e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From To
Commission file number 1-14122
(Exact name of registrant as specified in its charter)
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Delaware
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75-2386963 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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301 Commerce Street, Suite 500, Fort Worth, Texas
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76102 |
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(Address of principal executive offices)
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(Zip Code) |
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common stock, $.01 par value 317,098,284 shares as of July 31, 2009
D.R. HORTON, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
-2-
PART I. FINANCIAL INFORMATION
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ITEM 1. |
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FINANCIAL STATEMENTS |
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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June 30, |
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September 30, |
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2009 |
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2008 |
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(In millions) |
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(Unaudited) |
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ASSETS |
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Homebuilding: |
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Cash and cash equivalents |
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$ |
1,966.3 |
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$ |
1,355.6 |
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Inventories: |
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Construction in progress and finished homes |
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1,407.7 |
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1,681.6 |
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Residential land and lots developed and under development |
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1,875.9 |
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2,409.6 |
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Land held for development |
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567.0 |
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531.7 |
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Land inventory not owned |
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22.7 |
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60.3 |
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3,873.3 |
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4,683.2 |
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Income taxes receivable |
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124.9 |
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676.2 |
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Restricted cash |
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62.0 |
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2.0 |
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Deferred income taxes, net of valuation allowance of $1,068.5 million and
$961.3 million at June 30, 2009 and September 30, 2008, respectively |
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165.4 |
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213.5 |
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Property and equipment, net |
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62.5 |
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65.9 |
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Earnest money deposits and other assets |
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198.5 |
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245.5 |
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Goodwill |
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15.9 |
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15.9 |
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6,468.8 |
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7,257.8 |
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Financial Services: |
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Cash and cash equivalents |
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36.0 |
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31.7 |
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Mortgage loans held for sale |
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222.7 |
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352.1 |
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Other assets |
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52.0 |
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68.0 |
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310.7 |
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451.8 |
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Total assets |
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$ |
6,779.5 |
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$ |
7,709.6 |
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LIABILITIES |
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Homebuilding: |
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Accounts payable |
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$ |
170.6 |
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$ |
254.0 |
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Accrued expenses and other liabilities |
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685.9 |
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814.9 |
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Notes payable |
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3,280.2 |
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3,544.9 |
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4,136.7 |
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4,613.8 |
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Financial Services: |
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Accounts payable and other liabilities |
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46.8 |
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27.5 |
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Mortgage repurchase facility |
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77.4 |
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203.5 |
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124.2 |
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231.0 |
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4,260.9 |
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4,844.8 |
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Commitments and contingencies (Note L) |
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Minority interests |
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20.9 |
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30.5 |
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STOCKHOLDERS EQUITY |
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Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued |
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Common stock, $.01 par value, 1,000,000,000 shares authorized, 320,647,484 shares
issued and 316,992,251 shares outstanding at June 30, 2009 and 320,315,508
shares issued and 316,660,275 shares outstanding at September 30, 2008 |
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3.2 |
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3.2 |
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Additional capital |
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1,728.7 |
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1,716.3 |
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Retained earnings |
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861.5 |
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1,210.5 |
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Treasury stock, 3,655,233 shares at June 30, 2009 and September 30, 2008, at cost |
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(95.7 |
) |
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(95.7 |
) |
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2,497.7 |
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2,834.3 |
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Total liabilities and stockholders equity |
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$ |
6,779.5 |
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$ |
7,709.6 |
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See accompanying notes to consolidated financial statements.
-3-
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended |
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Nine Months Ended |
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June 30, |
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June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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(In millions, except per share data) |
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(Unaudited) |
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Homebuilding: |
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Revenues: |
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Home sales |
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$ |
896.6 |
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$ |
1,415.0 |
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$ |
2,553.1 |
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$ |
4,619.8 |
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Land/lot sales |
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17.5 |
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18.3 |
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36.6 |
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145.1 |
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914.1 |
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1,433.3 |
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2,589.7 |
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4,764.9 |
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Cost of sales: |
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Home sales |
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795.0 |
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1,271.7 |
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2,211.5 |
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4,097.1 |
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Land/lot sales |
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16.7 |
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14.2 |
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32.6 |
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118.0 |
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Inventory impairments and
land option cost write-offs |
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110.8 |
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330.4 |
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215.2 |
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1,410.0 |
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922.5 |
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1,616.3 |
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2,459.3 |
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5,625.1 |
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Gross profit (loss): |
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Home sales |
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101.6 |
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143.3 |
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341.6 |
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522.7 |
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Land/lot sales |
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0.8 |
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4.1 |
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4.0 |
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27.1 |
|
Inventory impairments and
land option cost write-offs |
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(110.8 |
) |
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(330.4 |
) |
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(215.2 |
) |
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(1,410.0 |
) |
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(8.4 |
) |
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(183.0 |
) |
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130.4 |
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(860.2 |
) |
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Selling, general and administrative expense |
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134.3 |
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194.7 |
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388.2 |
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616.1 |
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Interest expense |
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20.3 |
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11.7 |
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68.9 |
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22.9 |
|
Loss (gain) on early retirement of debt |
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3.9 |
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2.6 |
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(4.4 |
) |
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2.6 |
|
Other (income) |
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(2.2 |
) |
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(3.5 |
) |
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(8.7 |
) |
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(7.0 |
) |
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(164.7 |
) |
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(388.5 |
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(313.6 |
) |
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(1,494.8 |
) |
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Financial Services: |
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Revenues, net of recourse expense and
reinsurance reserves (Note G) |
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18.8 |
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30.9 |
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39.1 |
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98.8 |
|
General and administrative expense |
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18.1 |
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23.1 |
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58.5 |
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76.4 |
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Interest expense |
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0.2 |
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0.6 |
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1.2 |
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2.7 |
|
Interest and other (income) |
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(2.3 |
) |
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(2.2 |
) |
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(8.0 |
) |
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(8.5 |
) |
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2.8 |
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9.4 |
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(12.6 |
) |
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28.2 |
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Loss before income taxes |
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(161.9 |
) |
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(379.1 |
) |
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(326.2 |
) |
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(1,466.6 |
) |
(Benefit from) provision for income taxes |
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(19.6 |
) |
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20.2 |
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(12.8 |
) |
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367.2 |
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Net loss |
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$ |
(142.3 |
) |
|
$ |
(399.3 |
) |
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$ |
(313.4 |
) |
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$ |
(1,833.8 |
) |
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Basic and diluted net loss per common share |
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$ |
(0.45 |
) |
|
$ |
(1.26 |
) |
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$ |
(0.99 |
) |
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$ |
(5.81 |
) |
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Cash dividends declared per common share |
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$ |
0.0375 |
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$ |
0.075 |
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$ |
0.1125 |
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$ |
0.375 |
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See accompanying notes to consolidated financial statements.
-4-
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended |
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June 30, |
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|
2009 |
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2008 |
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(In millions) |
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(Unaudited) |
|
OPERATING ACTIVITIES |
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Net loss |
|
$ |
(313.4 |
) |
|
$ |
(1,833.8 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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|
20.7 |
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|
42.1 |
|
Amortization of debt discounts and fees |
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5.0 |
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|
5.3 |
|
Stock option compensation expense |
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10.0 |
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|
9.6 |
|
Income tax benefit from stock option exercises |
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(0.3 |
) |
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(2.7 |
) |
Deferred income taxes |
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|
48.1 |
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|
345.1 |
|
(Gain) loss on early retirement of debt |
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|
(4.4 |
) |
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|
2.6 |
|
Inventory impairments and land option cost write-offs |
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|
215.2 |
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|
1,410.0 |
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|
Changes in operating assets and liabilities: |
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Decrease in construction in progress and finished homes |
|
|
230.6 |
|
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|
991.2 |
|
Decrease in residential land and lots developed, under development,
and held for development |
|
|
325.3 |
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|
518.8 |
|
Decrease in earnest money deposits and other assets |
|
|
49.2 |
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|
55.7 |
|
Decrease in income taxes receivable |
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|
551.3 |
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|
Decrease in mortgage loans held for sale |
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|
129.4 |
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|
277.1 |
|
Decrease in accounts payable, accrued expenses and other liabilities |
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|
(164.7 |
) |
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(423.5 |
) |
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|
Net cash provided by operating activities |
|
|
1,102.0 |
|
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|
1,397.5 |
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INVESTING ACTIVITIES |
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|
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|
Purchases of property and equipment |
|
|
(6.2 |
) |
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|
(9.1 |
) |
(Increase) decrease in restricted cash |
|
|
(60.0 |
) |
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|
2.9 |
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Cash used in investing activities |
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(66.2 |
) |
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|
(6.2 |
) |
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FINANCING ACTIVITIES |
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|
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|
Proceeds from notes payable |
|
|
487.5 |
|
|
|
204.4 |
|
Repayment of notes payable |
|
|
(875.0 |
) |
|
|
(907.8 |
) |
Proceeds from stock associated with certain employee benefit plans |
|
|
2.0 |
|
|
|
9.2 |
|
Income tax benefit from stock option exercises |
|
|
0.3 |
|
|
|
2.7 |
|
Cash dividends paid |
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|
(35.6 |
) |
|
|
(118.2 |
) |
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Net cash used in financing activities |
|
|
(420.8 |
) |
|
|
(809.7 |
) |
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|
|
INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
615.0 |
|
|
|
581.6 |
|
Cash and cash equivalents at beginning of period |
|
|
1,387.3 |
|
|
|
269.6 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
2,002.3 |
|
|
$ |
851.2 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
-5-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2009
NOTE A BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements include the accounts of D.R.
Horton, Inc. and all of its wholly-owned, majority-owned and controlled subsidiaries (which are
referred to as the Company, unless the context otherwise requires), as well as certain variable
interest entities required to be consolidated pursuant to Interpretation No. 46, Consolidation of
Variable Interest Entities an interpretation of ARB No. 51, as amended (FIN 46R), issued by the
Financial Accounting Standards Board (FASB). All significant intercompany accounts, transactions
and balances have been eliminated in consolidation. The financial statements have been prepared in
accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The Company
has evaluated subsequent events through the time of filing these financial statements with the
Securities and Exchange Commission (SEC) on August 5, 2009. In the opinion of management, all
adjustments (consisting of normal, recurring accruals and the asset impairment charges, loss
reserves and deferred tax asset valuation allowance discussed below) considered necessary for a
fair presentation have been included.
These financial statements do not include all of the information and notes required by GAAP
for complete financial statements and should be read in conjunction with the consolidated financial
statements and accompanying notes included in the Companys annual report on Form 10-K for the
fiscal year ended September 30, 2008. Certain reclassifications have been made in the prior years
financial statements to conform to classifications used in the current year.
Seasonality
Historically, the homebuilding industry has experienced seasonal fluctuations; therefore, the
operating results for the three and nine-month periods ended June 30, 2009 are not necessarily
indicative of the results that may be expected for the fiscal year ending September 30, 2009.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
Business
The Company is a national homebuilder that is engaged primarily in the construction and sale
of single-family housing in 76 markets and 27 states in the United States at June 30, 2009. The
Company designs, builds and sells single-family detached homes on lots it developed and on finished
lots purchased ready for home construction. To a lesser extent, the Company also builds and sells
attached homes, such as town homes, duplexes, triplexes and condominiums (including some mid-rise
buildings), which share common walls and roofs. Periodically, the Company sells land and lots. The
Company also provides title agency and mortgage financing services, principally to its homebuyers.
The Company generally does not retain or service the mortgages that it originates but, rather,
seeks to sell the mortgages and related servicing rights to purchasers.
-6-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
NOTE B INVENTORY IMPAIRMENTS AND LAND OPTION COST WRITE-OFFS
The factors hurting demand for new homes that prevailed during fiscal 2008 continued in the
first nine months of fiscal 2009. High inventory levels of available homes, elevated cancellation
rates, low sales absorption rates and overall weak consumer confidence have persisted. The effects
of these factors have been further magnified by continued tight credit conditions in the mortgage
markets, high levels of home foreclosures and severe shortages of liquidity in the financial
markets. The overall economy has weakened significantly and is now in a recession marked by high
unemployment levels and reduced consumer spending. These factors caused the Companys outlook for
the homebuilding industry and the impact on its business to remain cautious.
At June 30, 2009, when the Company performed its quarterly inventory impairment analysis, the
assumptions utilized reflected its cautious outlook for the broader homebuilding industry and the
Companys markets, both of which impact its business. This outlook incorporates the Companys
belief that housing market conditions may continue to deteriorate, and that challenging conditions
will persist. Accordingly, the Companys impairment evaluation as of June 30, 2009 again indicated
a significant number of communities with impairment indicators. Communities with a combined
carrying value of $1,431.2 million as of June 30, 2009, had indicators of potential impairment and
were evaluated for impairment. The analysis of the large majority of these communities assumed that
sales prices in future periods will be equal to or lower than current sales order prices in each
community or in comparable communities in order to generate an acceptable absorption rate. For a
minority of communities that the Company does not intend to develop or operate in current market
conditions, slight increases over current sales prices were assumed. While it is difficult to
determine a timeframe for a given community in the current market conditions, the remaining lives
of these communities were estimated to be in a range from six months to in excess of ten years.
Through this evaluation process, it was determined that communities with a carrying value of $257.8
million as of June 30, 2009, the largest portion of which was in the West region, were impaired. As
a result, during the three months ended June 30, 2009, impairment charges of $102.9 million were
recorded to reduce the carrying value of the impaired communities to their estimated fair value, as
compared to $323.2 million in the same period of the prior year. During the nine months ended June
30, 2009 and 2008, impairment charges totaled $203.0 million and $1,383.7 million, respectively. In
performing its quarterly inventory impairment analyses during fiscal 2009, the Company utilized a
range of discount rates for communities of 14% to 20% which reflects an increase from the range of
12% to 18% it would have used for these communities in fiscal 2008. The increased discount rates
reflect the Companys estimate of the increased level of market risk present in the homebuilding
and related mortgage lending industries. The impact of the increase in the discount rates on the
current quarter inventory impairment charge was an increase of $4.6 million. In the three months
ended June 30, 2009, approximately 89% of the impairment charges were recorded to residential land
and lots and land held for development, and approximately 11% of the charges were recorded to
construction in progress and finished homes inventory, compared to 79% and 21%, respectively, in
the same period of 2008. In the nine months ended June 30, 2009 and 2008, approximately 79% of the
impairment charges were recorded to residential land and lots and land held for development, and
approximately 21% of the charges were recorded to construction in progress and finished homes
inventory.
The Companys estimate of undiscounted cash flows from communities analyzed may change and
could result in a future need to record impairment charges to adjust the carrying value of these
assets to their estimated fair value. There are several factors which could lead to changes in the
estimates of undiscounted future cash flows for a given community. The most significant of these
include pricing and incentive levels actually realized by the community, the rate at which the
homes are sold and the costs incurred to construct the homes. The pricing and incentive levels are
often inter-related with sales pace within a community such that a price reduction can be expected
to increase the sales pace. Further, both of these factors are heavily influenced by the
competitive pressures facing a given community from both new homes and existing homes which may
result from foreclosures. If conditions in the broader economy, homebuilding industry or specific
markets in which the Company operates worsen beyond current expectations, and as the Company
re-evaluates specific community pricing and incentives, construction and development plans, and its
overall land sale strategies, it may be required to evaluate additional communities or re-evaluate
previously impaired communities for potential impairment. These evaluations may result in
additional impairment charges, which could be significantly higher than the current quarter
charges.
-7-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
At June 30, 2009, the Company had $26.1 million of land held for sale, consisting of land held
for development and land under development that has met the criteria of available for sale in
accordance with SFAS No. 144.
During the three-month periods ended June 30, 2009 and 2008, the Company wrote off $7.9
million and $7.2 million, respectively, of earnest money deposits and pre-acquisition costs related
to land option contracts which are not expected to be acquired. During the nine-month periods ended
June 30, 2009 and 2008, the Company wrote off $12.2 million and $26.3 million, respectively, of
such deposits and costs. Should the current weak homebuilding market conditions persist and the
Company is unable to successfully renegotiate certain land purchase contracts, additional earnest
money deposits and pre-acquisition costs may be written off.
NOTE C LAND INVENTORY NOT OWNED
In the ordinary course of its homebuilding business, the Company enters into land and lot
option purchase contracts to procure land or lots for the construction of homes. Under these
contracts, the Company will fund a stated deposit in consideration for the right, but not the
obligation, to purchase land or lots at a future point in time with predetermined terms. Under the
terms of the option purchase contracts, many of the option deposits are not refundable at the
Companys discretion.
Certain of the Companys option purchase contracts result in the creation of a variable
interest in the entity holding the land parcel under option. The Company evaluates those land and
lot option purchase contracts with variable interest entities to determine whether the Company is
the primary beneficiary based upon analysis of the variability of the expected gains and losses of
the entity. The expected gains and losses are primarily determined by the amount of deposit
required by the contract, the time period or term of the contract, and by analyzing the volatility
in home sales prices as well as development and entitlement risk in each specific market. Based on
this evaluation, if the Company is the primary beneficiary of an entity with which the Company has
entered into a land or lot option purchase contract, the variable interest entity is consolidated.
The consolidation of these variable interest entities added $14.6 million in land inventory
not owned and minority interests related to entities not owned to the Companys balance sheet at
June 30, 2009. The Companys obligations related to these land or lot option contracts are
guaranteed by cash deposits totaling $1.8 million and promissory notes and surety bonds totaling
$0.3 million. Creditors, if any, of these variable interest entities have no recourse against the
Company.
For the variable interest entities which are unconsolidated because the Company is not subject
to a majority of the risk of loss or entitled to receive a majority of the entities residual
returns, the maximum exposure to loss is generally limited to the amounts of the Companys option
deposits. At June 30, 2009, the amount of option deposits totaled $15.8 million and are included in
homebuilding earnest money deposits and other assets on the Companys consolidated balance sheet.
Additionally, the Company evaluated land and lot option purchase contracts in accordance with
SFAS No. 49, Accounting for Product Financing Arrangements, and added $8.1 million in land
inventory not owned, with a corresponding increase to accrued expenses and other liabilities, to
the Companys balance sheet at June 30, 2009 as a result of this evaluation.
-8-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
NOTE D NOTES PAYABLE
The Companys notes payable at their principal amounts, net of any unamortized discounts,
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In millions) |
|
Homebuilding: |
|
|
|
|
|
|
|
|
Unsecured: |
|
|
|
|
|
|
|
|
5% senior notes due 2009, net |
|
$ |
|
|
|
$ |
200.0 |
|
8% senior notes due 2009, net |
|
|
|
|
|
|
349.6 |
|
4.875% senior notes due 2010, net |
|
|
143.9 |
|
|
|
249.6 |
|
9.75% senior notes due 2010 |
|
|
70.5 |
|
|
|
96.8 |
|
9.75% senior subordinated notes due 2010, net |
|
|
15.3 |
|
|
|
15.3 |
|
6% senior notes due 2011, net |
|
|
235.4 |
|
|
|
249.6 |
|
7.875% senior notes due 2011, net |
|
|
163.2 |
|
|
|
199.4 |
|
5.375% senior notes due 2012 |
|
|
277.8 |
|
|
|
300.0 |
|
6.875% senior notes due 2013 |
|
|
200.0 |
|
|
|
200.0 |
|
5.875% senior notes due 2013 |
|
|
96.0 |
|
|
|
100.0 |
|
6.125% senior notes due 2014, net |
|
|
198.4 |
|
|
|
198.2 |
|
2% convertible senior notes due 2014 |
|
|
500.0 |
|
|
|
|
|
5.625% senior notes due 2014, net |
|
|
248.8 |
|
|
|
248.6 |
|
5.25% senior notes due 2015, net |
|
|
298.5 |
|
|
|
298.3 |
|
5.625% senior notes due 2016, net |
|
|
298.3 |
|
|
|
298.1 |
|
6.5% senior notes due 2016, net |
|
|
496.9 |
|
|
|
499.2 |
|
Other secured |
|
|
37.2 |
|
|
|
42.2 |
|
|
|
|
|
|
|
|
|
|
$ |
3,280.2 |
|
|
$ |
3,544.9 |
|
|
|
|
|
|
|
|
Financial Services: |
|
|
|
|
|
|
|
|
Mortgage repurchase facility, maturing 2010 |
|
$ |
77.4 |
|
|
$ |
203.5 |
|
|
|
|
|
|
|
|
The aggregate fair value of the Companys senior, convertible senior and senior subordinated
notes at June 30, 2009 and September 30, 2008 was $2,949.5 million and $2,978.1 million,
respectively. For these notes, the Company determines fair value based on quoted market prices. For
other secured notes and balances due under the mortgage repurchase facility, the fair values
approximate their carrying amounts due to their short maturity or floating interest rate terms, as
applicable.
Homebuilding:
The Company voluntarily terminated its unsecured revolving credit facility in May 2009. There
were no cash borrowings and $61.0 million of standby letters of credit outstanding on the facility
at the time of termination. As a result of the termination, the Company recognized $7.6 million of
loss on early retirement of debt related to the write-off of unamortized fees in the three months
ended June 30, 2009. There were no penalties incurred in connection with the early termination of
the revolving credit facility. Concurrent with the termination, the Company entered into secured
letter of credit agreements with the three banks that had issued letters of credit under the
revolving credit facility. The effect of these agreements was to remove the outstanding letters of
credit from the facility and require the Company to deposit cash, in an amount approximating the
balance of letters of credit outstanding, as collateral with the issuing banks. At June 30, 2009,
the amount of cash restricted for this purpose totaled $60.6 million and is included in
homebuilding restricted cash on the Companys consolidated balance sheet.
The revolving credit facility imposed restrictions on the Companys operations and activities
by requiring the Company to maintain certain levels of leverage, tangible net worth and components
of inventory. As a result of the termination of the facility, these restrictions are no longer in
effect.
-9-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
In May 2009, the Company issued $500 million principal amount of 2% convertible senior notes
due 2014, with interest payable semi-annually. The notes, which mature May 15, 2014 subject to
earlier conversion or repurchase, represent unsecured obligations of the Company. Holders of the 2%
convertible senior notes may convert all or any portion of their notes at their option at any time
prior to the close of business on the second scheduled trading day immediately preceding the
maturity date. The initial conversion rate for the notes is 76.5697 shares of the Companys common
stock per $1,000 principal amount of senior notes, equivalent to an initial conversion price of
approximately $13.06 per share of the Companys common stock. The conversion rate is subject to
adjustment in certain events but will not be adjusted for accrued interest, including any
additional interest. Upon conversion of a 2% senior note, the Company will pay or deliver, as the
case may be, cash, shares of the Companys common stock or a combination thereof at the Companys
election. The Company may not redeem the notes prior to the maturity date. The annual effective
interest rate of the notes, after giving effect to the amortization of deferred financing costs is
2.6%.
On January 15, 2009, the Company repaid the remaining $155.2 million principal amount of its
5% senior notes which were due on that date. On February 1, 2009, the Company repaid the remaining
$297.7 million principal amount of its 8% senior notes which were due on that date.
In November 2008, upon expiration of the previous authorization, the Board of Directors
authorized the early repurchase of up to $500 million of the Companys debt securities. The new
authorization is effective from December 1, 2008 to November 30, 2009. At June 30, 2009, $294.6
million of the authorization was remaining.
During the nine months ended June 30, 2009, primarily through unsolicited transactions, the
Company repurchased the following senior notes prior to their maturity dates:
|
|
|
|
|
|
|
Principal |
|
|
|
Amount of |
|
|
|
Senior Notes |
|
|
|
Repurchased |
|
|
|
(In millions) |
|
5% senior notes due 2009 |
|
$ |
44.8 |
|
8% senior notes due 2009 |
|
|
52.0 |
|
4.875% senior notes due 2010 |
|
|
106.0 |
|
9.75% senior notes due 2010 |
|
|
26.3 |
|
6% senior notes due 2011 |
|
|
14.3 |
|
7.875% senior notes due 2011 |
|
|
36.4 |
|
5.375% senior notes due 2012 |
|
|
22.2 |
|
5.875% senior notes due 2013 |
|
|
4.0 |
|
6.5% senior notes due 2016 |
|
|
2.3 |
|
|
|
|
|
|
|
$ |
308.3 |
|
|
|
|
|
These senior notes were repurchased for an aggregate purchase price of $295.6 million, plus
accrued interest. The repurchases resulted in a gain of $12.0 million, which is net of unamortized
discounts and fees written off. This gain was partially offset by the $7.6 million loss related to
termination of the revolving credit facility as discussed above, and the resulting net gain of $4.4
million is included in the consolidated statement of operations for the nine months ended June 30,
2009.
In July 2009, through unsolicited transactions, the Company repurchased $1.0 million principal
amount of its 4.875% senior notes due 2010 and $0.5 million principal amount of its 6.875% senior
notes due 2013, for an aggregate purchase price of $1.47 million, plus accrued interest.
The indentures governing the Companys senior notes and senior subordinated notes impose
restrictions on the creation of secured debt and liens. At June 30, 2009, the Company was in
compliance with all of the limitations and restrictions that form a part of the public debt
obligations.
-10-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
Financial Services:
The Companys mortgage subsidiary, DHI Mortgage, entered into a mortgage sale and repurchase
agreement (the mortgage repurchase facility) on March 28, 2008. The mortgage repurchase facility,
which is accounted for as a secured financing, provides financing and liquidity to DHI Mortgage by
facilitating purchase transactions in which DHI Mortgage transfers eligible loans to the
counterparties against the transfer of funds by the counterparties, thereby becoming purchased
loans. DHI Mortgage then has the right and obligation to repurchase the purchased loans upon their
sale to third-party purchasers in the secondary market or within specified time frames from 45 to
120 days in accordance with the terms of the mortgage repurchase facility. On March 5, 2009,
through an amendment to the repurchase agreement and transfer of the rights of each of the
counterparties to one counterparty, the capacity of the facility was reduced from $275 million to
$75 million, with a provision allowing an increase in the capacity to $100 million during the last
five business days of a fiscal quarter and the first seven business days of the following fiscal
quarter. Additionally, the amendment extended the maturity date of the facility to March 4, 2010.
As of June 30, 2009, $213.4 million of mortgage loans held for sale were pledged under the
repurchase arrangement, with a carrying value of $211.3 million. DHI Mortgage has the option to
fund a portion of its repurchase obligations in advance. As a result of advance paydowns totaling
$127.5 million, DHI Mortgage had an obligation of $77.4 million outstanding under the mortgage
repurchase facility at June 30, 2009 at a 3.8% interest rate.
The mortgage repurchase facility is not guaranteed by either D.R. Horton, Inc. or any of the
subsidiaries that guarantee the Companys homebuilding debt. The facility contains financial
covenants as to the mortgage subsidiarys minimum required tangible net worth, its maximum
allowable ratio of debt to tangible net worth and its minimum required liquidity. At June 30, 2009,
the mortgage subsidiary was in compliance with all of the conditions and covenants of the mortgage
repurchase facility.
NOTE E HOMEBUILDING INTEREST
The Company capitalizes homebuilding interest costs to inventory during active development and
construction. Capitalized interest is charged to cost of sales as the related inventory is
delivered to the buyer. Additionally, the Company writes off a portion of the capitalized interest
related to communities for which inventory impairments are recorded. Due to the Companys inventory
reduction strategies, slowing or suspending land development in certain communities and limiting
the construction of unsold homes, the Companys inventory under active development and construction
was lower than its debt level at June 30, 2009 and 2008. Therefore, a portion of the interest
incurred was expensed directly to interest expense as reflected below.
The following table summarizes the Companys homebuilding interest costs incurred,
capitalized, expensed as interest expense, charged to cost of sales and written off during the
three and nine-month periods ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
Capitalized interest, beginning of period |
|
$ |
155.8 |
|
|
$ |
253.3 |
|
|
$ |
160.6 |
|
|
$ |
338.7 |
|
Interest incurred |
|
|
42.8 |
|
|
|
58.5 |
|
|
|
149.8 |
|
|
|
177.9 |
|
Interest expensed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directly to interest expense |
|
|
(20.3 |
) |
|
|
(11.7 |
) |
|
|
(68.9 |
) |
|
|
(22.9 |
) |
Amortized to cost of sales |
|
|
(30.3 |
) |
|
|
(44.9 |
) |
|
|
(89.1 |
) |
|
|
(178.1 |
) |
Written off with inventory impairments |
|
|
(3.4 |
) |
|
|
(30.4 |
) |
|
|
(7.8 |
) |
|
|
(90.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest, end of period |
|
$ |
144.6 |
|
|
$ |
224.8 |
|
|
$ |
144.6 |
|
|
$ |
224.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-11-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
NOTE F WARRANTY COSTS
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. The Companys warranty liability is based upon historical warranty cost experience in
each market in which it operates and is adjusted as appropriate to reflect qualitative risks
associated with the types of homes built and the geographic areas in which they are built.
During the three and nine months ended June 30, 2009, the Company recorded charges of $4.0
million and $6.0 million, respectively, as increases in liabilities for pre-existing warranties for
the repair of approximately 75 homes in its South Florida and Louisiana markets where certain homes
it constructed during 2005 through 2007 contain or are suspected to contain allegedly defective
drywall manufactured in China (Chinese Drywall) that may be responsible for the accelerated
corrosion of certain metals in the home. The Company first learned of this potential issue in its
quarter ended March 31, 2009 through customer inquiries. The
Company has identified these homes through a
review of the supply channel for its homes constructed in these markets and of the warranty claims
received in these markets as well as testing of specific homes. The Company is continuing its
investigation to determine if there are additional homes with the Chinese Drywall in these markets,
which if found, would likely require the Company to further increase its warranty reserve for this
matter in the future. As the actual costs incurred to remediate these homes have been minimal
through June 30, 2009, the costs accrued to correct these homes are based on the Companys
expectations of future repair costs. If the actual costs to remediate the homes differ from the
estimated costs, it may require the Company to revise its warranty estimate for this matter.
Through investigation of its supply channels in other markets, the Company has not identified
any homes suspected of containing the Chinese Drywall outside of its Florida and Louisiana markets
at this time. As of August 5, 2009 the Company has not been included as a defendant in any lawsuit
pertaining to the Chinese Drywall, although it is possible that it may in the future be subject to
such litigation. While the Company will seek reimbursement for these remediation costs from various
sources, it has not recorded a receivable for potential recoveries as of June 30, 2009 given the
early stage of this matter.
Changes in the Companys warranty liability during the three and nine-month periods ended June
30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In millions) |
|
Warranty liability, beginning of period |
|
$ |
67.0 |
|
|
$ |
98.7 |
|
|
$ |
83.4 |
|
|
$ |
116.0 |
|
Warranties issued |
|
|
4.3 |
|
|
|
6.7 |
|
|
|
12.2 |
|
|
|
21.9 |
|
Changes in liability for pre-existing warranties |
|
|
(1.4 |
) |
|
|
(4.8 |
) |
|
|
(12.9 |
) |
|
|
(16.1 |
) |
Settlements made |
|
|
(5.3 |
) |
|
|
(9.2 |
) |
|
|
(18.1 |
) |
|
|
(30.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability, end of period |
|
$ |
64.6 |
|
|
$ |
91.4 |
|
|
$ |
64.6 |
|
|
$ |
91.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE G MORTGAGE LOANS
To manage the interest rate risk inherent in its mortgage operations, the Company hedges its
risk using various derivative instruments, which include forward sales of mortgage-backed
securities (MBS), Eurodollar Futures Contracts (EDFC) and put options on both MBS and EDFC. Use of
the term hedging instruments in the following discussion refers to these securities collectively,
or in any combination. The Company does not enter into or hold derivatives for trading or
speculative purposes.
Mortgage Loans Held for Sale
Mortgage loans held for sale consist primarily of single-family residential loans
collateralized by the underlying property. Newly originated loans that have been closed but not
committed to third-party purchasers are hedged to
-12-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
mitigate the risk of changes in their fair value.
Hedged loans are committed to third-party purchasers typically within three days after origination.
Effective October 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB Statement No. 115, for all loans
originated on or after October 1, 2008. These mortgage loans held for sale are initially recorded
at fair value based on either sale commitments or current market quotes and are adjusted for
subsequent changes in fair value until the loan is sold. While the Companys risk management
policies with respect to interest rate risk and fair value changes in mortgage loans held for sale
have not changed, the effect of this standard alleviated the complex documentation requirements to
account for these instruments as designated fair value accounting hedges under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. Additionally, the recognition of
net origination costs and fees associated with mortgage loans originated on or after October 1,
2008 are no longer deferred until the time of sale. There were no required cumulative adjustments
to retained earnings because the Company chose to continue to account for mortgage loans held for
sale originated prior to October 1, 2008 at the lower of cost or market. The implementation of this
standard did not have a material impact on the Companys consolidated financial position, results
of operations or cash flows.
At June 30, 2009, mortgage loans held for sale accounted for under SFAS No. 159 had an
aggregate fair value of $222.1 million and an aggregate outstanding principal balance of $220.1
million. During the three months ended June 30, 2009 and 2008, the Company had net gains on sales
of loans of $12.2 million and $16.9 million, respectively. During the nine months ended June 30,
2009 and 2008, the Company had net gains on sales of loans of $15.5 million and $52.8 million,
respectively, which includes the effect of recording recourse expense, as discussed below in Other
Mortgage Loans, of $24.2 million and $16.0 million, respectively.
The notional amounts of the hedging instruments used to hedge mortgage loans held for sale
vary in relationship to the underlying loan amounts, depending on the movements in the value of
each hedging instrument relative to the value of the underlying mortgage loans. The fair value
change related to the hedging instruments generally offsets the fair value change in the mortgage
loans held for sale, which for the three and nine months ended June 30, 2009 was not significant,
and is recognized in current earnings. As of June 30, 2009, the Company had $80.2 million in
mortgage loans held for sale not committed to third-party purchasers and the notional amounts of
the hedging instruments related to those loans totaled $79.0 million. Prior to October 1, 2008, in
accordance with SFAS No. 133, the effectiveness of the fair value hedge in the prior year was
monitored and any ineffectiveness, which for the three and nine months ended June 30, 2008 was not
significant, was recognized in current earnings.
Other Mortgage Loans
Generally, mortgage loans are sold by the Company with limited recourse provisions which
include industry-standard representations and warranties, primarily involving a minimum number of
payments to be made by the borrower and/or misrepresentation by the borrower. The Company does not
retain any other continuing interest related to mortgage loans sold in the secondary market. Other
mortgage loans generally consist of loans repurchased due to these limited recourse obligations.
Typically, these loans are impaired and often become real estate owned through the foreclosure
process.
Based on historical performance and current housing and credit market conditions, the Company
has recorded reserves for estimated losses on other mortgage loans, real estate owned, future loan
repurchase obligations due to the limited recourse provisions and losses for mortgage reinsurance
activities, all of which are recorded as reductions of financial services revenue. These reserves
totaled $39.5 million and $30.5 million at June 30, 2009 and September 30, 2008, respectively, and
were comprised as follows. Other mortgage loans, subject to nonrecurring fair value measurement,
totaled $46.4 million and $58.6 million at June 30, 2009 and September 30, 2008, respectively, and
had corresponding loss reserves of $14.4 million and $20.1 million, respectively. The Company has
established loss reserves for real estate owned of $3.5 million and $4.7 million at June 30, 2009
and September 30, 2008, respectively. The Companys other mortgage loans and real estate owned are
included in financial services other assets in the accompanying consolidated balance sheet.
Additional loss reserves at June 30, 2009 and
September 30, 2008 included liabilities of $21.6 million and $5.7 million, respectively, for
expected losses on future loan repurchase obligations due to the limited recourse provisions.
-13-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
Additionally, a subsidiary of the Company reinsured a portion of private mortgage insurance
written on loans originated by DHI Mortgage in prior years. At June 30, 2009 and September 30,
2008, reserves for expected future losses under the reinsurance program totaled $16.3 million and
$5.8 million, respectively. The mortgage repurchase and reinsurance loss reserves are included in
financial services accounts payable and other liabilities in the accompanying consolidated balance
sheet. It is possible that future losses may exceed the amount of reserves and, if so, additional
charges will be required.
Loan Commitments
To meet the financing needs of its customers, the Company is party to interest rate lock
commitments (IRLCs) which are extended to borrowers who have applied for loan funding and meet
defined credit and underwriting criteria. At June 30, 2009, the Companys IRLCs totaled $217.3
million which are accounted for as derivative instruments recorded at fair value.
The Company manages interest rate risk related to its IRLCs through the use of best-efforts
whole loan delivery commitments and hedging instruments. These instruments are considered
derivatives in an economic hedge and are accounted for at fair value with gains and losses
recognized in current earnings. As of June 30, 2009, the Company had approximately $18.2 million of
best-efforts whole loan delivery commitments and $267.2 million of hedging instruments related to
its IRLCs not yet committed to purchasers.
At June 30, 2009, the Company had $301.6 million in EDFC options and MBS which were acquired
as part of a program to potentially offer homebuyers a below market interest rate on their home
financing. These hedging instruments and the related commitments are accounted for at fair value
with gains and losses recognized in current earnings. These gains and losses for the three and nine
months ended June 30, 2009 and 2008 were not material.
NOTE H FAIR VALUE MEASUREMENTS
Effective October 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, for
fair value measurements of certain financial instruments. In accordance with FASB Staff Position
No. FAS 157-2, the Company will adopt the provisions of SFAS No. 157 that relate to nonfinancial
assets and liabilities on October 1, 2009. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements. Fair value is
defined under SFAS No. 157 as the exchange (exit) price that would be received for an asset or paid
to transfer a liability in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. This standard
establishes a three-level hierarchy for fair value measurements based upon the inputs to the
valuation of an asset or liability. Observable inputs are those which can be easily seen by market
participants while unobservable inputs are generally developed internally, utilizing managements
estimates and assumptions.
|
|
|
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 derived from model-based techniques in which at least one
significant input is unobservable and based on the Companys own estimates about the
assumptions that market participants would use to value the asset or liability. |
When available, the Company uses quoted market prices in active markets to determine fair
value. The Company considers the principal market and nonperformance risk associated with the
Companys counterparties when determining the fair value measurements. Fair value measurements are
used for IRLCs, mortgage loans held for sale, other mortgage loans and hedging instruments.
The value of mortgage loans held for sale includes changes in estimated fair value from the
date the loan is closed until the date the loan is sold. The fair value of mortgage loans held for
sale is generally calculated by
-14-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
reference to quoted prices in secondary markets for commitments to
sell mortgage loans with similar characteristics; therefore, they have been classified as a Level 2
valuation. After consideration of nonperformance risk, no additional adjustments have been made by
the Company to the fair value measurement of mortgage loans held for sale. Closed mortgage loans
are typically sold within 30 days of origination, limiting any nonperformance exposure period. In
addition, the Company actively monitors the financial strength of its counterparties and has
limited the number of counterparties utilized in loan sale transactions due to the current market
volatility in the mortgage and bank environment.
The hedging instruments utilized by the Company to manage its interest rate risk and hedge the
changes in the fair value of mortgage loans held for sale are publicly traded derivatives with fair
value measurements based on quoted market prices. Exchange-traded derivatives are considered Level
1 valuations because quoted prices for identical assets are used for fair value measurements.
Over-the-counter derivatives, such as MBS, are classified as Level 2 valuations because quoted
prices for similar assets are used for fair value measurements. The Company mitigates exposure to
nonperformance risk associated with over-the-counter derivatives by limiting the number of
counterparties and actively monitoring their financial strength and creditworthiness while
requiring them to be well-known institutions with credit ratings equal to or better than AA- or
equivalent. Further, the Companys derivative contracts typically have short-term durations with
maturities from one to four months. Accordingly, the Companys risk of nonperformance relative to
its derivative positions is also not significant. Nonperformance risk associated with
exchange-traded derivatives is considered minimal as these items are traded on the Chicago
Mercantile Exchange. After consideration of nonperformance risk, no additional adjustments have
been made to the fair value measurement of hedging instruments.
The fair values of IRLCs are also calculated by reference to quoted prices in secondary
markets for commitments to sell mortgage loans with similar characteristics; therefore, they have
been classified as Level 2 valuations. These valuations do not contain adjustments for expirations
as any expired commitments are excluded from the fair value measurement. After consideration of
nonperformance risk, no additional adjustments have been made by the Company to the fair value
measurements of IRLCs. The Company generally only issues IRLCs for products that meet specific
purchaser guidelines. Should any purchaser become insolvent, the Company would not be required to
close the transaction based on the terms of the commitment. Since not all IRLCs will become closed
loans, the Company adjusts its fair value measurements for the estimated amount of IRLCs that will
not close.
A summary of assets and liabilities at June 30, 2009 measured at fair value on a recurring
basis were as follows:
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|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
Fair Value at
|
|
|
Hierarchy |
|
Balance Sheet Location |
|
June 30, 2009 |
|
|
|
|
|
|
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|
|
|
(In millions) |
Financial Services: |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans Held for Sale (a) |
|
Level 2 |
|
Mortgage Loans Held for Sale |
|
$ |
222.1 |
|
Derivatives not Designated as
Hedging Instruments under SFAS
No. 133 (b): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Lock Commitments |
|
Level 2 |
|
Other Assets |
|
$ |
0.8 |
|
Forward Sales of MBS |
|
Level 2 |
|
Other Liabilities |
|
$ |
(0.3 |
) |
EDFC Options |
|
Level 1 |
|
Other Liabilities |
|
$ |
|
|
Best-Efforts Commitments |
|
Level 2 |
|
Other Liabilities |
|
$ |
(0.6 |
) |
|
|
|
(a) |
|
Mortgage loans held for sale are reflected at full fair value. |
|
(b) |
|
Fair value measurements represent changes in fair value since inception. These changes
are reflected in the balance sheet and included in financial services revenues on the
Companys consolidated statement of operations. |
Additional information regarding the Companys purpose for entering into derivatives not
designated as hedging instruments and its overall risk management strategies is included in Note G
Mortgage Loans and in Item 3 Quantitative and Qualitative Disclosures about Market Risk of this
quarterly report on Form 10-Q.
-15-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
Interest income earned on mortgage loans held for sale is based on contractual interest rates
and included in financial services revenues.
Other mortgage loans are measured at the lower of cost or fair value on a nonrecurring basis
and include performing and nonperforming mortgage loans. Other mortgage loans are reported in other
assets based on the Companys assessment of the value of the underlying collateral and are
classified as Level 3 valuations.
NOTE I INCOME TAXES
The Companys benefit from income taxes for the three and nine months ended June 30, 2009 was
$19.6 million and $12.8 million, respectively. The provision for income taxes for the three and
nine months ended June 30, 2008 was $20.2 million and $367.2 million, respectively. The Companys
effective tax rate for the three and nine-month periods ended June 30, 2009 was 12.1% and 3.9%,
respectively. The effective tax rate for the three and nine-month periods ended June 30, 2008 was
negative 5.3% and negative 25.0%, respectively. The difference in the Companys effective tax rate
for the nine-month periods is primarily the result of recording a $714.3 million valuation
allowance on its deferred tax assets at March 31, 2008, of which $385.0 million related to deferred
tax assets existing as of the beginning of fiscal year 2008. The benefit from income taxes for the
three and nine-month periods ended June 30, 2009 relates primarily to adjustments to the tax
provision recorded for fiscal year 2008 resulting from the finalization and filing of the tax
return for that year. A portion of the benefit recognized in the current fiscal year periods in the
amount of approximately $6.8 million represents an underaccrual of income taxes receivable at
September 30, 2008, which had the effect of decreasing income tax expense and increasing net income
during the periods. This adjustment is not material to any of the impacted periods.
At June 30, 2009, the Company had a federal income tax receivable of $124.9 million, relating
to a net operating loss carryback from its 2008 year. In December 2008, the Company received a
federal income tax refund of $621.7 million with respect to its 2008 year. The Company expects to
receive the majority of the $124.9 million receivable in the form of a refund during the fourth
quarter of fiscal 2009.
At June 30, 2009 and September 30, 2008, the Company had net deferred tax assets of $1,233.9
million and $1,174.8 million, respectively, offset by valuation allowances of $1,068.5 million and
$961.3 million, respectively. A substantial portion of the remaining net deferred tax asset of
$165.4 million at June 30, 2009 is expected to be recovered through the carryback of federal tax
losses to be generated in fiscal 2009, primarily through the sale of inventories which have been
impaired in previous periods. Federal tax losses realized in fiscal 2009 can be carried back to
fiscal 2007 when the Company had taxable income. The remainder of the net deferred tax asset
relates to state income tax loss carrybacks. The accounting for deferred taxes is based upon an
estimate of future results. Differences between the anticipated and actual outcome of these future
tax consequences could have a material impact on the Companys consolidated results of operations
or financial position. The Companys ability to sell and close an adequate amount of previously
impaired homes in fiscal 2009 is a significant assumption required for full recovery of the net
deferred tax asset. Changes in existing tax laws also affect actual tax results and the valuation
of deferred tax assets over time.
The total amount of unrecognized tax benefits was $16.0 million and $18.7 million as of June
30, 2009 and September 30, 2008, respectively, which includes interest, penalties, and the tax
benefit relating to the deductibility of interest and state income taxes. All tax positions, if
recognized, would affect the Companys effective income tax rate. The Company does not expect the
total amount of unrecognized tax benefits to significantly decrease or increase within twelve
months of the current reporting date.
The Company is subject to federal income tax and to income tax in multiple states. The statute
of limitations for the Companys major tax jurisdictions remains open for examination for fiscal
years 2004 through 2009. The Company is currently being audited by various states. The IRS
concluded its examination of the Companys tax returns for 2004 and 2005 in February 2009 which
resulted in the assessment of $7.5 million of additional federal
and state income tax and interest. Also, the Company recorded a reduction of $2.7 million to
the amount of unrecognized tax benefits during the second quarter of fiscal 2009 as a result of the
conclusion of the audit.
-16-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
NOTE J LOSS PER SHARE
The following table sets forth the numerators and denominators used in the computation of
basic and diluted loss per share for the three and nine months ended June 30, 2009 and 2008. In all
four periods, all outstanding stock options and convertible senior notes were excluded from the
computation because they were antidilutive due to the net loss recorded during each period.
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Three Months Ended June 30, |
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|
Nine Months Ended June 30, |
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2009 |
|
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2008 |
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2009 |
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|
2008 |
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(In millions) |
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|
Numerator: |
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|
Net loss |
|
$ |
(142.3 |
) |
|
$ |
(399.3 |
) |
|
$ |
(313.4 |
) |
|
$ |
(1,833.8 |
) |
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|
|
Denominator: |
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Denominator for
basic and diluted
loss per share
adjusted weighted
average common
shares |
|
|
316.9 |
|
|
|
316.0 |
|
|
|
316.8 |
|
|
|
315.5 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
NOTE K STOCKHOLDERS EQUITY
The Company had an automatically effective universal shelf registration statement filed with
the SEC, registering debt and equity securities which expired in June 2009. Also, at June 30, 2009,
the Company had the capacity to issue approximately 22.5 million shares of common stock under its
acquisition shelf registration statement, to effect, in whole or in part, possible future business
acquisitions.
In November 2008, upon expiration of the previous authorization, the Board of Directors
authorized the repurchase of up to $100 million of the Companys common stock. The new
authorization is effective from December 1, 2008 to November 30, 2009. All of the $100 million
authorization was remaining at June 30, 2009.
During the three months ended June 30, 2009, the Board of Directors approved a quarterly cash
dividend of $0.0375 per common share, which was paid on May 27, 2009 to stockholders of record on
May 19, 2009. In July 2009, the Board of Directors approved a quarterly cash dividend of $0.0375
per common share, payable on August 28, 2009 to stockholders of record on August 19, 2009.
Quarterly cash dividends of $0.075 per common share were declared in the comparable quarters of
fiscal 2008.
On February 9, 2009, stock options were granted to executive officers, certain other officers
and employees, and outside directors of the Company by the Compensation Committee of the Board of
Directors or the Board of Directors. The recipients of these stock options may purchase
approximately 6.1 million shares of the Companys common stock, at an exercise price of $9.03 per
share, the closing market price of the Companys common stock on the date of grant.
NOTE L COMMITMENTS AND CONTINGENCIES
The Company has been named as defendant in various claims, complaints and other legal actions
arising in the ordinary course of business, including warranty and construction defect claims on
closed homes and claims related to its mortgage activities. The Company has established reserves
for such contingencies, based on the expected costs of the self-insured portion of such claims. The
Companys estimates of such reserves are based on the facts and circumstances of individual pending
claims and historical data and trends, including costs relative to revenues, home closings and
product types, and include estimates of the costs of unreported claims related to past operations.
These reserve estimates are subject to ongoing revision as the circumstances of individual pending
claims and historical
data and trends change. Adjustments to estimated reserves are recorded in the accounting
period in which the change in estimate occurs.
-17-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
Management believes that, while the outcome of these contingencies cannot be predicted with
certainty, the liabilities arising from these matters will not have a material adverse effect on
the Companys consolidated financial position, results of operations or cash flows. However, to the
extent the liability arising from the ultimate resolution of any matter exceeds managements
estimates reflected in the recorded reserves relating to these matters, the Company could incur
additional charges that could be significant.
On June 15, 2007, a putative class action, John R. Yeatman, et al. v. D.R. Horton, Inc., et
al., was filed by one of the Companys customers against it and its affiliated mortgage company
subsidiary in the United States District Court for the Southern District of Georgia. The complaint
sought certification of a class alleged to include persons who, within the year preceding the
filing of the suit, purchased a home from the Company and obtained a mortgage for such purchase
from its affiliated mortgage company subsidiary. The complaint alleged that the Company violated
Section 8 of the Real Estate Settlement Procedures Act by effectively requiring its homebuyers to
use its affiliated mortgage company to finance their home purchases by offering certain discounts
and incentives. The action sought damages in an unspecified amount and injunctive relief. On April
23, 2008, the Court ruled on the Companys motion to dismiss and dismissed this complaint with
prejudice. The plaintiffs filed a notice of appeal, which is currently pending.
On March 24, 2008, a putative class action, James Wilson, et al. v. D.R. Horton, Inc., et al.,
was filed by five customers of Western Pacific Housing, Inc., one of the Companys wholly-owned
subsidiaries, against the Company, Western Pacific Housing, Inc., and the Companys affiliated
mortgage company subsidiary, in the United States District Court for the Southern District of
California. The complaint sought certification of a class alleged to include persons who, within
the four years preceding the filing of the suit, purchased a home from the Company, or any of its
subsidiaries, and obtained a mortgage for such purchase from the Companys affiliated mortgage
company subsidiary. The complaint alleged that the Company violated Section 1 of the Sherman
Antitrust Act and Sections 16720, 17200 and 17500 of the California Business and Professions Code
by effectively requiring its homebuyers to apply for a loan through its affiliated mortgage
company. In June 2009 the complaint was amended to limit the putative class to California customers
only and the claims asserted were limited to alleged violations of the California Business and
Professions code. The complaint alleges that the homebuyers were either deceived about loan costs
charged by the Companys affiliated mortgage company or coerced into using its affiliated mortgage
company, or both, and that discounts and incentives offered by the Company or its subsidiaries to
buyers who obtained financing from its affiliated mortgage company were illusory. The action seeks
treble damages in an unspecified amount and injunctive relief. Management believes the claims
alleged in this action are without merit and will defend them vigorously. However, as the action is
still in its early stages, the Company is unable to express an opinion as to the likelihood of an
unfavorable outcome or the amount of damages, if any.
In the ordinary course of business, the Company enters into land and lot option purchase
contracts in order to procure land or lots for the construction of homes. At June 30, 2009, the
Company had total deposits of $35.0 million, comprised of cash deposits of $31.9 million,
promissory notes of $2.1 million, and letters of credit and surety bonds of $1.0 million, to
purchase land and lots with a total remaining purchase price of $726.2 million. Within the land and
lot option purchase contracts in force at June 30, 2009, there were a limited number of contracts,
representing only $9.9 million of remaining purchase price, subject to specific performance clauses
which may require the Company to purchase the land or lots upon the land sellers meeting their
obligations.
Included in the total deposits of $35.0 million were $17.3 million of deposits related to land
and lot option purchase contracts for which the Company does not expect to exercise its option to
purchase the land or lots, but the contract has not yet been terminated. The remaining purchase
price of land and lots subject to those contracts was $148.6 million. Consequently, the deposits
relating to these contracts have been written off, resulting in a net deposit balance of $17.7
million at June 30, 2009, which is included in homebuilding earnest money deposits and other assets
on the Companys consolidated balance sheet. The majority of land and lots under contract are
currently expected to be purchased within three years, based on the Companys assumptions as to the
extent it will exercise its options to purchase such land and lots.
-18-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
Additionally, in the normal course of its business activities, the Company provides standby
letters of credit and surety bonds, issued by third parties, to secure performance under various
contracts. At June 30, 2009, outstanding standby letters of credit were $59.3 million, all of which
were cash collateralized, and surety bonds were $1.19 billion.
NOTE M RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The statement
defines fair value, establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. SFAS No. 157 is effective as of the beginning of an
entitys fiscal year that begins after November 15, 2007. In February 2008, the FASB issued FASB
Staff Position (FSP) No. FAS 157-2, which partially deferred the effective date of SFAS No. 157 for
nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis, until fiscal years beginning after
November 15, 2008. The partial adoption of SFAS No. 157 did not have a material impact on the
Companys consolidated financial position, results of operations or cash flows (see Note H). The
Company is currently evaluating the impact of adopting the remaining provisions of SFAS No. 157;
however, it is not expected to have a material impact on the Companys consolidated financial
position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51. The statement clarifies the accounting for
noncontrolling interests and establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary, including classification as a component of equity. SFAS No. 160 is
effective for fiscal years beginning on or after December 15, 2008, and earlier adoption is
prohibited. The Company is currently evaluating the impact of the adoption of SFAS No. 160;
however, it is not expected to have a material impact on the Companys consolidated financial
position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, (SFAS
No. 141(R)). The statement replaces SFAS No. 141, Business Combinations and provides revised
guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities
assumed, and any noncontrolling interest in the acquiree. It also provides disclosure requirements
to enable users of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) is effective for fiscal years beginning on or after December
15, 2008, and is to be applied prospectively. The Company does not expect the adoption of SFAS No.
141(R) to have a material impact on its consolidated financial position, results of operations or
cash flows.
In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance
Contracts an interpretation of FASB Statement No. 60. The statement requires that an insurance
entity recognize a claim liability prior to an event of default (insured event) when there is
evidence that credit deterioration has occurred in an insured financial obligation. SFAS No. 163
also clarifies the application of SFAS No. 60 Accounting and Reporting by Insurance Enterprises
to financial guarantee insurance contracts and expands disclosure requirements surrounding such
contracts. SFAS No. 163 is effective for financial statements issued for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal years. The Company is currently
evaluating the impact of the adoption of SFAS No. 163; however, it is not expected to have a
material impact on the Companys consolidated financial position, results of operations or cash
flows.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 specifies
that issuers of such instruments should separately account for the liability and equity components
in a manner that will reflect the entitys nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. FSP APB 14-1 is effective for fiscal years beginning after
December 15, 2008 and early adoption is not permitted. The Company will retrospectively apply the
provisions of FSP APB 14-1 as a cumulative effect of a change in accounting principle upon its
adoption on October 1, 2009. This will require the Company to record the debt component of its 2%
convertible senior notes at its fair value on the date of issuance, assuming no conversion
features. The remaining
value of the equity component of the 2% senior notes will be recorded as a reduction in the
carrying value of the
-19-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
notes and an increase to additional paid-in-capital. The reduction in the
carrying value of the notes and the fees related to the notes will be amortized as interest
incurred and expensed or capitalized to inventory over the remaining life of the notes. Assuming
the provisions of FSP APB 14-1 had been applied at the date of issuance, the amount of the
reduction in the carrying value of the notes would have been $140.5 million and the increase in
additional paid-in-capital would have been approximately $136.7 million, net of tax.
In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities. The staff position amends SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, to require public entities to provide
additional disclosures about transfers of financial assets. It also amends FIN 46(R) to require
public enterprises, including sponsors that have a variable interest in a variable interest entity,
to provide additional disclosures about their involvement with variable interest entities. This
position is effective for financial statements issued for interim periods and fiscal years ending
after December 15, 2008. The adoption of this pronouncement, which is related to disclosure only,
did not have a material impact on the Companys consolidated financial position, results of
operations or cash flows.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2
changes the method for determining whether an other-than-temporary impairment exists for debt
securities and the amount of the impairment to be recorded in earnings. FSP FAS 115-2 and FAS 124-2
is effective for interim and annual periods ending after June 15, 2009 and therefore, was effective
for the Company this quarter. The adoption of this pronouncement did not impact the Companys
consolidated financial position, results of operations or cash flows.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures About Fair
Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 requires
fair value disclosures in both interim as well as annual financial statements in order to provide
more timely information about the effects of current market conditions on financial instruments.
FSP FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009
and therefore, was effective for the Company this quarter. The adoption of this pronouncement,
which required additional disclosures in this report, did not have a material impact on the
Companys consolidated financial position, results of operations or cash flows.
In April 2009, the FASB issued FSP FAS 157-4, Determining Whether a Market Is Not Active and
a Transaction Is Not Distressed (FSP 157-4). FSP 157-4 provides additional guidance on factors to
consider in estimating fair value when there has been a significant decrease in market activity for
a financial asset. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009
and therefore, was effective for the Company this quarter. The adoption of FSP 157-4 did not impact
the Companys consolidated financial position, results of operations or cash flows.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events. The statement establishes
general standards of accounting for and disclosure of events that occur after the balance sheet
date but before the date that the financial statements are issued or are available to be issued,
and requires disclosure of the date through which an entity has evaluated subsequent events and the
basis for that date. SFAS No. 165 is effective for interim and annual periods ending after June 15,
2009, and therefore, was effective for the Company this quarter. The adoption of this pronouncement
did not have a material impact on the Companys consolidated financial position, results of
operations or cash flows.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets.
The statement is a revision to SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, and will require more information about transfers of
financial assets, including securitization transactions, and where there is continuing exposure to
the risks related to transferred financial assets. It eliminates the concept of a qualifying
special-purpose entity, changes the requirements for derecognizing financial assets, and requires
additional disclosures. SFAS No. 166 is effective at the start of a companys first fiscal year
beginning after November 15, 2009 and early adoption is not permitted. The Company is currently
evaluating the impact of the
-20-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
adoption of SFAS No. 166; however, it is not expected to have a material impact on the
Companys consolidated financial position, results of operations or cash flows.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). The
statement is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest
Entities, and changes how a company determines when an entity that is insufficiently capitalized
or is not controlled through voting (or similar rights) should be consolidated. The determination
of whether a company is required to consolidate an entity is based on, among other things, an
entitys purpose and design and a companys ability to direct the activities of the entity that
most significantly impact the entitys economic performance. SFAS No. 167 is effective at the start
of a companys first fiscal year beginning after November 15, 2009 and early adoption is not
permitted. The Company is currently evaluating the impact the adoption of SFAS No. 167 will have on
its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No.
162. SFAS No. 168 establishes the FASB Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB to be used in the preparation of
financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP.
SFAS No. 168 is effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The adoption of the SFAS No. 168 will not impact the Companys
consolidated financial position, results of operations or cash flows.
-21-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
NOTE N SEGMENT INFORMATION
The Companys 32 homebuilding operating divisions and its financial services operation are its
operating segments under SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. As reflected in the current year presentation, the homebuilding operating segments
are aggregated into six reporting segments and the financial services operating segment is its own
reporting segment. Previously, the Company presented seven homebuilding reporting segments, based
on its seven operating regions which had been determined to be its operating segments. During the
fourth quarter of fiscal 2008, the Company reassessed the level at which the SFAS No. 131 operating
segment criteria are met, and as a result, changed its operating segments from the operating
regions to the operating divisions. This determination was based on changes to the Companys
management structure and decision-making processes, which have evolved primarily due to the
difficult market conditions and the decrease in size of the Companys operations.
As a result of the change in operating segments described above, the composition of the
Companys reporting segments was also revised. The California markets, which were previously
presented as a separate reporting segment are now included in the West reporting segment.
Additionally, the Salt Lake City, Utah market, which was previously included in the Southwest
reporting segment, is now included in the West reporting segment. Furthermore, the name of the
Northeast reporting segment has been changed to the East reporting segment, although the markets
comprising it remain the same.
Under the revised presentation, the Companys reportable homebuilding segments are: East,
Midwest, Southeast, South Central, Southwest and West. These reporting segments have homebuilding
operations located in the following states:
|
|
|
|
|
|
|
East:
|
|
Delaware, Georgia (Savannah only), Maryland, New Jersey, North Carolina,
Pennsylvania, South Carolina and Virginia |
|
|
|
|
|
|
|
Midwest:
|
|
Colorado, Illinois, Minnesota and Wisconsin |
|
|
|
|
|
|
|
Southeast:
|
|
Alabama, Florida and Georgia |
|
|
|
|
|
|
|
South Central:
|
|
Louisiana, Mississippi, Oklahoma and Texas |
|
|
|
|
|
|
|
Southwest:
|
|
Arizona and New Mexico |
|
|
|
|
|
|
|
West:
|
|
California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington |
Consequently, the Company has restated the prior year segment information provided in this
note to conform to the current year presentation.
Homebuilding is the Companys core business, generating 99% and 98% of consolidated revenues
during the nine months ended June 30, 2009 and 2008, respectively. The Companys homebuilding
segments are primarily engaged in the acquisition and development of land for residential purposes
and the construction and sale of residential homes on such land in 27 states and 76 markets in the
United States. The homebuilding segments generate most of their revenues from the sale of completed
homes, with a lesser amount from the sale of land and lots.
The Companys financial services segment provides mortgage financing and title agency services
principally to customers of the Companys homebuilding segments. The Company generally does not
retain or service the mortgages that it originates, but, rather, seeks to sell the mortgages and
related servicing rights to purchasers. The financial services segment generates its revenues from
originating and selling mortgages and collecting fees for title insurance agency and closing
services.
-22-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
The accounting policies of the reporting segments are described throughout Note A in the
Companys annual report on Form 10-K for the fiscal year ended September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
Restated |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East |
|
$ |
84.8 |
|
|
$ |
135.1 |
|
|
$ |
241.7 |
|
|
$ |
447.1 |
|
Midwest |
|
|
76.9 |
|
|
|
117.2 |
|
|
|
210.3 |
|
|
|
403.6 |
|
Southeast |
|
|
146.5 |
|
|
|
189.0 |
|
|
|
414.2 |
|
|
|
625.8 |
|
South Central |
|
|
270.6 |
|
|
|
345.0 |
|
|
|
747.5 |
|
|
|
1,058.0 |
|
Southwest |
|
|
86.8 |
|
|
|
251.2 |
|
|
|
307.0 |
|
|
|
904.4 |
|
West |
|
|
248.5 |
|
|
|
395.8 |
|
|
|
669.0 |
|
|
|
1,326.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homebuilding revenues |
|
$ |
914.1 |
|
|
$ |
1,433.3 |
|
|
$ |
2,589.7 |
|
|
$ |
4,764.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services revenues |
|
$ |
18.8 |
|
|
$ |
30.9 |
|
|
$ |
39.1 |
|
|
$ |
98.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues |
|
$ |
932.9 |
|
|
$ |
1,464.2 |
|
|
$ |
2,628.8 |
|
|
$ |
4,863.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Impairments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East |
|
$ |
9.5 |
|
|
$ |
19.3 |
|
|
$ |
15.1 |
|
|
$ |
128.6 |
|
Midwest |
|
|
18.2 |
|
|
|
67.5 |
|
|
|
31.3 |
|
|
|
93.0 |
|
Southeast |
|
|
19.7 |
|
|
|
45.5 |
|
|
|
25.7 |
|
|
|
243.8 |
|
South Central |
|
|
11.3 |
|
|
|
1.0 |
|
|
|
13.6 |
|
|
|
30.5 |
|
Southwest |
|
|
11.9 |
|
|
|
29.6 |
|
|
|
19.6 |
|
|
|
56.6 |
|
West |
|
|
32.3 |
|
|
|
160.3 |
|
|
|
97.7 |
|
|
|
831.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory impairments |
|
$ |
102.9 |
|
|
$ |
323.2 |
|
|
$ |
203.0 |
|
|
$ |
1,383.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding income (loss)
before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East |
|
$ |
(22.5 |
) |
|
$ |
(38.6 |
) |
|
$ |
(39.2 |
) |
|
$ |
(180.9 |
) |
Midwest |
|
|
(41.0 |
) |
|
|
(74.7 |
) |
|
|
(73.8 |
) |
|
|
(107.3 |
) |
Southeast |
|
|
(30.5 |
) |
|
|
(62.9 |
) |
|
|
(47.9 |
) |
|
|
(286.4 |
) |
South Central |
|
|
(6.1 |
) |
|
|
13.6 |
|
|
|
7.0 |
|
|
|
6.7 |
|
Southwest |
|
|
(15.6 |
) |
|
|
(34.9 |
) |
|
|
(24.8 |
) |
|
|
(14.1 |
) |
West |
|
|
(49.0 |
) |
|
|
(191.0 |
) |
|
|
(134.9 |
) |
|
|
(912.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homebuilding loss before
income taxes |
|
$ |
(164.7 |
) |
|
$ |
(388.5 |
) |
|
$ |
(313.6 |
) |
|
$ |
(1,494.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services income (loss)
before income taxes |
|
$ |
2.8 |
|
|
$ |
9.4 |
|
|
$ |
(12.6 |
) |
|
$ |
28.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated loss before income taxes |
|
$ |
(161.9 |
) |
|
$ |
(379.1 |
) |
|
$ |
(326.2 |
) |
|
$ |
(1,466.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
-23-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In millions) |
|
Homebuilding Inventories (2): |
|
|
|
|
|
|
|
|
East |
|
$ |
558.8 |
|
|
$ |
594.5 |
|
Midwest |
|
|
401.1 |
|
|
|
473.8 |
|
Southeast |
|
|
686.3 |
|
|
|
799.6 |
|
South Central |
|
|
792.7 |
|
|
|
939.7 |
|
Southwest |
|
|
288.8 |
|
|
|
423.6 |
|
West |
|
|
973.6 |
|
|
|
1,258.4 |
|
Corporate and unallocated (3) |
|
|
172.0 |
|
|
|
193.6 |
|
|
|
|
|
|
|
|
Total homebuilding inventory |
|
$ |
3,873.3 |
|
|
$ |
4,683.2 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Expenses maintained at the corporate level are allocated to each segment based on the
segments average inventory. These expenses consist primarily of capitalized interest
and property taxes, which are amortized to cost of sales, and the expenses related to
operating the Companys corporate office. |
|
(2) |
|
Homebuilding inventories are the only assets included in the measure of segment assets
used by the Companys chief operating decision maker, its CEO. |
|
(3) |
|
Corporate and unallocated consists primarily of capitalized interest and property taxes. |
-24-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION
All of the Companys senior, convertible senior and senior subordinated notes are fully and
unconditionally guaranteed, on a joint and several basis, by all of the Companys direct and
indirect subsidiaries (collectively, Guarantor Subsidiaries), other than financial services
subsidiaries and certain insignificant subsidiaries (collectively, Non-Guarantor Subsidiaries).
Each of the Guarantor Subsidiaries is wholly-owned. In lieu of providing separate financial
statements for the Guarantor Subsidiaries, consolidated condensed financial statements are
presented below. Separate financial statements and other disclosures concerning the Guarantor
Subsidiaries are not presented because management has determined that they are not material to
investors.
Consolidating Balance Sheet
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,921.4 |
|
|
$ |
40.8 |
|
|
$ |
40.1 |
|
|
$ |
|
|
|
$ |
2,002.3 |
|
Investments in subsidiaries |
|
|
966.4 |
|
|
|
|
|
|
|
|
|
|
|
(966.4 |
) |
|
|
|
|
Inventories |
|
|
1,212.0 |
|
|
|
2,618.0 |
|
|
|
43.3 |
|
|
|
|
|
|
|
3,873.3 |
|
Income taxes receivable |
|
|
124.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124.9 |
|
Restricted cash |
|
|
61.5 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
62.0 |
|
Deferred income taxes, net |
|
|
52.7 |
|
|
|
112.7 |
|
|
|
|
|
|
|
|
|
|
|
165.4 |
|
Property and equipment, net |
|
|
19.9 |
|
|
|
22.7 |
|
|
|
19.9 |
|
|
|
|
|
|
|
62.5 |
|
Earnest money deposits and
other assets |
|
|
61.6 |
|
|
|
97.9 |
|
|
|
91.0 |
|
|
|
|
|
|
|
250.5 |
|
Mortgage loans held for sale |
|
|
|
|
|
|
|
|
|
|
222.7 |
|
|
|
|
|
|
|
222.7 |
|
Goodwill |
|
|
|
|
|
|
15.9 |
|
|
|
|
|
|
|
|
|
|
|
15.9 |
|
Intercompany receivables |
|
|
1,600.7 |
|
|
|
|
|
|
|
|
|
|
|
(1,600.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
6,021.1 |
|
|
$ |
2,908.5 |
|
|
$ |
417.0 |
|
|
$ |
(2,567.1 |
) |
|
$ |
6,779.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
244.4 |
|
|
$ |
536.4 |
|
|
$ |
122.5 |
|
|
$ |
|
|
|
$ |
903.3 |
|
Intercompany payables |
|
|
|
|
|
|
1,560.5 |
|
|
|
40.2 |
|
|
|
(1,600.7 |
) |
|
|
|
|
Notes payable |
|
|
3,279.0 |
|
|
|
1.2 |
|
|
|
77.4 |
|
|
|
|
|
|
|
3,357.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
3,523.4 |
|
|
|
2,098.1 |
|
|
|
240.1 |
|
|
|
(1,600.7 |
) |
|
|
4,260.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
20.9 |
|
|
|
|
|
|
|
20.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity |
|
|
2,497.7 |
|
|
|
810.4 |
|
|
|
156.0 |
|
|
|
(966.4 |
) |
|
|
2,497.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Equity |
|
$ |
6,021.1 |
|
|
$ |
2,908.5 |
|
|
$ |
417.0 |
|
|
$ |
(2,567.1 |
) |
|
$ |
6,779.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-25-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Balance Sheet
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,261.5 |
|
|
$ |
90.1 |
|
|
$ |
35.7 |
|
|
$ |
|
|
|
$ |
1,387.3 |
|
Investments in subsidiaries |
|
|
1,073.4 |
|
|
|
|
|
|
|
|
|
|
|
(1,073.4 |
) |
|
|
|
|
Inventories |
|
|
1,443.8 |
|
|
|
3,177.8 |
|
|
|
61.6 |
|
|
|
|
|
|
|
4,683.2 |
|
Income taxes receivable |
|
|
676.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
676.2 |
|
Restricted cash |
|
|
1.2 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
2.0 |
|
Deferred income taxes, net |
|
|
67.2 |
|
|
|
146.3 |
|
|
|
|
|
|
|
|
|
|
|
213.5 |
|
Property and equipment, net |
|
|
16.1 |
|
|
|
29.1 |
|
|
|
20.7 |
|
|
|
|
|
|
|
65.9 |
|
Earnest money deposits and
other assets |
|
|
89.9 |
|
|
|
117.4 |
|
|
|
109.5 |
|
|
|
(3.3 |
) |
|
|
313.5 |
|
Mortgage loans held for sale |
|
|
|
|
|
|
|
|
|
|
352.1 |
|
|
|
|
|
|
|
352.1 |
|
Goodwill |
|
|
|
|
|
|
15.9 |
|
|
|
|
|
|
|
|
|
|
|
15.9 |
|
Intercompany receivables |
|
|
2,056.4 |
|
|
|
|
|
|
|
|
|
|
|
(2,056.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
6,685.7 |
|
|
$ |
3,577.4 |
|
|
$ |
579.6 |
|
|
$ |
(3,133.1 |
) |
|
$ |
7,709.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
307.9 |
|
|
$ |
681.7 |
|
|
$ |
110.1 |
|
|
$ |
(3.3 |
) |
|
$ |
1,096.4 |
|
Intercompany payables |
|
|
|
|
|
|
2,008.1 |
|
|
|
48.3 |
|
|
|
(2,056.4 |
) |
|
|
|
|
Notes payable |
|
|
3,543.5 |
|
|
|
1.4 |
|
|
|
203.5 |
|
|
|
|
|
|
|
3,748.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
3,851.4 |
|
|
|
2,691.2 |
|
|
|
361.9 |
|
|
|
(2,059.7 |
) |
|
|
4,844.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
30.5 |
|
|
|
|
|
|
|
30.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity |
|
|
2,834.3 |
|
|
|
886.2 |
|
|
|
187.2 |
|
|
|
(1,073.4 |
) |
|
|
2,834.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Equity |
|
$ |
6,685.7 |
|
|
$ |
3,577.4 |
|
|
$ |
579.6 |
|
|
$ |
(3,133.1 |
) |
|
$ |
7,709.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-26-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Statement of Operations
Three Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
222.3 |
|
|
$ |
686.0 |
|
|
$ |
5.8 |
|
|
$ |
|
|
|
$ |
914.1 |
|
Cost of sales |
|
|
241.7 |
|
|
|
669.5 |
|
|
|
11.3 |
|
|
|
|
|
|
|
922.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(19.4 |
) |
|
|
16.5 |
|
|
|
(5.5 |
) |
|
|
|
|
|
|
(8.4 |
) |
Selling, general and
administrative expense |
|
|
56.4 |
|
|
|
76.1 |
|
|
|
1.8 |
|
|
|
|
|
|
|
134.3 |
|
Equity in loss of subsidiaries |
|
|
63.0 |
|
|
|
|
|
|
|
|
|
|
|
(63.0 |
) |
|
|
|
|
Interest expense |
|
|
20.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.3 |
|
Loss on early retirement of debt |
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.9 |
|
Other (income) expense |
|
|
(1.1 |
) |
|
|
(0.2 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(161.9 |
) |
|
|
(59.4 |
) |
|
|
(6.4 |
) |
|
|
63.0 |
|
|
|
(164.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
18.8 |
|
|
|
|
|
|
|
18.8 |
|
General and administrative expense |
|
|
|
|
|
|
|
|
|
|
18.1 |
|
|
|
|
|
|
|
18.1 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
0.2 |
|
Interest and other (income) |
|
|
|
|
|
|
|
|
|
|
(2.3 |
) |
|
|
|
|
|
|
(2.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.8 |
|
|
|
|
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(161.9 |
) |
|
|
(59.4 |
) |
|
|
(3.6 |
) |
|
|
63.0 |
|
|
|
(161.9 |
) |
Benefit from income taxes |
|
|
(19.6 |
) |
|
|
(14.8 |
) |
|
|
(0.4 |
) |
|
|
15.2 |
|
|
|
(19.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(142.3 |
) |
|
$ |
(44.6 |
) |
|
$ |
(3.2 |
) |
|
$ |
47.8 |
|
|
$ |
(142.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-27-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Statement of Operations
Nine Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
592.5 |
|
|
$ |
1,982.1 |
|
|
$ |
15.1 |
|
|
$ |
|
|
|
$ |
2,589.7 |
|
Cost of sales |
|
|
594.7 |
|
|
|
1,844.7 |
|
|
|
19.9 |
|
|
|
|
|
|
|
2,459.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(2.2 |
) |
|
|
137.4 |
|
|
|
(4.8 |
) |
|
|
|
|
|
|
130.4 |
|
Selling, general and
administrative expense |
|
|
158.5 |
|
|
|
225.1 |
|
|
|
4.6 |
|
|
|
|
|
|
|
388.2 |
|
Equity in loss of subsidiaries |
|
|
106.4 |
|
|
|
|
|
|
|
|
|
|
|
(106.4 |
) |
|
|
|
|
Interest expense |
|
|
68.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68.9 |
|
(Gain) on early retirement of debt |
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.4 |
) |
Other (income) expense |
|
|
(5.4 |
) |
|
|
|
|
|
|
(3.3 |
) |
|
|
|
|
|
|
(8.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(326.2 |
) |
|
|
(87.7 |
) |
|
|
(6.1 |
) |
|
|
106.4 |
|
|
|
(313.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
39.1 |
|
|
|
|
|
|
|
39.1 |
|
General and administrative expense |
|
|
|
|
|
|
|
|
|
|
58.5 |
|
|
|
|
|
|
|
58.5 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
|
|
|
|
|
1.2 |
|
Interest and other (income) |
|
|
|
|
|
|
|
|
|
|
(8.0 |
) |
|
|
|
|
|
|
(8.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12.6 |
) |
|
|
|
|
|
|
(12.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(326.2 |
) |
|
|
(87.7 |
) |
|
|
(18.7 |
) |
|
|
106.4 |
|
|
|
(326.2 |
) |
Benefit from income taxes |
|
|
(12.8 |
) |
|
|
(9.6 |
) |
|
|
(0.3 |
) |
|
|
9.9 |
|
|
|
(12.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(313.4 |
) |
|
$ |
(78.1 |
) |
|
$ |
(18.4 |
) |
|
$ |
96.5 |
|
|
$ |
(313.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-28-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Statement of Operations
Three Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
272.6 |
|
|
$ |
1,154.3 |
|
|
$ |
6.4 |
|
|
$ |
|
|
|
$ |
1,433.3 |
|
Cost of sales |
|
|
336.2 |
|
|
|
1,274.4 |
|
|
|
5.7 |
|
|
|
|
|
|
|
1,616.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(63.6 |
) |
|
|
(120.1 |
) |
|
|
0.7 |
|
|
|
|
|
|
|
(183.0 |
) |
Selling, general and administrative
expense |
|
|
78.1 |
|
|
|
113.9 |
|
|
|
2.7 |
|
|
|
|
|
|
|
194.7 |
|
Equity in loss of subsidiaries |
|
|
226.8 |
|
|
|
|
|
|
|
|
|
|
|
(226.8 |
) |
|
|
|
|
Interest expense |
|
|
11.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.7 |
|
Loss on early retirement of debt |
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.6 |
|
Other (income) expense |
|
|
(3.7 |
) |
|
|
0.8 |
|
|
|
(0.6 |
) |
|
|
|
|
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(379.1 |
) |
|
|
(234.8 |
) |
|
|
(1.4 |
) |
|
|
226.8 |
|
|
|
(388.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
30.9 |
|
|
|
|
|
|
|
30.9 |
|
General and administrative expense |
|
|
|
|
|
|
|
|
|
|
23.1 |
|
|
|
|
|
|
|
23.1 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
0.6 |
|
Interest and other (income) |
|
|
|
|
|
|
|
|
|
|
(2.2 |
) |
|
|
|
|
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.4 |
|
|
|
|
|
|
|
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(379.1 |
) |
|
|
(234.8 |
) |
|
|
8.0 |
|
|
|
226.8 |
|
|
|
(379.1 |
) |
Provision for income taxes |
|
|
20.2 |
|
|
|
12.8 |
|
|
|
3.1 |
|
|
|
(15.9 |
) |
|
|
20.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(399.3 |
) |
|
$ |
(247.6 |
) |
|
$ |
4.9 |
|
|
$ |
242.7 |
|
|
$ |
(399.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-29-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Statement of Operations
Nine Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
885.8 |
|
|
$ |
3,849.0 |
|
|
$ |
30.1 |
|
|
$ |
|
|
|
$ |
4,764.9 |
|
Cost of sales |
|
|
1,198.1 |
|
|
|
4,402.7 |
|
|
|
24.3 |
|
|
|
|
|
|
|
5,625.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(312.3 |
) |
|
|
(553.7 |
) |
|
|
5.8 |
|
|
|
|
|
|
|
(860.2 |
) |
Selling, general and administrative
expense |
|
|
240.9 |
|
|
|
368.5 |
|
|
|
6.7 |
|
|
|
|
|
|
|
616.1 |
|
Equity in loss of subsidiaries |
|
|
891.8 |
|
|
|
|
|
|
|
|
|
|
|
(891.8 |
) |
|
|
|
|
Interest expense |
|
|
22.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.9 |
|
Loss on early retirement of debt |
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.6 |
|
Other (income) |
|
|
(3.9 |
) |
|
|
(1.1 |
) |
|
|
(2.0 |
) |
|
|
|
|
|
|
(7.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,466.6 |
) |
|
|
(921.1 |
) |
|
|
1.1 |
|
|
|
891.8 |
|
|
|
(1,494.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
98.8 |
|
|
|
|
|
|
|
98.8 |
|
General and administrative expense |
|
|
|
|
|
|
|
|
|
|
76.4 |
|
|
|
|
|
|
|
76.4 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
2.7 |
|
|
|
|
|
|
|
2.7 |
|
Interest and other (income) |
|
|
|
|
|
|
|
|
|
|
(8.5 |
) |
|
|
|
|
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.2 |
|
|
|
|
|
|
|
28.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(1,466.6 |
) |
|
|
(921.1 |
) |
|
|
29.3 |
|
|
|
891.8 |
|
|
|
(1,466.6 |
) |
Provision for income taxes |
|
|
367.2 |
|
|
|
252.2 |
|
|
|
11.1 |
|
|
|
(263.3 |
) |
|
|
367.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1,833.8 |
) |
|
$ |
(1,173.3 |
) |
|
$ |
18.2 |
|
|
$ |
1,155.1 |
|
|
$ |
(1,833.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-30-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Statement of Cash Flows
Nine Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
552.6 |
|
|
$ |
398.1 |
|
|
$ |
151.3 |
|
|
$ |
|
|
|
$ |
1,102.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(3.3 |
) |
|
|
(2.8 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
(6.2 |
) |
(Increase) decrease in restricted cash |
|
|
(60.4 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
(60.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(63.7 |
) |
|
|
(2.4 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
(66.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in notes payable |
|
|
(261.4 |
) |
|
|
|
|
|
|
(126.1 |
) |
|
|
|
|
|
|
(387.5 |
) |
Net change in intercompany
receivables/payables |
|
|
465.7 |
|
|
|
(445.0 |
) |
|
|
(20.7 |
) |
|
|
|
|
|
|
|
|
Proceeds from stock associated with
certain employee benefit plans |
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0 |
|
Income tax benefit from stock option
exercises |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
Cash dividends paid |
|
|
(35.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
171.0 |
|
|
|
(445.0 |
) |
|
|
(146.8 |
) |
|
|
|
|
|
|
(420.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents |
|
|
659.9 |
|
|
|
(49.3 |
) |
|
|
4.4 |
|
|
|
|
|
|
|
615.0 |
|
Cash and cash equivalents at
beginning of period |
|
|
1,261.5 |
|
|
|
90.1 |
|
|
|
35.7 |
|
|
|
|
|
|
|
1,387.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
end of period |
|
$ |
1,921.4 |
|
|
$ |
40.8 |
|
|
$ |
40.1 |
|
|
$ |
|
|
|
$ |
2,002.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-31-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2009
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Statement of Cash Flows
Nine Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
111.0 |
|
|
$ |
971.5 |
|
|
$ |
313.4 |
|
|
$ |
1.6 |
|
|
$ |
1,397.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(3.2 |
) |
|
|
(5.6 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
(9.1 |
) |
Decrease in restricted cash |
|
|
1.1 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities |
|
|
(2.1 |
) |
|
|
(3.8 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
(6.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in notes payable |
|
|
(402.1 |
) |
|
|
|
|
|
|
(301.3 |
) |
|
|
|
|
|
|
(703.4 |
) |
Net change in intercompany
receivables/payables |
|
|
1,151.1 |
|
|
|
(1,129.7 |
) |
|
|
(21.4 |
) |
|
|
|
|
|
|
|
|
Proceeds from stock associated with
certain employee benefit plans |
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.2 |
|
Income tax benefit from stock option
exercises |
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.7 |
|
Cash dividends paid |
|
|
(118.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
642.7 |
|
|
|
(1,129.7 |
) |
|
|
(322.7 |
) |
|
|
|
|
|
|
(809.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents |
|
|
751.6 |
|
|
|
(162.0 |
) |
|
|
(9.6 |
) |
|
|
1.6 |
|
|
|
581.6 |
|
Cash and cash equivalents at
beginning of period |
|
|
|
|
|
|
225.3 |
|
|
|
45.9 |
|
|
|
(1.6 |
) |
|
|
269.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
end of period |
|
$ |
751.6 |
|
|
$ |
63.3 |
|
|
$ |
36.3 |
|
|
$ |
|
|
|
$ |
851.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-32-
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and related notes included
in this quarterly report and with our annual report on Form 10-K for the fiscal year ended
September 30, 2008. Some of the information contained in this discussion and analysis constitutes
forward-looking statements that involve risks and uncertainties. Actual results could differ
materially from those discussed in these forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to, those described in the
Forward-Looking Statements section following this discussion.
BUSINESS
We are one of the largest homebuilding companies in the United States, constructing and
selling single-family housing through our operating divisions in 27 states and 76 markets as of
June 30, 2009, primarily under the name of D.R. Horton, Americas Builder. Our homebuilding
operations primarily include the construction and sale of single-family homes with sales prices
generally ranging from $90,000 to $900,000, with an average closing price of $214,700 during the
nine months ended June 30, 2009. Approximately 81% and 77% of home sales revenues were generated
from the sale of single-family detached homes in the nine months ended June 30, 2009 and 2008,
respectively. The remainder of home sales revenues were generated from the sale of attached homes,
such as town homes, duplexes, triplexes and condominiums (including some mid-rise buildings), which
share common walls and roofs.
Through our financial services operations, we provide mortgage financing and title agency
services to homebuyers in many of our homebuilding markets. DHI Mortgage, our wholly-owned
subsidiary, provides mortgage financing services principally to purchasers of homes we build. We
generally do not seek to retain or service the mortgages we originate but, rather, seek to sell the
mortgages and related servicing rights to purchasers. DHI Mortgage originates loans in accordance
with purchaser guidelines and historically has sold substantially all of its mortgage production
within 30 days of origination. Our subsidiary title companies serve as title insurance agents by
providing title insurance policies, examination and closing services, primarily to the purchasers
of our homes.
-33-
We conduct our homebuilding operations in all of the geographic regions, states and markets
listed below, and we conduct our mortgage and title operations in many of these markets. Our
homebuilding operating divisions are aggregated into six reporting segments, which are comprised of
the markets below. Our financial statements contain additional information regarding segment
performance.
|
|
|
|
|
|
|
State |
|
Reporting Region/Market |
|
State |
|
Reporting Region/Market |
|
|
|
East Region |
|
|
|
South Central Region |
Delaware
|
|
Central Delaware
|
|
Louisiana
|
|
Baton Rouge |
|
|
Delaware Shore
|
|
Mississippi
|
|
Mississippi Gulf Coast |
Georgia
|
|
Savannah
|
|
Oklahoma
|
|
Oklahoma City |
Maryland
|
|
Baltimore
|
|
Texas
|
|
Austin |
|
|
Suburban Washington, D. C. |
|
|
|
Dallas |
New Jersey
|
|
North New Jersey
|
|
|
|
Fort Worth |
|
|
South New Jersey
|
|
|
|
Houston |
North Carolina
|
|
Brunswick County
|
|
|
|
Killeen/Temple |
|
|
Charlotte
|
|
|
|
Laredo |
|
|
Greensboro/Winston-Salem
|
|
|
|
Rio Grande Valley |
|
|
Raleigh/Durham
|
|
|
|
San Antonio |
Pennsylvania
|
|
Lancaster
|
|
|
|
Waco |
|
|
Philadelphia |
|
|
|
|
South Carolina |
|
Charleston
|
|
|
|
Southwest Region |
|
|
Columbia
|
|
Arizona
|
|
Phoenix |
|
|
Hilton Head
|
|
|
|
Tucson |
|
|
Myrtle Beach
|
|
New Mexico
|
|
Albuquerque |
Virginia
|
|
Northern Virginia
|
|
|
|
Las Cruces |
|
|
|
|
|
|
|
|
|
Midwest Region |
|
|
|
West Region |
Colorado |
|
Colorado Springs
|
|
California
|
|
Bay Area |
|
|
Denver
|
|
|
|
Central Valley |
|
|
Fort Collins
|
|
|
|
Imperial Valley |
Illinois
|
|
Chicago
|
|
|
|
Los Angeles County |
Minnesota
|
|
Minneapolis/St. Paul
|
|
|
|
Riverside/San Bernardino |
Wisconsin
|
|
Kenosha
|
|
|
|
Sacramento |
|
|
|
|
|
|
San Diego County |
|
|
Southeast Region |
|
|
|
Ventura County |
Alabama
|
|
Birmingham
|
|
Hawaii
|
|
Hawaii |
|
|
Mobile
|
|
|
|
Kauai |
Florida
|
|
Daytona Beach
|
|
|
|
Maui |
|
|
Fort Myers/Naples
|
|
|
|
Oahu |
|
|
Jacksonville
|
|
Idaho
|
|
Boise |
|
|
Melbourne
|
|
Nevada
|
|
Las Vegas |
|
|
Miami/West Palm Beach
|
|
|
|
Laughlin |
|
|
Ocala
|
|
|
|
Reno |
|
|
Orlando
|
|
Oregon
|
|
Albany |
|
|
Pensacola
|
|
|
|
Central Oregon |
|
|
Tampa
|
|
|
|
Portland |
Georgia
|
|
Atlanta
|
|
Utah
|
|
Salt Lake City |
|
|
Macon
|
|
Washington
|
|
Eastern Washington |
|
|
|
|
|
|
Seattle/Tacoma |
|
|
|
|
|
|
Vancouver |
-34-
OVERVIEW
During the third quarter of fiscal 2009, conditions within the homebuilding industry remained
challenging. The decline in demand for new homes continues to be reflected in the low volume of our
net sales orders this quarter. Although our net sales orders were only 7% lower than in the third
quarter of fiscal 2008, they were 41% and 64% lower than in the third quarter of fiscal 2007 and
2006, respectively. These results suggest the severe declines in our net sales orders experienced
in recent years may be moderating. However, we expect overall demand for new homes to remain at
these very low levels for some time, which will continue to challenge our efforts to improve our
net sales order volume. The value of our sales order backlog at June 30, 2009 was 41% lower than a
year ago.
During the slowdown in the homebuilding industry, the factors hurting demand for new homes
have been pervasive across the United States. High inventory levels of available homes, elevated
cancellation rates, low sales absorption rates and overall weak consumer confidence have persisted.
The effects of these factors have been magnified by reduced availability of credit in the mortgage
markets, severe shortages of liquidity in the financial markets and high levels of home
foreclosures. High levels of foreclosures not only contribute to additional available for sale
inventory, but also reduce appraisal valuations for new homes, potentially resulting in lower sales
prices. The overall economy has weakened significantly and is now in a recession marked by high and
rising unemployment levels and substantially reduced consumer spending. The turmoil in the housing
market during the last three years and the recent weakness in the economy have resulted in drastic
price reductions in our homes and continued compression in our gross margins. However, these price
reductions have caused housing to become more affordable, which may lead to increased demand in the
future when other market conditions improve.
We continue to remain cautious regarding our outlook for the homebuilding industry. We believe
that challenging housing market conditions will persist for some time and that the timing of a
recovery in the housing market remains unclear. Our outlook incorporates several factors, including
continued margin pressure from sales price reductions and incentives; continued high levels of
homes available for sale; weak demand from new home consumers; the scheduled expiration of the
first-time homebuyer federal tax credit in November 2009; continued high sales cancellations;
significant restrictions on the availability of certain mortgage products and an overall increase
in the underwriting requirements for home financing as a result of the credit tightening in the
mortgage markets. Partially mitigating these negative industry factors are some favorable aspects
of our performance in the quarter ended June 30, 2009, in which our year over year net sales
decline has moderated, our sales order cancellation rate has declined and we were successful in
reducing our inventory of completed homes.
Due to the challenging market conditions discussed above, we have continued to evaluate our
homebuilding and financial services assets for recoverability. Our significant assets, excluding
cash, and those whose recoverability are most impacted by market conditions include inventory,
earnest money deposits and pre-acquisition costs related to land and lot option contracts, tax
assets, both on amounts reflected as deferred and as a receivable, and owned mortgage loans, which
collectively comprise 95% of our total non-cash assets. Our evaluations reflected our expectation
of continued challenges in the homebuilding industry, and our belief that these challenging
conditions will persist for some time. Based on our evaluations, we recorded inventory impairment
charges of $102.9 million, wrote-off earnest money deposits and pre-acquisition costs related to
land and lot option contracts we no longer plan to pursue of $7.9 million and recorded additional
reserves for losses of $4.4 million associated with limited recourse provisions on previously sold
mortgage loans and $4.8 million related to mortgage reinsurance activities during the three months
ended June 30, 2009. While these impairment charges and write-offs are generally less than amounts
recognized in the prior year periods, they reflect the continued weakness in market conditions. We
will evaluate whether further impairment charges, valuation adjustments or write-offs are necessary
on these assets in the coming quarters. Additional discussion of these evaluations and charges is
presented below.
STRATEGY
We believe the long-term fundamentals which support housing demand, namely population growth
and household formation, remain solid. In the near term, however, it is not possible to predict how
long the negative effects of the current market conditions will persist and if the homebuilding
industry will experience further deterioration from these levels or if conditions will begin to
improve. During the downturn we have aggressively reduced our inventory levels and increased our
cash balances. We have been successful in generating substantial cash flow from operations
primarily through inventory reductions and from the receipt of a tax refund from a loss
carryback. We have also increased our cash balance by accessing the capital markets. While we
will continue to conservatively manage our business, this increase in our liquidity provides us
with flexibility in determining the
-35-
appropriate operating strategy for each of our communities and markets to strike the best balance
between cash flow generation and potential profit. With this flexibility, we are committed to the
following initiatives related to our operating strategy in the current homebuilding business
environment:
|
|
|
Maintaining a strong cash balance and overall liquidity position. |
|
|
|
|
Managing the sales prices and level of sales incentives on our homes as necessary to
optimize the balance of sales volumes, returns and cash flows. |
|
|
|
|
Entering into new finished lot option contracts to purchase finished lots in
selected communities in an attempt to increase sales volumes and profitability. |
|
|
|
|
Renegotiating existing finished lot option contracts to reduce our lot costs and
better match the scheduled purchases with new home demand in the community. |
|
|
|
|
Limiting our land development spending or suspending development in communities that
require substantial investments of time or capital resources. |
|
|
|
|
Managing our inventory of homes under construction by starting construction on
unsold homes to take advantage of opportunities in certain markets, while closely
monitoring the aging of unsold homes and aggressively marketing our unsold, completed
homes in inventory. |
|
|
|
|
Decreasing our cost of goods purchased from both vendors and subcontractors. |
|
|
|
|
Modifying our product offerings to provide more affordable homes. |
|
|
|
|
Decreasing our SG&A infrastructure where necessary to match production levels. |
KEY RESULTS
Key financial results as of and for the three months ended June 30, 2009, as compared to the
same period of 2008, were as follows:
Homebuilding Operations:
|
|
|
Homebuilding revenues decreased 36% to $914.1 million. |
|
|
|
|
Homes closed decreased 31% to 4,240 homes and the average selling price of those
homes decreased 8% to $211,500. |
|
|
|
|
Net sales orders decreased 7% to 5,089 homes. |
|
|
|
|
Sales order backlog decreased 41% to $1,125.5 million. |
|
|
|
|
Home sales gross margins increased 120 basis points to 11.3%. |
|
|
|
|
Inventory impairments and land option cost write-offs were $110.8 million, compared
to $330.4 million. |
|
|
|
|
Homebuilding SG&A expenses decreased 31% to $134.3 million, but increased as a
percentage of homebuilding revenues by 110 basis points to 14.7%. |
|
|
|
|
Homebuilding pre-tax loss was $164.7 million, compared to a pre-tax loss of $388.5
million. |
|
|
|
|
Homes in inventory declined by 4,500 to 10,900. |
|
|
|
|
Owned lots declined by 43,500 to 90,500. |
|
|
|
|
Homebuilding debt decreased by $301.4 million to $3.28 billion. |
|
|
|
|
Net homebuilding debt to total capital decreased 850 basis points to 34.5%, and
gross homebuilding debt to total capital increased 730 basis points to 56.8%. |
|
|
|
|
Homebuilding cash was $1.97 billion, compared to $819.4 million at June 30, 2008. |
-36-
Financial Services Operations:
|
|
|
Total financial services revenues, net of recourse expense and reinsurance reserves,
decreased 39% to $18.8 million. |
|
|
|
|
Financial services pre-tax income was $2.8 million, compared to pre-tax income of
$9.4 million. |
|
|
|
|
Financial services debt decreased by $9.1 million to $77.4 million. |
Consolidated Results:
|
|
|
Net loss per share was $0.45, compared to net loss per share of $1.26. |
|
|
|
|
Net loss was $142.3 million, compared to net loss of $399.3 million. |
|
|
|
|
Stockholders equity decreased 32% to $2.5 billion. |
|
|
|
|
Net cash provided by operations was $124.1 million, compared to $388.9 million. |
Key financial results for the nine months ended June 30, 2009, as compared to the same period
of 2008, were as follows:
Homebuilding Operations:
|
|
|
Homebuilding revenues decreased 46% to $2,589.7 million. |
|
|
|
|
Homes closed decreased 39% to 11,893 homes and the average selling price of those
homes decreased 10% to $214,700. |
|
|
|
|
Net sales orders decreased 30% to 12,026 homes. |
|
|
|
|
Home sales gross margins increased 210 basis points to 13.4%. |
|
|
|
|
Inventory impairments and land option cost write-offs were $215.2 million, compared
to $1,410.0 million. |
|
|
|
|
Homebuilding SG&A expenses decreased 37% to $388.2 million, but increased as a
percentage of homebuilding revenues by 210 basis points to 15.0%. |
|
|
|
|
Homebuilding pre-tax loss was $313.6 million, compared to pre-tax loss of $1,494.8
million. |
Financial Services Operations:
|
|
|
Total financial services revenues, net of recourse expense and reinsurance reserves,
decreased 60% to $39.1 million. |
|
|
|
|
Financial services pre-tax loss was $12.6 million, compared to pre-tax income of
$28.2 million. |
Consolidated Results:
|
|
|
Net loss per share was $0.99, compared to net loss per share of $5.81. |
|
|
|
|
Net loss was $313.4 million, compared to net loss of $1,833.8 million. |
|
|
|
|
Net cash provided by operations was $1.1 billion, compared to $1.4 billion. |
-37-
RESULTS OF OPERATIONS HOMEBUILDING
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 three and nine months ended June 30,
2009 and 2008. We have restated the 2008 amounts between reporting segments to conform to the 2009
presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Orders (1) |
|
|
|
Three Months Ended June 30, |
|
|
|
Net Homes Sold |
|
|
Value (In millions) |
|
|
Average Selling Price |
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
East |
|
|
482 |
|
|
|
372 |
|
|
|
30 |
% |
|
$ |
115.8 |
|
|
$ |
95.4 |
|
|
|
21 |
% |
|
$ |
240,200 |
|
|
$ |
256,500 |
|
|
|
(6 |
)% |
Midwest |
|
|
377 |
|
|
|
406 |
|
|
|
(7 |
)% |
|
|
102.5 |
|
|
|
121.1 |
|
|
|
(15 |
)% |
|
|
271,900 |
|
|
|
298,300 |
|
|
|
(9 |
)% |
Southeast |
|
|
786 |
|
|
|
841 |
|
|
|
(7 |
)% |
|
|
145.4 |
|
|
|
172.3 |
|
|
|
(16 |
)% |
|
|
185,000 |
|
|
|
204,900 |
|
|
|
(10 |
)% |
South Central |
|
|
1,845 |
|
|
|
1,904 |
|
|
|
(3 |
)% |
|
|
317.6 |
|
|
|
344.5 |
|
|
|
(8 |
)% |
|
|
172,100 |
|
|
|
180,900 |
|
|
|
(5 |
)% |
Southwest |
|
|
583 |
|
|
|
836 |
|
|
|
(30 |
)% |
|
|
102.6 |
|
|
|
155.5 |
|
|
|
(34 |
)% |
|
|
176,000 |
|
|
|
186,000 |
|
|
|
(5 |
)% |
West |
|
|
1,016 |
|
|
|
1,142 |
|
|
|
(11 |
)% |
|
|
275.2 |
|
|
|
348.0 |
|
|
|
(21 |
)% |
|
|
270,900 |
|
|
|
304,700 |
|
|
|
(11 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,089 |
|
|
|
5,501 |
|
|
|
(7 |
)% |
|
$ |
1,059.1 |
|
|
$ |
1,236.8 |
|
|
|
(14 |
)% |
|
$ |
208,100 |
|
|
$ |
224,800 |
|
|
|
(7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
|
Net Homes Sold |
|
|
Value (In millions) |
|
|
Average Selling Price |
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
East |
|
|
1,024 |
|
|
|
1,225 |
|
|
|
(16 |
)% |
|
$ |
239.4 |
|
|
$ |
315.8 |
|
|
|
(24 |
)% |
|
$ |
233,800 |
|
|
$ |
257,800 |
|
|
|
(9 |
)% |
Midwest |
|
|
842 |
|
|
|
1,145 |
|
|
|
(26 |
)% |
|
|
227.0 |
|
|
|
331.5 |
|
|
|
(32 |
)% |
|
|
269,600 |
|
|
|
289,500 |
|
|
|
(7 |
)% |
Southeast |
|
|
2,087 |
|
|
|
2,586 |
|
|
|
(19 |
)% |
|
|
379.0 |
|
|
|
508.4 |
|
|
|
(25 |
)% |
|
|
181,600 |
|
|
|
196,600 |
|
|
|
(8 |
)% |
South Central |
|
|
4,319 |
|
|
|
5,896 |
|
|
|
(27 |
)% |
|
|
747.6 |
|
|
|
1,048.2 |
|
|
|
(29 |
)% |
|
|
173,100 |
|
|
|
177,800 |
|
|
|
(3 |
)% |
Southwest |
|
|
1,455 |
|
|
|
2,853 |
|
|
|
(49 |
)% |
|
|
249.0 |
|
|
|
525.7 |
|
|
|
(53 |
)% |
|
|
171,100 |
|
|
|
184,300 |
|
|
|
(7 |
)% |
West |
|
|
2,299 |
|
|
|
3,569 |
|
|
|
(36 |
)% |
|
|
629.1 |
|
|
|
1,095.4 |
|
|
|
(43 |
)% |
|
|
273,600 |
|
|
|
306,900 |
|
|
|
(11 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,026 |
|
|
|
17,274 |
|
|
|
(30 |
)% |
|
$ |
2,471.1 |
|
|
$ |
3,825.0 |
|
|
|
(35 |
)% |
|
$ |
205,500 |
|
|
$ |
221,400 |
|
|
|
(7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Order Cancellations |
|
|
|
Three Months Ended June 30, |
|
|
|
Cancelled Sales Orders |
|
|
Value (In millions) |
|
|
Cancellation Rate (2) |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
East |
|
|
103 |
|
|
|
222 |
|
|
$ |
23.5 |
|
|
$ |
52.3 |
|
|
|
18 |
% |
|
|
37 |
% |
Midwest |
|
|
50 |
|
|
|
118 |
|
|
|
13.4 |
|
|
|
33.9 |
|
|
|
12 |
% |
|
|
23 |
% |
Southeast |
|
|
347 |
|
|
|
518 |
|
|
|
61.4 |
|
|
|
108.1 |
|
|
|
31 |
% |
|
|
39 |
% |
South Central |
|
|
731 |
|
|
|
1,141 |
|
|
|
123.0 |
|
|
|
193.5 |
|
|
|
28 |
% |
|
|
37 |
% |
Southwest |
|
|
236 |
|
|
|
878 |
|
|
|
40.4 |
|
|
|
172.7 |
|
|
|
29 |
% |
|
|
51 |
% |
West |
|
|
343 |
|
|
|
596 |
|
|
|
99.2 |
|
|
|
208.3 |
|
|
|
25 |
% |
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,810 |
|
|
|
3,473 |
|
|
$ |
360.9 |
|
|
$ |
768.8 |
|
|
|
26 |
% |
|
|
39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
|
Cancelled Sales Orders |
|
|
Value (In millions) |
|
|
Cancellation Rate (2) |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
East |
|
|
350 |
|
|
|
866 |
|
|
$ |
84.6 |
|
|
$ |
204.9 |
|
|
|
25 |
% |
|
|
41 |
% |
Midwest |
|
|
186 |
|
|
|
348 |
|
|
|
50.9 |
|
|
|
107.2 |
|
|
|
18 |
% |
|
|
23 |
% |
Southeast |
|
|
953 |
|
|
|
1,569 |
|
|
|
180.3 |
|
|
|
363.3 |
|
|
|
31 |
% |
|
|
38 |
% |
South Central |
|
|
2,215 |
|
|
|
3,184 |
|
|
|
372.1 |
|
|
|
546.0 |
|
|
|
34 |
% |
|
|
35 |
% |
Southwest |
|
|
675 |
|
|
|
2,822 |
|
|
|
125.5 |
|
|
|
590.3 |
|
|
|
32 |
% |
|
|
50 |
% |
West |
|
|
915 |
|
|
|
1,803 |
|
|
|
275.9 |
|
|
|
661.7 |
|
|
|
28 |
% |
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,294 |
|
|
|
10,592 |
|
|
$ |
1,089.3 |
|
|
$ |
2,473.4 |
|
|
|
31 |
% |
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net sales orders represent the number and dollar value of new sales contracts
executed with customers, net of sales contract cancellations. |
|
(2) |
|
Cancellation rate represents the number of cancelled sales orders divided by
gross sales orders. |
-38-
Net Sales Orders
Net sales orders represent the number and dollar value of new sales contracts executed with
customers, net of sales contract cancellations. The value of net sales orders decreased 14%, to
$1,059.1 million (5,089 homes) for the three months ended June 30, 2009, from $1,236.8 million
(5,501 homes) for the same period of 2008. The value of net sales orders decreased 35%, to $2,471.1
million (12,026 homes) for the nine months ended June 30, 2009, from $3,825.0 million (17,274
homes) for the same period of 2008. The number of net sales orders decreased 7% and 30% for the
three and nine-month periods ended June 30, 2009, respectively. We believe the most significant
factors contributing to the slowing of demand for new homes in most of our markets include a
continued high level of homes for sale, which includes foreclosed homes for sale; a decrease in the
availability of mortgage financing for many potential homebuyers; the continued uncertainty in the
financial markets and a decline in homebuyer consumer confidence. Many prospective homebuyers
continue to approach the purchase decision tentatively due to concern over their ability to sell an
existing home or obtain mortgage financing, the general uncertainty surrounding the housing market,
increasing unemployment and weakness in the overall economy. However, these factors have led to
lower home prices and improved affordability, which combined with various homebuyer tax incentives,
has served to partially offset some of the market softness. We continue to manage our sales
incentives and pricing on a community by community basis in an attempt to optimize the balance of
sales volumes, profits, returns and cash flows. However, the factors above, combined with the
continued pricing responses of our competitors, have limited the impact of our pricing efforts on
sales. Further contributing to the decline in sales has been the elimination of seller funded down
payment assistance programs for FHA insured loans, as discussed below.
In comparing the three and nine-month periods ended June 30, 2009 to the same periods of 2008,
the value of net sales orders decreased in all of our market regions, with the exception of the
East region where the value of net sales orders increased 21% during the three-month period. These
decreases were primarily due to similar decreases in the number of homes sold in the respective
regions, as well as a decline in average selling price of those homes. The increase in the value of
net sales orders in the East region was primarily attributable to increased sales in our Maryland
and Virginia markets where improved affordability from reduced sales prices and relatively stronger
employment in these markets have increased demand for our homes.
The average price of our net sales orders in the three months ended June 30, 2009 was
$208,100, a decrease of 7% from the $224,800 average in the comparable period of 2008. The average
price of our net sales orders in the nine months ended June 30, 2009 was $205,500, a decrease of 7%
from the $221,400 average in the comparable period of 2008. The average price of our net sales
orders decreased in all of our market regions, due primarily to price reductions and increased
incentives implemented to attempt to achieve an appropriate sales absorption pace. As the inventory
of existing homes for sale, which includes a substantial number of foreclosed homes, has continued
to be high, we have adjusted our pricing to remain competitive with comparable existing home sales
prices. We monitor and may adjust our product mix, geographic mix and pricing within our
homebuilding markets in an effort to keep our core product offerings affordable for our target
customer base, typically first-time and move-up homebuyers, which has also contributed to the
decrease in average selling price.
Our sales order cancellation rates (cancelled sales orders divided by gross sales orders for
the period) during the three and nine months ended June 30, 2009 were 26% and 31%, respectively,
compared to 39% and 38% during the same periods of fiscal 2008. While an improvement from prior
year periods, these elevated cancellation rates reflect the ongoing challenges in most of our
homebuilding markets, including the inability of many prospective homebuyers to sell their existing
homes, the erosion of buyer confidence and the tight credit conditions in the mortgage markets. We
anticipate that cancellation rates will remain elevated and may continue to fluctuate substantially
until market conditions improve.
In July 2008, Congress passed and the President signed into law H.R. 3221, which includes the
American Housing Rescue and Foreclosure Prevention Act of 2008. Among other provisions, this law
eliminated seller-funded down payment assistance on FHA insured loans approved on or after October
1, 2008. Of our total home closings in fiscal 2008, approximately 25% were funded with mortgage
loans whereby the homebuyer used a seller-financed down payment assistance program. While we seek
other down payment assistance and mortgage financing alternatives for our buyers, the elimination
of the seller-financed down payment assistance programs has had a negative impact on our sales and
revenues in fiscal 2009 relative to fiscal 2008.
-39-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Order Backlog |
|
|
|
at June 30, |
|
|
|
Homes in Backlog |
|
|
Value (In millions) |
|
|
Average Selling Price |
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
East |
|
|
499 |
|
|
|
682 |
|
|
|
(27 |
)% |
|
$ |
117.6 |
|
|
$ |
176.6 |
|
|
|
(33 |
)% |
|
$ |
235,700 |
|
|
$ |
258,900 |
|
|
|
(9 |
)% |
Midwest |
|
|
427 |
|
|
|
443 |
|
|
|
(4 |
)% |
|
|
112.0 |
|
|
|
131.8 |
|
|
|
(15 |
)% |
|
|
262,300 |
|
|
|
297,500 |
|
|
|
(12 |
)% |
Southeast |
|
|
811 |
|
|
|
1,009 |
|
|
|
(20 |
)% |
|
|
151.1 |
|
|
|
217.5 |
|
|
|
(31 |
)% |
|
|
186,300 |
|
|
|
215,600 |
|
|
|
(14 |
)% |
South Central |
|
|
2,087 |
|
|
|
2,732 |
|
|
|
(24 |
)% |
|
|
362.1 |
|
|
|
492.5 |
|
|
|
(26 |
)% |
|
|
173,500 |
|
|
|
180,300 |
|
|
|
(4 |
)% |
Southwest |
|
|
643 |
|
|
|
1,943 |
|
|
|
(67 |
)% |
|
|
115.2 |
|
|
|
380.0 |
|
|
|
(70 |
)% |
|
|
179,200 |
|
|
|
195,600 |
|
|
|
(8 |
)% |
West |
|
|
963 |
|
|
|
1,472 |
|
|
|
(35 |
)% |
|
|
267.5 |
|
|
|
501.2 |
|
|
|
(47 |
)% |
|
|
277,800 |
|
|
|
340,500 |
|
|
|
(18 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,430 |
|
|
|
8,281 |
|
|
|
(34 |
)% |
|
$ |
1,125.5 |
|
|
$ |
1,899.6 |
|
|
|
(41 |
)% |
|
$ |
207,300 |
|
|
$ |
229,400 |
|
|
|
(10 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 principally due to cancellations,
which in the current market conditions have been substantial. At June 30, 2009, the value of our
backlog of sales orders was $1,125.5 million (5,430 homes), a decrease of 41% from $1,899.6 million
(8,281 homes) at June 30, 2008. The average sales price of homes in backlog was $207,300 at June
30, 2009, down 10% from the $229,400 average at June 30, 2008. The value of our sales order backlog
decreased significantly across all of our market regions, particularly in our Phoenix market in our
Southwest region and in our Northern California market in our West region, reflecting the severity
and pervasiveness of the national housing downturn.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes Closed and Home Sales Revenue |
|
|
|
Three Months Ended June 30, |
|
|
|
Homes Closed |
|
|
Value (In millions) |
|
|
Average Selling Price |
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
East |
|
|
351 |
|
|
|
540 |
|
|
|
(35 |
)% |
|
$ |
83.1 |
|
|
$ |
134.7 |
|
|
|
(38 |
)% |
|
$ |
236,800 |
|
|
$ |
249,400 |
|
|
|
(5 |
)% |
Midwest |
|
|
274 |
|
|
|
357 |
|
|
|
(23 |
)% |
|
|
76.8 |
|
|
|
107.8 |
|
|
|
(29 |
)% |
|
|
280,300 |
|
|
|
302,000 |
|
|
|
(7 |
)% |
Southeast |
|
|
718 |
|
|
|
890 |
|
|
|
(19 |
)% |
|
|
136.6 |
|
|
|
186.2 |
|
|
|
(27 |
)% |
|
|
190,300 |
|
|
|
209,200 |
|
|
|
(9 |
)% |
South Central |
|
|
1,529 |
|
|
|
1,894 |
|
|
|
(19 |
)% |
|
|
269.3 |
|
|
|
344.5 |
|
|
|
(22 |
)% |
|
|
176,100 |
|
|
|
181,900 |
|
|
|
(3 |
)% |
Southwest |
|
|
510 |
|
|
|
1,294 |
|
|
|
(61 |
)% |
|
|
86.8 |
|
|
|
251.2 |
|
|
|
(65 |
)% |
|
|
170,200 |
|
|
|
194,100 |
|
|
|
(12 |
)% |
West |
|
|
858 |
|
|
|
1,192 |
|
|
|
(28 |
)% |
|
|
244.0 |
|
|
|
390.6 |
|
|
|
(38 |
)% |
|
|
284,400 |
|
|
|
327,700 |
|
|
|
(13 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,240 |
|
|
|
6,167 |
|
|
|
(31 |
)% |
|
$ |
896.6 |
|
|
$ |
1,415.0 |
|
|
|
(37 |
)% |
|
$ |
211,500 |
|
|
$ |
229,400 |
|
|
|
(8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
|
Homes Closed |
|
|
Value (In millions) |
|
|
Average Selling Price |
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
East |
|
|
1,012 |
|
|
|
1,737 |
|
|
|
(42 |
)% |
|
$ |
240.0 |
|
|
$ |
445.8 |
|
|
|
(46 |
)% |
|
$ |
237,200 |
|
|
$ |
256,600 |
|
|
|
(8 |
)% |
Midwest |
|
|
743 |
|
|
|
1,302 |
|
|
|
(43 |
)% |
|
|
206.5 |
|
|
|
391.8 |
|
|
|
(47 |
)% |
|
|
277,900 |
|
|
|
300,900 |
|
|
|
(8 |
)% |
Southeast |
|
|
2,059 |
|
|
|
2,775 |
|
|
|
(26 |
)% |
|
|
393.6 |
|
|
|
600.5 |
|
|
|
(34 |
)% |
|
|
191,200 |
|
|
|
216,400 |
|
|
|
(12 |
)% |
South Central |
|
|
4,231 |
|
|
|
5,857 |
|
|
|
(28 |
)% |
|
|
745.0 |
|
|
|
1,051.9 |
|
|
|
(29 |
)% |
|
|
176,100 |
|
|
|
179,600 |
|
|
|
(2 |
)% |
Southwest |
|
|
1,624 |
|
|
|
4,049 |
|
|
|
(60 |
)% |
|
|
304.4 |
|
|
|
831.2 |
|
|
|
(63 |
)% |
|
|
187,400 |
|
|
|
205,300 |
|
|
|
(9 |
)% |
West |
|
|
2,224 |
|
|
|
3,715 |
|
|
|
(40 |
)% |
|
|
663.6 |
|
|
|
1,298.6 |
|
|
|
(49 |
)% |
|
|
298,400 |
|
|
|
349,600 |
|
|
|
(15 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,893 |
|
|
|
19,435 |
|
|
|
(39 |
)% |
|
$ |
2,553.1 |
|
|
$ |
4,619.8 |
|
|
|
(45 |
)% |
|
$ |
214,700 |
|
|
$ |
237,700 |
|
|
|
(10 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-40-
Home Sales Revenue
Revenues from home sales decreased 37%, to $896.6 million (4,240 homes closed) for the three
months ended June 30, 2009, from $1,415.0 million (6,167 homes closed) for the comparable period of
2008. Revenues from home sales decreased 45%, to $2,553.1 million (11,893 homes closed) for the
nine months ended June 30, 2009, from $4,619.8 million (19,435 homes closed) for the comparable
period of 2008. The average selling price of homes closed during the three months ended June 30,
2009 was $211,500, down 8% from the $229,400 average for the same period of 2008. The average
selling price of homes closed during the nine months ended June 30, 2009 was $214,700, down 10%
from the $237,700 average for the same period of 2008. During the three and nine months ended June
30, 2009, home sales revenues decreased significantly in all of our market regions, reflecting
continued weak demand and the resulting decline in net sales order volume and pricing.
The number of homes closed in the three and nine months ended June 30, 2009 decreased 31% and
39%, respectively, due to decreases in all of our market regions. As a result of the decline in net
sales orders during recent quarters and the decline in our sales order backlog, we will close fewer
homes in fiscal 2009 than we closed in fiscal 2008. As conditions change in the housing markets in
which we operate, our ongoing level of net sales orders will determine the number of home closings
and amount of revenue we will generate.
Revenues from home sales in the three and nine-month periods ended June 30, 2009 were
increased by $0.8 million and $3.1 million, respectively, from changes in profit deferred pursuant
to Statement of Financial Accounting Standards (SFAS) No. 66, Accounting for Sales of Real
Estate. In the same periods of fiscal 2008, revenues from home sales were not affected by changes
in deferred profit in the three-month period, and were increased by $26.8 million in the nine-month
period. The home sales profit related to our mortgage loans held for sale is deferred in instances
where a buyer finances a home through our wholly-owned mortgage company and has not made an
adequate initial or continuing investment as prescribed by SFAS No. 66. The decline in the change
in revenues from the year ago nine-month period is due to the reduced availability of the mortgage
types whose use generally resulted in the profit deferral. As of June 30, 2009, the balance of
deferred profit related to such mortgage loans held for sale was $2.7 million, compared to $5.8
million at September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Homebuilding Revenues |
|
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
East |
|
$ |
84.8 |
|
|
$ |
135.1 |
|
|
|
(37 |
)% |
|
$ |
241.7 |
|
|
$ |
447.1 |
|
|
|
(46 |
)% |
Midwest |
|
|
76.9 |
|
|
|
117.2 |
|
|
|
(34 |
)% |
|
|
210.3 |
|
|
|
403.6 |
|
|
|
(48 |
)% |
Southeast |
|
|
146.5 |
|
|
|
189.0 |
|
|
|
(22 |
)% |
|
|
414.2 |
|
|
|
625.8 |
|
|
|
(34 |
)% |
South Central |
|
|
270.6 |
|
|
|
345.0 |
|
|
|
(22 |
)% |
|
|
747.5 |
|
|
|
1,058.0 |
|
|
|
(29 |
)% |
Southwest |
|
|
86.8 |
|
|
|
251.2 |
|
|
|
(65 |
)% |
|
|
307.0 |
|
|
|
904.4 |
|
|
|
(66 |
)% |
West |
|
|
248.5 |
|
|
|
395.8 |
|
|
|
(37 |
)% |
|
|
669.0 |
|
|
|
1,326.0 |
|
|
|
(50 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
914.1 |
|
|
$ |
1,433.3 |
|
|
|
(36 |
)% |
|
$ |
2,589.7 |
|
|
$ |
4,764.9 |
|
|
|
(46 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-41-
Homebuilding Operating Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentages of Related Revenues |
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Gross profit Home sales |
|
|
11.3 |
% |
|
|
10.1 |
% |
|
|
13.4 |
% |
|
|
11.3 |
% |
Gross profit Land/lot sales |
|
|
4.6 |
% |
|
|
22.4 |
% |
|
|
10.9 |
% |
|
|
18.7 |
% |
Effect of inventory impairments and land option cost
write-offs on total homebuilding gross profit |
|
|
(12.1 |
)% |
|
|
(23.1 |
)% |
|
|
(8.3 |
)% |
|
|
(29.6 |
)% |
Gross profit (loss) Total homebuilding |
|
|
(0.9 |
)% |
|
|
(12.8 |
)% |
|
|
5.0 |
% |
|
|
(18.1 |
)% |
Selling, general and administrative expense |
|
|
14.7 |
% |
|
|
13.6 |
% |
|
|
15.0 |
% |
|
|
12.9 |
% |
Interest expense |
|
|
2.2 |
% |
|
|
0.8 |
% |
|
|
2.7 |
% |
|
|
0.5 |
% |
(Gain) loss on early retirement of debt |
|
|
0.4 |
% |
|
|
0.2 |
% |
|
|
(0.2 |
)% |
|
|
0.1 |
% |
Other (income) |
|
|
(0.2 |
)% |
|
|
(0.2 |
)% |
|
|
(0.3 |
)% |
|
|
(0.1 |
)% |
Loss before income taxes |
|
|
(18.0 |
)% |
|
|
(27.1 |
)% |
|
|
(12.1 |
)% |
|
|
(31.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Impairments
and Land Option Cost Write-offs |
|
|
|
Three Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Land Option |
|
|
|
|
|
|
|
|
|
|
Land Option |
|
|
|
|
|
|
Inventory |
|
|
Cost Write-offs |
|
|
|
|
|
|
Inventory |
|
|
Cost Write-offs |
|
|
|
|
|
|
Impairments |
|
|
(Recoveries) |
|
|
Total |
|
|
Impairments |
|
|
(Recoveries) |
|
|
Total |
|
|
|
(In millions) |
|
East |
|
$ |
9.5 |
|
|
$ |
0.5 |
|
|
$ |
10.0 |
|
|
$ |
19.3 |
|
|
$ |
5.9 |
|
|
$ |
25.2 |
|
Midwest |
|
|
18.2 |
|
|
|
7.6 |
|
|
|
25.8 |
|
|
|
67.5 |
|
|
|
|
|
|
|
67.5 |
|
Southeast |
|
|
19.7 |
|
|
|
0.1 |
|
|
|
19.8 |
|
|
|
45.5 |
|
|
|
2.3 |
|
|
|
47.8 |
|
South Central |
|
|
11.3 |
|
|
|
|
|
|
|
11.3 |
|
|
|
1.0 |
|
|
|
0.5 |
|
|
|
1.5 |
|
Southwest |
|
|
11.9 |
|
|
|
(0.3 |
) |
|
|
11.6 |
|
|
|
29.6 |
|
|
|
3.8 |
|
|
|
33.4 |
|
West |
|
|
32.3 |
|
|
|
|
|
|
|
32.3 |
|
|
|
160.3 |
|
|
|
(5.3 |
) |
|
|
155.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
102.9 |
|
|
$ |
7.9 |
|
|
$ |
110.8 |
|
|
$ |
323.2 |
|
|
$ |
7.2 |
|
|
$ |
330.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Land Option |
|
|
|
|
|
|
|
|
|
|
Land Option |
|
|
|
|
|
|
Inventory |
|
|
Cost Write-offs |
|
|
|
|
|
|
Inventory |
|
|
Cost Write-offs |
|
|
|
|
|
|
Impairments |
|
|
(Recoveries) |
|
|
Total |
|
|
Impairments |
|
|
(Recoveries) |
|
|
Total |
|
|
|
(In millions) |
|
East |
|
$ |
15.1 |
|
|
$ |
0.4 |
|
|
$ |
15.5 |
|
|
$ |
128.6 |
|
|
$ |
17.6 |
|
|
$ |
146.2 |
|
Midwest |
|
|
31.3 |
|
|
|
7.6 |
|
|
|
38.9 |
|
|
|
93.0 |
|
|
|
|
|
|
|
93.0 |
|
Southeast |
|
|
25.7 |
|
|
|
0.1 |
|
|
|
25.8 |
|
|
|
243.8 |
|
|
|
5.0 |
|
|
|
248.8 |
|
South Central |
|
|
13.6 |
|
|
|
1.7 |
|
|
|
15.3 |
|
|
|
30.5 |
|
|
|
3.1 |
|
|
|
33.6 |
|
Southwest |
|
|
19.6 |
|
|
|
2.9 |
|
|
|
22.5 |
|
|
|
56.6 |
|
|
|
3.7 |
|
|
|
60.3 |
|
West |
|
|
97.7 |
|
|
|
(0.5 |
) |
|
|
97.2 |
|
|
|
831.2 |
|
|
|
(3.1 |
) |
|
|
828.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
203.0 |
|
|
$ |
12.2 |
|
|
$ |
215.2 |
|
|
$ |
1,383.7 |
|
|
$ |
26.3 |
|
|
$ |
1,410.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-42-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Values of Potentially Impaired and Impaired Communities |
|
|
|
at June 30, 2009 |
|
|
|
|
|
|
|
Inventory with |
|
|
Analysis of Communities with Impairment |
|
|
|
|
|
|
|
Impairment Indicators |
|
|
Charges Recorded at June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value |
|
|
|
|
|
|
Number of |
|
|
Number of |
|
|
Carrying |
|
|
Number of |
|
|
Prior to |
|
|
|
|
|
|
Communities (1) |
|
|
Communities (1) |
|
|
Value |
|
|
Communities (1) |
|
|
Impairment |
|
|
Fair Value |
|
|
|
(Values in millions) |
|
East |
|
|
104 |
|
|
|
26 |
|
|
$ |
298.2 |
|
|
|
1 |
|
|
$ |
31.9 |
|
|
$ |
22.4 |
|
Midwest |
|
|
54 |
|
|
|
24 |
|
|
|
196.8 |
|
|
|
6 |
|
|
|
42.3 |
|
|
|
24.1 |
|
Southeast |
|
|
178 |
|
|
|
41 |
|
|
|
203.6 |
|
|
|
9 |
|
|
|
52.4 |
|
|
|
32.7 |
|
South Central |
|
|
235 |
|
|
|
42 |
|
|
|
174.2 |
|
|
|
3 |
|
|
|
19.8 |
|
|
|
8.5 |
|
Southwest |
|
|
72 |
|
|
|
25 |
|
|
|
103.8 |
|
|
|
6 |
|
|
|
33.1 |
|
|
|
21.2 |
|
West |
|
|
151 |
|
|
|
62 |
|
|
|
454.6 |
|
|
|
7 |
|
|
|
78.3 |
|
|
|
46.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
794 |
|
|
|
220 |
|
|
$ |
1,431.2 |
|
|
|
32 |
|
|
$ |
257.8 |
|
|
$ |
154.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at September 30, 2008 |
|
|
|
|
|
|
|
Inventory with |
|
|
Analysis of Communities with Impairment |
|
|
|
|
|
|
|
Impairment Indicators |
|
|
Charges
Recorded at September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value |
|
|
|
|
|
|
Number of |
|
|
Number of |
|
|
Carrying |
|
|
Number of |
|
|
Prior to |
|
|
|
|
|
|
Communities (1) |
|
|
Communities (1) |
|
|
Value |
|
|
Communities (1) |
|
|
Impairment |
|
|
Fair Value |
|
|
|
(Values in millions) |
|
East |
|
|
105 |
|
|
|
46 |
|
|
$ |
436.9 |
|
|
|
19 |
|
|
$ |
163.8 |
|
|
$ |
79.0 |
|
Midwest |
|
|
62 |
|
|
|
20 |
|
|
|
204.8 |
|
|
|
9 |
|
|
|
93.6 |
|
|
|
58.4 |
|
Southeast |
|
|
176 |
|
|
|
78 |
|
|
|
485.5 |
|
|
|
37 |
|
|
|
241.7 |
|
|
|
153.7 |
|
South Central |
|
|
241 |
|
|
|
57 |
|
|
|
207.1 |
|
|
|
15 |
|
|
|
38.1 |
|
|
|
30.5 |
|
Southwest |
|
|
79 |
|
|
|
25 |
|
|
|
237.1 |
|
|
|
15 |
|
|
|
158.7 |
|
|
|
105.7 |
|
West |
|
|
178 |
|
|
|
80 |
|
|
|
614.8 |
|
|
|
32 |
|
|
|
271.9 |
|
|
|
175.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
841 |
|
|
|
306 |
|
|
$ |
2,186.2 |
|
|
|
127 |
|
|
$ |
967.8 |
|
|
$ |
603.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A community may consist of land held for development, residential land and lots
developed and under development, and construction in progress and finished homes. A
particular community often includes inventory in more than one category. Further, a
community may contain multiple parcels with varying product types (e.g. entry level and
move-up single family detached, as well as attached product types). Some communities
have no homes under construction or finished homes, and no current home sales efforts
or activity. |
Home Sales Gross Profit
Gross profit from home sales decreased by 29%, to $101.6 million for the three months ended
June 30, 2009, from $143.3 million for the comparable period of 2008. As a percentage of home sales
revenues, gross profit from home sales increased 120 basis points, to 11.3%. Approximately 130
basis points of the increase in the home sales gross profit percentage was a result of the average
cost of our homes declining by more than our average selling prices, caused by a greater portion of
our closings occurring in our South Central region, which has experienced more stable housing
conditions than our other regions, and the effects of prior inventory impairments on homes closed
during the current quarter. Approximately 80 basis points of the increase was due to a decrease in
the amortization of capitalized interest and property taxes as a percentage of homes sales revenues
resulting from reductions in our interest and property taxes incurred and capitalized over the past
year. These increases were offset by a 90 basis point decrease due to an increase in actual and
estimated warranty costs incurred. The increase in estimated warranty costs was due in large part
to an adjustment to our estimated warranty liability in the current
quarter related to estimated costs to remedy homes which we have found to or suspect may
contain allegedly defective drywall manufactured in China (Chinese Drywall).
-43-
Gross profit from home sales decreased by 35%, to $341.6 million for the nine months ended
June 30, 2009, from $522.7 million for the comparable period of 2008. As a percentage of home sales
revenues, gross profit from home sales increased 210 basis points, to 13.4%. Generally, the factors
impacting gross margin for the nine-month period ended June 30, 2009 were similar to those
discussed for the three-month period. Specifically, the improvement in our cost of homes as
compared to average selling price contributed 210 basis points to the increase and the decrease in
the amortization of capitalized interest and property taxes contributed 70 basis points. These
increases were partially offset by a decrease of 40 basis points due to the recognition of a lesser
amount of previously deferred gross profit during the current year period compared to the year ago
period and by 30 basis points due to the increase in warranty costs.
Future changes in gross profit percentages are substantially dependent on our future need for
the use of sales incentives and price adjustments to generate an adequate volume of home closings
and cannot be predicted in the current housing market.
Land Sales Revenue and Gross Profit
Land sales revenues decreased 4% to $17.5 million for the three months ended June 30, 2009,
and 75% to $36.6 million for the nine months ended June 30, 2009, from $18.3 million and $145.1
million, respectively, in the comparable periods of 2008. Of the $36.6 million of revenues in the
first nine months of fiscal 2009, $24.1 million related to land sale transactions in the fourth
quarter of fiscal 2008 for which recognition of the revenue had been deferred due to the terms of
the sale. The gross profit percentage from land sales decreased to 4.6% for the three months ended
June 30, 2009, from 22.4% in the comparable period of the prior year, and to 10.9% for the nine
months ended June 30, 2009 from 18.7% in the prior year. The fluctuations in revenues and gross
profit percentages from land sales are a function of how we manage our inventory levels in various
markets. We generally purchase land and lots with the intent to build and sell homes on them;
however, we occasionally purchase land that includes commercially zoned parcels which we typically
sell to commercial developers, and we also sell residential lots or land parcels to manage our land
and lot supply. In markets where we own more land and lots than our expected needs in the next few
years, we plan to attempt to sell excess lots and land parcels. Land and lot sales occur at
unpredictable intervals and varying degrees of profitability. The challenging market conditions for
home sales also exist for the sale of land and lots; therefore, the revenues and gross profit from
land sales can fluctuate significantly from period to period. As of June 30, 2009, we had $26.1
million of land held for sale which we expect to sell in the next twelve months.
Inventory Impairments and Land Option Cost Write-offs
At June 30, 2009, when we performed our quarterly inventory impairment analysis, the
assumptions utilized continued to reflect our outlook for the homebuilding industry and its impact
on our business. This outlook incorporates our belief that housing market conditions may continue
to deteriorate, and that these challenging conditions will persist for some time. Accordingly, our
current quarter impairment evaluation again indicated a significant number of communities with
impairment indicators. Communities with a combined carrying value of $1,431.2 million as of June
30, 2009, had indicators of potential impairment and were evaluated for impairment. The analysis of
the large majority of these communities assumed that sales prices in future periods will be equal
to or lower than current sales order prices in each community or in comparable communities in order
to generate an acceptable absorption rate. For a minority of communities that we do not intend to
develop or operate in current market conditions, slight increases over current sales prices were
assumed. While it is difficult to determine a timeframe for a given community in the current market
conditions, we estimated the remaining lives of these communities to range from six months to in
excess of ten years. Through this evaluation process, we determined that communities with a
carrying value of $257.8 million as of June 30, 2009, the largest portion of which was in the West
region, were impaired. As a result, during the three months ended June 30, 2009, we recorded
impairment charges of $102.9 million to reduce the carrying value of the impaired communities to
their estimated fair value, as compared to $323.2 million in the prior year period. During the nine
months ended June 30, 2009 and 2008, impairment charges totaled $203.0 million and $1,383.7
million, respectively. In performing our quarterly inventory impairment analyses during fiscal
2009, we utilized a range of discount rates for communities of 14% to 20% which reflects an
increase from the range of 12% to 18% we would have used for these communities in fiscal 2008. The
increased discount rates reflect our estimate of the increased level of market risk present in the
homebuilding and related mortgage lending industries. The increase in the discount rates reduced
the estimated fair value of these
communities, increasing the inventory impairment charge by $4.6 million. In the three months
ended June 30, 2009, approximately 89%
of the impairment charges were recorded to residential land
and lots and land held for
-44-
development, and approximately 11% of the charges were recorded to
construction in progress and finished homes inventory, compared to 79% and 21%, respectively, in
the same period of 2008. In the nine months ended June 30, 2009 and 2008, approximately 79% of the
impairment charges were recorded to residential land and lots and land held for development, and
approximately 21% of the charges were recorded to construction in progress and finished homes
inventory.
Of the remaining $1,173.4 million carrying value of communities with impairment indicators
which were determined not to be impaired at June 30, 2009, the largest concentrations were in
California (15%), Texas (13%), Florida (11%), Illinois (9%) and Hawaii (8%). It is possible that
our estimate of undiscounted cash flows from these communities may change and could result in a
future need to record impairment charges to adjust the carrying value of these assets to their
estimated fair value. There are several factors which could lead to changes in the estimates of
undiscounted future cash flows for a given community. The most significant of these include pricing
and incentive levels actually realized by the community, the rate at which the homes are sold and
the costs incurred to construct the homes. The pricing and incentive levels are often inter-related
with sales pace within a community such that a price reduction can be expected to increase the
sales pace. Further, both of these factors are heavily influenced by the competitive pressures
facing a given community from both new homes and existing homes which may result from foreclosures.
Additionally, if conditions in the broader economy, homebuilding industry or specific markets in
which we operate worsen beyond current expectations, and as we re-evaluate specific community
pricing and incentives, construction and development plans, and our overall land sale strategies,
we may be required to evaluate additional communities or re-evaluate previously impaired
communities for potential impairment. These evaluations may result in additional impairment
charges, which could be significantly higher than the current quarter charges.
Based on a quarterly review of land and lot option contracts, we have written off earnest
money deposits and pre-acquisition costs related to land and lot option contracts which we no
longer plan to pursue. During the three-month periods ended June 30, 2009 and 2008, we wrote off
$7.9 million and $7.2 million, respectively, of earnest money deposits and pre-acquisition costs
related to land option contracts. During the nine-month periods ended June 30, 2009 and 2008, we
wrote off $12.2 million and $26.3 million, respectively, of such deposits and costs. We have
reduced our portfolio of land and lot option purchase contracts, as well as the outstanding earnest
money deposits and pre-acquisition costs associated with such, which totaled $17.7 million and
$14.9 million, respectively, as of June 30, 2009. The largest concentrations of these balances were
in the South Central (34%) and East (33%) regions. If the current weak homebuilding market
conditions persist and we are unable to successfully renegotiate certain land or lot purchase
contracts, we may write off additional earnest money deposits and pre-acquisition costs.
In the three and nine-month periods ended June 30, 2009, inventory impairment charges and
write-offs of earnest money deposits and pre-acquisition costs reduced total homebuilding gross
profit as a percentage of homebuilding revenues by approximately 1,210 basis points and 830 basis
points, respectively, compared to 2,310 basis points and 2,960 basis points, respectively, in the
same periods of 2008.
Selling, General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities decreased by 31% to $134.3 million in the three
months ended June 30, 2009, and decreased 37% to $388.2 million in the nine months ended June 30,
2009, from the comparable periods of 2008. As homebuilding revenues declined at a faster pace than
SG&A expense, when expressed as a percentage of homebuilding revenues, SG&A expense increased 110
basis points, to 14.7% in the three-month period ended June 30, 2009, and increased 210 basis
points, to 15.0%, in the nine-month period ended June 30, 2009. The largest component of our
homebuilding SG&A expenses is employee compensation and related costs, which represented 45% and
53% of SG&A costs in the three and nine-month periods ended June 30, 2009, respectively, and 52%
and 54% of SG&A costs in the comparable periods of fiscal 2008. These costs decreased by 39%, to
$60.7 million and $204.0 million in the three and nine months ended June 30, 2009, respectively,
from the comparable periods of 2008. These decreases were largely due to our continued efforts to
align the number of employees to match our current and anticipated home closing levels, as well as
a decrease in incentive compensation. Our homebuilding operations employed approximately 2,280 and
3,500 employees at June 30, 2009 and 2008, respectively. Most other SG&A cost components also
decreased in the three and nine months ended June 30, 2009 as compared to the same period of 2008,
as a result of our efforts to reduce all costs throughout the company. The most substantial
decreases occurred in advertising and depreciation.
-45-
Our homebuilding SG&A expense as a percentage of revenues can vary significantly between
quarters, depending largely on the fluctuations in quarterly revenue levels. We continue to adjust
our SG&A infrastructure to support our expected closings volume; however, we cannot make assurances
that our actions will permit us to maintain or improve upon the current SG&A expense as a
percentage of revenues. It becomes more difficult to reduce SG&A expense as the size of our
operations decreases. If revenues continue to decrease and we are unable to sufficiently adjust our
SG&A, future SG&A expense as a percentage of revenues may increase further.
Interest Incurred
We capitalize homebuilding interest costs to inventory during active development and
construction. Due to our inventory reduction strategies and slowing or suspending land development
in certain communities, our inventory under active development and construction has been lower than
our debt level and a portion of our interest incurred must be expensed. Therefore, we expensed
$20.3 million and $68.9 million of interest incurred during the three and nine-month periods ended
June 30, 2009, respectively, compared to $11.7 million and $22.9 million, respectively, in the same
periods of fiscal 2008.
Interest amortized to cost of sales, excluding interest written off with inventory impairment
charges, was 3.7% and 4.0% of total home and land/lot cost of sales in the three and nine-month
periods ended June 30, 2009, respectively, compared to 3.5% and 4.2% in the same periods of 2008.
Interest incurred is related to the average level of our homebuilding debt outstanding during the
period. Comparing the three and nine months ended June 30, 2009 with the same periods of 2008,
interest incurred related to homebuilding debt decreased 27% to $42.8 million, and 16% to $149.8
million, primarily due to decreases in our average homebuilding debt.
Gain/Loss on Early Retirement of Debt
During the nine months ended June 30, 2009, in addition to repaying maturing senior notes, we
repurchased a total of $308.3 million principal amount of various issues of our senior notes prior
to their maturity. These notes were repurchased primarily through unsolicited transactions for an
aggregate purchase price of $295.6 million, plus accrued interest. We recognized a gain of $12.0
million related to these repurchases, which represents the difference between the principal amount
of the notes and the aggregate purchase price, less any unamortized discounts and fees. Partially
offsetting this gain was a $7.6 million loss resulting from the write-off of unamortized fees in
connection with the early termination of our revolving credit facility in May 2009. These
transactions resulted in a net gain of $4.4 million during the nine months ended June 30, 2009.
During the three months ended June 30, 2009, we recognized a gain of $3.7 million related to senior
note repurchases, which was offset by the $7.6 million loss from the early termination of our
revolving credit facility.
The loss on early retirement of debt of $2.6 million during the three and nine months ended
June 30, 2008 was primarily due to the write-off of unamortized fees associated with reducing the
size of our revolving credit facility in June 2008.
Other Income
Other income, net of other expenses, associated with homebuilding activities was $2.2 million
in the three months ended June 30, 2009, compared to $3.5 million in the comparable period of 2008.
Other income, net of other expenses, associated with homebuilding activities was $8.7 million in
the nine months ended June 30, 2009, compared to $7.0 million in the comparable period of 2008. The
largest component of other income in all four periods was interest income.
-46-
Homebuilding Results by Reporting Region
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|
Homebuilding Income (Loss) Before Income Taxes (1) |
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|
Three Months Ended June 30, |
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|
Nine Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
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|
|
% of Region |
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% of Region |
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% of Region |
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% of Region |
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$s |
|
|
Revenues |
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|
$s |
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|
Revenues |
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|
$s |
|
|
Revenues |
|
|
$s |
|
|
Revenues |
|
|
|
(In millions) |
|
East |
|
$ |
(22.5 |
) |
|
|
(26.5 |
)% |
|
$ |
(38.6 |
) |
|
|
(28.6 |
)% |
|
$ |
(39.2 |
) |
|
|
(16.2 |
)% |
|
$ |
(180.9 |
) |
|
|
(40.5 |
)% |
Midwest |
|
|
(41.0 |
) |
|
|
(53.3 |
)% |
|
|
(74.7 |
) |
|
|
(63.7 |
)% |
|
|
(73.8 |
) |
|
|
(35.1 |
)% |
|
|
(107.3 |
) |
|
|
(26.6 |
)% |
Southeast |
|
|
(30.5 |
) |
|
|
(20.8 |
)% |
|
|
(62.9 |
) |
|
|
(33.3 |
)% |
|
|
(47.9 |
) |
|
|
(11.6 |
)% |
|
|
(286.4 |
) |
|
|
(45.8 |
)% |
South Central |
|
|
(6.1 |
) |
|
|
(2.3 |
)% |
|
|
13.6 |
|
|
|
3.9 |
% |
|
|
7.0 |
|
|
|
0.9 |
% |
|
|
6.7 |
|
|
|
0.6 |
% |
Southwest |
|
|
(15.6 |
) |
|
|
(18.0 |
)% |
|
|
(34.9 |
) |
|
|
(13.9 |
)% |
|
|
(24.8 |
) |
|
|
(8.1 |
)% |
|
|
(14.1 |
) |
|
|
(1.6 |
)% |
West |
|
|
(49.0 |
) |
|
|
(19.7 |
)% |
|
|
(191.0 |
) |
|
|
(48.3 |
)% |
|
|
(134.9 |
) |
|
|
(20.2 |
)% |
|
|
(912.8 |
) |
|
|
(68.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(164.7 |
) |
|
|
(18.0 |
)% |
|
$ |
(388.5 |
) |
|
|
(27.1 |
)% |
|
$ |
(313.6 |
) |
|
|
(12.1 |
)% |
|
$ |
(1,494.8 |
) |
|
|
(31.4 |
)% |
|
|
|
|
|
|
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|
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(1) |
|
Expenses maintained at the corporate level are allocated to each segment based
on the segments average inventory. These expenses consist primarily of capitalized
interest and property taxes, which are amortized to cost of sales, and the expenses
related to operating our corporate office. |
East Region Homebuilding revenues decreased 37% and 46% in the three and nine months ended
June 30, 2009, respectively, from the comparable periods of 2008, primarily due to decreases in the
number of homes closed, with the largest decreases in our New Jersey and Carolina markets. The
region reported losses before income taxes of $22.5 million and $39.2 million in the three and nine
months ended June 30, 2009, respectively, compared to losses of $38.6 million and $180.9 million
for the same periods of 2008. The losses were due in part to inventory impairment charges and
earnest money and pre-acquisition cost write-offs totaling $10.0 million and $15.5 million in the
three and nine months ended June 30, 2009, respectively, compared to $25.2 million and $146.2
million in the same periods of 2008. The regions gross profit from home sales as a percentage of
home sales revenue (home sales gross profit percentage) increased 100 basis points and 320 basis
points in the three and nine months ended June 30, 2009, respectively, compared to the same periods
of 2008. These increases were a result of the average cost of our homes declining by more than the
average selling prices due to the effects of prior inventory impairments on homes closed during
both periods of 2009.
Midwest Region Homebuilding revenues decreased 34% and 48% in the three and nine months
ended June 30, 2009, respectively, from the comparable periods of 2008, primarily due to decreases
in the number of homes closed in all of our markets. The region reported losses before income taxes
of $41.0 million and $73.8 million in the three and nine months ended June 30, 2009, respectively,
compared to losses of $74.7 million and $107.3 million for the same periods of 2008. The losses
were due in part to inventory impairment charges and earnest money and pre-acquisition cost
write-offs totaling $25.8 million and $38.9 million in the three and nine months ended June 30,
2009, respectively, compared to $67.5 million and $93.0 million in the same periods of 2008. The
regions home sales gross profit percentage decreased 580 basis points and 520 basis points in the
three and nine months ended June 30, 2009, respectively, compared to the same periods of 2008. The
decreases were a result of lower margins in our Chicago and Denver markets, as well as an increase
in warranty costs on previously closed homes in our Denver market. Additionally, our revenues
declined at a greater rate than our SG&A expense, which also contributed to the losses before
income taxes in both periods of 2009.
Southeast Region Homebuilding revenues decreased 22% and 34% in the three and nine months
ended June 30, 2009, respectively, from the comparable periods of 2008, primarily due to decreases
in the number of homes closed in most of our markets, as well as decreases in the average selling
price of those homes. The region reported losses before income taxes of $30.5 million and $47.9
million in the three and nine months ended June 30, 2009, respectively, compared to losses of $62.9
million and $286.4 million for the same periods of 2008. The losses were due in part to inventory
impairment charges and earnest money and pre-acquisition cost write-offs totaling $19.8 million and
$25.8 million in the three and nine months ended June 30, 2009, respectively, compared to $47.8
million and $248.8 million in the same periods of 2008. The regions home sales gross profit
percentage increased 210 basis points and 380 basis points in the three and nine months ended June
30, 2009, respectively, compared to the same periods of 2008. These increases were a result of the
average cost of our homes declining by more than the average
selling prices due to the effects of prior inventory impairments on homes closed during both
periods of 2009, and
-47-
both periods were offset by an increase in estimated warranty costs related to
homes in one market in Florida which we have found to or suspect may contain Chinese Drywall.
South Central Region Homebuilding revenues decreased 22% and 29% in the three and nine
months ended June 30, 2009, respectively, from the comparable periods of 2008, primarily due to
decreases in the number of homes closed in all of our markets. The region reported a loss before
income taxes of $6.1 million in the three months ended June 30, 2009, and income before income
taxes of $7.0 million in the nine month period, compared to income of $13.6 million and $6.7
million for the same periods of 2008. The changes in income before income taxes were primarily due
to inventory impairment charges and earnest money and pre-acquisition cost write-offs, which were
$11.3 million and $15.3 million in the three and nine months ended June 30, 2009, respectively,
compared to $1.5 million and $33.6 million in the same periods of 2008. In addition, the regions
home sales gross profit percentage decreased 60 basis points in the three months ended June 30,
2009, compared to the same period of the prior year due to an increase in estimated warranty costs
related to homes in our Louisiana market which we have found to or suspect may contain Chinese
Drywall. The regions home sales gross profit percentage increased 90 basis points in the nine
months ended June 30, 2009, compared to the same period of 2008, due to the effects of prior
inventory impairments on homes closed during 2009, which were also present to a lesser degree
during the three month period.
Southwest Region Homebuilding revenues decreased 65% and 66% in the three and nine months
ended June 30, 2009, respectively, from the comparable periods of 2008, primarily due to decreases
in the number of homes closed in our Phoenix market, as well as decreases in the average selling
price of homes in the region. The region reported losses before income taxes of $15.6 million and
$24.8 million in the three and nine months ended June 30, 2009, respectively, compared to losses of
$34.9 million and $14.1 million for the same periods of 2008. The losses were due in part to
inventory impairment charges and earnest money and pre-acquisition cost write-offs totaling $11.6
million and $22.5 million in the three and nine months ended June 30, 2009, respectively, compared
to $33.4 million and $60.3 million in the same periods of 2008. The regions revenues declined at a
greater rate than its SG&A expense, which also contributed to the losses before income taxes in
both periods of 2009. The regions home sales gross profit percentage increased 270 basis points
and 70 basis points in the three and nine months ended June 30, 2009, respectively, compared to the
same periods of 2008 due to the effects of prior inventory impairments on homes closed during both
periods of 2009.
West Region Homebuilding revenues decreased 37% and 50% in the three and nine months ended
June 30, 2009, respectively, from the comparable periods of 2008, primarily due to decreases in the
number of homes closed, as well as decreases in the average selling price of those homes. The
largest decreases in homes closed occurred in our Northern California markets. The region reported
losses before income taxes of $49.0 million and $134.9 million in the three and nine months ended
June 30, 2009, respectively, compared to losses of $191.0 million and $912.8 million for the same
periods of 2008. The losses were due in part to inventory impairment charges and earnest money and
pre-acquisition cost write-offs totaling $32.3 million and $97.2 million in the three and nine
months ended June 30, 2009, respectively, compared to $155.0 million and $828.1 million in the same
periods of 2008. The regions home sales gross profit percentage increased 350 basis points and 480
basis points in the three and nine months ended June 30, 2009, respectively, compared to the same
periods of 2008. These increases were a result of the average cost of our homes declining by more
than the average selling prices due to the effects of prior inventory impairments on homes closed
during both periods of 2009.
-48-
RESULTS OF OPERATIONS FINANCIAL SERVICES
The following tables set forth key operating and financial data for our financial services
operations, comprising DHI Mortgage and our subsidiary title companies, for the three and
nine-month periods ended June 30, 2009 and 2008:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Nine Months Ended June 30, |
|
|
2009 |
|
2008 |
|
% Change |
|
2009 |
|
2008 |
|
% Change |
Number of first-lien loans originated or
brokered by DHI Mortgage for
D.R. Horton homebuyers |
|
|
2,925 |
|
|
|
3,640 |
|
|
|
(20)% |
|
|
|
8,020 |
|
|
|
11,752 |
|
|
|
(32)% |
|
Number of homes closed by D.R. Horton |
|
|
4,240 |
|
|
|
6,167 |
|
|
|
(31)% |
|
|
|
11,893 |
|
|
|
19,435 |
|
|
|
(39)% |
|
DHI Mortgage capture rate |
|
|
69% |
|
|
|
59% |
|
|
|
|
|
|
|
67% |
|
|
|
60% |
|
|
|
|
|
|
Number of total loans originated or
brokered by DHI Mortgage for
D.R. Horton homebuyers |
|
|
2,950 |
|
|
|
3,685 |
|
|
|
(20)% |
|
|
|
8,093 |
|
|
|
12,048 |
|
|
|
(33)% |
|
Total number of loans originated or
brokered by DHI Mortgage |
|
|
3,704 |
|
|
|
4,089 |
|
|
|
(9)% |
|
|
|
9,948 |
|
|
|
13,068 |
|
|
|
(24)% |
|
Captive business percentage |
|
|
80% |
|
|
|
90% |
|
|
|
|
|
|
|
81% |
|
|
|
92% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans sold by DHI Mortgage to third parties |
|
|
3,469 |
|
|
|
4,211 |
|
|
|
(18)% |
|
|
|
10,475 |
|
|
|
13,874 |
|
|
|
(24)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
|
(In millions) |
|
Loan origination fees |
|
$ |
4.5 |
|
|
$ |
6.0 |
|
|
|
(25)% |
|
|
$ |
14.3 |
|
|
$ |
19.3 |
|
|
|
(26)% |
|
Sale of servicing rights and gains
from sale of mortgages |
|
|
16.6 |
|
|
|
19.1 |
|
|
|
(13)% |
|
|
|
39.7 |
|
|
|
68.8 |
|
|
|
(42)% |
|
Recourse expense |
|
|
(4.4 |
) |
|
|
(2.2 |
) |
|
|
100% |
|
|
|
(24.2 |
) |
|
|
(16.0 |
) |
|
|
51% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of servicing rights and gains
from sale of mortgages, net |
|
|
12.2 |
|
|
|
16.9 |
|
|
|
(28)% |
|
|
|
15.5 |
|
|
|
52.8 |
|
|
|
(71)% |
|
Other revenues |
|
|
2.0 |
|
|
|
2.6 |
|
|
|
(23)% |
|
|
|
6.4 |
|
|
|
9.3 |
|
|
|
(31)% |
|
Reinsurance reserves |
|
|
(4.8 |
) |
|
|
(1.0 |
) |
|
|
380% |
|
|
|
(10.5 |
) |
|
|
(2.4 |
) |
|
|
338% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues, net |
|
|
(2.8 |
) |
|
|
1.6 |
|
|
|
(275)% |
|
|
|
(4.1 |
) |
|
|
6.9 |
|
|
|
(159)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage operations revenues |
|
|
13.9 |
|
|
|
24.5 |
|
|
|
(43)% |
|
|
|
25.7 |
|
|
|
79.0 |
|
|
|
(67)% |
|
Title policy premiums, net |
|
|
4.9 |
|
|
|
6.4 |
|
|
|
(23)% |
|
|
|
13.4 |
|
|
|
19.8 |
|
|
|
(32)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
18.8 |
|
|
|
30.9 |
|
|
|
(39)% |
|
|
|
39.1 |
|
|
|
98.8 |
|
|
|
(60)% |
|
General and administrative expense |
|
|
18.1 |
|
|
|
23.1 |
|
|
|
(22)% |
|
|
|
58.5 |
|
|
|
76.4 |
|
|
|
(23)% |
|
Interest expense |
|
|
0.2 |
|
|
|
0.6 |
|
|
|
(67)% |
|
|
|
1.2 |
|
|
|
2.7 |
|
|
|
(56)% |
|
Interest and other (income) |
|
|
(2.3 |
) |
|
|
(2.2 |
) |
|
|
5% |
|
|
|
(8.0 |
) |
|
|
(8.5 |
) |
|
|
(6)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
2.8 |
|
|
$ |
9.4 |
|
|
|
(70)% |
|
|
$ |
(12.6 |
) |
|
$ |
28.2 |
|
|
|
(145)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services Operating Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentages of Financial Services Revenues, excluding |
|
|
the effects of Recourse Expense and Reinsurance Reserves |
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Recourse expense and reinsurance reserves |
|
|
32.9% |
|
|
|
9.4% |
|
|
|
47.0% |
|
|
|
15.7% |
|
General and administrative expense |
|
|
64.6% |
|
|
|
67.7% |
|
|
|
79.3% |
|
|
|
65.2% |
|
Interest expense |
|
|
0.7% |
|
|
|
1.8% |
|
|
|
1.6% |
|
|
|
2.3% |
|
Interest and other (income) |
|
|
(8.2)% |
|
|
|
(6.5)% |
|
|
|
(10.8)% |
|
|
|
(7.3)% |
|
Income (loss) before income taxes |
|
|
10.0% |
|
|
|
27.6% |
|
|
|
(17.1)% |
|
|
|
24.1% |
|
-49-
Mortgage Loan Activity
In the three and nine-month periods ended June 30, 2009, total first-lien loans originated or
brokered by DHI Mortgage for our homebuyers decreased by 20% and 32%, respectively, corresponding
to the decreases in the number of homes closed of 31% and 39%, respectively. The percentage
decreases in loans originated were less than the percentage decreases in homes closed due to an
increase in our mortgage capture rate (the percentage of total home closings by our homebuilding
operations for which DHI Mortgage handled the homebuyers financing). In the three and nine-month
current year periods our mortgage capture rate increased to 69% and 67%, respectively, from 59% and
60% in the comparable prior year periods.
Home closings from our homebuilding operations constituted 80% and 81% of DHI Mortgage loan
originations in the three and nine-month periods ended June 30, 2009, respectively, compared to 90%
and 92% in the comparable periods of 2008. These consistently high rates reflect DHI Mortgages
continued focus on supporting the captive business provided by our homebuilding operations. The
relatively lower captive percentages in the current year periods reflect an increase in refinancing
activity as existing homeowners have taken advantage of the recent decline in mortgage interest
rates.
The number of loans sold to third-party purchasers decreased by 18% and 24% in the three and
nine months ended June 30, 2009, respectively, from the comparable periods of 2008. The decreases
were primarily due to decreases in the number of mortgage loans originated as compared to the prior
year periods.
Consistent with fiscal 2008, originations during the first nine months of fiscal 2009
continued to predominantly be eligible for sale to FNMA, FHLMC, or GNMA (Agency-eligible). For
the nine-month period ended June 30, 2009, approximately 99% of DHI Mortgage production and 97% of
mortgage loans held for sale on June 30, 2009 were Agency-eligible. Other mortgage loans consist
primarily of repurchased loans originated between fiscal years 2005 through 2007. As of June 30,
2009, 72% of other mortgage loans were Alt-A, subprime or non-prime loans. In June 2007, DHI
Mortgage stopped originating these types of Agency-ineligible loans.
As investor underwriting guidelines could rapidly change, DHI Mortgages ability to sell all
of its loans could be negatively impacted.
Financial Services Revenues and Expenses
Revenues from the financial services segment decreased 39% and 60%, to $18.8 million and $39.1
million in the three and nine months ended June 30, 2009, respectively, from the comparable periods
of 2008. These decreases were primarily due to decreases in the number of mortgage loans originated
and sold, as well as increases in recourse expense related to future loan repurchase obligations,
which is a component of gains from sale of mortgages, and increases in the loss reserves for
reinsured loans, which is a component of other revenues. Charges related to recourse obligations
were $4.4 million and $24.2 million in the three and nine-month periods ended June 30, 2009,
respectively, compared to $2.2 million and $16.0 million in the same periods of fiscal 2008. The
increase in recourse expense is due to increasing our loan loss reserves during fiscal 2009 as a
result of receiving additional repurchase requests arising under the limited recourse provisions
leading to increased expectations for loan repurchases and losses. Also, a subsidiary of ours
reinsured a portion of private mortgage insurance written on loans originated by DHI Mortgage in
prior years. Charges to increase reserves for expected losses on the reinsured loans were $4.8
million and $10.5 million in the three and nine-month periods ended June 30, 2009, respectively,
compared to $1.0 million and $2.4 million in the same periods of fiscal 2008.
Additionally, revenues during the nine-month period ended June 30, 2008 included the
recognition of an additional $6.8 million of revenues related to the adoption of Staff Accounting
Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings (SAB 109),
which was adopted on January 1, 2008. SAB 109 requires that the expected net future cash flows
related to the associated servicing of a loan are included in the measurement of all written loan
commitments that are accounted for at fair value through earnings at the time of commitment. The
effect of SAB 109 in the nine-month period ended June 30, 2009 was a $4.0 million decrease in
revenues.
General and administrative (G&A) expenses associated with financial services decreased 22% and
23%, to $18.1 million and $58.5 million in the three and nine months ended June 30, 2009,
respectively, from the comparable
periods of 2008. The largest component of our financial services G&A expense is employee
compensation and
-50-
related costs, which represented 75% of G&A costs in both the three and nine-month
periods of fiscal 2009, compared to 70% and 72%, respectively, in the same periods of fiscal 2008.
These costs decreased 16%, to $13.6 million and 21% to $43.7 million in the three and nine months
ended June 30, 2009, respectively, compared to the respective prior year periods, as we have
continued to align the number of employees with current and anticipated loan origination and title
service levels. Our financial services operations employed approximately 570 and 700 employees at
June 30, 2009 and 2008, respectively.
As a percentage of financial services revenues, excluding the effects of recourse expense and
reinsurance reserves, G&A expenses in the three-month period ended June 30, 2009 decreased to
64.6%, from 67.7% in the comparable period of 2008. As a percentage of financial services revenues,
excluding the effects of recourse expense and reinsurance reserves, G&A expenses in the nine-month
period ended June 30, 2009 increased to 79.3%, from 65.2% in the comparable period of 2008 due to
higher revenues in the prior year period due to the adoption of SAB 109. Fluctuations in financial
services G&A expense as a percentage of revenues can be expected to occur as some expenses are not
directly related to mortgage loan volume or to changes in the amount of revenue earned.
RESULTS OF OPERATIONS CONSOLIDATED
Loss before Income Taxes
Loss before income taxes for the three months ended June 30, 2009 was $161.9 million, compared
to $379.1 million for the same period of 2008. Loss before income taxes for the nine months ended
June 30, 2009 was $326.2 million, compared to $1,466.6 million for the same period of 2008. The
decreases in our consolidated losses were primarily due to significantly lower inventory impairment
charges and SG&A expense, partially offset by decreases in the amount of our home sales gross
profit due to a reduction in revenues for the three and nine-month periods ended June 30, 2009.
Further deterioration of market conditions in the homebuilding industry and related availability of
mortgage financing may further negatively impact our financial results, and may also result in
further asset impairment charges against income in future periods.
Income Taxes
The benefit from income taxes for the three and nine months ended June 30, 2009 was $19.6
million and $12.8 million, respectively. The provision for income taxes for the three and nine
months ended June 30, 2008 was $20.2 million and $367.2 million, respectively. Our effective tax
rate for the three and nine-month periods ended June 30, 2009 was 12.1% and 3.9%, respectively. Our
effective tax rate for the three and nine-month periods ended June 30, 2008 was negative 5.3% and
negative 25.0%, respectively. The difference in our effective tax rate for the nine-month periods
is primarily the result of recording a $714.3 million valuation allowance on our deferred tax
assets at March 31, 2008, of which $385.0 million related to deferred tax assets existing as of the
beginning of fiscal year 2008. The benefit from income taxes for the three and nine-month periods
ended June 30, 2009 relates primarily to adjustments to the tax provision recorded for fiscal year
2008 resulting from the finalization and filing of the tax return for that year.
At June 30, 2009, we had a federal income tax receivable of $124.9 million, relating to a net
operating loss carryback from our 2008 year. In December 2008, we received a federal income tax
refund of $621.7 million with respect to our 2008 year. We expect to receive the majority of the
$124.9 million receivable in the form of a refund during the fourth quarter of fiscal 2009.
At June 30, 2009 and September 30, 2008, we had net deferred tax assets of $1,233.9 million
and $1,174.8 million, respectively, offset by valuation allowances of $1,068.5 million and $961.3
million, respectively. A substantial portion of the remaining net deferred tax asset of $165.4
million at June 30, 2009 is expected to be recovered through the carryback of federal tax losses to
be generated in fiscal 2009, primarily through the sale of inventories which have been impaired in
previous periods. Federal tax losses realized in fiscal 2009 can be carried back to fiscal 2007
when we had taxable income. We expect to recover the majority of the deferred tax asset during the
first quarter of fiscal 2010. The remainder of the net deferred tax asset relates to state income
tax loss carrybacks. The accounting for deferred taxes is based upon an estimate of future results.
Differences between the anticipated and actual outcome of these future tax consequences could have
a material impact on our consolidated financial position, results of operations or cash flows. Our
ability to sell and close an adequate amount of previously
impaired homes in fiscal 2009 is a significant assumption required for full recovery of the
net deferred tax asset. Changes in existing tax laws may also affect actual tax results and the
valuation of deferred tax assets over time.
-51-
The total amount of unrecognized tax benefits was $16.0 million and $18.7 million as of June
30, 2009 and September 30, 2008, respectively, which includes interest, penalties, and the tax
benefit relating to the deductibility of interest and state income taxes. All tax positions, if
recognized, would affect our effective income tax rate. We do not expect the total amount of
unrecognized tax benefits to significantly decrease or increase within twelve months of the current
reporting date.
We are subject to federal income tax and to income tax in multiple states. The statute of
limitations for our major tax jurisdictions remains open for examination for fiscal years 2004
through 2009. We are currently being audited by various states. The IRS concluded its examination
of our tax returns for 2004 and 2005 in February 2009 which resulted in the assessment of $7.5
million of additional federal and state income tax and interest. Also, we recorded a reduction of
$2.7 million to the amount of unrecognized tax benefits during the second quarter of fiscal 2009 as
a result of the conclusion of the audit.
CAPITAL RESOURCES AND LIQUIDITY
We have historically funded our homebuilding and financial services operations with cash flows
from operating activities, borrowings under our bank credit facilities and the issuance of new debt
securities. In light of the challenging homebuilding market conditions experienced over the past
few years, we have been operating with a primary focus to generate cash flows through reductions in
assets. The generation of cash flow has allowed us to increase our liquidity and strengthen our
balance sheet and places us in a position to react quickly to market opportunities that may arise
in the future. We intend to maintain adequate liquidity and balance sheet strength, and we will
continue to evaluate opportunities to access the capital markets as they become available.
At June 30, 2009, our ratio of net homebuilding debt to total capital was 34.5%, a decrease of
850 basis points from 43.0% at June 30, 2008, and 910 basis points from 43.6% at September 30,
2008. Net homebuilding debt to total capital consists of homebuilding notes payable net of cash
divided by total capital net of cash (homebuilding notes payable net of cash plus stockholders
equity). The decrease in our ratio of net homebuilding debt to total capital at June 30, 2009 as
compared with the ratio a year earlier and at September 30, 2008 was primarily due to our higher
cash balance resulting from generating cash flows from operations and lower debt balance resulting
from retiring maturing senior notes and repurchasing senior notes on the open market, which was
partially offset by the decrease in retained earnings. Our ratio of net homebuilding debt to total
capital remains within our target operating range of below 45%. We believe that our strong balance
sheet and liquidity position will allow us to be flexible in reacting to changing market
conditions. However, future period-end net homebuilding debt to total capital ratios may be higher
than the 34.5% ratio achieved at June 30, 2009.
We believe that the ratio of net homebuilding debt to total capital is useful in understanding
the leverage employed in our homebuilding operations and comparing us with other homebuilders. We
exclude the debt of our financial services business because it is separately capitalized and its
obligation under its repurchase agreement is substantially collateralized and not guaranteed by our
parent company or any of our homebuilding entities. Because of its capital function, we include
homebuilding cash as a reduction of our homebuilding debt and total capital. For comparison to our
ratios of net homebuilding debt to capital above, at June 30, 2009 and 2008, and at September 30,
2008, our ratios of homebuilding debt to total capital, without netting cash balances, were 56.8%,
49.5%, and 55.6%, respectively.
Historically, we used our $1.65 billion unsecured revolving credit facility as a partial
source of funding for our homebuilding operations. However, as we have generated substantial cash
flows from operations and accumulated a significant cash balance, we had not borrowed under the
revolving credit facility since January 2008. We had continued to pay fees associated with the
unused capacity under the facility since that time despite our expectation that we did not
anticipate borrowing under the facility in the near term. Additionally, the financial covenants and
borrowing base arrangement under the revolving credit facility imposed restrictions on our
operations and activities. In recent quarters, the borrowing base arrangement had limited our
additional borrowing capacity to an amount well below the unused capacity, and the margin by which
we had complied with the tangible net worth covenant had declined. In order to modify the financial
covenants and achieve more capacity under our borrowing base arrangement, an amendment to the
facility would have been required. Based on discussions with the lenders any amendment to the
facility would have likely substantially reduced the total amount of the facility and would have
possibly required the funding of a cash collateral account while increasing some of the costs
associated
with the
-52-
facility. Consequently, in accordance with the provisions of the agreement
governing the revolving credit facility, we voluntarily terminated the facility in May 2009.
We believe that we will be able to fund our working capital needs for our homebuilding and
financial services operations, as well as our debt obligations, through existing cash resources and
the cash flows from operations we expect to generate in the near term, our mortgage repurchase
facility and, for the longer term, the issuance of new securities through the public capital
markets as market conditions may permit.
Homebuilding Capital Resources
Cash and Cash Equivalents At June 30, 2009, we had available homebuilding cash and cash
equivalents of $1.97 billion.
Bank Credit Facility We had a $1.65 billion unsecured revolving credit facility, which
included a $1.0 billion letter of credit sub-facility, with a maturity of December 16, 2011. In
accordance with the provisions of the agreement governing the revolving credit facility, we
voluntarily terminated the facility in May 2009. There were no cash borrowings and $61.0 million of
standby letters of credit outstanding on the facility at the time of termination. As a result of
the termination, we recognized $7.6 million of loss on early retirement of debt related to the
write-off of unamortized fees in the three months ended June 30, 2009. There were no penalties
incurred in connection with the early termination of the revolving credit facility. Concurrent with
the termination, we entered into secured letter of credit agreements with the three banks that had
issued letters of credit under the revolving credit facility. The effect of these agreements was to
remove the outstanding letters of credit from the facility, which required us to deposit cash, in
an amount approximating the balance of letters of credit outstanding, as collateral with the
issuing banks. At June 30, 2009, the amount of cash restricted for this purpose totaled $60.6
million and is included in homebuilding restricted cash on our consolidated balance sheet.
The revolving credit facility imposed restrictions on our operations and activities by
requiring us to maintain certain levels of leverage, tangible net worth and components of
inventory. As a result of the termination of the facility, these restrictions are no longer in
effect.
Recently Issued Public Unsecured Debt In May 2009, we issued $500 million principal amount
of 2% convertible senior notes due May 15, 2014, with interest payable semi-annually. Holders of
the 2% convertible senior notes may convert all or any portion of their notes at their option at
any time prior to the close of business on the second scheduled trading day immediately preceding
the maturity date. The initial conversion rate for the notes is 76.5697 shares of our common stock
per $1,000 principal amount of senior notes, equivalent to an initial conversion price of
approximately $13.06 per share of our common stock. The conversion rate is subject to adjustment in
certain events but will not be adjusted for accrued interest, including any additional interest.
Upon conversion of a 2% senior note, we will pay or deliver, as the case may be, cash, shares of
our common stock or a combination thereof at our election. We may not redeem the notes prior to the
maturity date. The annual effective interest rate of the notes, after giving effect to the
amortization of deferred financing costs is 2.6%.
We will retrospectively apply the provisions of FASB Staff Position (FSP) APB 14-1,
Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including
Partial Cash Settlement), FSP APB 14-1 at the beginning of fiscal 2010. The adoption of FSP APB
14-1 will be accounted for as a cumulative effect of a change in accounting principle and require
us to record the debt component of our 2% convertible senior notes at its fair value on the date of
issuance, assuming no conversion features. The remaining value of the equity component of the 2%
senior notes will be recorded as a reduction in the carrying value of the notes and an increase to
additional paid-in-capital. The reduction in the carrying value of the notes and the fees related
to the notes will be amortized as interest incurred and expensed or capitalized to inventory over
the remaining life of the notes. Assuming the provisions of FSP APB 14-1 had been applied at the
date of issuance, the amount of the reduction in the carrying value of the notes would have been
$140.5 million and the increase in additional paid-in-capital would have been approximately $136.7
million, net of tax.
Repayments and Repurchases of Public Unsecured Debt On January 15, 2009, we repaid the
remaining $155.2 million principal amount of our 5% senior notes which were due on that date. On
February 1, 2009, we repaid the remaining $297.7 million principal amount of our 8% senior notes
which were due on that date. These repayments of public unsecured debt were made from our cash
balances on hand.
-53-
Additionally, during the nine months ended June 30, 2009, primarily through unsolicited
transactions, we repurchased the following senior notes prior to their maturity dates:
|
|
|
|
|
|
|
Principal |
|
|
|
Amount of |
|
|
|
Senior Notes |
|
|
|
Repurchased |
|
|
|
(In millions) |
|
5% senior notes due 2009 |
|
$ |
44.8 |
|
8% senior notes due 2009 |
|
|
52.0 |
|
4.875% senior notes due 2010 |
|
|
106.0 |
|
9.75% senior notes due 2010 |
|
|
26.3 |
|
6% senior notes due 2011 |
|
|
14.3 |
|
7.875% senior notes due 2011 |
|
|
36.4 |
|
5.375% senior notes due 2012 |
|
|
22.2 |
|
5.875% senior notes due 2013 |
|
|
4.0 |
|
6.5% senior notes due 2016 |
|
|
2.3 |
|
|
|
|
|
|
|
$ |
308.3 |
|
|
|
|
|
These senior notes were repurchased for an aggregate purchase price of $295.6 million, plus
accrued interest, and resulted in a gain of $12.0 million, which is net of unamortized discounts
and fees written off. This gain was partially offset by the $7.6 million loss related to
termination of the revolving credit facility as discussed above, and the resulting net gain of $4.4
million is included in our consolidated statement of operations for the nine months ended June 30,
2009.
In July 2009, through unsolicited transactions, we repurchased $1.0 million principal amount
of our 4.875% senior notes due 2010 and $0.5 million principal amount of our 6.875% senior notes
due 2013, for an aggregate purchase price of $1.47 million, plus accrued interest.
The indentures governing our senior notes and senior subordinated notes impose restrictions on
the creation of secured debt and liens. At June 30, 2009, we were in compliance with all of the
limitations and restrictions that form a part of the public debt obligations.
Shelf Registration Statements We had an automatically effective universal shelf registration
statement filed with the SEC, registering debt and equity securities which expired in June 2009. We
expect to file a new universal shelf registration statement in August 2009. Also, at June 30, 2009,
we had the capacity to issue approximately 22.5 million shares of common stock under our
acquisition shelf registration statement, to effect, in whole or in part, possible future business
acquisitions.
Financial Services Capital Resources
Cash and Cash Equivalents At June 30, 2009, the amount of our financial services cash and
cash equivalents was $36.0 million.
Mortgage Repurchase Facility Our mortgage subsidiary entered into a mortgage sale and
repurchase agreement (the mortgage repurchase facility) on March 28, 2008. The mortgage
repurchase facility, which is accounted for as a secured financing, provides financing and
liquidity to DHI Mortgage by facilitating purchase transactions in which DHI Mortgage transfers
eligible loans to the counterparties against the transfer of funds by the counterparties, thereby
becoming purchased loans. DHI Mortgage then has the right and obligation to repurchase the
purchased loans upon their sale to third-party purchasers in the secondary market or within
specified time frames from 45 to 120 days in accordance with the terms of the mortgage repurchase
facility. On March 5, 2009, through an amendment to the repurchase agreement and transfer of the
rights of each of the counterparties to one counterparty, the capacity of the facility was reduced
from $275 million to $75 million, with a provision allowing an increase in the capacity to $100
million during the last five business days of a fiscal quarter and the first seven business days of
the following fiscal quarter. Additionally, the amendment eliminated the minimum required net
income covenant and extended the maturity date of the facility to March 4, 2010.
-54-
As of June 30, 2009, $213.4 million of mortgage loans held for sale were pledged under the
repurchase arrangement, with a carrying value of $211.3 million. DHI Mortgage has the option to
fund a portion of its repurchase obligations in advance. As a result of advance fundings totaling
$127.5 million, DHI Mortgage had an obligation of $77.4 million outstanding under the mortgage
repurchase facility at June 30, 2009 at a 3.8% interest rate.
The mortgage repurchase facility is not guaranteed by either D.R. Horton, Inc. or any of the
subsidiaries that guarantee our homebuilding debt. The facility contains financial covenants as to
the mortgage subsidiarys minimum required tangible net worth, its maximum allowable ratio of debt
to tangible net worth and its minimum required liquidity. These covenants are measured and reported
monthly. At June 30, 2009, our mortgage subsidiary was in compliance with all of the conditions and
covenants of the mortgage repurchase facility.
In the past, we have been able to renew or extend our mortgage credit facilities on
satisfactory terms prior to their maturities, and obtain temporary additional commitments through
amendments of the respective credit agreements during periods of higher than normal volumes of
mortgages held for sale. The liquidity of our financial services business depends upon its
continued ability to renew and extend the mortgage repurchase facility or to obtain other
additional financing in sufficient capacities. We cannot assure that we will be successful in these
efforts in the future.
Operating Cash Flow Activities
For the nine months ended June 30, 2009, net cash provided by our operating activities was
$1.1 billion compared to $1.4 billion during the comparable period of the prior year. During the
nine-month period ended June 30, 2009, a significant portion of the net cash provided by our
operating activities was due to a federal income tax refund of $621.7 million, resulting from the
carryback of our fiscal 2008 net operating loss to fiscal 2006. Also, we continued to generate cash
flows from operations by reducing our inventories during the current year. The net cash provided by
our operating activities during the past two fiscal years has resulted in substantial liquidity and
allows the flexibility to determine the appropriate operating strategy for each of our communities
and to take advantage of opportunities in the market. While we have substantially slowed our
purchases of undeveloped land and our development spending on land we own, we are opportunistically
purchasing finished lots in certain markets in an attempt to drive sales and home closings volume
and return to profitability. However, during our attempt to increase sales and home closings
volume, we plan to continue to conservatively manage our inventories by closely monitoring the
aging of unsold homes and aggressively marketing our unsold, completed homes in inventory.
Another significant factor affecting our operating cash flows for the nine months ended June
30, 2009 was the decrease in mortgage loans held for sale of $129.4 million during the period. The
decrease in mortgage loans held for sale was due to a decrease in the number of loans originated
during the third quarter of fiscal 2009 compared to the fourth quarter of fiscal 2008. We expect to
continue to use cash to fund an increase in mortgage loans held for sale in quarters when our
homebuilding closings grow. However, in periods when home closings are flat or decline as compared
to prior periods, or if our mortgage capture rate declines, the amounts of net cash used may be
reduced or we may generate positive cash flows from reductions in the balances of mortgage loans
held for sale as we did in the current year period.
Investing Cash Flow Activities
For the nine months ended June 30, 2009, we used $6.2 million to invest in purchases of
property and equipment, primarily model home furniture and office equipment. These purchases are
not significant relative to our total assets or cash flows, and have declined in recent quarters
due to the decrease in size of our operations. Additionally, the increase in restricted cash was
due to the cash collateralization of our outstanding letters of credit during the nine months ended
June 30, 2009.
Financing Cash Flow Activities
In fiscal 2009, the majority of our short-term financing needs have been funded with cash
generated from operations and borrowings available under our financial services credit facility.
Long-term financing needs of our homebuilding operations have been generally funded with the
issuance of new senior unsecured debt securities through the public capital markets. In May 2009,
we issued $500 million principal amount of 2% convertible senior
notes due 2014. Our homebuilding senior, convertible senior and senior subordinated notes are
guaranteed by
-55-
substantially all of our wholly-owned subsidiaries other than our financial services
subsidiaries and certain insignificant subsidiaries.
During the three months ended June 30, 2009, our Board of Directors approved a quarterly cash
dividend of $0.0375 per common share, which was paid on May 27, 2009 to stockholders of record on
May 19, 2009. In July 2009, our Board of Directors approved a quarterly cash dividend of $0.0375
per common share, payable on August 28, 2009 to stockholders of record on August 19, 2009.
Quarterly cash dividends of $0.075 per common share were declared in the comparable quarters of
fiscal 2008. The declaration of future cash dividends is at the discretion of our Board of
Directors and will depend upon, among other things, future earnings, cash flows, capital
requirements, our financial condition and general business conditions.
Changes in Capital Structure
In November 2008, our Board of Directors authorized the repurchase of up to $100 million of
our common stock and the repurchase of up to $500 million of debt securities. The new
authorizations are effective from December 1, 2008 to November 30, 2009. Repurchases of senior
notes through June 30, 2009 have reduced the debt repurchase authorization to $294.6 million.
In July 2009, through unsolicited transactions, we repurchased $1.0 million principal amount
of our 4.875% senior notes due 2010 and $0.5 million principal amount of our 6.875% senior notes
due 2013, which further reduced the remaining debt repurchase authorization.
On May 4, 2009, we notified the lenders participating in the $1.65 billion unsecured revolving
credit facility of our intention to voluntarily terminate the facility. In accordance with the
provisions of the agreement governing the revolving credit facility, it was terminated effective
May 11, 2009.
In May 2009, we issued $500 million principal amount of 2% convertible senior notes due May
15, 2014, with interest payable semi-annually.
In fiscal 2008 and fiscal 2009, our primary non-operating uses of our available capital were
the repayment of debt, dividend payments and the cash collateralization of our outstanding letters
of credit. We continue to evaluate our alternatives for future non-operating sources and uses of
our available capital, including the amounts of debt repayments, dividend payments and the level of
our cash balances, based on market conditions and other circumstances, and within the constraints
of our balance sheet leverage targets and our liquidity targets.
CONTRACTUAL CASH OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
Our primary contractual cash obligations for our homebuilding and financial services segments
are payments under our debt agreements and lease payments under operating leases. Purchase
obligations of our homebuilding segment represent specific performance requirements under lot
option purchase agreements that may require us to purchase land contingent upon the land seller
meeting certain obligations. We expect to fund our contractual obligations in the ordinary course
of business through a combination of our existing cash resources, cash flows generated from
operations, renewed or amended mortgage repurchase facilities and, if needed or believed
advantageous, the issuance of new securities through the public capital markets as market
conditions may permit.
At June 30, 2009, our homebuilding operations had outstanding letters of credit of $59.3
million, all of which were cash collateralized, and surety bonds of $1.19 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 3
Quantitative and Qualitative Disclosures About Market Risk under Part I of this quarterly report
on Form 10-Q.
-56-
In the ordinary course of business, we enter into land and lot option purchase contracts to
procure land or lots for the construction of homes. Lot option contracts enable us to control
significant lot positions with limited capital investment and substantially reduce the risks
associated with land ownership and development. Within the land and lot option purchase contracts
in force at June 30, 2009, there were a limited number of contracts, representing only $9.9 million
of remaining purchase price, subject to specific performance clauses which may require us to
purchase the land or lots upon the land sellers meeting their obligations. Also, we consolidated
certain variable interest entities for which we are deemed to be the primary beneficiary, with
assets of $14.6 million related to some of our outstanding land and lot option purchase contracts.
Creditors, if any, of these variable interest entities have no recourse against us. Additionally,
we recorded $8.1 million of land inventory not owned related to some of our outstanding land and
lot option purchase contracts. Further discussion of our land option contracts is provided in the
Land and Lot Position and Homes in Inventory section that follows.
LAND AND LOT POSITION AND HOMES IN INVENTORY
The following is a summary of our land and lot position and homes in inventory at June 30,
2009 and
September 30, 2008:
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As of June 30, 2009 |
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As of September 30, 2008 |
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Lots |
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Lots |
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Controlled |
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Controlled |
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Lots Owned - |
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Under Lot |
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Total |
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Lots Owned - |
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Under Lot |
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Total |
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Developed |
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Option and |
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Land/Lots |
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Homes |
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Developed |
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Option and |
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Land/Lots |
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Homes |
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and Under |
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Similar |
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Owned and |
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in |
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and Under |
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Similar |
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Owned and |
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in |
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Development |
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Contracts |
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Controlled |
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Inventory |
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Development |
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Contracts |
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Controlled |
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Inventory |
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East |
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11,000 |
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5,000 |
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16,000 |
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1,200 |
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12,000 |
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6,000 |
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18,000 |
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|
1,100 |
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Midwest |
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6,500 |
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500 |
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7,000 |
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900 |
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8,000 |
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1,000 |
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9,000 |
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1,100 |
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Southeast |
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21,000 |
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5,000 |
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26,000 |
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2,200 |
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23,000 |
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6,000 |
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29,000 |
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|
2,300 |
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South Central |
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23,500 |
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9,500 |
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|
|
33,000 |
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|
|
3,400 |
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25,000 |
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9,000 |
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34,000 |
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|
|
3,700 |
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Southwest |
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5,500 |
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1,500 |
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7,000 |
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1,100 |
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6,000 |
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1,000 |
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7,000 |
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1,900 |
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West |
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23,000 |
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2,500 |
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25,500 |
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2,100 |
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25,000 |
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3,000 |
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28,000 |
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2,300 |
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90,500 |
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24,000 |
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|
|
114,500 |
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|
|
10,900 |
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|
|
99,000 |
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26,000 |
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|
|
125,000 |
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|
|
12,400 |
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|
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79% |
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21% |
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|
|
100% |
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79% |
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21% |
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|
|
100% |
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At June 30, 2009, we owned or controlled approximately 114,500 lots, compared to approximately
125,000 lots at September 30, 2008. Of the 114,500 total lots, we controlled approximately 24,000
lots (21%), with a total remaining purchase price of approximately $726.2 million, through land and
lot option purchase contracts with a total of $35.0 million in earnest money deposits. Our lots
controlled included approximately 5,000 optioned lots with a remaining purchase price of
approximately $148.6 million and secured by deposits totaling $17.3 million, for which we do not
expect to exercise our option to purchase the land or lots, but the contract has not yet been
terminated. Consequently, we have written off the deposits related to these contracts, resulting in
a net earnest money deposit balance of $17.7 million at June 30, 2009.
We had a total of approximately 10,900 homes in inventory, including approximately 1,200 model
homes at June 30, 2009, compared to approximately 12,400 homes in inventory, including
approximately 1,500 model homes at September 30, 2008. Of our total homes in inventory,
approximately 5,500 and 6,900 were unsold at June 30, 2009 and September 30, 2008, respectively. At
June 30, 2009, approximately 2,300 of our unsold homes were completed, of which approximately 1,000
homes had been completed for more than six months. At September 30, 2008, approximately 3,100 of
our unsold homes were completed, of which approximately 1,100 homes had been completed for more
than six months.
Our current strategy is to take advantage of market opportunities by entering into new
finished lot option contracts to purchase finished lots in selected communities in an attempt to
increase sales volumes and profitability. We plan to continue to conservatively manage our
inventory of homes under construction by starting construction on unsold homes in certain markets,
while closely monitoring the aging of unsold homes and aggressively marketing our unsold, completed
homes in inventory.
-57-
CRITICAL ACCOUNTING POLICIES
As disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2008,
our most critical accounting policies relate to revenue recognition, inventories and cost of sales,
land and lot option purchase contracts, goodwill, warranty and insurance claim costs, income taxes
and stock-based compensation. Since September 30, 2008, there have been no significant changes to
those critical accounting policies and estimates except for the partial adoption of SFAS No. 157,
Fair Value Measurements as described below. Additionally, we have expanded our critical
accounting policy disclosure related to Insurance Claim Costs and Self-Insurance which follows.
Fair Value Measurements Partial Adoption of SFAS No. 157 Effective October 1, 2008, we
adopted SFAS No. 157, Fair Value Measurements, for fair value measurements of certain financial
instruments. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the
exchange (exit) price that would be received for an asset or paid to transfer a liability in the
principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. This standard establishes a three-level hierarchy for
fair value measurements based upon the inputs to the valuation of an asset or liability. Observable
inputs are those which can be easily seen by market participants while unobservable inputs are
generally developed internally, utilizing managements estimates and assumptions.
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Level 1 Valuation is based on quoted prices in active markets for identical assets
and liabilities. |
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Level 2 Valuation is determined from quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar instruments in
markets that are not active, or by model-based techniques in which all significant
inputs are observable in the market. |
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Level 3 Valuation is derived from model-based techniques in which at least one
significant input is unobservable and based on our own estimates about the assumptions
that market participants would use to value the asset or liability. |
When available, we use quoted market prices in active markets to determine fair value. We
consider the principal market and nonperformance risk associated with our counterparties when
determining the fair value measurements. Fair value measurements are used for IRLCs, mortgage loans
held for sale, other mortgage loans and hedging instruments.
Insurance Claim Costs and Self-Insurance We have, and require the majority of the
subcontractors we use to have, general liability insurance which includes construction defect
coverage. Our general liability insurance policies protect us against a portion of our risk of loss
from construction defect and other claims and lawsuits, subject to self-insured retentions and
other coverage limits. For policy years 2004 through 2009, we are self-insured for up to $22.5
million of the aggregate claims incurred, at which point our excess loss insurance begins,
depending on the policy year. Once we have satisfied the annual aggregate limits, we are
self-insured for the first $10,000 to $1.5 million for each claim occurrence, depending on the
policy year. For policy year 2009, we are self-insured for up to $22.5 million of the aggregate
claims incurred and for up to $0.5 million of each claim occurrence thereafter.
In some states where we believe it is too difficult or expensive for our subcontractors to
obtain general liability insurance, we have waived our traditional subcontractor general liability
insurance requirements to obtain lower costs from subcontractors. In these states, we purchase
insurance policies from either third-party carriers or our wholly-owned captive insurance
subsidiary that provide coverage to us, and names certain subcontractors as additional insureds.
The policies issued to our homebuilding entities by our captive insurance subsidiary provide up to
$25.0 million in aggregate general liability coverage per policy year. The policies issued by our
captive insurance subsidiary represent self insurance of these risks by us; however, for policy
years after April 2007, the captive insurance subsidiary has reinsured the annual loss exposure
greater than $10.0 million with a third-party insurer.
Also, we are self-insured for the deductible amounts under our workers compensation insurance
policies. The deductibles vary by policy year, but in no years exceed $0.5 million per occurrence.
The deductible for the 2009 policy year is $0.5 million per occurrence.
-58-
We record expenses and liabilities related to the costs to cover the self-insured amounts
under our insurance policies for exposures related to workers compensation, construction defects
and claims and lawsuits incurred in the ordinary course of business, including employment matters,
personal injury claims, land development issues and contract disputes. Also, we record expenses and
liabilities for any estimated costs of potential claims and lawsuits (including expected legal
costs) in excess of our coverage limits or not covered by our policies, based on an analysis of our
historical claims, which includes an estimate of construction defect claims incurred but not yet
reported. The expenses and liabilities 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 we build, claim settlement patterns, insurance industry practices and legal
interpretations, among others.
SEASONALITY
We have typically experienced seasonal variations in our quarterly operating results and
capital requirements. Prior to the current downturn in the homebuilding industry, we generally had
more homes under construction, closed more homes and had greater revenues and operating income in
the third and fourth quarters of our fiscal year. This seasonal activity increased our working
capital requirements for our homebuilding operations during the third and fourth fiscal quarters
and increased our funding requirements for the mortgages we originated in our financial services
segment at the end of these quarters. As a result of seasonal activity, our results of operations
and financial position at the end of a particular fiscal quarter are not necessarily representative
of the balance of our fiscal year.
In contrast to our typical seasonal results, due to deterioration of homebuilding market
conditions during the past two years, we have incurred consolidated operating losses each quarter
since the third quarter of fiscal 2007. These results were primarily due to recording significant
inventory and goodwill impairment charges. Also, the increasingly challenging market conditions
caused declines in sales volume, pricing and margins that mitigated our historical seasonal
variations. Although we may experience our typical historical seasonal pattern in the future, given
the current market conditions, we can make no assurances as to when or whether this pattern will
recur.
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
managements beliefs as well as assumptions made by, and information currently available to,
management. These forward-looking statements typically include the words anticipate, believe,
consider, estimate, expect, forecast, goal, intend, objective, plan, predict,
projection, seek, strategy, target or other words of similar meaning. Any or all of the
forward-looking statements included in this report and in any other of our reports or public
statements may not approximate actual experience, and the expectations derived from them may not be
realized, due to risks, uncertainties and other factors. As a result, actual results may differ
materially from the expectations or results we discuss in the forward-looking statements. These
risks, uncertainties and other factors include, but are not limited to:
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the continuing downturn in the homebuilding industry, including further
deterioration in industry or broader economic conditions; |
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the downturn in homebuilding and the disruptions in the credit markets, which could
limit our ability to access capital and increase our costs of capital; |
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the reduction in availability of mortgage financing and the increase in mortgage
interest rates; |
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the limited success of our strategies in responding to adverse conditions in the
industry; |
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changes in general economic, real estate, construction and other business
conditions; |
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changes in the costs of owning a home; |
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the effects of governmental regulations and environmental matters on our
homebuilding operations; |
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the effects of governmental regulations on our financial services operations; |
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our substantial debt and our ability to comply with related debt covenants,
restrictions and limitations; |
-59-
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competitive conditions within our industry; |
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our ability to effect any future growth strategies successfully; |
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our ability to realize our deferred tax asset; |
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our net operating loss carryforwards could be substantially limited if we
experienced an ownership change as defined in the Internal Revenue Code; and |
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the uncertainties inherent in home warranty and construction defect claims matters. |
We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. However, any further
disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be
consulted. 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 II of this report and in our annual report on Form 10-K for the fiscal year ended September
30, 2008, including the section entitled Risk Factors, which is filed with the Securities and
Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk on our long-term debt. We monitor our exposure to changes
in interest rates and utilize both fixed and variable rate debt. For fixed rate debt, changes in
interest rates generally affect the value of the debt instrument, but not our earnings or cash
flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the
fair value of the debt instrument, but may affect our future earnings and cash flows. We generally
do not have an obligation to prepay fixed-rate debt prior to maturity and, as a result, interest
rate risk and changes in fair value would not have a significant impact on our cash flows related
to our fixed-rate debt until such time as we are required to refinance, repurchase or repay such
debt.
We are exposed to interest rate risk associated with our mortgage loan origination services.
We manage interest rate risk through the use of forward sales of mortgage-backed securities (MBS),
Eurodollar Futures Contracts (EDFC) and put options on MBS and EDFC. Use of the term hedging
instruments in the following discussion refers to these securities collectively, or in any
combination. We do not enter into or hold derivatives for trading or speculative purposes.
Interest rate lock commitments (IRLCs) are extended to borrowers who have applied for loan
funding and who meet defined credit and underwriting criteria. Typically, the IRLCs have a duration
of less than six months. Some IRLCs are committed immediately to a specific purchaser through the
use of best-efforts whole loan delivery commitments, while other IRLCs are funded prior to being
committed to third-party purchasers. The hedging instruments related to IRLCs are classified and
accounted for as derivative instruments in an economic hedge, with gains and losses recognized in
current earnings. Hedging instruments related to funded, uncommitted loans are accounted for at
fair value, with changes recognized in current earnings, along with changes in the fair value of
the funded, uncommitted loans. The fair value change related to the hedging instruments generally
offsets the fair value change in the uncommitted loans and the fair value change, which for the
three and nine months ended June 30, 2009 was not significant, is recognized in current earnings.
Prior to October 1, 2008, the effectiveness of the fair value hedge in the prior year was monitored
and any ineffectiveness, which for the three and nine months ended June 30, 2008 was not
significant, was recognized in current earnings. At June 30, 2009, hedging instruments used to
mitigate interest rate risk related to uncommitted mortgage loans held for sale and uncommitted
IRLCs totaled $346.2 million. Uncommitted IRLCs, the duration of which are generally less than six
months, totaled approximately $199.1 million, and uncommitted mortgage loans held for sale totaled
approximately $80.2 million at June 30, 2009.
At June 30, 2009, we had $301.6 million in EDFC options and MBS which were acquired as part of
a program to potentially offer homebuyers a below market interest rate on their home financing.
These hedging instruments and the related commitments are accounted for at fair value with gains
and losses recognized in current earnings. These gains and losses for the three and nine months
ended June 30, 2009 and 2008 were not material.
-60-
The following table sets forth principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair value of our debt obligations as of June 30, 2009. The interest
rate for our variable rate debt represents the interest rate on our mortgage repurchase facility.
Because the mortgage repurchase facility is effectively secured by certain mortgage loans held for
sale which are typically sold within 60 days, its outstanding balance is included as a variable
rate maturity in the most current period presented.
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|
Three Months |
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|
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|
|
|
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Fair value |
|
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Ending |
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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at |
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|
September 30, |
|
Fiscal Year Ending September 30, |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
Thereafter |
|
Total |
|
2009 |
|
|
(In millions) |
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
22.9 |
|
|
$ |
229.8 |
|
|
$ |
399.3 |
|
|
$ |
292.0 |
|
|
$ |
296.0 |
|
|
$ |
950.0 |
|
|
$ |
1,097.7 |
|
|
$ |
3,287.7 |
|
|
$ |
2,986.7 |
|
Average interest rate |
|
|
8.1% |
|
|
|
6.9% |
|
|
|
6.9% |
|
|
|
5.4% |
|
|
|
6.7% |
|
|
|
4.2% |
|
|
|
6.0% |
|
|
|
5.7% |
|
|
|
|
|
Variable rate |
|
$ |
77.4 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
77.4 |
|
|
$ |
77.4 |
|
Average interest rate |
|
|
3.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.8% |
|
|
|
|
|
ITEM 4. 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 Companys management, including the Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Companys 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 Companys disclosure
controls and procedures were effective in providing reasonable assurance that information required
to be disclosed in the reports the Company files, furnishes, submits or otherwise provides the
Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs 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 Companys 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 Companys internal controls over financial reporting during
the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
-61-
PART II. OTHER INFORMATION
ITEM 1. 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.
On June 15, 2007, a putative class action, John R. Yeatman, et al. v. D.R. Horton, Inc., et
al., was filed by one of our customers against us and our affiliated mortgage company subsidiary in
the United States District Court for the Southern District of Georgia. The complaint sought
certification of a class alleged to include persons who, within the year preceding the filing of
the suit, purchased a home from us and obtained a mortgage for such purchase from our affiliated
mortgage company subsidiary. The complaint alleged that we violated Section 8 of the Real Estate
Settlement Procedures Act by effectively requiring our homebuyers to use our affiliated mortgage
company to finance their home purchases by offering certain discounts and incentives. The action
sought damages in an unspecified amount and injunctive relief. On April 23, 2008, the Court ruled
on our motion to dismiss and dismissed this complaint with prejudice. The plaintiffs filed a notice
of appeal, which is currently pending.
On March 24, 2008, a putative class action, James Wilson, et al. v. D.R. Horton, Inc., et al.,
was filed by five customers of Western Pacific Housing, Inc., one of our wholly-owned subsidiaries,
against us, Western Pacific Housing, Inc., and our affiliated mortgage company subsidiary, in the
United States District Court for the Southern District of California. The complaint sought
certification of a class alleged to include persons who, within the four years preceding the filing
of the suit, purchased a home from us, or any of our subsidiaries, and obtained a mortgage for such
purchase from our affiliated mortgage company subsidiary. The complaint alleged that we violated
Section 1 of the Sherman Antitrust Act and Sections 16720, 17200 and 17500 of the California
Business and Professions Code by effectively requiring our homebuyers to apply for a loan through
our affiliated mortgage company. In June 2009 the complaint was amended to limit the putative class
to California customers only and the claims asserted were limited to alleged violations of the
California Business and Professions code. The complaint alleges that the homebuyers were either
deceived about loan costs charged by our affiliated mortgage company or coerced into using our
affiliated mortgage company, or both, and that discounts and incentives offered by us or our
subsidiaries to buyers who obtained financing from our affiliated mortgage company were illusory.
The action seeks treble damages in an unspecified amount and injunctive relief. We believe the
claims alleged in this action are without merit and will defend them vigorously. However, as the
action is still in its early stages, we are unable to express an opinion as to the likelihood of an
unfavorable outcome or the amount of damages, if any.
ITEM 1A. RISK FACTORS
In addition to the risk factors previously identified in our annual report on Form 10-K for
the year ended September 30, 2008, we replace the risk factors entitled Our substantial debt could
adversely affect our financial condition and Failure to comply with certain financial tests or
meet ratios contained in our credit facilities could preclude the payment of dividends, impose
restrictions on our business, capital resources or other activities or otherwise adversely affect
us with the following:
Our substantial debt could adversely affect our financial condition.
We have a significant amount of debt. As of June 30, 2009, our consolidated debt was $3,357.6
million. As of June 30, 2009, the scheduled maturities of principal on our outstanding debt for the
subsequent 12 months totaled $244.3 million.
Possible Consequences. The amount and the maturities of our debt could have important
consequences. For example, they could:
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require us to dedicate a substantial portion of our cash flow from operations to
payment of our debt and reduce our ability to use our cash flow for other purposes; |
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limit our flexibility in planning for, or reacting to, the changes in our business; |
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limit our ability to obtain future financing for working capital, capital expenditures,
acquisitions, debt service requirements or other requirements; |
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place us at a competitive disadvantage because we have more debt than some of our
competitors; and |
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make us more vulnerable to downturns in our business or general economic conditions. |
Dependence on Future Performance. Our ability to meet our debt service and other obligations
will depend, in part, upon our future financial performance. Our future results are subject to the
risks and uncertainties described in this report and in our annual report on Form 10-K for the
fiscal year ended September 30, 2008. These have been compounded by the current industry and
economic conditions. Our revenues and earnings vary with the level of general economic activity in
the markets we serve. Our businesses are also affected by financial, political, business and other
factors, many of which are beyond our control. The factors that affect our ability to generate cash
can also affect our ability to raise additional funds for these purposes through the sale of debt
or equity, the refinancing of debt, or the sale of assets. Changes in prevailing interest rates may
affect our ability to meet our debt service obligations, because borrowings under our mortgage
repurchase facility bear interest at a floating rate.
Mortgage Repurchase Facility and Other Debt Restrictions. The mortgage repurchase facility
for our financial services subsidiaries requires the maintenance of a minimum level of tangible net
worth, a maximum allowable ratio of debt to tangible net worth and a minimum level of liquidity. A
failure to comply with these requirements could allow the lending bank to terminate the
availability of funds to the financial services subsidiaries or cause their debt to become due and
payable prior to maturity.
In addition, the indentures governing our senior notes and senior subordinated notes impose
restrictions on the creation of secured debt and liens.
Changes in Debt Ratings. In fiscal 2008, all three of the agencies that rate our senior
unsecured debt lowered our ratings to a level below investment grade, and these agencies have since
lowered our ratings even further. The cost of debt capital has increased and could increase more
with further lowering of our debt ratings. The further lowering of our debt ratings could also make
accessing the public capital markets more difficult and expensive.
Change of Control Purchase Options. If a change of control occurs as defined in the
indentures governing many series of our senior and senior subordinated notes, which constituted
$1.0 billion principal amount in the aggregate as of June 30, 2009, we would be required to offer
to purchase such notes at 101% of their principal amount, together with all accrued and unpaid
interest, if any. If a fundamental change occurs as defined in the indenture governing our
convertible senior notes, which constituted $500 million at June 30, 2009, we would be required to
offer to purchase such notes at 100% of their principal amount, together with all accrued and
unpaid interest, if any. If purchase offers were required under the indentures for these notes, we
can give no assurance that we would have sufficient funds to pay the amounts that we would be
required to purchase.
Impact of Financial Services Debt. Our financial services business is conducted through
subsidiaries that are not restricted by our indentures. The ability of our financial services
subsidiaries to provide funds to our homebuilding operations, however, is subject to restrictions
in their mortgage repurchase facility. These funds would not be available to us upon the occurrence
and during the continuance of defaults under this facility. Moreover, our right to receive assets
from these subsidiaries upon liquidation or recapitalization will be subject to the prior claims of
the creditors of these subsidiaries. Any claims we may have to funds from this segment would be
subordinate to subsidiary indebtedness to the extent of any security for such indebtedness and to
any indebtedness otherwise recognized as senior to our claims.
We also add the following risk factor:
The utilization of our tax losses could be substantially limited if we experienced an ownership
change as defined in the Internal Revenue Code.
We have experienced continuing losses that have produced net operating losses and unrealized
built-in losses for income tax purposes. These have the potential to reduce future income tax
obligations if we become profitable in the future. However, Section 382 of the Internal Revenue
Code contains rules that limit the ability of a company that undergoes an ownership change to
utilize its net operating loss carryforwards and certain built-in losses recognized in years after
the ownership change. Under the rules, such an ownership change is generally any change in
ownership of more than 50% of its stock within a rolling three-year period, as calculated in
accordance with the
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rules. The rules generally operate by focusing on changes in ownership among stockholders
considered by the rules as owning directly or indirectly 5% or more of the stock of the company and
any change in ownership arising from new issuances of stock by the company.
If we undergo an ownership change for purposes of Section 382 as a result of future
transactions involving our common stock, our ability to use any of our net operating loss
carryforwards, tax credit carryforwards or net unrealized built-in losses at the time of ownership
change would be subject to the limitations of Section 382 on their use against future taxable
income. Depending on the limitation, a significant portion of our built-in losses, any net
operating loss carryforwards or tax credit carryforwards could expire before we would be able to
use them. This could adversely affect our financial position, results of operations and cash flow.
We believe that we have not experienced such an ownership change as of June 30, 2009; however,
the amount by which our ownership may change in the future could be affected by purchases and sales
of stock by 5% stockholders, over which we have no control, and new issuances of stock by us,
should we choose to do so. We are continuing to monitor the situation and, if we consider it
advisable, intend to institute measures intended to deter such an ownership change in order to
preserve these tax attributes. We can give no assurance as to whether we would do so or as to the
effectiveness of any such measures.
ITEM 6. EXHIBITS
(a) Exhibits.
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3.1
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Certificate of Amendment of the Amended and Restated Certificate
of Incorporation, as amended, of the Company dated January 31,
2006, and the Amended and Restated Certificate of Incorporation,
as amended, of the Company dated March 18, 1992. (1) |
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3.2
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Amended and Restated Bylaws of the Company. (2) |
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4.1
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Thirtieth Supplemental Indenture, dated as of May 13, 2009, among
the Registrant, the Guarantors named therein and American Stock
Transfer & Trust Company, LLC, as Trustee. (3) |
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12.1
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Statement of Computation of Ratio of Earnings to Fixed Charges. (*) |
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31.1
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Certificate of Chief Executive Officer provided pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002. (*) |
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31.2
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Certificate of Chief Financial Officer provided pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002. (*) |
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32.1
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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 Companys Chief Executive Officer. (*) |
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32.2
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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 Companys Chief Financial Officer. (*) |
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Incorporated by reference from Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for
the quarter ended December 31, 2005, filed with the SEC on February 2, 2006. |
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Incorporated by reference from Exhibit 3.1 to the Companys Current Report on Form 8-K filed
with the SEC on August 5, 2009. |
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Incorporated by reference from Exhibit 4.1 to the Companys Current Report on Form 8-K filed
with the SEC on May 14, 2009. |
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SIGNATURE
Pursuant to the requirements 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.
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D.R. HORTON, INC.
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Date: August 5, 2009 |
By: |
/s/ Bill W. Wheat
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Bill W. Wheat, on behalf of D.R. Horton, Inc., |
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as Executive Vice President and
Chief Financial Officer (Principal Financial and
Principal Accounting Officer) |
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