ANNUAL REPORT
- 2017 -
FINANCIAL SUMMARY
(In millions, except for number of homes and per share amounts)
As of and for the Fiscal Year Ended September 30,
2017
2016
2015
2014
2013
Balance Sheet Data:
Cash and cash equivalents ............................ $ 1,007.8
9,237.1
Inventories ...................................................
12,184.6
Total assets ..................................................
2,871.6
Notes payable ..............................................
7,747.1
Stockholders’ equity ....................................
$20.66
Book value per common share ...................
375.0
Common shares outstanding ......................
Income Statement and Cash Flow Data:
Revenues ...................................................... $ 14,091.0
1,602.1
Income before income taxes .......................
1,038.4
Net income ..................................................
$2.74
Diluted earnings per common share ...........
435.1
(cid:18)(cid:258)(cid:400)(cid:346)(cid:3)(cid:393)(cid:396)(cid:381)(cid:448)(cid:349)(cid:282)(cid:286)(cid:282)(cid:3)(cid:271)(cid:455)(cid:3)(cid:894)(cid:437)(cid:400)(cid:286)(cid:282)(cid:3)(cid:349)(cid:374)(cid:895)(cid:3)(cid:381)(cid:393)(cid:286)(cid:396)(cid:258)(cid:415)(cid:381)(cid:374)(cid:400)(cid:3)(cid:3)..........
Percentages of Revenues:
(cid:39)(cid:396)(cid:381)(cid:400)(cid:400)(cid:3)(cid:393)(cid:396)(cid:381)(cid:302)(cid:410)(cid:3)(cid:882)(cid:3)(cid:346)(cid:381)(cid:373)(cid:286)(cid:3)(cid:400)(cid:258)(cid:367)(cid:286)(cid:400) ............................
(cid:94)(cid:39)(cid:920)(cid:4)(cid:3)(cid:286)(cid:454)(cid:393)(cid:286)(cid:374)(cid:400)(cid:286)(cid:3)(cid:882)(cid:3)(cid:346)(cid:381)(cid:373)(cid:286)(cid:271)(cid:437)(cid:349)(cid:367)(cid:282)(cid:349)(cid:374)(cid:336)(cid:3)(cid:3)....................
Income before income taxes .......................
Net income ...................................................
20.0%
8.9%
11.4%
7.4%
Operating Data:
45,751
Homes closed ...............................................
46,605
(cid:69)(cid:286)(cid:410)(cid:3)(cid:400)(cid:258)(cid:367)(cid:286)(cid:400)(cid:3)(cid:381)(cid:396)(cid:282)(cid:286)(cid:396)(cid:400)(cid:3)(cid:882)(cid:3)(cid:346)(cid:381)(cid:373)(cid:286)(cid:400) .............................
(cid:94)(cid:258)(cid:367)(cid:286)(cid:400)(cid:3)(cid:381)(cid:396)(cid:282)(cid:286)(cid:396)(cid:3)(cid:271)(cid:258)(cid:272)(cid:364)(cid:367)(cid:381)(cid:336)(cid:3)(cid:882)(cid:3)(cid:346)(cid:381)(cid:373)(cid:286)(cid:400) .......................
12,329
(cid:94)(cid:258)(cid:367)(cid:286)(cid:400)(cid:3)(cid:381)(cid:396)(cid:282)(cid:286)(cid:396)(cid:3)(cid:271)(cid:258)(cid:272)(cid:364)(cid:367)(cid:381)(cid:336)(cid:3)(cid:882)(cid:3)(cid:448)(cid:258)(cid:367)(cid:437)(cid:286) ......................... $ 3,726.0
Homebuilding return on inventory(1) ..........
16.6%
$ 1,303.2
8,340.9
11,558.9
3,271.3
6,792.5
$18.21
372.9
$ 12,157.4
1,353.5
886.3
$2.36
618.0
20.2%
9.3%
11.1%
7.3%
40,309
40,814
11,475
$ 3,438.0
15.4%
$ 1,383.8
7,807.0
11,151.0
3,811.5
5,894.3
$15.99
368.6
$ 10,824.0
1,123.4
750.7
$2.03
700.4
19.8%
9.5%
10.4%
6.9%
36,648
37,380
10,662
$ 3,146.8
12.8%
$ 661.8
7,700.5
10,185.4
3,665.7
5,115.8
$14.03
364.6
$ 8,024.9
814.2
533.5
$1.50
(661.4)
21.3%
10.5%
10.1%
6.6%
28,670
29,709
9,888
$ 2,858.8
11.1%
$ 977.4
6,197.4
8,838.4
3,491.0
4,058.5
$12.57
322.9
$ 6,259.3
657.8
462.7
$1.33
(1,229.3)
20.8%
10.6%
10.5%
7.4%
24,155
25,120
8,205
$ 2,210.1
11.1%
Revenues
Income before Income Taxes
$14,091
$12,157
$10,824
$8,025
$6,259
$15,000
$10,000
$5,000
$0
$2,000
$1,500
$1,000
$500
$0
$1,602
$1,354
$1,123
$814
$658
20%
15%
10%
5%
0%
Homebuilding Return on
Inventory(1)
17%
15%
13%
11%
11%
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
Book Value per Common Share
Stockholders’ Equity
Homebuilding Leverage Ratio(2)
$20.66
$18.21
$15.99
$14.03
$12.57
$30
$20
$10
$0
$7,747
$6,793
$5,894
$5,116
$4,059
$8,000
$6,000
$4,000
$2,000
$0
60%
40%
20%
0%
45%
39%
36%
29%
24%
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
(1) Homebuilding return on inventory is calculated as homebuilding pre-tax income for the year divided by average inventory. Average inventory in the
(cid:272)(cid:258)(cid:367)(cid:272)(cid:437)(cid:367)(cid:258)(cid:415)(cid:381)(cid:374)(cid:3)(cid:349)(cid:400)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:400)(cid:437)(cid:373)(cid:3)(cid:381)(cid:296)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:286)(cid:374)(cid:282)(cid:349)(cid:374)(cid:336)(cid:3)(cid:349)(cid:374)(cid:448)(cid:286)(cid:374)(cid:410)(cid:381)(cid:396)(cid:455)(cid:3)(cid:271)(cid:258)(cid:367)(cid:258)(cid:374)(cid:272)(cid:286)(cid:400)(cid:3)(cid:296)(cid:381)(cid:396)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:410)(cid:396)(cid:258)(cid:349)(cid:367)(cid:349)(cid:374)(cid:336)(cid:3)(cid:302)(cid:448)(cid:286)(cid:3)(cid:395)(cid:437)(cid:258)(cid:396)(cid:410)(cid:286)(cid:396)(cid:400)(cid:3)(cid:282)(cid:349)(cid:448)(cid:349)(cid:282)(cid:286)(cid:282)(cid:3)(cid:271)(cid:455)(cid:3)(cid:302)(cid:448)(cid:286)(cid:856)
(cid:894)(cid:1006)(cid:895)(cid:3)(cid:3)(cid:44)(cid:381)(cid:373)(cid:286)(cid:271)(cid:437)(cid:349)(cid:367)(cid:282)(cid:349)(cid:374)(cid:336)(cid:3)(cid:367)(cid:286)(cid:448)(cid:286)(cid:396)(cid:258)(cid:336)(cid:286)(cid:3)(cid:396)(cid:258)(cid:415)(cid:381)(cid:3)(cid:396)(cid:286)(cid:393)(cid:396)(cid:286)(cid:400)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)(cid:346)(cid:381)(cid:373)(cid:286)(cid:271)(cid:437)(cid:349)(cid:367)(cid:282)(cid:349)(cid:374)(cid:336)(cid:3)(cid:374)(cid:381)(cid:410)(cid:286)(cid:400)(cid:3)(cid:393)(cid:258)(cid:455)(cid:258)(cid:271)(cid:367)(cid:286)(cid:3)(cid:282)(cid:349)(cid:448)(cid:349)(cid:282)(cid:286)(cid:282)(cid:3)(cid:271)(cid:455)(cid:3)(cid:410)(cid:381)(cid:410)(cid:258)(cid:367)(cid:3)(cid:272)(cid:258)(cid:393)(cid:349)(cid:410)(cid:258)(cid:367)(cid:3)(cid:894)(cid:410)(cid:381)(cid:410)(cid:258)(cid:367)(cid:3)(cid:286)(cid:395)(cid:437)(cid:349)(cid:410)(cid:455)(cid:3)(cid:393)(cid:367)(cid:437)(cid:400)(cid:3)(cid:346)(cid:381)(cid:373)(cid:286)(cid:271)(cid:437)(cid:349)(cid:367)(cid:282)(cid:349)(cid:374)(cid:336)(cid:3)(cid:374)(cid:381)(cid:410)(cid:286)(cid:400)(cid:3)(cid:393)(cid:258)(cid:455)(cid:258)(cid:271)(cid:367)(cid:286)(cid:895)(cid:856)
Dear Fellow Shareholders:
The D.R. Horton team delivered an outstanding year in fiscal 2017. We closed 58% more homes than any
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other homebuilder, completing our 16th consecutive year as the largest homebuilder in the United States. Our
experienced operational teams, broad geographic base, product diversity and financial strength provide a strong
competitive position to achieve growth in both revenues and profits while improving our return on inventory and
generating positive annual cash flow from operations.
Our financial achievements during fiscal 2017 included the following:
•
•
•
•
•
•
•
•
Increased total revenues by 16%;
Increased consolidated pre-tax income by 18% to $1.6 billion;
Improved consolidated pre-tax profit margin by 30 basis points to 11.4%;
Improved return on inventory (annual homebuilding pre-tax income divided by average inventory)
by 120 basis points to 16.6%;
Generated $435.1 million of cash from operations;
Improved homebuilding debt to total capital by 520 basis points to 24.0%;
Increased total equity to $7.7 billion, up 14% from $6.8 billion a year ago; and
Increased book value per share to $20.66, up 13% from a year ago.
The key to our performance is a consistent focus on the fundamentals of our business in each of our
communities across the 79 markets in which we operate. Our operational teams in each market are responsible for
building quality homes, ensuring our product offerings and pricing align with customer demand in each community
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and serving our customers with excellence. Our local teams strive to manage our business in each market to achieve
an optimal balance of sales pace, pricing, profit margins and inventory levels in each community to maximize the
returns on our inventory investments.
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We are experiencing solid demand, revenue growth and profitability in our D.R. Horton branded communities,
which are the core of our business and account for the majority of our home closings. We continue to expand our
Express Homes brand to address the growing demand from entry-level buyers who are focused on affordability
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well as our Emerald Homes brand, which appeals to buyers in search of higher-end move-up and luxury homes.
Also, we are introducing our Freedom Homes brand into more markets to offer a low-maintenance lifestyle in
communities designed for active adult buyers. We are focused on being the leading builder in each of our operating
markets and diversifying our product offerings across our broad geographic footprint.
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We are well-positioned to grow our revenues and profitability by 10% to 15% in fiscal
2018, in addition to
improving our return on inventory and generating at least $500 million of positive cash flow from operations. Our
employees are the best in the industry, and their dedication and daily ef
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We thank all of
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forts are driving our success.
our suppliers, subcontractors, land developers, real estate agents and lenders for their valuable relationships. Finally, yy
we appreciate our shareholders for your consistent support, as we strive to validate your trust by delivering
sustainable value, addressing future challenges directly and maintaining our position as the leader in the
homebuilding industry for the 17th consecutive year.
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Donald R. Horton
Chairman of the Boardrr
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, 2017
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)
1341 Horton Circle, Arlington, Texas
(Address of principal executive offices)
75-2386963
(I.R.S. Employer Identification No.)
76011
(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, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”
and “emerging growth 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
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately
$11,733,685,000 based on the closing price as reported on the New York Stock Exchange.
As of November 8, 2017, there were 384,087,900 shares of the registrant’s common stock, par value $.01 per share, issued and 375,037,829
shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated herein by reference (to
the extent indicated) in Part III.
D.R. HORTON, INC. AND SUBSIDIARIES
2017 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.
Properties .....................................................................................................................................
ITEM 3.
Legal Proceedings........................................................................................................................
ITEM 4.
Mine Safety Disclosures ..............................................................................................................
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities ..............................................................................
ITEM 6.
Selected Financial Data................................................................................................................
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ......
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk.....................................................
ITEM 8.
Financial Statements and Supplementary Data............................................................................
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......
ITEM 9A.
Controls and Procedures ..............................................................................................................
ITEM 9B.
Other Information ........................................................................................................................
PART III
ITEM 10.
Directors, Executive Officers and Corporate Governance...........................................................
ITEM 11.
Executive Compensation .............................................................................................................
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ............................................................................................
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence ............................
ITEM 14.
Principal Accountant Fees and Services ......................................................................................
PART IV
ITEM 15.
Exhibits and Financial Statement Schedules ...............................................................................
ITEM 16.
10-K Summary.............................................................................................................................
SIGNATURES .......................................................................................................................................................
1
12
22
22
22
22
23
25
26
57
59
103
103
103
104
104
104
105
105
106
112
113
PART I
ITEM 1. BUSINESS
D.R. Horton, Inc. is the largest homebuilding company in the United States as measured by number of homes
closed and revenues. We construct and sell homes through our operating divisions in 79 markets in 26 states, under the
names of D.R. Horton, America’s Builder, Emerald Homes, Express Homes, Freedom Homes and Pacific Ridge Homes.
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.
Our homebuilding business began in 1978 in Fort Worth, Texas, and our common stock has been publicly traded
since 1992. We have expanded and diversified our homebuilding operations geographically over the years by investing
available capital into our existing markets, start-up operations in new markets and acquisitions of 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, 2017, we closed 45,751 homes with an average closing price of $298,400.
Our business operations consist of homebuilding, financial services and other activities. Our homebuilding
operations are the most substantial part of our business, comprising 98% of consolidated revenues, which totaled $14.1
billion in fiscal 2017. 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 88% of our home sales revenue in fiscal 2017 was
generated from the sale of single-family detached homes, with the remainder from the sale of attached homes, such as
townhomes, duplexes, triplexes and condominiums.
Our financial services operations 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 homebuyers 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 homebuyers.
In addition to our core homebuilding and financial services operations, we have subsidiaries that engage in other
business activities. These subsidiaries conduct insurance-related operations, construct and own income-producing rental
properties, own non-residential real estate including ranch land and improvements and own and operate oil and gas
related assets. The operating results of these subsidiaries are immaterial for separate reporting and therefore are grouped
together and presented as other. One of these subsidiaries, DHI Communities, recently began developing and
constructing multi-family rental properties on land parcels we already owned and currently has four projects under active
construction. Costs incurred by DHI Communities totaled $93.7 million at September 30, 2017 and are included in
property and equipment in the Financial Services and Other section of our consolidated balance sheet. The combined
assets of all of our subsidiaries engaged in other business activities totaled $143.3 million and $54.9 million at
September 30, 2017 and 2016, respectively, and the combined pre-tax loss of these subsidiaries was $11.7 million, $9.0
million and $0 in fiscal 2017, 2016 and 2015, respectively.
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 “Financial Information” 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 1341 Horton Circle, Arlington, Texas 76011 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 homebuilding
operations and home to our corporate headquarters. We currently operate in 26 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 financial services 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 and the notes thereto 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
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
Raleigh/Durham
Wilmington
Philadelphia
Charleston
Columbia
Greenville/Spartanburg
Hilton Head
Myrtle Beach
Northern Virginia
Midwest Region
Denver
Fort Collins
Chicago
Minneapolis/St. Paul
Southeast Region
Birmingham
Huntsville
Mobile
Montgomery
Tuscaloosa
Fort Myers/Naples
Jacksonville
Lakeland
Melbourne/Vero Beach
Miami/Fort Lauderdale
Ocala
Orlando
Pensacola/Panama City
Port St. Lucie
Tampa/Sarasota
Volusia County
West Palm Beach
Atlanta
Augusta
Gulf Coast
Knoxville
Nashville
South Central Region
Baton Rouge
Lafayette
Oklahoma City
Austin
Dallas
El Paso
Fort Worth
Houston
Killeen/Temple/Waco
Midland/Odessa
New Braunfels/San Marcos
San Antonio
Southwest Region
Phoenix
Tucson
Albuquerque
West Region
Bakersfield
Bay Area
Fresno
Los Angeles County
Orange County
Riverside County
Sacramento
San Bernardino County
San Diego County
Ventura County
Hawaii
Kauai
Maui
Oahu
Las Vegas
Reno
Portland
Salt Lake City
Seattle/Tacoma/Everett
Vancouver
Louisiana
Oklahoma
Texas
Arizona
New Mexico
California
Hawaii
Nevada
Oregon
Utah
Washington
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 2017 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;
• 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 allows 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
to provide flexibility to our local managers on operational decisions. We believe that our local management teams, who
are familiar with local conditions, have the best information to make many decisions regarding their operations. At
September 30, 2017, we had 41 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. 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 and architectural plans;
Selecting construction subcontractors and ensuring their work meets our contracted scopes;
Planning and managing home construction schedules;
• Determining the pricing for each house plan and options in a given community;
• Developing and implementing local marketing and sales plans;
• Coordinating all interactions with customers and real estate brokers during the sales, construction and home
closing processes; and
• Ensuring the quality and timeliness of post-closing service and warranty repairs provided to customers.
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, a chief financial officer, legal counsel and other operational and 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 and approval 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;
• Approval and funding of land and lot acquisitions;
• Monitoring and analysis of profitability, returns, costs and inventory levels;
• Risk and litigation management;
• Environmental assessments of land and lot acquisitions;
• Technology systems to support management of operations, marketing and information;
• 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, reporting and monitoring of customer satisfaction surveys and resolutions of issues; and
• Approval of major personnel decisions and management incentive compensation plans.
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 or for other strategic reasons.
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.
6
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; 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 interact with our homebuyers during the
construction process and instruct buyers on post-closing home maintenance.
Our home designs are selected or prepared in each of our markets to appeal to the preferences of local homebuyers
in each community. Our local management teams regularly adjust our product offerings to address our customers’
expectations for affordability, home size and features. In many communities, we offer optional interior and exterior
features to homebuyers for an additional charge. 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 two 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 operations. At times,
we have experienced delays in receiving the proper approvals from municipalities or other government agencies that
have delayed our anticipated development and construction activities in certain communities.
7
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 and digital marketing initiatives, which we believe are efficient uses of our
marketing expenditures.
Marketing and Sales
We use the D.R. Horton, Emerald Homes, Express Homes and Freedom 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 majority of our home
closings, focusing on the first time and first time move-up homebuyer. Our Emerald branded communities appeal to
buyers in search of higher-end move-up and luxury homes. Our Express branded communities primarily accommodate a
segment of entry-level buyers who are focused on affordability. We introduced our Freedom Homes brand in late fiscal
2016 to offer affordable homes to active adult buyers seeking a low-maintenance lifestyle. The percentage of home
closings and home sales revenue contributed by each brand during fiscal 2017 was as follows:
D.R. Horton ..................................................................................................
Emerald ........................................................................................................
Express .........................................................................................................
Freedom........................................................................................................
Total .........................................................................................................
Percentage of
Home Closings
64%
Percentage of
Home Sales Revenue
67%
4%
31%
1%
100%
8%
24%
1%
100%
We also use the Pacific Ridge Homes brand in our Seattle market following our acquisition of their homebuilding
operations in fiscal 2015, and their product offerings are similar to, and included with, our D.R. Horton branded
communities shown above.
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 our homes and assisting with the selection of options, when available. 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 incentives, such as discounts or free
upgrades, to be competitive in a particular market or to attain our targeted sales pace.
We market our homes and communities to prospective homebuyers and real estate brokers digitally, through email,
search engine marketing, social media and our company website and other real estate websites, in addition to print media
and advertisement. We also use billboards, radio, television, magazine and newspaper advertising locally as necessary.
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 an important role in our
marketing efforts, and we expend significant effort and resources to create an attractive atmosphere in our model homes.
8
We also build speculative homes in most of our communities, which allow us to compete effectively with existing
homes available in the market and improve our profits and returns. These homes enhance our marketing and sales efforts
to prospective homebuyers who are renters or who are relocating to these markets and require a home within a short time
frame, as well as to independent brokers who represent these homebuyers. 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 community based on our current and planned sales pace, and we monitor and
adjust speculative home inventory on an ongoing basis as conditions warrant.
Sales Contracts and Backlog
Our sales contracts require an earnest money deposit which varies in amount across our markets and communities.
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 cancelled 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,
2017, the value of our backlog of sales orders was $3.7 billion (12,329 homes), an increase of 8% from $3.4 billion
(11,475 homes) at September 30, 2016. The average sales price of homes in backlog was $302,200 at September 30,
2017, up 1% from the $299,600 average at September 30, 2016. 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 22% and 23% in fiscal 2017 and 2016, 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, 2017 are scheduled to close in fiscal year 2018.
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 DHI Mortgage, our 100% owned subsidiary. 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. During the year ended September 30, 2017, DHI Mortgage
provided mortgage financing services for approximately 56% of our total homes closed, and approximately 95% 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.
9
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, the majority of which are eligible for sale to the Federal National
Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government
National Mortgage Association (Ginnie Mae). 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.
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, 2017, we employed 7,735 persons, of whom 1,673 were sales and marketing personnel, 2,157
were involved in construction, 2,107 were office personnel and 1,798 worked in mortgage and title operations. We focus
significant attention toward attracting and retaining talented and experienced individuals to manage and support our
operations, and we believe that we have good relations with our employees.
Recent Business Acquisitions
We routinely evaluate opportunities to profitably expand our operations, including potential acquisitions of other
homebuilding or related businesses. Acquisitions of homebuilding businesses usually provide us with immediate land
and home inventories and control of additional land and lot positions through option contracts. Also, employees of
acquired businesses generally 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 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.
In September 2016, we acquired the homebuilding operations of Wilson Parker Homes, which operated in Atlanta
and Augusta, Georgia; Raleigh, North Carolina; Columbia, South Carolina and Phoenix, Arizona.
Subsequent to September 30, 2017, we acquired 75% of the outstanding shares of Forestar Group Inc. (Forestar)
for $558.3 million in cash, pursuant to the terms of the June 2017 merger agreement. Forestar is and will continue to be a
publicly-traded residential and real estate development company with operations currently in 14 markets and 10 states,
where it owns, directly or through joint ventures, interests in 44 residential and mixed-use projects. Our alignment with
Forestar advances our strategy of increasing our access to high-quality optioned land and lot positions to enhance
operational efficiency and returns. Both companies are identifying land development opportunities to expand Forestar’s
platform, and we plan to acquire a large portion of Forestar’s finished lots in accordance with the master supply
agreement between the two companies.
10
Competition
The homebuilding industry is highly competitive. We compete with numerous other national, regional and local
homebuilders for homebuyers, desirable land, 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, location, design and mortgage financing terms.
The competitors to our financial services businesses include other mortgage lenders and title companies, including
national, regional and local mortgage bankers and other financial institutions. Some of these competitors are subject to
fewer governmental regulations and may have greater access to capital, 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.
However, we work diligently to provide flexible, fairly priced financing alternatives subject to applicable regulation.
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. These include zoning, density and development
requirements and 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 array 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 must comply with extensive state and federal laws and regulations, which are administered
by numerous agencies, including but not limited to the Consumer Financial Protection Bureau (CFPB), Federal Housing
Finance Agency, U.S. Department of Housing and Urban Development, FHA, VA, United States Department of
Agriculture (USDA), Fannie Mae, Freddie Mac and Ginnie Mae. These laws and regulations include many compliance
requirements, including but not limited to licensing, consumer disclosures, fair lending and real estate settlement
procedures. As a result, our operations are subject 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 close more homes and generate greater revenues and operating income in the third and
fourth quarters of our fiscal year. The seasonal nature of our business can also cause significant variations in our working
capital requirements in both our homebuilding and financial services operations. 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 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;
consumer confidence and spending;
housing demand;
availability of financing for homebuyers;
interest rates;
availability 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; and
•
demographic trends.
Adverse changes in these general and local economic conditions or deterioration in the broader economy would
cause a negative impact on our business and financial results and increase the risk for asset impairments and writeoffs.
Changes in these economic conditions may affect some of our regions or markets more than others. If adverse conditions
affect our larger markets, they could have a proportionately greater impact on us than on some other homebuilding
companies.
In the past, concerns regarding the federal 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 and new legislation related to economic stimulus, taxation, spending levels and
borrowing limits, along with the related political debates, conflicts and compromises associated with such actions, may
negatively impact the financial markets and consumer confidence. Such events could hurt the U.S. economy and the
housing market and in turn, could adversely affect the operating results of our homebuilding, financial services and other
businesses.
Weather conditions and natural disasters, such as hurricanes, tornadoes, earthquakes, volcanic activity, droughts
and floods, heavy or prolonged precipitation or wildfires, 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 and which have
experienced recent natural disasters, 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, related domestic or international
instability or civil unrest may cause an economic slowdown in the markets where we operate, which could adversely
affect our homebuilding business.
12
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 may be responsible for losses
associated with mortgage loans originated and sold to third-party purchasers in the event of errors or omissions relating
to certain representations and warranties that the loans sold meet certain requirements, including representations as to
underwriting standards, the type of collateral, the existence of primary mortgage insurance, and the validity of certain
borrower representations in the connection with the loan. 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 past economic and housing downturns, the credit markets constricted and reduced some sources of liquidity
that were previously available to us. Consequently, we relied principally on our cash on hand to meet our working capital
needs and repay outstanding indebtedness during those times. 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 $1.275 billion senior unsecured revolving credit facility with an uncommitted accordion feature that
could increase the size of the facility to $1.9 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. The maturity date of the commitments under the facility is September 25, 2022.
Also, our mortgage subsidiary utilizes a $600 million mortgage repurchase facility to finance the majority of the loans it
originates. The capacity of the facility increases, without requiring additional commitments, to $725 million for
approximately 30 days at each quarter end and to $800 million for approximately 45 days at fiscal year end. The capacity
can also be increased to $1.0 billion subject to the availability of additional commitments. The mortgage repurchase
facility must be renewed annually and currently expires on February 23, 2018. 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 these 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.
13
We regularly assess our projected capital requirements to fund growth in our business, repay debt obligations, and
support 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 August 2015,
registering debt and equity securities that 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. In October 2017, we used cash
on hand to purchase 75% of the outstanding shares of Forestar Group Inc. (Forestar) for $558.3 million. We believe that
our existing cash resources, our revolving credit facility, our mortgage repurchase facility and our ability to access the
capital markets will provide sufficient liquidity to fund our working capital needs and debt obligations, including the
maturity of $400 million principal amount of senior notes in fiscal 2018. Adverse changes in economic, homebuilding or
capital market conditions could negatively affect our business, liquidity and financial results, restrict our ability to obtain
additional capital or increase our costs of capital.
Reductions in the availability of mortgage financing provided by government agencies, changes in government
financing programs, a decrease in our ability to sell mortgage loans on attractive terms or an increase in mortgage
interest rates could decrease our buyers’ ability to obtain financing and adversely affect our business or financial
results.
The mortgage loans originated by our financial services operations are primarily eligible for sale to Fannie Mae,
Freddie Mac and Ginnie Mae and are sold to third-party purchasers. The secondary market for mortgage loans continues
to primarily desire securities backed by Fannie Mae, Freddie Mac or Ginnie Mae, and we believe the liquidity these
agencies provide to the mortgage industry is important to the housing market. There have been ongoing discussions
within the government regarding the long-term structure and viability of Fannie Mae and Freddie Mac, which could
result in adjustments to the size of their loan portfolios and to guidelines for their loan products. Any reduction in the
availability of financing provided by these institutions could adversely affect interest rates, mortgage availability and
sales of new homes and mortgage loans. During fiscal 2017, approximately 84% of our mortgage loans were sold to
three major financial entities, one of which purchased 45% of the total loans sold. On an ongoing basis, we seek to
establish loan purchase arrangements with additional financial entities. 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.
The FHA insures mortgage loans that generally have lower credit requirements and is an important source for
financing the sale of our homes. Changes, restrictions or significant premium increases in FHA programs in the future
may negatively affect the availability or affordability of FHA financing, which could adversely affect our ability to sell
homes.
Some of our customers may qualify for 100% financing through programs offered by the VA, USDA and certain
other housing finance agencies. These 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.
Mortgage rates are currently low as compared to most historical periods; however, they are expected to increase as
the Federal Reserve Board has raised its benchmark rate several times over the past year and has indicated further
interest rate increases are likely. When interest rates increase, the cost of owning a home will increase, which will likely
reduce the number of potential homebuyers who can obtain mortgage financing, and could result in a decline in the
demand for our homes.
14
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, 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 record inventory impairment charges on our land and lots. A significant
deterioration in economic or homebuilding industry conditions may result in substantial inventory impairment charges.
We cannot make any assurances that our growth strategies, acquisitions or investments will be successful or will not
expose us to additional risks or other negative consequences.
In recent years, we have primarily grown our business by increasing our investments in land, lot and home
inventories in our existing homebuilding markets. We have also expanded through investments in new product offerings
and 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.
Subsequent to September 30, 2017, we made an investment of $558.3 million in cash to acquire 75% of the
outstanding shares of Forestar, pursuant to the terms of the June 2017 merger agreement. Forestar is and will continue to
be a publicly-traded residential and real estate development company with operations currently in 14 markets and 10
states, where it owns, directly or through joint ventures, interests in 44 residential and mixed-use projects. Our alignment
with Forestar advances our strategy of increasing our access to high-quality optioned land and lot positions to enhance
operational efficiency and returns. Both companies are identifying land development opportunities to expand Forestar’s
platform, and we plan to acquire a large portion of Forestar’s finished lots in accordance with the master supply
agreement between the two companies.
In addition to the investment and merger with Forestar, we have acquired the homebuilding operations of several
companies since fiscal 2012, and we may make strategic acquisitions of or investments in other companies, operations or
assets in the future. Such acquisitions and investments may have risks similar to those related to land, lots and home
inventories, but they may also expose us to additional risks or other negative consequences. These transactions may not
advance our business strategy, provide a satisfactory return on our investment or provide other benefits we anticipate.
Also, the integration of these transactions may not be successful and may require significant time and resources, which
may divert management’s attention from other operations. Acquisitions and investments could also expose us to material
liabilities not discovered in the due diligence process and may lead to litigation. If these transactions under-perform our
expectations or are unsuccessful, we may incur significant expenses or write-offs of inventory, other assets or intangible
assets such as goodwill. Acquisitions and investments can result in dilution to existing stockholders if we issue our
common stock as consideration, and can increase our debt levels or reduce our liquidity if we purchase them with cash.
The magnitude, timing and nature of any future acquisitions or investments will depend on a number of factors,
including our ability to identify suitable additional markets or acquisition candidates, the negotiation of acceptable terms,
our financial capabilities and general economic and business conditions. We also may seek to divest an investment or a
business and may have difficulty selling such investment or business on acceptable terms in a timely manner.
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 do not meet adequate quality standards 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.
15
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.
A health and safety incident relating to our operations could be costly in terms of potential liability and reputational
damage.
Building sites are inherently dangerous, and operating in the homebuilding industry poses certain inherent health
and safety risks. Due to health and safety regulatory requirements and the number of homes we construct, health and
safety performance is critical to the success of our business. Any failure in health and safety performance may result in
penalties for non-compliance with relevant regulatory requirements, and a failure that results in a major or significant
health and safety incident is likely to be costly and could expose us to liability that could be costly. Such an incident
could generate significant negative publicity and have a corresponding impact on our reputation, our relationships with
relevant regulatory agencies or governmental authorities, and our ability to attract customers and employees, which in
turn could have a material adverse effect on our financial results and liquidity.
Damage to our corporate reputation or brands from negative publicity could adversely affect our business, financial
results and/or stock price.
Adverse publicity related to our company, industry, personnel, operations or business performance may cause
damage to our corporate reputation or brands and may generate negative sentiment, potentially affecting the performance
of our business or our stock price, regardless of its accuracy or inaccuracy. Negative publicity can be disseminated
rapidly through digital platforms, including social media, websites, blogs and newsletters. Customers and other
interested parties value readily available information and often act on such information without further investigation and
without regard to its accuracy. The harm may be immediate without affording us an opportunity for redress or correction,
and our success in preserving our brand image depends on our ability to recognize, respond to and effectively manage
negative publicity in a rapidly changing environment. Adverse publicity or unfavorable commentary from any source
could damage our reputation, reduce the demand for our homes or negatively impact the morale and performance of our
employees, which could adversely affect our business.
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.
16
These factors may increase our build times or cause us to incur more costs building our homes. 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 will likely increase.
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 affordability. 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, labor and materials can 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 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. If oil prices decline significantly, economic
conditions in markets that have significant exposure to the energy sector may weaken. These, or other factors that
increase the risk of significant deflation, could have a negative impact on our business or financial results.
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. At September 30, 2017, we had $1.2 billion of outstanding
surety bonds. 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.
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.
17
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 may 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. For example, we have received
Notices of Violation from the United States Environmental Protection Agency related to stormwater compliance at
certain of our sites in the Southeast. This matter could potentially result in requirements for us to perform additional
compliance procedures and to pay monetary sanctions.
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.
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, may require
us to incur additional compliance costs, and such costs may be significant.
Governmental regulation of our financial services operations could adversely affect our business or financial results.
Our financial services operations are subject to extensive state and federal laws and regulations, which are
administered by numerous agencies, including but not limited to the CFPB, Federal Housing Finance Agency, U.S.
Department of Housing and Urban Development, FHA, VA, USDA, Fannie Mae, Freddie Mac and Ginnie Mae. These
laws and regulations include many compliance requirements, including but not limited to licensing, consumer
disclosures, fair lending and real estate settlement procedures. As a result, our operations are subject to regular, extensive
examinations by the applicable agencies.
In fiscal 2013, our mortgage subsidiary was subpoenaed by the United States Department of Justice (DOJ)
regarding the adequacy of certain underwriting and quality control processes related to FHA loans originated and sold in
prior years. We have provided information related to these loans and our processes to the DOJ, and communications are
ongoing. The DOJ has to date not asserted any formal claim amount, penalty or fine.
Due to the significant increases in regulations, operating costs have increased for our mortgage operations. The
possibility of additional future regulations, changing rule interpretations and examinations by regulatory agencies may
result in more stringent compliance standards and could adversely affect the results of our operations.
18
We have significant 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, 2017, our consolidated debt was $2.9 billion, and we had $829.6 million principal amount of
our debt maturing before the end of fiscal 2018, including $400 million principal amount of senior notes and $420
million outstanding under the mortgage repurchase facility. The indenture governing our senior notes does 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 allows us to incur a
substantial amount of future unsecured debt. Also, the indenture governing our senior notes and the agreement governing
our revolving credit facility impose restrictions on our ability and on that of the guarantors to incur debt secured by
certain assets, but still 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 to adjust to changes in our business or economic conditions; and
limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service
requirements or other requirements.
In addition, our debt obligations and the restrictions imposed by the instruments governing those 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 the cost of 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
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.
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 any outstanding
borrowings 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.
19
In addition, although our financial services business is conducted through subsidiaries that are not restricted by the
indenture governing our senior notes or the agreement governing our revolving credit facility, the ability of our financial
services subsidiaries to distribute funds to our homebuilding operations would be restricted in the event such distribution
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 is 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 investment grade by all three major rating
agencies; however, there can be no assurance that we will be able to maintain this rating. 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 indenture governing our senior notes, 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 were accelerated and such acceleration were not rescinded or such indebtedness were not satisfied, in
either case within 30 days, an event of default would result under the indenture 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 purchase offers were required under the indenture for our
notes, repayment of the borrowings under our revolving credit facility were required, or if our senior notes were
accelerated, we can give no assurance that we would have sufficient funds to pay the required amounts.
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, and also 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 the value of our inventory or other assets to be impaired. 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 banks 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 increases as business conditions improve in the homebuilding and financial services industries and in the
general economy. If we are unable to attract and retain key employees, managers or executives, our business could be
adversely affected.
20
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. We seek to
retain our key personnel and to have succession plans in place to address the potential loss of key personnel. However, if
our retention and succession planning efforts are unsuccessful or if we fail to attract suitable replacements, the loss of
key personnel could 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, third-party software and data storage providers and other aspects of the
Internet infrastructure that have experienced security breaches, cyber-attacks, significant systems failures and service
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. A data security breach, a significant
and extended disruption in the functioning of our information technology systems or a breach of any of our data security
controls could disrupt our business operations, 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 could 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 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, because the techniques used to obtain unauthorized access,
disable or degrade systems change frequently and often are not recognized until launched against a target, we may be
unable to anticipate these techniques or to implement adequate preventative measures. Consequently, 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.
21
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
1,000,000 square feet, and we lease approximately 529,000 square feet of office space under leases expiring through
November 2023. 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 ranch land and improvements totaling approximately 93,600 acres which we use to conduct ranching and
agricultural activities and to host company meetings and events.
ITEM 3. LEGAL PROCEEDINGS
We are involved in lawsuits and other contingencies in the ordinary course of business. While the outcome of such
contingencies cannot be predicted with certainty, we believe that the liabilities arising from these matters will not have a
material adverse effect on our consolidated financial position, results of operations or cash flows. However, to the extent
the liability arising from the ultimate resolution of any matter exceeds our estimates reflected in the recorded reserves
relating to such matter, we could incur additional charges that could be significant.
In May and July of 2014, we received Notices of Violation from the United States Environmental Protection
Agency related to stormwater compliance at certain of our sites in the Southeast. This matter could potentially result in
monetary sanctions to the Company; however, we do not believe it is reasonably possible that this matter would result in
a loss that would have a material effect on our consolidated financial position, results of operations or cash flows.
In fiscal 2013, our mortgage subsidiary was subpoenaed by the United States Department of Justice (DOJ)
regarding the adequacy of certain underwriting and quality control processes related to Federal Housing Administration
loans originated and sold in prior years. We have provided information related to these loans and our processes to the
DOJ, and communications are ongoing. The DOJ has to date not asserted any formal claim amount, penalty or fine.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
22
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, 2017
Year Ended September 30, 2016
High
Low
Declared
Dividends
High
Low
Declared
Dividends
1st Quarter.............................................. $
30.62
$
26.69
$
0.10
$
33.10
$
28.45
$
2nd Quarter ............................................
3rd Quarter .............................................
4th Quarter .............................................
34.06
34.94
40.01
27.21
31.98
34.06
0.10
0.10
0.10
31.64
32.51
34.56
22.97
28.82
29.64
0.08
0.08
0.08
0.08
As of November 8, 2017, the closing price of our common stock on the NYSE was $45.41, and there were
approximately 373 holders of record.
In November 2017, our Board of Directors approved a cash dividend of $0.125 per common share, payable on
December 15, 2017, to stockholders of record on December 1, 2017. 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 2017, 2016 and 2015, we did not sell any equity securities that were not registered under the
Securities Act of 1933, as amended.
Effective August 1, 2016, our Board of Directors authorized the repurchase of up to $100 million of our common
stock effective through July 31, 2017. During the third quarter of fiscal 2017, we repurchased 1,850,000 shares of our
common stock for $60.6 million, resulting in a remaining authorization of $39.4 million. Effective August 1, 2017, our
Board of Directors authorized the repurchase of up to $200 million of our common stock effective through July 31, 2018.
As there were no repurchases of common stock during the fourth quarter of fiscal 2017, all of the $200 million
authorization was remaining at September 30, 2017, and no common stock has been repurchased subsequent to
September 30, 2017.
23
Stock Performance Graph
The following graph illustrates the cumulative total stockholder return on D.R. Horton common stock for the last
1500 Homebuilding Index.
five fiscal years through September 30, 2017, compared to the S&P 500 Index and the S&P
P
The comparison assumes a hypothetical investment in D.R. Horton common stock and in each of the foregoing indices of
$100 at September 30, 2012 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.
P
Comparison of Five-YearYY Cumulative
P
Among D.R. Horton, Inc., S&P 500 Index and S&P
P
r
TT
Total Return
1500 Homebuilding Index
$250
$200
$150
$100
$50
$0
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
D.R. Horton, Inc.
S&P 500 Index
S&P 1500 Homebuilding Index
2012
2013
r
YearYY Ended September
2015
r
2014
30,
2016
2017
D.R. Horton, Inc. ......................................... $ 100.00
$
95.10
$ 101.04
$ 145.90
$ 151.67
$ 203.07
S&P 500 Index ............................................
S&P 1500 Homebuilding Index
P
..................
100.00
100.00
119.34
103.93
142.89
107.04
142.02
130.03
163.93
129.26
194.44
178.92
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.
24
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.
Year Ended September 30,
2017
2016
2015
2014
2013
(In millions, except per share data)
Operating Data:
Revenues:
Homebuilding ............................................................. $ 13,741.5
349.5
Financial Services.......................................................
Inventory and land option charges...................................
40.2
Gross profit — Homebuilding.........................................
Income before income taxes:
2,698.7
$ 11,861.8
$ 10,559.0
$ 7,858.5
$ 6,085.9
295.6
31.4
265.0
60.3
166.4
85.2
173.4
31.1
2,359.2
2,023.3
1,589.9
1,232.4
Homebuilding .............................................................
Financial Services and Other ......................................
Income tax expense .........................................................
Net income.......................................................................
Net income per share:
Basic ...........................................................................
Diluted ........................................................................
Cash dividends declared per common share ...................
1,489.3
1,264.4
1,018.3
112.8
563.7
1,038.4
2.77
2.74
0.40
89.1
467.2
886.3
2.39
2.36
0.32
105.1
372.7
750.7
2.05
2.03
0.25
768.5
45.7
280.7
533.5
1.57
1.50
589.8
68.0
195.1
462.7
1.44
1.33
0.1375
0.1875
September 30,
2017
2016
2015
2014
2013
(In millions)
Balance Sheet Data:
Cash and cash equivalents and marketable securities ..... $ 1,007.8
Inventories .......................................................................
9,237.1
Total assets.......................................................................
Notes payable (1).............................................................
Total equity ......................................................................
12,184.6
7,747.6
2,871.6
$ 1,303.2
$ 1,383.8
$
661.8
$
977.4
8,340.9
7,807.0
7,700.5
11,558.9
11,151.0
10,185.4
3,271.3
6,793.0
3,811.5
5,895.4
3,665.7
5,119.7
6,197.4
8,838.4
3,491.0
4,061.4
_____________
(1) Notes payable includes both homebuilding notes payable and amounts outstanding on our mortgage repurchase
facility.
25
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations — Fiscal Year 2017 Overview
During fiscal 2017, demand for new homes continued to reflect the stable to moderately improved trends we
experienced across most of our operating markets in fiscal 2016. We continue to 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 homebuilder in the United States provides a strong
platform for us to compete for new home sales. In recent years, we have focused on expanding our product offerings to
more consistently include a broad range of homes for entry-level, move-up and luxury buyers across most of our
markets. Our affordable entry-level homes have experienced very strong demand from homebuyers, as the entry-level
segment of the new home market remains under-served, with low inventory levels relative to demand. Since the fourth
quarter of fiscal 2016, we have been introducing affordable homes in communities designed for active adult buyers
seeking a low-maintenance lifestyle. We plan to continue to expand our product offerings across more of our operating
markets.
We believe our business is well positioned because of our broad geographic footprint and diverse product offerings,
our ample supply of finished lots, land and homes, our strong balance sheet and liquidity and our experienced personnel
across our operating markets. We remain focused on growing our revenues and profitability, generating positive annual
cash flows from operations and managing our product offerings, pricing, sales pace, and inventory levels to optimize the
return on our inventory investments.
In fiscal 2017, our number of homes closed and home sales revenues increased 14% and 16%, respectively,
compared to the prior year. Our pre-tax income grew to $1.6 billion in fiscal 2017 compared to $1.4 billion in fiscal 2016
and $1.1 billion in fiscal 2015. Our pre-tax operating margin increased to 11.4% in fiscal 2017 compared to 11.1% in
fiscal 2016 and 10.4% in fiscal 2015. Cash provided by operations was $435.1 million in fiscal 2017 compared to $618.0
million in fiscal 2016 and $700.4 million in fiscal 2015. In fiscal 2017, our homebuilding return on inventory (ROI)
improved to 16.6% compared to 15.4% in fiscal 2016 and 12.8% in fiscal 2015. Homebuilding ROI is calculated as
homebuilding pre-tax income for the year divided by average inventory. Average inventory in the ROI calculation is the
sum of ending inventory balances for the trailing five quarters divided by five.
During the year, we also made significant progress in increasing our lots controlled under option purchase contracts
to 50% of our total lots owned and controlled compared to 45% in the prior year. The transaction with Forestar Group
Inc. (Forestar), which closed subsequent to year end, is expected to advance our strategy of increasing our access to high-
quality optioned land and lot positions.
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. If the U.S. economy continues to
improve, we expect to see slow to moderate 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.
26
Strategy
Our operating strategy focuses on leveraging our financial and competitive position to increase the returns on our
inventory investments and generate strong profitability and cash flows, while managing risk. This 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.
• Offering new home communities that appeal to a broad range of entry-level, move-up, active adult 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.
• 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 and actively controlling the number of
unsold, completed homes in inventory.
•
•
Investing in land and land development and pursuing 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.
Increasing the amount of land and finished lots controlled through option purchase contracts by expanding
relationships with land developers across the country.
• 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.
We believe our operating strategy, which has produced positive results in recent years, will allow us to maintain
and improve our financial and competitive position and balance sheet strength. 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.
27
Key Results
Key financial results as of and for our fiscal year ended September 30, 2017, as compared to fiscal 2016, were as
follows:
Homebuilding:
• Homebuilding revenues increased 16% to $13.7 billion.
• Homes closed increased 14% to 45,751 homes, and the average closing price of those homes increased 2% to
$298,400.
• Net sales orders increased 14% to 46,605 homes, and the value of net sales orders increased 16% to $13.9
billion.
•
Sales order backlog increased 7% to 12,329 homes, and the value of sales order backlog increased 8% to $3.7
billion.
• Home sales gross margin decreased 20 basis points to 20.0%.
• Homebuilding SG&A expenses as a percentage of homebuilding revenues decreased by 40 basis points to
8.9%.
• Homebuilding pre-tax income increased 18% to $1.5 billion compared to $1.3 billion.
• Homebuilding pre-tax income as a percentage of homebuilding revenues was 10.8% compared to 10.7%.
• Homebuilding return on inventory improved 120 basis points to 16.6%.
• Homebuilding cash and cash equivalents totaled $973.0 million compared to $1.3 billion.
• Homebuilding inventories totaled $9.2 billion compared to $8.3 billion.
• Homes in inventory totaled 26,200 compared to 23,100.
• Owned lots totaled 125,000 compared to 112,900, and lots controlled through option purchase contracts
totaled 124,000 compared to 91,600.
• Homebuilding debt was $2.5 billion compared to $2.8 billion.
• Homebuilding debt to total capital was 24.0%, improved from 29.2%.
Financial Services and Other:
•
•
•
Financial services and other revenues increased 18% to $349.5 million.
Financial services and other pre-tax income increased 27% to $112.8 million, compared to $89.1 million.
Financial services and other pre-tax income as a percentage of financial services and other revenues was
32.3% compared to 30.1%.
Consolidated Results:
• Consolidated pre-tax income increased 18% to $1.6 billion compared to $1.4 billion.
• Consolidated pre-tax income as a percentage of consolidated revenues was 11.4% compared to 11.1%.
• Net income increased 17% to $1.0 billion compared to $886.3 million.
• Diluted earnings per share increased 16% to $2.74 compared to $2.36.
• Total equity was $7.7 billion compared to $6.8 billion.
• Book value per common share increased 13% to $20.66 compared to $18.21.
• Net cash provided by operations was $435.1 million compared to $618.0 million.
28
Results of Operations — Homebuilding
Our operating segments are our 41 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 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
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, 2017, 2016 and 2015.
Net Sales Orders (1)
Net Homes Sold
Fiscal Year Ended September 30,
2016
2015
2017
% Change
2017 vs 2016
2016 vs 2015
East.........................................................
Midwest..................................................
Southeast ................................................
South Central .........................................
Southwest...............................................
West........................................................
6,039
1,841
15,575
13,374
2,693
7,083
46,605
4,944
1,766
13,616
12,433
1,761
6,294
40,814
4,859
1,696
11,703
11,753
1,645
5,724
37,380
East.........................................................
Midwest..................................................
Southeast ................................................
South Central .........................................
Southwest...............................................
West........................................................
East.........................................................
Midwest..................................................
Southeast ................................................
South Central .........................................
Southwest...............................................
West........................................................
_____________
$
1,708.9
$
1,388.5
$
1,319.8
Value (In millions)
722.6
4,068.9
3,339.1
620.5
3,481.2
669.2
3,547.3
3,045.4
409.0
2,940.8
641.0
3,053.4
2,849.7
364.1
2,510.7
$
$
13,941.2
$
12,000.2
$
10,738.7
Average Selling Price
283,000
$
280,800
$
271,600
392,500
261,200
249,700
230,400
491,500
378,900
260,500
244,900
232,300
467,200
377,900
260,900
242,500
221,300
438,600
$
299,100
$
294,000
$
287,300
22 %
4 %
14 %
8 %
53 %
13 %
14 %
23 %
8 %
15 %
10 %
52 %
18 %
16 %
1 %
4 %
— %
2 %
(1)%
5 %
2 %
2 %
4 %
16 %
6 %
7 %
10 %
9 %
5 %
4 %
16 %
7 %
12 %
17 %
12 %
3 %
— %
— %
1 %
5 %
7 %
2 %
(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.
29
Cancelled Sales Orders
2016
2017
2015
Sales Order Cancellations
Fiscal Year Ended September 30,
Value (In millions)
2016
2015
2017
Cancellation Rate (1)
2016
2017
2015
East ....................
Midwest .............
Southeast............
South Central .....
Southwest ..........
West ...................
_____________
1,818
260
4,898
3,989
864
1,221
1,582
241
4,413
3,795
745
1,119
1,536
$
500.3
$
425.4
$
296
3,663
3,833
572
1,151
103.6
1,252.5
1,000.8
196.9
616.9
91.6
1,105.9
942.5
160.4
544.7
416.7
115.2
899.2
913.2
123.0
515.7
13,050
11,895
11,051
$ 3,671.0
$ 3,270.5
$ 2,983.0
23%
12%
24%
23%
24%
15%
22%
24%
12%
24%
23%
30%
15%
23%
24%
15%
24%
25%
26%
17%
23%
(1) Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.
Net Sales Orders
2017 versus 2016
The value of net sales orders increased 16% to $13.9 billion (46,605 homes) in 2017 from $12.0 billion (40,814
homes) in 2016, with increases in all of our regions. The increase in the value of sales orders was due to increased
volume and to a lesser extent, increased selling prices in some regions.
The number of net sales orders increased 14%, and the average price of net sales orders increased 2% to $299,100
during 2017 compared to 2016. The increase in net sales orders reflects the continued stable to moderately improved
market conditions in most of our markets. Our Phoenix market contributed the most to the higher volume in our
Southwest region and our Carolina markets contributed most to the higher volume in our East region. Our sales order
cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 22% in fiscal 2017 compared to
23% in 2016.
We believe our business is well positioned to continue to generate increased sales volumes; 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.
2016 versus 2015
The value of net sales orders increased 12% to $12.0 billion (40,814 homes) in 2016 from $10.7 billion (37,380
homes) in 2015, with increases in all of our regions. The increase in the value of sales orders was due to increased
volume and to a lesser extent, increased selling prices in most regions.
The number of net sales orders increased 9%, and the average price of net sales orders increased 2% to $294,000
during 2016 compared to 2015. Our Florida markets contributed most to the higher volume in our Southeast region and
our Las Vegas market contributed most to the higher volume in our West region.
30
Sales Order Backlog
Homes in Backlog
As of September 30,
2016
2017
2015
2017 vs 2016
2016 vs 2015
% Change
East.........................................................
Midwest..................................................
Southeast ................................................
South Central .........................................
Southwest...............................................
West........................................................
1,544
419
4,057
3,956
843
1,510
1,301
470
4,053
3,840
655
1,156
1,430
412
3,511
3,656
571
1,082
12,329
11,475
10,662
Value (In millions)
East.........................................................
$
452.8
$
383.0
$
Midwest..................................................
Southeast ................................................
South Central .........................................
Southwest...............................................
West........................................................
172.5
1,104.9
1,018.1
192.7
785.0
184.0
1,121.7
1,018.1
150.7
580.5
413.0
166.4
977.9
951.3
124.0
514.2
$
3,726.0
$
3,438.0
$
3,146.8
Average Selling Price
East.........................................................
$
293,300
$
294,400
$
288,800
Midwest..................................................
Southeast ................................................
South Central .........................................
Southwest...............................................
West........................................................
411,700
272,300
257,400
228,600
519,900
391,500
276,800
265,100
230,100
502,200
403,900
278,500
260,200
217,200
475,200
$
302,200
$
299,600
$
295,100
19 %
(11)%
— %
3 %
29 %
31 %
7 %
18 %
(6)%
(1)%
— %
28 %
35 %
8 %
— %
5 %
(2)%
(3)%
(1)%
4 %
1 %
(9)%
14 %
15 %
5 %
15 %
7 %
8 %
(7)%
11 %
15 %
7 %
22 %
13 %
9 %
2 %
(3)%
(1)%
2 %
6 %
6 %
2 %
Sales Order Backlog
Sales order backlog represents homes under contract but not yet closed at the end of the period. Many of the
contracts in our sales order backlog are subject to contingencies, including mortgage loan approval and buyers selling
their existing homes, which can result in cancellations. A portion of the contracts in backlog will not result in closings
due to cancellations.
31
Home Closings and Revenue
Homes Closed
Fiscal Year Ended September 30,
2016
2017
2015
% Change
2017 vs 2016
2016 vs 2015
East.........................................................
Midwest..................................................
Southeast ................................................
South Central .........................................
Southwest...............................................
West........................................................
5,796
1,892
15,571
13,258
2,505
6,729
45,751
5,126
1,708
13,303
12,249
1,703
6,220
40,309
4,880
1,811
11,093
11,455
1,499
5,910
36,648
East.........................................................
Midwest..................................................
Southeast ................................................
South Central .........................................
Southwest...............................................
West........................................................
East.........................................................
Midwest..................................................
Southeast ................................................
South Central .........................................
Southwest...............................................
West........................................................
Home Sales Revenue (In millions)
$
1,639.1
$
1,431.0
$
1,323.5
734.1
4,085.7
3,339.1
578.5
3,276.7
651.7
3,459.3
2,978.5
388.1
2,874.5
665.9
2,866.2
2,690.1
336.1
2,587.6
$
$
13,653.2
$
11,783.1
$
10,469.4
Average Selling Price
282,800
$
279,200
$
271,200
388,000
262,400
251,900
230,900
487,000
381,600
260,000
243,200
227,900
462,100
367,700
258,400
234,800
224,200
437,800
$
298,400
$
292,300
$
285,700
13%
11%
17%
8%
47%
8%
14%
15%
13%
18%
12%
49%
14%
16%
1%
2%
1%
4%
1%
5%
2%
5 %
(6)%
20 %
7 %
14 %
5 %
10 %
8 %
(2)%
21 %
11 %
15 %
11 %
13 %
3 %
4 %
1 %
4 %
2 %
6 %
2 %
2017 versus 2016
Revenues from home sales increased 16% to $13.7 billion (45,751 homes closed) in 2017 from $11.8
billion (40,309 homes closed) in 2016. The increase in home sales revenues reflects the continued stable to moderately
improved market conditions in most of our markets.
The number of homes closed in fiscal 2017 increased 14% from 2016 due to increases in all of our regions. Our
Phoenix, Florida and Carolina markets contributed the most to higher closing volumes in our Southwest, Southeast and
East regions, respectively. The average selling price of homes closed during fiscal 2017 was $298,400, up 2% from the
prior year.
2016 versus 2015
Revenues from home sales increased 13% to $11.8 billion (40,309 homes closed) in 2016 from $10.5 billion
(36,648 homes closed) in 2015.
The number of homes closed in fiscal 2016 increased 10% from 2015 due to increases in most of our regions. Our
Florida and Phoenix markets contributed the most to higher closing volumes in our Southeast and Southwest regions,
respectively. The decrease in homes closed in our Midwest region was primarily due to lower volume in our Chicago and
Denver markets.
32
Homebuilding Operating Margin Analysis
Percentages of Related Revenues
Fiscal Year Ended September 30,
2016
2015
2017
Gross profit — Home sales .................................................................
Gross profit — Land/lot sales and other .............................................
Inventory and land option charges ......................................................
Gross profit — Total homebuilding ....................................................
Selling, general and administrative expense .......................................
Goodwill impairment ..........................................................................
Other (income) expense ......................................................................
Homebuilding pre-tax income ............................................................
20.0 %
15.3 %
(0.3)%
19.6 %
8.9 %
— %
(0.1)%
10.8 %
20.2 %
13.3 %
(0.3)%
19.9 %
9.3 %
0.1 %
(0.1)%
10.7 %
19.8 %
8.7 %
(0.6)%
19.2 %
9.5 %
0.1 %
(0.1)%
9.6 %
Home Sales Gross Profit
2017 versus 2016
Gross profit from home sales increased 15% to $2.7 billion in 2017 from $2.4 billion in 2016 and decreased
20 basis points to 20.0% as a percentage of home sales revenues. The 20 basis point decrease in the home sales gross
profit percentage resulted from a decrease of 50 basis points due to an increase in warranty and construction defect
expenses as a percentage of home sales revenues, partially offset by an improvement of 30 basis points due to a decrease
in the amortization of capitalized interest and property taxes.
2016 versus 2015
Gross profit from home sales increased 15% to $2.4 billion in 2016 from $2.1 billion in 2015 and increased
40 basis points to 20.2% as a percentage of home sales revenues. The 40 basis point increase in the home sales gross
profit percentage resulted from improvements of 30 basis points due to the average selling price of our homes closed
increasing by more than the average cost and 10 basis points due to a decrease in the amortization of capitalized interest
and property taxes as a percentage of home sales revenues.
We remain focused on managing the pricing, incentives and sales pace in each of our communities to optimize the
returns on our inventory investments and adjust to local market conditions. Our gross profit margins have remained
relatively stable in recent years and based on current market conditions, we expect continued stability; however, our
gross profit margins could fluctuate in future periods.
33
Land Sales and Other Revenues
Land sales and other revenues were $88.3 million, $78.7 million and $89.6 million in fiscal 2017, 2016 and 2015,
respectively. We continually evaluate our land and lot supply, and fluctuations in revenues and profitability from land
sales occur based on how we manage our inventory levels in various markets. We generally purchase land and lots with
the intent to build and sell homes on them. However, some of the land that we purchase includes commercially zoned
parcels that we may sell to commercial developers. We may also sell residential lots or land parcels to manage our supply
or for other strategic reasons. As of September 30, 2017, we had $10.4 million of land held for sale that we expect to sell
in the next twelve months.
Inventory and Land Option Charges
At the end of each quarter during fiscal 2017, we reviewed the performance and outlook for all of our communities
and land inventories for indicators of potential impairment and performed detailed impairment evaluations and analyses
when necessary. As of September 30, 2017, we performed detailed impairment evaluations of communities and land
inventories with a combined carrying value of $105.3 million and recorded impairment charges of $12.8 million during
the fourth quarter to reduce the carrying value of impaired communities and land to their estimated fair value. Total
impairment charges during fiscal 2017, 2016 and 2015 were $23.2 million, $20.3 million and $44.9 million, respectively.
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 weaken 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 2017, we wrote off $17.0 million of earnest money deposits and pre-acquisition costs related to land
option contracts that we have terminated or expect to terminate. Earnest money and pre-acquisition cost write-offs for
fiscal 2016 and 2015 were $11.1 million and $15.4 million, respectively.
Selling, General and Administrative (SG&A) Expense
SG&A expense related to homebuilding activities was $1.2 billion, $1.1 billion and $1.0 billion in fiscal 2017,
2016 and 2015, respectively, increasing 11% in 2017 and 10% in 2016 from the respective prior years. As a percentage
of homebuilding revenues, SG&A expense decreased 40 basis points to 8.9% in 2017 and decreased 20 basis points to
9.3% in 2016 from the respective prior years. This improvement in SG&A expense as a percentage of homebuilding
revenues was achieved primarily through leverage of our fixed overhead costs resulting from the increase in
homebuilding revenues.
Employee compensation and related costs were $860.2 million, $748.7 million and $679.4 million in fiscal 2017,
2016 and 2015, respectively. Compensation costs represented 70% of SG&A costs in fiscal 2017 and 68% of SG&A
costs in both fiscal 2016 and 2015. These costs increased 15% in 2017 and 10% in 2016 due to increases in the number
of employees and the amount of incentive compensation as compared to the respective prior years. Our homebuilding
operations employed 5,876, 5,366 and 4,888 employees at September 30, 2017, 2016 and 2015, 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.
34
Interest Incurred
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. Interest incurred
decreased 15% to $129.3 million in fiscal 2017 and decreased 10% to $152.3 million in fiscal 2016 compared to the
respective prior years. These decreases were due to decreases in our average debt of 12% and 9% in fiscal 2017 and
2016, respectively, and lower average interest rates on outstanding debt during the periods. Interest charged to cost of
sales was 1.4%, 1.8% and 1.9% of total cost of sales (excluding inventory and land option charges) in fiscal 2017, 2016
and 2015, respectively.
Other Income
Other income, net of other expenses, included in our homebuilding operations was $11.0 million, $12.7 million
and $7.8 million in fiscal 2017, 2016 and 2015, respectively. Other income in fiscal 2016 included a $4.5 million gain
from the sale of an investment in debt securities. Other income consists of interest income, rental income and various
other types of ancillary income, gains, expenses and losses not directly associated with sales of homes, land and lots. The
activities that result in this ancillary income or expense are not significant, either individually or in the aggregate.
Goodwill Impairment
We performed our annual goodwill impairment evaluation in the fourth quarters of fiscal 2017 and 2016. As a
result of the 2017 evaluation, no impairment charges were recorded. As a result of the 2016 evaluation, a $7.2 million
impairment charge was recorded to reduce the goodwill in the Huntsville operating segment in our Southeast reporting
region. This operating segment had experienced lower levels of profitability than anticipated primarily due to difficult
market conditions. See Note A.
Business Acquisitions
In September 2016, we acquired the homebuilding operations of Wilson Parker Homes for $91.9 million. Wilson
Parker Homes operated in Atlanta and Augusta, Georgia; Raleigh, North Carolina; Columbia, South Carolina and
Phoenix, Arizona. The assets acquired included approximately 380 homes in inventory, 490 lots and control of
approximately 1,850 additional lots through option contracts. We also acquired a sales order backlog of 308 homes
valued at $74.1 million.
Subsequent to September 30, 2017, we acquired 75% of the outstanding shares of Forestar for $558.3 million in
cash, pursuant to the terms of the June 2017 merger agreement. Forestar is and will continue to be a publicly-traded
residential and real estate development company listed on the New York Stock Exchange under the ticker symbol
“FOR,” with operations currently in 14 markets and 10 states, where it owns, directly or through joint ventures, interests
in 44 residential and mixed-use projects. Our alignment with Forestar advances our strategy of increasing our access to
high-quality optioned land and lot positions to enhance operational efficiency and returns. Both companies are
identifying land development opportunities to expand Forestar’s platform, and we plan to acquire a large portion of
Forestar’s finished lots in accordance with the master supply agreement between the two companies. As the controlling
shareholder of Forestar, we will have significant influence in guiding the strategic direction and driving the growth and
operational execution necessary to increase the future value potential of Forestar.
35
Homebuilding Results by Reporting Region
Fiscal Year Ended September 30,
Homebuilding Revenues
2016
2017
2015
Homebuilding Pre-tax Income (1)
2016
2017
2015
East..................
$ 1,640.1
$ 1,446.5
$ 1,333.6
$
153.9
$
138.7
$
Midwest...........
Southeast .........
South Central...
Southwest ........
736.5
4,087.6
3,383.1
597.5
651.7
3,463.5
2,995.1
388.1
666.1
2,890.6
2,725.2
336.1
West.................
3,296.7
2,916.9
2,607.4
49.1
450.3
439.1
39.6
357.3
44.3
388.4
374.8
7.3
310.9
94.2
49.8
278.7
296.6
13.1
Pre-tax Income as a
Percentage of
Homebuilding Revenues
2015
2016
2017
9.4%
6.7%
9.6%
6.8%
11.0% 11.2%
7.1%
7.5%
9.6%
13.0% 12.5% 10.9%
6.6%
1.9%
3.9%
285.9
10.8% 10.7% 11.0%
$ 13,741.5
$ 11,861.8
$ 10,559.0
$ 1,489.3
$ 1,264.4
$ 1,018.3
10.8% 10.7%
9.6%
_____________
(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 cost of sales, while expenses
associated with the corporate office are allocated to each segment based on the segment’s inventory balances.
2017 versus 2016
East Region — Homebuilding revenues increased 13% in fiscal 2017 compared to fiscal 2016, primarily due to an
increase in the number of homes closed in our North and South Carolina markets. The region generated pre-tax income
of $153.9 million in 2017, compared to $138.7 million in 2016. Pre-tax income was reduced by inventory impairment
charges of $10.5 million and $12.3 million in 2017 and 2016, respectively, primarily in our suburban Washington, D.C.
markets during 2017 and in our New Jersey market during 2016. Gross profit from home sales as a percentage of home
sales revenue (home sales gross profit percentage) decreased 30 basis points in 2017 compared to 2016. As a percentage
of homebuilding revenues, SG&A expenses increased by 20 basis points in 2017 compared to 2016.
Midwest Region — Homebuilding revenues increased 13% in fiscal 2017 compared to fiscal 2016, primarily due to
an increase in the number of homes closed in our Minneapolis and Denver markets. The region generated pre-tax income
of $49.1 million in 2017, compared to $44.3 million in 2016. Home sales gross profit percentage decreased 80 basis
points in 2017 compared to 2016, largely due to higher warranty and construction defect costs in our Denver market. As
a percentage of homebuilding revenues, SG&A expenses decreased by 70 basis points in 2017 compared to 2016.
Southeast Region — Homebuilding revenues increased 18% in fiscal 2017 compared to fiscal 2016, primarily due
to an increase in the number of homes closed in our Florida markets. The region generated pre-tax income of $450.3
million in 2017, compared to $388.4 million in 2016. Home sales gross profit percentage decreased 60 basis points in
2017 compared to 2016, due to the average cost of homes increasing by more than the average selling price. As a
percentage of homebuilding revenues, SG&A expenses decreased by 30 basis points in 2017 compared to 2016.
South Central Region — Homebuilding revenues increased 13% in fiscal 2017 compared to fiscal 2016, primarily
due to an increase in the number of homes closed in our Dallas market. The region generated pre-tax income of $439.1
million in 2017, compared to $374.8 million in 2016. Home sales gross profit percentage decreased 20 basis points in
2017 compared to 2016. As a percentage of homebuilding revenues, SG&A expenses decreased by 70 basis points in
2017 compared to 2016.
36
Southwest Region — Homebuilding revenues increased 54% in fiscal 2017 compared to fiscal 2016, primarily due
to an increase in the number of homes closed in our Phoenix market, as well as an increase in the average selling price of
those homes. The region generated pre-tax income of $39.6 million in 2017, compared to $7.3 million in 2016. Pre-tax
income in 2016 was reduced by inventory impairment charges of $6.0 million in our Phoenix market. Home sales gross
profit percentage increased 210 basis points in 2017 compared to 2016, primarily due to the average selling price
increasing while the average cost of homes decreased. The increase was also due to lower current year warranty and
construction defect costs in our Phoenix market. As a percentage of homebuilding revenues, SG&A expenses decreased
by 170 basis points in 2017 compared to 2016, primarily due to the significant increase in homebuilding revenues.
West Region — Homebuilding revenues increased 13% in fiscal 2017 compared to fiscal 2016, primarily due to an
increase in the number of homes closed in our Las Vegas and northern California markets, as well as increases in the
average selling price of homes closed in our Seattle, Portland and Sacramento markets. The region generated pre-tax
income of $357.3 million in 2017, compared to $310.9 million in 2016. Home sales gross profit percentage increased 20
basis points in 2017 compared to 2016. As a percentage of homebuilding revenues, SG&A expenses decreased by 20
basis points in 2017 compared to 2016.
2016 versus 2015
East Region — Homebuilding revenues increased 8% in fiscal 2016 compared to fiscal 2015, primarily due to an
increase in the number of homes closed in our Carolina markets, as well as an increase in the average selling price of
those homes. The region generated pre-tax income of $138.7 million in 2016, compared to $94.2 million in 2015. Pre-tax
income was reduced by inventory impairment charges of $12.3 million and $14.3 million in 2016 and 2015, respectively,
primarily in our New Jersey market. Home sales gross profit percentage increased 150 basis points in 2016 compared to
2015, largely due to the average selling price increasing by more than the average cost of homes. As a percentage of
homebuilding revenues, SG&A expenses decreased by 100 basis points in 2016 compared to 2015.
Midwest Region — Homebuilding revenues decreased 2% in fiscal 2016 compared to fiscal 2015, primarily due to
a decrease in the number of homes closed in our Chicago and Denver markets, partially offset by an increase in the
average selling price of those homes. The region generated pre-tax income of $44.3 million in 2016, compared to $49.8
million in 2015. Home sales gross profit percentage decreased 70 basis points in 2016 compared to 2015, largely due to
the average cost of homes increasing by more than the average selling price. As a percentage of homebuilding revenues,
SG&A expenses decreased by 10 basis points in 2016 compared to 2015.
Southeast Region — Homebuilding revenues increased 20% in fiscal 2016 compared to fiscal 2015, primarily due
to an increase in the number of homes closed in our Florida markets. The region generated pre-tax income of $388.4
million in 2016, compared to $278.7 million in 2015. Home sales gross profit percentage increased 50 basis points in
2016 compared to 2015. As a percentage of homebuilding revenues, SG&A expenses decreased by 50 basis points in
2016 compared to 2015.
South Central Region — Homebuilding revenues increased 10% in fiscal 2016 compared to fiscal 2015, primarily
due to an increase in the number and average selling price of homes closed in our Dallas and Fort Worth markets. The
region generated pre-tax income of $374.8 million in 2016, compared to $296.6 million in 2015. Home sales gross profit
percentage increased 140 basis points in 2016 compared to 2015, largely due to the average selling price increasing by
more than the average cost of homes. As a percentage of homebuilding revenues, SG&A expenses increased by 10 basis
points in 2016 compared to 2015.
37
Southwest Region — Homebuilding revenues increased 15% in fiscal 2016 compared to fiscal 2015, primarily due
to an increase in the number of homes closed in our Phoenix market. The region generated pre-tax income of $7.3
million in 2016, compared to $13.1 million in 2015. Pre-tax income in 2016 was reduced by inventory impairment
charges of $6.0 million in our Phoenix market. Home sales gross profit percentage decreased 80 basis points in 2016
compared to 2015, largely due to the average cost of homes increasing by more than the average selling price. As a
percentage of homebuilding revenues, SG&A expenses decreased by 20 basis points in 2016 compared to 2015.
West Region — Homebuilding revenues increased 12% in fiscal 2016 compared to fiscal 2015, due to an increase
in the number and average selling price of homes closed in our southern California, Portland and Las Vegas markets. The
region generated pre-tax income of $310.9 million in 2016, compared to $285.9 million in 2015. Pre-tax income was
reduced by inventory impairment charges of $0.3 million in 2016 and $20.4 million in 2015. The 2015 impairment
charges primarily related to strategic decisions to sell land. Home sales gross profit percentage decreased 110 basis
points in 2016 compared to 2015, largely due to the average cost of homes increasing by more than the average selling
price. As a percentage of homebuilding revenues, SG&A expenses increased by 10 basis points in 2016 compared to
2015.
38
Inventories, Land and Lot Position and Homes in Inventory
We routinely enter into land/lot option contracts to purchase land or developed residential 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 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 and actively controlling the number of unsold,
completed homes in inventory.
Our inventories at September 30, 2017 and 2016 are summarized as follows:
Construction
in Progress
and
Finished
Homes
Residential
Land/Lots
Developed
and Under
Development
September 30, 2017
Land Held
for
Development
(In millions)
Land Held
for Sale
Total
Inventory
East .................................................
$
569.3
$
478.1
$
21.0
$
Midwest ..........................................
Southeast ........................................
South Central ..................................
Southwest .......................................
West ................................................
Corporate and unallocated (1)......
335.8
1,265.6
1,050.8
203.9
1,070.0
110.6
155.0
1,085.0
1,132.6
299.5
1,257.3
112.2
1.8
35.9
14.1
2.7
23.2
2.3
$
0.5
—
5.8
1.9
—
2.0
0.2
$
4,606.0
$
4,519.7
$
101.0
$
10.4
$
1,068.9
492.6
2,392.3
2,199.4
506.1
2,352.5
225.3
9,237.1
Construction
in Progress
and
Finished
Homes
Residential
Land/Lots
Developed
and Under
Development
September 30, 2016
Land Held
for
Development
(In millions)
Land Held
for Sale
Total
Inventory
East .................................................
$
448.9
$
415.4
$
Midwest ..........................................
Southeast ........................................
South Central ..................................
Southwest .......................................
West ................................................
Corporate and unallocated (1)......
239.3
1,149.8
1,009.6
163.8
906.6
116.7
189.5
870.1
1,032.0
189.6
1,315.2
123.4
26.8
11.9
44.8
14.6
14.1
22.5
3.1
$
— $
0.5
5.6
19.4
3.6
3.3
0.8
$
4,034.7
$
4,135.2
$
137.8
$
33.2
$
891.1
441.2
2,070.3
2,075.6
371.1
2,247.6
244.0
8,340.9
_____________
(1) Corporate and unallocated inventory consists primarily of capitalized interest and property taxes.
39
Our land and lot position and homes in inventory at September 30, 2017 and 2016 are summarized as follows:
September 30, 2017
Lots Controlled
Under
Land and Lot
Option Purchase
Contracts (2)
Total
Land/Lots
Owned and
Controlled
Homes
in
Inventory (3)
17,800
4,400
47,500
38,700
2,400
13,200
124,000
50%
31,000
7,000
83,300
81,500
11,100
35,100
249,000
100%
3,500
1,500
8,500
7,300
1,700
3,700
26,200
September 30, 2016
Lots Controlled
Under
Land and Lot
Option Purchase
Contracts (2)
Total
Land/Lots
Owned and
Controlled
Homes
in
Inventory (3)
15,100
2,100
36,100
25,100
2,000
11,200
91,600
45%
28,500
5,300
66,700
62,800
9,500
31,700
204,500
100%
3,000
1,200
7,600
7,000
1,300
3,000
23,100
Land/Lots
Owned (1)
13,200
2,600
35,800
42,800
8,700
21,900
125,000
50%
Land/Lots
Owned (1)
13,400
3,200
30,600
37,700
7,500
20,500
112,900
55%
East .....................................................................
Midwest ..............................................................
Southeast .............................................................
South Central ......................................................
Southwest ............................................................
West ....................................................................
East .....................................................................
Midwest ..............................................................
Southeast .............................................................
South Central ......................................................
Southwest ............................................................
West ....................................................................
_____________
(1) Land/lots owned include approximately 33,200 and 30,400 owned lots that are fully developed and ready for home
construction at September 30, 2017 and 2016, respectively. Land/lots owned also include land held for development
representing 4,800 and 7,300 lots at September 30, 2017 and 2016, respectively.
(2) The total remaining purchase price of lots controlled through land and lot option purchase contracts at September 30,
2017 and 2016 was $4.6 billion and $3.6 billion, respectively, secured by earnest money deposits of $227.6 million and
$167.0 million, respectively. Our lots controlled under land and lot option purchase contracts exclude approximately 300
and 700 lots at September 30, 2017 and 2016, 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 1,600 model homes at both September 30, 2017 and 2016. Approximately
13,800 and 11,800 of our homes in inventory were unsold at September 30, 2017 and 2016, respectively. At
September 30, 2017, approximately 4,100 of our unsold homes were completed, of which approximately 500 homes had
been completed for more than six months. At September 30, 2016, approximately 3,500 of our unsold homes were
completed, of which approximately 500 homes had been completed for more than six months.
40
Results of Operations — Financial Services and Other
The following tables and related discussion set forth key operating and financial data for our financial services and
other operations, comprising DHI Mortgage, our subsidiary title companies and other businesses, for the fiscal years
ended September 30, 2017, 2016 and 2015.
Fiscal Year Ended September 30,
2016
2015
2017
2017 vs
2016
2016 vs
2015
Number of first-lien loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers.....................
Number of homes closed by D.R. Horton..............................
Percentage of D.R. Horton homes financed by
DHI Mortgage....................................................................
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....................................................................
25,488
45,751
21,970
40,309
18,821
36,648
56%
55%
51%
25,677
22,127
18,963
27,002
23,920
21,314
16%
14%
16%
13%
17%
10%
17%
12%
Captive business percentage ..................................................
95%
93%
89%
Loans sold by DHI Mortgage to third parties ........................
27,251
23,926
20,623
14%
16%
Fiscal Year Ended September 30,
2016
2015
2017
2017 vs
2016
2016 vs
2015
(In millions)
$
17.7
$
20.1
$
23.6
(12)%
(15)%
Loan origination fees .............................................................
Sale of servicing rights and gains from
sale of mortgage loans .......................................................
Recourse (expense) benefit ....................................................
Sale of servicing rights and gains from
sale of mortgage loans, net.............................................
Other revenues .......................................................................
Total mortgage operations revenues ......................................
Title policy premiums ............................................................
Total revenues ........................................................................
General and administrative expense ......................................
254.0
(2.9)
216.0
(8.5)
251.1
16.5
285.3
64.2
349.5
251.2
207.5
14.6
242.2
53.4
295.6
220.0
173.0
9.8
182.8
13.6
220.0
45.0
265.0
183.0
Interest and other (income) expense ......................................
(14.5)
(13.5)
(23.1)
Financial services and other pre-tax income..........................
$
112.8
$
89.1
$
105.1
Financial Services and Other Operating Margin Analysis
18 %
25 %
(66)%
(187)%
21 %
13 %
18 %
20 %
18 %
14 %
7 %
27 %
14 %
7 %
10 %
19 %
12 %
20 %
(42)%
(15)%
Percentages of
Financial Services Revenues (1)
Fiscal Year Ended September 30,
2016
2015
2017
Recourse expense (benefit).......................................................................
General and administrative expense .........................................................
Interest and other (income) expense .........................................................
Financial services and other pre-tax income ............................................
0.8 %
71.3 %
(4.1)%
32.0 %
2.8 %
72.3 %
(4.4)%
29.3 %
(3.8)%
71.7 %
(9.1)%
41.2 %
_____________
(1) Excludes the effects of recourse expense or benefit on financial services revenues.
41
Mortgage Loan Activity
The volume of loans originated by our mortgage operations is directly related to the number of homes closed by
our homebuilding operations. In fiscal 2017 and 2016, the volume of first-lien loans originated or brokered by DHI
Mortgage for our homebuyers increased 16% and 17% from the respective prior years, primarily as a result of increases
in the number of homes closed by our homebuilding operations of 14% and 10%, respectively. The percentages of total
home closings by our homebuilding operations for which DHI Mortgage handled the homebuyers’ financing were 56%,
55% and 51% in fiscal 2017, 2016 and 2015, respectively. These increases also contributed to our higher loan volumes.
Home closings from our homebuilding operations constituted 95%, 93% and 89% of DHI Mortgage loan
originations in fiscal 2017, 2016 and 2015, respectively. These rates reflect DHI Mortgage’s consistent focus on the
captive business provided by our homebuilding operations.
The number of loans sold increased 14% in fiscal 2017 and 16% in fiscal 2016 compared to the respective prior
years. Virtually all of the mortgage loans held for sale on September 30, 2017 were eligible for sale to Fannie Mae,
Freddie Mac or Ginnie Mae. Approximately 84% of the mortgage loans sold by DHI Mortgage during fiscal 2017 were
sold to three major financial entities, one of which purchased 45% of the total loans sold.
Financial Services and Other Revenues and Expenses
Revenues from our financial services and other operations increased 18% to $349.5 million in fiscal 2017 from
$295.6 million in fiscal 2016, while the number of loan originations increased 13% over that same period. Revenues
from our financial services and other operations increased 12% to $295.6 million in fiscal 2016 from $265.0 million in
fiscal 2015, and the number of loan originations also increased 12%. In fiscal 2017, revenues increased at a higher rate
than origination volume primarily due to improved loan sale execution in the secondary market and increased revenue
from title operations.
Our mortgage operations revenues were reduced by $2.9 million and $8.5 million in fiscal 2017 and 2016,
respectively, to increase our loss reserves for estimated future recourse obligations and other mortgage loans, and to
adjust certain mortgage loans held for sale to fair value. Our mortgage operations revenues were increased by $9.8
million in fiscal 2015 due to reductions in our loss reserves. Our loss reserves for loan recourse obligations are estimated
based upon analysis of the volume of mortgages originated, loan repurchase requests received, actual repurchases and
losses through the disposition of such loans or requests and discussions with our mortgage purchasers. Actual losses on
mortgage loans may differ from our estimates, which may result in future changes to our loss reserves.
General and administrative (G&A) expense related to financial services and other operations was $251.2 million,
$220.0 million and $183.0 million in fiscal 2017, 2016 and 2015, respectively, increasing 14% in 2017 and 20% in 2016
from the respective prior years. These increases were primarily due to increases in employee related costs due to both
increased volume and the cost of compliance with mortgage industry regulations. Our financial services and other
operations employed 1,859, 1,610 and 1,342 employees at September 30, 2017, 2016 and 2015, respectively.
As a percentage of financial services and other revenues (excluding the effects of recourse expense or benefit),
G&A expense was 71.3%, 72.3% and 71.7% in fiscal 2017, 2016 and 2015, respectively. 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.
Interest and other income, net of other expense, included in our financial services and other operations consists
primarily of the interest income of our mortgage subsidiary.
42
Results of Operations — Consolidated
Income before Income Taxes
Pre-tax income was $1.6 billion, $1.4 billion and $1.1 billion in fiscal 2017, 2016 and 2015, respectively. The
increase in our operating income over the three-year period is primarily due to higher revenues from increased home
closings.
Income Taxes
Our income tax expense was $563.7 million, $467.2 million and $372.7 million in fiscal 2017, 2016 and 2015,
respectively, and our effective tax rate was 35.2%, 34.5% and 33.2%, respectively, in those years. The effective tax rate
for all years includes an expense for state income taxes, reduced by tax benefits for the domestic production activities
deduction and federal energy tax credits. The effective tax rate for fiscal 2015 also includes a tax benefit for a reduction
in the valuation allowance on deferred tax assets.
We previously filed three requests for advance consent for a change in tax accounting method with the Internal
Revenue Service (IRS) relating to changes in the timing of income and expense recognition for tax purposes. We agreed
to and signed consent agreements for two of the three requests during the quarter ended June 30, 2017. The impact of the
approved tax accounting method changes was reflected in our consolidated financial statements as of June 30, 2017 as a
reduction in income taxes payable of $58.2 million, a reduction in the deferred tax asset related to inventory costs of
$50.1 million, an increase in the deferred tax liability related to the deferral of profit on home sales of $13.4 million and
income tax expense of $5.3 million. The third request for advance consent for a change in tax accounting method will be
recognized in the period in which a consent agreement is issued by the IRS and agreed to and signed by us.
At September 30, 2017 and 2016, we had deferred tax assets, net of deferred tax liabilities, of $376.2 million and
$486.6 million, respectively, partially offset by valuation allowances of $11.2 million and $10.3 million, respectively. We
had tax benefits of $26.2 million that exist for state net operating loss (NOL) carryforwards that will expire at various
times depending on the tax jurisdiction. Of the total amount, $3.8 million of the tax benefits will expire from fiscal years
2018 to 2022, $2.7 million will expire from fiscal years 2023 to 2027 and $19.7 million will expire from fiscal years
2028 to 2036. We also had tax benefits for state tax credit carryforwards of $1.4 million that will expire from fiscal years
2018 to 2019 and $1.1 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 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 and liabilities.
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 valuation allowance for both years relates
to our state deferred tax assets for NOL carryforwards. As of September 30, 2017, 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. We will continue to evaluate both the positive and negative evidence in
determining the need for a valuation allowance with respect to our remaining state NOL carryforwards.
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 and no accrued interest or
penalties related to unrecognized tax benefits at September 30, 2017 and 2016.
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 2014 through 2017. We are currently being audited by
various states; however, to date, we are not aware of any significant findings identified by the taxing authorities.
43
Capital Resources and Liquidity
We have historically funded our homebuilding and financial services and other 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 changes in
homebuilding market conditions and allow us to increase our investments in homes, finished lots, land and land
development to expand our operations and grow our profitability.
At September 30, 2017, our ratio of homebuilding debt to total capital (homebuilding notes payable divided by
total equity plus homebuilding notes payable) was 24.0% compared to 29.2% at September 30, 2016. Over the long term,
we intend to maintain our ratio of homebuilding debt to total capital below 35%, and we expect it to remain significantly
lower than 35% throughout fiscal 2018. We believe that the ratio of homebuilding debt to total capital is useful in
understanding the leverage employed in our homebuilding operations and comparing our capital structure with other
homebuilders. We exclude the debt of our financial services business because it is separately capitalized, and its
obligation under its repurchase facility is substantially collateralized and not guaranteed by our parent company or any of
our homebuilding entities.
We regularly assess our projected capital requirements to fund growth in our business, repay debt obligations, and
support 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 August 2015,
registering debt and equity securities that 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. In October 2017, we used cash
on hand to purchase 75% of the outstanding shares of Forestar for $558.3 million. We believe that our existing cash
resources, our revolving credit facility, our mortgage repurchase facility and our ability to access the capital markets will
provide sufficient liquidity to fund our working capital needs and debt obligations, including the maturity of $400
million principal amount of senior notes in fiscal 2018.
Capital Resources - Homebuilding
Cash and Cash Equivalents — At September 30, 2017, cash and cash equivalents of our homebuilding segment
totaled $973.0 million.
Bank Credit Facility — We have a senior unsecured revolving credit facility which was amended in September
2017 to increase its capacity from $975 million to $1.275 billion and to extend its maturity date to September 25, 2022.
The uncommitted accordion feature was also amended to permit an increase in the size of the facility to $1.9 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, 2017, there were no borrowings
outstanding and $94.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity
of approximately $1.2 billion.
Our revolving credit facility imposes restrictions on our operations and activities, including requiring the
maintenance of 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. The credit agreement governing the facility also imposes
restrictions on the creation of secured debt and liens. At September 30, 2017, we were in compliance with all of the
covenants, limitations and restrictions of our revolving credit facility.
44
Secured Letter of Credit Agreement — We have a secured letter of credit agreement which requires us to deposit
cash, in an amount approximating the balance of letters of credit outstanding, as collateral with the issuing bank. The
amount of cash restricted for letters of credit issued under this agreement totaled $2.5 million and $2.9 million at
September 30, 2017 and 2016, respectively, and is included in homebuilding restricted cash in our consolidated balance
sheets.
Public Unsecured Debt — On May 15, 2017, we repaid $350 million principal amount of our 4.75% senior notes,
which were due on that date. We have $400 million principal amount of senior notes maturing in February 2018 which
we currently expect to refinance. The indenture governing our senior notes imposes restrictions on the creation of
secured debt and liens. At September 30, 2017, we were in compliance with all of the limitations and restrictions
associated with our public debt obligations.
Repurchases of Common Stock — During fiscal 2017, we repurchased 1,850,000 shares of our common stock for
$60.6 million.
Debt and Equity Repurchase Authorizations — Effective August 1, 2017, our Board of Directors authorized the
repurchase of up to $500 million of debt securities and $200 million of our common stock effective through July 31,
2018. The full amount of each of these authorizations was remaining at September 30, 2017.
Capital Resources - Financial Services and Other
Cash and Cash Equivalents — At September 30, 2017, cash and cash equivalents of our financial services and
other operations totaled $34.8 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 60 days in accordance with the terms of the mortgage repurchase facility. In
February 2017, the mortgage repurchase facility was amended to increase its capacity to $600 million and extend its
maturity date to February 23, 2018. The capacity of the facility increases, without requiring additional commitments, to
$725 million for approximately 30 days at each quarter end and to $800 million for approximately 45 days at fiscal year
end. The capacity can also be increased to $1.0 billion subject to the availability of additional commitments.
As of September 30, 2017, $540.1 million of mortgage loans held for sale with a collateral value of $520.0 million
were pledged under the mortgage repurchase facility. As a result of advance paydowns totaling $100.0 million, DHI
Mortgage had an obligation of $420.0 million outstanding under the mortgage repurchase facility at September 30, 2017
at a 3.3% 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 to the lenders monthly. At September 30, 2017, 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 at a sufficient
capacity and on satisfactory terms prior to its maturity, and obtain temporary additional commitments through
amendments to the credit facility 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.
45
Operating Cash Flow Activities
In fiscal 2017, net cash provided by operating activities was $435.1 million compared to $618.0 million in fiscal
2016. We used $584.4 million of cash to increase our construction in progress and finished home inventory compared to
$496.2 million in fiscal 2016. In both years, the expenditures were made to support the current year increase in sales and
closing volumes, as well as the expected increase in the subsequent year. Cash used to increase residential land and lots
inventory to fund future growth was $362.3 million in fiscal 2017 compared to $10.3 million in fiscal 2016. The most
significant source of cash provided by operating activities in both years was net income.
Investing Cash Flow Activities
In fiscal 2017, net cash used in investing activities was $171.0 million compared to $112.6 million in fiscal 2016.
We used $157.3 million and $86.1 million in fiscal 2017 and 2016, respectively, to purchase and construct property and
equipment, including office buildings, rental properties, model home furniture and office and technology equipment to
support our operations. Of the cash used for property and equipment in fiscal 2017, $54.6 million relates to our recent
efforts to begin developing and constructing multi-family rental properties on land parcels we already owned, and we
currently have four such projects under active construction. During fiscal 2017, we purchased $8.8 million of debt
securities which were secured by residential real estate, and in fiscal 2016, we sold a previous investment in debt
securities for proceeds of $35.8 million. Additionally, we paid $4.1 million during fiscal 2017 to complete our purchase
of the homebuilding operations of Wilson Parker Homes, acquired in September 2016.
Financing Cash Flow Activities
We expect the short-term financing needs of our operations will be funded with existing cash, cash generated from
operations and borrowings 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 2017, net cash used in financing activities was $559.5 million, consisting primarily of note repayments,
payments of cash dividends and repurchases of common stock, partially offset by note proceeds. Note repayments of
$1.2 billion included the repayment of $350 million principal amount of our 4.75% senior notes at maturity and
repayments of amounts drawn on the revolving credit facility and the mortgage repurchase facility of $835.0 million and
$53.0 million, respectively. Proceeds from notes payable included draws of $835.0 million on the revolving credit
facility. During fiscal 2017, we also used cash to repurchase 1,850,000 shares of our common stock for $60.6 million.
During fiscal 2016, net cash used in financing activities was $586.0 million, consisting primarily of note repayments and
payments of cash dividends. Note repayments of $549.7 million included the repayment of $170.2 million principal
amount of our 5.625% senior notes and $372.7 million principal amount of our 6.5% senior notes at maturity.
Our Board of Directors approved and paid quarterly cash dividends of $0.10 per common share and $0.08 per
common share in fiscal 2017 and 2016, respectively. In November 2017, our Board of Directors approved a cash
dividend of $0.125 per common share, payable on December 15, 2017, to stockholders of record on December 1, 2017.
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.
46
Contractual Cash Obligations, Commercial Commitments and Off-Balance Sheet Arrangements
Our primary contractual cash obligations 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, 2017 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) .......................... $
2,461.1
$
409.6
$
1,001.5
$
350.0
$
Notes Payable — Interest (1) ............................
Operating Leases ...............................................
Purchase Obligations (2) ...................................
367.8
36.2
29.7
97.3
14.7
27.4
140.5
14.2
2.3
104.5
6.2
—
700.0
25.5
1.1
—
$
2,894.8
$
549.0
$
1,158.5
$
460.7
$
726.6
Financial Services and Other:
Notes Payable — Principal (3) .......................... $
420.0
$
420.0
$
— $
— $
Notes Payable — Interest (3) ............................
Operating Leases ...............................................
13.9
2.6
13.9
0.8
$
436.5
$
434.7
$
—
1.3
1.3
$
—
0.5
0.5
$
—
—
—
—
_____________
(1) Homebuilding notes payable represent principal and interest payments due on our senior notes and our secured notes.
Because the balance of our revolving credit facility was zero at September 30, 2017, we did not assume any principal or
interest payments related to this facility in future periods.
(2) Purchase obligations relate to our land and lot option purchase contracts which enable us to control significant lot positions
with limited capital investment. Among our land and lot option purchase contracts at September 30, 2017, there were a
limited number of contracts, representing $29.7 million of remaining purchase price, subject to specific performance
provisions 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.
(3) 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 3.3% and
principal balance outstanding at September 30, 2017.
At September 30, 2017, our homebuilding operations had outstanding letters of credit of $96.8 million and surety
bonds of $1.2 billion, issued by third parties to secure performance under various contracts. We expect that our
performance obligations secured by these letters of credit and bonds will generally be completed in the ordinary course
of business and in accordance with the applicable contractual terms. When we complete our performance obligations, the
related letters of credit and bonds are generally released shortly thereafter, leaving us with no continuing obligations. We
have no material third-party guarantees.
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.
47
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 close more homes and generate greater revenues and operating income in the third and
fourth quarters of our fiscal year. The seasonal nature of our business can also cause significant variations in our working
capital requirements in both our homebuilding and financial services operations. 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 financing, land, labor
and material construction costs. We attempt to pass cost increases through to our customers through increased sales
prices. However, during periods when housing market conditions are challenging, we may not be able to offset cost
increases with higher selling prices. In addition, higher mortgage interest rates reduce the affordability of our homes to
prospective homebuyers.
48
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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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 provided by government agencies, changes in government
financing 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;
our ability to effect our growth strategies, acquisitions or investments successfully;
home warranty and construction defect claims;
the effects of a health and safety incident;
the effects of negative publicity;
supply shortages and other risks of acquiring land, building materials and skilled labor;
the impact of an inflationary, deflationary or higher interest rate environment;
reductions in the availability of performance bonds;
increases in the costs of owning a home;
the effects of governmental regulations and environmental matters on our homebuilding operations;
the effects of governmental regulations on our financial services operations;
our significant debt and our ability to comply with related debt covenants, restrictions and limitations;
competitive conditions within the homebuilding and financial services industries;
the effects of the loss of key personnel; 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.
49
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, 2017 and 2016, and for
the years ended September 30, 2017, 2016 and 2015. 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 cancelled. We either retain or refund to the homebuyer deposits on cancelled 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 within 30 days of origination.
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.
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.
50
Land and development costs are typically allocated to individual residential lots on a pro-rata basis, and the costs
of residential lots are transferred to construction in progress when home construction begins. Home construction costs
are specifically identified and recorded to individual homes. 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 a
liability and a charge to cost of sales for the amount estimated to 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, we review our communities and land inventories 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 or future plans. 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:
•
•
•
•
•
•
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. 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:
•
•
•
•
•
•
•
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.
51
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 performed during fiscal 2017, 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 two 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 we determine that we will sell the asset, the project is accounted for as
land held for sale if certain criteria are met. We record land held for sale at the lesser of its carrying value or fair value
less estimated costs to sell. In performing the impairment evaluation for land held for sale, we consider several factors
including, but not limited to, 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 and economic conditions, 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, information obtained from the management of the acquired companies and our
estimates of significant assumptions that a market participant would use when determining fair value. 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 at least an annual basis by comparing the carrying value of each of our operating
segments with goodwill to their estimated fair values. The estimated fair value is determined by discounting the future
cash flows of the operating segment to their present value. If the carrying value of the operating segment exceeds its fair
value, we determine if an impairment exists based on the implied fair value of the operating segment’s goodwill. As a
result of the goodwill evaluation performed in fiscal 2017, no impairment charges were recorded. As a result of the
goodwill evaluation performed in fiscal 2016, an impairment charge of $7.2 million was recorded to write off the
remaining goodwill associated with the Huntsville operating segment in the Southeast reporting region. This operating
segment experienced lower levels of profitability than anticipated primarily due to difficult market conditions. Our total
goodwill balance was $80.0 million at both September 30, 2017 and 2016.
52
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 us with an indemnity and a certificate of insurance prior to
receiving payments for their work, claims relating to workmanship and materials are generally the primary responsibility
of the subcontractors. Warranty liabilities have been established by charging cost of sales for each home delivered. The
amounts charged are based on management’s estimate of expected warranty-related costs under all unexpired warranty
obligation periods. Our warranty liability is based upon historical warranty cost experience in each market in which we
operate, and is adjusted 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, contract disputes and
other matters. 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. Approximately 98% and 95% of
these reserves related to construction defect matters at September 30, 2017 and 2016, respectively.
Our reserves for construction defect claims include the estimated costs of both known claims and anticipated future
claims. At both September 30, 2017 and 2016, we had reserves for approximately 140 pending construction defect
claims, and no individual existing claim was material to our financial statements. During fiscal 2017, we established
reserves for approximately 75 new construction defect claims and resolved 75 construction defect claims for a total cost
of $52.6 million. 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. 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 over the past ten years. If the ultimate resolution of construction defect claims resulting from our home
closings in prior 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 the 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.
53
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 $71.4 million in our reserves and a $36.1 million increase in our receivable,
resulting in additional expense of $35.3 million. A 10% decrease in the claim frequency and the average cost per claim
would result in a decrease of approximately $63.9 million in our reserves and a $28.6 million decrease in our receivable,
resulting in a reduction in expense of $35.3 million.
Income Taxes — We calculate our income tax expense (benefit) using the asset and liability method, under which
deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary
differences between the financial statement amounts of assets and liabilities and their respective tax bases and
attributable to net operating losses and tax credit carryforwards. When 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 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. 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.
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 increases
or decreases in our income tax expense in the period in which we make the change.
Stock-based Compensation — Our stockholders formally authorize shares of our common stock to be available for
future grants of stock-based compensation awards. 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, 2017, 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, 2017 have a
remaining vesting period of 1 to 5 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, 2017 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 our stock price
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 stock options requires judgment in developing assumptions and
involves a number of estimates. These estimates 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 stock options 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.
54
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. 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.
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, certain 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 May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which is a
comprehensive new revenue recognition model that will replace most existing revenue recognition guidance. The core
principle of this guidance is that an entity should recognize revenue for the transfer of goods or services equal to the
amount that it expects to be entitled to receive for those goods or services. The guidance is effective for us beginning
October 1, 2018 and allows for full retrospective or modified retrospective methods of adoption. We currently plan to
adopt this standard using the modified retrospective method and are continuing to evaluate its effect.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which simplifies the
subsequent measurement of inventory, excluding inventory measured using the last-in, first-out or retail inventory
methods. The guidance specifies that inventory currently measured at the lower of cost or market, where market could be
determined with different methods, should now be measured at the lower of cost or net realizable value. The guidance is
effective for us beginning October 1, 2017 and is not expected to have a material impact on our consolidated financial
position, results of operations or cash flows.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Recognition and Measurement of
Financial Assets and Financial Liabilities,” which addresses certain aspects of recognition, measurement, presentation
and disclosure of financial instruments. The guidance is effective for us beginning October 1, 2018 and is not expected to
have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires that lease assets and liabilities be
recognized on the balance sheet, and that key information about leasing arrangements be disclosed. The guidance is
effective for us beginning October 1, 2019, although early adoption is permitted. We are currently evaluating the impact
of this guidance on our consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation,” which simplifies several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of
awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for us
beginning October 1, 2017 and is not expected to have a material impact on our consolidated financial position, results of
operations or cash flows.
55
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” which replaces the current
incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration
of a broader range of reasonable and supportable information in determining credit loss estimates. The guidance is
effective for us beginning October 1, 2020 and is not expected to have a material impact on our consolidated financial
position, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash
Receipts and Cash Payments,” which amends and clarifies the current guidance to reduce diversity in practice of the
classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for us
beginning October 1, 2018 and is not expected to have a material impact on our consolidated statements of cash flows.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows - Restricted Cash,” which requires
amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents
when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The
guidance is effective for us beginning October 1, 2018 and is not expected to have a material impact on our consolidated
financial position or cash flows.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations - Clarifying the Definition of a
Business,” which clarifies the definition of a business for determining whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. The guidance is effective for us beginning October 1, 2018 and is not
expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other.” The guidance simplifies the
measurement of goodwill impairment by removing the second step of the goodwill impairment test, which requires the
determination of the fair value of individual assets and liabilities of a reporting unit. Under the new guidance, goodwill
impairment is measured as the amount by which a reporting unit’s carrying amount exceeds its fair value with the loss
recognized limited to the total amount of goodwill allocated to the reporting unit. The guidance is effective for us
beginning October 1, 2020 and is not expected to have a material impact on our consolidated financial position, results of
operations or cash flows.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation: Scope of Modification
Accounting,” which clarifies which changes to the terms or conditions of a share-based payment award require an entity
to apply modification accounting. Under the new guidance, modification accounting is required if the fair value, vesting
conditions or classification (equity or liability) of the new award are different from the original award immediately
before the original award is modified. The guidance is effective for us beginning October 1, 2018 and is not expected to
have a material impact on our consolidated financial position, results of operations or cash flows.
56
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 fair 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, 2017 and 2016 was not significant, is recognized in current
earnings. At September 30, 2017, hedging instruments used to mitigate interest rate risk related to uncommitted
mortgage loans held for sale and uncommitted IRLCs totaled a notional amount of $720.0 million. Uncommitted IRLCs
totaled a notional amount of approximately $419.3 million and uncommitted mortgage loans held for sale totaled a
notional amount of approximately $330.7 million at September 30, 2017.
The following table sets forth principal cash flows by scheduled maturity, effective weighted average interest rates
and estimated fair value of our debt obligations as of September 30, 2017. Because the mortgage repurchase facility is
effectively secured by certain mortgage loans held for sale which are typically sold within 60 days, its outstanding
balance is included in the most current period presented. The interest rate for our variable rate debt represents the
weighted average interest rate in effect at September 30, 2017.
2018
Debt:
Fiscal Year Ending September 30,
2020
2019
2021
2022
Thereafter
Total
Fair Value at
September 30,
2017
($ in millions)
Fixed rate .....................
$ 409.6
$ 500.8
$ 500.7
$ — $ 350.0
$ 700.0
$2,461.1
$
2,595.2
Average interest rate.....
3.8%
3.9%
4.2%
—%
4.5%
5.5%
4.5%
Variable rate .................
$ 420.0
$ — $ — $ — $ — $
— $ 420.0
$
420.0
Average interest rate.....
3.3%
—%
—%
—%
—%
—%
3.3%
57
REPORTRR OF INDEPENDENT
F
REGISTERED PUBLIC ACCOUNTING FIRM
To TT the Board of Directors and Stockholders of D.R. Horton, Inc.
ff
ff
TT
internal control over financial reporting and for its assessment of the effectiveness
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations
and comprehensive income, total equity, yy and cash flows present fairly,yy in all material respects, the financial position
of D.R. Horton, Inc. and its subsidiaries as of September 30, 2017 and 2016, and the results of their operations and
their cash flows for each of the three years in the period ended September 30, 2017 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all
internal control over financial reporting as of September 30, 2017, based on criteria
material respects, effective
established in Internal Control rr
- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
Commission (COSO). The Company’s management is responsible for these financial statements, for
of the Treadway
maintaining effective
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 WW 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
of internal control based
material weakness exists, and testing and evaluating the design and operating effectiveness
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We WW believe that our audits provide a reasonable basis for our opinions.
ff
ff
ff
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.
ff
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.
ff
Fort Worth, WW
November 15, 2017
TT
Texas
58
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 $11.2 million
and $10.3 million at September 30, 2017 and 2016, respectively ...........................................
Property and equipment, net .........................................................................................................
Other assets ...................................................................................................................................
Goodwill........................................................................................................................................
Financial Services and Other:
Cash and cash equivalents.............................................................................................................
Mortgage loans held for sale .........................................................................................................
Property and equipment, net .........................................................................................................
Other assets ...................................................................................................................................
Total assets........................................................................................................................... $
LIABILITIES
Homebuilding:
Accounts payable .......................................................................................................................... $
Accrued expenses and other liabilities..........................................................................................
Notes payable ................................................................................................................................
Financial Services and Other:
Accounts payable and other liabilities ..........................................................................................
Mortgage repurchase facility ........................................................................................................
Total liabilities .....................................................................................................................
Commitments and contingencies (Note K)
September 30,
2017
2016
(In millions)
$
973.0
9.3
1,271.8
9.5
4,606.0
4,519.7
101.0
10.4
9,237.1
365.0
194.4
518.7
80.0
11,377.5
34.8
587.3
130.6
54.4
807.1
12,184.6
575.6
933.1
2,451.6
3,960.3
56.7
420.0
476.7
4,437.0
$
$
4,034.7
4,135.2
137.8
33.2
8,340.9
476.3
139.5
456.2
80.0
10,774.2
31.4
654.0
55.9
43.4
784.7
11,558.9
537.0
917.1
2,798.3
4,252.4
40.5
473.0
513.5
4,765.9
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,
384,036,150 shares issued and 374,986,079 shares outstanding at September 30, 2017
and 380,123,258 shares issued and 372,923,187 shares outstanding at September 30, 2016 ......
Additional paid-in capital..............................................................................................................
Retained earnings ..........................................................................................................................
Treasury stock, 9,050,071 shares and 7,200,071 shares at September 30, 2017 and 2016,
respectively, at cost .......................................................................................................................
Stockholders’ equity.................................................................................................................
Noncontrolling interests ................................................................................................................
Total equity...............................................................................................................................
Total liabilities and equity................................................................................................. $
—
—
3.8
2,992.2
4,946.0
(194.9)
7,747.1
0.5
7,747.6
12,184.6
$
3.8
2,865.8
4,057.2
(134.3)
6,792.5
0.5
6,793.0
11,558.9
See accompanying notes to consolidated financial statements.
59
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
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...............................................
Goodwill impairment..................................................................................
Other (income) expense..............................................................................
Homebuilding pre-tax income ...............................................................
Financial Services and Other:
Revenues.....................................................................................................
General and administrative expense ...........................................................
Interest and other (income) expense ...........................................................
Financial services and other pre-tax income..........................................
Income before income taxes .......................................................................
Income tax expense.....................................................................................
Net income.................................................................................................. $
Other comprehensive income (loss), net of income tax:
2017
Year Ended September 30,
2016
(In millions, except per share data)
2015
13,653.2
$
11,783.1
$
10,469.4
88.3
78.7
89.6
13,741.5
11,861.8
10,559.0
10,927.8
9,403.0
8,393.6
74.8
40.2
68.2
31.4
81.8
60.3
11,042.8
9,502.6
8,535.7
2,725.4
13.5
(40.2)
2,698.7
1,220.4
—
(11.0)
1,489.3
349.5
251.2
(14.5)
112.8
1,602.1
563.7
2,380.1
10.5
(31.4)
2,359.2
1,100.3
7.2
(12.7)
1,264.4
295.6
220.0
(13.5)
89.1
1,353.5
467.2
1,038.4
$
886.3
$
2,075.8
7.8
(60.3)
2,023.3
1,003.0
9.8
(7.8)
1,018.3
265.0
183.0
(23.1)
105.1
1,123.4
372.7
750.7
(0.8)
—
749.9
2.05
2.03
0.25
Debt securities collateralized by residential real estate: ........................
Net change in unrealized gain (loss)...............................................
Reclassification adjustment for net gain realized in net income ....
—
—
Comprehensive income .............................................................................. $
1,038.4
Basic net income per common share .......................................................... $
Net income per common share assuming dilution...................................... $
Cash dividends declared per common share............................................... $
2.77
2.74
0.40
1.2
(2.6)
884.9
2.39
2.36
0.32
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
60
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, 2014
(364,586,694 shares) ................................. $
Net income ...............................................
Issuances under employee benefit plans
(82,446 shares) .....................................
Exercise of stock options
(3,636,655 shares) ................................
Tax benefit from employee stock awards.
Stock issued under employee incentive
plans, net of shares withheld for
employee taxes (341,576 shares) .........
Stock-based compensation expense .........
Cash dividends declared...........................
Other comprehensive income, net of tax..
Noncontrolling interests ...........................
Balances at September 30, 2015
(368,647,371 shares) ................................. $
Net income ...............................................
Issuances under employee benefit plans
(89,652 shares) .....................................
Exercise of stock options
(3,504,989 shares) ................................
Tax benefit from employee stock awards.
Stock issued under employee incentive
plans, net of shares withheld for
employee taxes (681,175 shares) .........
Stock-based compensation expense .........
Cash dividends declared...........................
Other comprehensive income, net of tax..
Noncontrolling interests ...........................
Balances at September 30, 2016
(372,923,187 shares) ................................. $
Net income ...............................................
Issuances under employee benefit plans
(111,527 shares)....................................
Exercise of stock options
(2,770,569 shares) ................................
Tax benefit from employee stock awards.
Stock issued under employee incentive
plans, net of shares withheld for
employee taxes (1,030,796 shares) ......
Stock-based compensation expense .........
Cash dividends declared...........................
Repurchases of common stock
(1,850,000 shares) ................................
Balances at September 30, 2017
(374,986,079 shares) ................................. $
3.7
—
—
0.1
—
—
—
—
—
—
3.8
—
—
—
—
—
—
—
—
—
3.8
—
—
—
—
—
—
—
—
$ 2,613.7
$ 2,630.5
—
1.7
60.0
7.9
8.3
42.2
—
—
—
750.7
—
—
—
—
—
(91.6)
—
—
$ 2,733.8
$ 3,289.6
—
2.2
70.1
2.7
8.0
49.0
—
—
—
886.3
—
—
—
—
—
(118.7)
—
—
—
—
—
—
—
—
—
—
$ 2,865.8
$ 4,057.2
— 1,038.4
$ (134.3) $
—
2.8
43.8
13.7
6.9
59.2
—
—
—
—
—
—
—
(149.6)
—
—
—
—
—
—
—
(60.6)
$ (134.3) $
—
—
—
—
—
—
—
—
—
2.2
—
—
—
—
—
—
—
(0.8)
—
$
3.9
—
$ 5,119.7
750.7
—
—
—
—
—
—
—
(2.8)
1.7
60.1
7.9
8.3
42.2
(91.6)
(0.8)
(2.8)
$ (134.3) $
—
$
1.4
—
1.1
—
$ 5,895.4
886.3
—
—
—
—
—
—
(1.4)
—
—
—
—
—
—
—
—
(0.6)
2.2
70.1
2.7
8.0
49.0
(118.7)
(1.4)
(0.6)
— $
0.5
$ 6,793.0
—
—
—
—
—
—
—
—
— 1,038.4
—
—
—
—
—
—
—
2.8
43.8
13.7
6.9
59.2
(149.6)
(60.6)
3.8
$ 2,992.2
$ 4,946.0
$ (194.9) $
— $
0.5
$ 7,747.6
See accompanying notes to consolidated financial statements.
61
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2017
Year Ended September 30,
2016
(In millions)
2015
1,038.4
$
886.3
$
750.7
OPERATING ACTIVITIES
Net income.............................................................................................................. $
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...........................................................................
Amortization of discounts and fees....................................................................
Stock-based compensation expense...................................................................
Excess income tax benefit from employee stock awards...................................
Deferred income taxes .......................................................................................
Inventory and land option charges.....................................................................
Gain on sale of debt securities collateralized by residential real estate.............
Goodwill impairment .........................................................................................
Changes in operating assets and liabilities:
(Increase) decrease in construction in progress and finished homes .................
Increase in residential land and lots —
developed, under development, held for development and held for sale.......
Increase in other assets.......................................................................................
Decrease (increase) in mortgage loans held for sale..........................................
Increase in accounts payable, accrued expenses and other liabilities................
Net cash provided by operating activities...............................................................
INVESTING ACTIVITIES
Expenditures for property and equipment..........................................................
Proceeds from the sale of property and equipment to a related party................
(Increase) decrease in restricted cash.................................................................
Net principal decrease (increase) of other mortgage loans and
real estate owned ............................................................................................
(Purchases of) proceeds from debt securities collateralized by
residential real estate......................................................................................
Payments related to acquisition of a business....................................................
Net cash used in investing activities.......................................................................
FINANCING ACTIVITIES
54.7
5.0
59.2
(14.3)
110.8
40.2
—
—
(584.4)
(362.3)
(63.7)
67.6
83.9
435.1
(157.3)
—
(7.0)
6.2
(8.8)
(4.1)
(171.0)
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 ...........................................................................................
Repurchases of common stock ..........................................................................
Net cash (used in) 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:
835.0
(1,245.3)
46.7
14.3
(149.6)
(60.6)
(559.5)
(295.4)
1,303.2
1,007.8
Income taxes paid, net................................................................................... $
446.4
$
$
Supplemental disclosures of non-cash activities:
Notes payable issued for inventory ............................................................... $
Stock issued under employee incentive plans............................................... $
Accrued expenditures for property and equipment....................................... $
Accrual for holdback payment related to acquisition ................................... $
4.5
31.9
16.3
$
$
$
— $
See accompanying notes to consolidated financial statements.
62
61.0
5.4
49.0
(10.0)
75.3
31.4
(4.5)
7.2
54.1
5.6
42.2
(12.3)
3.1
60.3
—
9.8
(496.2)
63.1
(10.3)
(16.3)
(12.4)
52.1
618.0
(86.1)
—
0.2
19.7
35.8
(82.2)
(112.6)
—
(549.7)
72.4
10.0
(118.7)
—
(586.0)
(80.6)
1,383.8
1,303.2
389.9
4.2
20.1
4.3
9.7
$
$
$
$
$
$
(152.6)
(29.8)
(154.1)
60.3
700.4
(56.1)
56.0
(0.7)
(8.9)
(14.8)
(70.9)
(95.4)
1,590.7
(1,456.2)
61.8
12.3
(91.6)
—
117.0
722.0
661.8
1,383.8
334.0
9.7
8.3
—
—
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying 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. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from those estimates.
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 both September 30, 2017 and 2016, the deferred profit on these home sales was $3.6 million. 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 within 30 days of origination. Interest income is earned from the date a mortgage loan is originated until
the loan is sold.
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 and cash equivalents in the consolidated balance sheets.
Cash balances of the Company’s captive insurance subsidiary, which are expected to be used to fund the
subsidiary’s operations and pay future anticipated legal claims, were $36.7 million and $40.5 million at September 30,
2017 and 2016, respectively, and are included in homebuilding cash and cash equivalents in the consolidated balance
sheets.
63
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 issued under the Company’s secured letter of credit agreement 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. Home construction costs
are specifically identified and recorded to individual homes. 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 corresponding charge to cost of sales are recorded for the amount estimated to ultimately be paid related to
completed homes that have been closed. 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 the Company determines that it will sell the
asset, the project is accounted for as land held for sale if certain criteria are met. The Company records land held for sale
at the lesser of its carrying value or fair value less estimated costs to sell.
Each quarter, the Company reviews its communities and land inventories 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. 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 inventory 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.
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
periods in which the Company’s active inventory is lower than its debt level, a portion of the interest incurred is reflected
as interest expense in the period incurred. During fiscal 2017 and 2016, the Company’s active inventory exceeded its
debt level, and all interest incurred was capitalized to inventory. See Note E.
64
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 inventory and land option charges when
the Company believes it is probable that it will not acquire the property under option and will not be able to recover these
costs through other means. See Notes C and K.
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, 2017 and
2016 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 losses related to the Company’s variable interest entities is limited to the amounts
of the Company’s related option deposits. At September 30, 2017 and 2016, the option deposits related to these contracts
totaled $222.9 million and $149.5 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 30
years.
The Company’s property and equipment balances and the related accumulated depreciation at September 30, 2017
and 2016 were as follows:
September 30,
2017
2016
(In millions)
Buildings and improvements (1) .......................................................................................... $
Multi-family rental properties under construction (2)..........................................................
Model home furniture...........................................................................................................
Office furniture and equipment ............................................................................................
Land......................................................................................................................................
Total property and equipment ......................................................................................
Accumulated depreciation....................................................................................................
Property and equipment, net ........................................................................................ $
219.0
59.2
120.4
99.7
52.9
551.2
(226.2)
325.0
$
$
158.4
8.3
101.0
85.4
37.8
390.9
(195.5)
195.4
_____________
(1) The current year balance includes $15.3 million related to the Company’s multi-family rental properties at September 30,
2017.
(2) The prior year balance of $8.3 million, previously included in buildings and improvements, has been reclassified to conform
to the current year presentation.
Depreciation expense was $49.4 million, $50.8 million and $50.3 million in fiscal 2017, 2016 and 2015,
respectively.
65
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, information obtained from the management of the acquired companies and the Company’s
estimates of significant assumptions that a market participant would use when determining fair value. 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 September 2016, the Company acquired the homebuilding operations of Wilson Parker Homes for $91.9 million.
Wilson Parker Homes operated in Atlanta and Augusta, Georgia; Raleigh, North Carolina; Columbia, South Carolina and
Phoenix, Arizona. The assets acquired included approximately 380 homes in inventory, 490 lots and control of
approximately 1,850 additional lots through option contracts. The Company also acquired a sales order backlog of 308
homes. No goodwill was recorded as a result of this acquisition. All of the assets acquired in this transaction were
recorded at their estimated fair values by the Company. The acquisition was not material to the Company’s results of
operations or its financial condition.
In October 2017, the Company acquired 75% of the outstanding shares of Forestar Group Inc. (Forestar) for $558.3
million in cash, pursuant to the terms of the June 2017 merger agreement. Forestar is and will continue to be a publicly-
traded residential and real estate development company listed on the New York Stock Exchange under the ticker symbol
“FOR.” See Note P.
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 at least an annual basis by comparing the carrying value of each of the operating
segments with goodwill to their estimated fair values. The estimated fair value is determined by discounting the future
cash flows of the operating segment to their present value. If the carrying value of the operating segment exceeds its fair
value, the Company determines if an impairment exists based on the implied fair value of the operating segment’s
goodwill. As a result of the goodwill evaluation performed in fiscal 2017, no impairment charges were recorded. As a
result of the goodwill evaluation performed in fiscal 2016, an impairment charge of $7.2 million was recorded to write
off the remaining goodwill in the Huntsville operating segment in the Southeast reporting region. This operating segment
experienced lower levels of profitability than anticipated primarily due to difficult market conditions. The Company’s
goodwill balances by reporting segment were as follows:
East ....................................................................................................................................... $
Midwest................................................................................................................................
Southeast ..............................................................................................................................
South Central........................................................................................................................
Southwest .............................................................................................................................
West ......................................................................................................................................
September 30,
2017
2016
(In millions)
21.8
$
—
40.1
15.9
—
2.2
Total goodwill.................................................................................................................. $
80.0
$
21.8
—
40.1
15.9
—
2.2
80.0
66
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 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 legal claims related to construction defect matters, personal
injury claims, employment matters, land development issues, contract disputes and other matters. 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 its applicable
insurance policies for these legal claims 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. See Note K.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was approximately $45.4 million, $41.2
million and $42.4 million in fiscal 2017, 2016 and 2015, respectively.
Income Taxes
The Company’s income tax expense is calculated using the asset and liability method, under which deferred tax
assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between
the financial statement amounts of assets and liabilities and their respective tax bases and attributable to net operating
losses and tax credit carryforwards. When assessing the realizability of deferred tax assets, management 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 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. 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 and liabilities.
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.
67
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 stockholders formally authorize shares of its common stock to be available for future grants of
stock-based compensation awards. 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, 2017, 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, 2017 have a
remaining vesting period of 1 to 5 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, 2017 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 Company’s
stock price 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 stock options requires judgment in developing assumptions
and involves a number of estimates. These estimates 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 stock options 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.
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 and are used for inventories, certain 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 May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which is a
comprehensive new revenue recognition model that will replace most existing revenue recognition guidance. The core
principle of this guidance is that an entity should recognize revenue for the transfer of goods or services equal to the
amount that it expects to be entitled to receive for those goods or services. The guidance is effective for the Company
beginning October 1, 2018 and allows for full retrospective or modified retrospective methods of adoption. The
Company currently plans to adopt this standard using the modified retrospective method and is continuing to evaluate its
effect.
68
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which simplifies the
subsequent measurement of inventory, excluding inventory measured using the last-in, first-out or retail inventory
methods. The guidance specifies that inventory currently measured at the lower of cost or market, where market could be
determined with different methods, should now be measured at the lower of cost or net realizable value. The guidance is
effective for the Company beginning October 1, 2017 and is not expected to have a material impact on its consolidated
financial position, results of operations or cash flows.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Recognition and Measurement of
Financial Assets and Financial Liabilities,” which addresses certain aspects of recognition, measurement, presentation
and disclosure of financial instruments. The guidance is effective for the Company beginning October 1, 2018 and is not
expected to have a material impact on its consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires that lease assets and liabilities be
recognized on the balance sheet, and that key information about leasing arrangements be disclosed. The guidance is
effective for the Company beginning October 1, 2019, although early adoption is permitted. The Company is currently
evaluating the impact of this guidance on its consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation,” which simplifies several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of
awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for the
Company beginning October 1, 2017 and is not expected to have a material impact on its consolidated financial position,
results of operations or cash flows.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” which replaces the current
incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration
of a broader range of reasonable and supportable information in determining credit loss estimates. The guidance is
effective for the Company beginning October 1, 2020 and is not expected to have a material impact on its consolidated
financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash
Receipts and Cash Payments,” which amends and clarifies the current guidance to reduce diversity in practice of the
classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for the
Company beginning October 1, 2018 and is not expected to have a material impact on its consolidated statements of cash
flows.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows - Restricted Cash,” which requires
amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents
when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The
guidance is effective for the Company beginning October 1, 2018 and is not expected to have a material impact on its
consolidated financial position or cash flows.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations - Clarifying the Definition of a
Business,” which clarifies the definition of a business for determining whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. The guidance is effective for the Company beginning October 1, 2018
and is not expected to have a material impact on its consolidated financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other.” The guidance simplifies the
measurement of goodwill impairment by removing the second step of the goodwill impairment test, which requires the
determination of the fair value of individual assets and liabilities of a reporting unit. Under the new guidance, goodwill
impairment is measured as the amount by which a reporting unit’s carrying amount exceeds its fair value with the loss
recognized limited to the total amount of goodwill allocated to the reporting unit. The guidance is effective for the
Company beginning October 1, 2020 and is not expected to have a material impact on its consolidated financial position,
results of operations or cash flows.
69
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation: Scope of Modification
Accounting,” which clarifies which changes to the terms or conditions of a share-based payment award require an entity
to apply modification accounting. Under the new guidance, modification accounting is required if the fair value, vesting
conditions or classification (equity or liability) of the new award are different from the original award immediately
before the original award is modified. The guidance is effective for the Company beginning October 1, 2018 and is not
expected to have a material impact on its consolidated financial position, results of operations or cash flows.
NOTE B – SEGMENT INFORMATION
The Company’s operating segments are its 41 homebuilding divisions, its financial services operations and its
other business activities. The homebuilding operating segments are aggregated into six reporting segments and the
financial services 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 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 2017, 2016 and
2015. The Company’s homebuilding segments are primarily engaged in the acquisition and development of land and the
construction and sale of residential homes in 26 states and 79 markets across 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 to homebuyers in
many of the Company’s homebuilding markets. The segment generates the substantial majority of its revenues from
originating and selling mortgages and collecting fees for title insurance agency and closing services. The Company sells
substantially all of the mortgages it originates and the related servicing rights to third-party purchasers.
In addition to its core homebuilding and financial services operations, the Company has subsidiaries that engage in
other business activities. These subsidiaries conduct insurance-related operations, construct and own income-producing
rental properties, own non-residential real estate including ranch land and improvements and own and operate oil and gas
related assets. The operating results of these subsidiaries are immaterial for separate reporting and therefore are grouped
together and presented as other. One of these subsidiaries, DHI Communities, recently began developing and
constructing multi-family rental properties on land parcels the Company already owned and currently has four projects
under active construction. Costs incurred by DHI Communities totaled $93.7 million at September 30, 2017 and are
included in property and equipment in the Financial Services and Other section of the consolidated balance sheet. The
combined assets of all of the Company’s subsidiaries engaged in other business activities totaled $143.3 million and
$54.9 million at September 30, 2017 and 2016, respectively, and the combined pre-tax loss of these subsidiaries was
$11.7 million, $9.0 million and $0 in fiscal 2017, 2016 and 2015, respectively.
70
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:
Year Ended September 30,
2016
2015
2017
(In millions)
Revenues
Homebuilding revenues:
East......................................................................................................... $
Midwest..................................................................................................
Southeast ................................................................................................
South Central .........................................................................................
Southwest...............................................................................................
West........................................................................................................
Homebuilding revenues ..............................................................................
Financial services revenues ........................................................................
Total revenues............................................................................................. $
1,640.1
736.5
4,087.6
3,383.1
597.5
3,296.7
13,741.5
349.5
14,091.0
Inventory Impairments
East......................................................................................................... $
Midwest..................................................................................................
Southeast ................................................................................................
South Central .........................................................................................
Southwest...............................................................................................
West........................................................................................................
Total inventory impairments....................................................................... $
Income Before Income Taxes (1) (2)
Homebuilding pre-tax income:
East......................................................................................................... $
Midwest..................................................................................................
Southeast ................................................................................................
South Central .........................................................................................
Southwest...............................................................................................
West........................................................................................................
Homebuilding pre-tax income ....................................................................
Financial services pre-tax income ..............................................................
Homebuilding and financial services pre-tax income ................................
Other pre-tax loss...................................................................................
Income before income taxes ....................................................................... $
_____________
10.5
1.0
2.4
1.6
1.4
6.3
23.2
153.9
49.1
450.3
439.1
39.6
357.3
1,489.3
124.5
1,613.8
(11.7)
1,602.1
$
$
$
$
$
$
1,446.5
651.7
3,463.5
2,995.1
388.1
2,916.9
11,861.8
295.6
12,157.4
12.3
—
0.7
1.0
6.0
0.3
20.3
138.7
44.3
388.4
374.8
7.3
310.9
1,264.4
98.1
1,362.5
(9.0)
1,353.5
$
$
$
$
$
$
1,333.6
666.1
2,890.6
2,725.2
336.1
2,607.4
10,559.0
265.0
10,824.0
14.3
—
8.8
1.4
—
20.4
44.9
94.2
49.8
278.7
296.6
13.1
285.9
1,018.3
105.1
1,123.4
—
1,123.4
(1) Expenses maintained at the corporate level consist primarily of interest and property taxes, which are capitalized
and amortized to cost of sales or expensed directly, and the expenses related to operating the Company’s
corporate office. The amortization of capitalized interest and property taxes is allocated to each segment based on
the segment’s cost of sales, while expenses associated with the corporate office are allocated to each segment
based on the segment’s inventory balances.
(2) The operating results of certain subsidiaries that are immaterial for separate reporting are grouped together and
presented as other.
71
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
September 30,
2017
2016
(In millions)
Homebuilding Inventories (1):
East .................................................................................................................................. $
Midwest ...........................................................................................................................
Southeast..........................................................................................................................
South Central ...................................................................................................................
Southwest ........................................................................................................................
West .................................................................................................................................
Corporate and unallocated (2) .........................................................................................
Total homebuilding inventories............................................................................................ $
1,068.9
$
492.6
2,392.3
2,199.4
506.1
2,352.5
225.3
891.1
441.2
2,070.3
2,075.6
371.1
2,247.6
244.0
9,237.1
$
8,340.9
___________
(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
At the end of each quarter during fiscal 2017, the Company reviewed the performance and outlook for all of its
communities and land inventories for indicators of potential impairment and performed detailed impairment evaluations
and analyses when necessary. As of September 30, 2017, the Company performed detailed impairment evaluations of
communities and land inventories with a combined carrying value of $105.3 million and recorded impairment charges of
$12.8 million during the fourth quarter to reduce the carrying value of impaired communities and land to their estimated
fair value. Total impairment charges during fiscal 2017, 2016 and 2015 were $23.2 million, $20.3 million and $44.9
million, respectively.
During fiscal 2017, the Company wrote off $17.0 million of earnest money deposits and pre-acquisition costs
related to land option contracts that the Company has terminated or expects to terminate. Earnest money and pre-
acquisition cost write-offs for fiscal 2016 and 2015 were $11.1 million and $15.4 million, respectively.
72
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 debt issuance costs, consist of the following:
September 30,
2017
2016
(In millions)
Homebuilding:
Unsecured:
Revolving credit facility, maturing 2022............................................................ $
— $
4.75% senior notes due 2017 ..............................................................................
3.625% senior notes due 2018 ............................................................................
3.75% senior notes due 2019 ..............................................................................
4.0% senior notes due 2020 ................................................................................
4.375% senior notes due 2022 ............................................................................
4.75% senior notes due 2023 ..............................................................................
5.75% senior notes due 2023 ..............................................................................
Other secured notes .................................................................................................
—
399.7
498.8
497.9
348.1
298.4
397.6
11.1
—
349.5
398.9
498.0
497.1
347.7
298.2
397.3
11.6
$
2,451.6
$
2,798.3
Financial Services:
Mortgage repurchase facility, maturing 2018.......................................................... $
420.0
$
473.0
Debt issuance costs that were deducted from the carrying amounts of the senior notes totaled $9.5 million and
$13.3 million at September 30, 2017 and 2016, respectively. These costs are capitalized into inventory as they are
amortized.
As of September 30, 2017, maturities of consolidated notes payable, assuming the mortgage repurchase facility is
not extended or renewed, are $829.6 million in fiscal 2018, $500.8 million in fiscal 2019, $500.7 million in fiscal 2020,
none in fiscal 2021, $350.0 million in fiscal 2022 and $700.0 million thereafter.
Homebuilding:
The Company has a senior unsecured revolving credit facility which was amended in September 2017 to increase
its capacity from $975 million to $1.275 billion and to extend its maturity date to September 25, 2022. The uncommitted
accordion feature was also amended to permit an increase in the size of the facility to $1.9 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. Borrowings and repayments under the facility were $835 million during
fiscal 2017. At September 30, 2017, there were no borrowings outstanding and $94.3 million of letters of credit issued
under the revolving credit facility.
73
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company’s revolving credit facility imposes restrictions on its operations and activities, including requiring
the maintenance of 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. The credit agreement governing the facility
and the indenture governing the senior notes also impose restrictions on the creation of secured debt and liens. At
September 30, 2017, 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 August 2015, registering debt and equity securities that the Company may issue from
time to time in amounts to be determined.
On May 15, 2017, the Company repaid $350 million principal amount of its 4.75% senior notes, which were due
on that date.
The key terms of the Company’s senior notes outstanding as of September 30, 2017 are summarized below.
Notes Payable
3.625% senior notes ............
3.75% senior notes ..............
4.0% senior notes ................
4.375% senior notes ............
4.75% senior notes ..............
5.75% senior notes ..............
_____________
Principal
Amount
(In millions)
$400.0
$500.0
$500.0
$350.0
$300.0
$400.0
Date Issued
Date Due
Redeemable
Prior to
Maturity (1)
Effective
Interest Rate (2)
February 2013
February 15, 2018
February 2014
March 1, 2019
February 2015
February 15, 2020
September 2012
September 15, 2022
February 2013
February 15, 2023
August 2013
August 15, 2023
Yes
Yes
Yes
Yes
Yes
Yes
3.8%
3.9%
4.2%
4.5%
4.9%
5.9%
(1) 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 and unpaid interest.
(2) 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 debt issuance costs.
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 entities that hold approximately 92% of the Company’s assets. Upon the occurrence of both a change of
control of the Company and a ratings downgrade event, as defined in the indenture governing its senior notes, 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.
74
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Effective August 1, 2017, the Board of Directors authorized the repurchase of up to $500 million of the Company’s
debt securities effective through July 31, 2018. All of the $500 million authorization was remaining at September 30,
2017.
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 60 days in accordance with the terms of the mortgage repurchase facility. In February 2017, the mortgage
repurchase facility was amended to increase its capacity to $600 million and extend its maturity date to February 23,
2018. The capacity of the facility increases, without requiring additional commitments, to $725 million for
approximately 30 days at each quarter end and to $800 million for approximately 45 days at fiscal year end. The capacity
can also be increased to $1.0 billion subject to the availability of additional commitments.
As of September 30, 2017, $540.1 million of mortgage loans held for sale with a collateral value of $520.0 million
were pledged under the mortgage repurchase facility. As a result of advance paydowns totaling $100.0 million, DHI
Mortgage had an obligation of $420.0 million outstanding under the mortgage repurchase facility at September 30, 2017
at a 3.3% 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 to the lenders monthly. At September 30, 2017, DHI Mortgage was
in compliance with all of the conditions and covenants of the mortgage repurchase facility.
In the past, DHI Mortgage has been able to renew or extend its mortgage credit facility at a sufficient capacity and
on satisfactory terms prior to its maturity and obtain temporary additional commitments through amendments to the
credit facility during periods of higher than normal volumes of mortgages held for sale. The liquidity of the Company’s
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.
NOTE E – CAPITALIZED INTEREST
The following table summarizes the Company’s interest costs incurred, capitalized and expensed during the years
ended September 30, 2017, 2016 and 2015.
2017
Year Ended September 30,
2016
(In millions)
2015
Capitalized interest, beginning of year ....................................................... $
191.2
$
208.0
$
Interest incurred (1) ....................................................................................
Interest charged to cost of sales ..................................................................
129.3
(152.6)
152.3
(169.1)
Capitalized interest, end of year ................................................................. $
167.9
$
191.2
$
198.5
169.2
(159.7)
208.0
_____________
(1) Interest incurred includes interest on the Company's mortgage repurchase facility of $8.5 million, $8.4 million and
$7.4 million in fiscal 2017, 2016 and 2015, respectively.
75
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, 2017, mortgage loans held for sale had an aggregate carrying value of $587.3 million and an
aggregate outstanding principal balance of $570.8 million. At September 30, 2016, mortgage loans held for sale had an
aggregate carrying value of $654.0 million and an aggregate outstanding principal balance of $631.8 million. During the
years ended September 30, 2017, 2016 and 2015, mortgage loans originated totaled $6.8 billion, $5.9 billion and $5.1
billion, respectively, and mortgage loans sold totaled $6.8 billion, $5.9 billion and $5.0 billion, respectively. The
Company had gains on sales of loans and servicing rights of $251.1 million, $207.5 million and $182.8 million during
the years ended September 30, 2017, 2016 and 2015, respectively. Net gains on sales of loans and servicing rights are
included in financial services revenues in the consolidated statements of operations. Approximately 84% of the mortgage
loans sold by DHI Mortgage during fiscal 2017 were sold to three major financial entities, one of which purchased 45%
of the total loans sold.
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, 2017, 2016 and 2015 was not significant, is recognized in financial services revenues in the consolidated
statements of operations. At September 30, 2017 and 2016, the Company’s mortgage loans held for sale that were not
committed to third-party purchasers totaled $330.7 million and $284.5 million, respectively, and the notional amounts of
the hedging instruments related to those loans totaled $330.7 million and $284.5 million, respectively.
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. These representations and warranties primarily 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. The majority of other mortgage loans consists
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, 2017 and 2016, 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,
2017
2016
(In millions)
8.3
—
8.3
$
$
15.6
0.8
16.4
76
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 analysis of the
volume of mortgages originated, loan repurchase requests received, actual repurchases and losses through the disposition
of such loans or requests and discussions with mortgage purchasers. The reserve balances at September 30, 2017 and
2016 were as follows:
Loss reserves related to:
Other mortgage loans ...................................................................................................... $
Real estate owned ............................................................................................................
Loan repurchase and settlement obligations - known and expected ...............................
$
September 30,
2017
2016
(In millions)
1.0
—
7.7
8.7
$
$
1.8
0.1
6.8
8.7
Other mortgage loans and real estate owned net of the related loss reserves are included in other assets, while loan
repurchase obligations are included in accounts payable and other liabilities, both of which are in the Financial Services
and Other section of the Company’s 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, 2017 and 2016, the notional
amount of IRLCs, which are accounted for as derivative instruments recorded at fair value, totaled $446.2 million and
$467.6 million, respectively.
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. At September 30, 2017 and 2016, the notional amount of best-efforts whole loan delivery commitments
totaled $26.9 million and $37.2 million, respectively, and the notional amount of hedging instruments related to IRLCs
not yet committed to purchasers totaled $389.3 million and $385.5 million, respectively.
77
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE G – INCOME TAXES
Income Tax Expense
The components of the Company’s income tax expense are as follows:
Current tax expense:
Federal.............................................................................................. $
State..................................................................................................
Deferred tax expense (benefit):
Federal..............................................................................................
State..................................................................................................
Total income tax expense...................................................................... $
2017
Year Ended September 30,
2016
(In millions)
2015
425.6
27.3
452.9
87.9
22.9
110.8
563.7
$
$
376.0
15.9
391.9
47.6
27.7
75.3
467.2
$
$
356.4
13.2
369.6
(3.1)
6.2
3.1
372.7
The Company’s effective tax rate was 35.2%, 34.5% and 33.2% in fiscal 2017, 2016 and 2015, respectively. The
effective tax rate for all years includes an expense for state income taxes, reduced by tax benefits for the domestic
production activities deduction and federal energy tax credits. The effective tax rate for fiscal 2015 also includes a tax
benefit for a reduction in the valuation allowance on deferred tax assets.
The Company previously filed three requests for advance consent for a change in tax accounting method with the
Internal Revenue Service (IRS) relating to changes in the timing of income and expense recognition for tax purposes.
The Company agreed to and signed consent agreements for two of the three requests during the quarter ended June 30,
2017. The impact of the approved tax accounting method changes was reflected in the consolidated financial statements
as of June 30, 2017 as a reduction in income taxes payable of $58.2 million, a reduction in the deferred tax asset related
to inventory costs of $50.1 million, an increase in the deferred tax liability related to the deferral of profit on home sales
of $13.4 million and income tax expense of $5.3 million. The third request for advance consent for a change in tax
accounting method will be recognized in the period in which a consent agreement is issued by the IRS and agreed to and
signed by the Company.
Reconciliation of Expected Income Tax Expense
Differences between income tax expense 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........................................
Valuation allowance.........................................................................
Tax credits........................................................................................
Other ................................................................................................
Total income tax expense...................................................................... $
78
2017
Year Ended September 30,
2016
(In millions)
2015
560.7
$
473.7
$
393.2
42.3
(39.8)
0.8
(3.5)
3.2
563.7
$
38.6
(36.3)
0.2
(15.9)
6.9
467.2
$
37.0
(35.7)
(21.0)
(2.2)
1.4
372.7
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......................................................................................
Deferred income ..........................................................................................................
Other ............................................................................................................................
Total deferred tax assets ...................................................................................................
Valuation allowance .........................................................................................................
Total deferred tax assets, net of valuation allowance.......................................................
Deferred tax liabilities:
Deferral of profit on home sales..................................................................................
Other ............................................................................................................................
Total deferred tax liabilities.............................................................................................. $
Deferred income taxes, net............................................................................................... $
September 30,
2017
2016
(In millions)
42.6
83.9
163.7
26.2
2.5
92.6
1.7
13.9
427.1
(11.2)
415.9
41.6
9.3
50.9
365.0
$
$
$
87.6
128.3
138.8
40.1
2.9
82.2
2.2
11.1
493.2
(10.3)
482.9
—
6.6
6.6
476.3
Tax benefits of $26.2 million exist for state net operating loss (NOL) carryforwards that will expire at various times
depending on the tax jurisdiction. Of the total amount, $3.8 million of the tax benefits will expire from fiscal years 2018
to 2022, $2.7 million will expire from fiscal years 2023 to 2027 and $19.7 million will expire from fiscal years 2028 to
2037. Tax benefits for state tax credit carryforwards of $1.4 million will expire from fiscal years 2018 to 2019 and $1.1
million of tax benefits for state tax credit carryforwards 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. The valuation allowance
for both years relates to the Company’s state deferred tax assets for NOL carryforwards. As of September 30, 2017, 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 will continue
to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to its
remaining state NOL carryforwards.
79
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. The Company had no unrecognized tax benefits and no accrued
interest or penalties related to unrecognized tax benefits at September 30, 2017, 2016 and 2015. The Company classifies
interest expense and penalties on income taxes as income tax expense.
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 2014 through 2017. The Company
is currently being audited by various states; however, to date, management is not aware of any significant findings
identified by the taxing authorities.
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. Stock options to purchase 7.3 million shares of common stock were excluded from the computation
of diluted earnings per share for fiscal 2015 because their effect would have been antidilutive.
2017
Year Ended September 30,
2016
(In millions)
2015
Numerator:
Net income........................................................................................... $
1,038.4
$
886.3
$
750.7
Denominator:
Denominator for basic earnings per share —
weighted average common shares ...................................................
Effect of dilutive securities:
374.3
371.0
366.3
Employee stock awards....................................................................
4.6
4.1
3.5
Denominator for diluted earnings per share —
adjusted weighted average common shares.....................................
378.9
375.1
369.8
Basic net income per common share .......................................................... $
Net income per common share assuming dilution...................................... $
2.77
2.74
$
$
2.39
2.36
$
$
2.05
2.03
80
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE I – STOCKHOLDERS’ EQUITY
The Company has an automatically effective universal shelf registration statement, filed with the SEC in August
2015, registering debt and equity securities that it may issue from time to time in amounts to be determined. At
September 30, 2017, the Company had 384,036,150 shares of common stock issued and 374,986,079 shares outstanding.
No shares of preferred stock were issued or outstanding.
During fiscal 2017, the Company repurchased 1,850,000 shares of its common stock for $60.6 million. Effective
August 1, 2017, the Board of Directors authorized the repurchase of up to $200 million of the Company’s common stock
effective through July 31, 2018, which replaced the previous authorization. All of the $200 million authorization was
remaining at September 30, 2017, and no common stock has been repurchased subsequent to September 30, 2017.
The Board of Directors approved and paid quarterly cash dividends of $0.10 per common share and $0.08 per
common share in fiscal 2017 and 2016, respectively. In November 2017, the Board of Directors approved a cash
dividend of $0.125 per common share, payable on December 15, 2017, to stockholders of record on December 1, 2017.
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 $16.0 million, $13.3
million and $10.8 million of expense for matching contributions in fiscal 2017, 2016 and 2015, 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 $31.6 million and $28.3 million at September 30, 2017 and 2016, respectively. The Company recorded
$4.9 million, $4.6 million and $4.4 million of expense for this plan in fiscal 2017, 2016 and 2015, 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 $58.2 million and $46.7 million at
September 30, 2017 and 2016, respectively. The Company records as expense the amount that the employee
contributions would have earned had the funds been invested in the designated investments. Related to this plan, the
Company recorded expense of $6.3 million and $4.0 million in fiscal 2017 and 2016, respectively, and a reduction in
expense of $1.7 million in fiscal 2015.
81
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 111,527 shares for $2.8 million in fiscal 2017,
89,652 shares for $2.2 million in fiscal 2016 and 82,446 shares for $1.7 million in fiscal 2015. At September 30, 2017,
the Company had 3.2 million shares of common stock reserved for issuance pursuant to the Employee Stock Purchase
Plan.
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 2017, 2016 and 2015,
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 $16.8
million, $14.2 million and $11.8 million in fiscal 2017, 2016 and 2015, respectively.
Stock-Based Compensation
The Company’s Stock Incentive Plan provides for the granting of stock options and restricted stock units to
executive officers, other key employees and non-management directors. Restricted stock unit awards may be based on
performance (performance-based) or on service over a requisite time period (time-based).
At September 30, 2017, the Company had 31.8 million shares of common stock reserved for issuance and 19.0
million shares available for future grants under the Stock Incentive Plan. The discussion that follows provides further
information regarding stock-based compensation granted during fiscal 2017, 2016 and 2015.
Stock Options
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, 2017 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 Company did not grant stock options during fiscal 2017, 2016 or 2015, however the following table provides
additional information related to stock option activity during those years.
2017
Year Ended September 30,
2016
2015
Weighted
Average
Exercise
Price
Stock
Options
Weighted
Average
Exercise
Price
Stock
Options
Weighted
Average
Exercise
Price
Stock
Options
Outstanding at beginning of year ......
11,395,917
$
16.69
15,337,656
$
17.50
19,478,811
$
17.37
Exercised ...........................................
(2,770,569)
Cancelled or expired .........................
(194,000)
Outstanding at end of year ................
8,431,348
Exercisable at end of year .................
5,772,214
$
$
(3,504,989)
(436,750)
11,395,917
6,645,967
$
$
20.02
18.45
16.69
14.99
(3,636,655)
(504,500)
15,337,656
6,859,889
$
$
16.49
19.89
17.50
16.51
15.83
18.83
16.92
16.01
82
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The aggregate intrinsic value of options exercised during fiscal 2017, 2016 and 2015 was $49.5 million, $39.2
million and $44.6 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, 2017 was $194.0 million and
$138.0 million, respectively. Exercise prices for options outstanding at September 30, 2017 ranged from $9.03 to $23.86.
The weighted average remaining contractual lives of options outstanding and exercisable at September 30, 2017 were 4.0
and 3.9 years, respectively.
For fiscal 2017, 2016 and 2015, compensation expense related to stock options was $15.1 million, $20.5 million
and $28.9 million, respectively. At September 30, 2017, there was $9.0 million of unrecognized compensation expense
related to unvested stock option awards. This expense is expected to be recognized over a weighted average period of 1.3
years.
Performance-Based Restricted Stock Unit (RSU) Equity Awards
During fiscal 2017, 2016 and 2015, performance-based RSU equity awards that vest at the end of three-year
performance periods were granted to the Company’s Chairman, its Chief Executive Officer and its Chief Operating
Officer. The number of units that ultimately vest depends on the Company’s relative position as compared to its peers 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
performance-based RSUs have no dividend or voting rights during the performance period. Each of these performance-
based RSUs represents the contingent right to receive one share of the Company’s common stock if the vesting
conditions are satisfied. 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 grant date fair value of the award.
The following table provides additional information related to the performance-based RSUs outstanding at
September 30, 2017.
Grant Date
Vesting Date
Target Number
of Performance
Units
Grant Date
Fair Value
per Unit
Compensation Expense
Year Ended September 30,
2016
2017
2015
November 2014
September 2017
November 2015
September 2018
November 2016
September 2019
290,000
330,000
330,000
$
23.62
$
30.81
29.20
$
3.8
6.8
5.1
$
15.7
$
4.1
4.0
—
8.1
$
$
3.4
—
—
3.4
(In millions)
In November 2017, the Compensation Committee approved the payout of the performance-based RSUs that vested
in September 2017 in the form of 471,250 shares of common stock to satisfy the awards.
83
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Time-Based Restricted Stock Unit (RSU) Equity Awards
Time-based RSUs represent the contingent right to receive one share of the Company’s common stock if the
vesting conditions are satisfied. The time-based RSUs have no dividend or voting rights during the vesting period.
During fiscal 2017, 2016 and 2015, time-based RSUs were granted to the Company’s executive officers, other key
employees and non-management directors (collectively, approximately 600, 570 and 580 recipients, respectively). These
awards vest annually in equal installments over periods of three to five years. RSUs generally result in less dilution to
shareholders than stock options, which have been granted to key employees in the past. RSUs also provide an immediate,
tangible value to the recipient and better diversification than stock options alone, which promotes the retention of key
employees over the multi-year vesting period.
The following table provides additional information related to time-based RSU activity during fiscal 2017, 2016
and 2015.
2017
Year Ended September 30,
2016
2015
Number of
Restricted
Stock Units
Weighted
Average
Grant Date
Fair Value
Number of
Restricted
Stock Units
Weighted
Average
Grant Date
Fair Value
Number of
Restricted
Stock Units
Weighted
Average
Grant Date
Fair Value
Outstanding at beginning of year ........
3,478,233
$
Granted ................................................
1,868,660
Vested ..................................................
(792,941)
Cancelled .............................................
(188,170)
Outstanding at end of year...................
4,365,782
$
24.12
28.64
24.48
25.21
26.09
1,978,262
$
2,117,330
(423,427)
(193,932)
3,478,233
$
25.60
23.14
25.57
25.05
24.12
26,668
$
2,036,900
(12,221)
(73,085)
1,978,262
$
21.49
26.02
21.48
26.06
25.60
The total fair value of shares vested on the vesting date during fiscal 2017, 2016 and 2015 was $25.0 million,
$12.0 million and $0.3 million, respectively. For fiscal 2017, 2016 and 2015, compensation expense related to time-
based RSUs was $28.8 million, $18.7 million and $9.4 million respectively. At September 30, 2017, there was $69.0
million of unrecognized compensation expense related to unvested time-based RSU awards. This expense is expected to
be recognized over a weighted average period of 3.5 years.
84
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 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 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 2017 and 2016 were as follows:
September 30,
2017
2016
(In millions)
Warranty liability, beginning of year.................................................................................... $
104.4
$
Warranties issued..................................................................................................................
Changes in liability for pre-existing warranties ...................................................................
Settlements made..................................................................................................................
69.7
30.0
(60.4)
Warranty liability, end of year .............................................................................................. $
143.7
$
82.0
54.2
13.9
(45.7)
104.4
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, contract disputes and other
matters. 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 $420.6 million and $423.5 million at September 30, 2017 and 2016, respectively, and are included in
homebuilding accrued expenses and other liabilities in the consolidated balance sheets. Approximately 98% and 95% of
these reserves related to construction defect matters at September 30, 2017 and 2016, respectively. Expenses related to
the Company’s legal contingencies were $87.8 million, $49.6 million and $43.4 million in fiscal 2017, 2016 and 2015,
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, 2017, no individual existing claim was material to the Company’s
financial statements. The Company has closed a significant number of homes during recent years and 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.
85
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. 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. If
the ultimate resolution of construction defect claims resulting from the Company’s home closings in prior 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 $423.5 million at September 30, 2016 to $420.6 million at
September 30, 2017. Changes in the Company’s legal claims reserves during fiscal 2017 and 2016 were as follows:
September 30,
2017
2016
(In millions)
Reserves for legal claims, beginning of year ....................................................................... $
423.5
$
Increase in reserves ..............................................................................................................
Payments ..............................................................................................................................
91.0
(93.9)
Reserves for legal claims, end of year.................................................................................. $
420.6
$
451.0
25.4
(52.9)
423.5
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, 2005 through 2018, the
Company is self-insured for the first $10.0 million to $17.5 million of aggregate completed operations indemnity claims
incurred, depending on the policy year. After the aggregate self-insurance limits have been satisfied, the Company’s
excess loss insurance coverage begins. However, the Company must still pay $0.25 million of any indemnity claim and a
portion of the legal fees incurred for each claim occurrence.
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 and 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 excess loss insurance coverage with a third-party insurer. For policy years
2016, 2017 and 2018, 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.
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 2016, 2017
and 2018 policy years is $0.5 million per occurrence.
86
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company estimates and records receivables under its 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 for pending legal claims and anticipated future claims related
to previously closed homes totaled $74.4 million and $88.7 million at September 30, 2017 and 2016, respectively, and
are included in homebuilding other assets in the consolidated balance sheets.
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, 2017, the Company had total deposits of $227.6 million, consisting of cash deposits of $221.3
million and promissory notes and letters of credit of $6.3 million, to purchase land and lots with a total remaining
purchase price of approximately $4.6 billion. The majority of land and lots under contract are currently expected to be
purchased within three years. A limited number of the land and lot option purchase contracts at September 30, 2017,
representing $29.7 million of remaining purchase price, were subject to specific performance provisions which may
require the Company to purchase the land or lots upon the land sellers meeting their contractual obligations.
Other Commitments
At September 30, 2017, the Company had outstanding surety bonds of $1.2 billion and letters of credit of $96.8
million to secure performance under various contracts. Of the total letters of credit, $94.3 million were issued under the
Company’s revolving credit facility. The remaining $2.5 million of letters of credit were issued under a secured letter of
credit agreement requiring the Company to deposit cash as collateral with the issuing bank, 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, 2017,
the future minimum annual lease payments under these agreements are as follows (in millions):
2018 ..................................................................................................................................................................... $
15.5
2019 .....................................................................................................................................................................
2020 .....................................................................................................................................................................
2021 .....................................................................................................................................................................
2022 .....................................................................................................................................................................
Thereafter ............................................................................................................................................................
9.8
5.7
4.1
2.6
1.1
$
38.8
Rent expense was $26.3 million, $24.7 million and $22.4 million for fiscal 2017, 2016 and 2015, respectively.
87
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, 2017 and 2016 were as follows:
September 30,
2017
2016
(In millions)
Earnest money and refundable deposits ............................................................................... $
303.1
$
219.7
Insurance receivables ...........................................................................................................
Accounts and notes receivable .............................................................................................
Prepaid assets .......................................................................................................................
Rental properties ..................................................................................................................
Other assets ..........................................................................................................................
74.4
38.3
30.8
52.0
20.1
88.7
35.9
29.5
56.9
25.5
$
518.7
$
456.2
The Company’s homebuilding accrued expenses and other liabilities at September 30, 2017 and 2016 were as
follows:
September 30,
2017
2016
(In millions)
Reserves for legal claims...................................................................................................... $
420.6
$
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.....................................................................................................................
192.9
143.7
11.9
20.3
24.8
44.9
33.5
40.5
423.5
183.3
104.4
17.9
28.1
31.9
54.2
35.2
38.6
$
933.1
$
917.1
88
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. The Company does not
currently have any assets or liabilities measured at fair value using Level 1 inputs.
• 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:
• 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.
The Company’s assets measured at fair value using Level 2 inputs on a nonrecurring basis are a limited number of
mortgage loans held for sale with some degree of impairment affecting their marketability and are reported at the lower
of carrying value or fair value. When available, fair value is determined by reference to quoted prices in the secondary
markets for such assets.
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.
89
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
• 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 and for which reference to quoted prices in the secondary markets is not
available.
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 mortgage loans held for sale - A limited number of mortgage loans held for sale have some degree of
impairment affecting their marketability. For some of these loans, quoted prices in the secondary market are not
available and therefore, a cash flow valuation model is used to determine fair value.
• 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.
90
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, 2017 and 2016, and the changes in the fair value of the Level 3 assets during fiscal 2017 and 2016.
Balance Sheet Location
Level 1
Level 2
Level 3
Total
Fair Value at September 30, 2017
(In millions)
Homebuilding:
Debt securities collateralized by residential real estate ........
Other assets
$ — $ — $
8.8
$
8.8
Financial Services and Other:
Mortgage loans held for sale (a) ........................................... Mortgage loans held for sale
Derivatives not designated as hedging instruments (b):
Interest rate lock commitments .....................................
Forward sales of MBS...................................................
Best-efforts and mandatory commitments ....................
Other assets
Other assets
Other assets
—
—
—
—
580.2
5.6
585.8
9.4
1.1
0.6
—
—
—
9.4
1.1
0.6
Balance Sheet Location
Level 1
Level 2
Level 3
Total
Fair Value at September 30, 2016
(In millions)
Financial Services and Other:
Mortgage loans held for sale (a) ........................................... Mortgage loans held for sale
$ — $ 640.9
$
6.8
$ 647.7
Derivatives not designated as hedging instruments (b):
Interest rate lock commitments .....................................
Other assets
Forward sales of MBS...................................................
Other liabilities
Best-efforts and mandatory commitments ....................
Other liabilities
—
—
—
9.3
(2.6)
(0.2)
—
—
—
9.3
(2.6)
(0.2)
Balance at
September 30,
2016
Level 3 Assets at Fair Value for the Year Ended September 30, 2017
Net transfers
to (out of)
Level 3
Net realized
and unrealized
gains (losses)
Sales and
Settlements
Principal
Reductions
Purchases
Balance at
September 30,
2017
Debt securities collateralized by
residential real estate ..................... $
Mortgage loans held for sale (a) ........
— $
6.8
— $
1.3
8.8
—
$
— $
— $
— $
(13.4)
—
10.9
8.8
5.6
(In millions)
Balance at
September 30,
2015
Level 3 Assets at Fair Value for the Year Ended September 30, 2016
Net transfers
to (out of)
Level 3
Net realized
and unrealized
gains (losses)
Sales and
Settlements
Principal
Reductions
Purchases
Balance at
September 30,
2016
Debt securities collateralized by
residential real estate ..................... $
Mortgage loans held for sale (a) ........
_____________
(In millions)
$
33.9
13.9
2.2
2.4
$
— $
(35.8) $
(0.3) $
— $
—
(27.1)
—
17.6
—
6.8
(a) 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, 2017 and 2016 include $5.6
million and $6.8 million, respectively, of loans for which the Company elected the fair value option upon origination and which the Company did
not sell into the secondary market. Mortgage loans held for sale totaling $10.9 million and $17.6 million were transferred to Level 3 during fiscal
2017 and 2016, respectively, due to significant unobservable inputs used in determining the fair value of these loans. The fair value of these
mortgage loans held for sale is generally calculated considering pricing in the secondary market and adjusted for the value of the underlying
collateral, including interest rate risk, liquidity risk and prepayment risk. The Company plans to sell these loans as market conditions permit.
(b) Fair value measurements of these derivatives represent changes in fair value, as calculated by reference to quoted prices for similar assets, and are
reflected in the balance sheet as other assets or other liabilities. Changes in the fair value of these derivatives are included in financial services
revenues in the consolidated statements of operations.
91
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,
2017 and 2016.
Homebuilding:
Balance Sheet Location
Fair Value at
September 30, 2017
Level 3
Level 2
Fair Value at
September 30, 2016
Level 3
Level 2
(In millions)
Inventory held and used (a) (b)....................
Inventory available for sale (a) (c)...............
Inventories
Inventories
$
— $
—
33.4
1.2
$
— $
—
Financial Services and Other:
Mortgage loans held for sale (a) (d)............. Mortgage loans held for sale
Other mortgage loans (a) (e) ........................
Real estate owned (a) (e)..............................
Other assets
Other assets
—
—
—
0.6
1.4
—
1.6
—
—
____________________
5.2
0.8
2.4
3.8
0.1
(a) The fair values included in the table above represent only those assets whose carrying values were adjusted to fair value as a result of
impairment in the respective period and were held at the end of the period.
(b) In performing its impairment analysis of communities, discount rates ranging from 10% 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) These mortgage loans have some degree of impairment affecting their marketability. When available, quoted prices in the secondary
market are used to determine fair value (Level 2); otherwise, a cash flow valuation model is used to determine fair value (Level 3).
(e) 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, 2017 and 2016.
Carrying
Value
Fair Value at September 30, 2017
Level 1
Level 2
(In millions)
Level 3
Total
Homebuilding:
Cash and cash equivalents (a)........................ $
Restricted cash (a) .........................................
Senior notes (b)..............................................
Other secured notes (a)..................................
$
973.0
9.3
2,440.5
11.1
Financial Services and Other:
Cash and cash equivalents (a)........................
Restricted cash (a) (c)....................................
Mortgage repurchase facility (a) ...................
34.8
7.2
420.0
973.0
9.3
—
—
34.8
7.2
—
$
— $
—
2,584.1
—
—
—
—
— $
—
—
11.1
—
—
420.0
973.0
9.3
2,584.1
11.1
34.8
7.2
420.0
Carrying
Value
Fair Value at September 30, 2016
Level 1
Level 2
(In millions)
Level 3
Total
Homebuilding:
Cash and cash equivalents (a)........................ $
Restricted cash (a) .........................................
Senior notes (b)..............................................
Other secured notes (a)..................................
Financial Services and Other:
Cash and cash equivalents (a)........................
Mortgage repurchase facility (a) ...................
____________________
1,271.8
9.5
2,786.7
11.6
31.4
473.0
$
$
1,271.8
9.5
—
—
— $
—
2,947.4
—
— $
—
—
11.6
31.4
—
—
—
—
473.0
1,271.8
9.5
2,947.4
11.6
31.4
473.0
(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 prices, which is classified as Level 2 within the fair value hierarchy.
(c) Restricted cash of the financial services segment represents escrow funds for taxes and insurance and is included in other assets in
the Financial Services and Other section of the consolidated balance sheet.
92
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE N – RELATED PARTY TRANSACTIONS
In September 2015, the Company sold 177,000 acres of ranch land in New Mexico and all related assets, including
the livestock grazing rights under long-term leases on approximately 114,000 acres of land, to Donald R. Horton, its
Chairman, for $56.0 million in cash. The Company recognized a gain of $2.3 million related to the sale. The transaction
was approved by the Board of Directors, with Mr. Horton abstaining.
NOTE O – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Consolidated quarterly results of operations for fiscal 2017 and 2016 were (in millions, except per share amounts):
Revenues ........................................................................... $
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
2,904.2
Fiscal 2017
2nd Quarter
3,251.3
$
3rd Quarter
3,776.4
$
4th Quarter
4,159.1
$
558.2
318.1
111.2
206.9
0.55
0.55
614.5
353.9
124.7
229.2
0.61
0.60
723.4
444.5
155.5
289.0
0.77
0.76
802.5
485.5
172.3
313.2
0.84
0.82
Revenues ........................................................................... $
Gross profit .......................................................................
Income before income taxes (a) ........................................
Income tax expense ...........................................................
Net income ........................................................................
Basic net income per common share.................................
Net income per common share assuming dilution ............
1st Quarter
2,416.4
Fiscal 2016
2nd Quarter
2,767.9
$
3rd Quarter
3,231.9
$
4th Quarter
3,741.3
$
468.9
241.3
83.6
157.7
0.43
0.42
531.7
300.5
105.4
195.1
0.53
0.52
625.8
378.6
128.8
249.8
0.67
0.66
732.6
433.0
149.4
283.6
0.76
0.75
_____________
(a) In the fourth quarter of fiscal 2016, income before income taxes was reduced by a goodwill impairment charge of $7.2
million.
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 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.
93
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE P – SUBSEQUENT EVENT
On October 5, 2017, the Company acquired 75% of the outstanding shares of Forestar for $558.3 million in cash,
pursuant to the terms of the merger agreement entered into in June 2017. Forestar is and will continue to be a publicly-
traded residential and real estate development company with operations currently in 14 markets and 10 states, where it
owns, directly or through joint ventures, interests in 44 residential and mixed-use projects.
The Company’s alignment with Forestar advances its strategy of increasing its access to high-quality optioned land
and lot positions to enhance operational efficiency and returns. Both companies are identifying land development
opportunities to expand Forestar’s platform, and the Company plans to acquire a large portion of Forestar’s finished lots
in accordance with the master supply agreement between the two companies. As the controlling shareholder of Forestar,
the Company will have significant influence in guiding the strategic direction and driving the operational execution
necessary to increase the future value potential of Forestar.
The Company has hired a valuation firm to assist in the allocation of the purchase price to the assets acquired and
liabilities assumed. As of the date of issuance of the financial statements the purchase price allocation had not been
completed. The Company anticipates the purchase price will be allocated primarily to the tangible assets acquired and
liabilities assumed of Forestar, but does anticipate some intangible assets arising from the transaction.
94
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE Q – 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 D.R. Horton, Inc. and other subsidiaries (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, 2017
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.........................................
Stockholders’ equity...................................
Noncontrolling interests.............................
Total Equity ..............................................
Total Liabilities & Equity........................ $
780.9
$
154.5
$
72.4
$
— $
1,007.8
7.8
4,812.6
3,540.4
138.5
104.8
245.5
—
—
1,047.7
1.5
—
5,579.9
223.6
59.7
259.7
—
80.0
—
—
—
116.8
2.9
166.3
67.9
587.3
—
—
10,678.2
$
6,358.9
$
1,013.6
$
—
(4,812.6)
—
—
(5.8)
—
—
—
(1,047.7)
(5,866.1) $
9.3
—
9,237.1
365.0
325.0
573.1
587.3
80.0
—
12,184.6
483.9
$
956.9
$
126.6
$
(2.0) $
1,565.4
—
2,443.4
2,927.3
7,750.9
—
732.2
8.2
1,697.3
4,661.6
—
7,750.9
4,661.6
315.5
420.0
862.1
151.0
0.5
151.5
10,678.2
$
6,358.9
$
1,013.6
$
(1,047.7)
—
(1,049.7)
(4,816.4)
—
(4,816.4)
(5,866.1) $
—
2,871.6
4,437.0
7,747.1
0.5
7,747.6
12,184.6
95
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE Q – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Balance Sheet
September 30, 2016
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.........................................
Stockholders’ equity...................................
Noncontrolling interests.............................
Total Equity ..............................................
Total Liabilities & Equity........................ $
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
1,076.4
$
154.0
$
72.8
$
— $
1,303.2
9.5
—
8,340.9
476.3
195.4
499.6
654.0
80.0
—
11,558.9
1,494.6
—
3,271.3
4,765.9
6,792.5
0.5
6,793.0
11,558.9
7.4
4,118.6
2,822.1
159.3
72.0
168.7
—
—
1,604.5
2.1
—
5,425.7
314.1
49.9
274.2
—
80.0
—
—
—
93.1
2.9
78.7
56.7
654.0
—
—
10,029.0
$
6,300.0
$
958.2
$
—
(4,118.6)
—
—
(5.2)
—
—
—
(1,604.5)
(5,728.3) $
$
(1.8) $
(1,604.5)
—
(1,606.3)
(4,122.0)
—
(4,122.0)
(5,728.3) $
$
444.1
—
2,789.0
3,233.1
6,795.9
—
$
933.1
1,417.1
9.3
2,359.5
3,940.5
—
6,795.9
3,940.5
119.2
187.4
473.0
779.6
178.1
0.5
178.6
10,029.0
$
6,300.0
$
958.2
$
96
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE Q – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Operations
Year Ended September 30, 2017
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
$
(9.1) $ 13,741.5
(8.5)
11,042.8
(0.6)
—
1,220.4
2,698.7
1,232.7
—
(1,233.3)
—
—
—
—
(1,233.3)
(434.7)
(798.6) $
(798.6) $
$
$
—
(11.0)
1,489.3
349.5
251.2
(14.5)
112.8
1,602.1
563.7
1,038.4
1,038.4
Homebuilding:
Revenues ............................................................... $
Cost of sales ..........................................................
Gross profit ...........................................................
Selling, general and administrative expense .........
Equity in (income) of subsidiaries ........................
Other (income) expense ........................................
Homebuilding pre-tax income .........................
4,773.6
$
8,939.5
$
3,827.6
946.0
584.3
(1,232.7)
(8.3)
1,602.7
7,199.6
1,739.9
631.0
—
(1.4)
1,110.3
Financial Services and Other:
Revenues ...............................................................
General and administrative expense......................
Interest and other (income) expense .....................
Financial services and other pre-tax income ...
Income before income taxes .................................
Income tax expense ...............................................
Net income ............................................................ $
Comprehensive income......................................... $
—
—
—
—
—
—
—
—
1,602.7
563.9
1,038.8
1,038.8
$
$
1,110.3
388.6
721.7
721.7
$
$
37.5
24.1
13.4
5.1
—
(1.3)
9.6
349.5
251.2
(14.5)
112.8
122.4
45.9
76.5
76.5
97
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE Q – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Operations
Year Ended September 30, 2016
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
$
— $
(16.0) $ 11,861.8
(10.8)
9,502.6
(5.2)
—
2,359.2
1,100.3
—
1,071.0
—
(1,076.2)
—
—
—
—
(1,076.2)
(372.2)
(704.0) $
(704.0) $
$
$
7.2
—
(12.7)
1,264.4
295.6
220.0
(13.5)
89.1
1,353.5
467.2
886.3
884.9
(7.7)
7.7
3.8
—
—
(1.2)
5.1
295.6
220.0
(13.5)
89.1
94.2
35.5
58.7
58.7
Homebuilding:
Revenues ............................................................... $
Cost of sales ..........................................................
Gross profit ...........................................................
Selling, general and administrative expense .........
Goodwill impairment ............................................
Equity in (income) of subsidiaries ........................
Other (income) expense ........................................
Homebuilding pre-tax income .........................
$
3,947.5
3,163.6
783.9
503.8
—
(1,071.0)
(7.6)
1,358.7
7,930.3
6,357.5
1,572.8
592.7
7.2
—
(3.9)
976.8
Financial Services and Other:
Revenues ...............................................................
General and administrative expense......................
Interest and other (income) expense .....................
Financial services and other pre-tax income ...
Income before income taxes .................................
Income tax expense ...............................................
Net income ............................................................ $
Comprehensive income......................................... $
—
—
—
—
—
—
—
—
1,358.7
469.0
889.7
888.3
$
$
976.8
334.9
641.9
641.9
$
$
98
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE Q – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Operations
Year Ended September 30, 2015
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 .........
Goodwill impairment ............................................
Equity in (income) of subsidiaries ........................
Other (income) expense ........................................
Homebuilding pre-tax income (loss) ...............
Financial Services and Other:
Revenues ...............................................................
General and administrative expense......................
Interest and other (income) expense .....................
Financial services and other pre-tax income ...
Income before income taxes .................................
Income tax expense ...............................................
Net income ............................................................ $
Comprehensive income......................................... $
3,334.6
$
7,224.4
$
— $
— $ 10,559.0
2,698.1
636.5
461.2
—
(945.9)
(2.2)
1,123.4
—
—
—
—
5,834.3
1,390.1
538.8
9.8
—
(4.9)
846.4
—
—
—
—
1,123.4
372.7
750.7
750.7
$
$
846.4
277.2
569.2
568.4
$
$
3.3
(3.3)
3.0
—
—
(0.7)
(5.6)
265.0
183.0
(23.1)
105.1
99.5
37.4
62.1
62.1
$
$
—
—
—
—
945.9
—
(945.9)
—
—
—
—
(945.9)
(314.6)
(631.3) $
(631.3) $
8,535.7
2,023.3
1,003.0
9.8
—
(7.8)
1,018.3
265.0
183.0
(23.1)
105.1
1,123.4
372.7
750.7
749.9
99
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE Q – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Cash Flows
Year Ended September 30, 2017
OPERATING ACTIVITIES
Net cash (used in) provided by operating activities... $
(288.3) $
721.0
$
115.0
$
(112.6) $
435.1
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
INVESTING ACTIVITIES
Expenditures for property and equipment.............
(Increase) decrease in restricted cash....................
Net principal decrease of other
mortgage loans and real estate owned...............
Purchases of debt securities
collateralized by residential real estate .............
Intercompany advances.........................................
Payments related to acquisition of a business .......
Net cash provided by (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 ..............................................
Repurchases of common stock..............................
Net cash used in financing activities..........................
(Decrease) increase in cash and cash equivalents......
(54.2)
(0.4)
—
(8.8)
561.7
(4.1)
494.2
835.0
(1,187.2)
—
46.7
14.3
(149.6)
(60.6)
(501.4)
(295.5)
Cash and cash equivalents at beginning of year ........
1,076.4
(26.2)
0.6
—
—
—
—
(25.6)
—
(5.1)
(689.8)
—
—
—
—
(694.9)
0.5
154.0
(86.0)
(7.2)
6.2
—
—
—
(87.0)
—
(53.0)
128.1
—
—
(103.5)
—
(28.4)
(0.4)
72.8
9.1
—
—
—
(561.7)
—
(552.6)
—
—
561.7
—
—
103.5
—
665.2
—
—
(157.3)
(7.0)
6.2
(8.8)
—
(4.1)
(171.0)
835.0
(1,245.3)
—
46.7
14.3
(149.6)
(60.6)
(559.5)
(295.4)
1,303.2
Cash and cash equivalents at end of year................... $
780.9
$
154.5
$
72.4
$
— $
1,007.8
100
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE Q – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Cash Flows
Year Ended September 30, 2016
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities... $
115.1
$
596.7
$
(16.0) $
(77.8) $
618.0
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
INVESTING ACTIVITIES
Expenditures for property and equipment.............
Decrease in restricted cash ....................................
Net principal decrease of other
mortgage loans and real estate owned...............
Proceeds from the sale of debt securities
collateralized by residential real estate .............
Intercompany advances.........................................
Payments related to acquisition of a business .......
Net cash provided by (used in) investing activities ...
FINANCING ACTIVITIES
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 (used in) provided by financing activities...
(Decrease) increase in cash and cash equivalents......
(40.7)
—
—
35.8
409.9
(82.2)
322.8
(542.9)
—
72.4
10.0
(118.7)
(579.2)
(141.3)
Cash and cash equivalents at beginning of year ........
1,217.7
(14.3)
0.2
—
—
—
—
(14.1)
(1.9)
(521.3)
—
—
—
(523.2)
59.4
94.6
(47.1)
—
19.7
—
—
—
(27.4)
(4.9)
111.4
—
—
(61.8)
44.7
1.3
71.5
16.0
—
—
—
(409.9)
—
(393.9)
—
409.9
—
—
61.8
471.7
—
—
(86.1)
0.2
19.7
35.8
—
(82.2)
(112.6)
(549.7)
—
72.4
10.0
(118.7)
(586.0)
(80.6)
1,383.8
Cash and cash equivalents at end of year................... $
1,076.4
$
154.0
$
72.8
$
— $
1,303.2
101
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE Q – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)
Consolidating Statement of Cash Flows
Year Ended September 30, 2015
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities... $
308.2
$
530.1
$
(106.3) $
(31.6) $
700.4
D.R.
Horton, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
(In millions)
INVESTING ACTIVITIES
Expenditures for property and equipment.............
Proceeds from the sale of property and
equipment to a related party..............................
Increase in restricted cash .....................................
Net principal increase of other
mortgage loans and real estate owned...............
Purchases of debt securities
collateralized by residential real estate .............
Intercompany advances.........................................
Payments related to acquisition of a business .......
Net cash provided by (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 (used in) financing activities...
Increase (decrease) in cash and cash equivalents ......
Cash and cash equivalents at beginning of year ........
(24.5)
(24.8)
(6.8)
56.0
(0.4)
—
(14.8)
444.7
(70.9)
390.1
1,472.0
(1,432.5)
—
61.8
12.3
(91.6)
22.0
720.3
497.4
—
(0.3)
—
—
—
—
(25.1)
—
(6.3)
(493.6)
—
—
—
(499.9)
5.1
89.5
—
—
(8.9)
—
—
—
(15.7)
118.7
(17.4)
48.9
—
—
(31.6)
118.6
(3.4)
74.9
—
—
—
—
—
(444.7)
—
(444.7)
—
—
444.7
—
—
31.6
476.3
—
—
(56.1)
56.0
(0.7)
(8.9)
(14.8)
—
(70.9)
(95.4)
1,590.7
(1,456.2)
—
61.8
12.3
(91.6)
117.0
722.0
661.8
Cash and cash equivalents at end of year................... $
1,217.7
$
94.6
$
71.5
$
— $
1,383.8
102
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, 2017 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, 2017 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 (2013) 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, 2017.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the effectiveness of
our internal control over financial reporting as of September 30, 2017, as stated in their report included herein.
ITEM 9B. OTHER INFORMATION
None.
103
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 2018 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 2018 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, 2017.
(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))
13,747,130 (1)
$
16.92 (2)
22,223,307 (3)
—
n/a
16.92
—
22,223,307
Plan Category
Equity compensation plans
approved by stockholders ..................
Equity compensation plans
not approved by stockholders............
Total.....................................................
13,747,130
$
______________
(1) Amount includes outstanding stock option and restricted stock unit awards. The number of outstanding performance-based
restricted stock unit awards is based on the target number of units granted.
(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 3,215,080 shares reserved for issuance under the Company’s Employee Stock Purchase Plan. Under the
Employee Stock Purchase Plan, employees purchased 111,527 shares of common stock in fiscal 2017.
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 2018 Annual Meeting of Stockholders and incorporated
herein by reference.
104
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
2018 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 2018 Annual Meeting of Stockholders and incorporated herein by
reference.
105
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Agreement and Plan of Merger dated June 29, 2017 by and among the Registrant, Force Merger Sub, Inc.
and Forestar Group Inc. (10)
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
Senior Debt Securities Indenture, dated as of May 1, 2012, between Registrant and American Stock
Transfer & Trust Company, LLC, as Trustee (36)
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 (38)
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 (13)
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 (14)
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 (29)
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 (39)
106
Exhibit
Number
4.9
Eighth Supplemental Indenture, dated as of February 9, 2015, among the Registrant, the Guarantors named
therein and American Stock Transfer & Trust Company, LLC, as trustee, relating to the 4.000% Senior
Notes Due 2020 issued by the Registrant (45)
Exhibit
10.1
Form of Indemnification Agreement between the Registrant and each of its directors and executive officers
and schedules of substantially identical documents (5)
10.2 † D.R. Horton, Inc. 1991 Stock Incentive Plan, as amended and restated (6)
10.3 † Amendment No. 1 to 1991 Stock Incentive Plan, as amended and restated (7)
10.4 † Form of Non-Qualified Stock Option Agreement under the D.R. Horton, Inc. 1991 Stock Incentive Plan
(Term Vesting) (8)
10.5 † D.R. Horton, Inc. 2006 Stock Incentive Plan (19)
10.6 † D.R. Horton, Inc. 2006 Stock Incentive Plan, as amended and restated (33)
10.7 † D.R. Horton, Inc. 2006 Stock Incentive Plan, as amended and restated, effective as of December 11, 2014
(44)
10.8 † Form of Non-Qualified Stock Option Agreement under the D.R. Horton, Inc. 2006 Stock Incentive Plan
(Employee - Term Vesting 2006 Form) (20)
10.9 † Form of Non-Qualified Stock Option Agreement under the D.R. Horton, Inc. 2006 Stock Incentive Plan
(Director - Term Vesting 2006 Form) (21)
10.10 † Form of Non-Qualified Stock Option Agreement (Employee-Term Vesting 2008 Form) pursuant to the
Registrant’s 2006 Stock Incentive Plan (22)
10.11 † Form of Non-Qualified Stock Option Agreement (Outside Director-Term Vesting 2008 Form) pursuant to
the Registrant’s 2006 Stock Incentive Plan (24)
10.12 † Form of Restricted Stock Unit Agreement pursuant to the Registrant’s 2006 Stock Incentive Plan (34)
10.13 † Form of Restricted Stock Unit Agreement pursuant to the Registrant’s 2006 Stock Incentive Plan, as
amended and restated (1)
10.14 † Form of Restricted Stock Unit Agreement (Outside Director) pursuant to the Registrant’s 2006 Stock
Incentive Plan, as amended and restated (30)
10.15 † Form of Restricted Stock Unit Agreement (Employees) pursuant to the Registrant’s 2006 Stock Incentive
Plan, as amended and restated (43)
10.16 † Form of Time-Based Restricted Stock Unit Agreement (Employees) pursuant to the Registrant’s 2006 Stock
Incentive Plan, as amended and restated (48)
10.17 † Form of Stock Award Agreement pursuant to the Registrant’s 2006 Stock Incentive Plan (35)
10.18 † D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 1 (9)
10.19 † D.R. Horton, Inc. Amended and Restated Deferred Compensation Plan (32)
10.20 † D.R. Horton, Inc. Amended and Restated Supplemental Executive Retirement Plan No. 2 (31)
10.21 † D.R. Horton, Inc. Amended and Restated 2000 Incentive Bonus Plan (11)
10.22 † D.R. Horton, Inc. 2008 Performance Unit Plan (25)
10.23 † Form of Performance Unit Award pursuant to the Registrant’s 2008 Performance Unit Plan - 2008 Form and
2009 Form (15)
107
Exhibit
Number
Exhibit
10.24 † Summary of Executive Compensation Notification - Chairman, CEO and COO (fiscal 2017) (16)
10.25 † Summary of Executive Compensation Notification - Chairman, CEO and COO (fiscal 2018) (*)
10.26 † Summary of Executive Compensation Notification - Other Executive Officer - CFO (fiscal 2017) (17)
10.27 † Summary of Executive Compensation Notification - Other Executive Officer - CFO (fiscal 2018) (*)
10.28 † Summary of Director, Committee and Chairperson Compensation (fiscal 2017) (18)
10.29 † Summary of Director, Committee and Chairperson Compensation (fiscal 2018) (*)
10.30 † Consulting Agreement between Registrant and Donald J. Tomnitz (41)
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
Grantor Trust Agreement, dated June 21, 2002, by and between the Registrant and Wachovia Bank,
National Association, as Trustee (12)
Credit Agreement, dated September 7, 2012, among the Registrant, the Lenders named therein and The
Royal Bank of Scotland PLC, as Administrative Agent (37)
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 (23)
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 (28)
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 (42)
Amendment No. 5 to Credit Agreement, dated August 26, 2015 by and among Registrant, Mizuho Bank,
Ltd., as successor Administrative Agent, and the Lenders named therein (47)
Amendment No. 6 to Credit Agreement, dated September 25, 2017 by and among the Registrant, Mizuho
Bank, Ltd., as successor Administrative Agent, and the Lenders named therein. (51)
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 (26)
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 (40)
Second Amended and Restated Master Repurchase Agreement, dated February 27, 2015, among DHI
Mortgage Company, Ltd., U.S. Bank National Association, as Administrative Agent, Sole Book Runner,
Lead Arranger, and a Buyer, and all other buyers (46)
First Amendment to Second Amended and Restated Master Repurchase Agreement, dated February 26,
2016, among DHI Mortgage Company, Ltd., U.S. Bank National Association, as Administrative Agent, Sole
Book Runner, Lead Arranger, and a Buyer, and all other buyers (49)
Third Amendment to Second Amended and Restated Master Repurchase Agreement, dated September 23,
2016, among DHI Mortgage Company, Ltd., U.S. Bank National Association, as Administrative Agent, Sole
Book Runner, Lead Arranger, and a Buyer, and all other buyers (50)
Fourth Amendment to Second Amended and Restated Master Repurchase Agreement, dated February 24,
2017, among DHI Mortgage Company, Ltd., U.S. Bank National Association, as Administrative Agent, Sole
Book Runner, Lead Arranger, and a Buyer, and all other Buyers. (53)
108
Exhibit
Number
10.44
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 (27)
Exhibit
10.45
Stockholder’s Agreement dated June 29, 2017 by and between the Registrant and Forestar Group Inc. (52)
10.46
Master Supply Agreement dated June 29, 2017 by and between the Registrant and Forestar Group Inc. (54)
12.1
14.1
21.1
23.1
31.1
31.2
32.1
32.2
101
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, 2017, filed on November 15, 2017, 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 Investor Relations and Corporate Governance links.
† Management contract or compensatory plan arrangement.
(1)
(2)
(3)
(4)
(5)
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
quarter 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
November 2, 2017, filed with the SEC on November 8, 2017.
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 quarter ended June 30, 1998, filed
with the SEC on August 6, 1998; and Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001, filed with the SEC on May 15, 2001.
109
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, 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
quarter 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 by reference from Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated June 29,
2017, filed with the SEC on June 29, 2017.
Incorporated herein by reference from Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2007, filed with the SEC on February 7, 2008.
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.
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 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 by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated November
2, 2016, filed with the SEC on November 8, 2016.
Incorporated by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated November
2, 2016, filed with the SEC on November 8, 2016.
Incorporated by reference from Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated November
2, 2016, filed with the SEC on November 8, 2016.
Incorporated herein by reference from Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2005, filed with the SEC on February 2, 2006.
Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter 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
quarter ended March 31, 2006, filed with the SEC on May 8, 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 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter 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.
110
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)
(35)
(36)
(37)
(38)
(39)
(40)
(41)
(42)
(43)
(44)
(45)
(46)
(47)
Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated
February 27, 2015, filed with the SEC on March 4, 2015.
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 10.1 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 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 Registrant’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 Registrant’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 Registrant’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 Registrant’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.
Incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated January
22, 2015, filed with the SEC on January 26, 2015.
Incorporated by reference from Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated February 9,
2015, filed with the SEC on February 9, 2015.
Incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated February
27, 2015, filed with the SEC on March 4, 2015.
Incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated August 26,
2015, filed with the SEC on August 27, 2015.
111
(48)
(49)
(50)
(51)
(52)
(53)
(54)
Incorporated by reference from Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2015, filed with the SEC on April 24, 2015.
Incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated February
26, 2016, filed with the SEC on March 2, 2016.
Incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated September
23, 2016, filed with the SEC on September 27, 2016.
Incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated September
25, 2017, filed with the SEC on September 28, 2017.
Incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated June 29,
2017, filed with the SEC on June 29, 2017.
Incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated February
24, 2017, filed with the SEC on February 28, 2017.
Incorporated by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated June 29,
2017, filed with the SEC on June 29, 2017.
ITEM 16. 10-K SUMMARY
None.
112
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 15, 2017
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/ Brad S. Anderson
Brad 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 15, 2017
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
November 15, 2017
Chairman of the Board and Director
November 15, 2017
November 15, 2017
November 15, 2017
November 15, 2017
November 15, 2017
Director
Director
Director
Director
113
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 26 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,
Express Homes, Freedom Homes and Pacific Ridge Homes. For the year ended September 30, 2017, the Company
closed 45,751 homes with an average sales price of approximately $298,400. 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 24, 2018
At the corporate offices of D.R. Horton, Inc.
1341 Horton Circle
Arlington, Texas 76011
Barbara K. Allen (1)
Former Partner and Housing, Construction and
Retailing Analyst of Avondale Partners
Brad S. Anderson (1)
Executive Vice President of CBRE Group, Inc.
Director of KS StateBank
Michael R. Buchanan (1)
Former Managing Director, National Real Estate
Banking Group, Bank of America
Michael W. Hewatt (1)
Certified Public Accountant
_____________
(1) Member of the Audit Committee, Compensation
Committee and Nominating and Governance
Committee.
Investor Relations
Jessica L. Hansen
D.R. Horton, Inc.
1341 Horton Circle
Arlington, Texas 76011
(817) 390-8200
Website
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:
BBB- Fitch Ratings
Baa3 Moody’s Investors Service
BBB- 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
HOMEBUILDING OPERATIONS
WEST
(cid:17)(cid:258)(cid:364)(cid:286)(cid:396)(cid:400)(cid:302)(cid:286)(cid:367)(cid:282)(cid:853)(cid:3)(cid:18)(cid:4)
Bay Area, CA
Fresno, CA
Los Angeles County, CA
Orange County, CA
Riverside County, CA
Sacramento, CA
San Bernardino County, CA
San Diego County, CA
Ventura County, CA
Hawaii, HI
Kauai, HI
Maui, HI
Oahu, HI
Las Vegas, NV
Reno, NV
Portland, OR
Salt Lake City, UT
(cid:94)(cid:286)(cid:258)(cid:425)(cid:367)(cid:286)(cid:876)(cid:100)(cid:258)(cid:272)(cid:381)(cid:373)(cid:258)(cid:876)(cid:28)(cid:448)(cid:286)(cid:396)(cid:286)(cid:425)(cid:853)(cid:3)(cid:116)(cid:4)
(cid:115)(cid:258)(cid:374)(cid:272)(cid:381)(cid:437)(cid:448)(cid:286)(cid:396)(cid:853)(cid:3)(cid:116)(cid:4)
SOUTHWEST
Phoenix, AZ
Tucson, AZ
Albuquerque, NM
MIDWEST
Denver, CO
Fort Collins, CO
Chicago, IL
(cid:68)(cid:349)(cid:374)(cid:374)(cid:286)(cid:258)(cid:393)(cid:381)(cid:367)(cid:349)(cid:400)(cid:876)(cid:94)(cid:410)(cid:856)(cid:3)(cid:87)(cid:258)(cid:437)(cid:367)(cid:853)(cid:3)(cid:68)(cid:69)
SOUTH CENTRAL
Baton Rouge, LA
(cid:62)(cid:258)(cid:296)(cid:258)(cid:455)(cid:286)(cid:425)(cid:286)(cid:853)(cid:3)(cid:62)(cid:4)
Oklahoma City, OK
(cid:4)(cid:437)(cid:400)(cid:415)(cid:374)(cid:853)(cid:3)(cid:100)(cid:121)
(cid:24)(cid:258)(cid:367)(cid:367)(cid:258)(cid:400)(cid:853)(cid:3)(cid:100)(cid:121)
(cid:28)(cid:367)(cid:3)(cid:87)(cid:258)(cid:400)(cid:381)(cid:853)(cid:3)(cid:100)(cid:121)
(cid:38)(cid:381)(cid:396)(cid:410)(cid:3)(cid:116)(cid:381)(cid:396)(cid:410)(cid:346)(cid:853)(cid:3)(cid:100)(cid:121)
(cid:44)(cid:381)(cid:437)(cid:400)(cid:410)(cid:381)(cid:374)(cid:853)(cid:3)(cid:100)(cid:121)
(cid:60)(cid:349)(cid:367)(cid:367)(cid:286)(cid:286)(cid:374)(cid:876)(cid:100)(cid:286)(cid:373)(cid:393)(cid:367)(cid:286)(cid:876)(cid:116)(cid:258)(cid:272)(cid:381)(cid:853)(cid:3)(cid:100)(cid:121)
(cid:68)(cid:349)(cid:282)(cid:367)(cid:258)(cid:374)(cid:282)(cid:876)(cid:75)(cid:282)(cid:286)(cid:400)(cid:400)(cid:258)(cid:853)(cid:3)(cid:100)(cid:121)
(cid:69)(cid:286)(cid:449)(cid:3)(cid:17)(cid:396)(cid:258)(cid:437)(cid:374)(cid:296)(cid:286)(cid:367)(cid:400)(cid:876)(cid:94)(cid:258)(cid:374)(cid:3)(cid:68)(cid:258)(cid:396)(cid:272)(cid:381)(cid:400)(cid:853)(cid:3)(cid:100)(cid:121)
(cid:94)(cid:258)(cid:374)(cid:3)(cid:4)(cid:374)(cid:410)(cid:381)(cid:374)(cid:349)(cid:381)(cid:853)(cid:3)(cid:100)(cid:121)
SOUTHEAST
Birmingham, AL
Huntsville, AL
Mobile, AL
Montgomery, AL
Tuscaloosa, AL
(cid:38)(cid:381)(cid:396)(cid:410)(cid:3)(cid:68)(cid:455)(cid:286)(cid:396)(cid:400)(cid:876)(cid:69)(cid:258)(cid:393)(cid:367)(cid:286)(cid:400)(cid:853)(cid:3)(cid:38)(cid:62)
Jacksonville, FL
Lakeland, FL
(cid:68)(cid:286)(cid:367)(cid:271)(cid:381)(cid:437)(cid:396)(cid:374)(cid:286)(cid:876)(cid:115)(cid:286)(cid:396)(cid:381)(cid:3)(cid:17)(cid:286)(cid:258)(cid:272)(cid:346)(cid:853)(cid:3)(cid:38)(cid:62)
(cid:68)(cid:349)(cid:258)(cid:373)(cid:349)(cid:876)(cid:38)(cid:381)(cid:396)(cid:410)(cid:3)(cid:62)(cid:258)(cid:437)(cid:282)(cid:286)(cid:396)(cid:282)(cid:258)(cid:367)(cid:286)(cid:853)(cid:3)(cid:38)(cid:62)
Ocala, FL
Orlando, FL
(cid:87)(cid:286)(cid:374)(cid:400)(cid:258)(cid:272)(cid:381)(cid:367)(cid:258)(cid:876)(cid:87)(cid:258)(cid:374)(cid:258)(cid:373)(cid:258)(cid:3)(cid:18)(cid:349)(cid:410)(cid:455)(cid:853)(cid:3)(cid:38)(cid:62)
Port St. Lucie, FL
(cid:100)(cid:258)(cid:373)(cid:393)(cid:258)(cid:876)(cid:94)(cid:258)(cid:396)(cid:258)(cid:400)(cid:381)(cid:410)(cid:258)(cid:853)(cid:3)(cid:38)(cid:62)(cid:3)
Volusia County, FL
(cid:116)(cid:286)(cid:400)(cid:410)(cid:3)(cid:87)(cid:258)(cid:367)(cid:373)(cid:3)(cid:17)(cid:286)(cid:258)(cid:272)(cid:346)(cid:853)(cid:3)(cid:38)(cid:62)
Atlanta, GA
Augusta, GA
Gulf Coast, MS
Knoxville, TN
Nashville, TN
EAST
Northern Delaware
Savannah, GA
(cid:17)(cid:258)(cid:367)(cid:415)(cid:373)(cid:381)(cid:396)(cid:286)(cid:853)(cid:3)(cid:68)(cid:24)
(cid:94)(cid:437)(cid:271)(cid:437)(cid:396)(cid:271)(cid:258)(cid:374)(cid:3)(cid:116)(cid:258)(cid:400)(cid:346)(cid:349)(cid:374)(cid:336)(cid:410)(cid:381)(cid:374)(cid:853)(cid:3)(cid:24)(cid:856)(cid:18)(cid:856)
North New Jersey
South New Jersey
(cid:18)(cid:346)(cid:258)(cid:396)(cid:367)(cid:381)(cid:425)(cid:286)(cid:853)(cid:3)(cid:69)(cid:18)
(cid:38)(cid:258)(cid:455)(cid:286)(cid:425)(cid:286)(cid:448)(cid:349)(cid:367)(cid:367)(cid:286)(cid:853)(cid:3)(cid:69)(cid:18)
(cid:39)(cid:396)(cid:286)(cid:286)(cid:374)(cid:400)(cid:271)(cid:381)(cid:396)(cid:381)(cid:876)(cid:116)(cid:349)(cid:374)(cid:400)(cid:410)(cid:381)(cid:374)(cid:882)(cid:94)(cid:258)(cid:367)(cid:286)(cid:373)(cid:853)(cid:3)(cid:69)(cid:18)
(cid:90)(cid:258)(cid:367)(cid:286)(cid:349)(cid:336)(cid:346)(cid:876)(cid:24)(cid:437)(cid:396)(cid:346)(cid:258)(cid:373)(cid:853)(cid:3)(cid:69)(cid:18)
(cid:116)(cid:349)(cid:367)(cid:373)(cid:349)(cid:374)(cid:336)(cid:410)(cid:381)(cid:374)(cid:853)(cid:3)(cid:69)(cid:18)
Philadelphia, PA
Charleston, SC
Columbia, SC
(cid:39)(cid:396)(cid:286)(cid:286)(cid:374)(cid:448)(cid:349)(cid:367)(cid:367)(cid:286)(cid:876)(cid:94)(cid:393)(cid:258)(cid:396)(cid:410)(cid:258)(cid:374)(cid:271)(cid:437)(cid:396)(cid:336)(cid:853)(cid:3)(cid:94)(cid:18)
Hilton Head, SC
Myrtle Beach, SC
Northern Virginia
1341 Horton Circle
Arlington, Texas 76011
(cid:894)(cid:1012)(cid:1005)(cid:1011)(cid:895)(cid:3)(cid:1007)(cid:1013)(cid:1004)(cid:882)(cid:1012)(cid:1006)(cid:1004)(cid:1004)
www.drhorton.com