Edgar Filing: HORTON D R INC /DE/

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From To

Commission file number 1-14122

D.R. Horton, Inc.

(Exact name of registrant as specified in its charter)


Delaware		75-2386963
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

301 Commerce Street, Suite 500, Fort Worth, Texas		76102
(Address of principal executive offices)		(Zip Code)

(817) 390-8200

(Registrant’s telephone number, including area code)

Not Applicable

(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 x No ¨

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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $.01 par value – 318,370,893 shares as of April 18, 2012

D.R. HORTON, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX


	Page

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements
Consolidated Balance Sheets at March 31, 2012 (unaudited) and September 30, 2011 (unaudited)		3
Consolidated Statements of Operations and Comprehensive Income for the three and six months ended March 31, 2012 and 2011 (unaudited)		4
Consolidated Statements of Cash Flows for the six months ended March 31, 2012 and 2011 (unaudited)		5
Notes to Consolidated Financial Statements (unaudited)		6

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk		55

ITEM 4. Controls and Procedures		56

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings		57

ITEM 1A. Risk Factors		57

ITEM 6. Exhibits		58

SIGNATURE		59

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		September 30,			September 30,
	March 31, 2012			September 30, 2011
	(In millions)
	(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents	$	662.2		$	715.5
Marketable securities, available-for-sale		299.1			297.6
Restricted cash		40.7			49.1
Inventories:
Construction in progress and finished homes		1,441.1			1,369.2
Residential land and lots — developed and under development		1,495.1			1,370.7
Land held for development		700.5			709.8

		3,636.7			3,449.7
Income taxes receivable		12.9			12.4
Deferred income taxes, net of valuation allowance of $816.4 million and $848.5 million at March 31, 2012 and September 30, 2011, respectively		—			—
Property and equipment, net		53.4			57.6
Other assets		400.4			398.4
Goodwill		15.9			15.9

		5,121.3			4,996.2

Financial Services:
Cash and cash equivalents		17.6			17.1
Mortgage loans held for sale		297.3			294.1
Other assets		48.7			51.0

		363.6			362.2

Total assets	$	5,484.9		$	5,358.4

LIABILITIES
Homebuilding:
Accounts payable	$	166.1		$	154.0
Accrued expenses and other liabilities		821.1			829.8
Notes payable		1,592.9			1,588.1

		2,580.1			2,571.9

Financial Services:
Accounts payable and other liabilities		38.0			46.5
Mortgage repurchase facility		163.8			116.5

		201.8			163.0

Total liabilities		2,781.9			2,734.9

Commitments and contingencies (Note L)
EQUITY
Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued		—			—
Common stock, $.01 par value, 1,000,000,000 shares authorized, 325,570,964 shares issued and 318,370,893 shares outstanding at March 31, 2012 and 323,243,170 shares issued and 316,043,099 shares outstanding at September 30, 2011		3.3			3.2
Additional paid-in capital		1,951.8			1,917.0
Retained earnings		879.1			834.6
Treasury stock, 7,200,071 shares at March 31, 2012 and September 30, 2011, at cost		(134.3	)		(134.3	)
Accumulated other comprehensive income		0.1			0.1

Total stockholders’ equity		2,700.0			2,620.6
Noncontrolling interests		3.0			2.9

Total equity		2,703.0			2,623.5

Total liabilities and equity	$	5,484.9		$	5,358.4

See accompanying notes to consolidated financial statements.

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D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2012			2011			2012			2011
	(In millions, except per share data)
	(Unaudited)
Homebuilding:
Revenues:
Home sales	$	930.6		$	733.0		$	1,814.9		$	1,494.1
Land/lot sales		5.0			0.1			6.3			6.0

		935.6			733.1			1,821.2			1,500.1

Cost of sales:
Home sales		767.2			613.9			1,502.7			1,256.4
Land/lot sales		3.2			0.1			3.2			6.0
Inventory impairments and land option cost write-offs		0.8			14.3			2.2			22.7

		771.2			628.3			1,508.1			1,285.1

Gross profit:
Home sales		163.4			119.1			312.2			237.7
Land/lot sales		1.8			—			3.1			—
Inventory impairments and land option cost write-offs		(0.8	)		(14.3	)		(2.2	)		(22.7	)

		164.4			104.8			313.1			215.0
Selling, general and administrative expense		127.5			123.2			246.5			242.0
Interest expense		5.5			14.7			12.5			31.0
Loss (gain) on early retirement of debt, net		—			2.7			(0.1	)		4.2
Other (income)		(3.2	)		(3.4	)		(5.5	)		(5.6	)

		34.6			(32.4	)		59.7			(56.6	)

Financial Services:
Revenues, net of recourse and reinsurance expense		25.6			18.0			46.6			39.2
General and administrative expense		19.6			18.2			38.5			37.1
Interest expense		0.8			0.1			1.7			0.4
Interest and other (income)		(2.5	)		(1.9	)		(5.4	)		(4.2	)

		7.7			1.6			11.8			5.9

Income (loss) before income taxes		42.3			(30.8	)		71.5			(50.7	)
Income tax expense (benefit)		1.7			(58.6	)		3.2			(58.1	)

Net income	$	40.6		$	27.8		$	68.3		$	7.4

Other comprehensive income (loss), net of income tax:
Unrealized loss related to available-for-sale securities		(0.1	)		—			—			(0.3	)

Comprehensive income	$	40.5		$	27.8		$	68.3		$	7.1


Basic net income per common share	$	0.13		$	0.09		$	0.22		$	0.02

Net income per common share assuming dilution	$	0.13		$	0.09		$	0.21		$	0.02

Cash dividends declared per common share	$	0.0375		$	0.0375		$	0.075		$	0.075

See accompanying notes to consolidated financial statements.

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D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		$1,081.1			$1,081.1
	Six Months Ended March 31,
	2012			2011
	(In millions)
	(Unaudited)
OPERATING ACTIVITIES
Net income	$	68.3		$	7.4
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		9.8			9.9
Amortization of discounts and fees		19.7			18.1
Stock based compensation expense		10.1			6.6
(Gain) loss on early retirement of debt, net		(0.1	)		4.2
Gain on sale of marketable securities		(0.2	)		(0.1	)
Inventory impairments and land option cost write-offs		2.2			22.7
Changes in operating assets and liabilities:
Increase in construction in progress and finished homes		(72.2	)		(48.3	)
Increase in residential land and lots – developed, under development, and held for development		(112.8	)		(4.6	)
(Increase) decrease in other assets		(1.7	)		47.0
(Increase) decrease in income taxes receivable		(0.5	)		2.0
(Increase) decrease in mortgage loans held for sale		(3.2	)		47.3
Decrease in accounts payable, accrued expenses and other liabilities		(2.0	)		(133.3	)

Net cash used in operating activities		(82.6	)		(21.1	)

INVESTING ACTIVITIES
Purchases of property and equipment		(5.5	)		(8.2	)
Purchases of marketable securities		(162.8	)		(185.9	)
Proceeds from the sale or maturity of marketable securities		157.5			187.7
Decrease in restricted cash		8.4			8.7

Net cash (used in) provided by investing activities		(2.4	)		2.3

FINANCING ACTIVITIES
Proceeds from notes payable		47.3			—
Repayment of notes payable		(12.9	)		(186.6	)
Proceeds from stock associated with certain employee benefit plans		21.6			1.2
Cash dividends paid		(23.8	)		(24.0	)

Net cash provided by (used in) financing activities		32.2			(209.4	)

DECREASE IN CASH AND CASH EQUIVALENTS		(52.8	)		(228.2	)
Cash and cash equivalents at beginning of period		732.6			1,309.3

Cash and cash equivalents at end of period	$	679.8		$	1,081.1

See accompanying notes to consolidated financial statements.

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D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2012

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). 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. 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 Company’s annual report on Form 10-K for the fiscal year ended September 30, 2011.

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 in the construction and sale of single-family housing in 25 states and 73 markets in the United States as of March 31, 2012. The Company designs, builds and sells single-family detached homes on lots it develops 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 to other developers and homebuilders where it has excess land and lot positions. The Company also provides mortgage financing and title agency services, primarily to its homebuilding customers. The Company generally does not retain or service originated mortgages; rather, it seeks to sell the mortgages and related servicing rights to third-party purchasers.

Seasonality

Historically, the homebuilding industry has experienced seasonal fluctuations; therefore, the operating results for the three and six-month periods ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2012 or subsequent periods.

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D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

NOTE B – MARKETABLE SECURITIES

The Company invests a portion of its cash on hand by purchasing marketable securities with maturities in excess of three months. These securities are held in the custody of a single financial institution. The Company considers its investment portfolio to be available-for-sale. Accordingly, these investments are recorded at fair value. The investment portfolio consisted of the following marketable securities at March 31, 2012 and September 30, 2011:


	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In millions)
Type of security:
U.S. Treasury securities	$	41.0	$	—	$	—	$	41.0
Obligations of U.S. government agencies		83.2		—		—		83.2
Corporate debt securities issued under the FDIC Temporary Liquidity Guarantee Program		72.5		—		—		72.5
Corporate debt securities		97.3		0.1		—		97.4

Total debt securities		294.0		0.1		—		294.1
Certificates of deposit		5.0		—		—		5.0

Total marketable securities, available-for-sale	$	299.0	$	0.1	$	—	$	299.1


	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In millions)
Type of security:
U.S. Treasury securities	$	16.3	$	—	$	—		$	16.3
Obligations of U.S. government agencies		73.7		0.1		—			73.8
Corporate debt securities issued under the FDIC Temporary Liquidity Guarantee Program		103.7		0.1		—			103.8
Corporate debt securities		98.8		—		(0.1	)		98.7

Total debt securities		292.5		0.2		(0.1	)		292.6
Certificates of deposit		5.0		—		—			5.0

Total marketable securities, available-for-sale	$	297.5	$	0.2	$	(0.1	)	$	297.6

Of the $299.1 million in marketable securities at March 31, 2012, $178.3 million mature in the next twelve months and $120.8 million mature in one to two years. Gains and losses realized upon the sale of marketable securities are determined by specific identification and are included in homebuilding other income. The Company’s realized gains related to these sales were $0.2 million during both the three and six months ended March 31, 2012, compared to $0 and $0.1 million, respectively, in the same periods of 2011.

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D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

NOTE C – INVENTORY IMPAIRMENTS AND LAND OPTION COST WRITE-OFFS

At March 31, 2012, when the Company performed its quarterly inventory impairment analysis by reviewing the performance and outlook for all of its communities, the assumptions utilized reflected the Company’s expectation of continued challenging conditions and uncertainties in the homebuilding industry and in its markets. The Company evaluated communities with a combined carrying value of $383.2 million for impairment.

The analysis of the 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, some 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. When a discounted cash flow analysis was prepared for a community, the Company utilized a range of discount rates of 12% to 14%. Through this evaluation process, it was determined that communities with a carrying value of $0.9 million as of March 31, 2012 were impaired. As a result, during the three months ended March 31, 2012, impairment charges of $0.3 million were recorded to reduce the carrying value of the impaired communities to their estimated fair value, as compared to $13.0 million of impairment charges in the same period of 2011. During the six months ended March 31, 2012 and 2011, impairment charges totaled $0.8 million and $19.4 million, respectively.

The Company’s estimate of undiscounted cash flows from communities analyzed may change and could result in a future need to record impairment charges to adjust the carrying value of these assets to their estimated fair value. There are several factors which could lead to changes in the estimates of undiscounted future cash flows for a given community. The most significant of these include pricing and incentive levels actually realized by the community, the rate at which the homes are sold and the costs incurred to develop the lots and construct the homes. If conditions in the broader economy, homebuilding industry or specific markets in which the Company operates worsen, and as the Company re-evaluates specific community pricing and incentives, construction and development plans, and its overall land sale strategies, it may be required to evaluate additional communities or re-evaluate previously impaired communities for potential impairment. These evaluations may result in additional impairment charges.

At March 31, 2012 and September 30, 2011, the Company had $26.4 million and $26.3 million, respectively, of land held for sale, consisting of land held for development and land under development that met the criteria of land held for sale.

During the three-month periods ended March 31, 2012 and 2011, the Company wrote off $0.5 million and $1.3 million, respectively, of earnest money deposits and pre-acquisition costs related to land option contracts which are not expected to be acquired. During the six-month periods ended March 31, 2012 and 2011, the Company wrote off $1.4 million and $3.3 million, respectively, of these deposits and costs.

NOTE D – LAND AND LOT OPTION PURCHASE CONTRACTS

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 Company’s discretion.

Certain option purchase contracts result in the creation of a variable interest in the entity holding the land parcel under option. The current guidance for determining which entity is the primary beneficiary is based on the ability of an entity to control both (1) the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity. There were no variable interest entities reported as land inventory not owned in the consolidated balance sheets at March 31, 2012 and September 30, 2011 because the Company determined it did not control the activities that most significantly impact the variable interest entity’s economic performance.

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D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

The maximum exposure to loss related to the Company’s variable interest entities is generally limited to the amounts of the Company’s option deposits. At March 31, 2012 and September 30, 2011, the amounts of option deposits related to these contracts totaled $17.7 million and $13.2 million, respectively, and are included in homebuilding other assets on the consolidated balance sheets.

NOTE E – NOTES PAYABLE

The Company’s notes payable at their principal amounts, net of any unamortized discounts, consist of the following:

		September 30,		September 30,
	March 31, 2012		September 30, 2011
	(In millions)
Homebuilding:
Unsecured:
6.875% senior notes due 2013	$	171.7	$	171.7
6.125% senior notes due 2014, net		145.3		145.2
2% convertible senior notes due 2014, net		432.2		418.1
5.625% senior notes due 2014, net		137.6		137.5
5.25% senior notes due 2015, net		157.3		157.3
5.625% senior notes due 2016, net		169.5		169.5
6.5% senior notes due 2016, net		372.4		383.1
Other secured		6.9		5.7

	$	1,592.9	$	1,588.1

Financial Services:
Mortgage repurchase facility, maturing 2013	$	163.8	$	116.5

Homebuilding:

On August 1, 2011, the Board of Directors authorized the repurchase of up to $500 million of the Company’s debt securities effective through July 31, 2012. At March 31, 2012, $412.1 million of the authorization was remaining.

During the six months ended March 31, 2012, through unsolicited transactions, the Company repurchased $10.8 million of its 6.5% senior notes due 2016 for an aggregate purchase price of $10.6 million, plus accrued interest. These transactions resulted in a gain on early retirement of debt of $0.1 million, net of unamortized discounts and fees written off.

The indentures governing the Company’s senior notes impose restrictions on the creation of secured debt and liens. At March 31, 2012, the Company was in compliance with all of the limitations and restrictions that form a part of the public debt obligations.

Financial Services:

The Company’s mortgage subsidiary, DHI Mortgage, has a mortgage repurchase facility that is accounted for as a secured financing. The mortgage repurchase facility provides financing and liquidity to DHI Mortgage by facilitating purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties against the transfer of funds by the counterparties, thereby becoming purchased loans. DHI Mortgage then has the right and obligation to repurchase the purchased loans upon their sale to third-party purchasers in the secondary market or within specified time frames from 45 to 120 days in accordance with the terms of the mortgage repurchase facility. In March 2012, the mortgage repurchase facility was renewed and amended. The committed capacity of the facility remains at $180 million, but the capacity can be increased to $225 million. Increases in borrowing capacity in excess of $180 million are provided on an uncommitted basis and at a higher borrowing cost than committed borrowings. Additionally, the term of the facility was extended to March 3, 2013.

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D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

As of March 31, 2012, $243.8 million of mortgage loans held for sale were pledged under the mortgage repurchase facility. These mortgage loans had a collateral value of $230.4 million. DHI Mortgage has the option to fund a portion of its repurchase obligations in advance. As a result of advance paydowns totaling $66.6 million, DHI Mortgage had an obligation of $163.8 million outstanding under the mortgage repurchase facility at March 31, 2012 at a 2.8% annual interest rate.

The mortgage repurchase facility is not guaranteed by either D.R. Horton, Inc. or any of the subsidiaries that guarantee the Company’s homebuilding debt. The facility contains financial covenants as to the mortgage subsidiary’s minimum required tangible net worth, its maximum allowable ratio of debt to tangible net worth and its minimum required liquidity. At March 31, 2012, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

NOTE F – HOMEBUILDING INTEREST

The Company capitalizes homebuilding interest to inventory during active development and construction. Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. Additionally, the Company writes off a portion of the capitalized interest related to communities for which inventory impairments are recorded. The Company’s inventory under active development and construction was lower than its debt level at March 31, 2012 and 2011; therefore, a portion of the interest incurred is reflected as interest expense.

The following table summarizes the Company’s homebuilding interest costs incurred, capitalized, expensed as interest expense, charged to cost of sales and written off during the three and six-month periods ended March 31, 2012 and 2011:


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2012			2011			2012			2011
	(In millions)
Capitalized interest, beginning of period	$	79.8		$	89.4		$	79.2		$	91.5
Interest incurred		28.1			33.8			56.1			69.1
Interest expensed:
Directly to interest expense		(5.5	)		(14.7	)		(12.5	)		(31.0	)
Amortized to cost of sales		(21.3	)		(19.5	)		(41.7	)		(40.4	)
Written off with inventory impairments		—			(0.4	)		—			(0.6	)

Capitalized interest, end of period	$	81.1		$	88.6		$	81.1		$	88.6

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. At March 31, 2012, mortgage loans held for sale had an aggregate fair value of $297.3 million and an aggregate outstanding principal balance of $288.9 million. At September 30, 2011, mortgage loans held for sale had an aggregate fair value of $294.1 million and an aggregate outstanding principal balance of $284.6 million. During the six months ended March 31, 2012 and 2011, the Company had net gains on sales of loans of $25.1 million and $19.7 million, respectively, which includes the effect of recording recourse expense, as discussed below in “Other Mortgage Loans and Loss Reserves,” of $2.7 million and $4.2 million, respectively.

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D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

Approximately 74% of the mortgage loans sold by DHI Mortgage during the six months ended March 31, 2012 were sold to one major financial institution pursuant to a loan purchase agreement. The Company has been negotiating with other institutions to establish additional loan purchase options. If the Company is unable to sell mortgage loans to additional purchasers on attractive terms, the Company’s ability to originate and sell mortgage loans at competitive prices could be limited which would negatively affect profitability.

Newly originated loans that have been closed but not committed to third-party purchasers are hedged to mitigate the risk of changes in their fair value. Hedged loans are committed to third-party purchasers typically within three days after origination. The notional amounts of the hedging instruments used to hedge mortgage loans held for sale vary in relationship to the underlying loan amounts, depending on the movements in the value of each hedging instrument relative to the value of the underlying mortgage loans. The fair value change related to the hedging instruments generally offsets the fair value change in the mortgage loans held for sale, which for the three and six months ended March 31, 2012 and 2011 was not significant, and is recognized in current earnings. As of March 31, 2012, the Company had a notional amount of $73.6 million in mortgage loans held for sale not committed to third-party purchasers and the notional amounts of the hedging instruments related to those loans totaled $73.5 million.

Other Mortgage Loans and Loss Reserves

Mortgage loans are sold with limited recourse provisions which include industry-standard representations and warranties, primarily involving the absence of misrepresentations by the borrower or other parties, insurability if applicable and, depending on the agreement, may include requiring a minimum number of payments to be made by the borrower. The Company generally does not retain any other continuing interest related to mortgage loans sold in the secondary market. Other mortgage loans generally consist of loans repurchased due to these limited recourse obligations. Typically, these loans are impaired and often become real estate owned through the foreclosure process. At March 31, 2012 and September 30, 2011, the Company’s total other mortgage loans and real estate owned, before loss reserves were as follows:

		September 30,		September 30,
	March 31, 2012		September 30, 2011
	(In millions)
Other mortgage loans	$	44.9	$	42.8
Real estate owned		1.3		0.9

	$	46.2	$	43.7

Based on historical performance and current housing and credit market conditions, the Company has recorded reserves for estimated losses on other mortgage loans, real estate owned and future loan repurchase obligations due to the limited recourse provisions, all of which are recorded as reductions of financial services revenue. The reserve balances at March 31, 2012 and September 30, 2011 were as follows:

		September 30,		September 30,
	March 31, 2012		September 30, 2011
	(In millions)
Loss reserves related to:
Other mortgage loans	$	6.5	$	6.2
Real estate owned		0.4		0.4
Loan repurchase and settlement obligations – known and expected		24.2		26.4

	$	31.1	$	33.0

Other mortgage loans and real estate owned and the related loss reserves are included in financial services other assets, while loan repurchase obligations are included in financial services accounts payable and other liabilities in the accompanying consolidated balance sheets.

-11-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

A subsidiary of the Company reinsured a portion of the private mortgage insurance written on loans originated by DHI Mortgage in prior years. At March 31, 2012 and September 30, 2011, reserves for expected future losses under the reinsurance program totaled $2.0 million and $0.9 million, respectively, and are included in financial services accounts payable and other liabilities in the accompanying consolidated balance sheets. It is possible that future losses may exceed the amount of reserves and, if so, additional charges will be required.

Loan Commitments and Related Derivatives

The Company is party to interest rate lock commitments (IRLCs) which are extended to borrowers who have applied for loan funding and meet defined credit and underwriting criteria. At March 31, 2012, the notional amount of IRLCs, which are accounted for as derivative instruments recorded at fair value, totaled $211.8 million.

The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments and hedging instruments. These instruments are considered derivatives in an economic hedge and are accounted for at fair value with gains and losses recognized in current earnings. As of March 31, 2012, the Company had a notional amount of approximately $14.5 million of best-efforts whole loan delivery commitments and a notional amount of $177.5 million of hedging instruments related to IRLCs not yet committed to purchasers.

NOTE H – FAIR VALUE MEASUREMENTS

Fair value measurements are used for the Company’s marketable securities, mortgage loans held for sale, IRLCs and other derivative instruments on a recurring basis, and are used for inventories, other mortgage loans and real estate owned on a nonrecurring basis, when events and circumstances indicate that the carrying value may not be recoverable. The fair value hierarchy and its application to the Company’s assets and liabilities, is as follows:

•

Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities. The Company’s U.S. Treasury securities are measured at fair value using Level 1 inputs.

•

Level 2 – Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market. The Company’s assets/liabilities measured at fair value using Level 2 inputs are as follows:

•

government agency securities, corporate debt securities, foreign government securities and certificates of deposit;

•

mortgage loans held for sale;

•

over-the-counter derivatives such as forward sales of MBS, put options on MBS and best-efforts and mandatory commitments; and

•

IRLCs.

•

Level 3 – Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability. The Company’s assets measured at fair value using Level 3 inputs, which are typically reported at the lower of carrying value or fair value on a nonrecurring basis, are as follows:

•

inventory held and used;

•

other mortgage loans; and

•

real estate owned.

-12-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

The following tables summarize the Company’s assets and liabilities at March 31, 2012 and September 30, 2011 measured at fair value on a recurring basis:


	Balance Sheet Location	Fair Value at March 31, 2012
	Balance Sheet Location	Level 1		Level 2			Total
		(In millions)
Homebuilding:
Marketable securities, available-for-sale	Marketable securities	$	41.0	$	258.1		$	299.1
Financial Services:
Mortgage loans held for sale (a)	Mortgage loans held for sale		—		297.3			297.3
Derivatives not designated as hedging instruments (b):
Interest rate lock commitments	Other assets		—		1.9			1.9
Forward sales of MBS	Other liabilities		—		(0.3	)		(0.3	)
Best-efforts and mandatory commitments	Other liabilities		—		(0.4	)		(0.4	)


	Balance Sheet Location	Fair Value at September 30, 2011
	Balance Sheet Location	Level 1		Level 2			Total
		(In millions)
Homebuilding:
Marketable securities, available-for-sale	Marketable securities	$	16.3	$	281.3		$	297.6
Financial Services:
Mortgage loans held for sale (a)	Mortgage loans held for sale		—		294.1			294.1
Derivatives not designated as hedging instruments (b):
Interest rate lock commitments	Other assets		—		3.9			3.9
Forward sales of MBS	Other liabilities		—		(4.0	)		(4.0	)
Best-efforts and mandatory commitments	Other liabilities		—		(0.9	)		(0.9	)

(a)	Mortgage loans held for sale are reflected at fair value. Interest income earned on mortgage loans held for sale is based on contractual interest rates and included in financial services interest and other income.

(b)	Fair value measurements of these derivatives represent changes in fair value since inception. These changes are reflected in the balance sheet and included in financial services revenues on the consolidated statement of operations.

The following table summarizes the Company’s assets at March 31, 2012 and September 30, 2011 measured at fair value on a nonrecurring basis:


		Fair Value at March 31, 2012		Fair Value at September 30, 2011
	Balance Sheet Location	Level 3		Level 3
		(In millions)
Homebuilding:
Inventory held and used (a)	Inventories	$	0.6	$	26.9
Financial Services:
Other mortgage loans (a) (b)	Other assets		32.5		28.9
Real estate owned (a) (b)	Other assets		0.9		0.5

(a)	The fair values included in the table above represent only those assets whose carrying values were adjusted to fair value in the current quarter.

(b)	The fair values for other mortgage loans and real estate owned are determined based on the value of the underlying collateral.

-13-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

The fair values of cash and cash equivalents approximate their carrying amounts due to their short-term nature. The Company determines the fair values of its senior and convertible senior notes based on quoted market prices of recent transactions, which is classified as Level 2 within the fair value hierarchy. The aggregate fair value of these notes at March 31, 2012 and September 30, 2011 was $1,880.3 million and $1,668.1 million, respectively, compared to an aggregate carrying value of $1,586.0 million and $1,582.4 million, respectively. The aggregate fair value of the Company’s senior notes includes fair values for the 2% convertible senior notes of $653.1 million and $511.9 million at March 31, 2012 and September 30, 2011, respectively, compared to their carrying values of $432.2 million and $418.1 million, respectively. The carrying value of the equity component of the 2% convertible senior notes was $136.7 million at March 31, 2012 and September 30, 2011. 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.

NOTE I – INCOME TAXES

The Company’s income tax expense attributable to continuing operations for the three and six months ended March 31, 2012 was $1.7 million and $3.2 million, respectively, compared to a benefit from income taxes of $58.6 million and $58.1 million in the same periods of the prior year. The income tax expense in the current year periods is due to federal alternative minimum tax and state income taxes. The benefit from income taxes in the prior year periods was due to the Company receiving a favorable result from the Internal Revenue Service (IRS) on a ruling request concerning capitalization of inventory costs, allowing the Company to reduce its unrecognized tax benefits and corresponding interest by $59.2 million. The Company does not have meaningful effective tax rates in these periods because its net deferred tax assets are offset fully by a valuation allowance.

At March 31, 2012 and September 30, 2011, the Company had net deferred tax assets of $816.4 million and $848.5 million, respectively, offset by valuation allowances of $816.4 million and $848.5 million, respectively. The realization of the deferred tax assets ultimately depends upon the existence of sufficient taxable income in future periods. The Company continues to analyze both positive and negative evidence in determining the need for a valuation allowance with respect to its deferred tax assets. A significant part of the negative evidence the Company considers is its three-year cumulative pre-tax loss position, which has declined from $445 million at September 30, 2011 to $209 million at March 31, 2012, and is largely the result of pre-tax losses incurred in fiscal 2009 as the Company was profitable in fiscal 2010 and 2011. If the Company’s current business trends continue, it expects to be out of the three-year cumulative pre-tax loss position before September 30, 2012. Other negative evidence supporting the need for a valuation allowance that the Company considers in its analysis is the overall weakness in the economy and the housing market and tight mortgage lending standards. As the amount of negative evidence has declined over the past twelve months, a growing amount of positive evidence has developed related to the Company’s financial results. The Company has generated pre-tax income for four consecutive quarters totaling $134.2 million, and it generated more pre-tax income in the current quarter than in any of the three previous quarters. The Company closed 4,240 homes and earned $42.3 million of pre-tax income during the three months ended March 31, 2012 and closed 8,358 homes and earned $71.5 million of pre-tax income during the six months ended March 31, 2012. The value of the Company’s net sales orders for the quarter and the value of the sales order backlog at March 31, 2012 increased 28% and 25%, respectively, compared to the prior year. Based on a sales order backlog of 6,189 homes at March 31, 2012 and the Company’s current sales pace, the Company expects to close more homes in the second half of fiscal 2012 than in the first half, and expects to continue generating pre-tax income.

If homebuilding industry conditions and the Company’s business remain stable and additional positive evidence develops, the Company believes there could be sufficient positive evidence to support a conclusion that the Company will generate sufficient taxable income in future periods to realize its deferred tax asset, which would allow the Company to significantly reduce the valuation allowance at some point during the next few quarters.

The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on the Company’s consolidated results of operations or financial position.

-14-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

The Company had income taxes receivable of $12.9 million and $12.4 million at March 31, 2012 and September 30, 2011, respectively, that relates to a federal tax refund the Company expects to receive.

During the second quarter of 2012, after concluding its audit of the Company’s fiscal year ended 2006 and 2007 tax returns, the IRS submitted its report to the U.S. Congressional Joint Committee on Taxation (Committee). The Company expects the review and approval from the Committee will be completed during the current fiscal year at which time it will receive the $12.9 million income taxes receivable.

A reduction of $3.3 million in the amount of unrecognized tax benefits and accrued interest is reasonably possible within the current fiscal year.

NOTE J – EARNINGS PER SHARE

The following table sets forth the numerators and denominators used in the computation of basic and diluted earnings per share. Options to purchase 8.7 million and 9.5 million shares of common stock were excluded from the computation of diluted earnings per share for the fiscal 2012 and fiscal 2011 periods, respectively, because the exercise price was greater than the average market price of the common shares and, therefore, their effect would have been antidilutive. Additionally, the convertible senior notes were excluded from the computation of diluted earnings per share for all periods because their effect would have been antidilutive.


	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2012		2011		2012		2011
	(In millions)
Numerator:
Net income	$	40.6	$	27.8	$	68.3	$	7.4

Denominator:
Denominator for basic earnings per share—weighted average common shares		317.6		319.3		317.0		319.2
Effect of dilutive securities:
Employee stock awards		2.5		0.6		1.3		0.3

Denominator for diluted earnings per share— adjusted weighted average common shares		320.1		319.9		318.3		319.5

NOTE K – STOCKHOLDERS’ EQUITY

The Company has an automatically effective universal shelf registration statement filed with the SEC in September 2009, registering debt and equity securities that it may issue from time to time in amounts to be determined.

On August 1, 2011, the Board of Directors authorized the repurchase of up to $100 million of the Company’s common stock effective through July 31, 2012. All of the $100 million authorization was remaining at March 31, 2012.

During the three months ended March 31, 2012, the Board of Directors approved a quarterly cash dividend of $0.0375 per common share, which was paid on February 21, 2012 to stockholders of record on February 10, 2012. In April 2012, the Board of Directors approved a quarterly cash dividend of $0.0375 per common share, payable on May 22, 2012 to stockholders of record on May 8, 2012. Quarterly cash dividends of $0.0375 per common share were declared in the comparable quarters of fiscal 2011.

-15-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

NOTE L – COMMITMENTS AND CONTINGENCIES

Warranty Claims

The Company typically provides its homebuyers with a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems, a two-year limited warranty on major mechanical systems, and a one-year limited warranty on other construction components. The Company’s warranty liability is based upon historical warranty cost experience in each market in which it operates, and is adjusted as appropriate to reflect qualitative risks associated with the types of homes built and the geographic areas in which they are built.

At March 31, 2012, the Company had liabilities of $0.7 million for the remaining repair costs of homes which contain or are suspected to contain allegedly defective drywall manufactured in China (Chinese Drywall) that may be responsible for accelerated corrosion of certain metals in the home. During the three months ended March 31, 2012, the Company received a payment of $2.4 million from a third-party for the reimbursement of costs paid to repair homes with Chinese Drywall and recorded the reimbursement as a reduction of warranty expense, which is a component of home sales cost of sales. While the Company continues to seek additional reimbursements for these remediation costs from various sources, it has not recorded a receivable for potential additional recoveries as of March 31, 2012.

The Company is named as a defendant in five Chinese Drywall lawsuits filed in federal court, involving claims from fewer than ten of the Company’s homeowners. These lawsuits are purported class action complaints involving hundreds of plaintiffs who are suing the homebuilders, suppliers, installers, importers and manufacturers of the defective Chinese Drywall. The Company is also named as a defendant in a single plaintiff Chinese Drywall lawsuit pending in state court in Florida. At this time, the Company is unable to express an opinion as to the amount of damages, if any, that could result from these lawsuits beyond what has been reserved for repair as discussed above.

Changes in the Company’s warranty liability during the three and six-month periods ended March 31, 2012 and 2011 were as follows:


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2012			2011			2012			2011
	(In millions)
Warranty liability, beginning of period	$	46.0		$	41.2		$	46.2		$	46.2
Warranties issued		4.3			3.2			8.3			6.6
Changes in liability for pre-existing warranties		1.5			4.9			3.4			3.0
Settlements made		(2.9	)		(5.5	)		(9.0	)		(12.0	)

Warranty liability, end of period	$	48.9		$	43.8		$	48.9		$	43.8

Legal Claims and Insurance

The Company is named as a defendant in various claims, complaints and other legal actions in the ordinary course of business. At any point in time, the Company is managing several hundred individual claims related to construction defect matters, personal injury claims, employment matters, land development issues and contract disputes. The Company has established reserves for these contingencies based on the estimated costs of pending claims and the estimated costs of anticipated future claims related to previously closed homes. The estimated liabilities for these contingencies were $534.7 million and $529.6 million at March 31, 2012 and September 30, 2011, respectively, and are included in homebuilding accrued expenses and other liabilities in the consolidated balance sheets. At March 31, 2012 and September 30, 2011, the vast majority of these reserves related to construction defect matters. Expenses related to the Company’s legal contingencies were approximately $20.8 million and $10.5 million in the six months ended March 31, 2012 and 2011, respectively.

-16-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

The Company’s reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims. As of March 31, 2012, no individual existing claim was material to the Company’s financial statements, and the majority of the Company’s total construction defect reserves consisted of the estimated exposure to future claims on previously closed homes. The Company has closed a significant number of homes during recent years, and as a result the Company may be subject to future construction defect claims on these homes. Although regulations vary from state to state, construction defect issues can generally be reported for up to ten years after the home has closed in many states in which the Company operates. Historical data and trends regarding the frequency of claims incurred and the costs to resolve claims relative to the types of products and markets where the Company operates are used to estimate the construction defect liabilities for both existing and anticipated future claims. These estimates are subject to ongoing revision as the circumstances of individual pending claims and historical data and trends change. Adjustments to estimated reserves are recorded in the accounting period in which the change in estimate occurs.

Related to the contingencies for construction defect claims and estimates of future construction defect claims on previously closed homes, and other legal claims and lawsuits incurred in the ordinary course of business, the Company estimates and records insurance receivables for these matters under applicable insurance policies when recovery is probable. Additionally, the Company may have the ability to recover a portion of its losses from its subcontractors and their insurance carriers when the Company has been named as an additional insured on their insurance policies. Estimates of the Company’s insurance receivables related to these matters totaled $217.4 million and $218.3 million at March 31, 2012 and September 30, 2011, respectively, and are included in homebuilding other assets in the consolidated balance sheets.

The estimation of losses related to these reserves is subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to the Company’s markets and the types of products built, claim frequency rates, claim settlement costs and patterns, insurance industry practices and legal interpretations, among others. Due to the high degree of judgment required in establishing reserves for these contingencies, actual future costs could differ significantly from current estimated amounts and it is not possible for the Company to make a reasonable estimate of the possible loss or range of loss in excess of its reserves.

Land and Lot Option Purchase Contracts

The Company enters into land and lot option purchase contracts in order to acquire land or lots for the construction of homes. At March 31, 2012, the Company had total deposits of $20.1 million, consisting of cash deposits of $18.5 million and promissory notes and surety bonds of $1.6 million, to purchase land and lots with a total remaining purchase price of $1.2 billion. Within the land and lot option purchase contracts at March 31, 2012, there were a limited number of contracts, representing $11.1 million of remaining purchase price, subject to specific performance clauses which may require the Company to purchase the land or lots upon the land sellers meeting their obligations. The majority of land and lots under contract are currently expected to be purchased within three years.

Other Commitments

To secure performance under various contracts, the Company had outstanding letters of credit of $38.9 million and surety bonds of $666.1 million at March 31, 2012. The Company has secured letter of credit agreements that require it to deposit cash, in an amount approximating the balance of letters of credit outstanding, as collateral with the issuing banks. At March 31, 2012 and September 30, 2011, the amount of cash restricted for this purpose totaled $39.0 million and $47.5 million, respectively, and is included in homebuilding restricted cash on the Company’s consolidated balance sheets.

-17-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

NOTE M – OTHER ASSETS AND ACCRUED EXPENSES AND OTHER LIABILITIES

The Company’s homebuilding other assets were as follows:

		00000000		00000000
	March 31, 2012		September 30, 2011
	(In millions)
Insurance receivables	$	217.4	$	218.3
Earnest money and refundable deposits		64.2		59.1
Accounts and notes receivable		18.6		19.1
Prepaid assets		19.1		24.7
Other assets		81.1		77.2

	$	400.4	$	398.4

The Company’s homebuilding accrued expenses and other liabilities were as follows:

		00000000		00000000
	March 31, 2012		September 30, 2011
	(In millions)
Construction defect and other litigation liabilities	$	534.7	$	529.6
Employee compensation and related liabilities		89.0		85.8
Warranty liability		48.9		46.2
Accrued interest		25.0		25.3
Federal and state income tax liabilities		24.2		22.5
Other liabilities		99.3		120.4

	$	821.1	$	829.8

NOTE N – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards (IFRS). The guidance changes certain fair value measurement principles and expands the disclosure requirements particularly for Level 3 fair value measurements. The guidance is effective for the Company beginning January 1, 2012 and is to be applied prospectively. The adoption of this guidance, which relates to disclosure, did not impact the Company’s consolidated financial position, results of operations or cash flows.

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The guidance is effective for the Company beginning October 1, 2013 and is to be applied retrospectively. The adoption of this guidance, which is related to disclosure only, is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

-18-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

NOTE O – SEGMENT INFORMATION

The Company’s 30 homebuilding operating divisions and its financial services operation are its operating segments. The homebuilding operating segments are aggregated into six reporting segments and the financial services operating segment is its own reporting segment. The Company’s reportable homebuilding segments are: East, Midwest, Southeast, South Central, Southwest and West. These reporting segments have homebuilding operations located in the following states:


		East:		Delaware, Georgia (Savannah only), Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina and Virginia

		Midwest:		Colorado, Illinois and Minnesota

		Southeast:		Alabama, Florida and Georgia

		South Central:		Louisiana, New Mexico (Las Cruces only), Oklahoma and Texas

		Southwest:		Arizona and New Mexico

		West:		California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington

Homebuilding is the Company’s core business, generating 98% and 97% of consolidated revenues during the six months ended March 31, 2012 and 2011, respectively. The Company’s homebuilding segments are primarily engaged in the acquisition and development of land and the construction and sale of residential homes on the land, in 25 states and 73 markets in the United States. The homebuilding segments generate most of their revenues from the sale of completed homes, and to a lesser extent from the sale of land and lots.

The Company’s financial services segment provides mortgage financing and title agency services primarily to the Company’s homebuilding customers. The Company generally does not retain or service originated mortgages; rather, it seeks to sell the mortgages and related servicing rights to third-party purchasers. The financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services.

-19-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

The accounting policies of the reporting segments are described throughout Note A included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2011.

		00000000			00000000			00000000			00000000
	Three Months Ended March 31,						Six Months Ended March 31,
	2012			2011			2012			2011
	(In millions)
Revenues
Homebuilding revenues:
East	$	133.6		$	93.5		$	252.4		$	194.3
Midwest		71.7			54.9			129.4			112.7
Southeast		213.2			141.8			410.0			290.6
South Central		259.8			228.1			526.5			457.9
Southwest		55.6			50.0			109.6			108.1
West		201.7			164.8			393.3			336.5

Total homebuilding revenues		935.6			733.1			1,821.2			1,500.1
Financial services revenues		25.6			18.0			46.6			39.2

Consolidated revenues	$	961.2		$	751.1		$	1,867.8		$	1,539.3


Inventory Impairments
East	$	0.1		$	1.9		$	0.2		$	1.9
Midwest		—			—			—			—
Southeast		0.2			4.1			0.6			4.7
South Central		—			0.2			—			0.2
Southwest		—			—			—			2.2
West		—			6.8			—			10.4

Total inventory impairments	$	0.3		$	13.0		$	0.8		$	19.4


Income (Loss) Before Income Taxes (1)
Homebuilding income (loss) before income taxes:
East	$	3.6		$	(8.1	)	$	6.2		$	(12.6	)
Midwest		(1.0	)		(8.5	)		(8.1	)		(13.2	)
Southeast		8.7			(11.9	)		15.5			(13.8	)
South Central		13.0			6.4			28.4			11.1
Southwest		2.6			1.1			4.7			(2.0	)
West		7.7			(11.4	)		13.0			(26.1	)

Total homebuilding income (loss) before income taxes		34.6			(32.4	)		59.7			(56.6	)
Financial services income before income taxes		7.7			1.6			11.8			5.9

Consolidated income (loss) before income taxes	$	42.3		$	(30.8	)	$	71.5		$	(50.7	)

(1)

Expenses maintained at the corporate level consist primarily of interest and property taxes, which are capitalized and amortized to cost of sales or expensed directly, and the expenses related to operating the Company’s corporate office. The amortization of capitalized interest and property taxes is allocated to each segment based on the segment’s revenue, while interest expense and those expenses associated with the corporate office are allocated to each segment based on the segment’s inventory balances.

-20-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

		0000000000		0000000000
	March 31, 2012		September 30, 2011
	(In millions)
Homebuilding Inventories (1)
East	$	515.7	$	497.3
Midwest		297.7		268.5
Southeast		733.6		692.9
South Central		791.2		768.5
Southwest		183.0		193.6
West		1,023.3		938.4
Corporate and unallocated (2)		92.2		90.5

Total homebuilding inventory	$	3,636.7	$	3,449.7

(1)	Homebuilding inventories are the only assets included in the measure of segment assets used by the Company’s chief operating decision maker, its CEO.

(2)	Corporate and unallocated consists primarily of capitalized interest and property taxes.

-21-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION

All of the Company’s senior and convertible senior notes are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company’s direct and indirect subsidiaries (collectively, Guarantor Subsidiaries), other than financial services subsidiaries and certain insignificant subsidiaries (collectively, Non-Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is wholly-owned. In lieu of providing separate financial statements for the Guarantor Subsidiaries, consolidating condensed financial statements are presented below. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that they are not material to investors.

Consolidating Balance Sheet

March 31, 2012

		000000000		000000000		000000000		000000000			000000000
	D.R. Horton, Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total
	(In millions)
ASSETS
Cash and cash equivalents	$	625.1	$	33.2	$	21.5	$	—		$	679.8
Marketable securities, available-for-sale		299.1		—		—		—			299.1
Restricted cash		40.1		0.5		0.1		—			40.7
Investments in subsidiaries		1,489.4		—		—		(1,489.4	)		—
Inventories		1,145.6		2,471.8		19.3		—			3,636.7
Income taxes receivable		12.9		—		—		—			12.9
Property and equipment, net		15.7		20.0		17.7		—			53.4
Other assets		103.6		255.3		90.2		—			449.1
Mortgage loans held for sale		—		—		297.3		—			297.3
Goodwill		—		15.9		—		—			15.9
Intercompany receivables		820.1		—		—		(820.1	)		—

Total Assets	$	4,551.6	$	2,796.7	$	446.1	$	(2,309.5	)	$	5,484.9


LIABILITIES & EQUITY
Accounts payable and other liabilities	$	264.3	$	652.9	$	108.0	$	—		$	1,025.2
Intercompany payables		—		787.6		32.5		(820.1	)		—
Notes payable		1,587.3		5.6		163.8		—			1,756.7

Total Liabilities		1,851.6		1,446.1		304.3		(820.1	)		2,781.9

Total stockholders’ equity		2,700.0		1,350.6		138.8		(1,489.4	)		2,700.0
Noncontrolling interests		—		—		3.0		—			3.0

Total Equity		2,700.0		1,350.6		141.8		(1,489.4	)		2,703.0

Total Liabilities & Equity	$	4,551.6	$	2,796.7	$	446.1	$	(2,309.5	)	$	5,484.9

-22-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION – (Continued)

Consolidating Balance Sheet

September 30, 2011

		000000000		000000000		000000000		000000000			000000000
	D.R. Horton, Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total
	(In millions)
ASSETS
Cash and cash equivalents	$	681.3	$	31.3	$	20.0	$	—		$	732.6
Marketable securities, available-for-sale		297.6		—		—		—			297.6
Restricted cash		48.7		0.4		—		—			49.1
Investments in subsidiaries		1,452.3		—		—		(1,452.3	)		—
Inventories		1,100.6		2,329.6		19.5		—			3,449.7
Income taxes receivable		12.4		—		—		—			12.4
Property and equipment, net		18.0		21.7		17.9		—			57.6
Other assets		98.7		259.2		91.5		—			449.4
Mortgage loans held for sale		—		—		294.1		—			294.1
Goodwill		—		15.9		—		—			15.9
Intercompany receivables		748.3		—		—		(748.3	)		—

Total Assets	$	4,457.9	$	2,658.1	$	443.0	$	(2,200.6	)	$	5,358.4


LIABILITIES & EQUITY
Accounts payable and other liabilities	$	252.3	$	662.7	$	115.3	$	—		$	1,030.3
Intercompany payables		—		717.6		30.7		(748.3	)		—
Notes payable		1,585.0		3.1		116.5		—			1,704.6

Total Liabilities		1,837.3		1,383.4		262.5		(748.3	)		2,734.9

Total stockholders’ equity		2,620.6		1,274.7		177.6		(1,452.3	)		2,620.6
Noncontrolling interests		—		—		2.9		—			2.9

Total Equity		2,620.6		1,274.7		180.5		(1,452.3	)		2,623.5

Total Liabilities & Equity	$	4,457.9	$	2,658.1	$	443.0	$	(2,200.6	)	$	5,358.4

-23-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION – (Continued)

Consolidating Statement of Operations

Three Months Ended March 31, 2012


	D.R. Horton, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In millions)
Homebuilding:
Revenues	$	316.2		$	616.7		$	2.7		$	—		$	935.6
Cost of sales		253.5			515.6			2.1			—			771.2

Gross profit		62.7			101.1			0.6			—			164.4
Selling, general and administrative expense		59.1			67.1			1.3			—			127.5
Equity in (income) of subsidiaries		(43.2	)		—			—			43.2			—
Interest expense		5.5			—			—			—			5.5
Other (income)		(1.0	)		(1.6	)		(0.6	)		—			(3.2	)

		42.3			35.6			(0.1	)		(43.2	)		34.6


Financial Services:
Revenues, net of recourse and reinsurance expense		—			—			25.6			—			25.6
General and administrative expense		—			—			19.6			—			19.6
Interest expense		—			—			0.8			—			0.8
Interest and other (income)		—			—			(2.5	)		—			(2.5	)

		—			—			7.7			—			7.7

Income before income taxes		42.3			35.6			7.6			(43.2	)		42.3
Income tax expense		1.7			1.1			0.1			(1.2	)		1.7

Net income	$	40.6		$	34.5		$	7.5		$	(42.0	)	$	40.6

Comprehensive income	$	40.5		$	34.5		$	7.5		$	(42.0	)	$	40.5

-24-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION – (Continued)

Consolidating Statement of Operations

Six Months Ended March 31, 2012


	D.R. Horton, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In millions)
Homebuilding:
Revenues	$	610.1		$	1,206.7		$	4.4		$	—		$	1,821.2
Cost of sales		497.9			1,002.6			7.6			—			1,508.1

Gross profit (loss)		112.2			204.1			(3.2	)		—			313.1
Selling, general and administrative expense		114.5			128.5			3.5			—			246.5
Equity in (income) of subsidiaries		(84.3	)		—			—			84.3			—
Interest expense		12.5			—			—			—			12.5
Gain on early retirement of debt, net		(0.1	)		—			—			—			(0.1	)
Other (income)		(1.9	)		(2.2	)		(1.4	)		—			(5.5	)

		71.5			77.8			(5.3	)		(84.3	)		59.7


Financial Services:
Revenues, net of recourse and reinsurance expense		—			—			46.6			—			46.6
General and administrative expense		—			—			38.5			—			38.5
Interest expense		—			—			1.7			—			1.7
Interest and other (income)		—			—			(5.4	)		—			(5.4	)

		—			—			11.8			—			11.8

Income before income taxes		71.5			77.8			6.5			(84.3	)		71.5
Income tax expense		3.2			2.0			0.2			(2.2	)		3.2

Net income	$	68.3		$	75.8		$	6.3		$	(82.1	)	$	68.3

Comprehensive income	$	68.3		$	75.8		$	6.3		$	(82.1	)	$	68.3

-25-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION – (Continued)

Consolidating Statement of Operations

Three Months Ended March 31, 2011


	D.R. Horton, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In millions)
Homebuilding:
Revenues	$	199.7		$	529.9		$	3.5		$	—		$	733.1
Cost of sales		159.0			461.5			7.8			—			628.3

Gross profit (loss)		40.7			68.4			(4.3	)		—			104.8
Selling, general and administrative expense		59.8			67.9			(4.5	)		—			123.2
Equity in (income) of subsidiaries		(4.5	)		—			—			4.5			—
Interest expense		14.7			—			—			—			14.7
Loss on early retirement of debt, net		2.7			—			—			—			2.7
Other (income)		(1.2	)		(1.3	)		(0.9	)		—			(3.4	)

		(30.8	)		1.8			1.1			(4.5	)		(32.4	)


Financial Services:
Revenues, net of recourse and reinsurance expense		—			—			18.0			—			18.0
General and administrative expense		—			—			18.2			—			18.2
Interest expense		—			—			0.1			—			0.1
Interest and other (income)		—			—			(1.9	)		—			(1.9	)

		—			—			1.6			—			1.6

Income (loss) before income taxes		(30.8	)		1.8			2.7			(4.5	)		(30.8	)
Income tax benefit		(58.6	)		(41.4	)		(1.6	)		43.0			(58.6	)

Net income	$	27.8		$	43.2		$	4.3		$	(47.5	)	$	27.8

Comprehensive income	$	27.8		$	43.2		$	4.3		$	(47.5	)	$	27.8

-26-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION – (Continued)

Consolidating Statement of Operations

Six Months Ended March 31, 2011


	D.R. Horton, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In millions)
Homebuilding:
Revenues	$	409.7		$	1,085.9		$	4.5		$	—		$	1,500.1
Cost of sales		325.4			950.5			9.2			—			1,285.1

Gross profit		84.3			135.4			(4.7	)		—			215.0
Selling, general and administrative expense		109.1			135.9			(3.0	)		—			242.0
Equity in (income) of subsidiaries		(7.2	)		—			—			7.2			—
Interest expense		31.0			—			—			—			31.0
Loss on early retirement of debt, net		4.2			—			—			—			4.2
Other (income)		(2.1	)		(1.4	)		(2.1	)		—			(5.6	)

		(50.7	)		0.9			0.4			(7.2	)		(56.6	)


Financial Services:
Revenues, net of recourse and reinsurance expense		—			—			39.2			—			39.2
General and administrative expense		—			—			37.1			—			37.1
Interest expense		—			—			0.4			—			0.4
Interest and other (income)		—			—			(4.2	)		—			(4.2	)

		—			—			5.9			—			5.9

Income (loss) before income taxes		(50.7	)		0.9			6.3			(7.2	)		(50.7	)
Income tax benefit		(58.1	)		(41.0	)		(1.6	)		42.6			(58.1	)

Net income	$	7.4		$	41.9		$	7.9		$	(49.8	)	$	7.4

Comprehensive income	$	7.1		$	41.9		$	7.9		$	(49.8	)	$	7.1

-27-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION – (Continued)

Consolidating Statement of Cash Flows

Six Months Ended March 31, 2012


	D.R. Horton, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Total
	(In millions)
OPERATING ACTIVITIES
Net cash used in operating activities	$	(17.3	)	$	(63.2	)	$	(2.1	)	$	—	$	(82.6	)


INVESTING ACTIVITIES
Purchases of property and equipment		(1.6	)		(3.5	)		(0.4	)		—		(5.5	)
Purchases of marketable securities		(162.8	)		—			—			—		(162.8	)
Proceeds from the sale or maturity of marketable securities		157.5			—			—			—		157.5
Decrease (increase) in restricted cash		8.6			(0.1	)		(0.1	)		—		8.4

Net cash provided by (used in) investing activities		1.7			(3.6	)		(0.5	)		—		(2.4	)


FINANCING ACTIVITIES
Net change in notes payable		(11.6	)		(1.3	)		47.3			—		34.4
Net change in intercompany receivables/payables		(26.8	)		70.0			(43.2	)		—		—
Proceeds from stock associated with certain employee benefit plans		21.6			—			—			—		21.6
Cash dividends paid		(23.8	)		—			—			—		(23.8	)

Net cash (used in) provided by financing activities		(40.6	)		68.7			4.1			—		32.2

(Decrease) increase in cash and cash equivalents		(56.2	)		1.9			1.5			—		(52.8	)
Cash and cash equivalents at beginning of period		681.3			31.3			20.0			—		732.6

Cash and cash equivalents at end of period	$	625.1		$	33.2		$	21.5		$	—	$	679.8

-28-

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

March 31, 2012

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION – (Continued)

Consolidating Statement of Cash Flows

Six Months Ended March 31, 2011


	D.R. Horton, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Total
	(In millions)
OPERATING ACTIVITIES
Net cash (used in) provided by operating activities	$	(76.3	)	$	25.4		$	29.8		$	—	$	(21.1	)


INVESTING ACTIVITIES
Purchases of property and equipment		(3.3	)		(4.9	)		—			—		(8.2	)
Purchases of marketable securities		(185.9	)		—			—			—		(185.9	)
Proceeds from the sale or maturity of marketable securities		187.7			—			—			—		187.7
Decrease (increase) in restricted cash		9.0			(0.2	)		(0.1	)		—		8.7

Net cash provided by (used in) investing activities		7.5			(5.1	)		(0.1	)		—		2.3


FINANCING ACTIVITIES
Net change in notes payable		(145.0	)		—			(41.6	)		—		(186.6	)
Net change in intercompany receivables/payables		38.2			(39.2	)		1.0			—		—
Proceeds from stock associated with certain employee benefit plans		1.2			—			—			—		1.2
Cash dividends paid		(24.0	)		—			—			—		(24.0	)

Net cash used in financing activities		(129.6	)		(39.2	)		(40.6	)		—		(209.4	)

Decrease in cash and cash equivalents		(198.4	)		(18.9	)		(10.9	)		—		(228.2	)
Cash and cash equivalents at beginning of period		1,234.9			45.3			29.1			—		1,309.3

Cash and cash equivalents at end of period	$	1,036.5		$	26.4		$	18.2		$	—	$	1,081.1

-29-

ITEM 2. MANAGEMENT’S 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, 2011. 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 homes through our operating divisions in 25 states and 73 markets as of March 31, 2012, primarily under the name of D.R. Horton, America’s Builder. Our homebuilding operations primarily include the construction and sale of single-family homes with sales prices generally ranging from $90,000 to $600,000, with an average closing price of $217,100 during the six months ended March 31, 2012. Approximately 90% and 88% of home sales revenues were generated from the sale of single-family detached homes in the six months ended March 31, 2012 and 2011, 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 primarily to our homebuilding customers. We generally do not retain or service originated mortgages; rather, we seek to sell the mortgages and related servicing rights to third-party purchasers. DHI Mortgage originates loans in accordance with purchaser guidelines and historically has sold most 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 our homebuilding customers.

-30-

We conduct our homebuilding operations in the geographic regions, states and markets listed below, and we conduct our mortgage and title operations in many of these markets. Our homebuilding operating divisions are aggregated into six reporting segments, also referred to as reporting regions, which comprise the markets below. Our financial statements contain additional information regarding segment performance.


State	Reporting Region/Market	State	Reporting Region/Market

	East Region		South Central Region
Delaware	Central Delaware	Louisiana	Baton Rouge
Georgia	Savannah		Lafayette
Maryland	Baltimore	New Mexico	Las Cruces
	Suburban Washington, D.C.	Oklahoma	Oklahoma City
New Jersey	North New Jersey	Texas	Austin
	South New Jersey		Dallas
North Carolina	Charlotte		El Paso
	Fayetteville		Fort Worth
	Greensboro/Winston-Salem		Houston
	Jacksonville		Killeen/Temple/Waco
	Raleigh/Durham		Rio Grande Valley
	Wilmington		San Antonio
Pennsylvania	Lancaster
	Philadelphia		Southwest Region
South Carolina	Charleston	Arizona	Phoenix
	Columbia		Tucson
	Greenville	New Mexico	Albuquerque
	Hilton Head
	Myrtle Beach		West Region
Virginia	Northern Virginia	California	Bay Area
			Central Valley
	Midwest Region		Imperial Valley
Colorado	Colorado Springs		Los Angeles County
	Denver		Riverside County
	Fort Collins		Sacramento
Illinois	Chicago		San Bernardino County
Minnesota	Minneapolis/St. Paul		San Diego County
			Ventura County
	Southeast Region	Hawaii	Hawaii
Alabama	Birmingham		Maui
	Mobile		Oahu
	Montgomery	Idaho	Boise
	Tuscaloosa	Nevada	Las Vegas
Florida	Daytona Beach		Reno
	Fort Myers/Naples	Oregon	Portland
	Jacksonville	Utah	Salt Lake City
	Melbourne/Vero Beach	Washington	Seattle/Tacoma
	Miami/West Palm Beach		Vancouver
	Orlando
	Pensacola/Panama City
	Tampa/Sarasota
Georgia	Atlanta
	Middle Georgia

-31-

OVERVIEW

In our second quarter of 2012, we continued to see an improving sales trend as the number and value of our net sales orders increased 19% and 28% compared to the same period of fiscal 2011. Consistent with fiscal 2011, we are seeing a demand pattern in our net sales during fiscal 2012 that is similar to the demand pattern we traditionally saw prior to the current housing downturn. The traditional demand pattern has the lowest net sales orders in our first fiscal quarter, a sequential increase from the first quarter to the second quarter, a consistent level in the third quarter and then slowing net sales orders in the fourth quarter. Our net sales orders for the current quarter increased 55% from the previous quarter, reflecting the expected seasonal increase as our spring selling season began. Our recent results and other national housing data suggest that the overall demand for new homes has slowly begun to improve, but we expect that demand is likely to remain at low levels for some time, with uneven improvement across our operating markets.

In the three and six months ended March 31, 2012, revenues from home sales increased 27% and 21% from the prior year periods and pre-tax income was $42.3 million and $71.5 million compared to pre-tax losses of $30.8 million and $50.7 million in the prior year periods. Based on our sales order backlog of 6,189 homes at March 31, 2012 and our current sales pace, we expect to close more homes in the second half of fiscal 2012 than in the first half, and we expect to continue generating pre-tax income. These results reflect our ability to operate profitably in a challenging environment through our strategy of investing capital to expand our operations, managing inventory levels efficiently, improving gross margins, and controlling SG&A and interest costs effectively.

We believe we are well-positioned for an eventual housing recovery due to our strong balance sheet and liquidity, which has allowed us to profitably grow our business recently despite the current overall slow growth in new home demand. We have continued to identify and invest in an increasing number of housing and land inventory opportunities, and we will continue to adjust our business strategies as necessary based on housing demand in each of our markets. Nevertheless, our future results could be negatively impacted by prolonged weakness in the economy, continued high levels of unemployment, a significant increase in mortgage interest rates or further tightening of mortgage lending standards.

-32-

STRATEGY

While we are encouraged by recent modest improvement in new home demand, it remains difficult to predict if homebuilding industry conditions will continue to improve, remain stable or deteriorate from current levels. We expect that conditions will be inconsistent across our operating markets in the near term. During the industry downturn, we generated significant cash flow from operations which we primarily used to increase our cash balances and reduce our outstanding debt. Our liquidity and reduced leverage provide us flexibility to determine the appropriate operating strategy for each of our markets, and to increase our investments in housing and land inventory to expand our operations. Our operating strategy includes the following initiatives:

—

Maintaining a strong cash balance and overall liquidity position.

—

Managing the sales prices and level of sales incentives on our homes to optimize the balance of sales volumes, profits, returns on inventory investments and cash flows.

—

Entering into lot option contracts to purchase finished lots to potentially increase sales volumes and profitability.

—

Renegotiating existing lot option contracts where necessary to reduce lot costs and to better match the scheduled lot purchases with new home demand in each community.

—

Evaluating and selectively investing in land acquisition, land development and housing inventory opportunities to meet housing demand and expand our operations in desirable markets.

—

Managing our inventory of homes under construction by selectively starting construction on unsold homes to capture new home demand, while monitoring the number and aging of unsold homes and aggressively marketing unsold, completed homes in inventory.

—

Controlling the cost of goods purchased from both vendors and subcontractors.

—

Modifying product offerings and pricing to meet consumer demand in each of our markets.

—

Controlling our SG&A infrastructure to match production levels.

Although our operating strategy has produced positive results in recent quarters, we cannot provide any assurances that the initiatives listed above will continue to be successful, and we may need to adjust components of our strategy to meet changing market conditions. If market conditions do not deteriorate from current levels, we expect that our operating strategy will allow us to grow our profitability while maintaining a strong balance sheet and liquidity position in fiscal 2012 and into fiscal 2013.

-33-

KEY RESULTS

Key financial results as of and for the three months ended March 31, 2012, as compared to the same period of 2011, were as follows:

Homebuilding Operations:

—

Homebuilding revenues increased 28% to $935.6 million.

—

Homes closed increased 21% to 4,240 homes, and the average closing price of those homes increased 5% to $219,500.

—

Net sales orders increased 19% to 5,899 homes, and the value of net sales orders increased 28% to $1.3 billion.

—

Sales order backlog increased 25% to $1.4 billion.

—

Home sales gross margins increased 140 basis points to 17.6%.

—

Inventory impairments and land option cost write-offs were $0.8 million, compared to $14.3 million.

—

Homebuilding SG&A expenses increased 3% to $127.5 million, but decreased as a percentage of homebuilding revenues by 320 basis points to 13.6%, as we achieved improved leverage of these costs.

—

Interest expensed directly decreased 63%, to $5.5 million.

—

Interest amortized to cost of sales declined to 2.8% of total home and land/lot cost of sales, from 3.2%.

—

Homebuilding pre-tax income was $34.6 million, compared to a pre-tax loss of $32.4 million.

—

Homes in inventory were 11,100, compared to 10,500 at both September 30, 2011 and March 31, 2011.

—

Owned and optioned lots totaled 121,200, compared to 112,700 and 115,900 at September 30, 2011 and March 31, 2011, respectively.

—

Homebuilding debt was $1.6 billion at both March 31, 2012 and September 30, 2011, compared to $2.0 billion at March 31, 2011.

—

Net homebuilding debt to total capital was 18.9%, an increase of 90 basis points and 20 basis points from the ratios at September 30, 2011 and March 31, 2011, respectively. Gross homebuilding debt to total capital was 37.1%, a reduction of 60 basis points and 580 basis points from the ratios at September 30, 2011 and March 31, 2011, respectively.

—

Homebuilding cash and marketable securities totaled $1.0 billion at March 31, 2012 and September 30, 2011, compared to $1.4 billion at March 31, 2011.

Financial Services Operations:

—

Total financial services revenues, net of recourse and reinsurance expenses, increased 42% to $25.6 million from $18.0 million.

—

Financial services pre-tax income was $7.7 million, compared to $1.6 million.

Consolidated Results:

—

Consolidated pre-tax income was $42.3 million, compared to a pre-tax loss of $30.8 million.

—

Net income was $40.6 million, compared to $27.8 million.

—

Diluted earnings per share was $0.13, compared to $0.09.

—

Total equity was $2.7 billion, compared to $2.6 billion at both September 30, 2011 and March 31, 2011.

—

Net cash used in operations was $79.3 million, compared to $70.6 million.

-34-

Key financial results for the six months ended March 31, 2012, as compared to the same period of 2011, were as follows:

Homebuilding Operations:

—

Homebuilding revenues increased 21% to $1,821.2 million.

—

Homes closed increased 17% to 8,358 homes, and the average closing price of those homes increased 4% to $217,100.

—

Net sales orders increased 17% to 9,693 homes, and the value of net sales orders increased 23% to $2.1 billion.

—

Home sales gross margins increased 130 basis points to 17.2%.

—

Inventory impairments and land option cost write-offs were $2.2 million, compared to $22.7 million.

—

Homebuilding SG&A expenses increased 2% to $246.5 million, but decreased as a percentage of homebuilding revenues by 260 basis points to 13.5%, as we achieved improved leverage of these costs.

—

Interest expensed directly decreased 60%, to $12.5 million.

—

Interest amortized to cost of sales declined to 2.8% of total home and land/lot cost of sales, from 3.2%.

—

Homebuilding pre-tax income was $59.7 million, compared to a pre-tax loss of $56.6 million.

Financial Services Operations:

—

Total financial services revenues, net of recourse and reinsurance expenses, increased 19% to $46.6 million from $39.2 million.

—

Financial services pre-tax income was $11.8 million, compared to $5.9 million.

Consolidated Results:

—

Consolidated pre-tax income was $71.5 million, compared to a pre-tax loss of $50.7 million.

—

Net income was $68.3 million, compared to $7.4 million.

—

Diluted earnings per share was $0.21, compared to $0.02.

—

Net cash used in operations was $82.6 million, compared to $21.1 million.

-35-

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 six months ended March 31, 2012 and 2011.

		00 Change		00 Change		00 Change		00 Change		00 Change		00 Change		00 Change		00 Change		00 Change
	Net Sales Orders (1)
	Three Months Ended March 31,
	Net Homes Sold						Value (In millions)						Average Selling Price
	2012		2011		% Change		2012		2011		% Change		2012		2011		% Change
East		611		603		1 %	$	153.7	$	135.4		14 %	$	251,600	$	224,500		12 %
Midwest		402		269		49 %		116.6		68.0		71 %		290,000		252,800		15 %
Southeast		1,473		1,143		29 %		300.0		216.2		39 %		203,700		189,200		8 %
South Central		2,017		1,843		9 %		370.7		318.3		16 %		183,800		172,700		6 %
Southwest		527		349		51 %		95.8		64.3		49 %		181,800		184,200		(1)%
West		869		736		18 %		276.7		224.7		23 %		318,400		305,300		4 %

		5,899		4,943		19 %	$	1,313.5	$	1,026.9		28 %	$	222,700	$	207,700		7 %


	Six Months Ended March 31,
	Net Homes Sold						Value (In millions)						Average Selling Price
	2012		2011		% Change		2012		2011		% Change		2012		2011		% Change
East		1,120		1,003		12 %	$	269.1	$	223.4		20 %	$	240,300	$	222,700		8 %
Midwest		615		455		35 %		175.6		119.2		47 %		285,500		262,000		9 %
Southeast		2,394		1,912		25 %		481.1		365.0		32 %		201,000		190,900		5 %
South Central		3,316		3,005		10 %		603.9		523.0		15 %		182,100		174,000		5 %
Southwest		776		604		28 %		142.7		111.7		28 %		183,900		184,900		(1)%
West		1,472		1,327		11 %		464.3		390.3		19 %		315,400		294,100		7 %

		9,693		8,306		17 %	$	2,136.7	$	1,732.6		23 %	$	220,400	$	208,600		6 %

		000000000		000000000	000000000		000000000		000000000	000000000		000000000		000000000
	Sales Order Cancellations
	Three Months Ended March 31,
	Cancelled Sales Orders					Value (In millions)					Cancellation Rate (2)
	2012		2011			2012		2011			2012		2011
East		190		161		$	41.3	$	33.3			24%		21%
Midwest		63		43			17.2		11.5			14%		14%
Southeast		445		429			82.0		78.1			23%		27%
South Central		553		675			96.0		114.2			22%		27%
Southwest		179		172			29.7		29.0			25%		33%
West		199		172			60.7		52.4			19%		19%

		1,629		1,652		$	326.9	$	318.5			22%		25%


	Six Months Ended March 31,
	Cancelled Sales Orders					Value (In millions)					Cancellation Rate (2)
	2012		2011			2012		2011			2012		2011
East		327		304		$	71.3	$	64.7			23%		23%
Midwest		94		80			26.3		20.7			13%		15%
Southeast		801		684			146.3		124.5			25%		26%
South Central		1,062		1,271			186.1		215.9			24%		30%
Southwest		330		302			54.3		51.6			30%		33%
West		342		349			107.9		102.9			19%		21%

		2,956		2,990		$	592.2	$	580.3			23%		26%

(1)

Net sales orders represent the number and dollar value of new sales contracts executed with customers (gross sales orders), net of cancelled sales orders.

(2)

Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.

-36-

Net Sales Orders

The value of net sales orders increased 28%, to $1,313.5 million (5,899 homes) for the three months ended March 31, 2012, from $1,026.9 million (4,943 homes) for the same period of 2011. The value of net sales orders increased 23%, to $2,136.7 million (9,693 homes) for the six months ended March 31, 2012, from $1,732.6 million (8,306 homes) for the same period of 2011. The number of net sales orders increased 19% and 17% during the three and six-month periods ended March 31, 2012, respectively, compared to the prior year periods reflecting an increase in sales demand for our homes. While we believe the improvement in our sales as compared to the prior year reflects some modest improvement in new home demand and further stabilization of market conditions, overall demand for new homes remains at a low level.

In comparing the three and six-month periods ended March 31, 2012 to the same periods of 2011, the volume of net sales orders increased in all six of our market regions. The largest percentage increases occurred in our Midwest, Southwest and Southeast regions as a result of improved market conditions, particularly in Chicago, Denver and Phoenix. Changes in the value of net sales orders were generally due to the change in the number of homes sold in each respective region and, to a lesser extent, to increases in the average selling price of those homes, reflective of more stable market conditions. In our East region, the increase in average selling price in the current quarter had a greater effect on the value of net sales than the change in the number of homes sold. Our future sales volumes will depend on the strength of the overall economy, employment levels and our ability to successfully implement our operating strategies in each of our markets.

The average price of our net sales orders in the three and six months ended March 31, 2012 was $222,700 and $220,400, respectively, notably higher than the averages of $207,700 and $208,600 in the comparable periods of 2011. The largest percentage increases were in our Midwest and East regions and were primarily due to adjusting our product mix, with higher priced communities representing more of our sales. We continue to adjust our product mix, geographic mix and pricing within our homebuilding markets to respond to market conditions.

Our sales order cancellation rates (cancelled sales orders divided by gross sales orders for the period) during the three and six months ended March 31, 2012 were 22% and 23%, respectively, compared to 25% and 26% during the same periods of 2011. While our cancellation rates have improved recently, they remain slightly higher than they were prior to the current housing downturn, and are mainly reflective of tight mortgage lending standards.

Sales Order Backlog

As of March 31,

Homes in Backlog

Value (In millions)

Average Selling Price

2012

2011

% Change

2012

2011

% Change

2012

2011

% Change

East

680

608

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