in 2008.
The largest component of our financial services G&A expense is employee compensation and related costs,
which represented 75% and 71% of G&A costs in 2009 and 2008, respectively. These costs decreased 18%, to
$58.3 million in 2009 from $70.8 million in 2008, as we have continued to align the number of employees
with current and anticipated loan origination and title service levels. Our financial services operations
employed approximately 600 and 700 employees at September 30, 2009 and 2008, respectively.
As a percentage of financial services revenues, excluding the effects of recourse and reinsurance expense,
G&A expense increased to 76.7% in 2009, from 64.9% in 2008. The increase was primarily due to the
reduction in revenue resulting from the decrease in mortgage loan volume during fiscal 2009, as well as higher
revenues in the prior year due to the adoption of the authoritative guidance for written loan commitments.
48
Results of Operations — Consolidated
Fiscal Year Ended September 30, 2010 Compared to Fiscal Year Ended September 30, 2009
Income (Loss) before Income Taxes
Income before income taxes for fiscal 2010 was $99.5 million, compared to a loss before income taxes of
$556.8 million for fiscal 2009. The difference in our operating results for 2010 compared to a year ago is
primarily due to increased revenue from the higher volume of homes closed, a higher gross profit from home
sales revenues and lower inventory impairment charges.
Income Taxes
The benefit from income taxes in fiscal 2010 was $145.6 million, compared to a benefit of $7.0 million
in 2009. In November 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was enacted
into law and amended Section 172 of the Internal Revenue Code. This tax law change allows a net operating
loss (NOL) realized in one of our fiscal 2008, 2009 or 2010 years to be carried back up to five years
(previously limited to a two-year carryback). We elected to carry back our fiscal 2009 NOL. This resulted in a
benefit from income taxes of $208.3 million during fiscal 2010, which was partially offset by an increase in
unrecognized tax benefits and state income tax expense. We do not have meaningful effective tax rates in
these years because of the valuation allowances on our deferred tax assets.
We had income taxes receivable of $16.0 million and $293.1 million at September 30, 2010 and 2009,
respectively. During fiscal 2010, we received income tax refunds totaling $487.1 million, which resulted from
tax losses generated in fiscal 2008 and 2009. The income taxes receivable at September 30, 2010 relate to
additional federal and state income tax refunds we expect to receive.
At September 30, 2010, we had a federal NOL carryforward of $285.8 million that will expire in fiscal
2030 and tax benefits for state NOL carryforwards of $83.5 million that expire (beginning at various times
depending on the tax jurisdiction) from fiscal 2013 to fiscal 2030.
At September 30, 2010 and 2009, we had net deferred income tax assets of $902.6 million and
$1,073.9 million, respectively, offset by valuation allowances of $902.6 million and $1,073.9 million,
respectively. The future realization of our deferred income tax assets ultimately depends upon the existence of
sufficient taxable income in our carryforward periods under the tax laws. We continue to analyze the positive
and negative evidence in determining the expected realization of our deferred income tax assets. The
accounting for deferred taxes is based upon an estimate of future results. Differences between the anticipated
and actual outcomes of these future tax consequences could have a material impact on our consolidated results
of operations or financial position. Changes in existing tax laws also affect actual tax results and the valuation
of deferred tax assets over time.
The benefits of our NOL and tax credit carryforwards, as well as our unrealized built-in losses, would be
reduced or potentially eliminated if we experienced an ownership change as defined by Internal Revenue Code
Section 382. We do not believe we have experienced such an ownership change as of September 30, 2010;
however, the amount by which our ownership may change in the future is affected by purchases and sales of
stock by 5% stockholders; the potential conversion of our outstanding convertible senior notes and our
decision as to whether to settle any such conversions completely or partially in stock; and new issuances of
stock by us.
Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken in a
tax return, and the benefit recognized for accounting purposes. The total amount of unrecognized tax benefits
(which includes interest, penalties, and the tax benefit relating to the deductibility of interest and state income
taxes) was $82.8 million and $24.0 million as of September 30, 2010 and 2009, respectively. All tax positions,
if recognized, would affect our effective income tax rate. The increase in unrecognized tax benefits resulted in
large part from our election to carryback our fiscal 2009 NOL to fiscal 2004 and 2005, thereby changing the
reserve needed for all years open to further tax assessment including 2004 and 2005. It is reasonably possible
that, within the next 12 months, the amount of unrecognized tax benefits may decrease as much as
49
$59.2 million as a result of a ruling request filed by us with the Internal Revenue Service (IRS) concerning
capitalization of inventory costs. If the IRS rules favorably on the ruling request, our unrecognized tax benefits
would be reduced, resulting in a benefit from income taxes in the consolidated statement of operations.
We classify interest and penalties on income taxes as income tax expense. During fiscal 2010 and 2009,
we recognized interest and penalties with respect to income taxes of $11.7 million and $3.0 million,
respectively, in our consolidated statements of operations, and at September 30, 2010 and 2009, our total
accrued interest and penalties relating to unrecognized income tax benefits was $17.8 million and $6.2 million,
respectively.
We are subject to federal income tax and to income tax in multiple states. The statute of limitations for
our major tax jurisdictions remains open for examination for fiscal years 2004 through 2010. We are currently
being audited by various states and our federal NOL refunds from fiscal 2008 and 2009 are subject to
Congressional Joint Committee review.
Fiscal Year Ended September 30, 2009 Compared to Fiscal Year Ended September 30, 2008
Loss before Income Taxes
Loss before income taxes for fiscal 2009 was $556.8 million, compared to $2,631.8 million for fiscal
2008. The decrease in our consolidated loss was primarily due to significantly lower inventory impairment
charges during fiscal 2009, as well as a decrease in our SG&A expense. These improvements were slightly
offset by a decrease in the amount of our home sales gross profit due to a reduction in revenues.
Income Taxes
In fiscal 2009, we recorded a benefit from income taxes of $7.0 million, which relates primarily to
adjustments to the tax provision recorded for fiscal year 2008 resulting from the finalization and filing of the
tax return for that year. In fiscal 2008, we recorded a provision for income taxes of $1.8 million. We do not
have meaningful effective tax rates in these years because of losses from operations before taxes, the impact
of valuation allowances on our net deferred tax assets and impairment of nondeductible goodwill.
We had income tax receivables of $293.1 million and $676.2 million at September 30, 2009 and 2008,
respectively. In December 2008, we received a federal income tax refund of $621.7 million with respect to our
2008 year. We received $113.0 million of the $293.1 million receivable in the form of a tax refund during
October 2009. A substantial portion of the remaining tax receivable at September 30, 2009 was due to the
carryback of federal tax losses generated in fiscal 2009 that can be carried back against fiscal 2007 taxable
income. We also had $11.1 million of income tax receivables for state operating loss carrybacks at
September 30, 2009. At September 30, 2009 and 2008, we had net deferred tax assets of $1,073.9 million and
$1,174.8 million, respectively, offset by valuation allowances of $1,073.9 million and $961.3 million,
respectively.
During fiscal 2009 and 2008, we recognized interest and penalties with respect to income taxes of
$3.0 million and $4.0 million, respectively, in our consolidated statements of operations, and at September 30,
2009 and 2008, our total accrued interest and penalties relating to unrecognized income tax benefits was
$6.2 million and $4.9 million, respectively. As of September 30, 2009 and 2008, our total unrecognized
income tax benefits were $24.0 million and $18.7 million, respectively.
Overview of Capital Resources and Liquidity
We have historically funded our homebuilding and financial services operations with cash flows from
operating activities, borrowings under our bank credit facilities and the issuance of new debt securities. During
the challenging homebuilding market conditions experienced over the past few years, we have been operating
with a primary focus to generate cash flows through reductions in assets, as well as through profitable
operations. Our cash generation has also benefitted from income tax refunds. The generation of cash flow has
allowed us to increase our liquidity and strengthen our balance sheet, and has placed us in a position to be
able to invest in market opportunities as they arise. We do not expect to generate as much cash from asset
50
reductions in fiscal 2011 as we have in any of the past four fiscal years. Depending upon future homebuilding
market conditions and our expectations for these conditions, we may use a portion of our cash balances to
increase our operating assets. We intend to maintain adequate liquidity and balance sheet strength, and we will
continue to evaluate opportunities to access the capital markets as they become available.
At September 30, 2010, our ratio of net homebuilding debt to total capital was 16.1%, a decrease of
1,640 basis points from 32.5% at September 30, 2009. Net homebuilding debt to total capital consists of
homebuilding notes payable net of cash and marketable securities divided by total capital net of cash and
marketable securities (homebuilding notes payable net of cash and marketable securities plus total equity). The
decrease in our ratio of net homebuilding debt to total capital at September 30, 2010 as compared to the ratio
a year earlier was primarily due to our lower debt balance resulting from redemptions and repurchases of
senior and senior subordinated notes, income tax refunds and net income for the year. Our ratio of net
homebuilding debt to total capital remains well within our target operating range of below 45%. We believe
that our strong balance sheet and liquidity position will allow us to be flexible in reacting to changing market
conditions. However, future period-end net homebuilding debt to total capital ratios may be higher than the
16.1% ratio achieved at September 30, 2010.
We believe that the ratio of net homebuilding debt to total capital is useful in understanding the leverage
employed in our homebuilding operations and comparing us with other homebuilders. We exclude the debt of
our financial services business because it is separately capitalized and its obligation under its repurchase
agreement is substantially collateralized and not guaranteed by our parent company or any of our
homebuilding entities. Because of its capital function, we include our homebuilding cash and marketable
securities as a reduction of our homebuilding debt and total capital. For comparison to our ratios of net
homebuilding debt to capital above, our ratios of homebuilding debt to total capital, without netting cash and
marketable securities balances, were 44.3% and 56.2% at September 30, 2010 and 2009, respectively.
We believe that we will be able to fund our near-term working capital needs and debt obligations from
existing cash resources and our mortgage repurchase facility. For our longer-term capital requirements, we will
evaluate the need to issue new debt or equity securities through the public capital markets or obtain additional
bank financing as market conditions may permit.
Homebuilding Capital Resources
Cash and Cash Equivalents — At September 30, 2010, we had available homebuilding cash and cash
equivalents of $1.3 billion.
Marketable Securities — At September 30, 2010, we had marketable securities of $297.7 million. Our
marketable securities consist of U.S. Treasury securities, government agency securities, foreign government
securities, corporate debt securities, and certificates of deposit.
Secured Letter of Credit Agreements — Concurrent with the termination of our revolving credit facility in
May 2009, we entered into secured letter of credit agreements with the three banks that had issued letters of
credit under the facility. The effect of these agreements was to remove the outstanding letters of credit from
the facility, which required us to deposit cash, in an amount approximating the balance of letters of credit
outstanding, as collateral with the issuing banks. During fiscal 2010, we entered into secured letter of credit
agreements with two additional banks, which also require the deposit of cash as collateral. At September 30,
2010 and 2009, the amount of cash restricted for this purpose totaled $52.6 million and $53.3 million,
respectively, and is included in homebuilding restricted cash on our consolidated balance sheets.
Public Unsecured Debt — The indentures governing our senior notes impose restrictions on the creation
of secured debt and liens. At September 30, 2010, we were in compliance with all of the limitations and
restrictions that form a part of the public debt obligations.
Shelf Registration Statement — We have an effective universal shelf registration statement filed with the
SEC in September 2009, registering debt and equity securities which we may issue from time to time in
amounts to be determined.
51
Financial Services Capital Resources
Cash and Cash Equivalents — At September 30, 2010, the amount of financial services cash and cash
equivalents was $26.7 million.
Mortgage Repurchase Facility — Our mortgage subsidiary entered into a mortgage sale and repurchase
agreement (the “mortgage repurchase facility”) on March 28, 2008. The mortgage repurchase facility, which is
accounted for as a secured financing, provides financing and liquidity to DHI Mortgage by facilitating
purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties against the transfer
of funds by the counterparties, thereby becoming purchased loans. DHI Mortgage then has the right and
obligation to repurchase the purchased loans upon their sale to third-party purchasers in the secondary market
or within specified time frames from 45 to 120 days in accordance with the terms of the mortgage repurchase
facility. The capacity of the facility is $100 million, with a provision allowing an increase in the capacity to
$125 million during the last five business days of any fiscal quarter and the first seven business days of the
following fiscal quarter. The maturity date of the facility is March 4, 2011.
As of September 30, 2010, $236.9 million of mortgage loans held for sale were pledged under the
repurchase agreement. These mortgage loans had a collateral value of $222.7 million. DHI Mortgage has the
option to fund a portion of its repurchase obligations in advance. As a result of advance paydowns totaling
$136.2 million, DHI Mortgage had an obligation of $86.5 million outstanding under the mortgage repurchase
facility at September 30, 2010 at a 3.8% interest rate.
The mortgage repurchase facility is not guaranteed by either D.R. Horton, Inc. or any of the subsidiaries
that guarantee our homebuilding debt. The facility contains financial covenants as to the mortgage subsidiary’s
minimum required tangible net worth, its maximum allowable ratio of debt to tangible net worth and its
minimum required liquidity. These covenants are measured and reported monthly. At September 30, 2010, our
mortgage subsidiary was in compliance with all of the conditions and covenants of the mortgage repurchase
facility.
In the past, we have been able to renew or extend our mortgage credit facilities on satisfactory terms
prior to their maturities, and obtain temporary additional commitments through amendments to the credit
agreements during periods of higher than normal volumes of mortgages held for sale. The liquidity of our
financial services business depends upon its continued ability to renew and extend the mortgage repurchase
facility or to obtain other additional financing in sufficient capacities.
Operating Cash Flow Activities
During fiscal 2010, net cash provided by our operating activities was $709.4 million, compared to
$1.1 billion during fiscal 2009. A significant portion of the net cash provided by our operating activities
during these years was due to federal income tax refunds. In fiscal 2010, the profit we generated also
contributed to operating cash flows. In addition, during fiscal 2009 and particularly during fiscal 2008, a
significant portion of the net cash provided by our operating activities was due to the generation of cash flows
through the reduction of our inventories. The net cash provided by our operating activities during the past
three fiscal years has resulted in substantial liquidity. This liquidity gives us the flexibility to determine the
appropriate operating strategy for each of our communities and to take advantage of opportunities in the
market. While we have limited our purchases of undeveloped land and our development spending on land we
own, we are purchasing or contracting to purchase finished lots in many markets to potentially increase sales
and home closing volumes and return to sustainable profitability. We plan to continue to manage our
inventories by monitoring the number and aging of unsold homes and aggressively marketing our unsold,
completed homes in inventory. As we work toward these goals, we expect to generate less cash flow from
asset reductions than we have over the past three fiscal years. Depending upon future homebuilding market
conditions and our expectations for these conditions, we may use a portion of our cash balances to increase
our inventories.
52
Investing Cash Flow Activities
During fiscal 2010 and 2009, net cash used in our investing activities was $318.0 million and
$59.4 million, respectively. In fiscal 2010, we began to invest a portion of our cash on hand in marketable
securities and we used $328.0 million for this purpose. Proceeds from the sale of these marketable securities
during the year totaled $27.7 million. Additionally, in fiscal 2010 and 2009 we used $19.2 million and
$6.2 million, respectively, to invest in purchases of property and equipment, primarily model home furniture
and office equipment. In fiscal 2009, the increase in restricted cash was due to the initial cash collateralization
of our outstanding letters of credit under the terms of our secured letter of credit agreements. Subsequent
changes in restricted cash are primarily due to fluctuations in the balance of our outstanding letters of credit.
Financing Cash Flow Activities
During the last two years, the majority of our short-term financing needs have been funded with cash
generated from operations and borrowings available under our financial services credit facility. Long-term
financing needs of our homebuilding operations have historically been funded with the issuance of senior
unsecured debt securities through the public capital markets. During fiscal 2010, we repaid a total of
$1,016.3 million principal amount of various issues of senior and senior subordinated notes through maturities,
redemptions and repurchases for an aggregate purchase price of $1,018.2 million, plus accrued interest. During
fiscal 2009, we repaid a total of $833.2 million principal amount of various issues of senior notes through
maturities and repurchases for an aggregate purchase price of $821.0 million, plus accrued interest. Also,
during fiscal 2009, we issued $500 million principal amount of 2% convertible senior notes due 2014. Our
homebuilding senior and convertible senior notes are guaranteed by substantially all of our wholly-owned
subsidiaries other than our financial services subsidiaries and certain insignificant subsidiaries.
Consistent with dividends paid in fiscal 2009, our Board of Directors approved four quarterly cash
dividends of $0.0375 per common share during fiscal 2010. The last of these was paid on August 26, 2010 to
stockholders of record on August 16, 2010. On November 11, 2010, our Board of Directors approved a cash
dividend of $0.0375 per common share, payable on December 8, 2010, to stockholders of record on
November 24, 2010. The declaration of future cash dividends is at the discretion of our Board of Directors and
will depend upon, among other things, future earnings, cash flows, capital requirements, our financial
condition and general business conditions.
Changes in Capital Structure
In November 2009, our Board of Directors authorized the repurchase of up to $100 million of our
common stock and the repurchase of up to $500 million of our debt securities. Following significant
repurchase activity, the debt repurchase authorization was renewed in April 2010 and again in July 2010. The
current authorization is effective through July 31, 2011. At September 30, 2010, $483.8 million of the
authorization was remaining.
On January 15, 2010, we repaid the remaining $130.9 million principal amount of our 4.875% senior
notes which were due on that date. On February 24, 2010, we redeemed the remaining $95.0 million principal
amount of our 5.875% senior notes due 2013. On September 15, 2010, we repaid the remaining $51.9 million
principal amount of our 9.75% senior notes and $11.3 million principal amount of our 9.75% senior
subordinated notes due on that date. Additionally, during fiscal 2010, we repurchased a total of $727.2 million
principal amount of various issues of senior notes through unsolicited transactions. These repayments of public
unsecured debt were made from our cash balance.
In October 2010, through an unsolicited transaction, we repurchased $8.3 million principal amount of our
5.375% senior notes due 2012.
Recently, our primary non-operating use of available capital has been to repay debt. We continue to
evaluate our alternatives for future non-operating sources and uses of our available capital, including debt
repayments, dividend payments or common stock repurchases, while considering the overall level of our cash
balances within the constraints of our balance sheet leverage targets and our liquidity targets.
53
Contractual Cash Obligations, Commercial Commitments and Off-Balance Sheet Arrangements
Our primary contractual cash obligations for our homebuilding and financial services segments are
payments under our debt agreements and lease payments under operating leases. Purchase obligations of our
homebuilding segment represent specific performance requirements under lot option purchase agreements that
may require us to purchase land contingent upon the land seller meeting certain obligations. We expect to fund
our contractual obligations in the ordinary course of business through a combination of our existing cash
resources, cash flows generated from operations, renewed or amended mortgage repurchase facilities and, if
needed or believed advantageous, the issuance of new debt or equity securities through the public capital
markets as market conditions may permit.
Our future cash requirements for contractual obligations as of September 30, 2010 are presented below:
Payments Due by Period
Total
Less Than
1 Year
1 - 3 Years
(In millions)
3 - 5 Years
More Than
5 Years
Homebuilding:
Notes Payable — Principal (1). . . . . . . $2,197.4
424.7
Notes Payable — Interest (1) . . . . . . . .
38.7
Operating Leases . . . . . . . . . . . . . . . .
5.7
Purchase Obligations. . . . . . . . . . . . . .
$209.9
111.3
15.0
5.7
Totals . . . . . . . . . . . . . . . . . . . . . . . $2,666.5
$341.9
Financial Services:
Notes Payable — Principal (2). . . . . . . $
Notes Payable — Interest (2) . . . . . . . .
Operating Leases . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . $
86.5
3.2
2.2
91.9
$ 86.5
3.2
1.1
$ 90.8
$335.2
181.7
15.8
—
$532.7
$ —
—
0.9
$ 0.9
$ 995.0
112.8
7.9
—
$1,115.7
$
$
—
—
0.2
0.2
$657.3
18.9
—
—
$676.2
$ —
—
—
$ —
(1) Homebuilding notes payable represent principal and interest payments due on our senior, convertible senior and
secured notes.
(2) Financial services notes payable represent principal and interest payments due on our mortgage subsidiary’s repurchase
facility. The interest obligation associated with this variable rate facility is based on its effective rate of 3.8% and
principal balance outstanding at September 30, 2010.
At September 30, 2010, our homebuilding operations had outstanding letters of credit of $51.7 million,
all of which were cash collateralized, and surety bonds of $806.9 million, issued by third parties, to secure
performance under various contracts. We expect that our performance obligations secured by these letters of
credit and bonds will generally be completed in the ordinary course of business and in accordance with the
applicable contractual terms. When we complete our performance obligations, the related letters of credit and
bonds are generally released shortly thereafter, leaving us with no continuing obligations. We have no material
third-party guarantees.
Our mortgage subsidiary enters into various commitments related to the lending activities of our
mortgage operations. Further discussion of these commitments is provided in Item 7A “Quantitative and
Qualitative Disclosures About Market Risk” under Part II of this annual report on Form 10-K.
In the ordinary course of business, we enter into land and lot option purchase contracts to procure land or
lots for the construction of homes. Lot option contracts enable us to control significant lot positions with
limited capital investment and substantially reduce the risks associated with land ownership and development.
Within the land and lot option purchase contracts at September 30, 2010, there were a limited number of
contracts, representing $5.7 million of remaining purchase price, subject to specific performance clauses which
may require us to purchase the land or lots upon the land sellers meeting their obligations. Also, we
consolidated certain variable interest entities for which we are deemed to be the primary beneficiary, with
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assets of $7.6 million related to some of our outstanding land and lot option purchase contracts. Creditors, if
any, of these variable interest entities have no recourse against us. Further discussion of our land option
contracts is provided in the “Land and Lot Position and Homes in Inventory” section included herein.
Seasonality
We have typically experienced seasonal variations in our quarterly operating results and capital
requirements. Prior to the current downturn in the homebuilding industry, we generally had more homes under
construction, closed more homes and had greater revenues and operating income in the third and fourth
quarters of our fiscal year. This seasonal activity increased our working capital requirements for our
homebuilding operations during the third and fourth fiscal quarters and increased our funding requirements for
the mortgages we originated in our financial services segment at the end of these quarters. As a result of
seasonal activity, our quarterly results of operations and financial position at the end of a particular fiscal
quarter are not necessarily representative of the balance of our fiscal year.
In contrast to our typical seasonal results, the weakness in homebuilding market conditions during the
past four years has mitigated our historical seasonal variations. Also, in fiscal 2010 the expiration of the
federal homebuyer tax credit impacted the timing of our construction activities, home sales and closing
volumes. Although we may experience our typical historical seasonal pattern in the future, given the current
market conditions, we can make no assurances as to when or whether this pattern will recur.
Inflation
We and the homebuilding industry in general may be adversely affected during periods of high inflation,
primarily because of higher land, financing, labor and material construction costs. In addition, higher mortgage
interest rates can significantly affect the affordability of permanent mortgage financing to prospective
homebuyers. We attempt to pass through to our customers any increases in our costs through increased sales
prices. However, during periods of soft housing market conditions, we may not be able to offset our cost
increases with higher selling prices.
Forward-Looking Statements
Some of the statements contained in this report, as well as in other materials we have filed or will file
with the SEC, statements made by us in periodic press releases and oral statements we make to analysts,
stockholders and the press in the course of presentations about us, may be construed as “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements
are based on 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,” “predict,” “projection,” “seek,”
“strategy,” “target,” “will” or other words of similar meaning. Any or all of the forward-looking statements
included in this report and in any other of our reports or public statements may not approximate actual
experience, and the expectations derived from them may not be realized, due to risks, uncertainties and other
factors. As a result, actual results may differ materially from the expectations or results we discuss in the
forward-looking statements. These risks, uncertainties and other factors include, but are not limited to:
(cid:129) the continuing downturn in the homebuilding industry, including further deterioration in industry or
broader economic conditions;
(cid:129) the continuing constriction of the credit markets, which could limit our ability to access capital and
increase our costs of capital;
(cid:129) the reduction in availability of mortgage financing, increases in mortgage interest rates and the effects
of government programs;
(cid:129) the limited success of our strategies in responding to adverse conditions in the industry;
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(cid:129) the impact of an inflationary or deflationary environment;
(cid:129) changes in general economic, real estate and other business conditions;
(cid:129) the risks associated with our inventory ownership position in changing market conditions;
(cid:129) supply risks for land, materials and labor;
(cid:129) changes in the costs of owning a home;
(cid:129) the effects of governmental regulations and environmental matters on our homebuilding operations;
(cid:129) the effects of governmental regulation on our financial services operations;
(cid:129) the uncertainties inherent in home warranty and construction defect claims matters;
(cid:129) our substantial debt and our ability to comply with related debt covenants, restrictions and limitations;
(cid:129) competitive conditions within our industry;
(cid:129) our ability to effect any future growth strategies successfully;
(cid:129) our ability to realize our deferred income tax asset; and
(cid:129) the utilization of our tax losses could be substantially limited if we experienced an ownership change as
defined in the Internal Revenue Code.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. However, any further disclosures made on related
subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. Additional information
about issues that could lead to material changes in performance and risk factors that have the potential to
affect us is contained in Item 1A, “Risk Factors” under Part I of this annual report on Form 10-K.
Critical Accounting Policies
General — A comprehensive enumeration of the significant accounting policies of D.R. Horton, Inc. and
subsidiaries is presented in Note A to the accompanying financial statements as of September 30, 2010 and
2009, and for the years ended September 30, 2010, 2009 and 2008. Each of our accounting policies has been
chosen based upon current authoritative literature that collectively comprises U.S. Generally Accepted
Accounting Principles (GAAP). In instances where alternative methods of accounting are permissible under
GAAP, we have chosen the method that most appropriately reflects the nature of our business, the results of
our operations and our financial condition, and have consistently applied those methods over each of the
periods presented in the financial statements. The Audit Committee of our Board of Directors has reviewed
and approved the accounting policies selected.
Revenue Recognition — We generally recognize homebuilding revenue and related profit at the time of
the closing of a sale, when title to and possession of the property are transferred to the buyer. In situations
where the buyer’s financing is originated by DHI Mortgage, our wholly-owned mortgage subsidiary, and the
buyer has not made an adequate initial or continuing investment, the profit is deferred until the sale of the
related mortgage loan to a third-party purchaser has been completed. Any profit on land sales is deferred until
the full accrual method criteria are met. We include proceeds from home closings held for our benefit at title
companies in homebuilding cash. When we execute sales contracts with our homebuyers, or when we require
advance payment from homebuyers for custom changes, upgrades or options related to their homes, we record
the cash deposits received as liabilities until the homes are closed or the contracts are canceled. We either
retain or refund to the homebuyer deposits on canceled sales contracts, depending upon the applicable
provisions of the contract or other circumstances.
We recognize financial services revenues associated with our title operations as closing services are
rendered and title insurance policies are issued, both of which generally occur simultaneously as each home is
closed. We transfer substantially all underwriting risk associated with title insurance policies to third-party
insurers. In accordance with the FASB’s authoritative guidance related to the fair value option for financial
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assets, we typically elect the fair value option for our mortgage loan originations. Mortgage loans held for sale
are initially recorded at fair value based on either sale commitments or current market quotes and are adjusted
for subsequent changes in fair value until the loan is sold. The fair value option alleviates the complex
documentation required had these instruments been designated as a fair value hedge. Net origination costs and
fees associated with mortgage loans are recognized at the time of origination. The expected net future cash
flows related to the associated servicing of a loan are included in the measurement of all written loan
commitments that are accounted for at fair value through earnings at the time of commitment. We generally
do not retain or service the mortgages that we originate; rather, we seek to sell the mortgages and related
servicing rights to third-party purchasers. Interest income is earned from the date a mortgage loan is originated
until the loan is sold.
Some mortgage loans are sold with limited recourse provisions. Based on historical experience,
discussions with our mortgage purchasers, analysis of the mortgages we originated and current housing and
credit market conditions, we estimate and record a loss reserve for mortgage loans held in portfolio and
mortgage loans held for sale, as well as known and projected mortgage loan repurchase requests. A 20% or
40% increase in the amount of expected mortgage loan repurchases and expected losses on mortgage loan
repurchases would result in an increase of approximately $4.5 million or $9.7 million, respectively, in our
reserve for expected mortgage loan repurchases.
Marketable Securities — During fiscal 2010, we began to invest a portion of our cash on hand by
purchasing marketable securities with maturities in excess of three months. These securities are held in the
custody of a single financial institution. To be considered for investment, securities must meet certain
minimum requirements as to their credit ratings, time to maturity and other risk-related criteria as prescribed
by our investment policies. The primary objective of these investments is the preservation of capital, with the
secondary objectives of attaining higher yields than we earn on our cash and cash equivalents and maintaining
a high degree of liquidity.
We consider our investment portfolio to be available-for-sale. Accordingly, these investments are recorded
at fair value. At the end of a reporting period, unrealized gains and losses on these investments, net of tax, are
recorded in accumulated other comprehensive income (loss) on the consolidated balance sheet.
Inventories and Cost of Sales — Inventory includes the costs of direct land acquisition, land development
and home construction, capitalized interest, real estate taxes and direct overhead costs incurred during
development and home construction. Applicable direct overhead costs that we incur after development projects
or homes are substantially complete, such as utilities, maintenance, and cleaning, are charged to SG&A
expense as incurred. All indirect overhead costs, such as compensation of sales personnel, division and region
management, and the costs of 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. We use
the specific identification method for the purpose of accumulating home construction costs. Cost of sales for
homes closed includes the specific construction costs of each home and all applicable land acquisition, land
development and related costs (both incurred and estimated to be incurred) based upon the total number of
homes expected to be closed in each community. Any changes to the estimated total development costs
subsequent to the initial home closings in a community are allocated on a pro-rata basis to the homes in the
community benefiting from the relevant development activity, which generally relates to the remaining homes
in the community.
When a home is closed, we generally have not yet paid and recorded all incurred costs necessary to
complete the home. We record as a liability and as a charge to cost of sales the amount we determine will
ultimately be paid related to completed homes that have been closed. We compare our home construction
budgets to actual recorded costs to determine the additional costs remaining to be paid on each closed home.
We monitor the accuracy of the accrual by comparing actual costs incurred on closed homes in subsequent
months to the amount previously accrued. Although actual costs to be paid in the future on previously closed
homes could differ from our current accruals, differences in amounts historically have not been significant.
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Each quarter, we review our inventory for the purpose of determining whether recorded costs and any
estimated costs required to complete each home or community are recoverable. If the review indicates that an
impairment loss is required, an estimate of the loss is made and recorded to cost of sales in that quarter.
Land inventory and related communities under development are reviewed for potential write-downs when
impairment indicators are present. We generally review our inventory at the community level and the inventory
within each community may be categorized as land held for development, residential land and lots developed
and under development, and construction in progress and finished homes, based on the stage of production or
plans for future development. A particular community often includes inventory in more than one category. In
certain situations, inventory may be analyzed separately for impairment purposes based on its product type
(e.g. single family homes evaluated separately from condominium parcels). In reviewing each of our
communities, we determine if impairment indicators exist on inventory held and used by analyzing a variety of
factors including, but not limited to, the following:
(cid:129) gross margins on homes closed in recent months;
(cid:129) projected gross margins on homes sold but not closed;
(cid:129) projected gross margins based on community budgets;
(cid:129) trends in gross margins, average selling prices or cost of sales;
(cid:129) sales absorption rates; and
(cid:129) performance of other communities in nearby locations.
If indicators of impairment are present for a community, we perform an analysis to determine if the
undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts, and if
so, impairment charges are required to be recorded if the fair value of such assets is less than their carrying
amounts. These estimates of cash flows are significantly impacted by community specific factors including
estimates of the amounts and timing of future revenues and estimates of the amount of land development,
materials and labor costs which, in turn, may be impacted by the following local market conditions:
(cid:129) supply and availability of new and existing homes;
(cid:129) location and desirability of our communities;
(cid:129) variety of product types offered in the area;
(cid:129) pricing and use of incentives by us and our competitors;
(cid:129) alternative uses for our land or communities such as the sale of land, finished lots or home sites to third
parties;
(cid:129) amount of land and lots we own or control in a particular market or sub-market; and
(cid:129) local economic and demographic trends.
For those assets deemed to be impaired, the impairment to be recognized is measured as the amount by
which the carrying amount of the assets exceeds the fair value of the assets. Our determination of fair value is
primarily based on discounting the estimated cash flows at a rate commensurate with the inherent risks
associated with the assets and related estimated cash flow streams. When an impairment charge for a
community is determined, the charge is then allocated to each lot in the community in the same manner as
land and development costs are allocated to each lot. The inventory within each community is categorized as
construction in progress and finished homes, residential land and lots developed and under development, and
land held for development, based on the stage of production or plans for future development.
We typically do not purchase land for resale. However, when we own land or communities under
development that no longer fit into our development and construction plans and we determine that the best use
of the asset is the sale of the asset, the project is accounted for as land held for sale, assuming the land held
for sale criteria are met. We record land held for sale at the lesser of its carrying value or fair value less
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estimated costs to sell. In performing impairment evaluation for land held for sale, we consider several factors
including, but not limited to, prices for land in recent comparable sales transactions, market analysis studies,
which include the estimated price a willing buyer would pay for the land and recent legitimate offers received.
If the estimated fair value less costs to sell an asset is less than the current carrying value, the asset is written
down to its estimated fair value less costs to sell.
Impairment charges are also recorded on finished homes in substantially completed communities when
events or circumstances indicate that the carrying values are greater than the fair values less estimated costs to
sell these homes.
The key assumptions relating to the valuations are impacted by local market economic conditions and the
actions of competitors, and are inherently uncertain. Due to uncertainties in the estimation process, actual
results could differ from such estimates. Our quarterly assessments reflect management’s estimates and we
continue to monitor the fair value of held-for-sale assets through the disposition date.
Land and Lot Option Purchase Contracts — In the ordinary course of our homebuilding business, we
enter into land and lot option purchase contracts to procure land or lots for the construction of homes. Under
these contracts, we will fund a stated deposit in consideration for the right, but not the obligation, to purchase
land or lots at a future point in time with predetermined terms. Under the terms of the option purchase
contracts, many of our option deposits are not refundable at our discretion.
Option deposits and pre-acquisition costs we incur related to our land and lot option purchase contracts
are capitalized if all of the following conditions have been met: (1) the costs are directly identifiable with the
specific property; (2) the costs would be capitalized if the property were already acquired; and (3) acquisition
of the property is probable, meaning we are actively seeking and have the ability to acquire the property, and
there is no indication that the property is not available for sale. We also consider the following when
determining if the acquisition of the property is probable: (1) changes in market conditions subsequent to
contracting for the purchase of the land; (2) current contract terms, including per lot price and required
purchase dates; and (3) our current land position in the given market or sub-market. Option deposits and
capitalized pre-acquisition costs are expensed to cost of sales when we believe it is probable that we will no
longer acquire the land or lots under option and will not be able to recover these costs through other means.
We evaluate our land and lot option purchase contracts for the financial accounting and reporting of
interests in certain variable interest entities, which are defined as business entities that either have equity
investors with voting rights disproportionate to their ownership interests, or have equity investors that do not
provide sufficient financial resources for the entities to support their activities. Certain of our option purchase
contracts result in the creation of a variable interest in the entity holding the land parcel under option. We
evaluate those land and lot option purchase contracts with variable interest entities to determine whether we
are the primary beneficiary based upon analysis of the variability of the expected gains and losses of the
entity. The expected gains and losses are primarily determined by the amount of deposit required by the
contract, the time period or term of the contract, and by analyzing the volatility in home sales prices as well
as development and entitlement risk in each specific market. Based on this evaluation, if we are the primary
beneficiary of an entity with which we have entered into a land or lot option purchase contract, the variable
interest entity is consolidated. Since we own no equity interest in these unaffiliated variable interest entities,
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 noncontrolling interest for the assumed third-party
investment in the variable interest entity. Creditors, if any, of these variable interest entities have no recourse
against us.
Fair Value Measurements — We adopted the FASB’s authoritative guidance for fair value measurements
of financial and non-financial instruments on October 1, 2008 and 2009, respectively. The guidance defines
fair value, establishes a framework for measuring fair value and expands disclosures about fair value
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measurements. Fair value is defined as the exchange (exit) price that would be received for an asset or paid to
transfer a liability in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. This standard establishes a three-level
hierarchy for fair value measurements based upon the inputs to the valuation of an asset or liability.
Observable inputs are those which can be easily seen by market participants while unobservable inputs are
generally developed internally, utilizing management’s estimates and assumptions.
(cid:129) Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.
(cid:129) Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar instruments in markets that are not active, or by model-based
techniques in which all significant inputs are observable in the market.
(cid:129) Level 3 — Valuation is derived from model-based techniques in which at least one significant input is
unobservable and based on our own estimates about the assumptions that market participants would use
to value the asset or liability.
When available, we use quoted market prices in active markets to determine fair value. We consider the
principal market and nonperformance risk associated with our counterparties when determining the fair value
measurements. Fair value measurements are used for our marketable securities, mortgage loans held for sale,
interest rate lock commitments (IRLCs) and other derivative instruments on a recurring basis, and are used for
inventories and other mortgage loans on a nonrecurring basis, when events and circumstances indicate that the
carrying value may not be recoverable.
Goodwill — Goodwill represents the excess of purchase price over net assets acquired. We test goodwill
for potential impairment annually as of September 30, or more frequently if an event occurs or circumstances
change that indicate the remaining balance of goodwill may not be recoverable. In analyzing the potential
impairment of goodwill, a two-step process is utilized that begins with the estimation of the fair value of the
operating segments. The fair value is estimated primarily utilizing the present values of expected future cash
flows. If the results of the first step indicate that impairment potentially exists, the second step is performed to
measure the amount of the impairment, if any. Impairment is determined to exist when the estimated fair value
of goodwill is less than its carrying value. The goodwill assessment procedures require us to make
comprehensive estimates of future revenues and costs. Due to the uncertainties associated with such estimates,
actual results could differ from our estimates.
Warranty Claims — We typically provide our homebuyers with a ten-year limited warranty for major
defects in structural elements such as framing components and foundation systems, a two-year limited
warranty on major mechanical systems, and a one-year limited warranty on other construction components.
Since we subcontract our homebuilding work to subcontractors who typically provide us with an indemnity
and a certificate of insurance prior to receiving payments for their work, claims relating to workmanship and
materials are generally the primary responsibility of the subcontractors. Warranty liabilities have been
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.
Our warranty liability is based upon historical warranty cost experience in each market in which we operate,
and is adjusted as appropriate to reflect qualitative risks associated with the types of homes we build and the
geographic areas in which we build them. Actual future warranty costs could differ from our currently
estimated amounts. A 10% change in the historical warranty rates used to estimate our warranty accrual would
not result in a material change in our accrual.
Insurance and Legal Claims — We have, and require the majority of the subcontractors we use to have,
general liability insurance which includes construction defect coverage. Our general liability insurance policies
protect us against a portion of our risk of loss from construction defect and other claims and lawsuits, subject
to self-insured retentions and other coverage limits. For policy years ended June 30, 2004 through 2010, we
are self-insured for up to $22.5 million of the aggregate claims incurred, at which point our excess loss
insurance begins, depending on the policy year. Once we have satisfied the annual aggregate limits, we are
self-insured for the first $250,000 to $1.0 million for each claim occurrence, depending on the policy year. For
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policy years 2010 and 2011, we are self-insured for up to $20.0 million and $15.0 million, respectively, of the
aggregate claims incurred and for up to $0.5 million of each claim occurrence thereafter.
In some states where we believe it is too difficult or expensive for our subcontractors to obtain general
liability insurance, we have waived our traditional subcontractor general liability insurance requirements to
obtain lower costs from subcontractors. In these states, we purchase insurance policies from either third-party
carriers or our wholly-owned captive insurance subsidiary, and name certain subcontractors as additional
insureds. The policies issued by our captive insurance subsidiary represent self insurance of these risks by us
and are considered in the self-insured amounts above. For policy years after April 2007, the captive insurance
subsidiary has acquired $15.0 million of reinsurance coverage with a third-party insurer.
We are self-insured for the deductible amounts under our workers’ compensation insurance policies. The
deductibles vary by policy year, but in no years exceed $0.5 million per occurrence. The deductible for the
2010 and 2011 policy years is $0.5 million per occurrence.
We record expenses and liabilities related to the costs for exposures related to construction defects and
claims and lawsuits incurred in the ordinary course of business, including employment matters, personal injury
claims, land development issues and contract disputes. Also, we record expenses and liabilities for any
estimated costs of potential construction defect claims and lawsuits (including expected legal costs), based on
an analysis of our historical claims, which includes an estimate of construction defect claims incurred but not
yet reported. Related to the exposures for actual construction defect claims and estimates of construction
defect claims incurred but not yet reported and other legal claims and lawsuits incurred in the ordinary course
of business, we estimate and record insurance receivables for these matters under applicable insurance policies
when recovery is probable. Additionally, we may have the ability to recover a portion of our legal expenses
from our subcontractors when we have been named as an additional insured on their insurance policies. The
expenses, liabilities and receivables related to these claims are subject to a high degree of variability due to
uncertainties such as trends in construction defect claims relative to our markets, the types of products we
build, claim settlement patterns, insurance industry practices and legal interpretations, among others. A 10%
increase in the claim rate and the average cost per claim used to estimate the self-insured accruals would
result in an increase of approximately $158.0 million in our accrual and a $91.5 million increase in our
receivable resulting in additional expense of $66.5 million, while a 10% decrease in the claim rate and the
average cost per claim would result in a decrease of approximately $109.4 million in our accrual and a
$75.5 million decrease in our receivable resulting in a reduction in our expense of $33.9 million.
Income Taxes — We calculate a provision for, or benefit from, income taxes using the asset and liability
method, under which deferred tax assets and liabilities are recorded based on the difference between the
financial statement and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which
the differences are expected to reverse. In assessing the realizability of deferred tax assets, we consider
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. In determining the future tax
consequences of events that have been recognized in our financial statements or tax returns, judgment is
required. The accounting for deferred taxes is based upon an estimate of future results. Differences between
the anticipated and actual outcomes of these future tax consequences could have a material impact on our
consolidated results of operations or financial position. Changes in existing tax laws also affect actual tax
results and the valuation of deferred tax assets over time.
Interest and penalties related to unrecognized tax benefits are recognized in the financial statements as a
component of the income tax provision. Significant judgment is required to evaluate uncertain tax positions.
We evaluate our uncertain tax positions on a quarterly basis. Our evaluations are based upon a number of
factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities
during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement
of uncertain tax positions could result in material increases or decreases in our income tax expense in the
period in which we make the change.
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Stock-based Compensation — From time to time, the compensation committee of our board of directors
authorizes the issuance of options to purchase our common stock to employees and directors. The committee
approves grants only out of amounts remaining available for grant from amounts formally authorized by our
common stockholders. Options are granted at exercise prices which equal the market value of our common
stock at the date of the grant. Generally, the options vest over periods of 5 to 9.75 years and expire 10 years
after the dates on which they were granted.
We measure and recognize compensation expense at an amount equal to the fair value of share-based
payments granted under compensation arrangements for all awards granted or modified after October 1, 2005,
using the modified prospective method. Compensation expense for any unvested stock option awards
outstanding as of October 1, 2005 is recognized on a straight-line basis over the remaining vesting period. We
calculate the fair value of stock options using the Black-Scholes option pricing model. Determining the fair
value of share-based awards at the grant date requires judgment in developing assumptions, which involve a
number of variables. These variables include, but are not limited to, the expected stock price volatility over the
term of the awards, the expected dividend yield and expected stock option exercise behavior. In addition, we
also use judgment in estimating the number of share-based awards that are expected to be forfeited.
Recent Accounting Pronouncements
In June 2009, the FASB revised the authoritative guidance for accounting for transfers of financial assets,
which requires enhanced disclosures regarding transfers of financial assets, including securitization
transactions, and continuing exposure to the related risks. The guidance eliminates the concept of a qualifying
special-purpose entity and changes the requirements for derecognizing financial assets. The guidance is
effective for us beginning October 1, 2010. The adoption of this guidance will not have a material impact on
our consolidated financial position, results of operations or cash flows.
In June 2009, the FASB revised the authoritative guidance for consolidating variable interest entities,
which changes how a company determines when an entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. The determination of whether a company is required
to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s
ability to direct the activities of the entity that most significantly impact the entity’s economic performance.
The guidance is effective for us beginning October 1, 2010. The adoption of this guidance will not have a
material impact on our consolidated financial position, results of operations or cash flows.
In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value
Measurements,” which requires additional disclosures about transfers between Levels 1 and 2 of the fair value
hierarchy and disclosures about purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements. This guidance was effective for us in the third quarter of fiscal 2010, except
for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010.
The adoption of this guidance, which is related to disclosure only, will not impact our consolidated financial
position, results of operations or cash flows.
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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. Except in very limited circumstances, we do not have an obligation to prepay
fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair value would not have a
significant impact on our cash flows related to our fixed-rate debt until such time as we are required to
refinance, repurchase or repay such debt.
We are exposed to interest rate risk associated with our mortgage loan origination services. We manage
interest rate risk through the use of forward sales of mortgage-backed securities (MBS), Eurodollar Futures
Contracts (EDFC) and put options on MBS and EDFC. Use of the term “hedging instruments” in the
following discussion refers to these securities collectively, or in any combination. We do not enter into or hold
derivatives for trading or speculative purposes.
Interest rate lock commitments (IRLCs) are extended to borrowers who have applied for loan funding and
who meet defined credit and underwriting criteria. Typically, the IRLCs have a duration of less than six
months. Some IRLCs are committed immediately to a specific purchaser through the use of best-efforts whole
loan delivery commitments, while other IRLCs are funded prior to being committed to third-party purchasers.
The hedging instruments related to IRLCs are classified and accounted for as derivative instruments in an
economic hedge, with gains and losses recognized in current earnings. Hedging instruments related to funded,
uncommitted loans are accounted for at fair value, with changes recognized in current earnings, along with
changes in the fair value of the funded, uncommitted loans. The fair value change related to the hedging
instruments generally offsets the fair value change in the uncommitted loans and the fair value change, which
for the years ended September 30, 2010 and 2009 was not significant, is recognized in current earnings. At
September 30, 2010, hedging instruments used to mitigate interest rate risk related to uncommitted mortgage
loans held for sale and uncommitted IRLCs totaled $272.3 million. Uncommitted IRLCs, the duration of
which are generally less than six months, totaled approximately $166.8 million, and uncommitted mortgage
loans held for sale totaled approximately $127.1 million at September 30, 2010.
At September 30, 2010, we had $3.5 million notional amount of forward sales of MBS which were
acquired as part of a program to potentially offer homebuyers a below market interest rate on their home
financing. These hedging instruments and the related commitments are accounted for at fair value with gains
and losses recognized in current earnings. These gains and losses for the years ended September 30, 2010,
2009 and 2008 were not material.
The following table sets forth principal cash flows by scheduled maturity, weighted average interest rates
and estimated fair value of our debt obligations as of September 30, 2010. The interest rate for our variable
rate debt represents the interest rate on our mortgage repurchase facility. Because the mortgage repurchase
facility is effectively secured by certain mortgage loans held for sale which are typically sold within 60 days,
its outstanding balance is included as a variable rate maturity in the most current period presented.
2011
Debt:
Fixed rate . . . . . . . . . . . . . .
Average interest rate . . . . . . .
Variable rate. . . . . . . . . . . . .
Average interest rate . . . . . . .
$209.9
7.4%
$ 86.5
3.8%
Fiscal Year Ending September 30,
2013
2012
2014
2015
Thereafter
Total
(In millions)
$160.9
5.4%
$174.3
7.0%
$794.5
8.2%
$200.5
5.4%
$657.3
6.3%
$ — $ — $ — $ — $ — $
$2,197.4
6.9%
86.5
3.8%
—
—
63
—
—
—
Fair
Value at
September 30,
2010
$2,279.1
$
86.5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of D.R. Horton, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
operations, total equity, and cash flows present fairly, in all material respects, the financial position of
D.R. Horton, Inc. and its subsidiaries at September 30, 2010 and 2009 and the results of their operations and
their cash flows for each of the three years in the period ended September 30, 2010 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of September 30,
2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible
for these financial statements, for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in Management’s Report
on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on these financial statements and on the Company’s internal control over financial reporting based on
our integrated audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material respects. Our audits
of the financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.
A 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 (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the 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 effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Fort Worth, Texas
November 17, 2010
64
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
2010
2009
(In millions)
ASSETS
Homebuilding:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,282.6 $1,922.8
—
Marketable securities, available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55.2
Inventories:
297.7
53.7
Construction in progress and finished homes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential land and lots — developed and under development . . . . . . . . . . . . . . . . . . . . . . . .
Land held for development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land inventory not owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net of valuation allowance of $902.6 million
and $1,073.9 million at September 30, 2010 and 2009, respectively . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,286.0
1,406.1
749.3
7.6
3,449.0
16.0
1,446.6
1,643.3
562.5
14.3
3,666.7
293.1
—
60.5
434.8
15.9
5,610.2
—
57.8
433.0
15.9
6,444.5
Financial Services:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.5
220.8
57.0
312.3
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,938.6 $6,756.8
26.7
253.8
47.9
328.4
Homebuilding:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 135.1 $ 216.8
932.0
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,076.6
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,225.4
957.2
2,085.3
3,177.6
LIABILITIES
Financial Services:
Accounts payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage repurchase facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note M)
EQUITY
51.6
86.5
138.1
3,315.7
62.1
68.7
130.8
4,356.2
—
—
Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued . . . . . . . . . . . . . .
Common stock, $.01 par value, 1,000,000,000 shares authorized, 322,478,467 shares issued
and 318,823,234 shares outstanding at September 30, 2010 and 321,136,119 shares issued
and 317,480,886 shares outstanding at September 30, 2009. . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, 3,655,233 shares at September 30, 2010 and 2009, at cost . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2
1,871.1
613.2
(95.7)
—
2,391.8
8.8
2,400.6
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,938.6 $6,756.8
3.2
1,894.8
810.6
(95.7)
0.3
2,613.2
9.7
2,622.9
See accompanying notes to consolidated financial statements.
65
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30,
2009
2008
2010
(In millions, except per share data)
Homebuilding:
Revenues:
Home sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,302.3
7.4
Land/lot sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,563.6
40.3
$ 6,164.3
354.3
4,309.7
3,603.9
6,518.6
Cost of sales:
Home sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land/lot sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory impairments and land option cost write-offs . . . . . . . . . . . .
3,558.3
4.6
64.7
3,096.1
34.9
407.7
Gross profit (loss):
Home sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land/lot sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory impairments and land option cost write-offs . . . . . . . . . . . .
Selling, general and administrative expense . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on early retirement of debt, net . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,627.6
3,538.7
744.0
2.8
(64.7)
682.1
522.0
—
86.3
4.9
(9.2)
467.5
5.4
(407.7)
65.2
523.0
—
100.2
(3.9)
(12.8)
5,473.1
324.2
2,484.5
8,281.8
691.2
30.1
(2,484.5)
(1,763.2)
791.8
79.4
39.0
2.6
(9.1)
Financial Services:
Revenues, net of recourse and reinsurance expense . . . . . . . . . . . . . . . . . .
General and administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78.1
(541.3)
(2,666.9)
90.5
77.2
1.9
(10.0)
21.4
53.7
78.1
1.5
(10.4)
(15.5)
127.5
100.1
3.7
(11.4)
35.1
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Benefit from) provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
99.5
(145.6)
(556.8)
(7.0)
(2,631.8)
1.8
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 245.1
$ (549.8)
$(2,633.6)
Basic net income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . $
0.77
$ (1.73)
Net income (loss) per common share assuming dilution . . . . . . . . . . . . . . . $
0.77
$ (1.73)
Cash dividends declared per common share. . . . . . . . . . . . . . . . . . . . . . . . $
0.15
$
0.15
$
$
$
(8.34)
(8.34)
0.45
See accompanying notes to consolidated financial statements.
66
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF TOTAL EQUITY
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income
Non-Controlling
Interests
Total
Equity
(In millions, except common stock share data)
Balances at September 30, 2007
(314,914,440 shares) . . . . . . . . . . . . $
3.2 $1,693.3 $ 3,986.1 $ (95.7)
$
Net loss . . . . . . . . . . . . . . . . . . . . .
Issuances under employee benefit
plans (168,194 shares) . . . . . . . . .
Exercise of stock options
(1,577,641 shares) . . . . . . . . . . . .
Stock option compensation expense . .
Cash dividends declared . . . . . . . . . .
Noncontrolling interests . . . . . . . . . .
Balances at September 30, 2008
(316,660,275 shares) . . . . . . . . . . . . $
Net loss . . . . . . . . . . . . . . . . . . . . .
Issuances under employee benefit
plans (155,254 shares) . . . . . . . . .
Exercise of stock options
(665,357 shares) . . . . . . . . . . . . . .
Stock option compensation expense . .
Equity component of convertible
senior notes . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . .
Noncontrolling interests . . . . . . . . . .
Balances at September 30, 2009
—
—
—
—
—
—
— (2,633.6)
2.0
7.5
13.5
—
—
—
—
—
(142.0)
—
—
—
—
—
—
—
3.2 $1,716.3 $ 1,210.5 $ (95.7)
—
—
(549.8)
—
$
—
—
—
—
—
—
1.2
3.2
13.7
136.7
—
—
—
—
—
—
(47.5)
—
—
—
—
—
—
—
(317,480,886 shares) . . . . . . . . . . . . $
3.2 $1,871.1 $
613.2 $ (95.7)
$
Net income . . . . . . . . . . . . . . . . . . .
Issuances under employee benefit
plans (107,952 shares) . . . . . . . . .
Exercise of stock options
(1,234,396 shares) . . . . . . . . . . . .
Stock option compensation expense . .
Cash dividends declared . . . . . . . . . .
Other comprehensive income . . . . . .
Noncontrolling interests . . . . . . . . . .
Balances at September 30, 2010
—
—
—
—
—
—
—
—
1.1
9.3
13.3
—
—
—
245.1
—
—
—
(47.7)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.3
—
$
68.4
$ 5,655.3
—
—
—
—
—
(37.9)
(2,633.6)
2.0
7.5
13.5
(142.0)
(37.9)
$
30.5
—
$ 2,864.8
(549.8)
$
—
—
—
—
—
(21.7)
8.8
—
—
—
—
—
—
0.9
1.2
3.2
13.7
136.7
(47.5)
(21.7)
$ 2,400.6
245.1
1.1
9.3
13.3
(47.7)
0.3
0.9
(318,823,234 shares) . . . . . . . . . . . . $
3.2 $1,894.8 $
810.6 $ (95.7)
$
0.3
$
9.7
$ 2,622.9
See accompanying notes to consolidated financial statements.
67
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2010
Year Ended September 30,
2009
(In millions)
2008
OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of discounts and fees . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock option compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit from stock option exercises. . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on early retirement of debt, net . . . . . . . . . . . . . . . . . . . . .
Inventory impairments and land option cost write-offs . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Decrease in construction in progress and finished homes . . . . . . . . . . .
(Increase) decrease in residential land and lots — developed, under
development, and held for development . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in income taxes receivable . . . . . . . . . . . . . . . . . . .
(Increase) decrease in mortgage loans held for sale. . . . . . . . . . . . . . . .
Decrease in accounts payable, accrued expenses and other liabilities . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTING ACTIVITIES
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of marketable securities . . . . . . . . . . . . . . . . . .
Decrease (increase) in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCING ACTIVITIES
Proceeds from notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock associated with certain employee benefit plans . . .
Income tax benefit from stock option exercises. . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . .
$
245.1
$ (549.8)
$(2,633.6)
17.2
30.8
13.3
(2.8)
—
4.9
64.7
—
25.7
10.9
13.7
—
213.5
(3.9)
407.7
—
53.2
7.2
13.5
—
650.3
2.6
2,484.5
79.4
156.0
180.0
1,304.6
(11.2)
3.7
277.1
(33.0)
(56.4)
709.4
(19.2)
(328.0)
27.7
1.5
(318.0)
17.8
(1,019.9)
7.6
2.8
(47.7)
(1,039.4)
(648.0)
1,957.3
397.0
34.1
383.1
131.3
(102.1)
835.1
(248.8)
(676.2)
171.4
(166.7)
1,141.2
1,876.5
(6.2)
—
—
(53.2)
(59.4)
487.5
(956.2)
4.4
—
(47.5)
(511.8)
570.0
1,387.3
(6.6)
—
—
3.4
(3.2)
321.5
(944.6)
9.5
—
(142.0)
(755.6)
1,117.7
269.6
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . .
$ 1,309.3
$1,957.3
$ 1,387.3
Supplemental cash flow information:
Interest paid, net of amounts capitalized . . . . . . . . . . . . . . . . . . . .
$
101.8
$ 103.3
Income taxes (refunded) paid, net . . . . . . . . . . . . . . . . . . . . . . . . .
$ (485.4)
$ (603.9)
$
$
49.8
23.0
Supplemental disclosures of non-cash activities:
Notes payable issued for inventory . . . . . . . . . . . . . . . . . . . . . . . .
$
2.8
$ — $
—
See accompanying notes to consolidated financial statements.
68
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A — 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 all of 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 of which the Company is determined to be the
primary beneficiary. All significant intercompany accounts, transactions and balances have been eliminated in
consolidation.
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.
Reclassifications/Revisions
In accordance with the authoritative guidance issued by the Financial Accounting Standards Board
(FASB) for noncontrolling interests, which was adopted at the beginning of fiscal 2010, the balance sheet at
September 30, 2009 has been revised to present minority interests (now referred to as noncontrolling interests)
as a component of equity rather than as a liability. Correspondingly, the statements of total equity for the years
ended September 30, 2009 and 2008 have been revised to include noncontrolling interests as a component of
equity.
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 or continuing investment, the profit is deferred until the sale of the related
mortgage loan to a third-party purchaser has been completed. At September 30, 2010 and 2009, the Company
had deferred profit on such sales in the amounts of $2.0 million and $2.7 million, respectively. Any profit on
land sales is deferred until the full accrual method criteria are met.
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 Company transfers substantially all underwriting risk associated with title insurance
policies to third-party insurers. In accordance with the FASB’s authoritative guidance related to the fair value
option for financial assets, the Company typically elects the fair value option for its mortgage loan
originations. Mortgage loans held for sale are initially recorded at fair value based on either sale commitments
or current market quotes and are adjusted for subsequent changes in fair value until the loan is sold. The fair
value option alleviates the complex documentation required had these instruments been designated as a fair
value hedge. Net origination costs and fees associated with mortgage loans are recognized at the time of
origination. The expected net future cash flows related to the associated servicing of a loan are included in the
measurement of all written loan commitments that are accounted for at fair value through earnings at the time
of commitment. The Company generally does not retain or service the mortgages that it originates; rather, it
seeks to sell the mortgages and related servicing rights to third-party purchasers. Interest income is earned
from the date a mortgage loan is originated until the loan is sold.
69
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Proceeds from home closings held for the Company’s benefit at title
companies are included in homebuilding cash on the consolidated balance sheet.
Marketable Securities
During fiscal 2010, the Company began to invest a portion of its cash on hand by purchasing marketable
securities with maturities in excess of three months. These securities are held in the custody of a single
financial institution. To be considered for investment, securities must meet certain minimum requirements as
to their credit ratings, time to maturity and other risk-related criteria as prescribed by the Company’s
investment policies. The primary objective of these investments is the preservation of capital, with the
secondary objectives of attaining higher yields than the Company earns on its cash and cash equivalents and
maintaining a high degree of liquidity.
The Company considers its investment portfolio to be available-for-sale. Accordingly, these investments
are recorded at fair value. At the end of a reporting period, unrealized gains and losses on these investments,
net of tax, are recorded in accumulated other comprehensive income (loss) on the consolidated balance sheet.
Gains and losses realized upon the sale of marketable securities are determined by specific identification and
are included in homebuilding other income. See Notes B and C.
Restricted Cash
The Company has cash that is restricted as to its use. Restricted cash related to homebuilding operations
includes cash used as collateral for outstanding letters of credit and customer deposits that are temporarily
restricted in accordance with regulatory requirements. At September 30, 2010 and 2009, the balances of
restricted cash were $53.7 million and $55.2 million, respectively, and are presented as homebuilding
restricted cash on the consolidated balance sheets.
Inventories and Cost of Sales
Inventory includes the costs of direct land acquisition, land development and home construction,
capitalized interest, real estate taxes and direct overhead costs incurred during development and home
construction. Applicable direct overhead costs incurred 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 sales personnel, division
and region management, and the costs of 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. 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 and all applicable land acquisition,
land development and related costs (both incurred and estimated to be incurred) based upon the total number
of homes expected to be closed in each community. Any changes to the estimated total development costs
subsequent to the initial home closings in a community are allocated on a pro-rata basis to the homes in the
community benefiting from the relevant development activity, which generally relates to the remaining homes
in the community.
When a home is closed, the Company generally has not yet paid and recorded all incurred costs
necessary to complete the home. A liability and a charge to cost of sales is recorded for the amount that is
determined will ultimately be paid related to completed homes that have been closed. The home construction
70
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
budgets are compared to actual recorded costs to determine the additional costs remaining to be paid on each
closed home. The accuracy of the accrual is monitored by comparing actual costs incurred on closed homes in
subsequent months to the amount previously accrued.
Each quarter, inventory is reviewed for the purpose of determining whether recorded costs and any
estimated costs required to complete each home or community are recoverable. If the review indicates that an
impairment loss is required, an estimate of the loss is made and recorded to cost of sales in that quarter.
Land inventory and related communities under development are reviewed for potential write-downs when
impairment indicators are present. The Company generally reviews its inventory at the community level and
the inventory within each community may be categorized as land held for development, residential land and
lots developed and under development, and construction in progress and finished homes, based on the stage of
production or plans for future development. A particular community often includes inventory in more than one
category. In certain situations, inventory may be analyzed separately for impairment purposes based on its
product type (e.g. single family homes evaluated separately from condominium parcels). In reviewing each of
its communities, the Company determines if impairment indicators exist on inventory held and used by
analyzing a variety of factors including, but not limited to, the following:
(cid:129) gross margins on homes closed in recent months;
(cid:129) projected gross margins on homes sold but not closed;
(cid:129) projected gross margins based on community budgets;
(cid:129) trends in gross margins, average selling prices or cost of sales;
(cid:129) sales absorption rates; and
(cid:129) performance of other communities in nearby locations.
If indicators of impairment are present for a community, the Company performs an analysis to determine
if the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts,
and if so, impairment charges are required to be recorded if the fair value of such assets is less than their
carrying amounts. These estimates of cash flows are significantly impacted by community specific factors
including estimates of the amounts and timing of future revenues and estimates of the amount of land
development, materials and labor costs which, in turn, may be impacted by the following local market
conditions:
(cid:129) supply and availability of new and existing homes;
(cid:129) location and desirability of the Company’s communities;
(cid:129) variety of product types offered in the area;
(cid:129) pricing and use of incentives by the Company and its competitors;
(cid:129) alternative uses for the Company’s land or communities such as the sale of land, finished lots or home
sites to third parties;
(cid:129) amount of land and lots the Company owns or controls in a particular market or sub-market; and
(cid:129) local economic and demographic trends.
For those assets deemed to be impaired, the impairment to be recognized is measured as the amount by
which the carrying amount of the assets exceeds the fair value of the assets. The Company’s determination of
fair value is primarily based on discounting the estimated cash flows at a rate commensurate with the inherent
risks associated with the assets and related estimated cash flow streams. When an impairment charge for a
community is determined, the charge is then allocated to each lot in the community in the same manner as
71
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
land and development costs are allocated to each lot. The inventory within each community is categorized as
construction in progress and finished homes, residential land and lots developed and under development, and
land held for development, based on the stage of production or plans for future development.
The Company typically does not purchase land for resale. However, when the Company owns land or
communities under development that no longer fit into its development and construction plans and it is
determined that the best use of the asset is the sale of the asset, the project is accounted for as land held for
sale, assuming the land held for sale criteria are met. The Company records land held for sale at the lesser of
its carrying value or fair value less estimated costs to sell. In performing impairment evaluation for land held
for sale, several factors are considered including, but not limited to, prices for land in recent comparable sales
transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land
and recent legitimate offers received. If the estimated fair value less costs to sell an asset is less than the
current carrying value, the asset is written down to its estimated fair value less costs to sell.
Impairment charges are also recorded on finished homes in substantially completed communities when
events or circumstances indicate that the carrying values are greater than the fair values less estimated costs to
sell these homes.
The key assumptions relating to the valuations are impacted by local market economic conditions and the
actions of competitors, and are inherently uncertain. Due to uncertainties in the estimation process, actual
results could differ from such estimates. The Company’s quarterly assessments reflect management’s estimates
and it continues to monitor the fair value of held-for-sale assets through the disposition date. See Note D.
Homebuilding Interest
The Company capitalizes homebuilding interest costs to inventory during active development and
construction. Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer.
Additionally, the Company writes off a portion of the capitalized interest related to communities for which
inventory impairments are recorded. The Company’s inventory under active development and construction was
lower than its debt level during fiscal 2010, 2009 and 2008. Therefore, a portion of the interest incurred is
reflected as interest expense during those years.
The following table summarizes the Company’s homebuilding interest costs incurred, capitalized,
expensed as interest expense, charged to cost of sales and written off during the years ended September 30,
2010, 2009 and 2008:
Capitalized interest, beginning of year . . . . . . . . . . . . . . . . . . . . . . .
Interest incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expensed:
2010
2008
Year Ended September 30,
2009
(In millions)
$ 160.6
205.0
$ 338.7
236.7
$ 128.8
173.2
Directly to interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized to cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Written off with inventory impairments . . . . . . . . . . . . . . . . . . . .
(86.3)
(122.1)
(2.1)
(100.2)
(122.8)
(13.8)
(39.0)
(227.9)
(147.9)
Capitalized interest, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 91.5
$ 128.8
$ 160.6
Land and Lot Option Purchase Contracts
In the ordinary course of its homebuilding business, the Company enters into land and lot option purchase
contracts to procure land or lots for the construction of homes. Under these 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
72
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Option deposits and pre-acquisition costs incurred related to the Company’s land and lot option purchase
contracts are capitalized if all of the following conditions have been met: (1) the costs are directly identifiable
with the specific property; (2) the costs would be capitalized if the property were already acquired; and
(3) acquisition of the property is probable, meaning the Company is actively seeking and has the ability to
acquire the property, and there is no indication that the property is not available for sale. The Company also
considers the following when determining if the acquisition of the property is probable: (1) changes in market
conditions subsequent to contracting for the purchase of the land; (2) current contract terms, including per lot
price and required purchase dates; and (3) the Company’s current land position in the given market or
sub-market. Option deposits and capitalized pre-acquisition costs are expensed to cost of sales when the
Company believes it is probable that it will no longer acquire the land or lots under option and will not be
able to recover these costs through other means.
The Company evaluates its land and lot option purchase contracts for the financial accounting and
reporting of interests in certain variable interest entities, which are defined as business entities that either have
equity investors with voting rights disproportionate to their ownership interests, or have equity investors that
do not provide sufficient financial resources for the entities to support their activities. Certain option purchase
contracts result in the creation of a variable interest in the entity holding the land parcel under option. 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. The expected gains and losses are primarily determined by the amount of deposit
required by the contract, the time period or term of the contract, and by analyzing the volatility in home sales
prices as well as development and entitlement risk in each specific market. Based on this evaluation, if 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
these unaffiliated variable interest entities, it 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 these 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 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 noncontrolling interest for the assumed third-party investment in the variable interest
entity. See Note E.
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 $150.8 million
and $157.4 million as of September 30, 2010 and 2009, respectively. Depreciation expense was $17.2 million,
$25.7 million and $53.2 million in fiscal 2010, 2009 and 2008, respectively.
Fair Value Measurements
The Company adopted the FASB’s authoritative guidance for fair value measurements of financial and
non-financial instruments on October 1, 2008 and 2009, respectively. The guidance defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair
73
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
value is defined as the exchange (exit) price that would be received for an asset or paid to transfer a liability
in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. This standard establishes a three-level hierarchy for fair value
measurements based upon the inputs to the valuation of an asset or liability. Observable inputs are those which
can be easily seen by market participants while unobservable inputs are generally developed internally,
utilizing management’s estimates and assumptions.
(cid:129) Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.
(cid:129) Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar instruments in markets that are not active, or by model-based
techniques in which all significant inputs are observable in the market.
(cid:129) Level 3 — Valuation is derived from model-based techniques in which at least one significant input is
unobservable and based on the Company’s own estimates about the assumptions that market
participants would use to value the asset or liability.
When available, the Company uses quoted market prices in active markets to determine fair value. The
Company considers the principal market and nonperformance risk associated with the Company’s
counterparties when determining the fair value measurements, if applicable. Fair value measurements are used
for the Company’s marketable securities, mortgage loans held for sale, interest rate lock commitments (IRLCs)
and other derivative instruments on a recurring basis, and are used for inventories, other mortgage loans and
real estate owned on a nonrecurring basis, when events and circumstances indicate that the carrying value may
not be recoverable. See Note H.
Goodwill
Goodwill represents the excess of purchase price over net assets acquired. The Company tests goodwill
for potential impairment annually as of September 30, or more frequently if an event occurs or circumstances
change that indicate the remaining balance of goodwill may not be recoverable. In analyzing the potential
impairment of goodwill, a two-step process is utilized that begins with the estimation of the fair value of the
operating segments. If the results of the first step indicate that impairment potentially exists, the second step is
performed to measure the amount of the impairment, if any. Impairment is determined to exist when the
estimated fair value of goodwill is less than its carrying value.
In performing its goodwill impairment analysis, the Company estimates the fair value of its operating
segments utilizing the present values of expected future cash flows. As a result of the analyses performed as
of September 30, 2010 and 2009, it was determined that the fair value of the operating segments was greater
than their carrying value and therefore, no impairment of goodwill existed. As a result of the analysis
performed as of September 30, 2008, the Company recorded a goodwill impairment charge of $79.4 million,
all of which related to its Southwest reporting segment. Combined with previous impairments, accumulated
goodwill impairment losses at September 30, 2010 and 2009 totaled $553.5 million. As of September 30, 2010
and 2009, the Company’s remaining goodwill balance was $15.9 million, all of which related to its South
Central reporting segment. The goodwill assessment procedures require management to make comprehensive
estimates of future revenues and costs.
Warranty Claims
The Company typically provides its homebuyers with a ten-year limited warranty for major defects in
structural elements such as framing components and foundation systems, a two-year limited warranty on major
mechanical systems, and a one-year limited warranty on other construction components. Since 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
74
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. See Note M.
Insurance and Legal Claims
The Company has, and requires the majority of the subcontractors it uses to have, general liability
insurance which includes construction defect coverage. The Company’s general liability insurance policies
protect it against a portion of its risk of loss from construction defect and other claims and lawsuits, subject to
self-insured retentions and other coverage limits. For policy years ended June 30, 2004 through 2010, the
Company is self-insured for up to $22.5 million of the aggregate claims incurred, at which point the excess
loss insurance begins, depending on the policy year. Once the Company has satisfied the annual aggregate
limits, it is self-insured for the first $250,000 to $1.0 million for each claim occurrence, depending on the
policy year. For policy years 2010 and 2011, the Company is self-insured for up to $20.0 million and
$15.0 million, respectively, of the aggregate claims incurred and for up to $0.5 million of each claim
occurrence thereafter.
In some states where the Company believes it is too difficult or expensive for its subcontractors to obtain
general liability insurance, the Company has waived its traditional subcontractor general liability insurance
requirements to obtain lower costs from subcontractors. In these states, the Company purchases insurance
policies from either third-party carriers or its wholly-owned captive insurance subsidiary, and names certain
subcontractors as additional insureds. The policies issued by the captive insurance subsidiary represent self
insurance of these risks by the Company and are considered in the self-insured amounts above. For policy
years after April 2007, the captive insurance subsidiary has acquired $15.0 million of reinsurance coverage
with a third-party insurer.
The Company is self-insured for the deductible amounts under its workers’ compensation insurance
policies. The deductibles vary by policy year, but in no years exceed $0.5 million per occurrence. The
deductible for the 2010 and 2011 policy years was $0.5 million per occurrence.
The Company records expenses and liabilities related to the costs for exposures related to construction
defects and claims and lawsuits incurred in the ordinary course of business, including employment matters,
personal injury claims, land development issues and contract disputes. Also, the Company records expenses
and liabilities for any estimated costs of potential construction defect claims and lawsuits (including expected
legal costs), based on an analysis of the Company’s historical claims, which includes an estimate of
construction defect claims incurred but not yet reported. Related to the exposures for actual construction
defect claims and estimates of construction defect claims incurred but not yet reported and other legal claims
and lawsuits incurred in the ordinary course of business, the Company estimates and records insurance
receivables for these matters under applicable insurance policies when recovery is probable. Additionally, the
Company may have the ability to recover a portion of its legal expenses from its subcontractors when the
Company has been named as an additional insured on their insurance policies. The expenses, liabilities and
receivables related to these claims are subject to a high degree of variability due to uncertainties such as
trends in construction defect claims relative to the Company’s markets, the types of products it builds, claim
settlement patterns, insurance industry practices and legal interpretations, among others. See Note M.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was approximately
$39.3 million, $31.7 million and $60.9 million in fiscal 2010, 2009 and 2008, respectively.
75
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income Taxes
The provision for, or benefit from, 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. In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is primarily dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible. In determining the future tax
consequences of events that have been recognized in the Company’s 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 the Company’s consolidated results of operations or financial
position.
Interest and penalties related to unrecognized tax benefits are recognized in the financial statements as a
component of the income tax provision. Significant judgment is required to evaluate uncertain tax positions.
The Company evaluates its uncertain tax positions on a quarterly basis. The evaluations are based upon a
number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax
authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or
measurement of uncertain tax positions could result in material increases or decreases in the Company’s
income tax expense in the period in which the change is made. See Note I.
Earnings (Loss) Per Share
Basic earnings, or loss, per share is based on the weighted average number of shares of common stock
outstanding during each year. Diluted earnings per share is based on the weighted average number of shares of
common stock and dilutive securities outstanding during each year. See Note J.
Stock-Based Compensation
From time to time, the compensation committee of the Company’s board of directors authorizes the
issuance of options to purchase the Company’s common stock to employees and directors. The committee
approves grants only out of amounts remaining available for grant from amounts formally authorized by the
common stockholders.
The Company measures and recognizes compensation expense at an amount equal to the fair value of
share-based payments granted under compensation arrangements for all awards granted or modified after
October 1, 2005, using the modified prospective method. Compensation expense for any unvested stock option
awards outstanding as of October 1, 2005 is recognized on a straight-line basis over the remaining vesting
period. The fair values of the options are calculated on the date of grant using a Black-Scholes option pricing
model. The benefits of tax deductions in excess of recognized compensation expense are reported in the
Statement of Cash Flows as a financing cash flow. See Note L.
Recent Accounting Pronouncements
In June 2009, the FASB revised the authoritative guidance for accounting for transfers of financial assets,
which requires enhanced disclosures regarding transfers of financial assets, including securitization
transactions, and continuing exposure to the related risks. The guidance eliminates the concept of a qualifying
special-purpose entity and changes the requirements for derecognizing financial assets. The guidance is
effective for the Company beginning October 1, 2010. The adoption of this guidance will not have a material
impact on the Company’s consolidated financial position, results of operations or cash flows.
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In June 2009, the FASB revised the authoritative guidance for consolidating variable interest entities,
which changes how a company determines when an entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. The determination of whether a company is required
to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s
ability to direct the activities of the entity that most significantly impact the entity’s economic performance.
The guidance is effective for the Company beginning October 1, 2010. The adoption of this guidance will not
have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value
Measurements,” which requires additional disclosures about transfers between Levels 1 and 2 of the fair value
hierarchy and disclosures about purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements. This guidance was effective for the Company in the third quarter of fiscal
2010, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after
December 15, 2010. The adoption of this guidance, which is related to disclosure only, will not impact the
Company’s consolidated financial position, results of operations or cash flows.
NOTE B — COMPREHENSIVE INCOME (LOSS)
The following table provides a reconciliation of net income (loss) reported in the consolidated statements
of operations to comprehensive income (loss) for fiscal 2010, 2009 and 2008.
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income:
$
Unrealized gain related to available-for-sale securities
2010
Year Ended September 30,
2009
(In millions)
$ (549.8)
245.1
2008
$(2,633.6)
(see Note C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.3
—
—
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .
$
245.4
$ (549.8)
$(2,633.6)
NOTE C — MARKETABLE SECURITIES
The Company’s investment portfolio, which is classified as available-for-sale, includes U.S. Treasury
securities, government agency securities, foreign government securities, corporate debt securities, and
certificates of deposit. The amortized cost, unrealized gains and losses and fair values of these investments as
of September 30, 2010, were as follows:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In millions)
Fair Value
Type of security:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . .
Obligations of U.S. government agencies . . . . . .
Corporate debt securities issued under the FDIC
Temporary Liquidity Guarantee Program . . . . .
Domestic corporate debt securities . . . . . . . . . . .
Foreign government securities. . . . . . . . . . . . . . .
Total debt securities . . . . . . . . . . . . . . . . . . . .
Certificates of deposit. . . . . . . . . . . . . . . . . . . . .
$
1.0
131.0
$ —
0.2
$ —
—
$ 1.0
131.2
100.9
39.9
14.6
287.4
10.0
0.1
—
—
0.3
—
—
—
—
—
—
101.0
39.9
14.6
287.7
10.0
Total marketable securities, available-for-sale . . .
$297.4
$ 0.3
$ —
$297.7
77
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Of the $297.7 million in marketable securities, $277.9 million mature in the next twelve months and
$19.8 million mature in one to two years. Proceeds from the sale of securities during fiscal 2010 were
$27.7 million. The Company’s realized gains related to such sales were insignificant.
NOTE D — INVENTORY IMPAIRMENTS AND LAND OPTION COST WRITE-OFFS
During fiscal 2010, when the Company performed its quarterly inventory impairment analysis, the
assumptions utilized reflected the Company’s expectation of continued challenging conditions and
uncertainties in the homebuilding industry and in its markets. The impairment evaluation at September 30,
2010 indicated communities with a combined carrying value of $409.8 million had indicators of potential
impairment, and these communities were evaluated for impairment. The analysis of the large majority of these
communities assumed that sales prices in future periods will be equal to or lower than current sales order
prices in each community, or in comparable communities, in order to generate an acceptable absorption rate.
For a minority of communities that the Company does not intend to develop or operate in current market
conditions, slight increases over current sales prices were assumed. While it is difficult to determine a
timeframe for a given community in the current market conditions, the remaining lives of these communities
were estimated to be in a range from six months to in excess of ten years. In performing this analysis, the
Company utilized a range of discount rates for communities of 14% to 20%. Through this evaluation process,
it was determined that communities with a carrying value of $63.1 million as of September 30, 2010 were
impaired. As a result, during the three months ended September 30, 2010, impairment charges of
$29.1 million were recorded to reduce the carrying value of the impaired communities to their estimated fair
value, as compared to $174.9 million in the same period of the prior year. During fiscal 2010, 2009 and 2008,
impairment charges totaled $62.3 million, $377.8 million and $2,372.6 million, respectively.
The Company performs its impairment analysis based on total inventory at the community level. When
an impairment charge for a community is determined, the charge is then allocated to each lot in the
community in the same manner as land and development costs are allocated to each lot. The inventory within
each community is categorized as construction in progress and finished homes, residential land and lots
developed and under development, and land held for development, based on the stage of production or plans
for future development. During fiscal 2010, approximately 93% of the impairment charges were recorded to
residential land and lots and land held for development, and approximately 7% of the charges were recorded
to residential construction in progress and finished homes inventory, compared to 85% and 15%, respectively,
in fiscal 2009 and 79% and 21%, respectively, in fiscal 2008.
The Company’s estimate of undiscounted cash flows from communities analyzed may change and could
result in a future need to record impairment charges to adjust the carrying value of these assets to their
estimated fair value. There are several factors which could lead to changes in the estimates of undiscounted
future cash flows for a given community. The most significant of these include pricing and incentive levels
actually realized by the community, the rate at which the homes are sold and the costs incurred to develop the
lots and construct the homes. The pricing and incentive levels are often inter-related with sales pace within a
community such that a price reduction can be expected to increase the sales pace. Further, both of these
factors are heavily influenced by the competitive pressures facing a given community from both new homes
and existing homes, some of which may result from foreclosures. If conditions in the broader economy,
homebuilding industry or specific markets in which the Company operates worsen, and as the Company re-
evaluates specific community pricing and incentives, construction and development plans, and its overall land
sale strategies, it may be required to evaluate additional communities or re-evaluate previously impaired
communities for potential impairment. These evaluations may result in additional impairment charges.
At September 30, 2010 and 2009, the Company had $3.3 million and $15.1 million, respectively, of land
held for sale, consisting of land held for development and land under development that met the criteria of land
held for sale.
78
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During fiscal 2010, 2009 and 2008, the Company wrote off $2.4 million, $29.9 million and
$111.9 million, respectively, of earnest money deposits and pre-acquisition costs related to land option
contracts which are not expected to be acquired.
NOTE E — LAND INVENTORY NOT OWNED
The Company’s land inventory not owned includes its interests in land and lots controlled under certain
option purchase contracts with variable interest entities, and may also include the purchase price of certain
land and lot option purchase contracts that have been determined to represent financing arrangements.
The consolidation of variable interest entities added $7.6 million and $6.5 million in land inventory not
owned and noncontrolling interests related to entities not owned to the Company’s consolidated balance sheets
at September 30, 2010 and 2009, respectively. The Company’s obligations related to these land or lot option
contracts are guaranteed by deposits, including cash, promissory notes and surety bonds, totaling $0.6 million
as of September 30, 2010 and 2009. Creditors, if any, of these variable interest entities have no recourse
against the Company.
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. At September 30, 2010
and 2009, the amount of option deposits related to these contracts totaled $10.2 million and $8.0 million,
respectively, and are included in homebuilding other assets on the consolidated balance sheets.
Additionally, at September 30, 2009, the Company determined that certain of its land and lot option
purchase contracts represented financing arrangements. As a result, the Company added $7.8 million in land
inventory not owned, with a corresponding increase to accrued expenses and other liabilities, to its balance
sheet at September 30, 2009.
79
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE F — NOTES PAYABLE
The Company’s notes payable at their principal amounts, net of any unamortized discounts, consist of the
following:
Homebuilding:
Unsecured:
September 30,
2010
2009
(In millions)
4.875% senior notes due 2010, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 130.8
70.5
9.75% senior notes due 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.3
9.75% senior subordinated notes due 2010, net . . . . . . . . . . . . . . . . . . . .
212.8
6% senior notes due 2011, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
163.3
7.875% senior notes due 2011, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
242.1
5.375% senior notes due 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
199.5
6.875% senior notes due 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
96.0
5.875% senior notes due 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
198.5
6.125% senior notes due 2014, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
368.0
2% convertible senior notes due 2014, net . . . . . . . . . . . . . . . . . . . . . . .
248.8
5.625% senior notes due 2014, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
298.6
5.25% senior notes due 2015, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
298.3
5.625% senior notes due 2016, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
497.0
6.5% senior notes due 2016, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37.1
Other secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
70.1
118.8
146.6
174.3
—
146.0
391.9
147.1
199.7
225.5
430.1
35.2
$2,085.3
$3,076.6
Financial Services:
Mortgage repurchase facility, maturing 2011 . . . . . . . . . . . . . . . . . . . . . . . $
86.5
$
68.7
As of September 30, 2010, maturities of consolidated notes payable, assuming the mortgage repurchase
facility is not extended or renewed, are $296.4 million in fiscal 2011, $160.9 million in fiscal 2012,
$174.3 million in fiscal 2013, $794.5 million in fiscal 2014, $200.5 million in fiscal 2015 and $657.3 million
thereafter.
The Company has an automatically effective universal shelf registration statement filed with the
Securities and Exchange Commission (SEC) in September 2009, registering debt and equity securities that the
Company may issue from time to time in amounts to be determined.
80
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Homebuilding:
Following is a summary of the key terms of each of the Company’s unsecured homebuilding notes
payable outstanding as of September 30, 2010, including the annual effective interest rate of each series of
notes, after giving effect to the amortization of discounts and deferred financing costs.
Note Payable
6% senior . . . . . . . . . . . . . . . . . . .
7.875% senior . . . . . . . . . . . . . . . .
5.375% senior . . . . . . . . . . . . . . . .
6.875% senior . . . . . . . . . . . . . . . .
6.125% senior . . . . . . . . . . . . . . . .
2% convertible senior (3) . . . . . . . .
5.625% senior . . . . . . . . . . . . . . . .
5.25% senior . . . . . . . . . . . . . . . . .
5.625% senior . . . . . . . . . . . . . . . .
6.5% senior . . . . . . . . . . . . . . . . . .
Principal
Amount
(In millions)
$ 70.1
$118.9
$146.6
$174.3
$146.9
$500.0
$147.7
$200.5
$226.6
$430.7
Date Issued
Date Due
Redeemable
Prior to
Maturity
Effective
Interest Rate (1)
April 2006
August 2001
July 2005
April 2003
July 2004
May 2009
April 15, 2011
August 15, 2011
June 15, 2012
May 1, 2013
January 15, 2014
May 15, 2014
September 2004 September 15, 2014
February 15, 2015
February 2005
January 15, 2016
December 2004
April 15, 2016
April 2006
Yes (2)
No
Yes (2)
No
No
No
No
Yes (2)
Yes (2)
Yes (2)
6.2%
8.0%
5.4%
7.0%
6.3%
9.7% (4)
5.8%
5.4%
5.8%
6.6%
(1) Interest is payable semi-annually on each of the series of senior and convertible senior notes.
(2) 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.
(3) Holders of the 2% convertible senior notes may convert all or any portion of their notes at their option at any time
prior to maturity. The initial conversion rate for the notes is 76.5697 shares of the Company’s common stock per
$1,000 principal amount of senior notes, equivalent to an initial conversion price of approximately $13.06 per share of
common stock. The conversion rate is subject to adjustment in certain events but will not be adjusted for accrued
interest, including any additional interest. Upon conversion of a 2% senior note, the Company will pay or deliver, as
the case may be, cash, shares of its common stock or a combination thereof at its election. The Company may not
redeem the notes prior to the maturity date.
(4) Upon the adoption of the authoritative guidance for accounting for debt with conversion options, the annual effective
interest rate of the convertible senior notes is 9.7% after giving effect to the amortization of the discount and deferred
financing costs.
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 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 (as
defined), holders of all series of notes issued prior to October 2004, constituting $587.8 million principal amount
in the aggregate as of September 30, 2010, have the right to require the Company to purchase these notes at a
price of 101% of their principal amount, along with accrued and unpaid interest. If a fundamental change,
including a change in control (as defined), occurs as defined in the indenture governing the convertible senior
notes, holders of the convertible senior notes, constituting $500 million principal amount as of September 30, 2010,
have the right to require the Company to purchase these notes at par, along with accrued and unpaid interest.
In November 2009, the Board of Directors authorized the repurchase of up to $500 million of the
Company’s debt securities. Following significant repurchase activity, the authorization was renewed in
April 2010 and again in July 2010. The current authorization is effective through July 31, 2011. At
September 30, 2010, $483.8 million of the authorization was remaining.
81
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On January 15, 2010, the Company repaid the remaining $130.9 million principal amount of its
4.875% senior notes which were due on that date. On February 24, 2010, the Company redeemed the
remaining $95.0 million principal amount of its 5.875% senior notes due 2013. On September 15, 2010, the
Company repaid the remaining $51.9 million principal amount of its 9.75% senior notes and $11.3 million
principal amount of its 9.75% senior subordinated notes due on that date.
Following is a summary of the redemption and repurchase activity related to the Company’s senior and
senior subordinated notes for the years ended September 30, 2010 and 2009:
Principal Amount
Year Ended September 30,
2010
2009
(In millions)
Maturities / Early Redemptions:
5% senior notes, matured January 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . $
8% senior notes, matured February 2009 . . . . . . . . . . . . . . . . . . . . . . . . .
4.875% senior notes, matured January 2010. . . . . . . . . . . . . . . . . . . . . . .
5.875% senior notes due 2013, redeemed February 2010 . . . . . . . . . . . . .
9.75% senior notes, matured September 2010 . . . . . . . . . . . . . . . . . . . . .
9.75% senior subordinated notes, matured September 2010 . . . . . . . . . . .
Repurchases:
5% senior notes due 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8% senior notes due 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.875% senior notes due 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.75% senior notes due 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.75% senior subordinated notes due 2010. . . . . . . . . . . . . . . . . . . . . . . .
6% senior notes due 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.875% senior notes due 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.375% senior notes due 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.875% senior notes due 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.875% senior notes due 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.125% senior notes due 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.625% senior notes due 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.25% senior notes due 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.625% senior notes due 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.5% senior notes due 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
130.9
95.0
51.9
11.3
289.1
—
—
—
18.6
4.0
142.9
44.7
95.5
25.2
1.0
53.1
102.3
99.5
73.4
67.0
727.2
$155.2
297.7
—
—
—
—
452.9
44.8
52.0
119.1
26.3
—
37.0
36.4
57.9
0.5
4.0
—
—
—
—
2.3
380.3
These notes were redeemed or repurchased for an aggregate purchase price of $1,018.2 million and
$821.0 million, respectively, plus accrued interest. The transactions resulted in a net loss on early retirement of
debt of $4.9 million in fiscal 2010 and a net gain of $11.5 million in fiscal 2009, which included the write off
of unamortized discounts and fees. The loss in fiscal 2010 included a loss of $2.0 million for the call premium
related to the early redemption of the 5.875% senior notes due 2013. The gain in fiscal 2009 was partially
offset by a $7.6 million loss related to the early termination of the revolving credit facility in May 2009.
$1,016.3
$833.2
82
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In October 2010, through an unsolicited transaction, the Company repurchased $8.3 million principal
amount of its 5.375% senior notes due 2012, for a purchase price of $8.6 million, plus accrued interest.
The indentures governing the Company’s senior notes impose restrictions on the creation of secured debt
and liens. At September 30, 2010, the Company was in compliance with all of the limitations and restrictions
that form a part of the public debt obligations.
Financial Services:
The Company’s mortgage subsidiary, DHI Mortgage, entered into a mortgage sale and repurchase
agreement (the “mortgage repurchase facility”) on March 28, 2008. The mortgage repurchase facility, which is
accounted for as a secured financing, provides financing and liquidity to DHI Mortgage by facilitating
purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties against the transfer
of funds by the counterparties, thereby becoming purchased loans. DHI Mortgage then has the right and
obligation to repurchase the purchased loans upon their sale to third-party purchasers in the secondary market
or within specified time frames from 45 to 120 days in accordance with the terms of the mortgage repurchase
facility. The capacity of the facility is $100 million, with a provision allowing an increase in the capacity to
$125 million during the last five business days of any fiscal quarter and the first seven business days of the
following fiscal quarter. The maturity date of the facility is March 4, 2011.
As of September 30, 2010, $236.9 million of mortgage loans held for sale were pledged under the
repurchase agreement. These mortgage loans had a collateral value of $222.7 million. DHI Mortgage has the
option to fund a portion of its repurchase obligations in advance. As a result of advance paydowns totaling
$136.2 million, DHI Mortgage had an obligation of $86.5 million outstanding under the mortgage repurchase
facility at September 30, 2010 at a 3.8% interest rate.
The mortgage repurchase facility is not guaranteed by either D.R. Horton, Inc. or any of the subsidiaries
that guarantee the Company’s homebuilding debt. The facility contains financial covenants as to the mortgage
subsidiary’s minimum required tangible net worth, its maximum allowable ratio of debt to tangible net worth
and its minimum required liquidity. At September 30, 2010, the mortgage subsidiary was in compliance with
all of the conditions and covenants of the mortgage repurchase facility.
NOTE G — MORTGAGE LOANS
To manage the interest rate risk inherent in its mortgage operations, the Company hedges its risk using
various derivative instruments, which include forward sales of mortgage-backed securities (MBS), Eurodollar
Futures Contracts (EDFC) and put options on both MBS and EDFC. Use of the term “hedging instruments” in
the following discussion refers to these securities collectively, or in any combination. The Company does not
enter into or hold derivatives for trading or speculative purposes.
Mortgage Loans Held for Sale
Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the
underlying property. Newly originated loans that have been closed but not committed to third-party purchasers
are hedged to mitigate the risk of changes in their fair value. Hedged loans are committed to third-party
purchasers typically within three days after origination. Consistent with the prior two fiscal years,
approximately 86% of the mortgage loans sold by DHI Mortgage during fiscal 2010 were sold to two major
financial institutions pursuant to their loan purchase agreements with DHI Mortgage. At September 30, 2010,
mortgage loans held for sale had an aggregate fair value of $253.8 million and an aggregate outstanding
principal balance of $247.5 million. At September 30, 2009, mortgage loans held for sale had an aggregate
fair value of $220.8 million and an aggregate outstanding principal balance of $217.2 million. During the
years ended September 30, 2010, 2009 and 2008, the Company had net gains on sales of loans of
83
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$45.9 million, $23.6 million and $69.1 million, respectively, which includes the effect of recording recourse
expense of $13.7 million, $33.2 million and $21.9 million, respectively, as discussed in the “Other Mortgage
Loans and Loss Reserves” section below.
The notional amounts of the hedging instruments used to hedge mortgage loans held for sale vary in
relationship to the underlying loan amounts, depending on the movements in the value of each hedging
instrument relative to the value of the underlying mortgage loans. The fair value change related to the hedging
instruments generally offsets the fair value change in the mortgage loans held for sale, which for the years
ended September 30, 2010, 2009 and 2008 was not significant, and is recognized in current earnings. As of
September 30, 2010, the Company had $127.1 million in mortgage loans held for sale not committed to third-
party purchasers and the notional amounts of the hedging instruments related to those loans totaled
$123.1 million.
Other Mortgage Loans and Loss Reserves
Generally, mortgage loans are sold with limited recourse provisions which include industry-standard
representations and warranties, primarily involving the absence of misrepresentations by the borrower or other
parties and, depending on the agreement, may include requiring a minimum number of payments to be made
by the borrower. The Company generally does not retain any other continuing interest related to mortgage
loans sold in the secondary market. Other mortgage loans generally consist of loans repurchased due to these
limited recourse obligations. Typically, these loans are impaired and often become real estate owned through
the foreclosure process. At September 30, 2010 and 2009, the Company’s total other mortgage loans and real
estate owned were as follows:
September 30,
2010
2009
(In millions)
Other mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43.0
Real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.9
$50.2
$ 5.7
Based on historical performance and current housing and credit market conditions, the Company has
recorded reserves for estimated losses on other mortgage loans, real estate owned and future loan repurchase
obligations due to the limited recourse provisions, all of which are recorded as reductions of financial services
revenue. These reserves totaled $39.0 million and $43.6 million at September 30, 2010 and 2009, respectively,
allocated as follows:
September 30,
2010
2009
(In millions)
Loss reserves related to:
Other mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.0
1.8
Real estate owned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28.2
Loan repurchase obligations — known and expected . . . . . . . . . . . . . . . . . . . . . .
$13.1
2.6
27.9
$39.0
$43.6
Other mortgage loans and real estate owned and the related loss reserves are included in financial
services other assets in the accompanying consolidated balance sheets.
A subsidiary of the Company reinsured a portion of private mortgage insurance written on loans
originated by DHI Mortgage in prior years. At September 30, 2010 and 2009, reserves for expected future
losses under the reinsurance program totaled $9.7 million and $18.7 million, respectively. The mortgage
repurchase and reinsurance loss reserves are included in financial services accounts payable and other
84
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
liabilities in the accompanying consolidated balance sheets. It is possible that future losses may exceed the
amount of reserves and, if so, additional charges will be required.
Loan Commitments and Related Derivatives
The Company is party to IRLCs which are extended to borrowers who have applied for loan funding and
meet defined credit and underwriting criteria. The expected net future cash flows related to the associated
servicing of a loan are included in the measurement of all written loan commitments that are accounted for at
fair value through earnings at the time of commitment. At September 30, 2010, IRLCs, which are accounted
for as derivative instruments recorded at fair value, totaled $180.0 million.
The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan
delivery commitments and hedging instruments. These instruments are considered derivatives in an economic
hedge and are accounted for at fair value with gains and losses recognized in current earnings. As of
September 30, 2010, the Company had approximately $13.2 million of best-efforts whole loan delivery
commitments and $149.2 million of hedging instruments related to IRLCs not yet committed to purchasers.
At September 30, 2010, the Company had $3.5 million notional amount of forward sales of MBS which
were acquired as part of a program to potentially offer homebuyers a below market interest rate on their home
financing. These hedging instruments and the related commitments are accounted for at fair value with gains
and losses recognized in current earnings. These gains and losses for the years ended September 30, 2010,
2009 and 2008 were not material.
NOTE H — FAIR VALUE MEASUREMENTS
The Company’s marketable securities consist of U.S. Treasury securities, government agency securities,
corporate debt securities, foreign government securities, and certificates of deposit. The fair value of
U.S. Treasury securities is based on quoted prices for identical assets and therefore, they have been classified
as a Level 1 valuation. Obligations of government agencies, corporate debt securities, foreign government
securities and certificates of deposit are valued using quoted market prices of recent transactions or quoted
market prices of transactions in very similar securities and therefore, are classified as Level 2 valuations.
The value of mortgage loans held for sale includes changes in estimated fair value from the date the loan
is closed until the date the loan is sold. The fair value of mortgage loans held for sale is generally calculated
by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar
characteristics; therefore, they have been classified as a Level 2 valuation. After consideration of
nonperformance risk, no additional adjustments have been made to the fair value measurement of mortgage
loans held for sale. Closed mortgage loans are typically sold within 30 days of origination, limiting any
nonperformance exposure period. In addition, the Company actively monitors the financial strength of its
counterparties and has limited the number of counterparties utilized in loan sale transactions due to the current
market volatility in the mortgage and bank environment.
The hedging instruments utilized by the Company to manage its interest rate risk and hedge the changes
in the fair value of mortgage loans held for sale are publicly traded derivatives with fair value measurements
based on quoted market prices. Exchange-traded derivatives are considered Level 1 valuations because quoted
prices for identical assets are used for fair value measurements. Over-the-counter derivatives, such as forward
sales of MBS, are classified as Level 2 valuations because quoted prices for similar assets are used for fair
value measurements. The Company mitigates exposure to nonperformance risk associated with
over-the-counter derivatives by limiting the number of counterparties and actively monitoring their financial
strength and creditworthiness while requiring them to be well-known institutions with credit ratings equal to or
better than AA- or equivalent. Further, the Company’s derivative contracts typically have short-term durations
with maturities from one to four months. Accordingly, the Company’s risk of nonperformance relative to its
85
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
derivative positions is also not significant. Nonperformance risk associated with exchange-traded derivatives is
considered minimal as these items are traded on the Chicago Mercantile Exchange. After consideration of
nonperformance risk, no additional adjustments have been made to the fair value measurement of hedging
instruments.
The fair values of IRLCs are also calculated by reference to quoted prices in secondary markets for
commitments to sell mortgage loans with similar characteristics; therefore, they have been classified as
Level 2 valuations. These valuations do not contain adjustments for expirations as any expired commitments
are excluded from the fair value measurement. After consideration of nonperformance risk, no additional
adjustments have been made to the fair value measurements of IRLCs. The Company generally only issues
IRLCs for products that meet specific purchaser guidelines. Should any purchaser become insolvent, the
Company would not be required to close the transaction based on the terms of the commitment. Since not all
IRLCs will become closed loans, the Company adjusts its fair value measurements for the estimated amount
of IRLCs that will not close.
Inventory held and used is reported at the lower of carrying value or fair value on a nonrecurring basis.
The factors considered in determining fair values of the Company’s communities are described in the
discussion of the Company’s inventory impairment analysis (see Note D), and are classified as Level 3
valuations. Inventory held and used measured at fair value represents those communities for which the
Company has recorded impairments during the current period.
Other mortgage loans and real estate owned are measured at the lower of carrying value or fair value on
a nonrecurring basis. Other mortgage loans include performing and nonperforming mortgage loans. The fair
values of other mortgage loans and real estate owned are determined based on the Company’s assessment of
the value of the underlying collateral and are classified as Level 3 valuations.
The following tables summarize the Company’s assets and liabilities at September 30, 2010 and 2009
measured at fair value on a recurring basis:
Balance Sheet Location
Fair Value at September 30, 2010
Level 2
Level 1
Total
(In millions)
Homebuilding:
Marketable securities,
available-for-sale . . . . . . . . . . . Marketable securities
$ 1.0
$296.7
$297.7
Financial Services:
Mortgage loans held for sale (a) . . Mortgage loans held for sale
Derivatives not designated as
hedging instruments (b):
Interest rate lock commitments . . Other assets
Forward sales of MBS . . . . . . . Other liabilities
Best-efforts commitments . . . . . Other assets
$ —
$253.8
$253.8
$ —
$ —
$ —
$ 1.8
$ (1.8)
$ 0.2
$ 1.8
$ (1.8)
$ 0.2
86
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Balance Sheet Location
Fair Value at September 30, 2009
Level 1
Total
Level 2
(In millions)
Homebuilding:
Marketable securities,
available-for-sale . . . . . . . . . . . Marketable securities
$ —
$ — $ —
Financial Services:
Mortgage loans held for sale (a) . . Mortgage loans held for sale
Derivatives not designated as
hedging instruments (b):
Interest rate lock commitments . . Other assets
Forward sales of MBS . . . . . . . Other liabilities
Best-efforts commitments . . . . . Other liabilities
$ —
$220.8
$220.8
$ —
$ —
$ —
$ 2.6
$ (2.7)
$ (1.1)
$ 2.6
$ (2.7)
$ (1.1)
(a) Mortgage loans held for sale are reflected at full fair value. Interest income earned on mortgage loans held for sale is
based on contractual interest rates and included in financial services interest and other income.
(b) Fair value measurements of these derivatives represent changes in fair value since inception. These changes are
reflected in the balance sheet and included in financial services revenues on the consolidated statement of operations.
The following table summarizes the Company’s assets at September 30, 2010 measured at fair value on a
nonrecurring basis:
Balance Sheet Location
Fair Value at
September 30, 2010
Level 3
(In millions)
Homebuilding:
Inventory held and used (a) . . . . . . . . . . . . . . . . . . . . . .
Inventories
Financial Services:
Other mortgage loans (a) . . . . . . . . . . . . . . . . . . . . . . . Other assets
Real estate owned (a) . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets
$34.0
$27.5
$ 3.1
(a) The fair values included in the table above represent only those assets whose carrying values were adjusted to fair
value in the current quarter.
The fair values of cash and cash equivalents approximate their carrying amounts due to their short-term
nature. The Company determines fair value of its senior and convertible senior notes based on quoted market
prices. The aggregate fair value of these notes at September 30, 2010 and September 30, 2009 was
$2,244.0 million and $3,187.6 million, respectively, compared to carrying values of $2,050.1 million and
$3,039.5 million, respectively. The aggregate fair value of the Company’s senior notes includes fair values for
the 2% convertible senior notes of $553.8 million and $568.6 million at September 30, 2010 and
September 30, 2009, respectively, compared to their carrying values of $391.9 million and $368.0 million,
respectively. The carrying value of the equity component of the 2% convertible senior notes was
$136.7 million at September 30, 2010 and 2009. For other secured notes and balances due under the mortgage
repurchase facility, the fair values approximate their carrying amounts due to their short maturity or floating
interest rate terms, as applicable.
87
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE I — INCOME TAXES
In fiscal 2010 and 2009, the Company recorded a benefit from income taxes of $145.6 million and
$7.0 million, respectively. In fiscal 2008, the provision for income taxes was $1.8 million. The provision for
(benefit from) income taxes includes the following components:
2010
Year Ended September 30,
2009
(In millions)
2008
Current (benefit) provision:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(153.1)
7.5
$(213.9)
(6.6)
$(655.1)
6.6
Deferred provision:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(145.6)
(220.5)
(648.5)
—
—
—
200.7
12.8
213.5
576.9
73.4
650.3
Total (benefit from) provision for income taxes . . . . . . . . . . . . . . . .
$(145.6)
$
(7.0)
$
1.8
In November 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was enacted into
law and amended Section 172 of the Internal Revenue Code. This tax law change allows a net operating loss
(NOL) realized in one of the Company’s fiscal 2008, 2009 or 2010 years to be carried back up to five years
(previously limited to a two-year carryback). The Company elected to carry back its fiscal 2009 NOL. This
resulted in a benefit from income taxes of $208.3 million during fiscal 2010 which was partially offset by an
increase in unrecognized tax benefits and state income tax expense.
The Company does not have meaningful effective tax rates in fiscal years 2008, 2009 and 2010 because
of the valuation allowances on its deferred tax assets. In fiscal 2008, the impairment of nondeductible
goodwill was also a factor. The difference between income tax expense (benefit) and tax computed by
applying the federal statutory income tax rate of 35% to income (loss) before income taxes during each year is
due to the following:
Income taxes at federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in tax resulting from:
2010
Year Ended September 30,
2009
(In millions)
$(194.9)
2008
$(921.1)
$ 34.8
State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . .
Domestic production activities deduction . . . . . . . . . . . . . . . . . . .
Uncertain tax positions, net of deferred tax . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.8
(6.2)
13.5
(170.6)
—
(30.0)
3.1
(13.0)
8.1
—
164.8
—
30.0
(2.0)
(76.2)
18.6
—
956.6
20.8
—
3.1
(Benefit from) provision for income taxes . . . . . . . . . . . . . . . . . . . .
$(145.6)
$
(7.0)
$
1.8
88
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (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:
September 30,
2010
2009
(In millions)
Deferred tax assets:
Inventory costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105.6
449.2
Inventory impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
107.2
Warranty and construction defect costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
183.6
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.0
Tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45.9
Incentive compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.8
Deferral of profit on home sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.9
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48.1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
80.0
584.3
111.6
229.1
17.6
48.2
0.7
13.1
53.8
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
950.3
(902.6)
1,138.4
(1,073.9)
Total deferred tax assets, net of valuation allowance . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47.7
47.7
Deferred income taxes, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $
64.5
64.5
—
The Company had income taxes receivable of $16.0 million and $293.1 million at September 30, 2010
and 2009, respectively. During fiscal 2010, the Company received income tax refunds totaling $487.1 million,
which resulted from tax losses generated in fiscal 2008 and 2009. The income taxes receivable at
September 30, 2010 relates to additional federal and state income tax refunds the Company expects to receive.
At September 30, 2010, the Company had a federal NOL carryforward of $285.8 million that will expire
in fiscal 2030 and tax benefits for state NOL carryforwards of $83.5 million that expire (beginning at various
times depending on the tax jurisdiction) from fiscal 2013 to fiscal 2030.
Due to the challenging market conditions in the homebuilding industry during the past several years, the
Company has recorded significant impairment charges for both inventory and goodwill and was in a three-year
cumulative pre-tax loss position at the end of fiscal 2008. Since the cumulative loss position is significant
negative evidence in assessing the recoverability of the Company’s deferred tax assets, the Company recorded
a valuation allowance during fiscal 2008. At September 30, 2010 and 2009, the Company had net deferred tax
assets of $902.6 million and $1,073.9 million, respectively, offset by valuation allowances of $902.6 million
and $1,073.9 million, respectively.
The future realization of the Company’s deferred income tax assets ultimately depends upon the existence
of sufficient taxable income in its carryforward periods under the tax laws. The Company continues to analyze
the positive and negative evidence in determining the expected realization of its deferred income tax assets.
The accounting for deferred taxes is based upon an estimate of future results. Differences between the
anticipated and actual outcomes of these future tax consequences could have a material impact on the
Company’s consolidated results of operations or financial position. Changes in existing tax laws also affect
actual tax results and the valuation of deferred tax assets over time.
89
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The benefits of the Company’s NOL and tax credit carryforwards, as well as its unrealized built-in losses,
would be reduced or potentially eliminated if the Company experienced an ownership change as defined by
Internal Revenue Code Section 382. The Company does not believe it has experienced such an ownership
change as of September 30, 2010; however, the amount by which its ownership may change in the future is
affected by purchases and sales of stock by 5% stockholders; the potential conversion of the Company’s
outstanding convertible senior notes and its decision as to whether to settle any such conversions completely
or partially in stock; and new issuances of stock by the Company.
Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken in a
tax return, and the benefit recognized for accounting purposes. The following table sets forth the changes in
unrecognized income tax benefits during fiscal 2010 and 2009:
September 30,
2010
2009
(In millions)
Unrecognized income tax benefits, beginning of year . . . . . . . . . . . . . . . . . . . . . . . $24.0
—
62.2
(3.4)
—
Additions attributable to tax positions taken in the current year . . . . . . . . . . . . . .
Additions attributable to tax positions taken in prior years . . . . . . . . . . . . . . . . . .
Reductions attributable to tax positions taken in prior years . . . . . . . . . . . . . . . . .
Settlements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18.7
—
10.4
(5.1)
—
Unrecognized income tax benefits, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $82.8
$24.0
The total amount of unrecognized tax benefits includes interest, penalties, and the tax benefit relating to
the deductibility of interest and state income taxes. All tax positions, if recognized, would affect the
Company’s effective income tax rate. The increase in unrecognized tax benefits to $82.8 million at
September 30, 2010 from $24.0 million at September 30, 2009 resulted in large part from the Company’s
election to carryback its fiscal 2009 NOL to fiscal 2004 and 2005, thereby changing the reserve needed for all
years open to further tax assessment including 2004 and 2005. It is reasonably possible that, within the next
12 months, the amount of unrecognized tax benefits may decrease as much as $59.2 million as a result of a
ruling request filed by the Company with the Internal Revenue Service (IRS) concerning capitalization of
inventory costs. If the IRS rules favorably on the ruling request, the Company’s unrecognized tax benefits
would be reduced, resulting in a benefit from income taxes in the consolidated statement of operations.
The Company classifies interest and penalties on income taxes as income tax expense. During fiscal
2010, 2009 and 2008, the Company recognized interest and penalties with respect to income taxes of
$11.7 million, $3.0 million and $4.0 million, respectively, in its consolidated statements of operations, and at
September 30, 2010 and 2009, the Company’s total accrued interest and penalties relating to unrecognized
income tax benefits was $17.8 million and $6.2 million, respectively.
The Company is subject to federal income tax and to income tax in multiple states. The statute of
limitations for the Company’s major tax jurisdictions remains open for examination for fiscal years 2004
through 2010. The Company is currently being audited by various states and its federal NOL refunds from
fiscal 2008 and 2009 are subject to Congressional Joint Committee review.
NOTE J — EARNINGS (LOSS) PER SHARE
The following table sets forth the numerators and denominators used in the computation of basic and
diluted earnings (loss) per share. In fiscal 2010, options to purchase 10.2 million shares of common stock were
excluded from the computation of diluted earnings per share because the exercise price was greater than the
average market price of the common shares and, therefore, their effect would have been antidilutive. In fiscal
2010 and 2009, the convertible senior notes were excluded from the computation of diluted earnings per share
90
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
because they were antidilutive. In fiscal 2009 and 2008, all outstanding stock options were excluded from the
computation of diluted earnings per share because they were antidilutive due to the net loss recorded during
those years.
2010
Year Ended September 30,
2009
(In millions)
2008
Numerator:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 245.1
$ (549.8)
$(2,633.6)
Denominator:
Denominator for basic earnings (loss) per share —
weighted average common shares . . . . . . . . . . . . . . . . . . .
318.1
316.9
315.7
Effect of dilutive securities:
Employee stock options . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.5
—
—
Denominator for diluted earnings (loss) per share —
adjusted weighted average common shares . . . . . . . . . . . . .
318.6
316.9
315.7
NOTE K — STOCKHOLDERS’ EQUITY
The Company has an automatically effective universal shelf registration statement filed with the SEC in
September 2009, registering debt and equity securities that it may issue from time to time in amounts to be
determined. At September 30, 2010, the Company had 322,478,467 shares of Common Stock issued and
318,823,234 shares outstanding. No shares of Preferred Stock were issued or outstanding. At September 30,
2010, the Company had 37.2 million and 3.8 million shares of Common Stock reserved for issuance pursuant
to the D.R. Horton, Inc. Stock Incentive Plans and Employee Stock Purchase Plan, respectively.
In November 2009, the Board of Directors authorized the repurchase of up to $100 million of the
Company’s common stock. The authorization is effective through July 31, 2011. The Company made no
repurchases of its common stock under the share repurchase program during fiscal 2010; therefore, all of the
$100 million authorization was remaining at September 30, 2010.
During fiscal 2010 and 2009, the Board of Directors approved and paid four quarterly cash dividends of
$0.0375 per common share. On November 11, 2010, the Board of Directors approved a cash dividend of
$0.0375 per common share, payable on December 8, 2010, to stockholders of record on November 24, 2010.
NOTE L — EMPLOYEE BENEFIT PLANS
Deferred Compensation
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 may also be made at the Company’s
discretion. Expenses for the plan were $4.8 million, $3.9 million and $3.5 million in fiscal 2010, 2009 and
2008 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 the SERP, 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 $15.2 million and $13.2 million at
91
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
September 30, 2010 and 2009, respectively. The Company recorded $2.7 million, $2.2 million and
$2.1 million of expense for this plan in fiscal 2010, 2009 and 2008, respectively.
The Company has a deferred compensation plan available 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 $24.6 million and $31.3 million at September 30, 2010 and 2009, respectively. The
Company records as expense the amount that the employee contributions would have earned had the funds
been invested in the designated investments. In fiscal 2010, the Company recorded expense of $2.1 million for
this plan, and in fiscal 2009 and 2008, it recorded a reduction in expense of $1.1 million and $7.1 million,
respectively.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan provides eligible employees the opportunity to purchase
common stock of the Company at a discounted price of no more than 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 107,952 shares for $1.1 million in fiscal 2010, 155,254 shares for $1.2 million in fiscal 2009 and
168,194 shares for $2.0 million in fiscal 2008.
Stock Options
The Company’s 2006 Stock Incentive Plan provides 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. Generally, the options vest
over periods of 5 to 9.75 years and expire 10 years after the dates on which they were granted.
During fiscal 2009 and 2008, stock options were granted to purchase a total of 6.1 million shares and
6.5 million shares, respectively, of the Company’s common stock at the closing market price of the stock on
the date of the grant. The Compensation Committee of the Company’s Board of Directors granted all such
stock options to the Company’s executive officers, other officers and certain of its employees, and the
Company’s Board of Directors granted all such stock options to its outside directors. No stock options were
granted during fiscal 2010. At September 30, 2010, there were 19.5 million shares available for future grants
under the Plan.
92
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company measures and recognizes compensation expense at an amount equal to the fair value of
share-based payments granted under compensation arrangements. The following table provides additional
information related to activity under the Company’s Stock Incentive Plan.
2010
Year Ended September 30,
2009
2008
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Options
Options
Stock Options
Outstanding at
beginning of year. . . . . . . .
Granted . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . .
Canceled or expired. . . . . . . .
19,479,417
—
(1,234,396)
(586,149)
$14.31
15,623,148
— 6,115,000
(665,357)
(1,593,374)
5.36
16.27
$16.19
9.03
4.90
16.34
11,838,031
6,547,500
(1,577,641)
(1,184,742)
$16.07
14.44
6.14
18.72
Outstanding at end of year . . .
17,658,872
$14.87
19,479,417
$14.31
15,623,148
$16.19
Exercisable at end of year . . .
6,143,532
$16.76
5,410,674
$15.49
4,686,798
$14.24
The total intrinsic value of options exercised during fiscal 2010, 2009 and 2008 was $7.6 million,
$4.6 million and $11.8 million, respectively. The intrinsic value of a stock option is the amount by which the
market value of the underlying stock exceeds the exercise price of the option.
The aggregate intrinsic value of options outstanding and exercisable at September 30, 2010 was
$12.9 million and $2.2 million, respectively. Exercise prices for options outstanding at September 30, 2010,
ranged from $4.70 to $36.92. The weighted average remaining contractual lives of options outstanding and
exercisable at September 30, 2010 were 6.2 years and 4.5 years, respectively.
There were no options granted in fiscal 2010. The weighted average fair value of grants made in fiscal
2009 and 2008 was $3.89 and $4.48 per share, respectively. 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:
Year Ended September 30,
2010
2008
2009
Risk free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
2.50% 3.11%
7.74
45.36% 42.70%
1.66% 4.10%
7.74
For fiscal 2010, 2009 and 2008, the Company’s compensation expense related to stock option grants was
$13.3 million, $13.7 million and $13.5 million, respectively, and at September 30, 2010, there was
$48.2 million of total unrecognized compensation expense related to unvested stock option awards. This
expense is expected to be recognized over a weighted average period of 5.8 years.
Incentive Bonus Plan
Under the Company’s Incentive Bonus Plan, the maximum award limits are determined by a performance-
based formula tied to the actual performance period established under the plan, combined with a fixed dollar
amount. Performance periods may be based on one or more months, quarters or years, although no covered
employee may receive both a monthly or quarterly award and an annual award with respect to the same fiscal year.
At September 30, 2010, the Company had $1.8 million accrued related to the Incentive Bonus Plan.
93
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Stock Unit Agreement
On September 30, 2010, The Compensation Committee of the Board of Directors adopted and approved a
form of Restricted Stock Unit Agreement (RSU Agreement) for awards to executive officers and other key
employees of the Company pursuant to the 2006 Stock Incentive Plan. Under the form of RSU Agreement, the
Compensation Committee may award performance or service (time) based restricted stock units subject to the
terms and conditions of the RSU Agreement and the 2006 Stock Incentive Plan.
On September 30, 2010, the Compensation Committee approved and granted an award of 200,000
performance based restricted stock units (Performance RSUs) that will vest at the end of a two year
performance period ending September 30, 2012. The number of units that ultimately vest depends on the
Company’s relative position as compared to its peers at the end of the two year period in achieving certain
performance criteria and can range from 0% to 200% of the number of units granted. The performance criteria
are total shareholder return, return on investment, SG&A expense containment and gross profit. Each
Performance RSU represents the contingent right to receive one share of the Company’s common stock if the
vesting conditions are satisfied. The Performance RSUs have no dividend or voting rights during the
performance period. The fair value of these awards on the date of grant is $11.53 per unit.
Performance Unit Plan
The Company’s Performance Unit Plan, which was adopted in fiscal 2008, provides for the Compensation
Committee to award performance units to senior management based upon the level of achievement of certain
criteria. Performance units were granted in 2008 and 2009 with 33-month performance periods ending on
September 30, 2010 and 2011, respectively. The actual number of performance units earned is based upon the
Company’s level of achievement on defined performance metrics as compared to its peer group. The earned
award will have a value equal to the number of earned units multiplied by the closing price of the Company’s
common stock at the end of the performance period and may be paid in cash, equity or a combination of both.
The Compensation Committee has the discretion to reduce the final payout on the performance units from the
amount earned. The liability for these awards has been based on the Company’s performance against the peer
group, the elapsed portion of the performance period and the Company’s stock price as of each reporting date,
and previously assumed no future reduction of the earned value of the performance units by the Compensation
Committee. Because the values of the earned performance units are dependent on the Company’s performance
and the common stock price, and because the final amount can be reduced at the discretion of the
Compensation Committee, this liability has been subject to a high degree of volatility.
Subsequent to September 30, 2010, the Compensation Committee exercised its discretion and reduced the
amount earned under the 2008 performance unit grant to $4.9 million and expects to limit the amount which
may be earned under the 2009 performance unit grant to approximately $4.1 million. The liability related to
the 2008 and 2009 performance unit grants was $9.0 million and $11.3 million at September 30, 2010 and
September 30, 2009, respectively. Compensation expense (benefit) related to these grants were ($2.3) million
and $7.7 million for fiscal 2010 and 2009, respectively.
NOTE M — COMMITMENTS AND CONTINGENCIES
Warranty Claims
At September 30, 2010, the Company had liabilities of $2.6 million for the remaining repair costs of
homes in its South Florida and Louisiana markets constructed during 2005 through 2007 which contain or are
suspected to contain allegedly defective drywall manufactured in China (Chinese Drywall) that may be
responsible for accelerated corrosion of certain metals in the home. The Company first learned of this
potential issue during fiscal 2009 through customer inquiries. The Company has identified approximately 90
homes which contain or are suspected to contain Chinese Drywall through a review of the supply channel for
94
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
its homes constructed in these markets and of the warranty claims received in these markets as well as testing
of specific homes. Through September 30, 2010, the Company has spent approximately $4.9 million to
remediate these homes. While the Company will seek reimbursement for these remediation costs from various
sources, it has not recorded a receivable for potential recoveries as of September 30, 2010. The Company is
continuing its investigation to determine if there are additional homes with the Chinese Drywall in these
markets, which if found, would likely require the Company to further increase its warranty reserve for this
matter in the future. The remaining costs accrued to complete this remediation are based on the Company’s
estimate of remaining repair costs. If the actual costs to remediate the homes differ from the estimated costs,
the Company may revise its warranty estimate. As of September 30, 2010, the Company has been named as a
defendant in several lawsuits in Louisiana and Florida pertaining to Chinese Drywall. As these actions are still
in their early stages, the Company is unable to express an opinion as to the amount of damages, if any,
beyond what has been reserved for repair as discussed above.
Changes in the Company’s warranty liability during fiscal 2010 and 2009 were as follows:
September 30,
2010
2009
(In millions)
Warranty liability, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranties issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in liability for pre-existing warranties . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 59.6
19.5
(5.0)
(27.9)
$ 83.4
16.8
(16.0)
(24.6)
Warranty liability, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 46.2
$ 59.6
Insurance and Legal Claims
The Company has been named as defendant in various claims, complaints and other legal actions
including construction defect claims on closed homes and other claims and lawsuits incurred in the ordinary
course of business, including employment matters, personal injury claims, land development issues, contract
disputes and claims related to its mortgage activities. The Company has established reserves for these
contingencies, based on the expected costs of the claims. The Company’s estimates of such reserves are based
on the facts and circumstances of individual pending claims and historical data and trends, including costs
relative to revenues, home closings and product types, and include estimates of the costs of construction defect
claims incurred but not yet reported. These reserve 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
liabilities for these items were $571.3 million and $534.0 million at September 30, 2010 and 2009,
respectively, and are included in homebuilding accrued expenses and other liabilities in the consolidated
balance sheets. Related to the contingencies for construction defect claims and estimates of construction defect
claims incurred but not yet reported, and other legal claims and lawsuits incurred in the ordinary course of
business, the Company estimates and records insurance receivables for these matters under applicable
insurance policies when recovery is probable. Additionally, the Company may have the ability to recover a
portion of its legal expenses from its subcontractors when the Company has been named as an additional
insured on their insurance policies. Estimates of the Company’s insurance receivables related to these matters
totaled $251.5 million and $234.6 million at September 30, 2010 and 2009, respectively, and are included in
homebuilding other assets in the consolidated balance sheets. Expenses related to these items were
approximately $43.2 million, $58.3 million and $53.8 million in fiscal 2010, 2009 and 2008, respectively.
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 consolidated
95
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
financial position, results of operations or cash flows. To the extent the liability arising from the ultimate
resolution of any matter exceeds management’s estimates reflected in the recorded reserves relating to these
matters, the Company would incur additional charges that could be significant.
Land and Lot Option Purchase Contracts
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, 2010, the Company had total
deposits of $13.3 million, consisting of cash deposits of $11.2 million, promissory notes of $1.9 million, and
letters of credit and surety bonds of $0.2 million, to purchase land and lots with a total remaining purchase
price of $963.9 million. Within the land and lot option purchase contracts at September 30, 2010, there were a
limited number of contracts, representing $5.7 million of remaining purchase price, subject to specific
performance clauses which may require the Company to purchase the land or lots upon the land sellers
meeting their obligations. The majority of land and lots under contract are currently expected to be purchased
within three years, based on the Company’s assumptions as to the extent it will exercise its options to
purchase such land and lots.
Other Commitments
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, 2010, the
Company had outstanding letters of credit of $51.7 million, all of which were cash collateralized, and surety
bonds of $806.9 million. The Company has secured letter of credit agreements with five banks that require it
to deposit cash, in an amount approximating the balance of letters of credit outstanding, as collateral with the
issuing banks. At September 30, 2010 and 2009, the amount of cash restricted for this purpose totaled
$52.6 million and $53.3 million, respectively, and is included in homebuilding restricted cash on the
Company’s consolidated balance sheets.
The Company leases office space and equipment under non-cancelable operating leases. Minimum annual
lease payments under these leases at September 30, 2010 approximate (in millions):
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.1
10.3
6.4
5.6
2.5
—
$
40.9
Rent expense approximated $24.9 million, $34.3 million and $55.5 million for fiscal 2010, 2009 and
2008, respectively.
96
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE N — OTHER ASSETS AND ACCRUED EXPENSES AND OTHER LIABILITIES
The Company’s homebuilding other assets at September 30, 2010 and 2009 were as follows:
September 30,
2010
2009
(In millions)
Insurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $251.5
18.5
Accounts and notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28.9
Prepaid assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135.9
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$234.6
50.7
39.0
108.7
$434.8
$433.0
The Company’s homebuilding accrued expenses and other liabilities at September 30, 2010 and 2009
were as follows:
September 30,
2010
2009
(In millions)
Construction defect and other litigation liabilities . . . . . . . . . . . . . . . . . . . . . . . . $571.3
90.4
Employee compensation and related liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
46.2
Warranty liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39.8
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
83.8
Federal and state income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125.7
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$534.0
98.5
59.6
53.5
24.0
162.4
$957.2
$932.0
97
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE O — SEGMENT INFORMATION
The Company’s 33 homebuilding operating divisions and its financial services operation are its operating
segments. The homebuilding operating segments are aggregated into six reporting segments and the financial
services operating segment is its own reporting segment. The Company’s reportable homebuilding segments
are: East, Midwest, Southeast, South Central, Southwest and West. These reporting segments have
homebuilding operations located in the following states:
East:
Delaware, Georgia (Savannah only), Maryland, New Jersey, North Carolina,
Pennsylvania, South Carolina and Virginia
Midwest:
Colorado, Illinois, Minnesota and Wisconsin
Southeast:
Alabama, Florida and Georgia
South Central: Louisiana, New Mexico (Las Cruces only), Oklahoma and Texas
Southwest:
Arizona and New Mexico
West:
California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington
During the fourth quarter of fiscal 2010, a change in the composition of the Company’s operating
divisions required that the Las Cruces, New Mexico market, previously included in the Southwest reporting
segment, now be included in the South Central reporting segment. Consequently, the Company has restated the
prior year segment information provided in this note to conform to the current year presentation.
Homebuilding is the Company’s core business, generating approximately 98% of consolidated revenues in
fiscal 2010, 2009 and 2008. The Company’s homebuilding segments are primarily engaged in the acquisition
and development of land and the construction and sale of residential homes on the land, in 26 states and 72
markets in the United States. The homebuilding segments generate most of their revenues from the sale of
completed homes, and to a lesser extent from the sale of land and lots.
The Company’s financial services segment provides mortgage financing and title agency services
principally to customers of the Company’s homebuilding segments. The Company generally does not retain or
service the mortgages that it originates; rather, it seeks to sell the mortgages and related servicing rights to
third-party purchasers. The financial services segment generates its revenues from originating and selling
mortgages and collecting fees for title insurance agency and closing services.
98
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The accounting policies of the reporting segments are described throughout Note A.
Year Ended September 30,
Restated
2009
(In millions)
Restated
2008
2010
Revenues
Homebuilding revenues:
East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 492.3
331.0
Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
747.6
Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,383.5
South Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
329.7
Southwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,025.6
West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,309.7
Total homebuilding revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
90.5
Financial services revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,400.2
Inventory Impairments
East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total inventory impairments . . . . . . . . . . . . . . . . . . . . . . . . . . $
9.0
21.9
17.0
13.3
0.6
0.5
62.3
$ 347.1
314.5
570.8
1,024.6
382.4
964.5
3,603.9
53.7
$3,657.6
$
54.3
46.3
36.7
17.0
36.5
187.0
$ 377.8
$
589.9
546.7
820.8
1,469.7
1,153.4
1,938.1
6,518.6
127.5
$ 6,646.1
$
256.2
161.8
448.4
67.2
264.9
1,174.1
$ 2,372.6
Goodwill Impairments
East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $
Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total goodwill impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
—
—
—
— $ — $
— $
—
—
—
—
—
—
—
—
—
79.4
—
79.4
Income (Loss) Before Income Taxes (1)
Homebuilding income (loss) before income taxes:
East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total homebuilding income (loss) before income taxes . . . . . . .
Financial services income (loss) before income taxes . . . . . . . .
Consolidated income (loss) before income taxes. . . . . . . . . . . . $
(6.3)
(31.3)
(7.5)
83.4
12.0
27.8
78.1
21.4
99.5
$ (95.9)
(104.9)
(73.2)
4.9
(45.8)
(226.4)
(541.3)
(15.5)
$ (556.8)
$ (332.5)
(184.3)
(507.7)
(6.1)
(369.6)
(1,266.7)
(2,666.9)
35.1
$(2,631.8)
(1) Expenses maintained at the corporate level consist primarily of interest and property taxes, which are capitalized and
amortized to cost of sales or expensed directly, and the expenses related to operating the Company’s corporate office.
The amortization of capitalized interest and property taxes is allocated to each segment based on the segment’s
revenue, while the interest expensed directly and those expenses associated with the corporate office are allocated to
each segment based on the segment’s average inventory.
99
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
September 30,
2010
Restated
2009
(In millions)
Homebuilding Inventories (1):
East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 511.5
297.3
Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
656.4
Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
760.1
South Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
218.7
Southwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
898.8
West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
106.2
Corporate and unallocated (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 535.4
371.1
656.6
864.1
244.4
842.5
152.6
Total homebuilding inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,449.0
$3,666.7
(1) Homebuilding inventories are the only assets included in the measure of segment assets used by the Company’s chief
operating decision maker, its CEO.
(2) Corporate and unallocated consists primarily of capitalized interest and property taxes.
100
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE P — SUPPLEMENTAL GUARANTOR INFORMATION
All of the Company’s senior and convertible senior notes are fully and unconditionally guaranteed, on a
joint and several basis, by all of the Company’s direct and indirect subsidiaries (collectively, Guarantor
Subsidiaries), other than financial services subsidiaries and certain insignificant subsidiaries (collectively, Non-
Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is wholly-owned. In lieu of providing separate
financial statements for the Guarantor Subsidiaries, consolidated condensed financial statements are presented
below. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not
presented because management has determined that they are not material to investors.
Consolidating Balance Sheet
September 30, 2010
ASSETS
Cash and cash equivalents . . . . . . . .
Marketable securities,
available-for-sale . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . .
Investments in subsidiaries . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . .
Property and equipment, net . . . . . .
Other assets . . . . . . . . . . . . . . . . . .
Mortgage loans held for sale . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . .
Intercompany receivables . . . . . . . .
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In millions)
Eliminations
Total
$1,234.9
$
45.3
$
29.1
$
— $1,309.3
297.7
53.3
1,316.7
1,081.7
16.0
18.5
101.1
—
—
904.6
—
0.4
—
2,340.1
—
23.3
292.8
—
15.9
—
—
—
—
27.2
—
18.7
88.8
253.8
—
—
—
—
(1,316.7)
297.7
53.7
—
— 3,449.0
16.0
—
60.5
—
482.7
—
253.8
—
15.9
—
—
(904.6)
Total Assets . . . . . . . . . . . . . . . . . .
$5,024.5
$2,717.8
$
417.6
$(2,221.3) $5,938.6
LIABILITIES & EQUITY
Accounts payable and
other liabilities . . . . . . . . . . . . . .
Intercompany payables . . . . . . . . . .
Notes payable . . . . . . . . . . . . . . . . .
$ 327.9
—
2,083.4
$ 688.3
871.4
1.9
$
Total Liabilities . . . . . . . . . . . . . . .
2,411.3
1,561.6
Total stockholders’ equity . . . . . . . .
Noncontrolling interests . . . . . . . . .
2,613.2
—
1,156.2
—
Total Equity . . . . . . . . . . . . . . . . .
2,613.2
1,156.2
127.7
33.2
86.5
247.4
160.5
9.7
170.2
$
(904.6)
— $1,143.9
—
— 2,171.8
(904.6)
3,315.7
(1,316.7)
—
2,613.2
9.7
(1,316.7)
2,622.9
Total Liabilities & Equity . . . . . . .
$5,024.5
$2,717.8
$
417.6
$(2,221.3) $5,938.6
101
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Consolidating Balance Sheet
September 30, 2009
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In millions)
Eliminations
Total
ASSETS
Cash and cash equivalents . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . .
Investments in subsidiaries . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . .
Property and equipment, net. . . . . . .
Other assets. . . . . . . . . . . . . . . . . . .
Mortgage loans held for sale . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . .
Intercompany receivables . . . . . . . . .
$1,871.2
54.5
1,033.7
1,118.2
293.1
18.1
116.6
—
—
1,280.0
$
48.3
0.7
—
2,521.7
—
19.7
275.3
—
15.9
—
$
37.8
—
—
26.8
—
20.0
98.1
220.8
—
—
$
— $1,957.3
55.2
—
—
(1,033.7)
— 3,666.7
293.1
—
57.8
—
490.0
—
220.8
—
15.9
—
—
(1,280.0)
Total Assets . . . . . . . . . . . . . . . . . .
$5,785.4
$2,881.6
$ 403.5
$(2,313.7) $6,756.8
LIABILITIES & EQUITY
Accounts payable and
other liabilities . . . . . . . . . . . . . . .
Intercompany payables . . . . . . . . . .
Notes payable . . . . . . . . . . . . . . . . .
$ 318.1
$ 747.1
— 1,243.9
1.1
3,075.5
Total Liabilities . . . . . . . . . . . . . . .
3,393.6
1,992.1
Total stockholders’ equity . . . . . . . .
Noncontrolling interests . . . . . . . . . .
2,391.8
—
Total Equity . . . . . . . . . . . . . . . . . .
2,391.8
889.5
—
889.5
$ 145.7
36.1
68.7
$
(1,280.0)
— $1,210.9
—
— 3,145.3
250.5
144.2
8.8
153.0
(1,280.0)
4,356.2
(1,033.7)
—
2,391.8
8.8
(1,033.7)
2,400.6
Total Liabilities & Equity . . . . . . .
$5,785.4
$2,881.6
$ 403.5
$(2,313.7) $6,756.8
102
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Consolidating Statement of Operations
Year Ended September 30, 2010
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In millions)
Eliminations
Total
Homebuilding:
Revenues. . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . .
$1,103.3
888.0
$3,199.8
2,736.5
$
Gross profit . . . . . . . . . . . . . . . . . . .
Selling, general and administrative
expense . . . . . . . . . . . . . . . . . . . .
Equity in (income) of subsidiaries . .
Interest expense . . . . . . . . . . . . . . . .
Loss on early retirement of debt, net. .
Other (income) . . . . . . . . . . . . . . . .
Financial Services:
Revenues. . . . . . . . . . . . . . . . . . . . .
General and administrative
expense . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . .
Interest and other (income) . . . . . . .
215.3
463.3
206.4
(177.9)
86.3
4.9
(3.9)
99.5
—
—
—
—
—
308.0
—
—
—
(1.5)
156.8
—
—
—
—
—
Income before income taxes . . . . .
Benefit from income taxes . . . . . . . .
99.5
(145.6)
156.8
(109.7)
6.6
3.1
3.5
7.6
—
—
—
(3.8)
(0.3)
90.5
77.2
1.9
(10.0)
21.4
21.1
(2.9)
$ — $4,309.7
— 3,627.6
—
682.1
—
177.9
—
—
—
(177.9)
—
—
—
—
—
522.0
—
86.3
4.9
(9.2)
78.1
90.5
77.2
1.9
(10.0)
21.4
(177.9)
112.6
99.5
(145.6)
Net income . . . . . . . . . . . . . . . . .
$ 245.1
$ 266.5
$
24.0
$(290.5)
$ 245.1
103
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Consolidating Statement of Operations
Year Ended September 30, 2009
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In millions)
Eliminations
Total
Homebuilding:
Revenues. . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . .
$ 828.7
889.2
$2,754.7
2,615.5
$
20.5
34.0
$ — $3,603.9
— 3,538.7
Gross profit (loss) . . . . . . . . . . . . . .
Selling, general and administrative
expense . . . . . . . . . . . . . . . . . . . .
Equity in loss of subsidiaries . . . . . .
Interest expense . . . . . . . . . . . . . . . .
(Gain) on early retirement of debt, net. .
Other (income) . . . . . . . . . . . . . . . .
(60.5)
139.2
(13.5)
—
65.2
209.7
192.2
100.2
(3.9)
(1.9)
306.9
—
—
—
(2.4)
6.4
—
—
—
(8.5)
—
(192.2)
—
—
—
523.0
—
100.2
(3.9)
(12.8)
(556.8)
(165.3)
(11.4)
192.2
(541.3)
Financial Services:
Revenues. . . . . . . . . . . . . . . . . . . . .
General and administrative
expense . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . .
Interest and other (income) . . . . . . .
—
—
—
—
—
—
—
—
—
—
Loss before income taxes . . . . . . .
Benefit from income taxes . . . . . . . .
(556.8)
(7.0)
(165.3)
(5.3)
53.7
78.1
1.5
(10.4)
(15.5)
(26.9)
(0.1)
—
—
—
—
—
53.7
78.1
1.5
(10.4)
(15.5)
192.2
5.4
(556.8)
(7.0)
Net loss . . . . . . . . . . . . . . . . . . . .
$(549.8)
$ (160.0)
$ (26.8)
$ 186.8
$ (549.8)
104
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Consolidating Statement of Operations
Year Ended September 30, 2008
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In millions)
Eliminations
Total
Homebuilding:
Revenues . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . .
$ 1,245.4
1,840.4
$ 5,241.2
6,404.7
$
Gross profit (loss) . . . . . . . . . . . . . . . .
Selling, general and administrative
expense . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . .
Equity in loss of subsidiaries . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . .
Loss on early retirement of debt, net . .
Other (income) expense. . . . . . . . . . . .
Financial Services:
Revenues . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense . . .
Interest expense . . . . . . . . . . . . . . . . .
Interest and other (income) . . . . . . . . .
(595.0)
(1,163.5)
280.9
—
1,721.2
39.0
2.6
(6.9)
501.7
79.4
—
—
—
4.7
(2,631.8)
(1,749.3)
—
—
—
—
—
—
—
—
—
—
Income (loss) before income taxes . .
(2,631.8)
(1,749.3)
Provision for (benefit from)
income taxes. . . . . . . . . . . . . . . . . .
1.8
(5.8)
Net income (loss) . . . . . . . . . . . . . .
$(2,633.6)
$(1,743.5)
$
32.0
36.7
(4.7)
9.2
—
—
—
—
(6.9)
(7.0)
127.5
100.1
3.7
(11.4)
35.1
28.1
10.6
17.5
$
— $ 6,518.6
— 8,281.8
— (1,763.2)
—
—
(1,721.2)
—
—
—
791.8
79.4
—
39.0
2.6
(9.1)
1,721.2
(2,666.9)
—
—
—
—
—
127.5
100.1
3.7
(11.4)
35.1
1,721.2
(2,631.8)
(4.8)
1.8
$ 1,726.0
$(2,633.6)
105
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Consolidating Statement of Cash Flows
Year Ended September 30, 2010
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In millions)
Eliminations
Total
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities . . . . . . . . . . . . . . .
$
344.9
$ 380.0
$ (15.5)
$
— $
709.4
INVESTING ACTIVITIES
Purchases of property and equipment . .
Purchases of marketable securities . . . .
Proceeds from the sale of marketable
securities . . . . . . . . . . . . . . . . . . . .
Decrease in restricted cash . . . . . . . . .
(7.9)
(328.0)
27.7
1.2
(11.0)
—
—
0.3
Net cash used in investing activities. . . . .
(307.0)
(10.7)
(0.3)
—
—
—
(0.3)
—
—
—
—
—
(19.2)
(328.0)
27.7
1.5
(318.0)
FINANCING ACTIVITIES
Net change in notes payable . . . . . . . .
Net change in intercompany
receivables/payables . . . . . . . . . . . .
Proceeds from stock associated with
(1,019.9)
—
17.8
— (1,002.1)
383.0
(372.3)
(10.7)
certain employee benefit plans . . . . .
7.6
Income tax benefit from stock option
exercises. . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . .
2.8
(47.7)
—
—
—
Net cash (used in) provided by
financing activities . . . . . . . . . . . . . . .
(674.2)
(372.3)
(Decrease) increase in cash and
cash equivalents . . . . . . . . . . . . . . . . .
(636.3)
(3.0)
Cash and cash equivalents at
beginning of year . . . . . . . . . . . . . . . .
1,871.2
48.3
Cash and cash equivalents at
—
—
—
7.1
(8.7)
37.8
—
—
—
—
—
7.6
2.8
(47.7)
— (1,039.4)
—
—
(648.0)
1,957.3
end of year. . . . . . . . . . . . . . . . . . . . .
$ 1,234.9
$
45.3
$
29.1
$
— $ 1,309.3
106
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Consolidating Statement of Cash Flows
Year Ended September 30, 2009
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In millions)
Eliminations
Total
OPERATING ACTIVITIES
Net cash provided by operating
activities . . . . . . . . . . . . . . . . . . . . .
$ 414.6
$ 561.0
$ 165.6
$ — $1,141.2
INVESTING ACTIVITIES
Purchases of property and
equipment . . . . . . . . . . . . . . . . . .
(4.2)
(1.6)
(Increase) decrease in
restricted cash . . . . . . . . . . . . . . .
Net cash used in investing activities . . .
FINANCING ACTIVITIES
Net change in notes payable . . . . . .
Net change in intercompany
receivables/payables . . . . . . . . . . .
Proceeds from stock associated with
certain employee benefit plans . . .
Cash dividends paid. . . . . . . . . . . . .
Net cash provided by (used in)
(53.3)
(57.5)
0.1
(1.5)
(0.4)
—
(0.4)
(333.8)
—
(134.9)
629.5
(601.3)
(28.2)
4.4
(47.5)
—
—
—
—
financing activities. . . . . . . . . . . . . .
252.6
(601.3)
(163.1)
Increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . . .
609.7
(41.8)
Cash and cash equivalents at
beginning of year . . . . . . . . . . . . . .
1,261.5
90.1
2.1
35.7
—
—
—
—
—
—
—
—
—
—
(6.2)
(53.2)
(59.4)
(468.7)
—
4.4
(47.5)
(511.8)
570.0
1,387.3
Cash and cash equivalents at
end of year . . . . . . . . . . . . . . . . . . .
$1,871.2
$ 48.3
$ 37.8
$ — $1,957.3
107
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Consolidating Statement of Cash Flows
Year Ended September 30, 2008
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In millions)
Eliminations
Total
OPERATING ACTIVITIES
Net cash (used in) provided by
operating activities. . . . . . . . . . . . . .
$ (123.9) $ 1,794.5
$ 204.3
$ 1.6
$1,876.5
INVESTING ACTIVITIES
Purchases of property and
equipment . . . . . . . . . . . . . . . . . .
Decrease in restricted cash . . . . . . . .
Net cash used in investing activities . . .
FINANCING ACTIVITIES
Net change in notes payable . . . . . .
Net change in intercompany
receivables/payables . . . . . . . . . . .
Proceeds from stock associated with
certain employee benefit plans . . .
Cash dividends paid. . . . . . . . . . . . .
Net cash provided by (used in)
(3.2)
1.7
(1.5)
(3.3)
1.7
(1.6)
(0.1)
—
(0.1)
(438.8)
—
(184.3)
1,958.2
(1,928.1)
(30.1)
9.5
(142.0)
—
—
—
—
financing activities. . . . . . . . . . . . . .
1,386.9
(1,928.1)
(214.4)
—
—
—
—
—
—
—
—
(6.6)
3.4
(3.2)
(623.1)
—
9.5
(142.0)
(755.6)
Increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . . .
1,261.5
(135.2)
(10.2)
1.6
1,117.7
Cash and cash equivalents at
beginning of year . . . . . . . . . . . . . .
—
225.3
45.9
(1.6)
269.6
Cash and cash equivalents at
end of year . . . . . . . . . . . . . . . . . . .
$1,261.5
$
90.1
$ 35.7
$ — $1,387.3
108
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE Q — QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations were (in millions, except per share amounts):
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . .
Provision for (benefit from) income taxes . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Basic net income (loss) per common share . . . .
Diluted net income (loss) per common share . . .
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit (loss) . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . .
Provision for (benefit from) income taxes . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted net loss per common share . . .
September 30
$ 948.4
127.8
(1.7)
7.2
(8.9)
(0.03)
(0.03)
September 30
$1,028.9
(65.2)
(229.1)
5.8
(234.9)
(0.74)
Fiscal 2010
Three Months Ended
June 30
March 31
$1,406.1
206.8
46.3
(4.2)
50.5
0.16
0.16
$ 913.5
159.2
12.1
0.7
11.4
0.04
0.04
Fiscal 2009
Three Months Ended
June 30
$ 932.9
(8.4)
(163.3)
(19.6)
(143.7)
(0.45)
March 31
$ 778.0
55.0
(103.0)
5.6
(108.6)
(0.34)
December 31
$1,132.2
188.3
42.8
(149.2)
192.0
0.60
0.56
December 31
$ 918.0
83.7
(61.3)
1.3
(62.6)
(0.20)
In the past, the Company experienced 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. In contrast to the typical seasonal results, the weakness in homebuilding market
conditions during the past several years has mitigated these historical seasonal variations. In fiscal 2009 and
2010, just over half (54%) of consolidated revenues were attributable to operations in the third and fourth
fiscal quarters, and the Company incurred operating losses in all quarters of fiscal 2009 and in the fourth
quarter of fiscal 2010. Net income in the first quarter of fiscal 2010 includes a $149.2 million benefit from
income taxes.
Gross profit during fiscal 2010 was reduced by inventory impairment charges and write-offs of earnest
money deposits and pre-acquisition costs of $1.2 million, $2.4 million, $30.3 million and $30.8 million in the
first, second, third and fourth quarters, respectively. Gross profit during fiscal 2009 was reduced by inventory
impairment charges and write-offs of earnest money deposits and pre-acquisition costs of $56.2 million,
$48.1 million, $110.8 million and $192.5 million in the first, second, third and fourth quarters, respectively.
109
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed under the supervision
and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), of the effectiveness of the Company’s disclosure controls and procedures as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation,
the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective in
providing reasonable assurance that information required to be disclosed in the reports the Company files,
furnishes, submits or otherwise provides the Securities and Exchange Commission under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms,
and that information required to be disclosed in reports filed by the Company under the Exchange Act is
accumulated and communicated to the Company’s management, including the CEO and CFO, in such a
manner as to allow timely decisions regarding the required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the
quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. 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. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control — 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, 2010.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the
effectiveness of our internal control over financial reporting as of September 30, 2010, as stated in their report
included herein.
ITEM 9B. OTHER INFORMATION
None.
110
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is set forth under the captions “Proposal One — Election of
Directors,” “Corporate Governance,” “Section 16(a) Beneficial Ownership Reporting Compliance” and
“Requesting Documents from the Company” in the registrant’s definitive Proxy Statement for the 2011 Annual
Meeting of Stockholders and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption “Executive Compensation” in the
registrant’s definitive Proxy Statement for the 2011 Annual Meeting of Stockholders and incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes our equity compensation plans as of September 30, 2010:
(a)
Number of Shares to
be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
(b)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
Plan Category
Equity compensation plans
approved by stockholders . . .
17,658,872
Equity compensation plans not
approved by stockholders . . .
—
Total . . . . . . . . . . . . . . . . . .
17,658,872
$
$
14.87
n/a
14.87
23,332,820(1)
—
23,332,820(1)
(1) Includes 3,809,831 shares reserved for issuance under the Company’s Employee Stock Purchase Plan. Under this
Employee Stock Purchase Plan, employees of the Company purchased 107,952 shares of common stock in fiscal 2010.
The remaining information required by this item is set forth under the caption “Beneficial Ownership of
Common Stock” in the registrant’s definitive Proxy Statement for the 2011 Annual Meeting of Stockholders
and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is set forth under the captions “Executive Compensation —
Transactions with Management” and “Corporate Governance” in the registrant’s definitive Proxy Statement
for the 2011 Annual Meeting of Stockholders 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” in the registrant’s definitive Proxy Statement for the 2011 Annual Meeting of Stockholders and
incorporated herein by reference.
111
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
applicable, or because the required information is shown in the consolidated financial statements or notes
thereto.
(3). and (b) Exhibits:
Exhibit
Number
Exhibit
2.1
2.2
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
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
supplementally a copy of omitted schedules to the SEC upon request(2)
Certificate of Amendment of the Amended and Restated Certificate of Incorporation, as amended,
of the Registrant, dated January 31, 2006, and the Amended and Restated Certificate of
Incorporation, as amended, of the Registrant dated March 18, 1992(3)
Certificate of Elimination of Series A Junior Participating Preferred Stock of Registrant, filed with
the Secretary of State on the State of Delaware on August 20, 2010(66)
Amended and Restated Bylaws(4)
See Exhibits 3.1 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)
Second Supplemental Indenture, dated as of September 30, 1997, among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, as Trustee(6)
Third Supplemental Indenture, dated as of April 17, 1998, among the Registrant, the Guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(7)
Fourth Supplemental Indenture, dated as of April 20, 1998, among the Registrant, the Guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(8)
Fifth Supplemental Indenture, dated as of August 31, 1998, among the Registrant, the Guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(9)
Seventh Supplemental Indenture, dated as of August 31, 1999, among the Registrant, the Guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(11)
Ninth Supplemental Indenture, dated as of March 31, 2000, among the Registrant, the Guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(12)
Twelfth Supplemental Indenture, dated as of May 21, 2001, among the Registrant, the Guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(13)
Thirteenth Supplemental Indenture, dated as of August 15, 2001, among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating to
the 7.875% Senior Notes due 2011 issued by the Registrant(14)
Fourteenth Supplemental Indenture, dated as of February 21, 2002, among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, as Trustee(25)
112
Exhibit
Number
Exhibit
4.12
4.13
4.14
4.15
4.16
4.17
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
Indenture, dated as of September 11, 2000, among the Registrant, the Guarantors named therein and
American Stock Transfer & Trust Company, as Trustee(15)
First Supplemental Indenture, dated as of September 11, 2000, 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 issued by the Registrant(16)
Third Supplemental Indenture, dated as of May 21, 2001, among the Registrant, the Guarantors
named therein and American Stock Transfer & Trust Company, as Trustee(17)
Fourth Supplemental Indenture, dated as of February 21, 2002, among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, as Trustee(26)
Fifteenth Supplemental Indenture, dated as of December 3, 2002, by and among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating to
the 7.5% Senior Notes due 2007 issued by the Registrant(28)
Sixteenth Supplemental Indenture, dated as of April 17, 2003, by and among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating to
the 6.875% Senior Notes due 2013 issued by the Registrant(29)
Seventeenth Supplemental Indenture, dated as of June 25, 2003, by and among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating to
the 5.875% Senior Notes due 2013 issued by the Registrant(30)
Nineteenth Supplemental Indenture, dated as of July 12, 2004, by and among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating to
the 6.125% Senior Notes due 2014 issued by the Registrant(33)
Twentieth Supplemental Indenture, dated as of September 21, 2004, by and among the Registrant,
the Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating
to the 5.625% Senior Notes due 2014 issued by the Registrant(34)
Twenty-First Supplemental Indenture, dated as of October 15, 2004, by and among the Registrant,
the Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating
to the 4.875% Senior Notes due 2010 issued by the Registrant.(35)
Twenty-Second Supplemental Indenture, dated as of December 15, 2004, by and among the
Registrant, the Guarantors named therein and American Stock Transfer & Trust Company, as
Trustee, relating to the 5.625% Senior Notes due 2016 issued by the Registrant(36)
Twenty-Third Supplemental Indenture, dated as of February 11, 2005, by and among the Registrant,
the Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating
to the 5.25% Senior Notes due 2015 issued by the Registrant(37)
Twenty-Fourth Supplemental Indenture, dated as of July 7, 2005, by and among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating to
the 5.375% Senior Notes due 2012 issued by the Registrant(38)
Twenty-Fifth Supplemental Indenture, dated as of January 23, 2006, by and among the Registrant,
the Guarantors named therein and American Stock Transfer & Trust Company, as Trustee(42)
Fifth Supplemental Indenture, dated as of January 23, 2006, by and among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, as Trustee(44)
Twenty-Sixth Supplemental Indenture, dated as of April 17, 2006, by and among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating to
the 6.0% Senior Notes due 2011 issued by the Registrant(45)
Twenty-Seventh Supplemental Indenture, dated as of April 17, 2006, by and among the Registrant,
the Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating
to the 6.5% Senior Notes due 2016 issued by the Registrant(46)
Twenty-Eighth Supplemental Indenture, dated as of June 13, 2006, by and among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, as Trustee(49)
Sixth Supplemental Indenture, dated as of June 13, 2006, by and among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, as Trustee(50)
113
Exhibit
Number
4.31
4.32
4.33
10.1
10.2†
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
Exhibit
Seventh Supplemental Indenture, dated as of June 4, 2008, by and 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 issued by the Registrant(63)
Twenty-Ninth Supplemental Indenture, dated as of June 20, 2008, by and among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, LLC, as Trustee,
relating to the 9.75% Senior Notes due 2010 issued by the Registrant(10)
Thirtieth Supplemental Indenture, dated as of May 13, 2009, by and among the Registrant, the
Guarantors named therein and American Stock Transfer & Trust Company, LLC, as Trustee,
relating to the 2.00% Convertible Senior Notes due 2014 issued by the Registrant(31)
Form of Indemnification Agreement between the Registrant and each of its directors and executive
officers and schedules of substantially identical documents(18)
D.R. Horton, Inc. 1991 Stock Incentive Plan, as amended and restated(19)
Amendment No. 1 to 1991 Stock Incentive Plan, as amended and restated(20)
Form of Non-Qualified Stock Option Agreement under the D.R. Horton, Inc. 1991 Stock Incentive
Plan (Term Vesting)(21)
D.R. Horton, Inc. 2006 Stock Incentive Plan(43)
Form of Non-Qualified Stock Option Agreement under the D.R. Horton, Inc. 2006 Stock Incentive
Plan (Employee — Term Vesting 2006 Form)(47)
Form of Non-Qualified Stock Option Agreement under the D.R. Horton, Inc. 2006 Stock Incentive
Plan (Director — Term Vesting 2006 Form)(48)
Form of Non-Qualified Stock Option Agreement (Employee-Term Vesting 2008 Form) pursuant to
the Registrant’s 2006 Stock Incentive Plan(51)
Form of Non-Qualified Stock Option Agreement (Outside Director-Term Vesting 2008 Form)
pursuant to the Registrant’s 2006 Stock Incentive Plan(53)
10.10† Form of Restricted Stock Unit Agreement pursuant to the Registrant’s 2006 Stock Incentive
Plan(67)
10.11† Form of Stock Award Agreement pursuant to the Registrant’s 2006 Stock Incentive Plan(68)
10.12† D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 1(22)
10.13† D.R. Horton, Inc. Supplemental Executive Retirement Trust No. 1(23)
10.14† D.R. Horton, Inc. Amended and Restated Supplemental Executive Retirement Plan No. 2(61)
10.15† D.R. Horton, Inc. Amended and Restated 2000 Incentive Bonus Plan(24)
10.16† D.R. Horton, Inc. 2008 Performance Unit Plan(55)
10.17† Form of Performance Unit Award pursuant to the Registrant’s 2008 Performance Unit Plan(32)
10.18† Executive Compensation Notification (fiscal 2011) — Chairman and CEO(39)
10.19† Executive Compensation Notification (fiscal 2010) — Chairman and CEO(54)
10.20† Executive Compensation Summary — Other Executive Officers (fiscal 2011)(40)
10.21† Executive Compensation Summary — Other Executive Officers (fiscal 2010)(64)
10.22† Director Compensation Summary (fiscal 2011)(41)
10.23† Director Compensation Summary (fiscal 2010)(65)
10.24† D.R. Horton, Inc. Amended and Restated Deferred Compensation Plan(62)
10.25
Grantor Trust Agreement, dated June 21, 2002, by and between the Registrant and Wachovia Bank,
National Association, as Trustee(27)
10.26 Master Repurchase Agreement, dated March 27, 2008, among DHI Mortgage Company, Ltd., U.S.
Bank National Association, as Administrative Agent and a Buyer, JP Morgan Chase Bank, National
Association, as Syndication Agent, J.P. Morgan Securities, Inc., as Lead Arranger and Sole
Bookrunner, and other parties named therein(56)
114
Exhibit
Number
10.27
10.28
10.29
10.30
10.31
12.1
14.1
21.1
23.1
31.1
31.2
32.1
32.2
101
Exhibit
Custody Agreement, dated March 27, 2008, by and between DHI Mortgage Company, Ltd. and U.S.
Bank National Association, as Administrative Agent and representative of certain Buyers(57)
First Amendment to Master Repurchase Agreement, dated March 5, 2009, among DHI Mortgage
Company, Ltd., U.S. Bank National Association, as Administrative Agent, Syndication Agent and a
buyer, and other parties named therein(58)
Second Amendment to Master Repurchase Agreement, dated September 23, 2009, among DHI
Mortgage Company, Ltd., U.S. Bank National Association, as Administrative Agent, Syndication
Agent and a buyer, and other parties named therein(59)
Third Amendment to Master Repurchase Agreement, dated March 4, 2010, among DHI Mortgage
Company, Ltd., U.S. Bank National Association, as Administrative Agent, Syndication Agent and a
buyer(52)
Fourth Amendment to Master Repurchase Agreement, dated July 30, 2010, among DHI Mortgage
Company, Ltd., U.S. Bank National Association, as Administrative Agent, Syndication Agent and a
buyer(60)
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 PricewaterhouseCoopers 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 (*)
The following financial statements from D.R. Horton, Inc.’s Annual Report on Form 10-K for the
year ended September 30, 2010, filed on November 17, 2010, formatted in XBRL (Extensible
Business Reporting Language); (i) Consolidated Balance Sheets, (ii) Consolidated Statements of
Operations, (iii) Consolidated Statements of Total Equity, (iv) Consolidated Statements of Cash
Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text. (***)
* Filed herewith.
** Posted to the Registrant’s website at www.drhorton.com under the Investor Relations and Corporate
Governance links.
*** In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this
Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any
registration or other document filed under the Securities Act or the Exchange Act, except as shall be
expressly set forth by specific reference in such filing.
† Management contract or compensatory plan arrangement.
(1) Incorporated herein 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 herein 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 for
the quarterly period ended December 31, 2005, filed with the SEC on February 2, 2006.
115
(4) Incorporated herein by reference from Exhibit 3.1 to the Registrant’s Current Report of Form 8-K, dated
July 30, 2009, filed with the SEC on August 5, 2009.
(5) Incorporated herein 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 herein 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.
(7) Incorporated herein by reference from Exhibit 4.3 to the Registrant’s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1998, filed with SEC on May 14, 1998.
(8) Incorporated herein by reference from Exhibit 4.4 to the Registrant’s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1998, filed with SEC on May 14, 1998.
(9) Incorporated herein by reference from Exhibit 4.7 to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended September 30, 1998, filed with the SEC on December 10, 1998.
(10) Incorporated herein by reference from Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated
June 20, 2008, filed with the SEC on June 20, 2008.
(11) Incorporated herein 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.
(12) Incorporated herein by reference from Exhibit 4.5 to the Registrant’s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2000, filed with the SEC on May 12, 2000.
(13) Incorporated herein by reference from Exhibit 4.5 to the Registrant’s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2001, filed with the SEC on August 14, 2001.
(14) Incorporated herein by reference from Exhibit 4.1(a) to the Registrant’s Current Report on Form 8-K,
dated August 8, 2001, filed with the SEC on August 14, 2001.
(15) Incorporated herein by reference from Exhibit 4.1(a) to the Registrant’s Current Report on Form 8-K,
dated September 6, 2000, filed with the SEC on September 11, 2000.
(16) Incorporated herein by reference from Exhibit 4.1(b) to the Registrant’s Current Report on Form 8-K,
dated September 6, 2000, filed with the SEC on September 11, 2000.
(17) Incorporated herein by reference from Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2001, filed with the SEC on August 14, 2001.
(18) Incorporated herein 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 quarterly period 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 quarterly period ended March 31, 2001, filed with the SEC on May 15,
2001.
(19) Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2002, filed with the SEC on August 13, 2002.
(20) Incorporated herein by reference from Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2002, filed with the SEC on August 13, 2002.
(21) Incorporated herein 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.
(22) Incorporated herein 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).
(23) Incorporated herein 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).
(24) Incorporated herein by reference from Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2007, filed with the SEC on February 7, 2008.
116
(25) Incorporated herein by reference from Exhibit 4.13 to the Registrant’s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2002, filed with the SEC on May 15, 2002.
(26) Incorporated herein by reference from Exhibit 4.14 to the Registrant’s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2002, filed with the SEC on May 15, 2002.
(27) Incorporated herein by reference from Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended September 30, 2002, filed with the SEC on December 13, 2002.
(28) Incorporated herein by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, dated
November 22, 2002, filed with the SEC on December 2, 2002.
(29) Incorporated herein by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, dated
April 11, 2003, filed with the SEC on April 17, 2003.
(30) Incorporated herein by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, dated
June 18, 2003, filed with the SEC on June 24, 2003.
(31) Incorporated herein by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated
May 13, 2009, filed with the SEC on May 14, 2009.
(32) Incorporated herein by reference from Exhibit 10.1 (2008 Form) to the Registrant’s Current Report on
Form 8-K dated February 11, 2008, filed with the SEC on February 15, 2008; and Exhibit 10.4 (2009
Form) to the Registrant’s Current Report on Form 8-K dated November 20, 2008, filed with the SEC on
November 26, 2008.
(33) Incorporated herein by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, dated
July 6, 2004, filed with the SEC on July 9, 2004.
(34) Incorporated herein by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, dated
September 14, 2004, filed with the SEC on September 17, 2004.
(35) Incorporated herein by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, dated
October 7, 2004, filed with the SEC on October 14, 2004.
(36) Incorporated herein by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, dated
December 8, 2004, filed with the SEC on December 14, 2004.
(37) Incorporated herein by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, dated
February 4, 2005, filed with the SEC on February 10, 2005.
(38) Incorporated herein by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, dated
June 29, 2005, filed with the SEC on July 6, 2005.
(39) Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K,
dated November 10, 2010, filed with the SEC on November 16, 2010.
(40) Incorporated herein by reference from Exhibit 10.3 to the Registrant’s Current Report on Form 8-K,
dated November 10, 2010, filed with the SEC on November 16, 2010.
(41) Incorporated herein by reference from Exhibit 10.4 to the Registrant’s Current Report on Form 8-K,
dated November 10, 2010, filed with the SEC on November 16, 2010.
(42) Incorporated herein by reference from Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for
the quarterly period ended December 31, 2005, filed with the SEC on February 2, 2006.
(43) Incorporated herein by reference from Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2005, filed with the SEC on February 2, 2006.
(44) Incorporated herein by reference from Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q for
the quarterly period ended December 31, 2005, filed with the SEC on February 2, 2006.
(45) Incorporated herein by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, dated
April 11, 2006, filed with the SEC on April 13, 2006.
(46) Incorporated herein by reference from Exhibit 4.2 to the Registrant’s Current Report on Form 8-K, dated
April 11, 2006, filed with the SEC on April 13, 2006.
117
(47) Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2006, filed with the SEC on May 8, 2006.
(48) Incorporated herein by reference from Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2006, filed with the SEC on May 8, 2006.
(49) Incorporated herein by reference from Exhibit 4.2 to the Registrant’s Registration Statement on
Form S-3, filed with the SEC on June 13, 2006.
(50) Incorporated herein by reference from Exhibit 4.3 to the Registrant’s Registration Statement on
Form S-3, filed with the SEC on June 13, 2006.
(51) Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated
February 11, 2008, filed with the SEC on February 15, 2008.
(52) Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated
March 4, 2010, filed with the SEC on March 5, 2010.
(53) Incorporated herein by reference from Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated
February 11, 2008, filed with the SEC on February 15, 2008.
(54) Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated
October 23, 2009, filed with the SEC on October 29, 2009.
(55) Incorporated herein by reference from Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2007, filed with the SEC on February 7, 2008.
(56) Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated
March 28, 2008, filed with the SEC on April 3, 2008.
(57) Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated
March 28, 2008, filed with the SEC on April 3, 2008.
(58) Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated
March 5, 2009, filed with the SEC on March 10, 2009.
(59) Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated
September 23, 2009, filed with the SEC on September 24, 2009.
(60) Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2010, filed with the SEC on August 3, 2010.
(61) Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated
December 10, 2008, filed with the SEC on December 16, 2008.
(62) Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated
December 10, 2008, filed with the SEC on December 16, 2008.
(63) Incorporated herein by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated
June 4, 2008, filed with the SEC on June 5, 2008.
(64) Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated
November 18, 2009, filed with the SEC on November 20, 2009.
(65) Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated
November 18, 2009, filed with the SEC on November 20, 2009.
(66) Incorporated herein by reference from Exhibit 3.1 to the Registrant’s Report on Form 8-K dated
August 19, 2010, filed with the SEC on August 23, 2010.
(67) Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated
September 30, 2010, filed with the SEC on October 6, 2010.
(68) Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated
September 30, 2010, filed with the SEC on October 6, 2010.
118
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.
Date: November 17, 2010
By:
/s/ DONALD J. TOMNITZ
Donald J. Tomnitz,
Vice Chairman, Chief Executive Officer
and President
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/ MICHAEL W. HEWATT
Michael W. Hewatt
/s/ BOB G. SCOTT
Bob G. Scott
Chairman of the Board
November 17, 2010
Vice Chairman, Chief Executive Officer,
President, and Director
(Principal Executive Officer)
November 17, 2010
Chief Financial Officer, Executive Vice
President and Director (Principal
Financial Officer and Principal
Accounting Officer)
November 17, 2010
Director
November 17, 2010
Director
November 17, 2010
Director
November 17, 2010
Director
November 17, 2010
119
CORPORATE INFORMATION
D.R. Horton, Inc. (the “Company”) constructs and sells homes generally ranging in price from $90,000 to
$700,000. The Company operates in 26 states and 72 markets in the East, Midwest, Southeast, South Central,
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, 2010, the Company closed 20,875 homes with an average sales
price of approximately $206,100. Founded in 1978, the Company’s 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
Executive 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)
Michael W. Hewatt
Certified Public Accountant (1) (2) (3)
Bob G. Scott
Director, Secretary and Treasurer of
Liberty Bancshares, Inc.
Former Chief Financial Officer and Chief Operating
Officer of Summit Bancshares, Inc. (1) (2) (3)
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Nominating and Governance Committee
Member
Form 10-K
The Annual Report on Form 10-K of D.R. Horton,
Inc. may be accessed through the “Investors” link
on our website, or a copy is available upon request
to our Investor Relations department at our
corporate headquarters.
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
Annual Meeting
January 20, 2011
At the Corporate Offices of D.R. Horton, Inc.
301 Commerce Street
Fort Worth, Texas 76102
Public Debt Ratings
Senior Notes:
BB Fitch Ratings
Ba3 Moody’s Investors Service
BB(cid:2) Standard & Poor’s Ratings Services
A rating is not a recommendation to buy, sell or
hold a security, and ratings are subject to revision
at any time by the assigning agency.
Certifications
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 March 1, 2010. 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, 2010.
Website
Visit us at www.drhorton.com
H O M E B U I L D I N G O P E R A T I O N S
EAST
Central Delaware, DE
Savannah, GA
Baltimore, MD
Suburban Washington, D.C., MD
North New Jersey, NJ
South New Jersey, NJ
Brunswick County, NC
Charlotte, NC
Greensboro/Winston-Salem, NC
Raleigh/Durham, NC
Lancaster, PA
Philadelphia, PA
Charleston, SC
Columbia, SC
Greenville, SC
Hilton Head, SC
Myrtle Beach, SC
Northern Virginia, VA
MIDWEST
Colorado Springs, CO
Denver, CO
Fort Collins, CO
Chicago, IL
Minneapolis/St. Paul, MN
Kenosha,WI
SOUTHEAST
Birmingham, AL
Mobile, AL
Daytona Beach, FL
Fort Myers/Naples, FL
Jacksonville, FL
Melbourne, FL
Miami/West Palm Beach, FL
Orlando, FL
Pensacola, FL
Sarasota County, FL
Tampa, FL
Atlanta, GA
Macon, GA
SOUTH CENTRAL
Baton Rouge, LA
Lafayette, LA
Las Cruces, NM
Oklahoma City, OK
Austin, TX
Dallas, TX
Fort Worth, TX
Houston, TX
Killeen/Temple/Waco, TX
Rio Grande Valley, TX
San Antonio, TX
SOUTHWEST
Phoenix, AZ
Tucson, AZ
Albuquerque, NM
WEST
Bay Area, CA
Central Valley, CA
Imperial Valley, CA
Los Angeles County, CA
Riverside County, CA
Sacramento, CA
San Bernardino County, CA
San Diego County, CA
Ventura County, CA
Hawaii, HI
Maui, HI
Oahu, HI
Boise, ID
Las Vegas, NV
Reno, NV
Albany, OR
Central Oregon, OR
Portland, OR
Salt Lake City, UT
Seattle/Tacoma, WA
Vancouver, WA
301 Commerce Street
Suite 500
Fort Worth, Texas 76102
(817) 390-8200
www.drhorton.com