ANNUAL REPORT
2014
FINANCIAL SUMMARY
(In millions, except for number of homes and per share amounts)
Revenues
$8,025
$6,259
$4,400
$4,354
$3,637
2010
2011
2012
2013
2014
$9,000
$6,000
$3,000
$0
Net Income
$1,000
$956
Balance Sheet Data:
Cash and marketable securities(1) ............
Inventories ...............................................
Total assets ..............................................
Notes payable ..........................................
Total equity .............................................
Book value per share ...............................
Common shares outstanding ...................
Income Statement Data:
Revenues .................................................
Income before income taxes ...................
Net income ..............................................
As of or for the Year Ended September 30,
2014
2013
2012
2011
2010
$ 661.8 $ 977.4 $1,384.8 $1,068.1 $1,645.0
3,449.0
4,165.2
7,700.5
5,938.6
7,248.2
10,202.5
2,171.8
2,493.1
3,682.8
2,622.9
3,594.7
5,119.7
$8.23
$11.20
$14.04
318.8
320.9
364.6
3,449.7
5,358.4
1,704.6
2,623.5
$8.30
316.0
6,197.4
8,856.4
3,509.0
4,061.4
$12.58
322.9
$8,024.9 $6,259.3 $4,354.0 $3,636.8 $4,400.2
99.5
245.1
242.9
956.3
657.8
462.7
814.2
533.5
12.1
71.8
$750
$500
$250
$0
$9,000
$6,000
$3,000
$0
$3,000
$2,000
$534
$463
$245
$72
2010
2011
2012
2013
2014
Percentages of Revenues:
(cid:42)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:191)(cid:87)(cid:3)(cid:16)(cid:3)(cid:75)(cid:82)(cid:80)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86) .........................
(cid:42)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:191)(cid:87)(cid:3)(cid:16)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:75)(cid:82)(cid:80)(cid:72)(cid:69)(cid:88)(cid:76)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74) ............
(cid:54)(cid:42)(cid:9)(cid:36)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:16)(cid:3)(cid:75)(cid:82)(cid:80)(cid:72)(cid:69)(cid:88)(cid:76)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74) ..............
Income before income taxes ...................
Net income ..............................................
21.3%
20.2%
10.6%
10.1%
6.6%
20.8%
20.3%
10.7%
10.5%
7.4%
17.7%
17.6%
12.5%
5.6%
22.0%
16.1%
14.8%
13.5%
0.3%
2.0%
17.3%
15.8%
12.1%
2.3%
5.6%
Net Sales Orders
$8,309
$6,567
$4,803
$4,011
$3,728
Operating Data:
Homes closed ..........................................
(cid:49)(cid:72)(cid:87)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:82)(cid:85)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:16)(cid:3)(cid:75)(cid:82)(cid:80)(cid:72)(cid:86) .........................
(cid:49)(cid:72)(cid:87)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:82)(cid:85)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:16)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72) ...........................
(cid:54)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:82)(cid:85)(cid:71)(cid:72)(cid:85)(cid:3)(cid:69)(cid:68)(cid:70)(cid:78)(cid:79)(cid:82)(cid:74)(cid:3)(cid:16)(cid:3)(cid:75)(cid:82)(cid:80)(cid:72)(cid:86) ...................
(cid:54)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:82)(cid:85)(cid:71)(cid:72)(cid:85)(cid:3)(cid:69)(cid:68)(cid:70)(cid:78)(cid:79)(cid:82)(cid:74)(cid:3)(cid:16)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72) .....................
24,155
25,120
18,890
21,048
28,670
29,709
20,875
19,375
$8,308.6 $6,567.0 $4,803.3 $3,727.6 $4,011.0
4,128
$2,858.8 $2,210.1 $1,667.9 $1,036.2 $ 850.8
16,695
17,421
7,240
9,888
8,205
4,854
2010
2011
2012
2013
2014
notes payable plus total equity).
(1) Includes cash, cash equivalents and marketable securities.
(2) Homebuilding leverage ratio represents homebuilding notes payable divided by total capital (homebuilding
Sales Order Backlog
Total Equity
Homebuilding Leverage Ratio
(2)
$2,859
$6,000
$2,210
$1,668
$5,120
$4,061
$3,595
$2,623 $2,624
2010
2011
2012
2013
2014
$4,000
$2,000
$0
60%
40%
20%
0%
44%
45%
38% 39%
39%
2010
2011
2012
2013
2014
$1,000
$851
$1,036
$0
2010
2011
2012
2013
2014
Dear Fellow Shareholders:
Fiscal 2014 was a great year for D.R. Horton, Inc. We closed 46% more homes than any other homebuilder in
the United States and achieved the largest national market share in the Company’s history, strengthening our 13-year
leading position in the homebuilding industry. Our broad geographic base and product diversity, financial strength
and supply of land, lots and homes are allowing us to leverage our competitive position to achieve strong growth in
both revenues and profits. At the same time, our management team is also focused on continuing to improve our
operational efficiency and our returns on invested capital.
Our financial achievements during fiscal 2014 included the following:
•
•
•
•
•
27% increase in the value of net sales orders;
28% increase in total revenues;
$2.9 billion sales order backlog, up 29% from a year ago;
$814.2 million of consolidated pre-tax income, up from $657.8 million in fiscal 2013; and
$5.1 billion of total equity, up from $4.1 billion a year ago.
The key to our success is our ongoing focus on the fundamentals of our business in each of our communities
across the 79 markets in which we operate. Our experienced operational teams in each market are responsible for
building quality homes, ensuring our product offerings and pricing align with customer demand in each community
and serving our customers with excellence. Our local teams strive to manage our business in each market in a
manner that will achieve the optimal balance of sales pace, pricing, profit margins and inventory levels in each
community and maximize the returns on our inventory investments.
During fiscal 2014 we introduced a new brand, Express Homes, to offer affordable homes for entry-level
homebuyers, and we continued to roll out our Emerald Homes brand of higher-end move-up and luxury
communities. Both the Express and Emerald brands have received positive consumer reception, and we plan to
introduce many more of these communities across our markets in fiscal 2015. These brands are expanding our
product diversity across our already broad geographic footprint, which is positioning our operations for further
growth.
As our fiscal year came to a close, our CEO, Don Tomnitz, announced his retirement after more than 30 years
with the Company and 15 years as President and CEO, during which time we became the largest homebuilder in the
United States. We thank Don for his outstanding leadership and invaluable contributions to our company, including
the development of our current management team, led by David Auld, that will guide the Company in the future.
We are well-positioned to achieve another strong year of growth in revenues and profitability in fiscal 2015.
Our employees are the best in the industry, and their dedication and daily efforts to improve our operations are
driving our success. We thank all of our suppliers, subcontractors, real estate agents and lenders for their valuable
relationships. Finally, we appreciate our shareholders for your consistent support, as we strive to validate your trust
by delivering sustainable value, addressing future challenges directly and remaining the leader in the homebuilding
industry.
Donald R. Horton
Chairman of the Board
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________________________________________
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, 2014
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
Common Stock, par value $.01 per share
5.750% Senior Notes due 2023
Name of Each Exchange on Which Registered
New York Stock Exchange
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
No
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
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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
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.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
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
No
As of March 31, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
approximately $6,431,364,000 based on the closing price as reported on the New York Stock Exchange.
As of November 10, 2014, there were 371,786,765 shares of the registrant’s common stock, par value $.01 per share, issued and
364,586,694 shares outstanding.
Portions of the registrant’s definitive Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated herein by reference
(to the extent indicated) in Part III.
DOCUMENTS INCORPORATED BY REFERENCE
D.R. HORTON, INC. AND SUBSIDIARIES
2014 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Page
ITEM 1.
Business .......................................................................................................................................
ITEM 1A.
Risk Factors .................................................................................................................................
ITEM 1B.
Unresolved Staff Comments ........................................................................................................
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
Properties .....................................................................................................................................
Legal Proceedings........................................................................................................................
Mine Safety Disclosures ..............................................................................................................
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities ..............................................................................
Selected Financial Data................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ......
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk.....................................................
ITEM 8.
ITEM 9.
Financial Statements and Supplementary Data............................................................................
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.
ITEM 12.
Executive Compensation .............................................................................................................
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ............................................................................................
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence ............................
ITEM 14.
Principal Accountant Fees and Services ......................................................................................
ITEM 15.
Exhibits and Financial Statement Schedules ...............................................................................
SIGNATURES .......................................................................................................................................................
PART IV
1
12
21
21
21
21
22
24
25
64
66
110
110
110
111
111
111
112
112
113
120
ITEM 1.
BUSINESS
PART I
D.R. Horton, Inc. is the largest homebuilding company by volume in the United States. We construct and sell
homes through our operating divisions in 27 states and 79 metropolitan markets of the United States, under the names of
D.R. Horton, America’s Builder, Express Homes, Emerald Homes, Breland Homes, Regent Homes and Crown
Communities. 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 Fort Worth, Texas. 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 the initial public
offering of our common stock. Our company expanded and diversified its operations geographically over the years by
investing available capital into our existing homebuilding markets and into start-up operations in new markets, as well as
by acquiring other homebuilding companies. Our product offerings across our operating markets are broad and diverse.
Our homes range in size from 1,000 to more than 4,000 square feet and in price from $100,000 to more than $1,000,000.
For the year ended September 30, 2014, we closed 28,670 homes with an average sales price of approximately $272,200.
Through our financial services operations, we provide mortgage financing and title agency services to homebuyers
in many of our homebuilding markets. DHI Mortgage, our 100% owned subsidiary, provides mortgage financing
services primarily to our homebuilding customers and generally sells the mortgages it originates and the related servicing
rights to third-party purchasers. DHI Mortgage originates loans in accordance with purchaser guidelines and sells
substantially all of its mortgage production shortly after origination. Our subsidiary title companies serve as title
insurance agents by providing title insurance policies, examination and closing services, primarily to our homebuilding
customers.
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 $8.0 billion in fiscal 2014. 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. Approximately 90% of our home sales
revenue in fiscal 2014 came from the construction and sale of single-family detached homes, with the remainder from
attached homes, such as town homes, duplexes, triplexes and condominiums. Our financial services segment generates
its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services.
In addition to our homebuilding and financial services operations, we have ancillary activities that are related to
our homebuilding business and real estate holdings, but are not components of our core homebuilding operations. These
include the activities of our captive insurance subsidiary and other insurance-related subsidiaries, subsidiaries that own
rental properties and collect rental income, and subsidiaries that own income-producing assets such as non-residential
real estate, mineral rights and other rights or assets. These ancillary activities and the related income or loss are not
significant, either individually or in the aggregate.
1
Available Information
We make available, as soon as reasonably practicable, on our website, www.drhorton.com, all of our reports
required to be filed with the Securities and Exchange Commission (SEC). These reports can be found on the “Investor
Relations” page of our website under “SEC Filings” and include our annual and quarterly reports on Form 10-K and
10-Q (including related filings in XBRL format), current reports on Form 8-K, beneficial ownership reports on Forms 3,
4, and 5, proxy statements and amendments to such reports. Our SEC filings are also available to the public on the 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. Further information on the operation of the public reference room
can be obtained by calling the SEC at 1-800-SEC-0330. In addition to our SEC filings, our corporate governance
documents, including our Code of Ethical Conduct for the Chief Executive Officer, Chief Financial Officer and senior
financial officers, are available on the “Investor Relations” page of our website under “Corporate Governance.” Our
stockholders may also obtain these documents in paper format free of charge upon request made to our Investor
Relations department.
Our principal executive offices are located at 301 Commerce Street, Suite 500, Fort Worth, Texas 76102 and our
telephone number is (817) 390-8200. Information on or linked to our website is not incorporated by reference into this
annual report on Form 10-K unless expressly noted.
OPERATING STRUCTURE AND PROCESSES
Following is an overview of our company's operating structure and the significant processes that support our
business controls, strategies and performance.
Homebuilding Markets
Our homebuilding business began in the Dallas/Fort Worth area, which is still one of our largest local
homebuilding operations and home to our corporate headquarters. We currently operate in 27 states and 79 markets,
which provides us with geographic diversification in our homebuilding inventory investments and our sources of
revenues and earnings. We believe our geographic diversification lowers our operational risks by mitigating the effects of
local and regional economic cycles, and it also enhances our earnings potential by providing more diverse opportunities
to invest in our business.
2
We conduct our homebuilding operations in the geographic regions, states and markets listed below, and we
conduct our mortgage and title operations in many of these markets. Our homebuilding operating divisions are
aggregated into six reporting segments, also referred to as reporting regions, which comprise the markets below. Our
financial statements contain additional information regarding segment performance.
State
Reporting Region/Market
State
Reporting Region/Market
Delaware
Georgia
Maryland
New Jersey
North Carolina
Pennsylvania
South Carolina
Virginia
Colorado
Illinois
Indiana
Minnesota
Alabama
Florida
Georgia
Mississippi
Tennessee
East Region
Northern Delaware
Savannah
Baltimore
Suburban Washington, D.C.
North New Jersey
South New Jersey
Charlotte
Fayetteville
Greensboro/Winston-Salem
Jacksonville
Raleigh/Durham
Wilmington
Philadelphia
Charleston
Columbia
Greenville/Spartanburg
Hilton Head
Myrtle Beach
Northern Virginia
Midwest Region
Colorado Springs
Denver
Fort Collins
Chicago
Northern Indiana
Minneapolis/St. Paul
Southeast Region
Birmingham
Huntsville
Mobile
Montgomery
Tuscaloosa
Fort Myers/Naples
Jacksonville
Lakeland
Melbourne/Vero Beach
Miami/Fort Lauderdale
Orlando
Pensacola/Panama City
Port St. Lucie
Tampa/Sarasota
Volusia County
West Palm Beach
Atlanta
Augusta
Middle Georgia
Gulf Coast
Hattiesburg
Nashville
Louisiana
Oklahoma
Texas
Arizona
New Mexico
California
Hawaii
Nevada
Oregon
Utah
Washington
South Central Region
Baton Rouge
Lafayette
Oklahoma City
Austin
Dallas
El Paso
Fort Worth
Houston
Killeen/Temple/Waco
Midland/Odessa
San Antonio
Southwest Region
Phoenix
Tucson
Albuquerque
West Region
Bay Area
Central Valley
Imperial Valley
Los Angeles County
Riverside County
Sacramento
San Bernardino County
San Diego County
Ventura County
Hawaii
Maui
Oahu
Las Vegas
Reno
Portland
Salt Lake City
Seattle/Tacoma
Vancouver
3
When evaluating new or existing homebuilding markets for purposes of capital allocation, we consider local,
market-specific factors, including among others:
• Economic conditions;
• Employment levels and job growth;
•
Income level of potential homebuyers;
• Local housing affordability and typical mortgage products utilized;
• Market for homes at our targeted price points;
• Availability of land and lots in desirable locations on acceptable terms;
• Land entitlement and development processes;
• Availability of qualified subcontractors;
• New and secondary home sales activity;
• Competition; and
•
Prevailing housing products, features, cost and pricing.
Economies of Scale
We are the largest homebuilding company in the United States in fiscal 2014 as measured by number of homes
closed and revenues, and we are also one of the largest builders in many of the markets in which we operate. We believe
that our national, regional and local scale of operations provides us with benefits that may not be available to the same
degree to some other smaller homebuilders, such as:
• Greater access to and lower cost of capital, due to our balance sheet strength and our lending and capital
markets relationships;
• Negotiation of volume discounts and rebates from national, regional and local materials suppliers and lower
labor rates from certain subcontractors; and
• Enhanced leverage of our general and administrative activities, which allow us flexibility to adjust to changes
in market conditions and compete effectively in each of our markets.
Decentralized Homebuilding Operations
We view homebuilding as a local business; therefore, most of our direct homebuilding activities are decentralized,
which provides flexibility to our local managers on operational decisions. At September 30, 2014, we had 37 separate
homebuilding operating divisions, many of which operate in more than one market area. Generally, each operating
division consists of a division president; a controller; land entitlement, acquisition and development personnel; a sales
manager and sales and marketing personnel; a construction manager and construction superintendents; customer service
personnel; a purchasing manager and office staff. We believe that our division presidents and their management teams,
who are familiar with local conditions, generally have the best information on which to base many decisions regarding
their operations. Our division presidents receive performance based compensation if they achieve targeted financial and
operating metrics related to their operating divisions. Following is a summary of our homebuilding activities that are
decentralized in our local operating divisions, and the control and oversight functions that are centralized in our regional
and corporate offices:
4
Operating Division Responsibilities
Each operating division is responsible for:
•
Site selection, which involves
— A feasibility study;
— Soil and environmental reviews;
— Review of existing zoning and other governmental requirements;
— Review of the need for and extent of offsite work required to obtain project entitlements; and
— Financial analysis of the potential project;
• Negotiating lot option, land acquisition and related contracts;
• Obtaining all necessary land development and home construction approvals;
•
•
•
•
Selecting land development subcontractors and ensuring their work meets our contracted scopes;
Selecting building plans and architectural schemes;
Selecting construction subcontractors and ensuring their work meets our contracted scopes;
Planning and managing homebuilding schedules;
• Developing and implementing local marketing and sales plans;
• Determining the pricing for each house plan in a given community; and
• Coordinating post-closing customer service and warranty repairs.
Centralized Controls
We centralize many important risk elements of our homebuilding business through our regional and corporate
offices. We have five separate homebuilding regional offices. Generally, each regional office consists of a region
president, legal counsel, a chief financial officer and limited office support staff. Each of our region presidents and their
management teams are responsible for oversight of the operations of a number of homebuilding operating divisions,
including:
• Review and approval of division business plans and budgets;
• Review of all land and lot acquisition contracts;
• Review of all business and financial analysis for potential land and lot inventory investments;
• Oversight of land and home inventory levels;
• Monitoring division financial and operating performance; and
• Review of major personnel decisions and division incentive compensation plans.
5
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:
•
Financing;
• Cash management;
• Allocation of capital;
•
Issuance and monitoring of inventory investment guidelines to our operating divisions;
• Approval and funding of land and lot acquisitions;
• Monitoring and analysis of margins, costs, profitability and inventory levels;
• Risk and litigation management;
• Environmental assessments of land and lot acquisitions;
•
Information technology systems;
• Accounting and management reporting;
•
•
•
Income taxes;
Internal audit;
Public reporting and investor and media relations;
• Administration of payroll and employee benefits;
• Negotiation of national purchasing contracts;
• Administration of customer satisfaction surveys and reporting of results; and
• Approval of major personnel decisions and management incentive compensation plans.
Cost Controls
We control construction costs by designing our homes efficiently and by obtaining competitive bids for
construction materials and labor. We also competitively bid and negotiate pricing from our subcontractors and suppliers
based on the volume of services and products we purchase on a local, regional and national basis. We monitor our land
development expenditures and construction costs versus budgets for each house and community, and we review our
inventory levels, margins, expenses, profitability and returns for each operating market compared to both its business
plan and our performance expectations.
We control overhead costs by centralizing certain accounting and administrative functions and by monitoring
staffing and compensation levels. We review other general and administrative costs to identify efficiencies and savings
opportunities in our operating divisions and our regional and corporate offices. We also direct many of our promotional
activities toward local real estate brokers, which we believe is an efficient use of our marketing expenditures.
6
Land/Lot Acquisition and Inventory Management
We acquire land for use in our homebuilding operations 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 complete a feasibility study, which
includes soil tests, independent environmental studies, other engineering work and financial analysis. We also 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 may sell land
and lots to other developers and homebuilders where we have excess land and lot positions.
We also enter into land/lot option contracts, in which we obtain the right, but generally not the obligation, to buy
land or lots at predetermined prices on a defined schedule commensurate with anticipated home closings or planned
development. Our option contracts generally are non-recourse, which limits our financial exposure to our earnest money
deposited into escrow under the terms of the contract and any pre-acquisition due diligence costs we incur. This enables
us to control land and lot positions with limited capital investment, which substantially reduces the risks associated with
land ownership and development.
We directly acquire almost all of our land and lot positions. We are a party to a small number of joint ventures, all
of which are consolidated in our financial statements.
We attempt to mitigate our exposure to real estate inventory risks by:
• Managing our supply of land/lots controlled (owned and optioned) in each market based on anticipated future
home closing levels;
• Monitoring local market and demographic trends, housing preferences and related economic developments,
including the identification of desirable housing submarkets based on the quality of local schools, new job
opportunities, local growth initiatives and personal income trends;
• Utilizing land/lot option contracts, where possible;
•
Seeking to acquire developed lots which are substantially ready for home construction, where possible;
• Controlling our levels of investment in land acquisition, land development and housing inventory to match
the expected housing demand in each of our operating markets;
• 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
• Monitoring and managing the number of speculative homes (homes under construction without an executed
sales contract) built in each subdivision.
Land Development and Home Construction
Substantially all of our land development and home construction work is performed by subcontractors.
Subcontractors typically are selected after a competitive bidding process, and are retained for a specific subdivision or
series of house plans pursuant to a contract that obligates the subcontractor to complete the scope of work at an agreed-
upon price. We employ land development managers and construction superintendents to monitor land development and
home construction activities, 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.
7
Our home designs are selected or prepared in each of our markets to appeal to the tastes and preferences of local
homebuyers in each community. We offer optional interior and exterior features to allow homebuyers to enhance the
basic home design and to allow us to generate additional revenues from each home sold. We continually adjust our
product offerings to address our customers’ expectations for affordability, home size and features. Construction time for
our homes depends on the availability of labor, materials and supplies, the weather, the size of the home and other
factors. We complete the construction of most homes within three to six months.
We typically do not maintain significant inventories of land development or construction materials, except for
work in progress materials for active development projects and 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 building materials that are cancelable at our option.
We are subject to governmental regulations that affect our land development and construction activities. At times,
we have experienced delays because of the entitlement process, which is dependent upon receiving the proper approvals
from municipalities that may not be adequately staffed.
Marketing and Sales
In most of our markets, we use the D.R. Horton, Emerald Homes and Express Homes brand names to market and
sell our homes. Our D.R. Horton branded communities are the core of our business and account for the substantial
majority of our home closings, focusing on the first time and first time move-up homebuyer. Our Emerald branded
communities, introduced in fiscal 2013, appeal to buyers in search of higher-end move-up and luxury homes. Our
Express branded communities were introduced in fiscal 2014 to accommodate a segment of entry-level buyers, whose
focus is primarily on affordability. In several markets, we also use the Crown Communities, Breland Homes and Regent
Homes brands, after we acquired their homebuilding operations. Crown and Breland's product offerings are similar to
our D.R. Horton communities, and Regent's communities are similar to our Express Homes communities. Homes
marketed under our Express Homes and Regent Homes brands together represented 5% of our fiscal 2014 home
closings, and homes marketed under our Emerald Homes brand represented 2% of our fiscal 2014 home closings.
We market and sell our homes primarily through commissioned employees, and the majority of our home closings
also involve an independent real estate broker. We typically conduct home sales from sales offices located in furnished
model homes in each subdivision, and we generally do not offer our model homes for sale until the completion of a
subdivision. Our sales personnel assist prospective homebuyers by providing floor plans and price information,
demonstrating the features and layouts of model homes and assisting with the selection of options and other custom
features. We train and inform our sales personnel as to the availability of financing, construction schedules, and
marketing and advertising plans. As market conditions warrant, we may provide potential homebuyers with one or more
of a variety of incentives, including discounts and free upgrades, to be competitive in a particular market.
We market our homes and communities to prospective homebuyers and real estate brokers through electronic
media, including email, social networking sites and our company website, as well as brochures, flyers, newsletters and
promotional events. We also use billboards, radio, television, magazine and newspaper advertising as necessary in each
local market. We attempt to position our subdivisions in locations that are desirable to potential homebuyers and
convenient to or visible from local traffic patterns, which helps to reduce advertising costs. Model homes play a
substantial role in our marketing efforts, and we expend significant effort and resources to create an attractive
atmosphere in our model homes.
We also build speculative homes in most of our subdivisions. These homes enhance our marketing and sales efforts
to prospective homebuyers who are renters or who are relocating to these markets, as well as to independent brokers,
who often represent homebuyers requiring a 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
maintain a level of speculative home inventory 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. Speculative homes help to
provide us with opportunities to compete effectively with existing homes available in the market and improve our profits
and returns.
8
Sales Contracts and Backlog
Our sales contracts require an earnest money deposit which varies in amount across our markets and subdivisions.
Additionally, customers are generally required to pay additional deposits when they select options or upgrade features for
their homes. Our sales contracts include a financing contingency which permits customers to cancel and receive a refund
of their deposit if they cannot obtain mortgage financing at prevailing or specified interest rates within a specified period.
Our contracts may include other contingencies, such as the sale of an existing home. We either retain or refund customer
deposits on canceled sales contracts, depending upon the applicable provisions of the contract or other circumstances.
Sales order backlog represents homes under contract but not yet closed at the end of the period. At September 30,
2014, the value of our backlog of sales orders was $2,858.8 million (9,888 homes), an increase of 29% from $2,210.1
million (8,205 homes) at September 30, 2013. The average sales price of homes in backlog was $289,100 at
September 30, 2014, up 7% from the $269,400 average at September 30, 2013. Many of the contracts in our sales order
backlog are subject to contingencies, such as those described above, which can result in cancellations. A portion of the
contracts in backlog will not result in closings due to cancellations. As a percentage of gross sales orders, cancellations
of sales contracts were 23% and 24% in fiscal 2014 and 2013, respectively.
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; therefore, substantially all of the homes in our sales backlog at
September 30, 2014 are scheduled to close in fiscal year 2015. 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 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 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.
Customer Mortgage Financing
We provide mortgage financing services principally to purchasers of our homes in the majority of our
homebuilding markets through our 100% owned subsidiary, DHI Mortgage. DHI Mortgage assists in the sales
transaction by coordinating the mortgage application, mortgage commitment and home closing processes to facilitate a
timely and efficient home buying experience for our buyers. DHI Mortgage originates mortgage loans for a substantial
portion of our homebuyers. During the year ended September 30, 2014, DHI Mortgage provided mortgage financing
services for approximately 50% of our total homes closed, and approximately 88% of DHI Mortgage’s loan volume
related to homes closed by our homebuilding operations. Most of our homebuilding divisions also work with a number
of additional mortgage lenders that offer a range of mortgage financing programs to our homebuyers.
To limit the risks associated with our mortgage operations, DHI Mortgage originates loan products that we believe
can be sold to third-party purchasers of mortgage loans. DHI Mortgage sells substantially all of the loans and their
servicing rights to third-party purchasers shortly after origination with limited recourse provisions. DHI Mortgage
centralizes most of its control and oversight functions, including those related to loan underwriting, quality control,
regulatory compliance, secondary marketing of loans, hedging activities, accounting and financial reporting.
9
Title Services
Through our subsidiary title companies, we serve as a title insurance agent in selected markets by providing title
insurance policies, examination and closing services primarily to our homebuilding customers. We currently assume little
or no underwriting risk associated with these title policies.
Employees
At September 30, 2014, we employed 5,621 persons, of whom 1,364 were sales and marketing personnel, 1,499
were involved in construction, 1,662 were office personnel and 1,096 worked in mortgage and title operations. We
believe that we have good relations with our employees.
Acquisitions
We routinely evaluate opportunities to profitably expand our operations, including potential acquisitions of other
homebuilding or related businesses. In August 2012, we acquired the homebuilding operations of Breland Homes, which
operates in Huntsville and Mobile, Alabama and along the coast of Mississippi. In October 2013, we acquired the
homebuilding operations of Regent Homes, Inc., which operates in Charlotte, Greensboro and Winston-Salem, North
Carolina. In May 2014, we acquired the homebuilding operations of Crown Communities, which operates in Georgia,
South Carolina and eastern Alabama.
Acquisitions of homebuilding businesses can provide us with immediate land and home inventories, as well as
control of additional land and lot positions through option contracts. In addition, employees may have specialized
knowledge of local market conditions, including existing relationships with municipalities, land owners, developers,
subcontractors and suppliers. These inventory positions and local market knowledge and relationships could take us
several years to develop through our own start-up efforts. We seek to limit the risks associated with acquiring other
companies 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.
Competition
The homebuilding industry is highly competitive. We compete with numerous other national, regional and local
homebuilders for homebuyers, desirable properties, raw materials, skilled labor, employees, management talent and
financing. We also compete with resales of existing and foreclosed homes and with the rental housing market. Our
homes compete on the basis of quality, price, design, mortgage financing terms and location.
The competitors to our financial services businesses include other title companies and mortgage lenders, including
national, regional and local mortgage bankers and other financial institutions. Some of these competitors are subject to
fewer governmental regulations and have greater access to capital than we do, and some of them may operate with
different lending criteria and may offer a broader array of financing and other products and services to consumers than
we do.
10
Governmental Regulation and Environmental Matters
The homebuilding industry is subject to extensive and complex regulations. We and the subcontractors we use
must comply with many federal, state and local laws and regulations, including zoning, density and development
requirements, building, environmental, advertising, labor and real estate sales rules and regulations. These regulations
and requirements affect substantially all aspects of our land development and home design, construction and sales
processes in varying degrees across our markets. 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 Department
of Veteran Affairs (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, utilities and other public improvements.
Our homebuilding operations are also subject to an extensive 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 comply with extensive federal and state laws and
regulations as administered by numerous federal and state government agencies. These include eligibility and other
requirements for participation in the programs offered by the FHA, VA, Government National Mortgage Association
(Ginnie Mae), Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation
(Freddie Mac) and the United States Department of Agriculture (USDA). These laws and regulations also require
compliance with consumer lending laws and other regulations governing disclosure requirements, prohibitions against
discrimination and real estate settlement procedures. These laws and regulations subject our operations to regular,
extensive examinations by the applicable agencies.
Seasonality
Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so
again in the future, we generally have more homes under construction, close more homes and have greater revenues and
operating income in the third and fourth quarters of our fiscal year. The seasonal activity increases our working capital
requirements for our homebuilding operations during our third and fourth fiscal quarters and increases our funding
requirements for the mortgages we originate in our financial services segment at the end of these quarters. 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.
11
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 experienced a significant downturn from 2006 through 2011. Homebuilding industry
conditions began to improve in fiscal 2012, and we have begun to see improvements in the general U.S. economy more
recently. However, a subsequent deterioration in industry conditions or general economic conditions could adversely
affect our business or financial results.
We experienced one of the most severe housing downturns in U.S. history from 2006 through 2011. During this
downturn, we experienced significant reductions in our home sales and homebuilding revenues, and we incurred
substantial asset impairments and write-offs. Since fiscal 2012, our results and other national data indicate that the overall
demand for new homes has improved. Also, more recently we have seen an improvement in U.S. economic conditions.
However, industry conditions vary across our operating markets, and the mortgage lending environment remains
restrictive. Weakening economic conditions and a deterioration in industry conditions could adversely affect our business
and financial results.
The homebuilding industry is cyclical and affected by changes in economic, real estate or other conditions that could
adversely affect our business or financial results.
The homebuilding industry is cyclical and is significantly affected by changes in general and local economic and real
estate conditions, such as:
•
•
•
•
•
•
•
employment levels;
availability of financing for homebuyers;
interest rates;
consumer confidence;
levels and prices of new homes for sale and alternatives to new homes, including foreclosed homes, homes held
for sale by investors and speculators, other existing homes and rental properties;
demographic trends; and
housing demand.
Adverse changes in these general and local economic conditions or deterioration in the broader economy could have a
negative impact on our business and financial results. Also, changes in these economic conditions may affect some of our
regions or markets more than others. If adverse conditions affect any of our larger markets, they could have a
proportionately greater impact on us than on some other homebuilding companies.
In recent years, concerns regarding the U.S. government’s fiscal policies and economic stimulus actions have created
uncertainty in the financial markets and caused volatility in interest rates, which has impacted business and consumer
confidence. Federal government actions related to economic stimulus, taxation and spending levels, borrowing limits,
potential government shutdowns, the implementation of federal healthcare legislation and the related political debates,
conflicts and compromises associated with such actions may negatively impact the financial markets and consumer
confidence and spending, which could hurt the U.S. economy and the housing market. Such events could adversely affect
our homebuilding and financial services businesses and operating results.
12
Weather conditions and natural disasters, such as hurricanes, tornadoes, earthquakes, wildfires, volcanic activity,
droughts and floods, can harm our homebuilding business. These can delay our development work, home construction and
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, Texas and other coastal
areas, where we have some of our larger operations, present increased risks of adverse weather or natural disasters.
Deployments of U.S. military personnel to foreign regions, terrorist attacks, other acts of violence or threats to
national security and any corresponding response by the United States or others, or related domestic or international
instability, may cause an economic slowdown in the markets where we operate, which could adversely affect our
homebuilding business.
Public health issues such as a major epidemic or pandemic could adversely affect our business. The U.S. and other
countries have experienced, and may experience in the future, outbreaks of contagious diseases that affect public
perception of health risk. In the event of a widespread, prolonged, actual or perceived outbreak of a contagious disease, our
operations could be negatively impacted by a reduction in customer traffic or other factors which could reduce demand for
new homes.
If we experience any of the foregoing, potential customers may be less willing or able to buy our homes. In the
future, our pricing and product strategies may also be limited by market conditions. We may be unable to change the mix of
our home offerings, reduce the costs of the homes we build, offer more affordable homes or satisfactorily address changing
market conditions in other ways without adversely affecting our profit margins. In addition, cancellations of home sales
contracts in backlog may increase if homebuyers do not honor their contracts due to any of the factors discussed above.
Our financial services business is closely related to our homebuilding business, as it originates mortgage loans
principally to purchasers of the homes we build. A decrease in the demand for our homes because of the foregoing matters
will 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 recourse 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 current
estimated amounts.
Constriction of the credit markets could limit our ability to access capital and increase our costs of capital.
During the housing downturn, the credit markets constricted and reduced some sources of liquidity that were
previously available to us. Consequently, we focused on maintaining positive operating cash flow, and we relied principally
on our cash on hand to meet our working capital needs and repay outstanding indebtedness during those years. There likely
will be periods in the future when financial market upheaval will increase our cost of capital or limit our ability to access
the public debt markets or obtain bank financing.
We have a revolving credit facility, which currently provides committed loan financing through September 7, 2019 in
an amount totaling $975 million. Also, our mortgage subsidiary utilizes a $300 million mortgage repurchase facility to
finance the majority of the loans it originates. The capacity of the facility can be increased up to $400 million subject to the
availability of additional commitments. The mortgage repurchase facility must be renewed annually and currently expires
on February 27, 2015. We expect to renew and extend the term of the mortgage repurchase facility with similar terms prior
to its maturity. Adverse changes in market conditions could make the renewal of these facilities more difficult or could
result in an increase in the cost of the facilities or a decrease in the committed amounts. Such changes affecting our
mortgage repurchase facility may also make it more difficult or costly to sell the mortgages that we originate.
We believe that our existing cash resources, our revolving credit facility and our mortgage repurchase facility provide
sufficient liquidity to fund our near-term working capital needs and debt obligations. We regularly assess our projected
capital requirements to fund future growth in our business, repay our longer-term debt obligations, and support our other
general corporate and operational needs, and we regularly evaluate our opportunities to raise additional capital. As market
conditions permit, we may issue new debt or equity securities through the public capital markets or obtain additional bank
financing to fund our projected capital requirements or provide additional liquidity. Adverse changes in economic,
homebuilding or capital market conditions could negatively affect our business, liquidity and financial results.
13
Reductions in the availability of mortgage financing and the liquidity provided by government-sponsored enterprises,
the effects of government programs, a decrease in our ability to sell mortgage loans on attractive terms or an increase in
mortgage interest rates could adversely affect our business or financial results.
Since the housing downturn, 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
predominantly limited to securities backed by Fannie Mae, Freddie Mac or Ginnie Mae. As a result, it remains difficult for
some potential buyers to finance their home purchases. Further tightening of credit requirements could adversely affect our
business or financial results.
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. There has been ongoing
discussion by the government with regard to the long term structure and viability of Fannie Mae and Freddie Mac. These
discussions include the downsizing of their portfolios as well as the tightening of guidelines for their loan products. In
addition, increased lending volume and losses insured by the FHA have resulted in a reduction of its insurance fund. Any
reduction in the availability of the financing or insuring provided by these institutions could adversely affect interest rates,
mortgage availability and sales of new homes and mortgage loans. The FHA insures mortgage loans that generally have
lower credit requirements and is an important source for financing the sale of our homes. In recent years, more restrictive
guidelines have been placed on FHA insured loans, affecting minimum down payment and availability for condominium
financing. Also in recent years, the FHA has raised the premium charged to borrowers for insuring loans, which has
increased the cost of FHA financing. Additional future restrictions or premium increases 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). These government-sponsored loan programs are subject to changes in regulations, lending standards and
government funding levels. There can be no assurances that these programs or other programs will continue to be available
in our homebuilding markets or that they will be as attractive to our customers as the programs currently offered, which
could negatively affect our sales.
The mortgage loans originated by our financial services operations are generally sold to third-party purchasers.
During fiscal 2014, approximately 71% of our mortgage loans were sold to four major financial institutions and the largest
concentration of total loans sold to one institution was 28%. On an ongoing basis, we seek to establish loan purchase
arrangements with multiple institutions. If we are unable to sell mortgage loans to purchasers on attractive terms, our
ability to originate and sell mortgage loans at competitive prices could be limited, which would negatively affect our
profitability.
Even if potential customers do not need financing, changes in the availability of mortgage products may make it more
difficult for them to sell their current homes to potential buyers who need financing.
Mortgage rates are currently low as compared to most historical periods. If interest rates increase, the costs of owning
a home will be affected, which could result in a decline in the demand for our homes.
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. There are risks inherent in controlling, owning and
developing land. If housing demand declines, we may not be able to build and sell homes profitably in some of our
communities, and we may not be able to fully recover the costs of some of the land and lots we own. Also, the values of
our owned undeveloped land, building lots and housing inventories may fluctuate significantly due to changes in market
conditions. As a result, our deposits for lots controlled under option or similar contracts may be put at risk, we may have to
sell homes or land for a lower profit margin or we may have to record inventory impairment charges on our developed and
undeveloped land and lots. A significant deterioration in economic or homebuilding industry conditions may result in
substantial inventory impairment charges.
14
Homebuilding is subject to home warranty and construction defect claims in the ordinary course of business that can be
significant.
We are subject to home warranty and construction defect claims arising in the ordinary course of our homebuilding
business. We rely on subcontractors to perform the actual construction of our homes, and in many cases, to select and
obtain construction materials. Despite our detailed specifications and monitoring of the construction process, our
subcontractors occasionally use improper construction processes or defective materials in the construction of our homes.
When we find these issues, we repair them in accordance with our warranty obligations. We spend significant resources to
repair items in homes we have sold to fulfill the warranties we issued to our homebuyers. Additionally, we are subject to
construction defect claims which can be costly to defend and resolve in the legal system. Warranty and construction defect
matters can also result in negative publicity in the media and on the internet, which can damage our reputation and
adversely affect our ability to sell homes.
Based on the large number of homes we have sold over the years, our potential liabilities related to warranty and
construction defect claims are significant. As a consequence, we maintain product liability insurance, and we seek to obtain
indemnities and certificates of insurance from subcontractors covering claims related to their workmanship and materials.
We establish warranty and other reserves for the homes we sell based on historical experience in our markets and our
judgment of the qualitative risks associated with the types of homes built. Because of the uncertainties inherent to these
matters, we cannot provide assurance that our insurance coverage, our subcontractor arrangements and our reserves will be
adequate to address all of our future warranty and construction defect claims. 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 limited and costly. We have responded to increases in insurance costs and
coverage limitations by increasing our self-insured retentions and claim reserves. There can be no assurance that coverage
will not be further restricted or become more costly. If costs to resolve our future warranty and construction defect claims
exceed our estimates, our financial results and liquidity could be adversely affected.
Supply shortages and other risks related to acquiring land, 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:
•
•
•
•
•
difficulty in acquiring land suitable for residential building at affordable prices in locations where our potential
customers want to live;
shortages of qualified subcontractors;
reliance on local subcontractors, manufacturers and distributors who may be inadequately capitalized;
shortages of materials; and
volatile increases in the cost of materials, particularly increases in the price of lumber, drywall and cement,
which are significant components of home construction costs.
These factors may cause us to take longer or incur more costs to build our homes and adversely affect our revenues
and margins. If the level of new home demand increases significantly in future periods, the risk of shortages in residential
lots, labor and materials available to the homebuilding industry could increase in some markets where we operate.
We are required to obtain performance bonds, the unavailability of which could adversely affect our results of
operations and cash flows.
We often are required to provide surety bonds to secure our performance or obligations under construction contracts,
development agreements and other arrangements. Our ability to obtain surety bonds primarily depends upon our credit
rating, financial condition, past performance and other factors, including the capacity of the surety market and the
underwriting practices of surety bond issuers. The ability to obtain surety bonds also can be impacted by the willingness of
insurance companies to issue performance bonds for construction and development activities. If we are unable to obtain
surety bonds when required, our results of operations and cash flows could be adversely affected.
15
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. The loss or reduction of homeowner tax deductions, if such tax law
changes were enacted without offsetting provisions, could adversely affect demand for and sales prices of new homes.
In addition, increases in property tax rates by local governmental authorities, as experienced in some areas in
response to reduced federal and state funding, could adversely affect the amount of financing our potential customers could
obtain or their desire to purchase new homes.
Our business and financial results could be adversely affected by significant inflation, higher interest rates or deflation.
Inflation can adversely affect us by increasing costs of land, materials and labor. In addition, significant inflation is
often accompanied by higher interest rates, which have a negative impact on housing demand. In a highly inflationary
environment, depending on industry and other economic conditions, we may be precluded from raising home prices
enough to keep up with the rate of inflation, which could reduce our profit margins. Moreover, with inflation, the costs of
capital increase and the purchasing power of our cash resources can decline. Current or future efforts by the government to
stimulate the economy may increase the risk of significant inflation and its adverse impact on our business or financial
results.
Alternatively, a significant period of deflation could cause a decrease in overall spending and borrowing levels. This
could lead to a further deterioration in economic conditions, including an increase in the rate of unemployment. Deflation
could also cause the value of our inventories to decline or reduce the value of existing homes below the related mortgage
loan balance, which could potentially increase the supply of existing homes and have a negative impact on our results of
operations.
Governmental regulations and environmental matters 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 significant number and variety of local, state and federal laws and regulations concerning
protection of health, safety, labor standards 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. Government agencies also routinely initiate audits, reviews or
investigations of our business practices to ensure compliance with these laws and regulations, which can cause us to incur
costs or create other disruptions in our business that can be significant.
The subcontractors we rely on to perform the actual construction of our homes are also subject to a significant
number of local, state and federal laws and regulations, including laws involving matters that are not within our control. If
the subcontractors who construct our homes fail to comply with all applicable laws, we can suffer reputational damage, and
may be exposed to possible liability.
16
We are also subject to an extensive number of laws and regulations because our common stock and debt securities are
publicly traded in the capital markets. These regulations govern our communications with our shareholders and the capital
markets, our financial statement disclosures and our legal processes, and they also impact the work required to be
performed by our independent registered public accounting firm and our legal counsel. Changes in these laws and
regulations, including the subsequent implementation of rules by the administering government authorities, can require us
to incur additional compliance costs, and such costs can be significant.
Governmental regulation of our financial services operations could adversely affect our business or financial results.
Our financial services operations are subject to a significant number of federal, state and local laws and regulations,
any of which may limit our ability to provide mortgage financing or title services to potential purchasers of our homes.
These include eligibility requirements for participation in federal loan programs, compliance with consumer lending laws
and other regulations governing disclosure requirements, prohibitions against discrimination, real estate settlement
procedures and foreclosure and servicing policies. Additionally, the turmoil caused by the significant number of defaults
and resulting foreclosures during the housing downturn has encouraged consumer lawsuits and the investigation of
financial services industry practices by various governmental authorities. These governmental inquiries could result in
changes in regulations and in the practices of the financial services and homebuilding industries, and they could adversely
affect the costs and financial results of financial services and homebuilding companies.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was enacted,
providing for a number of new requirements related to residential mortgage lending practices. In 2011, the Consumer
Financial Protection Bureau (CFPB) was created to regulate consumer protection with regard to financial products and
services. In January 2014, the CFPB implemented rules regarding the creation and definition of a “Qualified
Mortgage” (QM). These rules created standards for lender practices regarding assessing borrowers’ ability to repay, and
limitations on certain fees and incentive arrangements. Additional rules regarding loan estimates, closing disclosures and
fees are scheduled to be implemented in August 2015. The effect of these rules on our homebuilding and financial services
businesses have yet to be determined, and could affect the availability and cost of mortgage credit.
We have substantial amounts of consolidated debt and may incur additional debt; our debt obligations and our ability to
comply with related covenants, restrictions or limitations could adversely affect our financial condition.
As of September 30, 2014, our consolidated debt was $3.7 billion, and we had $522.4 million principal amount of our
debt maturing before the end of fiscal 2015. The indentures governing our senior notes do not restrict the incurrence of
future unsecured debt by us or our homebuilding subsidiaries or the incurrence of secured or unsecured debt by our
financial services subsidiaries, and the agreement governing our revolving credit facility and our senior note indentures
allow us to incur a substantial amount of future unsecured debt. Such instruments also permit us and our homebuilding
subsidiaries to incur significant amounts of additional secured debt.
Possible consequences. The amount and the maturities of our debt could have important consequences. For example,
they could:
•
•
•
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;
limit our flexibility in planning for, or reacting to, the changes in our business;
limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service
requirements or other requirements;
•
place us at a competitive disadvantage to the extent that we have more debt than some of our competitors; and
• make us more vulnerable to downturns in our business or general economic conditions.
17
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 and the financial
covenants under our revolving credit and mortgage repurchase facilities will depend, in part, upon our future financial
performance. Our future results are subject to the risks and uncertainties described in this report. 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. Changes in prevailing interest rates may affect our ability to meet our debt service
obligations, because borrowings under our revolving credit facility and mortgage repurchase facility bear interest at
floating rates.
Revolving credit facility. Our revolving credit facility contains financial covenants requiring the maintenance of a
minimum level of tangible net worth, a maximum allowable ratio of debt to tangible net worth and a borrowing base
restriction if our ratio of debt to tangible net worth exceeds a certain level. A failure to comply with these requirements
could allow the lending banks to terminate the availability of funds under our revolving credit facility or cause any
outstanding borrowings to become due and payable prior to maturity. The agreement governing our revolving credit facility
and the indentures governing our senior notes impose restrictions on the ability of the Company and the guarantors to incur
debt secured by certain assets.
Mortgage repurchase facility and other restrictions. The mortgage repurchase facility for our mortgage subsidiary
requires the maintenance of a minimum level of tangible net worth, a maximum allowable ratio of debt to tangible net
worth and a minimum level of liquidity by our mortgage subsidiary. A failure to comply with these requirements could
allow the lending banks to terminate the availability of funds to our mortgage subsidiary or cause their debt to become due
and payable prior to maturity. Any difficulty experienced in complying with these covenants could make the renewal of the
facility more difficult or costly.
In addition, although our financial services business is conducted through subsidiaries that are not restricted by our
indentures or revolving credit facility, the ability of our financial services subsidiaries to provide funds to our homebuilding
operations would be restricted in the event such distribution of funds would cause an event of default under the mortgage
repurchase facility or if an event of default had occurred 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 our financial services subsidiaries 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.
Changes in debt ratings. Our senior unsecured debt is currently rated below investment grade. Any lowering of our
debt ratings could make accessing the public capital markets or obtaining additional credit from banks more difficult and/or
more expensive.
Change of control purchase options and change of control default. Upon the occurrence of both a change of control
and a ratings downgrade event, each as defined in the indentures governing $2.3 billion principal amount of our senior
notes as of September 30, 2014, we will be required to offer to repurchase such notes at 101% of their principal amount,
together with all accrued and unpaid interest, if any. Moreover, a change of control (as defined in our revolving credit
facility) would constitute an event of default under our revolving credit facility, which could result in the acceleration of
the repayment of any borrowings outstanding under our revolving credit facility, a requirement to cash collateralize all
letters of credit outstanding thereunder and the termination of the commitments thereunder. If repayment of more than $50
million outstanding under our revolving credit facility was accelerated, and such acceleration was not rescinded or such
indebtedness was not satisfied, in either case within 30 days, an event of default would result under the indentures
governing our senior notes, entitling the trustee for the notes or holders of at least 25 percent in principal amount of the
relevant series of notes then outstanding to declare all such notes to be due and payable immediately. If repayment of the
borrowings under our revolving credit facility or of our senior notes was accelerated, we can give no assurance that we
would have sufficient funds to pay the amounts owed.
18
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 local, regional and national homebuilders,
often within larger subdivisions designed, planned and developed by such homebuilders. We also compete with existing
home sales, foreclosures and rental properties. The competitive conditions in the homebuilding industry can negatively
affect our sales volumes, selling prices and incentive levels, reduce our profit margins, and cause impairments in the value
of our inventory or other assets. Competition can also affect our ability to acquire suitable land, raw materials and skilled
labor at acceptable prices or terms, or cause delays in the construction of our homes.
The competitors to our financial services businesses include other title companies and mortgage lenders, including
national, regional and local mortgage bankers and other financial institutions. Some of these competitors are subject to
fewer governmental regulations and have greater access to capital than we do, and some of them may operate with different
lending criteria than we do. These competitors may offer a broader or more attractive array of financing and other products
and services to potential customers than we do.
Our homebuilding and financial services businesses compete with other companies across all industries to attract and
retain highly skilled and experienced employees, managers and executives. Competition for the services of these
individuals will likely increase as business conditions improve in the homebuilding and financial services industries or in
the general economy. If we are unable to attract and retain key employees, managers or executives, our business could be
adversely affected.
We cannot make any assurances that our growth strategies or acquisitions will be successful or not expose us to
additional risks.
We have primarily focused on internal growth in recent years by increasing our investments in land, lot and home
inventories in our existing homebuilding markets. We have also expanded our business through selected investments in
new geographic markets. Investments in land, lots and home inventories can expose us to risks of economic loss and
inventory impairments if housing conditions weaken or if we are unsuccessful in implementing our growth strategies.
Additionally, we acquired the homebuilding operations of one company in fiscal 2012 and two companies in fiscal
2014, and we may make strategic acquisitions of other companies or their assets in the future. Such acquisitions have
similar risks as our other investments in land, lots and home inventories, but they also require the integration of the
acquired operations and management. We can give no assurance that we will be able to successfully identify, acquire and
integrate strategic acquisitions in the future. Acquisitions can result in dilution to existing stockholders if we issue our
common stock as consideration, or reduce our liquidity or increase our debt if we fund them with cash. In addition,
acquisitions can expose us to valuation risks, including the risk of writing off goodwill or impairing inventory and other
assets related to such acquisitions. The risk of goodwill and asset impairments increases during a cyclical housing
downturn when our profitability may decline, as evidenced by the goodwill and asset impairment charges we recognized
during the most recent downturn.
Our deferred income tax assets may not be fully realizable.
As of September 30, 2014, we had deferred income tax assets, net of deferred tax liabilities, of $596.1 million,
against which we provided a valuation allowance of $31.1 million. The realization of all or a portion of our deferred
income tax assets is dependent upon the generation of future taxable income during the statutory carryforward periods and
in the jurisdictions in which the related temporary differences become deductible. We have provided a valuation allowance
against a portion of our net deferred income tax assets because it is more likely than not that a portion of our state net
operating loss (NOL) carryforwards will not be realized because the NOL carryforward periods in some states are too brief
to realize the related deferred tax assets. The accounting for deferred income taxes is based upon estimates of future results.
A housing industry downturn or other adverse situations that negatively affect our future taxable income could result in the
need for us to record a larger valuation allowance against our net deferred income tax assets. 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. Specifically, a decrease in income tax rates would result in a decrease in our deferred tax assets and a
corresponding charge to income tax expense.
19
Our business could be adversely affected by the loss of key personnel.
We rely on our key personnel to effectively operate and manage our homebuilding and financial services businesses.
Specifically, our success depends heavily on the performance of our homebuilding division and region presidents and their
management teams, our financial services management team, our corporate office management teams and our executive
officers. These key personnel have significant experience and skills in the homebuilding and financial services industries,
as well as leadership and management abilities that are important to our success. Effective September 30, 2014, our
President and Chief Executive Officer (CEO) retired, and our Chief Operating Officer was named as successor effective
October 1, 2014. Our former CEO will provide consulting services to us for three years under a consulting agreement. We
seek to have succession plans for events such as this retirement when we lose the services of our key personnel. However,
if we lose the services of key personnel and our succession planning and implementation efforts are unsuccessful, our
business could be adversely affected.
Negative publicity could adversely affect our reputation as well as our business, financial results and stock price.
Unfavorable media related to our industry, company, brands, marketing, personnel, operations, business performance,
or prospects may affect our stock price and the performance of our business, regardless of its accuracy or inaccuracy. The
speed at which negative publicity can be disseminated has increased dramatically with the capabilities of electronic
communication, including social media outlets, websites, blogs, or newsletters. Our success in maintaining, extending and
expanding our brand image depends on our ability to adapt to this rapidly changing media environment. Adverse publicity
or negative commentary from any media outlets could damage our reputation and reduce the demand for our homes, which
would adversely affect our business.
Information technology failures and data security breaches could harm our business.
We use information technology and other computer resources to carry out important operational and marketing
activities and to maintain our business records. These information technology systems are dependent upon global
communications providers, web browsers, telephone systems and other aspects of the Internet infrastructure that have
experienced security breaches, cyber-attacks, significant systems failures and electrical outages in the past. A material
breach in the security of our information technology systems or other data security controls could include the theft or
release of customer, employee or company data. In February 2012, we experienced a software security breach by unknown
external sources in our Internet Loan Prequalification System. We investigated the breach with the assistance of
information technology security experts and with local and federal law enforcement. Our investigations produced no
evidence that any of our customers’ data was actually accessed or exported from our systems. A security breach such as the
one we experienced, a significant and extended disruption in the functioning of our information technology systems or a
breach of any of our data security controls could damage our reputation and cause us to lose customers, adversely impact
our sales and revenue and require us to incur significant expense to address and remediate or otherwise resolve these kinds
of issues. The release of confidential information as a result of a security breach may also lead to litigation or other
proceedings against us by affected individuals or business partners, or by regulators, and the outcome of such proceedings,
which could include penalties or fines, could have a significant negative impact on our business. We may also be required
to incur significant costs to protect against damages caused by these information technology failures or security breaches in
the future. We routinely utilize information technology security experts to assist us in our evaluations of the effectiveness
of the security of our information technology systems, and we regularly enhance our security measures to protect our
systems and data. However, we cannot provide assurances that a security breach, cyber-attack, data theft or other
significant systems or security failures will not occur in the future, and such occurrences could have a material and adverse
effect on our consolidated results of operations or financial position.
20
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
In addition to our inventories of land, lots and homes, we own office buildings totaling approximately
620,000 square feet, and we lease approximately 550,000 square feet of office space under leases expiring through
December 2019. These properties are located in our various operating markets to house our homebuilding and financial
services operating divisions and our regional and corporate offices.
We own approximately 261,000 acres held as long-term land investments. We use these properties to conduct
ranching and agricultural activities.
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. MINE SAFETY DISCLOSURES
Not applicable.
21
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, 2014
Year Ended September 30, 2013
High
Low
Declared
Dividends
High
Low
Declared
Dividends
1st Quarter .......................... $
22.35
$
17.60
$
— $
22.32
$
17.71
$
0.1875
2nd Quarter.........................
3rd Quarter .........................
4th Quarter..........................
25.06
24.83
25.23
20.20
21.06
19.99
0.0375
0.0375
0.0625
25.56
27.75
23.20
20.02
19.94
17.52
—
—
—
As of November 10, 2014, the closing price of our common stock on the NYSE was $23.43, and there were
approximately 448 holders of record.
Cash dividends of $0.1875 per common share declared during the first quarter of fiscal 2013 included a quarterly
cash dividend of $0.0375 per share and an additional cash dividend of $0.15 per share. The cash dividend of $0.15 per
share was in lieu of and accelerated the payment of all quarterly dividends that would have otherwise paid in calendar
year 2013. The declaration of future cash dividends is at the discretion of our Board of Directors and will depend upon,
among other things, our future earnings, cash flows, capital requirements, 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 2014, 2013 and 2012, we did not sell any equity securities that were not registered under the
Securities Act of 1933, as amended.
Effective August 1, 2014, our Board of Directors authorized the repurchase of up to $100 million of our common
stock effective through July 31, 2015. All of the $100 million authorization was remaining at September 30, 2014, and
no common stock has been repurchased subsequent to September 30, 2014.
22
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, 2014, 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, 2009, 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
$250
$250
$200
$150
$100
$50
$0
Sep09
Sep10
Sep11
Sep12
Sep13
Sep14
D.R. Horton, Inc.
S&P 500 Index
S&P 500 Homebuilding Index
Year Ended September 30,
2009
2010
2011
2012
2013
2014
D.R. Horton, Inc. ........................................ $ 100.00 $
81.37 $ 187.52 $ 178.34 $ 189.47
S&P 500 Index............................................ $ 100.00 $ 110.16 $ 111.42 $ 145.08 $ 173.14 $ 207.30
66.13 $ 182.87 $ 185.19 $ 200.49
S&P 500 Homebuilding Index.................... $ 100.00 $
92.77 $
98.75 $
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.
23
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.
Operating Data:
Revenues:
2014
Year Ended September 30,
2012
2011
2013
(In millions, except per share data)
2010
Homebuilding............................................................... $ 7,858.5
166.4
Financial Services ........................................................
Inventory and land option charges ....................................
85.2
Gross profit — Homebuilding ..........................................
1,589.9
Income (loss) before income taxes:
Homebuilding...............................................................
Financial Services ........................................................
Income tax expense (benefit) (1) (2).................................
Net income ........................................................................
Net income per share:
Basic .............................................................................
Diluted..........................................................................
Cash dividends declared per common share .....................
768.8
45.4
280.7
533.5
1.57
1.50
0.1375
$ 6,085.9
173.4
31.1
1,232.4
$ 4,236.2
117.8
6.2
743.8
$ 3,549.6
87.2
45.4
526.3
$ 4,309.7
90.5
64.7
682.1
592.3
65.5
195.1
462.7
1.44
1.33
0.1875
203.7
39.2
(713.4)
956.3
3.01
2.77
0.15
(7.0)
19.1
(59.7)
71.8
0.23
0.23
0.15
78.1
21.4
(145.6)
245.1
0.77
0.77
0.15
2014
2013
September 30,
2012
(In millions)
2011
2010
Balance Sheet Data:
Cash and cash equivalents and marketable securities (3).... $
Inventories.........................................................................
Total assets ........................................................................
Notes payable (4) ..............................................................
Total equity........................................................................
661.8
7,700.5
10,202.5
3,682.8
5,119.7
___________________
$
977.4
6,197.4
8,856.4
3,509.0
4,061.4
$ 1,384.8
4,165.2
7,248.2
2,493.1
3,594.7
$ 1,068.1
3,449.7
5,358.4
1,704.6
2,623.5
$ 1,645.0
3,449.0
5,938.6
2,171.8
2,622.9
(1) The income tax benefit in fiscal 2012 reflects a $753.2 million reduction of our deferred tax asset valuation allowance during the
year. The income tax benefit in fiscal 2011 was due to receiving a favorable result from the Internal Revenue Service on a ruling
request concerning capitalization of inventory costs, and the income tax benefit in fiscal 2010 resulted from a tax law change
regarding net operating loss (NOL) carrybacks.
(2) At September 30, 2013 we recorded an out-of-period adjustment which increased both our deferred income taxes and the valuation
allowance on our deferred income taxes by $23.9 million. The out-of-period adjustment had no impact on our statement of
operations during fiscal 2013. Had deferred income taxes related to the state NOL carryforwards of each of our legal entities been
reflected at state specific tax rates as of September 30, 2012, our deferred income taxes would have increased by $31.6 million and
the corresponding valuation allowance on our deferred income taxes would have increased by $37.6 million. This would have
resulted in a decrease in our income tax benefit of $6.0 million in fiscal 2012, which would have reversed and decreased our income
tax expense by $6.0 million in fiscal 2013. The unadjusted amounts from fiscal 2012 were not material to our financial statements
for fiscal 2012, and the out-of-period adjustment recorded in fiscal 2013 was not material to our financial statements for fiscal 2013.
(3) Cash balances of our captive insurance subsidiary, which are expected to be used to pay future anticipated legal claims, have been
correctly presented within cash and cash equivalents rather than other assets as classified in prior years. These balances were $40.9
million, $39.1 million, $37.9 million and $38.0 million at September 30, 2013, 2012, 2011 and 2010, respectively.
(4) Notes payable includes both homebuilding notes payable and the amount outstanding on our mortgage repurchase facility.
24
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations — Fiscal Year 2014 Overview
During fiscal 2014, demand for new homes reflected stable to moderately improved trends across most of our
operating markets. The significant increases in new home prices that occurred in many markets during fiscal 2013
moderated during fiscal 2014, as new home prices became less affordable to some buyers and as the supply of new
homes increased. While most of our operating markets are relatively stable, we see varying levels of strength in new
home demand and home prices across our markets, with demand in each market generally reflecting the relative strength
of each market’s economy, as measured by job growth, household incomes, household formations and consumer
confidence.
Our position as the largest and most geographically diverse builder in the United States provides a strong platform
for us to compete for new home sales. Over the past two years, we significantly increased our land, lot and home
inventories by $3.5 billion across our markets, while maintaining a strong balance sheet and liquidity position. In fiscal
2013, we introduced our Emerald Homes brand to expand our product offerings to include more move-up and luxury
homes. In fiscal 2014, we introduced our Express Homes brand to offer more affordable homes for entry-level buyers,
who we believe have been under-served in the new home market recently. Both of these new offerings are being
introduced across our operating markets over the next year, which will significantly broaden our product diversity.
In fiscal 2014, the number and value of our net sales orders increased 18% and 27%, respectively, compared to the
prior year, and the number of homes closed and home sales revenues increased 19% and 30%, respectively. We generated
pre-tax income of $814.2 million in fiscal 2014, compared to $657.8 million in fiscal 2013 and $242.9 million in fiscal
2012. These results reflect the improved housing market conditions over the past two years and strong performance from
our homebuilding and financial services operations. We believe our business is well-positioned to continue to grow
profitably due to our broad geographic operating base and product offerings, our increased inventory position of finished
lots, land and homes and our strong balance sheet and liquidity. We are focused on operating each of our communities to
optimize the returns on our inventory investments by effectively managing our product offerings, home prices,
incentives, sales pace, profit margins and inventory levels.
We believe that housing demand in our individual operating markets is tied closely to each market’s economy;
therefore, we expect that housing market conditions will vary across our markets. The U.S. economy continues to slowly
improve, which we expect will allow slow to moderate overall growth in housing demand, concentrated in markets
where job growth is occurring. The pace and sustainability of new home demand and our future results could be
negatively affected by weakening economic conditions, decreases in the level of employment and housing demand,
decreased home affordability, significant increases in mortgage interest rates or tightening of mortgage lending
standards.
25
Strategy
During fiscal 2014, demand for new homes has been relatively stable across most of our operating markets, with
varying levels of strength in demand and home prices across our individual markets based on local economic conditions.
We have used our liquidity and balance sheet flexibility to provide the capital to increase our investments in housing and
land inventory, expand our product offerings, geographically expand our operations and opportunistically pursue
business acquisitions. Our operating strategy is focused on leveraging our strong financial and competitive position to
generate strong profitability, improve cash flows and increase our returns on our inventory investments. Our operating
strategy includes the following initiatives:
• Maintaining a strong cash balance and overall liquidity position, and controlling our level of debt.
• Allocating and actively managing our inventory investments across our operating markets to diversify our
geographic risk and optimize returns.
• Offering new home communities that appeal to a broad range of entry-level, move-up and luxury homebuyers
based on consumer demand in each market.
• Modifying product offerings, sales pace, home prices and sales incentives as necessary in each of our markets
to meet consumer demand, align with finished lot supply and construction activity and optimize returns on
inventory investments and cash flows.
• Entering into option purchase contracts to control land and finished lots, where possible, to mitigate the risk
of land ownership.
•
Investing in land, land development and opportunistic acquisitions of homebuilding companies in desirable
markets, while controlling the level of land and lots we own in each of our markets relative to the local new
home demand.
• Managing our inventory of homes under construction relative to demand in each of our markets, including
starting construction on unsold homes to capture new home demand, monitoring the number and aging of
unsold homes and aggressively marketing unsold, completed homes in inventory.
• Controlling the cost of goods purchased from both vendors and subcontractors.
•
Improving the efficiency of our land development, construction, sales and other key operational activities.
• Controlling our selling, general and administrative (SG&A) expense infrastructure to match production
levels.
Our operating strategy has produced positive results in recent years and in fiscal 2014. However, we cannot provide
any assurances that the initiatives listed above will continue to be successful, and we may need to adjust components of
our strategy to meet future market conditions. We expect that our operating strategy will allow us to increase our
profitability while maintaining a strong balance sheet and liquidity position in fiscal 2015.
26
Key Results
Key financial results as of and for our fiscal year ended September 30, 2014, as compared to fiscal 2013, were as
follows:
Homebuilding Operations:
• Homebuilding revenues increased 29% to $7.9 billion.
• Homes closed increased 19% to 28,670 homes, and the average closing price of those homes increased 9% to
$272,200.
• Net sales orders increased 18% to 29,709 homes, and the value of net sales orders increased 27% to $8.3
billion.
•
Sales order backlog increased 21% to 9,888 homes, and the value of sales order backlog increased 29% to
$2.9 billion.
• Home sales gross margins increased 50 basis points to 21.3%.
•
Inventory and land option charges were $85.2 million, compared to $31.1 million.
• Homebuilding SG&A expenses decreased as a percentage of homebuilding revenues by 10 basis points to
10.6%.
• Homebuilding pre-tax income increased 30% to $768.8 million, compared to $592.3 million.
• Homebuilding cash totaled $632.5 million, compared to $954.2 million.
• Homebuilding inventories totaled $7.7 billion, compared to $6.2 billion.
• Homes in inventory totaled 20,600, compared to 17,000.
• Owned and controlled lots totaled 183,500, compared to 180,900.
• Homebuilding debt was $3.3 billion, consistent with the prior year.
• Gross homebuilding debt to total capital was 39.4%, improving from 44.6%. Net homebuilding debt to total
capital was 34.5%, improving from 36.3%.
Financial Services Operations:
• Total financial services revenues, net of recourse and reinsurance expenses, decreased 4% to $166.4 million.
•
Financial services pre-tax income decreased 31% to $45.4 million.
Consolidated Results:
• Consolidated pre-tax income increased 24% to $814.2 million, compared to $657.8 million.
• Net income increased 15% to $533.5 million, compared to $462.7 million.
• Diluted earnings per share increased 13% to $1.50, compared to $1.33.
• Total equity was $5.1 billion, compared to $4.1 billion.
27
Results of Operations — Homebuilding
Our operating segments are our 37 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:
Midwest:
Southeast:
Delaware, Georgia (Savannah only), Maryland, New Jersey, North Carolina, Pennsylvania,
South Carolina and Virginia
Colorado, Illinois, Indiana and Minnesota
Alabama, Florida, Georgia, Mississippi and Tennessee
South Central:
Louisiana, Oklahoma and Texas
Southwest:
Arizona and New Mexico
West:
California, Hawaii, Nevada, Oregon, Utah and Washington
Fiscal Year Ended September 30, 2014 Compared to Fiscal Year Ended September 30, 2013
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, 2014 and 2013.
2013
$ 275,800
340,000
237,500
208,500
209,200
387,400
%
Change
1%
7%
7%
6%
5%
12%
7%
Net Homes Sold
2014
2013
%
Change
Net Sales Orders (1)
Fiscal Year Ended September 30,
Value (In millions)
Average Selling Price
2014
2013
%
Change
2014
East.....................
Midwest..............
Southeast ............
South Central .....
Southwest...........
West....................
3,867
1,413
8,529
9,707
1,298
4,895
2,624
1,480
7,408
8,074
1,381
4,153
47 % $ 1,074.2
$
(5)%
514.9
15 % 2,164.4
20 % 2,144.5
(6)%
285.2
723.6
503.2
1,759.2
1,683.1
288.9
48 % $ 277,800
2 % 364,400
23 % 253,800
27 % 220,900
(1)% 219,700
18 % 2,125.4
1,609.0
32 % 434,200
29,709
25,120
18 % $ 8,308.6
$ 6,567.0
27 % $ 279,700
$ 261,400
East.....................
Midwest..............
Southeast ............
South Central .....
Southwest...........
West....................
Cancelled Sales Orders
2014
2013
1,106
271
2,955
3,136
517
1,072
9,057
807
248
2,369
2,794
738
795
7,751
______________
Sales Order Cancellations
Fiscal Year Ended September 30,
Value (In millions)
2013
2014
$
288.2
$
207.6
97.0
701.2
686.8
104.6
471.5
79.1
513.1
547.7
141.6
290.1
$ 2,349.3
$ 1,779.2
Cancellation Rate (2)
2014
2013
22%
16%
26%
24%
28%
18%
23%
24%
14%
24%
26%
35%
16%
24%
(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.
28
Net Sales Orders
The value of net sales orders increased 27%, to $8,308.6 million (29,709 homes) in 2014 from $6,567.0 million (25,120
homes) in 2013, with significant increases in four of our six regions. The increases in sales order value in those regions were
primarily due to increases in volume as we have expanded our operations and increased our market share in many of our
markets over the past year. To a lesser extent and to varying degrees, increases in selling prices also contributed to the value
of net sales orders in each region.
The number of net sales orders increased 18% and the average price of our net sales orders increased 7% to $279,700
during 2014 compared to 2013. The largest percentage increase in net sales orders occurred in our East region, reflecting the
positive impact of our recent acquisitions of the homebuilding operations of Regent Homes and Crown Communities, which
contributed 714 net sales orders to the East region in 2014. Crown Communities also contributed 508 net sales orders to the
Southeast region in 2014. The decreases in net sales orders that occurred in our Midwest and Southwest regions were
primarily due to decreases in sales orders in our Minnesota, Colorado, Phoenix and Albuquerque markets. We believe our
business is well positioned for the future; however, our future sales volumes will depend on the economic strength of each of
our operating markets and our ability to successfully implement our operating strategies in each market.
Homes in Backlog
2014
2013
%
Change
2014
2013
%
Change
2014
Sales Order Backlog
As of September 30,
Value (In millions)
Average Selling Price
782
456
2,810
2,697
475
985
86 % $
416.7
$
16 %
3 %
25 %
(11)%
24 %
191.3
790.7
791.7
96.0
572.4
226.3
159.4
703.7
595.8
96.1
428.8
84 % $ 287,200
20 % 363,000
12 % 272,600
33 % 235,800
— % 225,900
33 % 466,900
8,205
21 % $ 2,858.8
$ 2,210.1
29 % $ 289,100
$ 269,400
2013
$ 289,400
349,600
250,400
220,900
202,300
435,300
%
Change
(1)%
4 %
9 %
7 %
12 %
7 %
7 %
East.....................
Midwest..............
Southeast ............
South Central .....
Southwest...........
West....................
1,451
527
2,901
3,358
425
1,226
9,888
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.
The largest percentage increase in our sales order backlog occurred in our East region, reflecting the positive impact of our
recent acquisitions of the homebuilding operations of Regent Homes and Crown Communities, which contributed 377 homes
to our East region backlog at September 30, 2014. Crown Communities also contributed 305 homes to our Southeast region
backlog at September 30, 2014.
29
Homes Closed
Homes Closed and Home Sales Revenue
Fiscal Year Ended September 30,
Value (In millions)
Average Selling Price
East.....................
Midwest..............
Southeast ............
South Central .....
Southwest...........
West....................
2014
2013
%
Change
2014
2013
%
Change
2014
3,537
1,342
8,743
9,046
1,348
4,654
2,505
1,449
6,807
7,609
1,605
4,180
41 % $
948.0
$
(7)%
483.0
28 % 2,158.0
19 % 1,948.6
667.8
471.3
1,520.4
1,520.8
42 % $ 268,000
2 % 359,900
42 % 246,800
28 % 215,400
(16)%
285.2
327.7
(13)% 211,600
11 % 1,981.9
1,516.8
31 % 425,800
2013
$ 266,600
%
Change
1%
325,300
223,400
199,900
204,200
362,900
11%
10%
8%
4%
17%
9%
28,670
24,155
19 % $ 7,804.7
$ 6,024.8
30 % $ 272,200
$ 249,400
Home Sales Revenue
Revenues from home sales increased 30%, to $7,804.7 million (28,670 homes closed) in 2014 from $6,024.8 million
(24,155 homes closed) in 2013. During the current year, home sales revenues increased in most of our regions as we have
expanded our operations and increased our market share in many of our markets.
The number of homes closed in fiscal 2014 increased 19% from 2013 due to increases in four of our six regions. The
most significant percentage increase occurred in our East region, reflecting the positive impact of our recent acquisitions of
the homebuilding operations of Regent Homes and Crown Communities, which contributed 676 closings to the East region in
2014. Crown Communities also contributed 508 closings to the Southeast region in 2014. Excluding the impact of Crown
Communities, the increase in homes closed in our Southeast region was primarily due to increases in our Jacksonville and
Atlanta markets. In our South Central region, the highest percentage increases in homes closed occurred in our Fort Worth,
Dallas and Houston markets. The increase in our West region was primarily due to increases in our Bay Area, Portland and
Sacramento markets. The decrease in home closings in our Southwest region was primarily due to weak demand in the
Phoenix market compared to a year ago, and in our Midwest region the decrease was attributable to our Colorado and
Chicago markets.
The average selling price of homes closed during 2014 was $272,200, up 9% from the $249,400 average in 2013. The
level of home price increases began to moderate during fiscal 2014, a trend we expect will continue in future periods. We are
focused on managing our product offerings, home prices, incentives, sales pace, profit margins and inventory levels in each
community in a manner that will optimize the returns on our inventory investments.
Homebuilding Operating Margin Analysis
Percentages of
Related Revenues
Fiscal Year Ended
September 30,
2014
2013
Gross profit — Home sales .....................................................................................................
Gross profit — Land/lot sales and other..................................................................................
Effect of inventory and land option charges on total homebuilding gross profit....................
Gross profit — Total homebuilding.........................................................................................
Selling, general and administrative expense ...........................................................................
Interest expense .......................................................................................................................
Other (income).........................................................................................................................
Homebuilding pre-tax income.................................................................................................
21.3 %
17.7 %
(1.1)%
20.2 %
10.6 %
— %
(0.2)%
9.8 %
20.8 %
16.7 %
(0.5)%
20.3 %
10.7 %
0.1 %
(0.2)%
9.7 %
30
Home Sales Gross Profit
Gross profit from home sales increased 33%, to $1.7 billion in 2014, from $1.3 billion in 2013, and increased 50 basis
points, to 21.3% as a percentage of home sales revenues. Approximately 40 basis points of the increase in the home sales
gross profit percentage resulted from the average selling price of our homes closed increasing by more than the average home
cost, 20 basis points of the increase resulted from a decrease in the amortization of capitalized interest and property taxes as a
percentage of homes sales revenues and 10 basis points of the increase resulted from lower costs for warranty and
construction defect claims as a percentage of home sales revenue. Partially offsetting these increases was a 20 basis point
decrease from purchase accounting adjustments related to the acquisitions of Crown Communities and Regent Homes.
Our gross profit margins during fiscal 2013 and throughout the first half of fiscal 2014 benefited significantly from
favorable market conditions that allowed us to increase sales prices across most of our markets, while we limited increases in
construction costs. Our gross profit margins also benefited from reduced interest amortized to cost of sales as our average
borrowing costs declined. The increases in our average sales prices moderated in the second half of fiscal 2014, and we
expect future price increases will continue to moderate, while our construction costs will likely increase. Also, we have and
will continue to manage the sales pace in each of our communities by adjusting the pricing, incentives and product mix to
optimize the returns on our inventory investments. These factors caused our gross profit margins in the third and fourth
quarters of fiscal 2014 to decline as compared to the prior year quarters and to the first two quarters of fiscal 2014. Gross
profit margins in future periods could be lower than fiscal 2014 levels.
Land Sales and Other Revenues
Land sales and other revenues were $53.8 million in fiscal 2014, compared to $61.1 million in 2013. 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 that we typically sell to commercial developers, and we may 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. Revenues in fiscal 2013
included revenue of $20.0 million from a long-term construction project for which we served as the general contractor. As of
September 30, 2014, we had $26.4 million of land held for sale that we expect to sell in the next twelve months.
Inventory and Land Option Charges
During fiscal 2014, we reviewed the performance and outlook for all of our land inventories and communities each
quarter for indicators of potential impairment and performed detailed impairment evaluations and analyses when necessary.
As of September 30, 2014, we performed detailed impairment evaluations of communities with a combined carrying value of
$359.8 million, and we recorded impairment charges of $18.1 million during the fourth quarter to reduce the carrying value
of impaired communities to their estimated fair value. Total impairment charges during fiscal 2014 and 2013 were $75.2
million and $21.3 million, respectively.
Of the total impairment charges in fiscal 2014, $49.3 million occurred in our Midwest region, primarily related to
communities in Chicago that were purchased predominantly in 2004 through 2007 and had been previously impaired. During
the third quarter of fiscal 2014, we reduced home prices and identified land parcels we intend to sell in these Chicago
communities in an effort to increase sales pace, reduce inventories and improve cash flows and returns. In contrast to most of
our markets, the Chicago housing market remains weak with sales absorptions and returns in these communities performing
below our expectations given the size of our investments.
Also during fiscal 2014, $17.7 million of impairment charges occurred in our East region. These impairments primarily
related to long-held inactive and underperforming projects in the suburban Washington, D.C. market that we intend to sell to
reduce inventories and improve cash flows and returns.
31
As we manage our inventory investments across our operating markets to optimize returns and cash flows, we may
modify our pricing and incentives, construction and development plans or land sale strategies in individual active
communities and land held for development, which could result in the affected communities being evaluated for potential
impairment. Also, if housing or economic conditions are weak in specific markets in which we operate, or if conditions
weaken in the broader economy or homebuilding industry, we may be required to evaluate additional communities for
potential impairment. These evaluations could result in additional impairment charges.
During fiscal 2014 and 2013, we wrote off $10.0 million and $9.8 million, respectively, of earnest money deposits and
pre-acquisition costs related to land option contracts that are expected to be terminated. At September 30, 2014, outstanding
earnest money deposits associated with our portfolio of land and lot option purchase contracts totaled $58.7 million.
Selling, General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities increased 28% to $834.2 million in 2014 from $649.9 million in 2013. As
a percentage of homebuilding revenues, SG&A expense decreased 10 basis points, to 10.6% in 2014 from 10.7% in 2013.
Employee compensation and related costs represented 64% and 65% of SG&A costs in 2014 and 2013, respectively.
These costs increased by 26%, to $536.9 million in 2014 from $425.2 million in 2013, mainly due to an increase in our
number of employees and an increase in incentive compensation related to the increase in profitability in many of our
divisions in the current year as compared to the prior year. Our homebuilding operations employed approximately 4,525 and
3,600 employees at September 30, 2014 and 2013, respectively.
Variances in our homebuilding SG&A expense as a percentage of revenues can occur due to fluctuations in revenue,
profit levels and our stock price. Our awards of performance based units to executive management are accounted for as
liability awards and are measured quarterly with changes in value recorded in compensation expense within SG&A. Changes
in our stock price and our performance compared to our peer group can cause significant changes in the value of these awards
and in our compensation expense. Compensation expense related to these liability awards was $9.1 million and $8.8 million,
during fiscal 2014 and 2013, respectively.
We attempt to control our SG&A costs while ensuring that our infrastructure adequately supports our operations;
however, we cannot make assurances that we will be able to maintain or improve upon the current SG&A expense as a
percentage of revenues.
Interest Incurred
Comparing fiscal 2014 with 2013, interest incurred increased 8% to $185.8 million, due to an 18% increase in our
average debt. Interest incurred in the current year increased by a lower percentage than the increase in our average debt as a
result of a decrease in the average interest rate of our debt as compared to the prior year.
We capitalize interest costs incurred to inventory during active development and construction (active inventory).
Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. During a portion of fiscal
2013, our active inventory was lower than our debt level and therefore a portion of the interest incurred was reflected as
interest expense. However, since the third quarter of fiscal 2013, our active inventory has exceeded our debt level, and all
interest incurred has been capitalized to inventory. As a result, no interest was expensed during fiscal 2014, compared to $7.1
million during 2013. Interest amortized to cost of sales declined to 2.0% of total home and land/lot and other cost of sales in
fiscal 2014 from 2.3% in fiscal 2013 due to the growth in our active inventory relative to our debt balance and a decrease in
the average interest rate on our outstanding debt. We do not expect interest amortized to cost of sales as a percentage of total
home and land/lot cost of sales to decline as significantly in future periods.
32
Other Income
Other income, net of other expenses, included in our homebuilding operations was $13.1 million in fiscal 2014,
compared to $14.9 million in 2013. Other income consists of interest income, rental income, income from insurance related
activities, income associated with other income-producing assets, and various other types of ancillary income, gains,
expenses and losses not directly associated with our core homebuilding operations. The activities that result in this ancillary
income or loss are not significant, either individually or in the aggregate.
Acquisitions
In October 2013, we acquired the homebuilding operations of Regent Homes, Inc. for $34.5 million in cash. Regent
Homes operates in Charlotte, Greensboro and Winston-Salem, North Carolina. The assets acquired included approximately
240 homes in inventory, 300 lots and control of approximately 600 additional lots through option contracts. We also acquired
a sales order backlog of 213 homes valued at $31.1 million. Subsequent to the acquisition, Regent Homes closed 463 homes
and generated home sales revenues of $69.4 million during fiscal 2014.
In May 2014, we acquired the homebuilding operations of Crown Communities for $209.6 million in cash. Crown
Communities operates in Georgia, South Carolina and eastern Alabama. The assets acquired included approximately 640
homes in inventory, 2,350 lots and control of approximately 3,400 additional lots through option contracts. We also acquired
a sales order backlog of 431 homes valued at $113.6 million. Subsequent to the acquisition, Crown Communities closed 721
homes and generated home sales revenues of $187.7 million during fiscal 2014.
33
Homebuilding Results by Reporting Region
Fiscal Year Ended September 30,
2014
Homebuilding
Pre-tax Income
(Loss) (1)
Homebuilding
Revenues
% of
Revenues
Homebuilding
Revenues
2013
Homebuilding
Pre-tax
Income (1)
% of
Revenues
East...........................
Midwest....................
Southeast ..................
South Central ...........
Southwest.................
West..........................
______________
$
954.7
$
483.5
2,167.0
1,971.2
285.2
1,996.9
$
7,858.5
$
45.2
(9.5)
218.0
208.0
25.5
281.6
768.8
(In millions)
4.7 % $
686.3
$
(2.0)%
10.1 %
10.6 %
8.9 %
14.1 %
471.5
1,520.7
1,526.2
327.7
1,553.5
9.8 % $
6,085.9
$
48.3
38.9
148.4
149.0
26.3
181.4
592.3
7.0%
8.3%
9.8%
9.8%
8.0%
11.7%
9.7%
(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 those expenses
associated with the corporate office are allocated to each segment based on the segment’s inventory balances.
East Region — Homebuilding revenues increased 39% in 2014 compared to 2013, primarily due to an increase in
the number of homes closed in our Charlotte market due to our acquisition of Regent Homes in October 2013, which
added 463 closings to the fiscal 2014 results. The region also benefited from our acquisition of Crown Communities in
May 2014, which added 213 closings to the region's fiscal 2014 results. The region generated pre-tax income of $45.2
million in 2014, compared to $48.3 million in 2013. Fiscal 2014 pre-tax income was reduced by inventory impairment
charges of $17.7 million, primarily in our suburban Washington, D.C. market. Gross profit from home sales as a
percentage of home sales revenue (home sales gross profit percentage) decreased 120 basis points in fiscal 2014,
compared to fiscal 2013, largely due to purchase accounting adjustments for the two acquisitions. As a percentage of
homebuilding revenues, SG&A expenses decreased by 70 basis points in 2014 due to the increase in revenues.
Midwest Region — Homebuilding revenues increased 3% in 2014 compared to 2013, due to an increase in the
average selling price of homes closed, while the number of homes closed decreased, particularly in our Denver
market. The region generated a pre-tax loss of $9.5 million in 2014, compared to pre-tax income of $38.9 million in
2013, largely due to $49.3 million of inventory impairments, primarily in our Chicago market. Home sales gross profit
percentage increased 110 basis points in fiscal 2014, compared to fiscal 2013. The region's home sales gross profit
percentages in both years were impacted by the timing of resolving construction defect claims and the receipt of
insurance recoveries related to construction defect claims, most of which related to our Denver market. As a percentage
of homebuilding revenues, SG&A expenses increased by 110 basis points in fiscal 2014.
Southeast Region — Homebuilding revenues increased 43% in 2014 compared to 2013, due to an increase in the
number of homes closed as well as an increase in the average selling price in the majority of the region’s markets. The
increase in home closings in our Jacksonville, Atlanta, Orlando and South Florida markets contributed most to the
overall increase in homebuilding revenues in the region. The region also benefited from our acquisition of Crown
Communities in May 2014, which added 508 homes closed to the region's fiscal 2014 results. The region generated pre-
tax income of $218.0 million in 2014, compared to $148.4 million in 2013, primarily as a result of increases in
revenues. Home sales gross profit percentage increased 50 basis points in fiscal 2014, compared to fiscal 2013. As a
percentage of homebuilding revenues, SG&A expenses decreased by 10 basis points in fiscal 2014.
34
South Central Region — Homebuilding revenues increased 29% in 2014 compared to 2013, due to an increase in
the number of homes closed, as well as an increase in the average selling price in the majority of the region’s
markets. The increase in home closings in our Fort Worth, Dallas and Houston markets contributed most to the overall
increase in homebuilding revenues in the region. The region generated pre-tax income of $208.0 million in 2014,
compared to $149.0 million in 2013, primarily as a result of increases in revenues. Home sales gross profit percentage
increased 10 basis points in fiscal 2014, compared to fiscal 2013. As a percentage of homebuilding revenues, SG&A
expenses decreased by 40 basis points in fiscal 2014 due to the increase in revenues.
Southwest Region — Homebuilding revenues decreased 13% in 2014 compared to 2013, primarily due to a
decrease in the number of homes closed in our Phoenix market. The region generated pre-tax income of $25.5 million in
2014, compared to $26.3 million in 2013. Home sales gross profit percentage increased 300 basis points in fiscal 2014,
compared to fiscal 2013. The increase was largely due to a reimbursement of development costs received from a
municipality as part of a settlement during fiscal 2014, which related to a community that was completed in a prior year,
as well as a decrease in expenses related to construction defect settlements. As a percentage of homebuilding revenues,
SG&A expenses increased by 240 basis points in fiscal 2014 due to the decrease in revenues.
West Region — Homebuilding revenues increased 29% in 2014 compared to 2013, due to an increase in the
average selling price of homes closed as well as an increase in the number of homes closed. The increase in home
closings and average selling price in our northern California markets contributed most to the overall increase in
homebuilding revenues in the region. The region generated pre-tax income of $281.6 million in 2014, compared to
$181.4 million in 2013, primarily as a result of increases in revenues. Home sales gross profit percentage increased 120
basis points in fiscal 2014, compared to fiscal 2013. As a percentage of homebuilding revenues, SG&A expenses
decreased by 10 basis points in fiscal 2014 compared to the prior year.
35
Inventories, Land and Lot Position and Homes in Inventory
We routinely enter into land/lot option contracts to purchase land or finished lots at predetermined prices on a
defined schedule commensurate with planned development or anticipated new home demand. We also purchase
undeveloped land that generally is vested with the rights to begin development or construction work, and we plan and
coordinate the development of our land into residential lots for use in our homebuilding business. We significantly
increased our investments in land and lot acquisition and land development across all of our market regions in fiscal
2012 and 2013 to expand our operations as market conditions improved. In 2014, we slowed the growth of our land and
lot inventories and increased our housing inventories to capture an increased share of new home demand and generate
higher returns on our land investments. We manage our inventory of owned land and lots and homes under construction
relative to demand in each of our markets, including starting construction on unsold homes to capture new home
demand, monitoring the number and aging of unsold homes and aggressively marketing our unsold, completed homes in
inventory.
Our inventories at September 30, 2014 and 2013 are summarized as follows:
Construction
in Progress
and Finished
Homes
Residential
Land/Lots
Developed and
Under
Development
September 30, 2014
Land Held
for
Development
(In millions)
Land Held
for Sale
Total
Inventory
East .................................................
$
419.0
$
360.5
$
Midwest ..........................................
Southeast ........................................
South Central ..................................
Southwest .......................................
West ................................................
Corporate and unallocated (1)............
252.9
980.9
813.9
137.2
830.6
106.8
211.2
849.1
908.4
132.7
1,220.6
117.5
50.6
13.3
103.9
18.8
23.0
115.7
7.5
$
12.6
$
0.2
9.1
1.4
—
2.5
0.6
$
3,541.3
$
3,800.0
$
332.8
$
26.4
$
842.7
477.6
1,943.0
1,742.5
292.9
2,169.4
232.4
7,700.5
Construction
in Progress
and Finished
Homes
Residential
Land/Lots
Developed and
Under
Development
September 30, 2013
Land Held
for
Development
(In millions)
Land Held
for Sale
Total
Inventory
East .................................................
$
293.5
$
359.7
$
Midwest ..........................................
Southeast ........................................
South Central ..................................
Southwest .......................................
West ................................................
Corporate and unallocated (1)............
__________
182.3
677.2
610.3
124.6
545.8
64.3
208.6
674.8
785.0
108.4
994.0
84.7
$
80.3
21.3
147.2
47.6
29.4
113.8
10.6
$
9.4
—
9.3
0.7
—
14.6
—
742.9
412.2
1,508.5
1,443.6
262.4
1,668.2
159.6
6,197.4
$
2,498.0
$
3,215.2
$
450.2
$
34.0
$
(1) Corporate and unallocated inventory consists primarily of capitalized interest and property taxes.
36
Our land and lot position and homes in inventory at September 30, 2014 and 2013 are summarized as follows:
September 30, 2014
Lots Controlled
Under
Land and Lot
Option Purchase
Contracts (2)
Total
Land/Lots
Owned and
Controlled
Homes
in
Inventory (3)
7,100
1,000
21,400
23,300
1,500
4,600
58,900
32%
20,800
6,000
57,900
62,500
7,800
28,500
183,500
100%
2,600
1,100
6,400
6,600
1,000
2,900
20,600
September 30, 2013
Lots Controlled
Under
Land and Lot
Option Purchase
Contracts (2)
Total
Land/Lots
Owned and
Controlled
Homes
in
Inventory (3)
5,600
1,900
22,600
16,700
1,400
6,100
54,300
30%
20,300
7,500
56,800
57,700
8,000
30,600
180,900
100%
1,900
1,000
5,400
5,300
1,100
2,300
17,000
Land/Lots
Owned (1)
13,700
5,000
36,500
39,200
6,300
23,900
124,600
68%
Land/Lots
Owned (1)
14,700
5,600
34,200
41,000
6,600
24,500
126,600
70%
East .....................................................................
Midwest ..............................................................
Southeast .............................................................
South Central ......................................................
Southwest ............................................................
West ....................................................................
East .....................................................................
Midwest ..............................................................
Southeast .............................................................
South Central ......................................................
Southwest ............................................................
West ....................................................................
__________
(1) Land/lots owned include approximately 32,400 and 32,500 owned lots that are fully developed and ready for home
construction at September 30, 2014 and 2013, respectively. Land/lots owned also include land held for development
representing 14,000 and 21,700 lots at September 30, 2014 and 2013, respectively.
(2) The total remaining purchase price of lots controlled through land and lot option purchase contracts at September 30,
2014 and 2013 was $2.0 billion and $1.9 billion, respectively, secured with $58.7 million and $42.4 million in earnest
money deposits. Our lots controlled under land and lot option purchase contracts exclude approximately 2,200 and
2,800 lots at September 30, 2014 and 2013, respectively, representing lots controlled under lot option contracts for
which we do not expect to exercise our option to purchase the land or lots, but the underlying contracts have yet to be
terminated. We have reserved the deposits related to these contracts.
(3) Homes in inventory include approximately 1,500 and 1,300 model homes at September 30, 2014 and 2013, respectively.
Approximately 11,200 and 9,000 of our homes in inventory were unsold at September 30, 2014 and 2013, respectively.
At September 30, 2014, approximately 3,900 of our unsold homes were completed, of which approximately 600 homes
had been completed for more than six months. At September 30, 2013, approximately 3,000 of our unsold homes were
completed, of which approximately 600 homes had been completed for more than six months.
37
Results of Operations — Financial Services
Fiscal Year Ended September 30, 2014 Compared to Fiscal Year Ended September 30, 2013
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, 2014 and 2013:
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 ..........................
Percentage of loan volume from D.R. Horton homebuyers...................................
Loans sold by DHI Mortgage to third parties ........................................................
Loan origination fees..............................................................................................
Sale of servicing rights and gains from sale of mortgage loans.............................
Recourse benefit (expense) ....................................................................................
Sale of servicing rights and gains from sale of mortgage loans, net .................
Other revenues........................................................................................................
Reinsurance expense ..............................................................................................
Other revenues, net............................................................................................
Total mortgage operations revenues.......................................................................
Title policy premiums, net......................................................................................
Total revenues.........................................................................................................
General and administrative expense.......................................................................
Interest and other (income) ....................................................................................
Financial services pre-tax income ..........................................................................
$
$
Financial Services Operating Margin Analysis
Fiscal Year Ended September 30,
2013
2014
% Change
14,213
28,670
13,514
24,155
50%
56%
14,297
16,177
13,566
15,806
88%
86%
15,806
15,601
5%
19%
5%
2%
1%
Fiscal Year Ended September 30,
2013
2014
% Change
(In millions)
21.4
$
112.5
(0.5)
112.0
10.1
(0.1)
10.0
143.4
30.0
173.4
116.4
(8.5)
65.5
$
20.0
99.6
2.2
101.8
9.9
(0.2)
9.7
131.5
34.9
166.4
131.2
(10.2)
45.4
(7)%
(11)%
(9)%
(2)%
100 %
(3)%
(8)%
16 %
(4)%
13 %
20 %
(31)%
Percentages of
Financial Services Revenues (1)
Fiscal Year Ended September 30,
2014
2013
Recourse and reinsurance (benefit) expense ..........................................................
General and administrative expense.......................................................................
Interest and other (income) ....................................................................................
Financial services pre-tax income ..........................................................................
(1.2)%
79.8 %
(6.2)%
27.6 %
0.3 %
66.9 %
(4.9)%
37.6 %
______________
(1) Excludes the effects of recourse and reinsurance charges on financial services revenues.
38
Mortgage Loan Activity
The volume of loans originated and brokered by our mortgage operations is related to the number of homes closed
by our homebuilding operations. In fiscal 2014, the volume of first-lien loans originated or brokered by DHI Mortgage
for our homebuyers increased by 5%, while the number of homes closed by our homebuilding operations increased by
19%. This was 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 50% in fiscal 2014, from 56%
in fiscal 2013. The decrease in capture rate was due to an increase in home closings in markets not served by DHI
Mortgage as well as a more competitive mortgage pricing market as compared to the prior year.
Home loans to customers of our homebuilding operations constituted 88% of DHI Mortgage loan originations in
2014, compared to 86% in 2013. These rates reflect DHI Mortgage’s consistent focus on the captive business provided
by our homebuilding operations.
The number of loans sold in 2014 increased slightly from the number sold in 2013. Virtually all of the mortgage
loans originated during fiscal 2014 and mortgage loans held for sale on September 30, 2014 were eligible for sale to the
Fannie Mae, Freddie Mac or Ginnie Mae. Approximately 71% of the mortgage loans sold by DHI Mortgage during fiscal
2014 were sold to four major financial institutions and the largest concentration of total loans sold to one institution was
28%.
Financial Services Revenues and Expenses
Revenues from the financial services segment decreased 4%, to $166.4 million in fiscal 2014 from $173.4 million
in fiscal 2013. The volume of loans sold increased 1% while revenues from the sale of servicing rights and gains from
sale of mortgages decreased 11%. Although loan sale volume was essentially unchanged, loan sale revenue decreased
from fiscal 2013 due to pricing pressure from increased competition in the origination marketplace. In addition, loan sale
execution in the prior year was unusually strong due in part to the lower interest rate environment at the time.
We had a credit of $2.2 million related to a reduction in our estimated future recourse obligations in fiscal 2014,
compared to a charge of $0.5 million in fiscal 2013 related to an increase in our estimated future recourse obligations.
Our loss reserve for loan recourse obligations is estimated based upon an analysis of loan repurchase requests received,
our actual repurchases and losses through the disposition of such loans or requests, discussions with our mortgage
purchasers and analysis of the mortgages we originated. While we believe that we have adequately reserved for losses on
known and projected repurchase requests, if actual repurchase volume or actual losses incurred resolving those
repurchases differ from our expectations, additional recourse expense or credits may be incurred.
Financial services general and administrative (G&A) expense increased 13%, to $131.2 million in 2014 from
$116.4 million in 2013. As a percentage of financial services revenues (excluding the effects of recourse and reinsurance
expense), G&A expense was 79.8% in 2014, compared to 66.9% in 2013 due to an increase in the number of employees
to ensure adequate staffing for expected higher volumes of loan originations from the growth in our homebuilding
operations and compliance with new regulatory requirements. Fluctuations in financial services G&A expense as a
percentage of revenues can be expected to occur, as some components of revenue may fluctuate differently than loan
volumes, and some expenses are not directly related to mortgage loan volume or to changes in the amount of revenue
earned.
39
Results of Operations — Consolidated
Fiscal Year Ended September 30, 2014 Compared to Fiscal Year Ended September 30, 2013
Income before Income Taxes
Pre-tax income for fiscal 2014 was $814.2 million, compared to $657.8 million for fiscal 2013. The increase in our
operating income for the current year compared to a year ago is primarily due to higher revenues and home sales gross
profits from increased home closings.
Income Taxes
Our income tax expense in fiscal 2014 was $280.7 million, compared to $195.1 million in 2013. Our effective tax
rate was 34.5% in fiscal 2014, compared to 29.7% in fiscal 2013. The effective tax rate for fiscal 2014 includes a tax
benefit for the domestic production activities deduction and a reduction in unrecognized tax benefits and the related
interest. In fiscal 2013, a reduction in the valuation allowance on deferred tax assets, as well as a reduction in
unrecognized tax benefits and related interest, contributed to the low effective tax rate.
At September 30, 2014 and 2013, we had deferred tax assets, net of deferred tax liabilities, of $596.1 million and
$617.6 million, respectively, partially offset by valuation allowances of $31.1 million and $31.0 million, respectively.
The valuation allowance for both periods primarily relates to our state deferred tax assets for net operating loss (NOL)
carryforwards. We believe it is more likely than not that a portion of our state NOL carryforwards will not be realized
because some state NOL carryforward periods are too brief to realize the related deferred tax assets.
At September 30, 2014, we had tax benefits of $84.5 million for state NOL carryforwards that expire (beginning at
various times depending on the tax jurisdiction) from fiscal 2015 to fiscal 2034. We also had state tax credit
carryforwards of $5.7 million that will expire from fiscal 2018 to fiscal 2024 and $1.9 million of state tax credit
carryforwards that have no expiration date.
When assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some
portion or all of our deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the
generation of sufficient taxable income in future periods. We record a valuation allowance when we determine it is more
likely than not that a portion of the deferred tax assets will not be realized. The accounting for deferred taxes is based
upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could
have a material impact on our consolidated results of operations or financial position. Also, changes in existing federal
and state tax laws and tax rates could affect future tax results and the valuation of our deferred tax assets.
Unrecognized tax benefits are the differences between tax positions taken or expected to be taken in a tax return
and the benefits recognized for accounting purposes. We had no unrecognized tax benefits at September 30, 2014 and
$4.2 million of unrecognized tax benefits at September 30, 2013.
We classify interest expense and penalties on income taxes as income tax expense. During fiscal 2014 and 2013,
we recognized interest benefits related to unrecognized tax benefits of $2.2 million and $2.8 million, respectively, in our
consolidated statements of operations. At September 30, 2014, we had no accrued interest or penalties related to
unrecognized tax benefits. At September 30, 2013, we had $2.2 million of accrued interest and no accrued penalties
related to unrecognized tax benefits.
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 2010 through 2014. We are currently being audited by
various states.
40
Results of Operations — Homebuilding
Fiscal Year Ended September 30, 2013 Compared to Fiscal Year Ended September 30, 2012
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, 2013 and 2012.
Net Homes Sold
2013
2012
%
Change
Net Sales Orders (1)
Fiscal Year Ended September 30,
Value (In millions)
Average Selling Price
2013
2012
%
Change
2013
2012
$ 251,900
%
Change
9%
15%
16%
11%
9%
22%
15%
East.....................
Midwest..............
Southeast ............
South Central .....
Southwest...........
West....................
2,624
1,480
7,408
8,074
1,381
4,153
2,244
1,301
5,378
6,822
1,715
3,588
17 % $
723.6
$
14 %
503.2
38 % 1,759.2
18 % 1,683.1
565.3
386.2
1,101.9
1,282.3
28 % $ 275,800
30 % 340,000
60 % 237,500
31 % 208,500
(19)%
288.9
327.7
(12)% 209,200
16 % 1,609.0
1,139.9
41 % 387,400
296,800
204,900
188,000
191,100
317,700
25,120
21,048
19 % $ 6,567.0
$ 4,803.3
37 % $ 261,400
$ 228,200
Cancelled Sales Orders
2013
2012
East.....................
Midwest..............
Southeast ............
South Central .....
Southwest...........
West....................
807
248
2,369
2,794
738
795
655
192
1,851
2,426
705
828
Sales Order Cancellations
Fiscal Year Ended September 30,
Value (In millions)
2012
2013
$
207.6
$
147.7
79.1
513.1
547.7
141.6
290.1
53.9
351.6
436.4
120.0
256.3
7,751
6,657
$ 1,779.2
$ 1,365.9
_______________
Cancellation Rate (2)
2013
2012
24%
14%
24%
26%
35%
16%
24%
23%
13%
26%
26%
29%
19%
24%
(1) Net sales orders represent the number and dollar value of new sales contracts executed with customers (gross sales orders), net of
cancelled sales orders.
(2) Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.
Net Sales Orders
The value of net sales orders increased 37%, to $6,567.0 million (25,120 homes) in 2013 from $4,803.3 million (21,048
homes) in 2012, with significant increases in five of our six market regions. Average selling prices increased in all regions
and the volume of net sales orders increased in most regions, indicating broad improvement in market conditions across our
business.
The number of net sales orders increased 19% during 2013 compared to 2012, reflecting the improvement in new home
demand and market conditions, as well as the effects of investments we made to expand our operations. The largest
percentage increase occurred in our Southeast region as a result of improved market conditions and our increased inventory
investments in our Atlanta, Jacksonville and Orlando markets. Sales orders in our Southeast region were also positively
impacted by our acquisition of the homebuilding operations of Breland Homes during the fourth quarter of fiscal 2012, which
contributed 674 net sales orders in 2013, compared to 118 net sales orders in 2012. The decrease in net sales orders in our
Southwest region was primarily due to sales decreases in our Phoenix market as compared to 2012 when significant sales
41
increases occurred in this market. Our overall net sales volume growth moderated in the second half of the year which we
believe was due in part to the impact of increases in mortgage interest rates and higher home prices, as well as our efforts to
align our sales pace with our construction activities in many of our communities.
The average price of our net sales orders increased 15% to $261,400 in 2013, from $228,200 in 2012, resulting from
our ability to raise sales prices in many of our communities as demand for new homes improved and the relative supply of
homes for sale declined in many of our markets. A small increase in the average size of our homes sold was also a
contributing factor.
Our sales order cancellation rate was 24% in both fiscal 2013 and 2012. Our cancellation rates in the third and fourth
quarters of fiscal 2013 were 24% and 31%, respectively, which were higher than the same periods of 2012, as potential
buyers adjusted to the impact of higher mortgage interest rates and home prices.
Sales Order Backlog
As of September 30,
Value (In millions)
Average Selling Price
Homes in Backlog
2013
2012
%
Change
2013
2012
%
Change
2013
East.....................
Midwest..............
Southeast ............
South Central .....
Southwest...........
West....................
782
456
2,810
2,697
475
985
8,205
663
425
2,209
2,232
699
1,012
7,240
226.3
18 % $
159.4
7 %
703.7
27 %
595.8
21 %
96.1
(32)%
428.8
(3)%
13 % $ 2,210.1
$
170.5
127.4
465.0
433.5
134.9
336.6
$ 1,667.9
33 % $ 289,400
25 % 349,600
51 % 250,400
37 % 220,900
(29)% 202,300
27 % 435,300
33 % $ 269,400
2012
$ 257,200
299,800
210,500
194,200
193,000
332,600
$ 230,400
%
Change
13%
17%
19%
14%
5%
31%
17%
Sales Order Backlog
Our homes in backlog at September 30, 2013 increased 13% from the prior year, with more homes in backlog in most
regions due to increases in net sales orders as compared with the prior year.
Homes Closed
Homes Closed and Home Sales Revenue
Fiscal Year Ended September 30,
Value (In millions)
Average Selling Price
2013
2012
%
Change
2013
2012
%
Change
2013
East.....................
Midwest..............
Southeast ............
South Central .....
Southwest...........
West....................
2,505
1,449
6,807
7,609
1,605
4,180
2,187
1,164
4,682
6,300
1,442
3,115
15% $
667.8
$
24%
471.3
45% 1,520.4
542.4
339.3
930.7
23% $ 266,600
39% 325,300
63% 223,400
21% 1,520.8
1,158.4
31% 199,900
11%
327.7
34% 1,516.8
269.4
978.2
22% 204,200
55% 362,900
2012
$ 248,000
%
Change
8%
291,500
198,800
183,900
186,800
314,000
12%
12%
9%
9%
16%
12%
24,155
18,890
28% $ 6,024.8
$ 4,218.4
43% $ 249,400
$ 223,300
Home Sales Revenue
Revenues from home sales increased 43%, to $6,024.8 million (24,155 homes closed) in 2013 from $4,218.4 million
(18,890 homes closed) in 2012. During fiscal 2013, home sales revenues increased in all of our market regions, resulting
from increases in the number of homes closed and increases in average selling prices due to favorable housing market
conditions and our increased inventory investments.
42
The number of homes closed in fiscal 2013 increased 28% from 2012 due to increases in all of our market regions. The
most significant percentage increase occurred in our Southeast region, where the highest percentage increases occurred in the
Jacksonville, Orlando, Southwest Florida and Atlanta markets and where Huntsville was a new market in fiscal 2013. In our
West region, the highest percentage increases occurred in the Southern California, Portland and Las Vegas markets.
The average selling price of homes closed during 2013 was $249,400, up 12% from the $223,300 average in 2012,
resulting from our ability to raise sales prices in many of our communities as demand for new homes improved from the prior
year and the supply of homes for sale declined in many of our markets. Also, a small increase in the average size of our
homes closed was a contributing factor.
Homebuilding Operating Margin Analysis
Percentages of
Related Revenues
Fiscal Year Ended
September 30,
2013
2012
Gross profit — Home sales .....................................................................................................
Gross profit — Land/lot sales and other..................................................................................
Effect of inventory and land option charges on total homebuilding gross profit....................
Gross profit — Total homebuilding.........................................................................................
Selling, general and administrative expense ...........................................................................
Interest expense .......................................................................................................................
Other (income).........................................................................................................................
Homebuilding pre-tax income.................................................................................................
20.8 %
16.7 %
(0.5)%
20.3 %
10.7 %
0.1 %
(0.2)%
9.7 %
17.7 %
25.3 %
(0.1)%
17.6 %
12.5 %
0.6 %
(0.3)%
4.8 %
Home Sales Gross Profit
Gross profit from home sales increased by 68%, to $1.3 billion in 2013, from $745.5 million in 2012, and increased
310 basis points, to 20.8% as a percentage of home sales revenues. Approximately 210 basis points of the increase in the
home sales gross profit percentage resulted from reduced sales incentives and increases in the average selling price of our
homes closed, partially offset by smaller increases in the average cost of our homes closed, reflecting improved market
conditions. Approximately 60 basis points of the increase was due to lower costs for warranty and construction defect claims
as a percentage of home sales revenue. The remaining 40 basis points of the increase was due to a decrease in the
amortization of capitalized interest and property taxes as a percentage of home sales revenues, resulting from the decrease in
interest capitalized as a percentage of our active inventory from the prior year due to a decrease in the average interest rate on
our outstanding debt and the growth in our active inventory.
Our gross profit margins in fiscal 2013 benefited significantly from favorable market conditions that allowed us to
increase sales prices and reduce incentives across most of our markets, while we limited increases in construction costs. Our
gross profit margins also benefited from reduced interest amortized to cost of sales, as our average borrowing costs benefited
from the maturity of some higher interest rate debt combined with the issuance of new debt securities with lower interest
rates.
Land Sales and Other Revenues
Land sales and other revenues increased to $61.1 million in 2013, from $17.8 million in 2012. Revenue from a single
long-term construction project for which we served as the general contractor was included in land sales and other revenues.
Revenue from this project was recognized on a percentage-of-completion basis as the construction was completed. During
fiscal 2013 and 2012, the revenue related to this project was $20.0 million and $6.5 million, respectively, and the gross profit
was $4.4 million and $1.2 million, respectively.
43
Inventory and Land Option Charges
As of September 30, 2013, we performed impairment evaluations of communities with a combined carrying value of
$165.9 million, and we recorded impairment charges of $21.3 million during the fourth quarter to reduce the carrying values
of impaired communities to their estimated fair values. Total impairment charges during fiscal 2013 and 2012 were $21.3
million and $3.2 million, respectively.
During fiscal 2013 and 2012, we wrote off $9.8 million and $3.0 million, respectively, of earnest money deposits and
pre-acquisition costs related to land option contracts that were expected to be terminated. At September 30, 2013, outstanding
earnest money deposits associated with our portfolio of land and lot option purchase contracts totaled $42.4 million.
Selling, General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities increased 23% to $649.9 million in 2013 from $528.7 million in 2012. As
a percentage of homebuilding revenues, SG&A expense decreased 180 basis points, to 10.7% in 2013 from 12.5% in 2012.
The improvement in SG&A expenses as a percentage of revenues was due to an increase in both the volume and the average
selling prices of our homes closed, combined with our efforts to keep the growth in overhead expenses at a lower level than
the growth in home closings volume and revenues.
Employee compensation and related costs represented 65% and 63% of SG&A costs in 2013 and 2012, respectively.
These costs increased by 27%, to $425.2 million in 2013 from $335.6 million in 2012, mainly due to an increase in our
number of employees and an increase in the level of incentive compensation related to the significant increases in
profitability in 2013 as compared to 2012. Our homebuilding operations employed approximately 3,600 and 2,740 employees
at September 30, 2013 and 2012, respectively.
Our awards of performance based units to executive management are accounted for as liability awards and are
measured quarterly with changes in value recorded in compensation expense within SG&A. Changes in our stock price and
our performance compared to our peer group can cause significant changes in the value of these awards and in our
compensation expense. During fiscal 2013 and 2012, the compensation expense related to these liability awards was $8.8
million and $9.8 million, respectively.
Interest Incurred
Comparing fiscal 2013 with fiscal 2012, interest incurred increased 39% to $172.8 million, due to a 59% increase in
our average debt. Interest incurred in fiscal 2013 increased by a lower percentage than the increase in our average debt due to
new debt issued at lower interest rates and the maturity of higher interest rate debt, both of which reduced our average
interest rate as compared to the prior year.
We capitalize interest costs incurred to inventory during active development and construction (active inventory).
Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. During fiscal 2012 and a
portion of fiscal 2013, our active inventory was lower than our debt level and therefore, a portion of the interest incurred was
reflected as interest expense. However, during the third and fourth quarters of fiscal 2013, our active inventory exceeded our
debt level and therefore, all interest incurred during those periods was capitalized to inventory. As a result, $7.1 million of
interest was expensed during fiscal 2013, compared to $26.9 million during 2012. Interest amortized to cost of sales declined
to 2.3% of total home and land/lot and other cost of sales in fiscal 2013 from 2.7% in fiscal 2012 as a result of a decrease in
interest capitalized as a percentage of our active inventory from the prior year due to the decrease in the average interest rate
on our outstanding debt and the growth in our active inventory.
44
Other Income
Other income, net of other expenses, included in our homebuilding operations was $14.9 million in 2013, compared to
$12.2 million in 2012. Other income consists of interest income, rental income, income from insurance related activities,
income associated with other income-producing assets, and various other types of ancillary income, gains, expenses and
losses not directly associated with our core homebuilding operations. The activities that result in this ancillary income or loss
are not significant, either individually or in the aggregate.
Acquisitions
In August 2012, we acquired the homebuilding operations of Breland Homes for $105.9 million in cash, of which $9.4
million was paid in fiscal 2013. Breland Homes operates in Huntsville and Mobile, Alabama and along the coast of
Mississippi. The assets acquired included approximately 300 homes in inventory, 1,000 lots and control of approximately
3,700 additional lots through option contracts. We also acquired a sales order backlog of 228 homes valued at $46.9 million.
45
Homebuilding Results by Reporting Region
Fiscal Year Ended September 30,
Homebuilding
Revenues
2013
Homebuilding
Pre-tax
Income (1)
% of
Revenues
Homebuilding
Revenues
2012
Homebuilding
Pre-tax
Income (1)
% of
Revenues
East ..................................
Midwest ...........................
Southeast..........................
South Central ...................
Southwest ........................
West.................................
______________
$
686.3
$
471.5
1,520.7
1,526.2
327.7
1,553.5
$
6,085.9
$
48.3
38.9
148.4
149.0
26.3
181.4
592.3
(In millions)
7.0% $
542.4
$
8.3%
9.8%
9.8%
8.0%
11.7%
339.3
934.6
1,158.4
270.7
990.8
16.0
1.1
38.0
80.6
16.8
51.2
9.7% $
4,236.2
$
203.7
2.9%
0.3%
4.1%
7.0%
6.2%
5.2%
4.8%
(1) Expenses maintained at the corporate level consist primarily of interest and property taxes, which are capitalized and amortized
to cost of sales or expensed directly, and the expenses related to operating our corporate office. The amortization of capitalized
interest and property taxes is allocated to each segment based on the segment’s revenue, while those expenses associated with the
corporate office are allocated to each segment based on the segment’s inventory balances.
East Region — Homebuilding revenues increased 27% in 2013 compared to 2012, due to an increase in the average
selling price and the number of homes closed in the majority of the region's markets. The increase in home closings in our
South Carolina markets contributed most to the overall increase in the region. The region generated pre-tax income of $48.3
million in 2013, compared to $16.0 million in 2012, primarily as a result of increases in revenues and gross profit. Gross
profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased 270 basis points
in fiscal 2013, compared to fiscal 2012. As a percentage of homebuilding revenues, SG&A expenses decreased by 70 basis
points in 2013 due to the increase in revenues.
Midwest Region — Homebuilding revenues increased 39% in 2013 compared to 2012, due to an increase in the number
of homes closed as well as an increase in the average selling price in the majority of the region’s markets. The increase in
home closings in our Denver market contributed most to the overall increase in the region. The region generated pre-tax
income of $38.9 million in 2013, compared to $1.1 million in 2012, primarily as a result of increases in revenues and gross
profit. Home sales gross profit percentage increased 500 basis points in fiscal 2013, compared to fiscal 2012. The fiscal 2013
results benefited from reimbursements received from subcontractors of $8.2 million related to legal claim settlements in our
Denver market. As a percentage of homebuilding revenues, SG&A expenses decreased by 250 basis points in fiscal 2013 due
to the increase in revenues.
Southeast Region — Homebuilding revenues increased 63% in 2013 compared to 2012, due to an increase in the
number of homes closed as well as an increase in the average selling price in the majority of the region’s markets. The
increase in home closings in our Huntsville, Jacksonville, Orlando, Southwest Florida and Atlanta markets contributed most
to the overall increase in the region. The acquisition of Breland Homes in August 2012 contributed 695 homes closed and
$145.8 million in homebuilding revenues to the region's operating results in fiscal 2013, compared to 114 homes closed and
$22.4 million in homebuilding revenues in fiscal 2012. The region generated pre-tax income of $148.4 million in 2013,
compared to $38.0 million in 2012, primarily as a result of increases in revenues and gross profit. Home sales gross profit
percentage increased 400 basis points in fiscal 2013, compared to fiscal 2012. As a percentage of homebuilding revenues,
SG&A expenses decreased by 120 basis points in fiscal 2013 due to the increase in revenues.
46
South Central Region — Homebuilding revenues increased 32% in 2013 compared to 2012, due to an increase in the
number of homes closed, as well as an increase in the average selling price in the majority of the region’s markets. The
increase in home closings in our Houston and Dallas markets contributed most to the overall increase in the region. The
region generated pre-tax income of $149.0 million in 2013, compared to $80.6 million in 2012, primarily as a result of
increases in revenues and gross profit. Home sales gross profit percentage increased 150 basis points in fiscal 2013,
compared to fiscal 2012. As a percentage of homebuilding revenues, SG&A expenses decreased by 120 basis points in fiscal
2013 due to the increase in revenues.
Southwest Region — Homebuilding revenues increased 21% in 2013 compared to 2012, primarily due to an increase in
the number of homes closed in our Tucson market. The region generated pre-tax income of $26.3 million in 2013, compared
to $16.8 million in 2012, primarily as a result of increases in revenues and gross profit. Home sales gross profit percentage
increased 30 basis points in fiscal 2013, compared to fiscal 2012. The fiscal 2013 results included $5.7 million of expenses
related to construction defect settlements in the Phoenix market which limited the region's improvement in gross profit
percentage. As a percentage of homebuilding revenues, SG&A expenses decreased by 130 basis points in fiscal 2013 due to
the increase in revenues.
West Region — Homebuilding revenues increased 57% in 2013 compared to 2012, primarily due to an increase in the
number of homes closed in the majority of the region's markets. The increase in home closings in our Southern California,
Portland and Las Vegas markets contributed most to the overall increase in the region. The region generated pre-tax income
of $181.4 million in 2013, compared to $51.2 million in 2012, primarily as a result of increases in revenues and gross
profit. Fiscal 2013 pre-tax income was reduced by inventory impairment charges of $20.2 million in California. Home sales
gross profit percentage increased 420 basis points in fiscal 2013, compared to fiscal 2012. As a percentage of homebuilding
revenues, SG&A expenses decreased by 340 basis points in fiscal 2013 due to the increase in revenues.
47
Results of Operations — Financial Services
Fiscal Year Ended September 30, 2013 Compared to Fiscal Year Ended September 30, 2012
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, 2013 and 2012:
Fiscal Year Ended September 30,
2012
2013
% Change
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 ..........................
Percentage of loan volume from D.R. Horton homebuyers...................................
Loans sold by DHI Mortgage to third parties ........................................................
13,514
24,155
11,228
18,890
56%
59%
13,566
15,806
86%
15,601
11,283
13,499
84%
13,397
20%
28%
20%
17%
16%
Loan origination fees..............................................................................................
Sale of servicing rights and gains from sale of mortgage loans.............................
Recourse expense ...................................................................................................
Sale of servicing rights and gains from sale of mortgage loans, net .................
Other revenues........................................................................................................
Reinsurance expense ..............................................................................................
Other revenues, net............................................................................................
Total mortgage operations revenues.......................................................................
Title policy premiums, net......................................................................................
Total revenues.........................................................................................................
General and administrative expense.......................................................................
Interest and other (income) ....................................................................................
Financial services pre-tax income ..........................................................................
Fiscal Year Ended September 30,
2012
2013
% Change
$
21.4
(In millions)
18.9
$
112.5
(0.5)
112.0
10.1
(0.1)
10.0
143.4
30.0
173.4
116.4
(8.5)
65.5
$
73.9
(4.7)
69.2
7.5
(1.5)
6.0
94.1
23.7
117.8
85.5
(6.9)
39.2
$
13 %
52 %
(89)%
62 %
35 %
(93)%
67 %
52 %
27 %
47 %
36 %
23 %
67 %
Financial Services Operating Margin Analysis
Percentages of
Financial Services Revenues (1)
Fiscal Year Ended September 30,
2013
2012
Recourse and reinsurance expense.........................................................................
General and administrative expense.......................................................................
Interest and other (income) ....................................................................................
Financial services pre-tax income ..........................................................................
0.3 %
66.9 %
(4.9)%
37.6 %
5.0 %
69.0 %
(5.6)%
31.6 %
______________
(1) Excludes the effects of recourse and reinsurance charges on financial services revenues.
48
Mortgage Loan Activity
In fiscal 2013, total first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased by 20%,
due to an increase of 28% in the number of homes closed by our homebuilding operations. The percentage increase in
loans originated was lower than the percentage increase in the number of homes closed due to a decrease in our mortgage
capture rate to 56% in fiscal 2013, from 59% in fiscal 2012. Home loans to customers of our homebuilding operations
constituted 86% of DHI Mortgage loan originations in 2013, compared to 84% in 2012.
The number of loans sold increased by 16% in 2013 compared to 2012, corresponding to the 17% increase in the
number of loans originated. Virtually all of the mortgage loans originated during fiscal 2013 and mortgage loans held for
sale on September 30, 2013 were eligible for sale to Fannie Mae, Freddie Mac or Ginnie Mae. Approximately 44% of the
mortgage loans sold by DHI Mortgage during fiscal 2013 were sold to one major financial institution.
Financial Services Revenues and Expenses
Revenues from the financial services segment increased 47%, to $173.4 million in fiscal 2013 from $117.8 million
in fiscal 2012. The volume of loans sold increased 16% while revenues from the sale of servicing rights and gains from
sale of mortgages increased 52%. Loan sale revenue increased at a higher rate than loan sale volume primarily due to a
more competitive marketplace among loan purchasers, resulting in an improved execution in the secondary market, as
well as an increase in the average loan amount due to an increase in the sales prices of homes closed by our
homebuilding operations. Loan origination fees increased 13%, corresponding to increases in the number of loans
originated of 17%. Charges related to recourse obligations were $0.5 million in fiscal 2013, compared to $4.7 million in
fiscal 2012.
Financial services G&A expense increased 36%, to $116.4 million in 2013 from $85.5 million in 2012. As a
percentage of financial services revenues (excluding the effects of recourse and reinsurance expense), G&A expense was
66.9% in 2013, compared to 69.0% in 2012.
Results of Operations — Consolidated
Fiscal Year Ended September 30, 2013 Compared to Fiscal Year Ended September 30, 2012
Income before Income Taxes
Pre-tax income for fiscal 2013 was $657.8 million, compared to $242.9 million for fiscal 2012. The difference in
our operating results for 2013 compared to 2012 was due to higher revenues from increased home closings and sales of
mortgage loans and higher profit margins in both our homebuilding and financial services businesses.
Income Taxes
Our income tax expense in fiscal 2013 was $195.1 million, compared to a benefit of $713.4 million in 2012. The
effective tax rate in fiscal 2013 was 29.7%. We did not have a meaningful effective tax rate in fiscal 2012 because our
net deferred tax assets were fully offset by a valuation allowance until the third quarter of fiscal 2012 when we
significantly reduced the valuation allowance on our deferred tax assets.
At September 30, 2013 and 2012, we had deferred tax assets, net of deferred tax liabilities, of $617.6 million and
$751.4 million, respectively, offset by valuation allowances of $31.0 million and $41.9 million, respectively. At
September 30, 2013, we had tax benefits of $99.3 million for state NOL carryforwards that expire (beginning at various
times depending on the tax jurisdiction) from fiscal 2014 to fiscal 2032. We also had state tax credit carryforwards of
$4.0 million that expire from fiscal 2018 to fiscal 2023 and $1.9 million of state tax credit carryforwards had no
expiration date.
49
When assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some
portion or all of our deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the
generation of sufficient taxable income in future periods. We record a valuation allowance when we determine it is more
likely than not that a portion of the deferred tax assets will not be realized. In fiscal 2012, we determined it was more
likely than not that the substantial majority of our deferred tax assets would be realized, which resulted in a $753.2
million reversal of all of the valuation allowance related to our federal deferred tax assets and a portion of the valuation
allowance related to our state deferred tax assets.
Further changes in the valuation allowance were recorded during fiscal 2013 based on our quarterly evaluations to
determine the need for a valuation allowance related to our state deferred tax assets. At March 31, 2013, after considering
the impact of significantly improving profits from operations, we concluded it was more likely than not that we would
realize more of our deferred tax assets related to state NOL carryforwards than previously anticipated. We based this
conclusion on additional positive evidence related to the actual pre-tax profits achieved during the six months ended
March 31, 2013 and higher levels of forecasted profitability for the remainder of fiscal 2013 and in future years. We
expected these increased profits to result in a greater realization of our NOL carryforwards in certain states before they
expire than previously estimated. Accordingly, at March 31, 2013, we reduced the valuation allowance on our state
deferred tax assets by $18.7 million to a balance of $23.2 million. Because this reduction of the valuation allowance was
recognized in an interim period, a portion of the valuation allowance to be reversed was allocated to the remaining
interim periods. Therefore, we reversed an additional $2.9 million of the valuation allowance in the third and fourth
quarters of fiscal 2013. Additionally, approximately $13.2 million of our valuation allowance was attributable to state
NOL carryforwards that expired at the end of fiscal 2013, at which time the related unrealized deferred tax assets and
valuation allowances were written off. The amount of our valuation allowance at September 30, 2013 as a result of the
activity described above would have been $7.1 million.
At September 30, 2013 we recorded an out-of-period adjustment which increased both our deferred income taxes
and the valuation allowance on our deferred income taxes by $23.9 million. The out-of-period adjustment had no impact
on our statement of operations during fiscal 2013. The increase in our deferred income taxes of $23.9 million corrected
an error in recording the future benefits for state NOL carryforwards based on each of our legal entities’ NOLs in each
state and the current tax rate of each state. The valuation allowance was also increased by $23.9 million because we
determined it was more likely than not that these state NOL carryforwards would not be realized because we estimated
that we would not have sufficient taxable income within these states' carryforward periods. As a result of this adjustment,
the remaining amount of the valuation allowance related to state deferred tax assets was $31.0 million at September 30,
2013. Our valuation allowance was based on an analysis of the amount of NOL carryforwards associated with each of
our legal entities in the states in which we conduct business, as compared to our expected level of taxable income under
existing apportionment or recognition rules in each state and the carryforward periods allowed in each state's tax code.
Had deferred income taxes related to the state NOL carryforwards of each of our legal entities been reflected at state
specific tax rates as of September 30, 2012, our deferred income taxes would have increased by $31.6 million and the
corresponding valuation allowance on our deferred income taxes would have increased by $37.6 million. This would
have resulted in a decrease in our income tax benefit of $6.0 million in fiscal 2012, which would have reversed and
decreased our income tax expense by $6.0 million in fiscal 2013. The unadjusted amounts from fiscal 2012 were not
material to our financial statements for fiscal 2012, and the out-of-period adjustment recorded in fiscal 2013 was not
material to our financial statements for fiscal 2013.
At September 30, 2013 and 2012, the total amount of our unrecognized tax benefits was $4.2 million and $14.1
million, respectively. During fiscal 2013 and 2012, we recognized interest benefits related to unrecognized tax benefits
of $2.8 million and $0.1 million, respectively, in our consolidated statements of operations. At September 30, 2013 and
2012, our total accrued interest expense relating to unrecognized tax benefits was $2.2 million and $5.1 million,
respectively, and there were no accrued penalties.
The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013, and did not have a material
effect on our consolidated financial position, results of operations or cash flows.
50
Capital Resources and Liquidity
We have historically funded our homebuilding and financial services operations with cash flows from operating
activities, borrowings under bank credit facilities and the issuance of new debt securities. Our current levels of cash,
borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to homebuilding
market conditions. During the last two years, we have increased our investments in homes, finished lots, land and land
development to expand our operations and grow our profitability. We intend to maintain adequate liquidity and balance
sheet strength, and we regularly evaluate opportunities to access the capital markets.
At September 30, 2014, our ratio of homebuilding debt to total capital was 39.4%, compared to 44.6% at
September 30, 2013. Our ratio of net homebuilding debt to total capital (homebuilding notes payable net of cash divided
by homebuilding notes payable net of cash plus total equity) was 34.5% at September 30, 2014, compared to 36.3% at
September 30, 2013. The improvement in these ratios is primarily due to the conversion of our 2% convertible senior
notes into equity during the current fiscal year, which decreased our homebuilding debt and increased our total capital.
We intend to maintain our ratio of net homebuilding debt to total capital within or below a range of 40% to 45% over the
long term, but we may choose to operate above this range for short-term periods. Therefore, future net homebuilding
debt to total capital ratios may be higher than the current level.
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 our capital structure with other homebuilders. Because of its capital
function, we include our homebuilding cash as a reduction of our homebuilding debt and total capital. 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.
We believe that our existing cash resources, our revolving credit facility and our mortgage repurchase facility
provide sufficient liquidity to fund our near-term working capital needs and debt obligations. We regularly assess our
projected capital requirements to fund future growth in our business, repay our future debt obligations, and support our
other general corporate and operational needs, and we regularly evaluate our opportunities to raise additional capital. We
have an automatically effective universal shelf registration statement filed with the SEC in September 2012, registering
debt and equity securities which we may issue from time to time in amounts to be determined. As market conditions
permit, we may issue new debt or equity securities through the public capital markets or obtain additional bank financing
to fund our projected capital requirements or provide additional liquidity.
Homebuilding Capital Resources
Cash and Cash Equivalents — At September 30, 2014, our homebuilding cash and cash equivalents were $632.5
million.
Bank Credit Facility — We have a senior unsecured revolving credit facility which was amended in August 2014
to increase its capacity from $725 million to $975 million and to extend its maturity date to September 7, 2019. The
facility has an uncommitted accordion feature that could increase the size of the facility to $1.25 billion, subject to
certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters
of credit with a sublimit equal to approximately 50% of the revolving credit commitment. Letters of credit issued under
the facility reduce the available borrowing capacity. The interest rate on borrowings under the revolving credit facility
may be based on either the Prime Rate or London Interbank Offered Rate (LIBOR) plus an applicable margin, as defined
in the credit agreement governing the facility. At September 30, 2014, we had $300.0 million of borrowings outstanding
at a 2.9% annual interest rate and $92.7 million of letters of credit issued under the revolving credit facility, resulting in
available capacity of $582.3 million.
51
Our revolving credit facility imposes restrictions on our operations and activities, including requiring the
maintenance of a minimum level of tangible net worth, a maximum allowable ratio of debt to tangible net worth and a
borrowing base restriction if our ratio of debt to tangible net worth exceeds a certain level. These covenants are measured
as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply
with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving
credit facility or cause any outstanding borrowings to become due and payable prior to maturity. In addition, the credit
agreement governing the facility imposes restrictions on the creation of secured debt and liens. At September 30, 2014,
we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.
Secured Letter of Credit Agreements — We have secured letter of credit agreements which require us to deposit
cash, in an amount approximating the balance of letters of credit outstanding, as collateral with the issuing banks. The
amount of cash restricted for letters of credit issued under these agreements totaled $3.1 million and $8.5 million at
September 30, 2014 and 2013, respectively, and is included in homebuilding restricted cash in our consolidated balance
sheets.
Public Unsecured Debt — On January 15, 2014, we repaid the remaining $145.9 million principal amount of our
6.125% senior notes which were due on that date. On September 15, 2014, we repaid the remaining $137.9 million
principal amount of our 5.625% senior notes which were due on that date. In February 2014, we issued $500 million
principal amount of 3.75% senior notes due March 1, 2019, with interest payable semi-annually. The annual effective
interest rate of the senior notes after giving effect to the amortization of financing costs is 3.9%. We have $157.7 million
principal amount of our senior notes maturing before the end of fiscal 2015. The indentures governing our senior notes
impose restrictions on the creation of secured debt and liens. At September 30, 2014, we were in compliance with all of
the limitations and restrictions that form a part of the public debt obligations.
During April and May of 2014, our outstanding 2% convertible senior notes were converted into 38.6 million
shares of our common stock. The conversion rate was 77.18004 shares of our common stock per $1,000 principal amount
of senior notes, which was equivalent to a conversion price of approximately $12.96 per share of common stock.
Debt and Equity Repurchase Authorizations — Effective August 1, 2014, our Board of Directors authorized the
repurchase of up to $500 million of debt securities and $100 million of our common stock effective through July 31,
2015. The full amount of each of these authorizations was remaining at September 30, 2014.
Financial Services Capital Resources
Cash and Cash Equivalents — At September 30, 2014, our financial services cash and cash equivalents were $29.3
million.
Mortgage Repurchase Facility — Our mortgage subsidiary, DHI Mortgage, has a mortgage repurchase facility that
is accounted for as a secured financing. The mortgage repurchase facility provides financing and liquidity to DHI
Mortgage by facilitating purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties
against the transfer of funds by the counterparties, thereby becoming purchased loans. DHI Mortgage then has the right
and obligation to repurchase the purchased loans upon their sale to third-party purchasers in the secondary market or
within specified time frames from 45 to 120 days in accordance with the terms of the mortgage repurchase facility. The
total capacity of the facility is $300 million; however, the capacity can be increased up to $400 million subject to the
availability of additional commitments. In February 2014, the mortgage repurchase facility was renewed and amended.
This renewal and amendment extends the maturity date of the facility to February 27, 2015 and allows for the capacity of
the facility to be increased, without requiring additional commitments, from $300 million to $325 million on the last five
days of any fiscal quarter and the first twenty-five days of the following fiscal quarter, excluding the quarter ending
December 31, 2014. Through an additional commitment obtained in September 2014, the capacity of the facility was
temporarily increased to $400 million until October 24, 2014.
52
As of September 30, 2014, $448.1 million of mortgage loans held for sale with a collateral value of $429.0 million
were pledged under the mortgage repurchase facility. As a result of advance paydowns totaling $69.8 million, DHI
Mortgage had an obligation of $359.2 million outstanding under the mortgage repurchase facility at September 30, 2014
at a 2.6% annual interest rate.
The mortgage repurchase facility is not guaranteed by 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, 2014, DHI Mortgage was in compliance with all of the
conditions and covenants of the mortgage repurchase facility.
In the past, our mortgage subsidiary has been able to renew or extend its mortgage credit facility on satisfactory
terms prior to its maturity, and obtain temporary additional commitments through amendments to the credit agreement
during periods of higher than normal volumes of mortgages held for sale. The liquidity of our financial services business
depends upon its continued ability to renew and extend the mortgage repurchase facility or to obtain other additional
financing in sufficient capacities.
Operating Cash Flow Activities
In fiscal 2014, we used $661.4 million of cash in our operating activities, compared to $1.2 billion in fiscal 2013.
We used $918.2 million of cash to increase our construction in progress and finished home inventory, compared to
$815.3 million in fiscal 2013. We used $513.6 million of cash to increase our residential land and lot inventory through
purchases of land and finished lots and increased land development activity, compared to $1.2 billion in fiscal 2013.
Cash used for operations in the prior year reflected our significant inventory investments as we responded to improved
market conditions. We slowed the growth of our land and lot inventories in fiscal 2014 to align with our desired level of
owned land and lots, while increasing our homes in inventory to capture an increased share of new home demand.
Investing Cash Flow Activities
In fiscal 2014, net cash used in investing activities was $282.1 million, compared to $180.9 million provided by
investing activities in fiscal 2013. The primary use of cash for investing activities during fiscal 2014 was related to the
acquisition of the homebuilding operations of Crown Communities for $209.6 million in cash. We also purchased the
homebuilding operations of Regent Homes for $34.5 million.
We used $100.2 million and $58.0 million in fiscal 2014 and 2013, respectively, to purchase property and
equipment, including model home furniture, office and technology equipment and office buildings to support our
operations. The purchases of property and equipment during fiscal 2014 included the purchase of 177,000 acres in New
Mexico as a long-term land investment for $56.0 million, of which $37.4 million was paid in cash and $18.6 million was
notes payable assumed from the seller. Of the total purchase price, $46.5 million was allocated to land and the remainder
was allocated to buildings, improvements and equipment. As part of the purchase, we also obtained the livestock grazing
rights under long-term leases on approximately 114,000 acres of land. We plan to use the property to conduct ranching
and agricultural activities.
Cash provided by investing activities during fiscal 2014 included a $67.8 million decrease in restricted cash due to
a reduction in the amount of letters of credit that were cash collateralized in fiscal 2014, compared to an increase of
$28.5 million in restricted cash due to an increase in the amount of cash collateralized on letters of credit in fiscal 2013.
In fiscal 2013, the primary source of investing cash flows was the receipt of proceeds from the sale or maturity of
marketable securities, which totaled $296.5 million, net of purchases. Additionally, during fiscal 2013 we paid $18.6
million to purchase defaulted debt securities collateralized by one residential real estate parcel and we paid $9.4 million
to complete our purchase of the homebuilding operations of Breland Homes, acquired in August 2012.
53
Financing Cash Flow Activities
We expect the short-term financing needs of our operations will be funded with existing cash, cash generated from
profits and borrowings available under our homebuilding and financial services credit facilities. Long-term financing
needs for the growth of our operations have historically been funded with the issuance of senior unsecured debt securities
through the public capital markets.
In fiscal 2014, net cash provided by financing activities was $627.9 million, consisting primarily of note proceeds,
partially offset by repayments of notes payable and payments of cash dividends. Proceeds from notes payable of $1.4
billion included our issuance of $500 million principal amount of 3.75% senior notes in February 2014, borrowings of
$810.0 million on the revolving credit facility and borrowings of $120.6 million under our mortgage repurchase facility.
Note repayments of $796.9 million included our repayment of $145.9 million principal amount of our 6.125% senior
notes and $137.9 million principal amount of our 5.625% senior notes at maturity, and our repayment of $510.0 million
drawn on the revolving credit facility. During fiscal 2013, financing activities provided $939.0 million of cash, primarily
from our issuance of a total of $1.1 billion principal amount of senior notes, borrowings of $165.0 million on the
revolving credit facility and borrowings of $50.8 million under our mortgage repurchase facility. Note repayments of
$345.1 million in fiscal 2013 included our repayment of$171.7 million principal amount of our 6.875% senior notes at
maturity and repayment of the $165.0 million drawn on the revolving credit facility.
The Board of Directors approved and paid cash dividends of $0.0375 per common share in each of the second and
third quarters of fiscal 2014 and a cash dividend of $0.0625 per common share in the fourth quarter of fiscal 2014. In
November 2014, the Board of Directors approved a cash dividend of $0.0625 per common share, payable on December
15, 2014, to stockholders of record on December 1, 2014.
During the first quarter of fiscal 2013, the Board of Directors approved and paid total cash dividends of $0.1875
per common share, which included cash dividends of $0.0375 per share and an additional cash dividend of $0.15 per
share. The cash dividend of $0.15 per share was in lieu of and accelerated the payment of all quarterly dividends that
would have otherwise been paid in calendar year 2013.
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.
54
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. 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 profits, our
homebuilding and financial services credit facilities or other bank financing, and 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, 2014 are presented below:
Payments Due by Period
Total
Less Than
1 Year
1 - 3 Years
3 - 5 Years
(In millions)
More Than
5 Years
Homebuilding:
Notes Payable — Principal (1) .......................... $
Notes Payable — Interest (1) ............................
Operating Leases ...............................................
Purchase Obligations .........................................
$
Financial Services:
Notes Payable — Principal (2) .......................... $
Notes Payable — Interest (2) ............................
Operating Leases ...............................................
$
$
$
3,324.0
724.9
31.9
30.9
4,111.7
359.2
9.2
1.4
$
$
$
163.2
149.1
13.8
23.0
349.1
359.2
9.2
0.5
$
369.8
$
368.9
$
894.1
233.3
14.9
5.3
1,147.6
$
$
1,201.2
155.4
3.1
0.9
1,360.6
$
$
1,065.5
187.1
0.1
1.7
1,254.4
— $
— $
—
0.6
0.6
$
—
0.3
0.3
$
—
—
—
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(1) Homebuilding notes payable represent principal and interest payments due on our senior notes, our revolving credit facility
and our secured notes. The principal amount of our revolving credit facility is assumed to be $300 million through its
maturity, and the related interest obligation is based on the effective rate of 2.9% as of September 30, 2014.
(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 annual effective rate of 2.6% and
principal balance outstanding at September 30, 2014.
At September 30, 2014, our homebuilding operations had outstanding letters of credit of $95.8 million, of which
$3.1 million were cash collateralized, and surety bonds of $876.2 million, issued by third parties to secure performance
under various contracts. We expect that our performance obligations secured by these letters of credit and bonds will
generally be completed in the ordinary course of business and in accordance with the applicable contractual terms. When
we complete our performance obligations, the related letters of credit and bonds are generally released shortly thereafter,
leaving us with no continuing obligations. We have no material third-party guarantees.
Our mortgage subsidiary enters into various commitments related to the lending activities of our mortgage
operations. Further discussion of these commitments is provided in Item 7A “Quantitative and Qualitative Disclosures
About Market Risk” under Part II of this annual report on Form 10-K.
We enter into land and lot option purchase contracts to acquire land or lots for the construction of homes. Lot
option contracts enable us to control significant lot positions with limited capital investment and substantially reduce the
risks associated with land ownership and development. Among our land and lot option purchase contracts at
September 30, 2014, there were a limited number of contracts, representing $30.9 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 contractual obligations. Further information about our land option contracts is provided in the “Inventories, Land
and Lot Position and Homes in Inventory” section included herein.
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Seasonality
Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so
again in the future, we generally have more homes under construction, close more homes and have greater revenues and
operating income in the third and fourth quarters of our fiscal year. The seasonal activity increases our working capital
requirements for our homebuilding operations during our third and fourth fiscal quarters and increases our funding
requirements for the mortgages we originate in our financial services segment at the end of these quarters. 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.
Inflation
We may be adversely affected during periods of high inflation, primarily because of higher land, financing, labor
and material construction costs. In addition, higher mortgage interest rates significantly affect the affordability of
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 when housing market conditions are challenging, we may not be
able to offset our cost increases with higher selling prices.
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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
Securities and Exchange Commission, statements made by us in periodic press releases and oral statements we make to
analysts, stockholders and the press in the course of presentations about us, may be construed as “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act
of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on
management’s beliefs as well as assumptions made by, and information currently available to, management. These
forward-looking statements typically include the words “anticipate,” “believe,” “consider,” “estimate,” “expect,”
“forecast,” “goal,” “intend,” “objective,” “plan,” “predict,” “projection,” “seek,” “strategy,” “target,” “will” or other
words of similar meaning. Any or all of the forward-looking statements included in this report and in any other of our
reports or public statements may not approximate actual experience, and the expectations derived from them may not be
realized, due to risks, uncertainties and other factors. As a result, actual results may differ materially from the
expectations or results we discuss in the forward-looking statements. These risks, uncertainties and other factors include,
but are not limited to:
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•
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•
•
•
•
•
•
•
•
•
•
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potential deterioration in homebuilding industry conditions or general economic conditions;
the cyclical nature of the homebuilding industry and changes in economic, real estate and other conditions;
constriction of the credit markets, which could limit our ability to access capital and increase our costs of
capital;
reductions in the availability of mortgage financing and the liquidity provided by government-sponsored
enterprises, the effects of government programs, a decrease in our ability to sell mortgage loans on attractive
terms or an increase in mortgage interest rates;
the risks associated with our land and lot inventory;
home warranty and construction defect claims;
supply shortages and other risks of acquiring land, building materials and skilled labor;
reductions in the availability of performance bonds;
increases in the costs of owning a home;
the impact of an inflationary, deflationary or higher interest rate environment;
the effects of governmental regulations and environmental matters on our homebuilding operations;
the effects of governmental regulation on our financial services operations;
our substantial debt and our ability to comply with related debt covenants, restrictions and limitations;
competitive conditions within the homebuilding and financial services industries;
our ability to effect our growth strategies or acquisitions successfully;
our ability to realize the full amount of our deferred income tax assets;
the effects of the loss of key personnel;
the effects of negative publicity; and
information technology failures and data security breaches.
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.
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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, 2014 and 2013, and for
the years ended September 30, 2014, 2013 and 2012. 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 100% 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. When appropriate,
revenue and profit on long-term construction projects are recognized under the percentage-of-completion method.
We include proceeds from home closings held for our benefit at title companies in homebuilding cash. When we
execute sales contracts with our homebuyers, or when we require advance payment from homebuyers for custom
changes, upgrades or options related to their homes, we record the cash deposits received as liabilities until the homes
are closed or the contracts are canceled. We either retain or refund to the homebuyer deposits on canceled sales contracts,
depending upon the applicable provisions of the contract or other circumstances.
We recognize financial services revenues associated with our title operations as closing services are rendered and
title insurance policies are issued, both of which generally occur simultaneously as each home is closed. We transfer
substantially all underwriting risk associated with title insurance policies to third-party insurers. We typically elect the
fair value option for our mortgage loan originations. Mortgage loans held for sale are initially recorded at fair value
based on either sale commitments or current market quotes and are adjusted for subsequent changes in fair value until the
loans are sold. Net origination costs and fees associated with mortgage loans are recognized at the time of origination.
The expected net future cash flows related to the associated servicing of a loan are included in the measurement of all
written loan commitments that are accounted for at fair value through earnings at the time of commitment. We generally
sell the mortgages we originate and the 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, which can result in repurchases of loans previously
sold to investors or payments to reimburse investors for loan losses. 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 40% increase in the amount of expected mortgage loan
repurchases and expected losses on mortgage loan repurchases would not result in a material change in our reserve for
expected mortgage loan repurchases.
Inventories and Cost of Sales — Inventory includes the costs of direct land acquisition, land development and
home construction, capitalized interest, real estate taxes and direct overhead costs incurred during development and
home construction. 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.
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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) allocated to each residential lot based upon the total number of homes expected to
be closed in each community. Any changes to the estimated total development costs subsequent to the initial home
closings in a community are generally allocated on a pro-rata basis to the remaining homes in the community associated
with the relevant development activity.
When a home is closed, we generally have not paid all incurred costs necessary to complete the home. We record
as a liability and as a charge to cost of sales the amount we estimate will ultimately be paid related to completed homes
that have been closed. We compare our home construction budgets to actual recorded costs to determine the additional
costs remaining to be paid on each closed home. We monitor the accrual by comparing actual costs incurred on closed
homes in subsequent months to the amounts previously accrued. Although actual costs to be paid in the future on
previously closed homes could differ from our current accruals, such differences have not been significant.
Each quarter, the performance and outlook of land inventory and communities under development are reviewed for
indicators of potential impairment. We generally review our inventory for impairment indicators at the community level,
and the inventory within each community is categorized as land held for development, residential land and lots
developed and under development, land held for sale and construction in progress and finished homes, based on the stage
of production or plans for future development or sale. A particular community often includes inventory in more than one
category. In certain situations, inventory may be analyzed separately for impairment purposes based on its product type
(e.g. single family homes evaluated separately from condominium parcels). In reviewing each of our communities, we
determine if impairment indicators exist on inventory held and used by analyzing a variety of factors including, but not
limited to, the following:
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gross margins on homes closed in recent months;
projected gross margins on homes sold but not closed;
projected gross margins based on community budgets;
trends in gross margins, average selling prices or cost of sales;
sales absorption rates; and
performance of other communities in nearby locations.
If indicators of impairment are present for a community, we perform an impairment evaluation of the community,
which includes 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 recorded to cost of sales if the fair value of such assets is
less than their carrying amounts. These estimates of cash flows are significantly impacted by community specific factors
including estimates of the amounts and timing of future revenues and estimates of the amount of land development,
materials and labor costs which, in turn, may be impacted by the following local market conditions:
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supply and availability of new and existing homes;
location and desirability of our communities;
variety of product types offered in the area;
pricing and use of incentives by us and our competitors;
alternative uses for our land or communities such as the sale of land, finished lots or home sites to third
parties;
amount of land and lots we own or control in a particular market or sub-market; and
local economic and demographic trends.
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For those assets deemed to be impaired, the impairment to be recognized is measured as the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Our determination of fair value is primarily based on
discounting the estimated cash flows at a rate commensurate with the inherent risks associated with the assets and related
estimated cash flow streams. When an impairment charge for a community is determined, the charge is then allocated to
each lot in the community in the same manner as land and development costs are allocated to each lot. 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.
For the inventory impairment analyses we performed during fiscal 2014, we assumed that for the majority of
communities, 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. The remaining lives of the communities
evaluated were estimated to be in a range from six months to ten years, and we utilized a range of discount rates for
communities from 12% to 18%.
We rarely purchase land for resale. However, when we own land or communities under development that do not fit
into our development and construction plans and determine we will sell the asset, the project is accounted for as land
held for sale. We record land held for sale at the lesser of its carrying value or fair value less estimated costs to sell. In
performing the impairment evaluation for land held for sale, we consider several factors including, but not limited to,
recent offers received to purchase the property, prices for land in recent comparable sales transactions and market
analysis studies, which include the estimated price a willing buyer would pay for the land. 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.
The key assumptions relating to inventory valuations are impacted by local market economic conditions and the
actions of competitors, and are inherently uncertain. Although our quarterly assessments reflect management’s best
estimates, due to uncertainties in the estimation process, actual results could differ from such estimates.
Business Acquisitions — We account for acquisitions of businesses by allocating the purchase price of the business
to the various assets acquired and liabilities assumed at their respective fair values. Any excess of the purchase price over
the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often
required in estimating the fair value of assets acquired, particularly intangible assets. These estimates and assumptions
are based on historical experience and information obtained from the management of the acquired companies. While we
believe the estimates and assumptions are reasonable, they are inherently uncertain. Unanticipated market or
macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and
assumptions.
Goodwill — We record goodwill associated with our acquisitions of businesses when the purchase price of the
business exceeds the fair value of the net tangible and identifiable intangible assets acquired. We evaluate our goodwill
balances for potential impairment on an annual basis. The accounting guidance allows an entity to assess qualitatively
whether it is necessary to perform step one of a prescribed two-step annual goodwill impairment test. If an entity
believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit
exceeds its carrying amount, the two-step goodwill impairment test is not required. We performed a qualitative
assessment of our goodwill balance of $94.8 million and $38.9 million at September 30, 2014 and 2013, respectively,
and determined that the two-step process was not necessary.
Warranty Claims — We typically provide our homebuyers with a ten-year limited warranty for major defects in
structural elements such as framing components and foundation systems, a two-year limited warranty on major
mechanical systems, and a one-year limited warranty on other construction components. Since we subcontract our
construction work to subcontractors who typically provide an indemnity and a certificate of insurance prior to receiving
payments for their work, claims relating to workmanship and materials are generally the primary responsibility of the
subcontractors. Warranty liabilities 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
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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.
Legal Claims and Insurance — We are named as a defendant in various claims, complaints and other legal actions
in the ordinary course of business. At any point in time, we are managing several hundred individual claims related to
construction defect matters, personal injury claims, employment matters, land development issues and contract disputes.
We have established reserves for these contingencies based on the estimated costs of pending claims and the estimated
costs of anticipated future claims related to previously closed homes. At both September 30, 2014 and 2013, 99% of
these reserves related to construction defect matters.
Our reserves for construction defect claims include the estimated costs of both known claims and anticipated future
claims. As of September 30, 2014 and 2013, we had reserves for approximately 180 and 160 pending construction defect
claims, respectively, and no individual existing claim was material to our financial statements. During fiscal 2014, we
established reserves for approximately 80 new construction defect claims and resolved 60 construction defect claims for
a total cost of $33.7 million. The majority of our total construction defect reserves consists of the estimated exposure to
future claims on previously closed homes. We have closed a significant number of homes during recent years, and we
may be subject to future construction defect claims on these homes. Although regulations vary from state to state,
construction defect issues can generally be reported for up to ten years after the home has closed in many states in which
we operate. Historical data and trends regarding the frequency of claims incurred and the costs to resolve claims relative
to the types of products and markets where we operate are used to estimate the construction defect liabilities for both
existing and anticipated future claims. These 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.
Historical trends in construction defect claims have been inconsistent, and we believe they may continue to
fluctuate over the next several years. Housing market conditions have been volatile across most of our markets over the
past ten years, and we believe such conditions can affect the frequency and cost of construction defect claims. We closed
a significant number of homes during our peak operating years from 2003 to 2007. If the ultimate resolution of
construction defect claims resulting from closings in those years varies from current expectations, it could significantly
change our estimates regarding the frequency and timing of claims incurred and the costs to resolve existing and
anticipated future claims, which would impact the construction defect reserves in the future. If the frequency of claims
incurred or costs of existing and future legal claims significantly exceed our current estimates, they will have a
significant negative impact on our future earnings and liquidity.
We estimate and record receivables under applicable insurance policies related to our estimated contingencies for
known claims and anticipated future construction defect claims on previously closed homes and other legal claims and
lawsuits incurred in the ordinary course of business when recovery is probable. Additionally, we may have the ability to
recover a portion of our losses from our subcontractors and their insurance carriers when we have been named as an
additional insured on their insurance policies.
The estimation of losses related to these reserves and the related estimates of recoveries from insurance policies are
subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to our
markets and the types of products built, claim frequency, claim settlement costs and patterns, insurance industry practices
and legal interpretations, among others. Due to the high degree of judgment required in establishing reserves for these
contingencies, actual future costs and recoveries from insurance could differ significantly from current estimated
amounts. A 10% increase in the claim frequency and the average cost per claim used to estimate the reserves would
result in an increase of approximately $96.5 million in our reserves and a $51.7 million increase in our receivable,
resulting in additional expense of $44.8 million. A 10% decrease in the claim frequency and the average cost per claim
would result in a decrease of approximately $76.7 million in our reserves and a $38.1 million decrease in our receivable,
resulting in a reduction in expense of $38.6 million.
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Income Taxes — We calculate our income tax expense (benefit) using the asset and liability method, under which
deferred tax assets and liabilities are recorded based on the tax consequences of temporary differences between the
financial statement amounts of assets and liabilities and their tax bases, and of tax loss and credit carryforwards. In
assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The realization of deferred tax assets is primarily dependent upon the
generation of sufficient taxable income in future periods and in the jurisdictions in which those temporary differences
become deductible. We record a valuation allowance when we determine it is more likely than not that a portion of our
deferred tax assets will not be realized. In determining the future tax consequences of events that have been recognized
in our financial statements or tax returns, judgment is required. Differences between the anticipated and actual outcomes
of these future tax consequences could have a material impact on our consolidated results of operations or financial
position. Changes in existing tax laws and tax rates also affect actual tax results and the valuation of deferred tax assets
over time.
Interest and penalties related to unrecognized tax benefits are recognized in the financial statements as a
component of income tax expense. Significant judgment is required to evaluate uncertain tax positions. We evaluate our
uncertain tax positions on a quarterly basis. Our evaluations are based upon a number of factors, including changes in
facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective
settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material
increases or decreases in our income tax expense in the period in which we make the change.
Stock-based Compensation — Our common stockholders formally authorize shares of stock-based compensation
available for future grants. From time to time, the Compensation Committee of our Board of Directors authorizes the
grant of stock-based compensation to our employees and directors from these available shares. At September 30, 2014,
our outstanding stock-based compensation awards include stock options and restricted stock units. Grants of restricted
stock units may vest immediately or over a certain number of years as determined by the Compensation Committee of
our Board of Directors. Restricted stock units outstanding at September 30, 2014 have a remaining vesting period of 1 to
3 years. Stock options are granted at exercise prices which equal the market value of our common stock at the date of the
grant. The stock options outstanding at September 30, 2014 vest over periods of 2 to 9.75 years from the initial grant date
and expire 10 years after the dates on which they were granted.
The compensation expense for stock-based awards is based on the fair value of the award and is recognized on a
straight-line basis over the remaining vesting period. The fair values of restricted stock units are based on the stock
prices at the date of grant. The fair values of stock options granted are calculated on the date of grant using a 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. The benefits of tax deductions in excess of recognized compensation expense are reported in our
consolidated statements of cash flows as a financing cash flow.
Fair Value Measurements — The FASB’s authoritative guidance for fair value measurements establishes a three-
level hierarchy based upon the inputs to the valuation model of an asset or liability. The fair value hierarchy and its
application to our assets and liabilities, is as follows:
• Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.
• 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.
• Level 3 — Valuation is typically derived from model-based techniques in which at least one significant input is
unobservable and based on our own estimates about the assumptions that market participants would use to value
the asset or liability.
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When available, we use quoted market prices in active markets to determine fair value. We consider the principal
market and nonperformance risk associated with our counterparties when determining the fair value measurements, if
applicable. Fair value measurements are used for our mortgage loans held for sale, debt securities collateralized by
residential real estate, interest rate lock commitments (IRLCs) and other derivative instruments on a recurring basis, and
are used for inventories, other mortgage loans, rental properties and real estate owned on a nonrecurring basis, when
events and circumstances indicate that the carrying value may not be recoverable.
Recent Accounting Pronouncements
In January 2014, the FASB issued ASU 2014-04, “Receivables - Troubled Debt Restructurings by Creditors,”
which clarifies when an in substance repossession or foreclosure of residential real estate property collateralizing a
consumer mortgage loan has occurred. This guidance helps determine when a creditor should derecognize a loan
receivable and recognize real estate property. The guidance is effective for us beginning October 1, 2015 and is not
expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which is a
comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods
or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or
services. The guidance is effective for us beginning October 1, 2017 and allows for both full retrospective or modified
retrospective methods of adoption. We are currently evaluating the impact of this guidance on our consolidated financial
position, results of operations and cash flows.
In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing - Repurchase-to-Maturity Transactions,
Repurchase Financings, and Disclosures,” which changes the accounting for repurchase-to-maturity transactions to
secured borrowing accounting. Also, for repurchase financing arrangements, the amendments require separate
accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same
counterparty, which will result in secured borrowing accounting for the repurchase agreement. The guidance is effective
for us beginning January 1, 2015 and will not have a material impact on our consolidated financial position, results of
operations or cash flows.
In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation,” which states that a
performance target in a share-based payment that affects vesting and that could be achieved after the requisite service
period should be accounted for as a performance condition. The guidance is effective for us beginning October 1, 2016
and is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU 2014-14, “Receivables - Troubled Debt Restructurings by Creditors,” which
requires that certain government-guaranteed mortgage loans, including those guaranteed by the FHA and VA, be
derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon
foreclosure, the separate other receivable should be measured based on the amount of the loan balance expected to be
recovered from the guarantor. The guidance is effective for us beginning October 1, 2015 and is not expected to have a
material impact on our consolidated financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern,” which
provides guidance about management's responsibility to evaluate whether there is substantial doubt about the entity's
ability to continue as a going concern and to provide related footnote disclosures. This guidance is intended to reduce the
diversity in the timing and content of footnote disclosures. The guidance is effective for us at the end of fiscal 2017 and
is not expected to have any impact on 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), which are referred to as “hedging instruments”
in the following discussion. 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 financial
services revenues in the consolidated statements of operations. Hedging instruments related to funded, uncommitted loans
are accounted for at fair value, with changes recognized in financial services revenues in the consolidated statements of
operations, 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. The net fair value change, which for
the years ended September 30, 2014 and 2013 was not significant, is recognized in current earnings. At September 30,
2014, hedging instruments used to mitigate interest rate risk related to uncommitted mortgage loans held for sale and
uncommitted IRLCs totaled a notional amount of $592.0 million. Uncommitted IRLCs totaled a notional amount of
approximately $275.0 million and uncommitted mortgage loans held for sale totaled a notional amount of approximately
$348.6 million at September 30, 2014.
The following table sets forth principal cash flows by scheduled maturity, effective weighted average interest rates
and estimated fair value of our debt obligations as of September 30, 2014. Because the mortgage repurchase facility is
effectively secured by certain mortgage loans held for sale which are typically sold within 60 days, its outstanding balance
is included in the most current period presented. The interest rates for our variable rate debt represent the weighted average
interest rates in effect at September 30, 2014.
Fiscal Year Ending September 30,
2015
2016
2017
2018
2019
Thereafter
Total
($ in millions)
Debt:
Fixed rate.....................
$ 162.6
$ 542.9
$ 350.0
$ 400.0
$ 500.0
$ 1,050.0
$3,005.5
Average interest rate....
5.5%
6.4%
5.0%
3.8%
3.9%
5.1%
5.0%
Variable rate ................
$ 359.8
$
0.6
$
0.6
$
0.6
$ 300.6
$
15.5
$ 677.7
Average interest rate....
2.6%
3.0%
3.0%
3.0%
2.9%
3.0%
2.7%
Fair Value at
September 30,
2014
$
$
3,038.6
677.7
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of D.R. Horton, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and
comprehensive income, 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, 2014 and 2013, and the results of their operations and their cash flows
for each of the three years in the period ended September 30, 2014 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, 2014, based on criteria established in Internal Control -
Integrated Framework (1992) 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.
As described in Management’s Report On Internal Control Over Financial Reporting, management has excluded Crown
Communities (“Crown”) from its assessment of internal control over financial reporting as of September 30, 2014 because
it was acquired by the Company in a purchase business combination during 2014. We have also excluded Crown from our
audit of internal control over financial reporting. Crown’s total assets and total revenues represent 1% and 2%, respectively,
of the related consolidated financial statement amounts as of and for the year ended September 30, 2014.
Fort Worth, Texas
November 17, 2014
65
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Homebuilding:
Cash and cash equivalents............................................................................................................. $
Restricted cash ..............................................................................................................................
Inventories:
Construction in progress and finished homes ..........................................................................
Residential land and lots — developed and under development .............................................
Land held for development ......................................................................................................
Land held for sale .....................................................................................................................
Deferred income taxes, net of valuation allowance of $31.1 million
and $31.0 million at September 30, 2014 and 2013, respectively ...........................................
Property and equipment, net .........................................................................................................
Other assets ...................................................................................................................................
Goodwill........................................................................................................................................
Financial Services:
Cash and cash equivalents.............................................................................................................
Mortgage loans held for sale .........................................................................................................
Other assets ...................................................................................................................................
Total assets........................................................................................................................... $
LIABILITIES
Homebuilding:
Accounts payable .......................................................................................................................... $
Accrued expenses and other liabilities..........................................................................................
Notes payable ................................................................................................................................
Financial Services:
Accounts payable and other liabilities ..........................................................................................
Mortgage repurchase facility ........................................................................................................
Total liabilities.....................................................................................................................
Commitments and contingencies (Note K)
September 30,
2014
2013
(In millions)
$
632.5
10.0
954.2
77.8
3,541.3
3,800.0
332.8
26.4
7,700.5
565.0
190.8
441.1
94.8
9,634.7
29.3
476.9
61.6
567.8
10,202.5
480.3
875.0
3,323.6
4,678.9
44.7
359.2
403.9
5,082.8
$
$
2,498.0
3,215.2
450.2
34.0
6,197.4
586.6
106.7
419.6
38.9
8,381.2
23.2
395.1
56.9
475.2
8,856.4
346.4
886.0
3,270.4
4,502.8
53.6
238.6
292.2
4,795.0
EQUITY
Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued.........................
Common stock, $.01 par value, 1,000,000,000 shares authorized,
371,786,765 shares issued and 364,586,694 shares outstanding at September 30, 2014
and 330,143,689 shares issued and 322,943,618 shares outstanding at September 30, 2013 .....
Additional paid-in capital..............................................................................................................
Retained earnings ..........................................................................................................................
Treasury stock, 7,200,071 shares at September 30, 2014 and 2013, at cost .................................
Accumulated other comprehensive income ..................................................................................
Total stockholders’ equity ........................................................................................................
Noncontrolling interests ................................................................................................................
Total equity...............................................................................................................................
Total liabilities and equity................................................................................................. $
—
—
3.7
2,613.7
2,630.5
(134.3)
2.2
5,115.8
3.9
5,119.7
10,202.5
$
3.3
2,042.0
2,145.6
(134.3)
1.9
4,058.5
2.9
4,061.4
8,856.4
See accompanying notes to consolidated financial statements.
66
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
2014
Year Ended September 30,
2013
(In millions, except per share data)
2012
Homebuilding:
Revenues:
Home sales ............................................................................................. $
Land/lot sales and other .........................................................................
Cost of sales:
Home sales .............................................................................................
Land/lot sales and other .........................................................................
Inventory and land option charges.........................................................
Gross profit:
Home sales .............................................................................................
Land/lot sales and other .........................................................................
Inventory and land option charges.........................................................
Selling, general and administrative expense...............................................
Interest expense ..........................................................................................
Other (income)............................................................................................
Homebuilding pre-tax income ...............................................................
Financial Services:
Revenues, net of recourse and reinsurance expense...................................
General and administrative expense ...........................................................
Interest and other (income).........................................................................
Financial services pre-tax income..........................................................
Income before income taxes .......................................................................
Income tax expense (benefit)......................................................................
Net income.................................................................................................. $
Other comprehensive income (loss), net of income tax:
Unrealized (loss) gain related to available-for-sale securities ...............
Unrealized gain related to debt securities collateralized
by residential real estate.....................................................................
Comprehensive income .............................................................................. $
Basic net income per common share .......................................................... $
Net income per common share assuming dilution...................................... $
Cash dividends declared per common share............................................... $
7,804.7
$
6,024.8
$
4,218.4
53.8
7,858.5
6,139.1
44.3
85.2
6,268.6
1,665.6
9.5
(85.2)
1,589.9
834.2
—
(13.1)
768.8
166.4
131.2
(10.2)
45.4
814.2
280.7
61.1
6,085.9
4,771.5
50.9
31.1
4,853.5
1,253.3
10.2
(31.1)
1,232.4
649.9
5.1
(14.9)
592.3
173.4
116.4
(8.5)
65.5
657.8
195.1
533.5
$
462.7
$
—
0.3
533.8
1.57
1.50
0.1375
$
$
$
$
(0.2)
1.9
464.4
1.44
1.33
0.1875
$
$
$
$
17.8
4,236.2
3,472.9
13.3
6.2
3,492.4
745.5
4.5
(6.2)
743.8
528.7
23.6
(12.2)
203.7
117.8
85.5
(6.9)
39.2
242.9
(713.4)
956.3
0.1
—
956.4
3.01
2.77
0.15
See accompanying notes to consolidated financial statements.
67
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, 2011
(316,043,099 shares) ................................. $
Net income ...............................................
Issuances under employee benefit plans
(79,455 shares) .....................................
Exercise of stock options
(4,493,797 shares) ................................
Stock issued under employee incentive
plans (275,625 shares)..........................
Stock based compensation expense..........
Cash dividends declared...........................
Other comprehensive income, net of tax..
Noncontrolling interests ...........................
Balances at September 30, 2012
(320,891,976 shares) ................................. $
Net income ...............................................
Issuances under employee benefit plans
(63,105 shares) .....................................
Exercise of stock options
(1,785,412 shares) ................................
Excess income tax benefit from
employee stock awards.........................
Stock issued under employee incentive
plans, net of shares withheld for
employee taxes (203,125 shares) .........
Stock based compensation expense..........
Cash dividends declared...........................
Other comprehensive income, net of tax..
Noncontrolling interests ...........................
Balances at September 30, 2013
(322,943,618 shares) ................................. $
Net income ...............................................
Issuances under employee benefit plans
(77,216 shares) .....................................
Exercise of stock options
(2,687,724 shares) ................................
Net income tax deficiency from
employee stock awards.........................
Stock issued under employee incentive
plans, net of shares withheld for
employee taxes (288,685 shares) .........
Conversion of 2% convertible
senior notes (38,589,451 shares) ..........
Stock based compensation expense..........
Cash dividends declared...........................
Other comprehensive income, net of tax..
Noncontrolling interests ...........................
Balances at September 30, 2014
(364,586,694 shares) ................................. $
3.2
—
—
0.1
—
—
—
—
—
$ 1,917.0
—
$
834.6
956.3
$ (134.3) $
—
0.9
40.7
3.1
18.1
—
—
—
—
—
—
—
(47.8)
—
—
—
—
—
—
—
—
—
3.3
—
$ 1,979.8
—
$ 1,743.1
462.7
$ (134.3) $
—
—
—
—
—
—
—
—
—
1.1
37.8
6.7
(2.4)
19.0
—
—
—
—
—
—
—
—
(60.2)
—
—
—
—
—
—
—
—
—
—
3.3
—
$ 2,042.0
—
$ 2,145.6
533.5
$ (134.3) $
—
—
—
—
—
0.4
—
—
—
—
1.4
43.8
(3.4)
5.5
498.2
26.2
—
—
—
—
—
—
—
—
—
(48.6)
—
—
—
—
—
—
—
—
—
—
—
0.1
—
—
—
—
—
—
0.1
—
0.2
—
—
—
—
—
—
—
1.7
—
1.9
—
—
—
—
—
—
—
—
0.3
—
$
2.9
—
—
—
—
—
—
—
(0.3)
$ 2,623.5
956.3
0.9
40.8
3.1
18.1
(47.8)
0.1
(0.3)
$
2.6
—
$ 3,594.7
462.7
$
—
—
—
—
—
—
—
0.3
2.9
—
—
—
—
—
—
—
—
—
1.0
1.1
37.8
6.7
(2.4)
19.0
(60.2)
1.7
0.3
$ 4,061.4
533.5
1.4
43.8
(3.4)
5.5
498.6
26.2
(48.6)
0.3
1.0
3.7
$ 2,613.7
$ 2,630.5
$ (134.3) $
2.2
$
3.9
$ 5,119.7
See accompanying notes to consolidated financial statements.
68
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2014
Year Ended September 30,
2013
(In millions)
2012
OPERATING ACTIVITIES
Net income.............................................................................................................. $
Adjustments to reconcile net income to net cash used in operating activities:
533.5
$
462.7
$
956.3
Depreciation and amortization...........................................................................
Amortization of discounts and fees....................................................................
Stock based compensation expense ...................................................................
Excess income tax benefit from employee stock awards...................................
Deferred income taxes .......................................................................................
Gain on early retirement of debt, net .................................................................
Gain on sale of marketable securities ................................................................
Inventory and land option charges.....................................................................
Changes in operating assets and liabilities:
Increase in construction in progress and finished homes...................................
Increase in residential land and lots —
developed, under development, held for development and held for sale.......
Decrease (increase) in other assets ....................................................................
Decrease (increase) in income taxes receivable.................................................
Increase in mortgage loans held for sale............................................................
Increase in accounts payable, accrued expenses and other liabilities................
Net cash used in operating activities ......................................................................
INVESTING ACTIVITIES
Purchases of property and equipment ................................................................
Purchases of marketable securities ....................................................................
Proceeds from the sale or maturity of marketable securities .............................
Decrease (increase) in restricted cash ................................................................
Net principal increase of other mortgage loans and real estate owned..............
Purchase of debt securities collateralized by residential real estate ..................
Principal payments received on debt securities collateralized
by residential real estate.................................................................................
Payments related to acquisition of a business....................................................
Net cash (used in) provided by investing activities ................................................
FINANCING ACTIVITIES
38.4
27.4
26.2
(0.6)
17.4
—
—
85.2
(918.2)
(513.6)
8.8
—
(81.8)
115.9
(661.4)
(100.2)
—
—
67.8
(5.6)
—
—
(244.1)
(282.1)
Proceeds from notes payable .............................................................................
Repayment of notes payable ..............................................................................
Proceeds from stock associated with certain employee benefit plans ...............
Excess income tax benefit from employee stock awards...................................
Cash dividends paid ...........................................................................................
Net cash provided by financing activities...............................................................
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............
Cash and cash equivalents at beginning of year .....................................................
Cash and cash equivalents at end of year ............................................................... $
Supplemental cash flow information:
1,427.6
(796.9)
45.2
0.6
(48.6)
627.9
(315.6)
977.4
661.8
$
22.7
39.7
19.0
(6.7)
130.9
—
(0.2)
31.1
(815.3)
(1,235.6)
18.3
14.4
(49.8)
139.5
(1,229.3)
(58.0)
(28.9)
325.4
(28.5)
(2.5)
(18.6)
1.4
(9.4)
180.9
1,307.9
(345.1)
29.7
6.7
(60.2)
939.0
(109.4)
1,086.8
977.4
Interest paid, net of amounts capitalized....................................................... $
Income taxes paid, net................................................................................... $
— $
$
279.8
5.6
34.8
Supplemental disclosures of non-cash activities:
$
$
$
Notes payable issued for inventory ............................................................... $
Stock issued under employee incentive plans............................................... $
Conversion of 2% convertible senior notes into equity ................................ $
Notes payable assumed to purchase long-term land investment................... $
Note receivable related to sale of land .......................................................... $
Accrual for holdback payment related to acquisition ................................... $
— $
$
5.5
$
498.6
$
18.6
5.0
$
— $
$
11.4
$
3.9
— $
— $
— $
— $
See accompanying notes to consolidated financial statements.
18.8
40.4
18.1
—
(709.5)
(0.1)
(0.2)
6.2
(275.4)
(371.0)
(36.2)
(2.0)
(51.2)
113.6
(292.2)
(33.6)
(240.8)
232.8
(0.2)
(4.7)
—
—
(96.5)
(143.0)
765.9
(17.5)
50.9
—
(47.8)
751.5
316.3
770.5
1,086.8
19.5
6.1
4.1
3.1
—
—
—
9.4
69
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 100% owned, majority-owned and
controlled subsidiaries (which are referred to as the Company, unless the context otherwise requires). 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
Certain reclassifications have been made in the prior years' financial statements to conform to classifications used in
the current year. Cash balances of the Company's captive insurance subsidiary, which are expected to be used by the
Company to pay future anticipated legal claims, have been correctly presented within homebuilding cash and cash
equivalents rather than homebuilding other assets. These balances were $40.9 million, $39.1 million and $37.9 million at
September 30, 2013, 2012 and 2011, respectively. The balance sheet at September 30, 2013 and the statements of cash
flows for the fiscal years ended September 30, 2013 and 2012, including the financial statements of the Non-Guarantor
Subsidiaries as reflected in Note O, have been revised to reflect this correction. Additionally, the balance sheet at
September 30, 2013 has been revised to present land held for sale of $34.0 million as a separate component of inventory, of
which $12.1 million had previously been included in residential land and lots - developed and under development and
$21.9 million had been included in land held for development. As other prior period financial information is presented in
future filings, the Company will similarly revise its financial statements in such filings.
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 100% 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, 2014 and 2013, the Company had deferred profit on these home sales in the amounts of $1.4 million and
$2.3 million, respectively. Any profit on land sales is deferred until the full accrual method criteria are met. When
appropriate, revenue and profit on long-term construction projects are recognized under the percentage-of-completion
method.
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. 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 loans are sold. Net origination costs and fees associated with mortgage loans are recognized at the
time of origination. The expected net future cash flows related to the associated servicing of a loan are included in the
measurement of all written loan commitments that are accounted for at fair value through earnings at the time of
commitment. The Company generally sells the mortgages it originates and the related servicing rights to third-party
purchasers. Interest income is earned from the date a mortgage loan is originated until the loan is sold.
70
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 in the consolidated balance sheets.
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.
Inventories and Cost of Sales
Inventory includes the costs of direct land acquisition, land development and home construction, capitalized interest,
real estate taxes and direct overhead costs incurred during development and home construction. Costs 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) allocated to each residential lot based upon the total number of homes expected to be
closed in each community. Any changes to the estimated total development costs subsequent to the initial home closings in
a community are generally allocated on a pro-rata basis to the remaining homes in the community associated with the
relevant development activity.
When a home is closed, the Company generally has not paid all incurred costs necessary to complete the home. A
liability and a charge to cost of sales are recorded for the amount that is estimated to ultimately be paid related to
completed homes that have been closed. The home construction budgets are compared to actual recorded costs to
determine the additional costs remaining to be paid on each closed home.
The Company rarely purchases land for resale. However, when the Company owns land or communities under
development that do not fit into its development and construction plans and determines it will sell the asset, the project is
accounted for as land held for sale. The Company records land held for sale at the lesser of its carrying value or fair value
less estimated costs to sell.
Each quarter, the performance and outlook of land inventory and communities under development are reviewed for
indicators of potential impairment. If indicators of impairment are present for a community, the Company performs an
impairment evaluation of the community, which includes 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 recorded to cost of
sales if the fair value of such assets is less than their carrying amounts. Impairment charges are also recorded on finished
homes in substantially completed communities when events or circumstances indicate that the carrying values are greater
than the fair values less estimated costs to sell these homes. The key assumptions relating to asset valuations are impacted
by local market and economic conditions, and are inherently uncertain. Due to uncertainties in the estimation process,
actual results could differ from such estimates. See Note C.
71
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Capitalized Interest
The Company capitalizes interest costs incurred to inventory during active development and construction (active
inventory). Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. During fiscal
2012 and a portion of fiscal 2013, the Company’s active inventory was lower than its debt level and therefore, a portion of
the interest incurred was reflected as interest expense. However, since the third quarter of fiscal 2013, the Company's active
inventory has exceeded its debt level, and all interest incurred has been capitalized to inventory. See Note E.
Land Option Deposits and Pre-Acquisition Costs
The Company enters into land and lot option purchase contracts to acquire 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 in time with predetermined terms. Under the terms of many of the option purchase
contracts, the option deposits are not refundable in the event the Company elects to terminate the contract. 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 property under option and will not be able to recover these costs through other means.
Variable Interests
Option purchase contracts can result in the creation of a variable interest in the entity holding the land parcel under
option. There were no variable interest entities reported in the consolidated balance sheets at September 30, 2014 and 2013
because the Company determined it did not control the activities that most significantly impact the variable interest entity’s
economic performance and it did not have an obligation to absorb losses of or the right to receive benefits from the entity.
The maximum exposure to loss related to the Company’s variable interest entities is limited to the amounts of the
Company’s related option deposits. At September 30, 2014 and 2013, the amount of option deposits related to these
contracts totaled $55.7 million and $36.9 million, respectively, and are included in homebuilding other assets in the
consolidated balance sheets.
Property and Equipment
Property and equipment are 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.
The depreciable life of model home furniture is 2 years, depreciable lives of office furniture and equipment typically range
from 2 to 5 years, and depreciable lives of buildings and improvements typically range from 5 to 20 years.
The Company's property and equipment balances and the related accumulated depreciation at September 30, 2014
and 2013 were as follows:
Buildings and improvements................................................................................... $
Model home furniture..............................................................................................
Office furniture and equipment ...............................................................................
Land.........................................................................................................................
Total property and equipment..........................................................................
Accumulated depreciation .......................................................................................
Property and equipment, net (1)...................................................................... $
___________________
September 30,
2014
2013
(In millions)
112.8
$
86.7
68.4
66.9
334.8
(141.1)
193.7
$
92.2
72.7
54.9
16.9
236.7
(127.2)
109.5
(1) Includes $2.9 million and $2.8 million at September 30, 2014 and 2013, respectively, of property and equipment related to the
Company's financial services subsidiaries which is included in financial services other assets in the consolidated balance sheets.
72
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Depreciation expense was $36.6 million, $22.3 million and $18.8 million in fiscal 2014, 2013 and 2012, respectively.
In July 2014, the Company purchased approximately 177,000 acres in New Mexico as a long-term land investment
for $56.0 million. The Company paid $37.4 million in cash and assumed notes payable of $18.6 million from the seller. Of
the total purchase price, $46.5 million was allocated to land and the remainder was allocated to buildings, improvements
and equipment. As part of the purchase, the Company also obtained the livestock grazing rights under long-term leases on
approximately 114,000 acres of land. The Company plans to use the property to conduct ranching and agricultural
activities.
Business Acquisitions
The Company accounts for acquisitions of businesses by allocating the purchase price of the business to the various
assets acquired and liabilities assumed at their respective fair values. Any excess of the purchase price over the estimated
fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often required in
estimating the fair value of assets acquired, particularly intangible assets. These estimates and assumptions are based on
historical experience and information obtained from the management of the acquired companies. While the Company
believes the estimates and assumptions are reasonable, they are inherently uncertain. Unanticipated market or
macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and
assumptions.
In August 2012, the Company acquired the homebuilding operations of Breland Homes for $105.9 million in cash, of
which $9.4 million was paid in fiscal 2013. Breland Homes operates in Huntsville and Mobile, Alabama and along the
coast of Mississippi. The assets acquired included approximately 300 homes in inventory, 1,000 lots and control of
approximately 3,700 additional lots through option contracts. The Company also acquired a sales order backlog of 228
homes. In October 2013, the Company acquired the homebuilding operations of Regent Homes, Inc. for $34.5 million in
cash. Regent Homes operates in Charlotte, Greensboro and Winston-Salem, North Carolina. The assets acquired included
approximately 240 homes in inventory, 300 lots and control of approximately 600 additional lots through option contracts.
The Company also acquired a sales order backlog of 213 homes. All of the assets acquired were recorded at their estimated
fair values by the Company. These acquisitions were not material to the Company's results of operations or its financial
condition.
In May 2014, the Company acquired the homebuilding operations of Crown Communities (Crown) for $209.6
million in cash. Crown operates in Georgia, South Carolina and eastern Alabama. The assets acquired included
approximately 640 homes in inventory, 2,350 lots and control of approximately 3,400 additional lots through option
contracts. The Company also acquired a sales order backlog of 431 homes. Subsequent to the acquisition, Crown closed
721 homes and generated home sales revenues of $187.7 million during fiscal 2014.
The assets acquired and liabilities assumed from Crown were recorded by the Company at their estimated fair values
as of the acquisition date and were as follows (amounts in millions):
Inventories ...................................................................................................................................... $
Property and equipment..................................................................................................................
Other assets.....................................................................................................................................
Goodwill .........................................................................................................................................
Intangible assets..............................................................................................................................
Other liabilities ...............................................................................................................................
$
140.5
1.9
4.9
53.6
11.7
(3.0)
209.6
As a result of the transaction, the Company recorded goodwill of $53.6 million, whereby $34.1 million was allocated
to its Southeast reporting segment and $19.5 million was allocated to its East reporting segment, all of which is tax
deductible. The goodwill relates to expected synergies from increasing the Company's market presence in the Georgia and
South Carolina markets, Crown's experienced and knowledgeable workforce and their capital efficient operating processes.
The intangible assets will be amortized on a straight-line basis to SG&A expense over their expected five-year lives.
73
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Goodwill
The Company records goodwill associated with its acquisitions of businesses when the purchase price of the business
exceeds the fair value of the net tangible and identifiable intangible assets acquired. Goodwill balances are evaluated for
potential impairment on an annual basis. The accounting guidance allows an entity to assess qualitatively whether it is
necessary to perform step one of a prescribed two-step annual goodwill impairment test. If an entity believes, as a result of
its qualitative assessment, that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount,
the two-step goodwill impairment test is not required. The Company performed a qualitative assessment of goodwill at
September 30, 2014 and 2013, except for the goodwill related to the recent Crown acquisition, and determined that the
two-step process was not necessary. The Company's goodwill balances by reporting segment were as follows:
East ...................................................................................................................... $
Midwest ...............................................................................................................
Southeast..............................................................................................................
South Central .......................................................................................................
Southwest ............................................................................................................
West.....................................................................................................................
September 30,
2014
2013
(In millions)
21.8
$
—
57.1
15.9
—
—
Total Goodwill................................................................................................ $
94.8
$
—
—
23.0
15.9
—
—
38.9
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 construction work
to subcontractors who typically provide it with an indemnity and a certificate of insurance prior to receiving payments for
their work, claims relating to workmanship and materials are generally the primary responsibility of the subcontractors.
Warranty liabilities have been established by charging cost of sales for each home delivered. The amounts charged are
based on management’s estimate of expected warranty-related costs under all unexpired warranty obligation periods. The
Company’s warranty liability is based upon historical warranty cost experience in each market in which it operates, and is
adjusted as appropriate to reflect qualitative risks associated with the types of homes built and the geographic areas in
which they are built. See Note K.
Legal Claims and Insurance
The Company records expenses and liabilities for contingencies for legal claims related to construction defect
matters, personal injury claims, employment matters, land development issues and contract disputes. The amounts recorded
for these contingencies are based on the estimated costs of pending claims and the estimated costs of anticipated future
claims related to previously closed homes. The Company estimates and records receivables under applicable insurance
policies related to its estimated contingencies when recovery is probable. Additionally, the Company may have the ability
to recover a portion of its losses from its subcontractors and their insurance carriers when the Company has been named as
an additional insured on their insurance policies. The estimation of losses related to these contingencies and the related
estimates of recoveries from insurance policies are subject to a high degree of variability due to uncertainties such as trends
in construction defect claims relative to the Company's markets and the types of products built, claim frequency, claim
settlement costs and patterns, insurance industry practices and legal interpretations, among others. See Note K.
74
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was approximately $44.0 million, $33.2
million and $24.4 million in fiscal 2014, 2013 and 2012, respectively.
Income Taxes
The Company’s income tax expense (benefit) is calculated using the asset and liability method, under which deferred
tax assets and liabilities are recorded based on the tax consequences of temporary differences between the financial
statement amounts of assets and liabilities and their tax bases, and of tax loss and credit carryforwards. In assessing the
realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The realization of deferred tax assets is primarily dependent upon the generation of
sufficient taxable income in future periods and in the jurisdictions in which those temporary differences become deductible.
The Company records a valuation allowance when it determines it is more likely than not that a portion of the deferred tax
assets will not be realized. 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 income tax expense. 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 increases or
decreases in the Company’s income tax expense in the period in which the change is made. See Note G.
Earnings Per Share
Basic earnings 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 H.
Stock-Based Compensation
The Company's common stockholders formally authorize shares of stock-based compensation available for future
grants. From time to time, the Compensation Committee of the Company's Board of Directors authorizes the grant of
stock-based compensation to its employees and directors from these available shares. At September 30, 2014, the
outstanding stock-based compensation awards include stock options and restricted stock units. Grants of restricted stock
units may vest immediately or over a certain number of years as determined by the Compensation Committee of the Board
of Directors. Restricted stock units outstanding at September 30, 2014 have a remaining vesting period of 1 to 3 years.
Stock options are granted at exercise prices which equal the market value of the Company's common stock at the date of
the grant. The stock options outstanding at September 30, 2014 vest over periods of 2 to 9.75 years from the initial grant
date and expire 10 years after the dates on which they were granted.
The compensation expense for stock-based awards is based on the fair value of the award and is recognized on a
straight-line basis over the remaining vesting period. The fair values of restricted stock units are based on the stock prices
at the date of grant. The fair values of stock options granted are calculated on the date of grant using a 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,
judgment is used in estimating the number of share-based awards that are expected to be forfeited. The benefits of tax
deductions in excess of recognized compensation expense are reported in the consolidated statements of cash flows as a
financing cash flow. See Note J.
75
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Fair Value Measurements
The Financial Accounting Standards Board’s (FASB) authoritative guidance for fair value measurements establishes
a three-level hierarchy based upon the inputs to the valuation model of an 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 mortgage loans held for sale, debt securities collateralized
by residential real estate, interest rate lock commitments and other derivative instruments on a recurring basis. Fair value
measurements are used for inventories, other mortgage loans, rental properties and real estate owned on a nonrecurring
basis, when events and circumstances indicate that the carrying value may not be recoverable. See Note M.
Recent Accounting Pronouncements
In January 2014, the FASB issued ASU 2014-04, “Receivables - Troubled Debt Restructurings by Creditors,” which
clarifies when an in substance repossession or foreclosure of residential real estate property collateralizing a consumer
mortgage loan has occurred. This guidance helps determine when a creditor should derecognize a loan receivable and
recognize real estate property. The guidance is effective for the Company beginning October 1, 2015 and is not expected to
have a material impact on its consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which is a comprehensive
new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a
customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. The
guidance is effective for the Company beginning October 1, 2017 and allows for both full retrospective or modified
retrospective methods of adoption. The Company is currently evaluating the impact of this guidance on its consolidated
financial position, results of operations and cash flows.
In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing - Repurchase-to-Maturity Transactions,
Repurchase Financings, and Disclosures,” which changes the accounting for repurchase-to-maturity transactions to secured
borrowing accounting. Also, for repurchase financing arrangements, the amendments require separate accounting for a
transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which
will result in secured borrowing accounting for the repurchase agreement. The guidance is effective for the Company
beginning January 1, 2015 and will not have a material impact on its consolidated financial position, results of operations
or cash flows.
In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation,” which states that a
performance target in a share-based payment that affects vesting and that could be achieved after the requisite service
period should be accounted for as a performance condition. The guidance is effective for the Company beginning
October 1, 2016 and is not expected to have a material impact on its consolidated financial position, results of operations or
cash flows.
In August 2014, the FASB issued ASU 2014-14, “Receivables - Troubled Debt Restructurings by Creditors,” which
requires that certain government-guaranteed mortgage loans, including those guaranteed by the FHA and VA, be
derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon
foreclosure, the separate other receivable should be measured based on the amount of the loan balance expected to be
recovered from the guarantor. The guidance is effective for the Company beginning October 1, 2015 and is not expected to
have a material impact on its consolidated financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern,” which
provides guidance about management's responsibility to evaluate whether there is substantial doubt about the entity's
ability to continue as a going concern and to provide related footnote disclosures. This guidance is intended to reduce the
diversity in the timing and content of footnote disclosures. The guidance is effective for the Company at the end of fiscal
2017 and is not expected to have any impact on its consolidated financial position, results of operations or cash flows.
76
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE B – SEGMENT INFORMATION
The Company’s 37 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, Indiana and Minnesota
Southeast:
Alabama, Florida, Georgia, Mississippi and Tennessee
South Central:
Louisiana, Oklahoma and Texas
Southwest:
Arizona and New Mexico
West:
California, Hawaii, Nevada, Oregon, Utah and Washington
Homebuilding is the Company’s core business, generating 98% of consolidated revenues in fiscal 2014 and 97% of
consolidated revenues in fiscal 2013 and 2012. The Company’s homebuilding segments are primarily engaged in the
acquisition and development of land and the construction and sale of residential homes in 27 states and 79 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 primarily to the
Company’s homebuilding customers. The Company sells substantially all of the mortgages it originates and the 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.
77
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The accounting policies of the reporting segments are described throughout Note A. Financial information relating
to the Company's reporting segments is as follows:
Revenues
Homebuilding revenues:
East ..................................................................................... $
Midwest ..............................................................................
Southeast.............................................................................
South Central ......................................................................
Southwest............................................................................
West ....................................................................................
Homebuilding revenues...........................................................
Financial services revenues .....................................................
Total revenues.......................................................................... $
Inventory Impairments
East ..................................................................................... $
Midwest ..............................................................................
Southeast.............................................................................
South Central ......................................................................
Southwest............................................................................
West ....................................................................................
Total inventory impairments.................................................... $
Income (Loss) Before Income Taxes (1)
Homebuilding pre-tax income (loss):
East ..................................................................................... $
Midwest ..............................................................................
Southeast.............................................................................
South Central ......................................................................
Southwest............................................................................
West ....................................................................................
Homebuilding pre-tax income.................................................
Financial services pre-tax income ...........................................
Income before income taxes.................................................... $
Year Ended September 30,
2013
2012
2014
(In millions)
954.7
$
686.3
$
483.5
2,167.0
1,971.2
285.2
1,996.9
7,858.5
166.4
471.5
1,520.7
1,526.2
327.7
1,553.5
6,085.9
173.4
542.4
339.3
934.6
1,158.4
270.7
990.8
4,236.2
117.8
8,024.9
$
6,259.3
$
4,354.0
$
17.7
49.3
3.1
—
—
5.1
75.2
$
$
45.2
(9.5)
218.0
208.0
25.5
281.6
768.8
45.4
0.1
$
$
$
—
—
1.0
—
20.2
21.3
48.3
38.9
148.4
149.0
26.3
181.4
592.3
65.5
814.2
$
657.8
$
1.0
—
1.6
0.1
0.5
—
3.2
16.0
1.1
38.0
80.6
16.8
51.2
203.7
39.2
242.9
____________
(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 those expenses associated with the corporate office are allocated to each segment
based on the segment’s inventory balances.
78
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
September 30,
2014
2013
(In millions)
Homebuilding Inventories (1):
East ............................................................................................................... $
Midwest........................................................................................................
Southeast ......................................................................................................
South Central................................................................................................
Southwest .....................................................................................................
West..............................................................................................................
Corporate and unallocated (2) ......................................................................
Total homebuilding inventories......................................................................... $
842.7
$
477.6
1,943.0
1,742.5
292.9
2,169.4
232.4
742.9
412.2
1,508.5
1,443.6
262.4
1,668.2
159.6
7,700.5
$
6,197.4
____________
(1) Homebuilding inventories are the only assets included in the measure of homebuilding segment assets used by the
Company’s chief operating decision makers.
(2) Corporate and unallocated consists primarily of capitalized interest and property taxes.
NOTE C – INVENTORY
The Company reviewed the performance and outlook for all of its land inventories and communities each quarter
for indicators of potential impairment and performed detailed impairment evaluations and analyses when necessary. As
of September 30, 2014, the Company performed detailed impairment evaluations of communities with a combined
carrying value of $359.8 million and recorded impairment charges of $18.1 million during the fourth quarter to reduce
the carrying value of impaired communities to their estimated fair value. Total impairment charges during fiscal 2014,
2013 and 2012 were $75.2 million, $21.3 million and $3.2 million, respectively.
Of the total impairment charges in fiscal 2014, $49.3 million occurred in the Midwest region, primarily related to
communities in Chicago that were purchased predominantly in 2004 through 2007 and had been previously impaired. In
contrast to most of the Company's markets, the Chicago housing market remains weak with sales absorptions and returns
in these communities performing below management’s expectations given the size of the Company's investments. During
the year, the Company reduced home prices and identified land parcels it intends to sell in these communities in an effort
to increase sales pace, reduce inventories and improve cash flows and returns.
Also during fiscal 2014, $17.7 million of impairment charges occurred in the East region. These impairments
primarily related to long-held inactive and underperforming projects in the suburban Washington, D.C. market that the
Company intends to sell to reduce inventories and improve cash flows and returns.
During fiscal 2014, 2013 and 2012, the Company wrote off $10.0 million, $9.8 million and $3.0 million,
respectively, of earnest money deposits and pre-acquisition costs related to land option contracts that are expected to be
terminated.
79
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE D – NOTES PAYABLE
The Company’s notes payable at their principal amounts, net of any unamortized discounts, consist of the
following:
September 30,
2014
2013
(In millions)
Homebuilding:
Unsecured:
Revolving credit facility, maturing 2019......................................... $
6.125% senior notes due 2014, net..................................................
2% convertible senior notes due 2014, net......................................
5.625% senior notes due 2014, net..................................................
5.25% senior notes due 2015, net....................................................
5.625% senior notes due 2016, net..................................................
6.5% senior notes due 2016, net......................................................
4.75% senior notes due 2017...........................................................
3.625% senior notes due 2018.........................................................
3.75% senior notes due 2019...........................................................
4.375% senior notes due 2022.........................................................
4.75% senior notes due 2023...........................................................
5.75% senior notes due 2023...........................................................
Other secured........................................................................................
$
300.0
—
—
—
157.7
169.9
372.6
350.0
400.0
500.0
350.0
300.0
400.0
23.4
3,323.6
Financial Services:
Mortgage repurchase facility, maturing 2015....................................... $
359.2
$
$
$
—
145.8
478.7
137.8
157.5
169.7
372.5
350.0
400.0
—
350.0
300.0
400.0
8.4
3,270.4
238.6
As of September 30, 2014, maturities of consolidated notes payable, assuming the mortgage repurchase facility is
not extended or renewed, are $522.4 million in fiscal 2015, $543.5 million in fiscal 2016, $350.6 million in fiscal 2017,
$400.6 million in fiscal 2018, $800.6 million in fiscal 2019 and $1,065.5 million in maturities thereafter.
Homebuilding:
The Company has a senior unsecured revolving credit facility which was amended in August 2014 to increase its
capacity from $725 million to $975 million and to extend its maturity date to September 7, 2019. The facility has an
uncommitted accordion feature that could increase the size of the facility to $1.25 billion, subject to certain conditions
and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a
sublimit equal to approximately 50% of the revolving credit commitment. Letters of credit issued under the facility
reduce the available borrowing capacity. The interest rate on borrowings under the revolving credit facility may be based
on either the Prime Rate or London Interbank Offered Rate (LIBOR) plus an applicable margin, as defined in the credit
agreement governing the facility. At September 30, 2014, the Company had $300.0 million of borrowings outstanding at
a 2.9% annual interest rate and $92.7 million of letters of credit issued under the revolving credit facility.
The Company's revolving credit facility imposes restrictions on its operations and activities, including requiring the
maintenance of a minimum level of tangible net worth, a maximum allowable ratio of debt to tangible net worth and a
borrowing base restriction if the Company's ratio of debt to tangible net worth exceeds a certain level. These covenants
are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure
to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the
revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. In addition,
the credit agreement governing the facility and the indentures governing the senior notes impose restrictions on the
80
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
creation of secured debt and liens. At September 30, 2014, the Company was in compliance with all of the covenants,
limitations and restrictions of its revolving credit facility and public debt obligations.
The Company has an automatically effective universal shelf registration statement filed with the Securities and
Exchange Commission (SEC) in September 2012, registering debt and equity securities that the Company may issue
from time to time in amounts to be determined.
On January 15, 2014, the Company repaid the remaining $145.9 million principal amount of its 6.125% senior
notes which were due on that date. On September 15, 2014, the Company repaid the remaining $137.9 million principal
amount of its 5.625% senior notes which were due on that date. In February 2014, the Company issued $500.0 million
principal amount of 3.75% senior notes due March 1, 2019.
During April and May of 2014, the Company's outstanding 2% convertible senior notes were converted into 38.6
million shares of the Company's common stock. The conversion rate was 77.18004 shares of the Company's common
stock per $1,000 principal amount of senior notes, which was equivalent to a conversion price of approximately $12.96
per share of common stock.
The key terms of each of the Company’s senior notes outstanding as of September 30, 2014 are summarized below.
Note Payable
5.25% senior .......................
5.625% senior .....................
6.5% senior .........................
4.75% senior .......................
3.625% senior .....................
3.75% senior .......................
4.375% senior .....................
4.75% senior .......................
5.75% senior .......................
______________
Principal
Amount
(In millions)
$157.7
$170.2
$372.7
$350.0
$400.0
$500.0
$350.0
$300.0
$400.0
Date Issued
Date Due
Redeemable
Prior to
Maturity
Effective
Interest Rate (1)
February 2005
February 15, 2015
December 2004
January 15, 2016
April 2006
May 2012
April 15, 2016
May 15, 2017
February 2013
February 15, 2018
February 2014
March 1, 2019
September 2012
September 15, 2022
February 2013
February 15, 2023
August 2013
August 15, 2023
Yes (2)
Yes (2)
Yes (2)
Yes (2)
Yes (2)
Yes (2)
Yes (2)
Yes (2)
Yes (2)
5.4%
5.8%
6.6%
5.0%
3.8%
3.9%
4.5%
4.9%
5.9%
(1) Interest is payable semi-annually on each of the series of senior notes. The annual effective interest rate is calculated
after giving effect to the amortization of the financing costs and any discount associated with the note issuance.
(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 accrued interest.
All series of senior notes and borrowings under the revolving credit facility are senior obligations and rank pari
passu in right of payment to all existing and future unsecured indebtedness, and senior to all existing and future
indebtedness expressly subordinated to them. The senior notes and borrowings under the revolving credit facility are
guaranteed by substantially all of the Company’s homebuilding subsidiaries. Upon the occurrence of both a change of
control of the Company and a ratings downgrade event, as defined in the indentures governing $2.3 billion principal
amount of its senior notes as of September 30, 2014, the Company would be required in certain circumstances to offer to
repurchase these notes at 101% of their principal amount, along with accrued and unpaid interest. Also, a change of
control as defined in the revolving credit facility would constitute an event of default under the revolving credit facility,
which could result in the acceleration of any borrowings outstanding under the facility and the termination of the
commitments thereunder.
81
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Effective August 1, 2014, the Board of Directors authorized the repurchase of up to $500 million of the
Company’s debt securities effective through July 31, 2015. All of the $500 million authorization was remaining at
September 30, 2014.
Financial Services:
The Company’s mortgage subsidiary, DHI Mortgage, has a mortgage repurchase facility that is accounted for as a
secured financing. The mortgage repurchase facility provides financing and liquidity to DHI Mortgage by facilitating
purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties against the transfer of funds
by the counterparties, thereby becoming purchased loans. DHI Mortgage then has the right and obligation to repurchase
the purchased loans upon their sale to third-party purchasers in the secondary market or within specified time frames
from 45 to 120 days in accordance with the terms of the mortgage repurchase facility. The total capacity of the facility is
$300 million; however, the capacity can be increased up to $400 million subject to the availability of additional
commitments. In February 2014, the mortgage repurchase facility was renewed and amended. This renewal and
amendment extends the maturity date of the facility to February 27, 2015 and allows for the capacity of the facility to be
increased, without requiring additional commitments, from $300 million to $325 million on the last five days of any
fiscal quarter and the first twenty-five days of the following fiscal quarter, excluding the quarter ending December 31,
2014. Through an additional commitment obtained in September 2014, the capacity of the facility was temporarily
increased to $400 million until October 24, 2014.
As of September 30, 2014, $448.1 million of mortgage loans held for sale with a collateral value of $429.0 million
were pledged under the mortgage repurchase facility. As a result of advance paydowns totaling $69.8 million, DHI
Mortgage had an obligation of $359.2 million outstanding under the mortgage repurchase facility at September 30, 2014
at a 2.6% annual interest rate.
The mortgage repurchase facility is not guaranteed by 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. These covenants are measured and reported monthly. At September 30, 2014, DHI Mortgage was in
compliance with all of the conditions and covenants of the mortgage repurchase facility.
NOTE E – CAPITALIZED INTEREST
The following table summarizes the Company’s interest costs incurred, capitalized, expensed as interest expense
and charged to cost of sales during the years ended September 30, 2014, 2013 and 2012:
Capitalized interest, beginning of year.................................... $
Interest incurred (1) .................................................................
Interest expensed:
Directly to interest expense ................................................
Amortized to cost of sales...................................................
Written off with inventory impairments .............................
Capitalized interest, end of year .............................................. $
______________
2014
Year Ended September 30,
2013
(In millions)
2012
137.1
$
82.3
$
185.8
172.8
79.2
124.1
—
(123.1)
(1.3)
198.5
$
(7.1)
(110.2)
(0.7)
137.1
$
(26.9)
(94.0)
(0.1)
82.3
(1) Interest incurred includes interest incurred on the Company's financial services mortgage repurchase facility of $4.5
million, $4.6 million and $3.3 million in fiscal 2014, 2013 and 2012, respectively.
82
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE F – MORTGAGE LOANS
Mortgage Loans Held for Sale
Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying
property. At September 30, 2014, mortgage loans held for sale had an aggregate fair value of $476.9 million and an
aggregate outstanding principal balance of $466.6 million. At September 30, 2013, mortgage loans held for sale had an
aggregate fair value of $395.1 million and an aggregate outstanding principal balance of $381.1 million. During the years
ended September 30, 2014, 2013 and 2012, mortgage loans originated totaled $3.7 billion, $3.4 billion and $2.7 billion,
respectively, and mortgage loans sold totaled $3.6 billion, $3.4 billion and $2.6 billion, respectively. The Company had
gains on sales of loans and servicing rights, net of recourse expense (benefit), of $101.8 million, $112.0 million and
$69.2 million during the years ended September 30, 2014, 2013 and 2012, respectively. Net gains on sales of loans and
servicing rights are included in financial services revenues in the consolidated statements of operations. Approximately
71% of the mortgage loans sold by DHI Mortgage during fiscal 2014 were sold to four major financial institutions and
the largest concentration of total loans sold to one institution was 28%.
To manage the interest rate risk inherent in its mortgage operations, the Company hedges its risk using derivative
instruments, generally forward sales of mortgage-backed securities (MBS), which are referred to as “hedging
instruments” in the following discussion. The Company does not enter into or hold derivatives for trading or speculative
purposes.
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. 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. The net fair value change, which for the years ended
September 30, 2014, 2013 and 2012 was not significant, is recognized in financial services revenues in the consolidated
statements of operations. As of September 30, 2014, the Company had $348.6 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
$348.2 million.
Other Mortgage Loans and Loss Reserves
Mortgage loans are sold with limited recourse provisions derived from industry-standard representations and
warranties in the relevant agreements. Primarily, these representations and warranties involve the absence of
misrepresentations by the borrower or other parties, the appropriate underwriting of the loan and in some cases, a
required 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 some become real
estate owned through the foreclosure process. At September 30, 2014 and 2013, the Company’s total other mortgage
loans and real estate owned, before loss reserves, were as follows:
Other mortgage loans ........................................................................................ $
Real estate owned..............................................................................................
September 30,
2014
2013
(In millions)
41.0
$
0.7
$
41.7
$
83
35.9
1.3
37.2
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. The loss reserve for loan repurchase and settlement obligations is estimated based on an analysis of
loan repurchase requests received, actual repurchases and losses through the disposition of such loans or requests,
discussions with mortgage purchasers and analysis of mortgages originated. The reserve balances at September 30, 2014
and 2013 were as follows:
Loss reserves related to:
Other mortgage loans ................................................................................... $
Real estate owned.........................................................................................
Loan repurchase and settlement obligations — known and expected .........
$
September 30,
2014
2013
(In millions)
1.7
0.1
24.4
26.2
$
$
3.2
0.2
25.9
29.3
Other mortgage loans and real estate owned and the related loss reserves are included in financial services other
assets, while loan repurchase obligations are included in financial services accounts payable and other liabilities in the
accompanying consolidated balance sheets.
Loan Commitments and Related Derivatives
The Company is party to interest rate lock commitments (IRLCs), which are extended to borrowers who have
applied for loan funding and meet defined credit and underwriting criteria. At September 30, 2014, the notional amount
of IRLCs, which are accounted for as derivative instruments recorded at fair value, totaled $303.2 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 financial services revenues in the consolidated statements
of operations. As of September 30, 2014, the Company had a notional amount of approximately $28.2 million of best-
efforts whole loan delivery commitments and a notional amount of $243.8 million of hedging instruments related to
IRLCs not yet committed to purchasers.
84
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE G – INCOME TAXES
Income Tax Expense (Benefit)
The components of the Company’s income tax expense (benefit) are as follows:
Current tax expense (benefit):
Federal .......................................................................... $
State ..............................................................................
Deferred tax expense (benefit):
Federal ..........................................................................
State ..............................................................................
Total income tax expense (benefit).................................... $
2014
Year Ended September 30,
2013
(In millions)
2012
253.6
9.1
262.7
2.9
15.1
18.0
280.7
$
$
66.6
6.8
73.4
146.3
(24.6)
121.7
195.1
$
$
(7.0)
3.1
(3.9)
(616.1)
(93.4)
(709.5)
(713.4)
The Company's effective tax rate was 34.5% and 29.7% in fiscal 2014 and 2013, respectively. The effective tax rate
for fiscal 2014 includes a tax benefit for the domestic production activities deduction and a reduction in unrecognized tax
benefits and the related interest. In fiscal 2013, a reduction in the valuation allowance on deferred tax assets, as well as a
reduction in unrecognized tax benefits and related interest, contributed to the low effective tax rate. The Company did
not have a meaningful effective tax rate in fiscal 2012 because its net deferred tax assets were fully offset by a valuation
allowance until the third quarter when the Company significantly reduced the valuation allowance on its deferred tax
assets. The reduction in the valuation allowance resulted in an income tax benefit in fiscal 2012.
Reconciliation of Expected Income Tax Expense (Benefit)
Differences between income tax expense (benefit) and tax computed by applying the federal statutory rate of 35%
to income before income taxes during each year is due to the following:
Income taxes at federal statutory rate................................ $
Increase (decrease) in tax resulting from:
State income taxes, net of federal benefit.....................
Domestic production activities deduction ....................
Uncertain tax positions .................................................
Valuation allowance......................................................
Tax credits.....................................................................
Other .............................................................................
Total income tax expense (benefit).................................... $
2014
Year Ended September 30,
2013
(In millions)
2012
285.0
$
230.2
$
85.0
24.9
(22.4)
(6.4)
0.1
(0.9)
0.4
280.7
$
6.5
(6.5)
(12.7)
(24.1)
(1.1)
2.8
195.1
$
12.1
—
(2.3)
(806.6)
(1.3)
(0.3)
(713.4)
85
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Deferred Income Taxes
Deferred tax assets and liabilities reflect the tax consequences of temporary differences between the financial
statement amounts of assets and liabilities and their tax bases, and of tax loss and credit carryforwards. Components of
deferred income taxes are summarized as follows:
Deferred tax assets:
Inventory costs ......................................................................................... $
Inventory impairments .............................................................................
Warranty and construction defect costs....................................................
Net operating loss carryforwards .............................................................
Tax credit carryforwards ..........................................................................
Incentive compensation plans ..................................................................
Deferral of profit on home sales...............................................................
Other.........................................................................................................
Total deferred tax assets................................................................................
Valuation allowance......................................................................................
Total deferred tax assets, net of valuation allowance....................................
Deferred tax liabilities...................................................................................
Deferred income taxes, net............................................................................ $
September 30,
2014
2013
(In millions)
88.6
$
234.7
117.3
84.5
7.6
69.3
1.9
19.9
623.8
(31.1)
592.7
27.7
565.0
$
74.5
267.6
114.5
99.3
5.9
69.9
1.9
21.5
655.1
(31.0)
624.1
37.5
586.6
Tax benefits of $84.5 million exist for state net operating loss (NOL) carryforwards that will expire (beginning at
various times depending on the tax jurisdiction) from fiscal 2015 to fiscal 2034. Tax benefits for state tax credit
carryforwards of $5.7 million will expire from fiscal 2018 to fiscal 2024 and $1.9 million of tax benefits for state tax
credit carryforwards that have no expiration date.
The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and
actual outcomes of these future results could have a material impact on the Company's consolidated results of operations
or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and
the valuation of the Company's deferred tax assets.
Valuation Allowance
When assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not
that some portion or all of its deferred tax assets will not be realized. The realization of deferred tax assets is dependent
upon the generation of sufficient taxable income in future periods. The Company records a valuation allowance when it
determines it is more likely than not that a portion of the deferred tax assets will not be realized. At September 30, 2014,
the Company determined it was more likely than not that all of the Company’s federal deferred tax assets will be
realized.
The Company had a valuation allowance of $31.1 million at September 30, 2014 related to its state deferred tax
assets for NOL carryforwards and tax credit carryforwards. The Company believes it is more likely than not that a
portion of its state NOL carryforwards will not be realized because some state NOL carryforward periods are too brief to
realize the related deferred tax assets. The Company continues to evaluate both the positive and negative evidence in
determining the need for a valuation allowance with respect to its tax benefits for state NOL carryforwards.
86
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During most of fiscal 2012, the Company's net deferred tax assets were fully offset by a valuation allowance. The
Company’s analyses leading to changes in the valuation allowance during fiscal 2012 and 2013 are discussed below.
In fiscal 2012, the Company determined it was more likely than not that the substantial majority of the Company's
deferred tax assets would be realized, which resulted in a $753.2 million reversal of the valuation allowance on its
deferred tax assets. The Company evaluated both positive and negative evidence to determine its ability to realize its
deferred tax assets.
The most significant changes in the Company's evaluation of the realizability of its deferred tax assets in fiscal
2012 compared to prior periods were the development of significant positive evidence related to the Company's
accelerating growth in pre-tax income, net sales orders and backlog as fiscal 2012 progressed; the Company's
expectation to realize all of its federal NOLs in less than five years and to absorb all federal deductible temporary
differences as they reverse in future years based on fiscal 2012 pre-tax income levels; the Company's expectation of
sustained and increasing profitability in future years; and the lessening of the significance of the negative evidence
considered in prior periods related to the Company's pre-tax losses incurred in prior years, because the Company had
generated positive cumulative pre-tax income for the past three years as of June 30, 2012. These significant changes led
the Company to determine that it was appropriate to reverse all of the valuation allowance related to its federal deferred
tax assets and a portion of the valuation allowance related to its state deferred tax assets.
Further changes in the valuation allowance were recorded during fiscal 2013 based on the Company’s quarterly
evaluations to determine the need for a valuation allowance related to its state deferred tax assets. At March 31, 2013,
after considering the impact of significantly improving profits from operations, the Company concluded it was more
likely than not that it would realize more of its deferred tax assets related to state NOL carryforwards than previously
anticipated. The Company based this conclusion on additional positive evidence related to the actual pre-tax profits
achieved during the six months ended March 31, 2013 and higher levels of forecasted profitability for the remainder of
fiscal 2013 and in future years. The Company expected these increased profits to result in a greater realization of its NOL
carryforwards in certain states before they expire than previously estimated. Accordingly, at March 31, 2013, the
Company reduced the valuation allowance on its state deferred tax assets by $18.7 million to a balance of $23.2 million.
Because this reduction of the valuation allowance was recognized in an interim period, a portion of the valuation
allowance to be reversed was allocated to the remaining interim periods. Therefore, the Company reversed an additional
$2.9 million of the valuation allowance in the third and fourth quarters of fiscal 2013. Additionally, approximately $13.2
million of the Company's valuation allowance was attributable to state NOL carryforwards that expired at the end of
fiscal 2013, at which time the related unrealized deferred tax assets and valuation allowances were written off. The
amount of the Company’s valuation allowance at September 30, 2013 as a result of the activity described above would
have been $7.1 million.
At September 30, 2013 the Company recorded an out-of-period adjustment which increased both the Company’s
deferred income taxes and the valuation allowance on its deferred income taxes by $23.9 million. The out-of-period
adjustment had no impact on the Company’s statement of operations during fiscal 2013. The increase in the Company’s
deferred income taxes of $23.9 million corrected an error in recording the future benefits for state NOL carryforwards
based on each of the Company’s legal entities’ NOLs in each state and the current tax rate of each state. The valuation
allowance was also increased by $23.9 million because the Company determined it is more likely than not that these state
NOL carryforwards will not be realized because the Company estimates it will not have sufficient taxable income within
these states' carryforward periods. As a result of this adjustment, the remaining amount of the valuation allowance related
to state deferred tax assets was $31.0 million at September 30, 2013. The Company’s valuation allowance is based on an
analysis of the amount of NOL carryforwards associated with each of its legal entities in the states in which it conducts
business, as compared to its expected level of taxable income under existing apportionment or recognition rules in each
state and the carryforward periods allowed in each state's tax code. Had deferred income taxes related to the state NOL
carryforwards of each of the Company's legal entities been reflected at state specific tax rates as of September 30, 2012,
the Company's deferred income taxes would have increased by $31.6 million and the corresponding valuation allowance
on its deferred income taxes would have increased by $37.6 million. This would have resulted in a decrease in the
Company’s income tax benefit of $6.0 million in fiscal 2012, which would have reversed and decreased income tax
expense by $6.0 million in fiscal 2013. The unadjusted amounts from fiscal 2012 are not material to the Company’s
financial statements for fiscal 2012, and the out-of-period adjustment recorded in fiscal 2013 is not material to the
financial statements for fiscal 2013.
87
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Unrecognized Tax Benefits
Unrecognized tax benefits are the differences between tax positions taken or expected to be taken in a tax return
and the benefits recognized for accounting purposes. A reconciliation of the beginning and ending amounts of
unrecognized tax benefits is as follows:
Year Ended September 30,
2013
2012
2014
Unrecognized tax benefits, beginning of year............................... $
Reductions attributable to tax positions taken in prior years....
Reductions attributable to lapse of statute of limitations..........
Unrecognized tax benefits, end of year ......................................... $
(In millions)
14.1
$
(2.4)
(7.5)
4.2
4.2
(4.2)
—
— $
$
$
16.3
(1.6)
(0.6)
14.1
The Company had no unrecognized tax benefits at September 30, 2014. The Company classifies interest expense
and penalties on income taxes as income tax expense. During fiscal 2014, 2013 and 2012, the Company recognized
interest benefits related to unrecognized tax benefits of $2.2 million, $2.8 million and $0.1 million, respectively, in its
consolidated statements of operations. At September 30, 2014, the Company had no accrued interest or penalties related
to unrecognized tax benefits. At September 30, 2013, the Company had $2.2 million of accrued interest and no accrued
penalties related to unrecognized tax benefits.
Regulations and Legislation
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 2010 through 2014. The Company is
currently being audited by various states.
88
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE H – EARNINGS PER SHARE
The following table sets forth the numerators and denominators used in the computation of basic and diluted
earnings per share. Options to purchase 8.5 million, 4.6 million and 6.4 million shares of common stock were excluded
from the computation of diluted earnings per share for fiscal 2014, 2013 and 2012, respectively, because the exercise
price of the options was greater than the average market price of the common shares and, therefore, their effect would
have been antidilutive.
2014
Year Ended September 30,
2013
(In millions)
2012
Numerator:
Net income ............................................................................................. $
Effect of dilutive securities:
Interest and amortization of issuance costs associated
with convertible senior notes, net of tax, if applicable ...................
Numerator for diluted earnings per share after assumed conversions ... $
533.5
$
462.7
$
956.3
16.5
23.9
36.8
550.0
$
486.6
$
993.1
Denominator:
Denominator for basic earnings per share —
weighted average common shares......................................................
Effect of dilutive securities:
340.5
322.1
318.1
Employee stock awards ......................................................................
Convertible senior notes .....................................................................
3.1
23.0
4.2
38.6
2.6
38.3
Denominator for diluted earnings per share —
adjusted weighted average common shares .......................................
366.6
364.9
359.0
NOTE I – STOCKHOLDERS’ EQUITY
The Company has an automatically effective universal shelf registration statement, filed with the SEC in
September 2012, registering debt and equity securities that it may issue from time to time in amounts to be determined.
At September 30, 2014, the Company had 371,786,765 shares of common stock issued and 364,586,694 shares
outstanding. No shares of preferred stock were issued or outstanding. At September 30, 2014, the Company had 23.2
million and 3.5 million shares of common stock reserved for issuance pursuant to the D.R. Horton, Inc. Stock Incentive
Plans and Employee Stock Purchase Plan, respectively.
During April and May of 2014, the Company's outstanding 2% convertible senior notes were converted into 38.6
million shares of the Company's common stock. The conversion rate was 77.18004 shares of the Company's common
stock per $1,000 principal amount of senior notes, which was equivalent to a conversion price of approximately $12.96
per share of common stock.
Effective August 1, 2014, the Board of Directors authorized the repurchase of up to $100 million of the Company’s
common stock effective through July 31, 2015. All of the $100 million authorization was remaining at September 30,
2014.
The Board of Directors approved and paid cash dividends of $0.0375 per common share in each of the second and
third quarters of fiscal 2014 and a cash dividend of $0.0625 per common share in the fourth quarter of fiscal 2014. In
November 2014, the Board of Directors approved a cash dividend of $0.0625 per common share, payable on December
15, 2014, to stockholders of record on December 1, 2014.
89
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During the first quarter of fiscal 2013, the Board of Directors approved and paid total cash dividends of $0.1875
per common share, which included cash dividends of $0.0375 per share and an additional cash dividend of $0.15 per
share. The cash dividend of $0.15 per share was in lieu of and accelerated the payment of all quarterly dividends that the
Company would have otherwise paid in calendar year 2013.
NOTE J – EMPLOYEE BENEFIT PLANS
Deferred Compensation Plans
The Company has a 401(k) plan for all 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. The Company recorded $8.5 million, $6.4 million
and $5.6 million of expense for matching contributions in fiscal 2014, 2013 and 2012 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. 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 $24.3 million and $21.5 million at September 30, 2014 and 2013, respectively. The Company recorded
$3.9 million, $3.6 million and $3.1 million of expense for this plan in fiscal 2014, 2013 and 2012, respectively.
The Company has a deferred compensation plan available to a select group of employees which allows
participating employees to contribute compensation into the plan on a before tax basis and defer income taxation on the
contributions until the funds are withdrawn from the plan. 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 $39.7 million and $22.9 million at
September 30, 2014 and 2013, respectively. The Company records as expense the amount that the employee
contributions would have earned had the funds been invested in the designated investments. The Company recorded
$1.6 million, $0.6 million and $1.6 million of expense for this plan in fiscal 2014, 2013 and 2012, 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 85% of the fair market value of the stock on the designated dates of
purchase. The price to eligible employees 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 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 purchased 77,216 shares for $1.4 million in fiscal 2014,
63,105 shares for $1.1 million in fiscal 2013 and 79,455 shares for $0.9 million in fiscal 2012.
90
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock Options
The Company’s Stock Incentive Plan provides for the granting of stock options to certain executive officers, other
key employees and non-management directors 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. The options outstanding at
September 30, 2014 vest over periods of 2 to 9.75 years from the initial grant date and expire 10 years after the dates on
which they were granted.
The following table provides additional information related to stock option activity under the Company’s Stock
Incentive Plan.
2014
Year Ended September 30,
2013
2012
Stock
Options
18,962,536
3,856,166
(2,687,724)
(652,167)
19,478,811
7,207,978
Weighted
Average
Exercise
Price
$
$
$
15.91
23.85
16.30
17.68
17.37
16.27
Stock
Options
17,580,031
3,676,000
(1,785,412)
(508,083)
18,962,536
6,626,337
Weighted
Average
Exercise
Price
$
$
$
14.24
23.80
16.00
14.66
15.91
16.83
Stock
Options
22,705,963
—
(4,493,797)
(632,135)
17,580,031
5,815,913
Weighted
Average
Exercise
Price
$
13.63
—
11.13
14.46
14.24
18.55
$
$
Outstanding at beginning of year.....
Granted.............................................
Exercised..........................................
Canceled or expired .........................
Outstanding at end of year ...............
Exercisable at end of year ................
At September 30, 2014, there were 3.8 million shares available for future grants under the Plan.
The total intrinsic value of options exercised during fiscal 2014, 2013 and 2012 was $18.0 million, $14.6 million
and $26.4 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the
underlying stock exceeds the option exercise price.
The aggregate intrinsic value of options outstanding and exercisable at September 30, 2014 was $101.4 million and
$47.0 million, respectively. Exercise prices for options outstanding at September 30, 2014, ranged from $9.03 to $36.92.
The weighted average remaining contractual lives of options outstanding and exercisable at September 30, 2014 were
6.1 years and 4.6 years, respectively.
During fiscal 2014 and 2013, the Compensation Committee of the Board of Directors and the Board of Directors
approved and granted stock options to executive officers, other officers, employees and non-management directors of the
Company. There were approximately 520 recipients of the 2014 stock option grants and 500 recipients of the 2013 stock
option grants who collectively may purchase approximately 3.9 million shares and 3.7 million shares, respectively, of the
Company's common stock at the closing market price of the stock on the date of the grant. The stock options granted in
fiscal 2014 and 2013 vest over periods of 2 to 5 years and expire 10 years after the dates on which they were granted. No
stock options were granted by the Company during fiscal 2012.
91
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 weighted average fair value of options granted in fiscal 2014
and 2013 was $11.21 per share and $10.92 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:
Risk free interest rate .................................................................
Expected life (in years) ..............................................................
Expected volatility .....................................................................
Expected dividend yield.............................................................
Year Ended September 30,
2013
1.13%
2014
2.01%
2012
—
6.48
48.80%
0.63%
6.46
49.30%
0.63%
—
—
—
For fiscal 2014, 2013 and 2012, the Company’s compensation expense related to stock option grants was $25.5
million, $18.6 million and $15.1 million, respectively, and at September 30, 2014, there was $71.7 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 3.75 years.
Incentive Bonus Plan
The Company's Incentive Bonus Plan provides for the Compensation Committee to award short-term performance
bonuses to senior management based upon the level of achievement of certain criteria. For fiscal 2014, 2013 and 2012
the Compensation Committee approved awards whereby certain executive officers could earn performance bonuses
based upon percentages of the Company's pre-tax income. Compensation expense related to these plans was $11.8
million, $9.8 million and $4.9 million in fiscal 2014, 2013 and 2012, respectively.
Restricted Stock Unit Agreement
The Company has a Restricted Stock Unit Agreement (RSU Agreement) for awards to certain executive officers,
other key employees and non-management directors pursuant to the Stock Incentive Plan. Under the 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 Stock Incentive Plan.
In September 2010, the Compensation Committee approved and granted awards of 200,000 performance based
restricted stock units (Performance RSUs) that vested at the end of a two-year performance period that ended
September 30, 2012. The number of units that vested depended 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 ranged from 0% to 200% of the
number of units granted. The performance criteria were total shareholder return, return on investment, SG&A expense
containment and gross profit. Each Performance RSU represented the contingent right to receive one share of the
Company's common stock if the vesting conditions were satisfied. The Performance RSUs had no dividend or voting
rights during the performance period. The fair value of these awards on the date of grant was $11.53 per unit. Based on
the achievement of the performance criteria, 325,000 Performance RSUs were earned and vested on September 30, 2012.
Compensation expense for these awards was based on the Company's performance against the peer group, the elapsed
portion of the performance period and the grant date fair value of the award. Compensation expense for these awards was
$2.6 million in fiscal 2012.
92
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In fiscal 2014, 2013 and 2012, the Compensation Committee approved and granted awards of performance based
units (Performance Units) that vest at the end of three-year performance periods. The number of units that ultimately vest
depends on the Company's relative position as compared to its peers at the end of the three-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. The earned awards 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 respective performance period and may be paid in cash, equity or a combination of both at the discretion of the
Compensation Committee. The Compensation Committee also has the discretion to reduce the final payout on the
Performance Units from the amount earned. The Performance Units have no dividend or voting rights during the
performance period. Compensation expense related to these grants is based on the Company's performance against the
peer group, the elapsed portion of the performance period and the Company's stock price at the end of the period. The
following table provides additional information related to the Performance Units granted in fiscal 2014, 2013 and 2012
and outstanding at September 30, 2014.
Grant Date
Vesting Date
Target
Number of
Performance
Units
Grant Date
Fair Value
per Unit
Liability at
September 30,
2013
2014
November 2011
September 2014
November 2012
September 2015
November 2013
September 2016
350,000
350,000
350,000
$
11.79
$
(In millions)
11.7
$
22.15
19.64
4.9
2.6
$
7.4
2.7
—
$
19.2
$
10.1
$
Compensation Expense
Year Ended September 30,
2013
2012
2014
(In millions)
3.3
$
4.3
$
4.1
2.2
2.6
9.1
$
2.7
—
6.0
$
—
—
4.1
Based on the achievement of performance criteria, 568,750 Performance Units related to the awards granted in
November 2011, were earned and vested on September 30, 2014. In November 2014, the Compensation Committee
approved the payout of these Performance Units in the form of 568,750 shares of common stock to satisfy the award.
In January 2014 and 2013, the Company's Board of Directors approved and granted awards of 6,667 and 33,333
Restricted Stock Units, respectively, to non-management directors which vest in annual installments over one to three-
year periods ending in January 2017. Each Restricted Stock Unit represents the contingent right to receive one share of
the Company's common stock if the vesting conditions are satisfied. The Restricted Stock Units have no dividend or
voting rights during the vesting period. The fair value of the January 2014 award on the date of grant was $21.58 per
unit. The fair value of the January 2013 awards on the date of grant was $21.49 per unit. Compensation expense related
to these grants was $0.3 million and $0.2 million in fiscal 2014 and 2013, respectively.
93
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE K – COMMITMENTS AND CONTINGENCIES
Warranty Claims
The Company provides its homebuyers with warranties on the homes it sells for defects in structural components,
mechanical systems and other construction components of the home. Warranty liabilities are established by charging cost
of sales for each home delivered based on management's estimate of expected warranty-related costs and by accruing for
existing warranty claims. The Company’s warranty liability is based upon historical warranty cost experience in each
market in which it operates, and is adjusted as appropriate to reflect qualitative risks associated with the types of homes
built and the geographic areas in which they are built. The estimation of these costs is subject to a high degree of variability
due to uncertainties related to these factors. Due to the high degree of judgment required in establishing the liability for
warranty claims, actual future costs could differ significantly from current estimated amounts, and it is not possible for the
Company to make a reasonable estimate of the possible loss or range of loss in excess of its warranty liability.
Changes in the Company’s warranty liability during fiscal 2014 and 2013 were as follows:
Warranty liability, beginning of year..................................................................... $
Warranties issued...................................................................................................
Changes in liability for pre-existing warranties ....................................................
Settlements made...................................................................................................
Warranty liability, end of year............................................................................... $
September 30,
2014
2013
(In millions)
56.9
$
34.6
8.3
(34.1)
65.7
$
56.8
26.7
10.1
(36.7)
56.9
Legal Claims and Insurance
The Company is named as a defendant in various claims, complaints and other legal actions in the ordinary course of
business. At any point in time, the Company is managing several hundred individual claims related to construction defect
matters, personal injury claims, employment matters, land development issues and contract disputes. The Company has
established reserves for these contingencies based on the estimated costs of pending claims and the estimated costs of
anticipated future claims related to previously closed homes. The estimated liabilities for these contingencies were $456.9
million and $482.0 million at September 30, 2014 and 2013, respectively, and are included in homebuilding accrued
expenses and other liabilities in the consolidated balance sheets. At both September 30, 2014 and 2013, approximately 99%
of these reserves related to construction defect matters. Expenses related to the Company’s legal contingencies were $18.9
million, $19.3 million and $41.2 million in fiscal 2014, 2013 and 2012, respectively.
The Company’s reserves for construction defect claims include the estimated costs of both known claims and
anticipated future claims. As of September 30, 2014, no individual existing claim was material to the Company’s financial
statements, and the majority of the Company’s total construction defect reserves consisted of the estimated exposure to
future claims on previously closed homes. The Company has closed a significant number of homes during recent years, and
the Company may be subject to future construction defect claims on these homes. Although regulations vary from state to
state, construction defect issues can generally be reported for up to ten years after the home has closed in many states in
which the Company operates. Historical data and trends regarding the frequency of claims incurred and the costs to resolve
claims relative to the types of products and markets where the Company operates are used to estimate the construction
defect liabilities for both existing and anticipated future claims. These 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.
94
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Historical trends in construction defect claims have been inconsistent, and the Company believes they may continue
to fluctuate over the next several years. Housing market conditions have been volatile across most of the Company's
markets over the past ten years, and the Company believes such conditions can affect the frequency and cost of
construction defect claims. The Company closed a significant number of homes during its peak operating years from 2003
to 2007. If the ultimate resolution of construction defect claims resulting from closings in the Company's peak operating
years varies from current expectations, it could significantly change the Company's estimates regarding the frequency and
timing of claims incurred and the costs to resolve existing and anticipated future claims, which would impact the
construction defect reserves in the future. If the frequency of claims incurred or costs of existing and future legal claims
significantly exceed the Company's current estimates, they will have a significant negative impact on its future earnings
and liquidity.
The Company's reserves for legal claims decreased from $482.0 million at September 30, 2013 to $456.9 million at
September 30, 2014 primarily due to payments made for legal claims during the period, net of reimbursements received
from subcontractors. Also, a net decrease in the reserves was caused by a decrease in the estimated cost to resolve future
claims, partially offset by an increase in reserves for homes closed during the current year that are subject to possible future
construction defect claims. Changes in the Company’s legal claims reserves during fiscal 2014 and 2013 were as follows:
September 30,
2014
2013
(In millions)
Reserves for legal claims, beginning of year......................................................... $
Decrease in reserves ..............................................................................................
Payments................................................................................................................
Reserves for legal claims, end of year................................................................... $
482.0
(3.0)
(22.1)
456.9
$
$
544.9
(34.6)
(28.3)
482.0
In the majority of states in which it operates, 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 2014, the Company is self-
insured for up to $17.5 million of the aggregate completed operations indemnity 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 $0.25 million to $1.0 million of indemnity for each claim occurrence, depending on the policy year. For
policy years 2013, 2014 and 2015, the Company is self-insured for up to $15.0 million of the aggregate completed
operations indemnity claims incurred and for up to $0.25 million, plus a portion of the legal fees incurred, for 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 normal 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 100% 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. The Company is self-
insured under its captive policies for up to $25.0 million in aggregate completed operations indemnity claims per policy
year, at which point the excess loss insurance begins, and it is self-insured for the first $0.25 million for each claim
occurrence. For all policy years after April 2007, the captive insurance subsidiary has $15.0 million of risk transfer with a
third-party insurer. For policy years 2013, 2014 and 2015, after consideration of the aforementioned $15.0 million of risk
transfer, the Company is self-insured under these captive policies for up to $10.0 million in aggregate completed operations
indemnity claims, plus defense costs, per policy year and for up to $0.25 million for each claim occurrence. For the portion
of states insured by third party carriers, the aggregate amount of self-insured retentions for completed operations indemnity
claims for each year is limited to $4.0 million.
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 2013, 2014 and
2015 policy years is $0.5 million per occurrence.
95
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company estimates and records receivables under applicable insurance policies related to its estimated
contingencies for known claims and anticipated future construction defect claims on previously closed homes and other
legal claims and lawsuits incurred in the ordinary course of business when recovery is probable. Additionally, the Company
may have the ability to recover a portion of its losses from its subcontractors and their insurance carriers when the
Company has been named as an additional insured on their insurance policies. The Company's receivables related to its
estimates of insurance recoveries from estimated losses from pending legal claims and anticipated future claims related to
previously closed homes totaled $138.4 million and $162.1 million at September 30, 2014 and 2013, respectively, and are
included in homebuilding other assets in the consolidated balance sheets. The decrease in these receivables corresponds
closely to the decrease in the reserve for legal claims.
The estimation of losses related to these reserves and the related estimates of recoveries from insurance policies are
subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to the
Company's markets and the types of products built, claim frequency, claim settlement costs and patterns, insurance industry
practices and legal interpretations, among others. Due to the high degree of judgment required in establishing reserves for
these contingencies, actual future costs and recoveries from insurance could differ significantly from current estimated
amounts, and it is not possible for the Company to make a reasonable estimate of the possible loss or range of loss in
excess of its reserves.
Land and Lot Option Purchase Contracts
The Company enters into land and lot option purchase contracts to acquire land or lots for the construction of homes.
At September 30, 2014, the Company had total deposits of $58.7 million, consisting of cash deposits of $48.6 million and
promissory notes, letters of credit and surety bonds of $10.1 million, to purchase land and lots with a total remaining
purchase price of approximately $2.0 billion. A limited number of the land and lot option purchase contracts at
September 30, 2014, representing $30.9 million of remaining purchase price, were subject to specific performance clauses
which may require the Company to purchase the land or lots upon the land sellers meeting their contractual obligations.
The majority of land and lots under contract are currently expected to be purchased within three years.
Other Commitments
At September 30, 2014, the Company had outstanding surety bonds of $876.2 million and letters of credit of $95.8
million to secure performance under various contracts. Of the total letters of credit, $92.7 million were issued under the
Company's revolving credit facility. The remaining $3.1 million of letters of credit were issued under secured letter of
credit agreements requiring the Company to deposit cash as collateral with the issuing banks, and the cash restricted for
this purpose is included in homebuilding restricted cash in the consolidated balance sheets.
The Company leases office space and equipment under non-cancelable operating leases. At September 30, 2014, the
future minimum annual lease payments under these agreements are as follows (in millions):
2015...................................................................................................................................................... $
2016......................................................................................................................................................
2017......................................................................................................................................................
2018......................................................................................................................................................
2019......................................................................................................................................................
Thereafter.............................................................................................................................................
14.3
11.1
4.4
2.6
0.8
0.1
$
33.3
Rent expense was $19.3 million, $18.1 million and $18.5 million for fiscal 2014, 2013 and 2012, respectively.
96
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE L – OTHER ASSETS AND ACCRUED EXPENSES AND OTHER LIABILITIES
The Company’s homebuilding other assets at September 30, 2014 and 2013 were as follows:
Insurance receivables............................................................................................... $
Earnest money and refundable deposits ..................................................................
Accounts and notes receivable ................................................................................
Prepaid assets...........................................................................................................
Rental properties......................................................................................................
Debt securities collateralized by residential real estate...........................................
Other assets..............................................................................................................
$
September 30,
2014
2013
(In millions)
138.4
$
162.1
113.3
38.6
55.4
48.7
20.8
25.9
441.1
$
98.5
24.1
49.4
41.3
20.3
23.9
419.6
The Company’s homebuilding accrued expenses and other liabilities at September 30, 2014 and 2013 were as follows:
Reserves for legal claims......................................................................................... $
Employee compensation and related liabilities .......................................................
Warranty liability.....................................................................................................
Accrued interest.......................................................................................................
Federal and state income tax liabilities ...................................................................
Inventory related accruals........................................................................................
Homebuyer deposits ................................................................................................
Accrued property taxes............................................................................................
Other liabilities ........................................................................................................
September 30,
2014
2013
(In millions)
456.9
$
150.8
65.7
29.1
12.8
36.1
49.5
29.1
45.0
482.0
130.2
56.9
34.0
29.9
46.3
39.3
30.0
37.4
$
875.0
$
886.0
NOTE M – FAIR VALUE MEASUREMENTS
Fair value measurements are used for the Company's mortgage loans held for sale, debt securities collateralized by
residential real estate, IRLCs and other derivative instruments on a recurring basis, and are used for inventories, other
mortgage loans, rental properties and real estate owned on a nonrecurring basis, when events and circumstances indicate that
the carrying value may not be recoverable. The fair value hierarchy and its application to the Company’s assets and liabilities
is as follows:
• Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities.
• 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. The Company’s assets and liabilities measured at fair value using Level 2 inputs
on a recurring basis are as follows:
97
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
• Mortgage loans held for sale - The fair value of these loans is generally calculated by reference to quoted prices in
secondary markets for commitments to sell mortgage loans with similar characteristics. Closed mortgage loans are
typically sold shortly after origination, which limits exposure to nonperformance by loan buyer counterparties to a
short time period. In addition, the Company actively monitors the financial strength of its counterparties.
•
IRLCs - The fair value of IRLCs is calculated by reference to quoted prices in secondary markets for commitments
to sell mortgage loans with similar characteristics. These valuations do not contain adjustments for expirations as
any expired commitments are excluded from the fair value measurement. 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.
• Loan sale commitments and hedging instruments - The fair values of best-efforts and mandatory loan sale
commitments and derivative instruments such as forward sales of MBS that are utilized as hedging instruments are
calculated by reference to quoted prices for similar assets. The Company mitigates exposure to nonperformance
risk associated with derivative instruments 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
derivative positions is not significant.
After consideration of nonperformance risk, no additional adjustments were made to the fair value measurements of
mortgage loans held for sale, IRLCs or hedging instruments.
• Level 3 – Valuation is typically 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.
The Company's assets measured at fair value using Level 3 inputs on a recurring basis are its debt securities
collateralized by residential real estate and a limited number of mortgage loans held for sale with some degree of
impairment affecting their marketability.
The Company’s assets measured at fair value using Level 3 inputs that are typically reported at the lower of carrying
value or fair value on a nonrecurring basis are as follows:
•
•
Inventory held and used - In determining the fair values of its inventory held and used in its impairment
evaluations, the Company performs an analysis of the undiscounted cash flows estimated to be generated by those
assets. The most significant factors used to estimate undiscounted future cash flows 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. Inventory held and used measured at fair value represents those communities for
which the estimated undiscounted cash flows are less than their carrying amounts and therefore, the Company has
recorded impairments during the current period to record the inventory at fair value calculated based on its
discounted estimated future cash flows.
Inventory available for sale - The factors considered in determining fair values of the Company's land held for sale
primarily include actual sale contracts and recent offers received from outside third parties, and may also include
prices for land in recent comparable sales transactions and other market analysis. If the estimated fair value less the
costs to sell an asset is less than the asset's current carrying value, the asset is written down to its estimated fair
value less costs to sell.
• Certain other mortgage loans, rental properties and real estate owned - Other mortgage loans include performing
and nonperforming mortgage loans, which often become real estate owned through the foreclosure process. The
fair values of other mortgage loans, rental properties and real estate owned are determined based on the Company’s
assessment of the value of the underlying collateral or the value of the property, as applicable. The Company uses
different methods to assess the value of the properties, which may include broker price opinions, appraisals or cash
flow valuation models.
98
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis at
September 30, 2014 and 2013, and the changes in the fair value of the Level 3 assets during fiscal 2014.
Balance Sheet Location
Level 1
Level 2
Level 3
Total
Fair Value at September 30, 2014
(In millions)
Homebuilding:
Debt securities collateralized by residential real estate (a) ...
Other assets
$ — $ — $
20.8
$
20.8
Financial Services:
Mortgage loans held for sale (b) ........................................... Mortgage loans held for sale
Derivatives not designated as hedging instruments (c):
Interest rate lock commitments .....................................
Other assets
Forward sales of MBS...................................................
Other liabilities
Best-efforts and mandatory commitments ....................
Other liabilities
—
—
—
—
464.9
12.0
476.9
2.4
(1.9)
(0.1)
—
—
—
2.4
(1.9)
(0.1)
Balance Sheet Location
Level 1
Level 2
Level 3
Total
Fair Value at September 30, 2013
(In millions)
Homebuilding:
Debt securities collateralized by residential real estate (a) ...
Other assets
$ — $ — $
20.3
$
20.3
Financial Services:
Mortgage loans held for sale (b) ........................................... Mortgage loans held for sale
Derivatives not designated as hedging instruments (c):
Interest rate lock commitments .....................................
Other assets
Forward sales of MBS...................................................
Other liabilities
Best-efforts and mandatory commitments ....................
Other liabilities
—
—
—
—
389.4
5.7
395.1
7.0
(8.8)
(3.1)
—
—
—
7.0
(8.8)
(3.1)
Level 3 Assets at Fair Value for the
Year Ended September 30, 2014
Balance at
September 30,
2013
Net realized
and unrealized
gains/(losses)
Purchases
Principal
Reductions
Net transfers
in (out) of
Level 3
Balance at
September 30,
2014
Sales and
Settlements
(In millions)
Debt securities collateralized by
residential real estate (a) ........... $
Mortgage loans held for sale (b)...
$
20.3
5.7
$
0.5
0.8
— $
—
— $
(0.8)
— $
—
— $
6.3
20.8
12.0
(a) In October 2012, the Company purchased defaulted debt securities which are secured by residential real estate. The Company intends to
negotiate an agreement to obtain the right to take possession of the residential real estate in order to develop the property and ultimately
build and sell homes. These securities, which are included in other assets in the consolidated balance sheets, are classified as available
for sale and are reflected at fair value. The fair value of these securities was determined by estimating the future cash flows of the
securities and the residential real estate utilizing discount rates of 6% and 18%, respectively. Unrealized gains or losses on these
securities, net of tax, are recorded in accumulated other comprehensive income (loss) in the consolidated balance sheets.
(b) Mortgage loans held for sale are reflected at 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. Mortgage loans held for sale at September 30, 2014 includes
$12.0 million of originated loans for which the Company elected the fair value option upon origination and which the Company has not
sold into the secondary market, but plans to sell as market conditions permit. The fair value of these mortgage loans held for sale is
generally calculated considering the secondary market and adjusted for the value of the underlying collateral, including interest rate
risk, liquidity risk and prepayment risk.
(c) Fair value measurements of these derivatives represent changes in fair value and are reflected in the balance sheet. Changes in these fair
values during the periods presented are included in financial services revenues in the consolidated statements of operations.
99
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the Company’s assets measured at fair value on a nonrecurring basis at September 30,
2014 and 2013:
Homebuilding:
Balance Sheet Location
Fair Value at
September 30, 2014
Level 3
Fair Value at
September 30, 2013
Level 3
Inventory held and used (a) (b) ...............................
Inventory available for sale (a) (c) ..........................
Inventories
Inventories
$
Financial Services:
Other mortgage loans (a) (d) ...................................
Real estate owned (a) (d) ........................................
Other assets
Other assets
___________________
(In millions)
$
19.2
8.2
16.0
0.5
0.5
10.8
22.6
0.7
(a) The fair values included in the table above represent only those assets whose carrying values were adjusted to fair value in the
respective period.
(b) In performing its impairment analysis of communities, discount rates ranging from 12% to 18% were used in the periods presented.
(c) The fair value of inventory available for sale was determined based on recent offers received from outside third parties, comparable
sales or actual contracts.
(d) The fair values of other mortgage loans and real estate owned are determined based on the value of the underlying collateral.
For the financial assets and liabilities that the Company does not reflect at fair value, the following tables present both
their respective carrying value and fair value at September 30, 2014 and 2013:
Carrying
Value
Fair Value at September 30, 2014
Level 1
Level 2
(In millions)
Level 3
Total
Homebuilding:
Cash and cash equivalents (a) .................... $
Restricted cash (a)......................................
Revolving credit facility (a) .......................
Senior notes (b) ..........................................
Financial Services:
Cash and cash equivalents (a) ....................
Mortgage repurchase facility (a)................
632.5
10.0
300.0
3,000.2
29.3
359.2
Homebuilding:
Cash and cash equivalents (a) .................... $
Restricted cash (a)......................................
Senior notes (b) ..........................................
Convertible senior notes (b).......................
Financial Services:
Cash and cash equivalents (a) ....................
Mortgage repurchase facility (a)................
___________________
Carrying
Value
954.2
77.8
2,783.3
478.7
23.2
238.6
$
$
632.5
10.0
—
—
29.3
—
$
— $
—
—
3,033.8
— $
—
300.0
—
—
—
—
359.2
632.5
10.0
300.0
3,033.8
29.3
359.2
Fair Value at September 30, 2013
Level 1
Level 2
(In millions)
Level 3
Total
954.2
77.8
—
—
23.2
—
$
— $
—
2,811.5
762.4
— $
—
—
—
—
—
—
238.6
954.2
77.8
2,811.5
762.4
23.2
238.6
(a) The fair value approximates carrying value due to its short-term nature, short maturity or floating interest rate terms, as applicable.
(b) The fair value is determined based on quoted market prices of recent transactions of the notes, which is classified as Level 2 within
the fair value hierarchy.
100
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE N – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Consolidated quarterly results of operations were (in millions, except per share amounts):
Revenues...................................................................... $
Inventory and land option charges...............................
Gross profit..................................................................
Income before income taxes........................................
Income tax expense .....................................................
Net income...................................................................
Basic net income per common share ...........................
Net income per common share assuming dilution ......
1st Quarter
1,670.6
Fiscal 2014
2nd Quarter
1,735.0
$
3rd Quarter
2,147.0
$
4th Quarter
2,472.3
$
2.6
362.0
189.7
66.5
123.2
0.38
0.36
4.4
376.8
201.9
70.9
131.0
0.40
0.38
56.8
377.4
171.8
58.7
113.1
0.32
0.32
21.3
473.7
250.8
84.5
166.3
0.46
0.45
Revenues...................................................................... $
Inventory and land option charges...............................
Gross profit..................................................................
Income before income taxes........................................
Income tax expense .....................................................
Net income...................................................................
Basic net income per common share ...........................
Net income per common share assuming dilution ......
1st Quarter
1,275.1
Fiscal 2013
2nd Quarter
1,431.6
$
3rd Quarter
1,692.8
$
4th Quarter
1,859.8
$
1.3
230.9
107.9
41.6
66.3
0.21
0.20
1.8
281.2
142.1
31.1
111.0
0.35
0.32
0.8
349.1
205.1
59.1
146.0
0.45
0.42
27.1
371.4
202.8
63.3
139.5
0.43
0.40
The Company experiences variability in its results of operations from quarter to quarter due to the seasonal nature
of its homebuilding business. The Company generally has more homes under construction, closes more homes and has
greater revenues and income before income taxes in the third and fourth quarters (June and September) than in the first
and second quarters (December and March) of its fiscal year.
Income tax expense in the second quarter of fiscal 2013 was reduced by $18.7 million due to a reduction of the
Company's deferred tax asset valuation allowance in that quarter.
101
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE O – SUPPLEMENTAL GUARANTOR INFORMATION
All of the Company's senior notes and the unsecured revolving credit facility are fully and unconditionally guaranteed, on
a joint and several basis, by substantially all of the Company's homebuilding subsidiaries (collectively, Guarantor Subsidiaries).
Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by the Company. The Company's subsidiaries
engaged in the financial services segment and certain other subsidiaries do not guarantee the Company's senior notes and the
unsecured revolving credit facility (collectively, Non-Guarantor Subsidiaries). In lieu of providing separate financial statements
for the Guarantor Subsidiaries, consolidating 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.
The guarantees by a Guarantor Subsidiary will be automatically and unconditionally released and discharged upon: (1) the
sale or other disposition of its common stock whereby it is no longer a subsidiary of the Company; (2) the sale or other
disposition of all or substantially all of its assets (other than to the Company or another Guarantor); (3) its merger or
consolidation with an entity other than the Company or another Guarantor; or (4) depending on the provisions of the applicable
indenture, either (a) its proper designation as an unrestricted subsidiary, (b) its ceasing to guarantee any of the Company's
publicly traded debt securities, or (c) its ceasing to guarantee any of the Company's obligations under the revolving credit
facility.
Consolidating Balance Sheet
September 30, 2014
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
ASSETS
Cash and cash equivalents ............................. $
Restricted cash...............................................
Investments in subsidiaries............................
Inventories .....................................................
Deferred income taxes...................................
Property and equipment, net..........................
Other assets....................................................
Mortgage loans held for sale .........................
Goodwill ........................................................
Intercompany receivables..............................
Total Assets................................................... $
LIABILITIES & EQUITY
Accounts payable and other liabilities........... $
Intercompany payables..................................
Notes payable ................................................
Total Liabilities............................................
Total stockholders’ equity..............................
Noncontrolling interests ................................
Total Equity..................................................
Total Liabilities & Equity ........................... $
497.4
$
89.5
$
74.9
$
— $
6.8
2,878.2
2,675.9
189.9
51.9
163.0
—
—
2,364.2
2.1
—
5,014.3
364.4
49.1
250.8
—
94.8
—
1.1
—
10.3
10.7
89.8
88.9
476.9
—
—
8,827.3
$
5,865.0
$
752.6
$
—
(2,878.2)
—
—
—
—
—
—
(2,364.2)
(5,242.4) $
661.8
10.0
—
7,700.5
565.0
190.8
502.7
476.9
94.8
—
10,202.5
409.8
$
853.3
$
136.9
$
— $
1,400.0
—
3,301.7
3,711.5
5,115.8
—
2,282.2
3.4
3,138.9
2,726.1
—
5,115.8
2,726.1
82.0
377.7
596.6
152.1
3.9
156.0
8,827.3
$
5,865.0
$
752.6
$
(2,364.2)
—
(2,364.2)
(2,878.2)
—
(2,878.2)
(5,242.4) $
—
3,682.8
5,082.8
5,115.8
3.9
5,119.7
10,202.5
102
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE O – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Balance Sheet
September 30, 2013
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
ASSETS
Cash and cash equivalents ............................. $
Restricted cash...............................................
Investments in subsidiaries............................
Inventories .....................................................
Deferred income taxes...................................
Property and equipment, net..........................
Other assets....................................................
Mortgage loans held for sale .........................
Goodwill ........................................................
Intercompany receivables..............................
Total Assets................................................... $
LIABILITIES & EQUITY
Accounts payable and other liabilities........... $
Intercompany payables..................................
Notes payable ................................................
Total Liabilities............................................
Total stockholders’ equity..............................
Noncontrolling interests ................................
Total Equity..................................................
Total Liabilities & Equity ........................... $
977.4
77.8
—
6,197.4
586.6
106.7
476.5
395.1
38.9
—
8,856.4
1,286.0
—
3,509.0
4,795.0
4,058.5
2.9
4,061.4
8,856.4
871.4
$
38.4
$
67.6
$
— $
76.5
2,477.7
2,177.4
201.7
41.0
167.0
—
—
1,697.0
1.2
—
4,002.9
384.9
34.5
233.4
—
38.9
—
0.1
—
17.1
—
31.2
76.1
395.1
—
—
7,709.7
$
4,734.2
$
587.2
$
—
(2,477.7)
—
—
—
—
—
—
(1,697.0)
(4,174.7) $
$
— $
(1,697.0)
—
(1,697.0)
(2,477.7)
—
(2,477.7)
(4,174.7) $
$
383.8
—
3,267.4
3,651.2
4,058.5
—
$
766.5
1,664.2
3.0
2,433.7
2,300.5
—
4,058.5
2,300.5
135.7
32.8
238.6
407.1
177.2
2.9
180.1
7,709.7
$
4,734.2
$
587.2
$
103
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE O – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Operations
Year Ended September 30, 2014
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
Homebuilding:
Revenues........................................................... $
Cost of sales......................................................
Gross profit .......................................................
Selling, general and administrative expense.....
Equity in (income) of subsidiaries....................
Other (income)..................................................
Homebuilding pre-tax income (loss) .........
Financial Services:
Revenues, net of recourse and
reinsurance expense ......................................
General and administrative expense .................
Interest and other (income)...............................
Financial services pre-tax income .............
Income before income taxes .............................
Income tax expense...........................................
Net income........................................................ $
Comprehensive income .................................... $
2,547.4
$
5,299.9
$
11.2
$
— $
2,038.0
509.4
388.3
(691.8)
(1.3)
814.2
—
—
—
—
4,222.5
1,077.4
433.0
—
(3.3)
647.7
—
—
—
—
814.2
280.7
533.5
533.5
$
$
647.7
222.1
425.6
425.9
$
$
8.1
3.1
12.9
—
(8.5)
(1.3)
166.4
131.2
(10.2)
45.4
44.1
16.6
27.5
27.5
$
$
—
—
—
691.8
—
(691.8)
—
—
—
—
(691.8)
(238.7)
(453.1) $
(453.1) $
7,858.5
6,268.6
1,589.9
834.2
—
(13.1)
768.8
166.4
131.2
(10.2)
45.4
814.2
280.7
533.5
533.8
104
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE O – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Operations
Year Ended September 30, 2013
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
Homebuilding:
Revenues........................................................... $
Cost of sales......................................................
Gross profit (loss) .............................................
Selling, general and administrative expense.....
Equity in (income) of subsidiaries....................
Interest expense ................................................
Other (income)..................................................
Homebuilding pre-tax income...................
Financial Services:
Revenues, net of recourse and
reinsurance expense ......................................
General and administrative expense .................
Interest and other (income)...............................
Financial services pre-tax income .............
Income before income taxes .............................
Income tax expense...........................................
Net income........................................................ $
Comprehensive income .................................... $
$
1,981.6
1,563.1
$
4,094.1
3,279.9
418.5
302.1
(542.5)
5.1
(4.0)
657.8
—
—
—
—
814.2
341.1
—
—
(3.7)
476.8
—
—
—
—
657.8
195.1
462.7
462.5
$
$
476.8
126.9
349.9
351.8
$
$
10.2
10.5
(0.3)
6.7
—
—
(7.2)
0.2
173.4
116.4
(8.5)
65.5
65.7
18.7
47.0
47.0
$
$
$
— $
—
—
—
542.5
—
—
(542.5)
—
—
—
—
(542.5)
(145.6)
(396.9) $
(396.9) $
6,085.9
4,853.5
1,232.4
649.9
—
5.1
(14.9)
592.3
173.4
116.4
(8.5)
65.5
657.8
195.1
462.7
464.4
105
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE O – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Operations
Year Ended September 30, 2012
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
Homebuilding:
Revenues........................................................... $
Cost of sales......................................................
Gross profit (loss) .............................................
Selling, general and administrative expense.....
Equity in (income) of subsidiaries....................
Interest expense ................................................
Other (income)..................................................
Homebuilding pre-tax income (loss) .........
Financial Services:
Revenues, net of recourse and
reinsurance expense ......................................
General and administrative expense .................
Interest and other (income)...............................
Financial services pre-tax income .............
Income before income taxes .............................
Income tax benefit ............................................
Net income........................................................ $
Comprehensive income .................................... $
1,400.3
$
2,828.0
$
7.9
$
— $
1,130.9
2,341.5
269.4
243.6
(235.7)
23.6
(5.0)
242.9
—
—
—
—
486.5
277.5
—
—
(2.2)
211.2
—
—
—
—
242.9
(713.4)
956.3
956.4
$
$
211.2
(463.4)
674.6
674.6
$
$
20.0
(12.1)
7.6
—
—
(5.0)
(14.7)
117.8
85.5
(6.9)
39.2
24.5
(20.6)
45.1
45.1
$
$
—
—
—
235.7
—
—
(235.7)
—
—
—
—
(235.7)
484.0
(719.7) $
(719.7) $
4,236.2
3,492.4
743.8
528.7
—
23.6
(12.2)
203.7
117.8
85.5
(6.9)
39.2
242.9
(713.4)
956.3
956.4
106
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE O – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Cash Flows
Year Ended September 30, 2014
OPERATING ACTIVITIES
Net cash used in operating activities....................... $
(257.4) $
(293.9) $
(57.5) $
(52.6) $
(661.4)
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
INVESTING ACTIVITIES
Purchases of property and equipment ................
Decrease (increase) in restricted cash ................
Net principal increase of other mortgage loans
and real estate owned .....................................
Intercompany advances ......................................
Payments related to acquisition of a business ....
Net cash used in investing activities .......................
FINANCING ACTIVITIES
Proceeds from notes payable..............................
Repayment of notes payable ..............................
Intercompany advances ......................................
Proceeds from stock associated with
certain employee benefit plans .......................
Excess income tax benefit from
employee stock awards...................................
Cash dividends paid ...........................................
Net cash provided by financing activities ...............
(Decrease) increase in cash and cash equivalents ...
Cash and cash equivalents at beginning of year......
(63.9)
69.7
—
(385.7)
(244.1)
(624.0)
1,307.0
(796.8)
—
45.2
0.6
(48.6)
507.4
(374.0)
871.4
(28.0)
(0.9)
—
—
—
(28.9)
—
—
373.9
—
—
—
373.9
51.1
38.4
(8.3)
(1.0)
(5.6)
—
—
(14.9)
120.6
(0.1)
11.8
—
—
(52.6)
79.7
7.3
67.6
Cash and cash equivalents at end of year................ $
497.4
$
89.5
$
74.9
$
—
—
—
385.7
—
385.7
—
—
(385.7)
—
—
52.6
(333.1)
—
—
— $
(100.2)
67.8
(5.6)
—
(244.1)
(282.1)
1,427.6
(796.9)
—
45.2
0.6
(48.6)
627.9
(315.6)
977.4
661.8
107
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE O – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Cash Flows
Year Ended September 30, 2013
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
OPERATING ACTIVITIES
Net cash (used in) provided by
operating activities ............................................. $
INVESTING ACTIVITIES
Purchases of property and equipment ................
Purchases of marketable securities.....................
Proceeds from the sale or maturity of
marketable securities ......................................
Increase in restricted cash ..................................
Net principal increase of other mortgage loans
and real estate owned .....................................
Purchase of debt securities collateralized by
residential real estate ......................................
Principal payments received on debt securities
collateralized by residential real estate...........
Intercompany advances ......................................
Payments related to acquisition of a business ....
Net cash (used in) provided by
investing activities..............................................
FINANCING ACTIVITIES
Proceeds from notes payable..............................
Repayment of notes payable ..............................
Intercompany advances ......................................
Proceeds from stock associated with
certain employee benefit plans .......................
Excess income tax benefit from
employee stock awards...................................
Cash dividends paid ...........................................
Net cash provided by financing activities ...............
(Decrease) increase in cash and cash equivalents ...
Cash and cash equivalents at beginning of year......
(523.7) $
(670.6) $
5.0
$
(40.0) $
(1,229.3)
(29.7)
(28.9)
325.4
(27.8)
—
(18.6)
1.4
(674.4)
(9.4)
(462.0)
1,257.1
(345.1)
—
29.7
6.7
(60.2)
888.2
(97.5)
968.9
(24.0)
—
—
(0.7)
—
—
—
—
—
(4.3)
—
—
—
(2.5)
—
—
—
—
(24.7)
(6.8)
—
—
677.4
—
—
—
677.4
(17.9)
56.3
50.8
—
(3.0)
—
—
(40.0)
7.8
6.0
61.6
—
—
—
—
—
—
—
674.4
—
674.4
—
—
(674.4)
—
—
40.0
(634.4)
—
—
(58.0)
(28.9)
325.4
(28.5)
(2.5)
(18.6)
1.4
—
(9.4)
180.9
1,307.9
(345.1)
—
29.7
6.7
(60.2)
939.0
(109.4)
1,086.8
Cash and cash equivalents at end of year................ $
871.4
$
38.4
$
67.6
$
— $
977.4
108
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE O – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Cash Flows
Year Ended September 30, 2012
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
OPERATING ACTIVITIES
Net cash (used in) provided by
operating activities .............................................. $
INVESTING ACTIVITIES
Purchases of property and equipment ................
Purchases of marketable securities.....................
Proceeds from the sale or maturity of
marketable securities ......................................
Increase in restricted cash ..................................
Net principal increase of other mortgage loans
and real estate owned .....................................
Intercompany advances ......................................
Payments related to acquisition of a business ....
Net cash used in investing activities .......................
FINANCING ACTIVITIES
Proceeds from notes payable..............................
Repayment of notes payable ..............................
Intercompany advances ......................................
Proceeds from stock associated with
certain employee benefit plans .......................
Cash dividends paid ...........................................
Net cash provided by financing activities ...............
Increase in cash and cash equivalents .....................
Cash and cash equivalents at beginning of year......
(115.2) $
(126.3) $
0.4
$
(51.1) $
(292.2)
(10.2)
(240.8)
232.8
—
—
(168.3)
(96.5)
(283.0)
694.6
(11.9)
—
50.9
(47.8)
685.8
287.6
681.3
(7.6)
—
—
(0.1)
—
—
—
(7.7)
—
(5.6)
164.6
—
—
159.0
25.0
31.3
(15.8)
—
—
(0.1)
(4.7)
—
—
(20.6)
71.3
—
3.7
—
(51.1)
23.9
3.7
57.9
—
—
—
—
—
168.3
—
168.3
—
—
(168.3)
—
51.1
(117.2)
—
—
(33.6)
(240.8)
232.8
(0.2)
(4.7)
—
(96.5)
(143.0)
765.9
(17.5)
—
50.9
(47.8)
751.5
316.3
770.5
Cash and cash equivalents at end of year................ $
968.9
$
56.3
$
61.6
$
— $
1,086.8
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 as of September 30, 2014 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 (SEC) 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.
There have been no changes in the Company’s internal controls over financial reporting during the quarter ended
September 30, 2014 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 (1992) 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, 2014.
Management excluded from its assessment of the effectiveness of the Company’s internal control over financial
reporting Crown Communities (Crown) because Crown was acquired by the Company in a purchase business
combination during fiscal 2014 (as further described in Note A of the Company’s consolidated financial statements).
Crown's total assets and total revenues represent approximately 1% and 2%, respectively, of the related consolidated
financial statement amounts as of and for the year ended September 30, 2014.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the effectiveness of
our internal control over financial reporting as of September 30, 2014, 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 and Board Matters,” “Section 16(a) Beneficial Ownership Reporting Compliance” and
“Requesting Documents from the Company” in the registrant’s definitive Proxy Statement for the 2015 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 2015 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, 2014:
(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))
20,558,812 (1)
$
16.46 (2)
7,249,675 (3)
—
n/a
16.46
—
7,249,675
Plan Category
Equity compensation plans
approved by stockholders...............
Equity compensation plans
not approved by stockholders.........
Total .................................................
20,558,812
$
______________
(1) Amount includes outstanding stock option and restricted stock unit awards. The number of outstanding restricted stock unit
awards is based on the target number of units granted to certain executive officers, other key employees and non-
management directors.
(2) Amount reflects the weighted average exercise price with respect to outstanding stock options and does not take into account
outstanding restricted stock units, which do not have an exercise price.
(3) Amount includes 3,498,705 shares reserved for issuance under the Company’s Employee Stock Purchase Plan. Under the
Employee Stock Purchase Plan, employees purchased 77,216 shares of common stock in fiscal 2014.
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 2015 Annual Meeting of Stockholders and incorporated
herein by reference.
111
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is set forth under the captions “Certain Relationships and Related Person
Transactions” and “Corporate Governance and Board Matters” in the registrant’s definitive Proxy Statement for the
2015 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 2015 Annual Meeting of Stockholders and incorporated herein by
reference.
112
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) The following documents are filed as part of this report:
(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 (SEC) 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
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
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)
Amended and Restated Bylaws (4)
See Exhibit 3.1
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 (10)
Ninth Supplemental Indenture, dated as of March 31, 2000, among the Registrant, the Guarantors named
therein and American Stock Transfer & Trust Company, as Trustee (11)
Twelfth Supplemental Indenture, dated as of May 21, 2001, among the Registrant, the Guarantors named
therein and American Stock Transfer & Trust Company, as Trustee (12)
Fourteenth Supplemental Indenture, dated as of February 21, 2002, among the Registrant, the Guarantors
named therein and American Stock Transfer & Trust Company, as Trustee (20)
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 (26)
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 (27)
113
Exhibit
Number
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
10.1
Exhibit
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 (28)
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 (29)
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 (34)
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 (36)
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 (39)
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 (24)
Thirty-First Supplemental Indenture, dated as of February 5, 2013, among the Registrant, the Guarantors
named therein and American Stock Transfer & Trust Company, LLC, as Trustee (30)
Senior Debt Securities Indenture, dated as of May 1, 2012, between Registrant and American Stock
Transfer & Trust Company, LLC, as Trustee (57)
Supplemental Indenture, dated as of May 1, 2012, among the Registrant, the Guarantors named therein and
American Stock Transfer & Trust Company, LLC, as Trustee, relating to the 4.750% Senior Notes due 2017
issued by the Registrant (58)
Second Supplemental Indenture, dated as of September 14, 2012, among the Registrant, the Guarantors
named therein and American Stock Transfer & Trust Company, LLC, as Trustee, relating to the 4.375%
Senior Notes due 2022 issued by the Registrant (60)
Third Supplemental Indenture, dated as of February 5, 2013, among the Registrant, the Guarantors named
therein and American Stock Transfer & Trust Company, LLC, as Trustee, relating to the 3.625% Senior
Notes due 2018 issued by the Registrant (2)
Fourth Supplemental Indenture, dated as of February 5, 2013, among the Registrant, the Guarantors named
therein and American Stock Transfer & Trust Company, LLC, as Trustee, relating to the 4.750% Senior
Notes due 2023 issued by the Registrant (22)
Fifth Supplemental Indenture, dated as of February 5, 2013, among the Registrant, the Guarantors named
therein and American Stock Transfer & Trust Company, LLC, as trustee (23)
Sixth Supplemental Indenture, dated as of August 5, 2013, among the Registrant, the Guarantors named
therein and American Stock Transfer & Trust Company, LLC, as Trustee, relating to the 5.750% Senior
Notes Due 2023 issued by the Registrant (48)
Seventh Supplemental Indenture, dated as of February 24, 2014, among the Registrant, the Guarantors
named therein and American Stock Transfer & Trust Company, LLC, as trustee, relating to the 3.750%
Senior Notes Due 2019 issued by the Registrant (61)
Form of Indemnification Agreement between the Registrant and each of its directors and executive officers
and schedules of substantially identical documents (13)
10.2 † D.R. Horton, Inc. 1991 Stock Incentive Plan, as amended and restated (14)
10.3 † Amendment No. 1 to 1991 Stock Incentive Plan, as amended and restated (15)
114
Exhibit
Number
Exhibit
10.4 † Form of Non-Qualified Stock Option Agreement under the D.R. Horton, Inc. 1991 Stock Incentive Plan
(Term Vesting) (16)
10.5 † D.R. Horton, Inc. 2006 Stock Incentive Plan (35)
10.6 † D.R. Horton, Inc. 2006 Stock Incentive Plan, as amended and restated (54)
10.7 † Form of Non-Qualified Stock Option Agreement under the D.R. Horton, Inc. 2006 Stock Incentive Plan
(Employee - Term Vesting 2006 Form) (37)
10.8 † Form of Non-Qualified Stock Option Agreement under the D.R. Horton, Inc. 2006 Stock Incentive Plan
(Director - Term Vesting 2006 Form) (38)
10.9 † Form of Non-Qualified Stock Option Agreement (Employee-Term Vesting 2008 Form) pursuant to the
Registrant's 2006 Stock Incentive Plan (40)
10.10 † Form of Non-Qualified Stock Option Agreement (Outside Director-Term Vesting 2008 Form) pursuant to
the Registrant's 2006 Stock Incentive Plan (42)
10.11 † Form of Restricted Stock Unit Agreement pursuant to the Registrant's 2006 Stock Incentive Plan (55)
10.12 † Form of Restricted Stock Unit Agreement pursuant to the Registrant's 2006 Stock Incentive Plan, as
amended and restated (1)
10.13 † Form of Restricted Stock Unit Agreement (Outside Director) pursuant to the Registrant's 2006 Stock
Incentive Plan, as amended and restated (49)
10.14 † Form of Restricted Stock Unit Agreement (Employees) pursuant to the Registrant's 2006 Stock Incentive
Plan, as amended and restated (65)
10.15 † Form of Stock Award Agreement pursuant to the Registrant's 2006 Stock Incentive Plan (56)
10.16 † D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 1 (17)
10.17 † D.R. Horton, Inc. Supplemental Executive Retirement Trust No. 1 (18)
10.18 † D.R. Horton, Inc. Amended and Restated Supplemental Executive Retirement Plan No. 2 (50)
10.19 † D.R. Horton, Inc. Amended and Restated 2000 Incentive Bonus Plan (19)
10.20 † D.R. Horton, Inc. 2008 Performance Unit Plan (44)
10.21 † Form of Performance Unit Award pursuant to the Registrant's 2008 Performance Unit Plan (25)
10.22 † Summary of Executive Compensation Notification - Chairman, CEO and COO (fiscal 2014) (43)
10.23 † Summary of Executive Compensation Notification - Chairman, CEO and COO (fiscal 2015) (31)
10.24 † Summary of Executive Compensation Notification - Other Executive Officers (fiscal 2014) (52)
10.25 † Summary of Executive Compensation Notification - Other Executive Officer - CFO (fiscal 2015) (32)
10.26 † Summary of Board and Committee Compensation (fiscal 2014) (53)
10.27 † Summary of Director, Committee and Chairperson Compensation (fiscal 2015) (33)
10.28 † Consulting Agreement between Registrant and Donald J. Tomnitz (63)
10.29 † D.R. Horton, Inc. Amended and Restated Deferred Compensation Plan (51)
10.30
Grantor Trust Agreement, dated June 21, 2002, by and between the Registrant and Wachovia Bank,
National Association, as Trustee (21)
115
Exhibit
Number
10.31
10.32
10.33
10.34
10.35
10.36
10.37
12.1
14.1
21.1
23.1
31.1
31.2
32.1
32.2
101
Exhibit
Credit Agreement, dated September 7, 2012, among the Registrant, the Lenders named therein and The
Royal Bank of Scotland PLC, as Administrative Agent (59)
Amendment No.1 to Credit Agreement, dated November 1, 2012, among the Registrant, The Royal Bank of
Scotland PLC, as Administrative Agent, and the Lenders named therein (41)
Amendment No. 2 to Credit Agreement, dated August 8, 2013 by and among the Registrant, The Royal
Bank of Scotland PLC, as Administrative Agent, and the Lenders named therein (47)
Amendment No. 3 to Credit Agreement, dated August 22, 2014 by and among Registrant, The Royal Bank
of Scotland PLC, as Administrative Agent, and the Lenders named therein (64)
Amended and Restated Master Repurchase Agreement, dated March 1, 2013, among DHI Mortgage
Company, Ltd., U.S. Bank National Association, as a Buyer, Administrative Agent and Syndication Agent,
and all other buyers (45)
Second Amendment to Amended and Restated Master Repurchase Agreement, dated February 28, 2014,
among DHI Mortgage Company, Ltd., U.S. Bank National Association, and all other buyers (62)
Amended and Restated Custody Agreement, dated March 1, 2013, by and between DHI Mortgage
Company, Ltd. and U.S. Bank National Association, as Administrative Agent and representative of certain
buyers (46)
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, 2014, filed on November 17, 2014, formatted in XBRL (Extensible Business
Reporting Language); (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and
Comprehensive Income, (iii) Consolidated Statements of Total Equity, (iv) Consolidated Statements of
Cash Flows and (v) the Notes to Consolidated Financial Statements.
________________
* Filed herewith.
** Posted to the Registrant's website at www.drhorton.com under the Investors and Corporate Governance links.
† Management contract or compensatory plan arrangement.
116
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
Incorporated herein by reference from Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated November
9, 2011, filed with the SEC on November 16, 2011.
Incorporated herein by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February 5,
2013, filed with the SEC on February 8, 2013.
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.
Incorporated herein by reference from Exhibit 3.1 to the Registrant's Current Report on Form 8-K, dated July 30,
2009, filed with the SEC on August 5, 2009.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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).
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.
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.
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.
117
(22)
(23)
(24)
(25)
(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)
(35)
(36)
(37)
(38)
(39)
(40)
(41)
(42)
(43)
Incorporated herein by reference from Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated February 5,
2013, filed with the SEC on February 8, 2013.
Incorporated herein by reference from Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated February 5,
2013, filed with the SEC on February 8, 2013.
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.
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.
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.
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.
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.
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.
Incorporated herein by reference from Exhibit 4.4 to the Registrant's Current Report on Form 8-K dated February 5,
2013, filed with the SEC on February 8, 2013.
Incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated November 5,
2014, filed with the SEC on November 12, 2014.
Incorporated by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated November 5,
2014, filed with the SEC on November 12, 2014.
Incorporated by reference from Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated November 5,
2014, filed with the SEC on November 12, 2014.
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.
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.
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.
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.
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.
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.
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.
Incorporated herein by reference from Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated November
1, 2012, filed with the SEC on November 5, 2012.
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.
Incorporated herein by reference from Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated November
7, 2013, filed with the SEC on November 13, 2013.
118
(44)
(45)
(46)
(47)
(48)
(49)
(50)
(51)
(52)
(53)
(54)
(55)
(56)
(57)
(58)
(59)
(60)
(61)
(62)
(63)
(64)
(65)
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.
Incorporated herein by reference from Exhibit 10.1 to the Registrant's Current Report on Form 8-K/A dated March
1, 2013, filed with the SEC on March 8, 2013.
Incorporated herein by reference from Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated March 1,
2013, filed with the SEC on March 4, 2013.
Incorporated herein by reference from Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated August 8,
2013, filed with the SEC on August 13, 2013.
Incorporated herein by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated August 5,
2013, filed with the SEC on August 8, 2013.
Incorporated herein by reference from Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2012, filed with the SEC on January 29, 2013.
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.
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.
Incorporated herein by reference from Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated November
7, 2013, filed with the SEC on November 13, 2013.
Incorporated herein by reference from Exhibit 10.3 to the Registrant's Current Report on Form 8-K dated November
7, 2013, filed with the SEC on November 13, 2013.
Incorporated herein by reference from Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated January
20, 2011, filed with the SEC on January 26, 2011.
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.
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.
Incorporated herein by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated May 1,
2012, filed with the SEC on May 4, 2012.
Incorporated herein by reference from Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated May 1,
2012, filed with the SEC on May 4, 2012.
Incorporated herein by reference from Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated September
7, 2012, filed with the SEC on September 10, 2012.
Incorporated herein by reference from Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated September
14, 2012, filed with the SEC on September 17, 2012.
Incorporated by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K dated February 24, 2014,
filed with the SEC on February 25, 2014.
Incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 28,
2014, filed with the SEC on March 5, 2014.
Incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 29,
2014, filed with the SEC on October 3, 2014.
Incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 22, 2014,
filed with the SEC on August 25, 2014.
Incorporated by reference from Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated November 5,
2014, filed with the SEC on November 12, 2014.
119
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
Date: November 17, 2014
D.R. Horton, Inc.
By: /s/ Bill W. Wheat
Bill W. Wheat
Executive Vice President and Chief Financial Officer
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/ David V. Auld
David V. Auld
/s/ Bill W. Wheat
Bill W. Wheat
/s/ Donald R. Horton
Donald R. Horton
/s/ Barbara K. Allen
Barbara K. Allen
/s/ Bradley S. Anderson
Bradley S. Anderson
/s/ Michael R. Buchanan
Michael R. Buchanan
/s/ Michael W. Hewatt
Michael W. Hewatt
President and Chief Executive Officer
(Principal Executive Officer)
November 17, 2014
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
November 17, 2014
Chairman of the Board and Director
November 17, 2014
November 17, 2014
November 17, 2014
November 17, 2014
November 17, 2014
Director
Director
Director
Director
120
CORPORATE INFORMATION
D.R. Horton, Inc. (the “Company”) constructs and sells homes ranging in price from $100,000 to more than
$1,000,000. The Company operates in 27 states and 79 markets in the East, Midwest, Southeast, South Central, Southwest
and West regions of the United States, under the names of D.R. Horton, America's Builder, Emerald Homes, Breland
Homes, Regent Homes, Express Homes and Crown Communities. For the year ended September 30, 2014, the Company
closed 28,670 homes with an average sales price of approximately $272,200. 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
Annual Meeting of Stockholders
January 22, 2015
At the corporate offices of D.R. Horton, Inc.
301 Commerce Street
Fort Worth, Texas 76102
Barbara K. Allen
Former Partner and Housing, Construction and
Retailing Analyst of Avondale Partners (1) (2) (3)
Brad S. Anderson
Executive Vice President of CBRE Group, Inc. (1) (2) (3)
Michael R. Buchanan
Director of Piedmont Office Realty Trust, Inc.
Former Managing Director, National Real Estate
Banking Group, Bank of America (1) (2) (3)
Michael W. Hewatt
Certified Public Accountant (1) (2) (3)
_____________
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Nominating and Governance Committee Member
Investor Relations
Jessica L. Hansen
D.R. Horton, Inc.
301 Commerce Street, Suite 500
Fort Worth, Texas 76102
(817) 390-8200
Website
Visit us at www.drhorton.com
Form 10-K
The Annual Report on Form 10-K of D.R. Horton, Inc.
may be accessed through the "Investor Relations" page
of our website, or a copy is available upon request to our
Investor Relations department at our corporate offices.
Public Debt Ratings
Senior Notes:
BB+ Fitch Ratings
Ba1 Moody's Investors Service
BB 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.
Transfer Agent and Registrar
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
(800) 937-5449
H O M E B U I L D I N G O P E R A T I O N S
EAST
Northern Delaware, DE
Savannah, GA
Baltimore, MD
Suburban Washington, D.C., MD
North New Jersey, NJ
South New Jersey, NJ
Charlotte, NC
Fayetteville, NC
(cid:42)(cid:85)(cid:72)(cid:72)(cid:81)(cid:86)(cid:69)(cid:82)(cid:85)(cid:82)(cid:18)(cid:58)(cid:76)(cid:81)(cid:86)(cid:87)(cid:82)(cid:81)(cid:16)(cid:54)(cid:68)(cid:79)(cid:72)(cid:80)(cid:15)(cid:3)(cid:49)(cid:38)
Jacksonville, NC
Raleigh/Durham, NC
Wilmington, NC
Philadelphia, PA
Charleston, SC
Columbia, SC
Greenville/Spartanburg, SC
Hilton Head, SC
Myrtle Beach, SC
Northern Virginia, VA
MIDWEST
Colorado Springs, CO
Denver, CO
Fort Collins, CO
Chicago, IL
Northern Indiana, IN
Minneapolis/St. Paul, MN
SOUTHEAST
Birmingham, AL
Huntsville, AL
Mobile, AL
Montgomery, AL
Tuscaloosa, AL
Fort Myers/Naples, FL
Jacksonville, FL
Lakeland, FL
Melbourne/Vero Beach, FL
Miami/Fort Lauderdale, FL
Orlando, FL
Pensacola/Panama City, FL
Port St. Lucie, FL
Tampa/Sarasota, FL
Volusia County, FL
West Palm Beach, FL
Atlanta, GA
Augusta, GA
Middle Georgia, GA
Gulf Coast, MS
Hattiesburg, MS
Nashville, TN
SOUTH CENTRAL
Baton Rouge, LA
Lafayette, LA
Oklahoma City, OK
Austin, TX
Dallas, TX
El Paso, TX
Fort Worth, TX
Houston, TX
Killeen/Temple/Waco, TX
Midland/Odessa, 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
Las Vegas, NV
Reno, NV
Portland, OR
Salt Lake City, UT
Seattle/Tacoma, WA
Vancouver, WA
301 Commerce Street
Suite 500
Fort Worth, Texas 76102
(cid:11)(cid:27)(cid:20)(cid:26)(cid:12)(cid:3)(cid:22)(cid:28)(cid:19)(cid:16)(cid:27)(cid:21)(cid:19)(cid:19)
www.drhorton.com