Edgar Filing: HORTON D R INC /DE/

2012.9.30 - 10K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________________________________________________________________________

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2012

Commission file number 1-14122

___________________________________________________________________________________________________________________

D.R. Horton, Inc.

(Exact name of registrant as specified in its charter)



Delaware (State or other jurisdiction of incorporation or organization)		75-2386963 (I.R.S. Employer Identification No.)
301 Commerce Street, Suite 500, Fort Worth, Texas (Address of principal executive offices)		76102 (Zip Code)

(817) 390-8200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share		New York Stock Exchange
2.00% Convertible Senior Notes due 2014		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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



Large accelerated filer 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

As of March 31, 2012, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $4,399,754,000 based on the closing price as reported on the New York Stock Exchange.

As of November 9, 2012, there were 328,166,547 shares of the registrant’s common stock, par value $.01 per share, issued and 320,966,476 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2013 Annual Meeting of Stockholders are incorporated herein by reference (to the extent indicated) in Part III.

D.R. HORTON, INC. AND SUBSIDIARIES

2012 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



		Page
PART I
ITEM 1.	Business	1
ITEM 1A.	Risk Factors	10
ITEM 1B.	Unresolved Staff Comments	19
ITEM 2.	Properties	19
ITEM 3.	Legal Proceedings	19
ITEM 4.	Mine Safety Disclosures	19

PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
ITEM 6.	Selected Financial Data	22
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	58
ITEM 8.	Financial Statements and Supplementary Data	60
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	101
ITEM 9A.	Controls and Procedures	101
ITEM 9B.	Other Information	101

PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	102
ITEM 11.	Executive Compensation	102
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	102
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	102
ITEM 14.	Principal Accountant Fees and Services	102

PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	103
SIGNATURES		109
EX-12.1
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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PART I


ITEM 1.	BUSINESS

D.R. Horton, Inc. is one of the largest homebuilding companies in the United States. We construct and sell homes through our operating divisions in 26 states and 77 metropolitan markets of the United States, primarily under the name of D.R. Horton, America’s Builder. Our common stock is included in the S&P 500 Index and listed on the New York Stock Exchange under the ticker symbol “DHI.” Unless the context otherwise requires, the terms “D.R. Horton,” the “Company,” “we” and “our” used herein refer to D.R. Horton, Inc., a Delaware corporation, and its predecessors and subsidiaries.

Donald R. Horton began our homebuilding business in 1978. In 1991, we were incorporated in Delaware to acquire the assets and businesses of our predecessor companies, which were residential home construction and development companies owned or controlled by Mr. Horton. In 1992, we completed our initial public offering of our common stock. Our company’s growth over the years was achieved by investing available capital into our existing homebuilding markets and into start-up operations in new markets. Additionally, we acquired other homebuilding companies, which strengthened our position in existing markets and expanded our geographic presence and product offerings in other markets. Our homes generally range in size from 1,000 to 4,000 square feet and in price from $100,000 to $600,000. For the year ended September 30, 2012, we closed 18,890 homes with an average sales price of approximately $223,300.

Through our financial services operations, we provide mortgage financing and title agency services to homebuyers in many of our homebuilding markets. DHI Mortgage, our 100% owned subsidiary, provides mortgage financing services primarily to our homebuilding customers and generally sells the mortgages it originates and the related servicing rights to third-party purchasers. DHI Mortgage originates loans in accordance with purchaser guidelines and 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.

Our financial reporting segments consist of six homebuilding segments and a financial services segment. Our homebuilding operations are the most substantial part of our business, comprising approximately 97% of consolidated revenues, which totaled $4.4 billion in fiscal 2012. Our homebuilding operations generate most of their revenues from the sale of completed homes, with a lesser amount from the sale of land and lots. In addition to building traditional single-family detached homes, we also build attached homes, such as town homes, duplexes, triplexes and condominiums. The sale of detached homes generated approximately 90% of home sales revenues in fiscal 2012. Our financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services.

Available Information

We make available, as soon as reasonably practicable, on our Internet website all of our reports required to be filed with the Securities and Exchange Commission (SEC). These reports can be found on the “Investors” page of our website under “SEC Filings” and include our annual and quarterly reports on Form 10-K and 10-Q (including related filings in XBRL format), current reports on Form 8-K, beneficial ownership reports on Forms 3, 4, and 5, proxy statements and amendments to such reports. Our SEC filings are also available to the public on the SEC’s website at www.sec.gov, and the public may read and copy any document we file at the SEC’s public reference room located at 100 F Street NE, Washington, D.C. 20549. Further information on the operation of the public reference room can be obtained by calling the SEC at 1-800-SEC-0330. In addition to our SEC filings, our corporate governance documents, including our Code of Ethical Conduct for the CEO, CFO and Senior Financial Officers, are available on the “Investors” page of our website under “Corporate Governance.” Our stockholders may also obtain these documents in paper format free of charge upon request made to our Investor Relations department.

Our principal executive offices are located at 301 Commerce Street, Suite 500, Fort Worth, Texas 76102. Our telephone number is (817) 390-8200, and our Internet website address is www.drhorton.com. Information on or linked to our website is not incorporated by reference into this annual report on Form 10-K unless expressly noted.

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Operating Strategy and Structure

For a substantial part of our company's existence, we achieved significant growth and profitability through an operating strategy focused on capturing greater market share while maintaining a strong balance sheet. To execute our strategy, we invested available capital in our existing homebuilding markets, opportunistically entered new markets and acquired other homebuilding companies.

During the industry downturn over the last several years, we managed our business to generate a significant amount of cash from operations. We used this cash to reduce our outstanding debt and increase our cash balances, which provided us with a strong liquidity position, lower balance sheet leverage and improved operational flexibility. We also implemented restrictive land and lot inventory investment guidelines and did not increase our inventory levels from 2007 through 2011.

Although new home demand remains at low historical levels, in fiscal 2012 we saw an improvement in demand that has positively impacted our profitability and our confidence in the new home market. We have begun increasing our capital investments in land, lot and home inventories to expand our operations, while controlling our construction costs and selling and overhead expenses to increase our profitability. We expect, however, that the recent improvement in conditions will continue to be uneven across our markets in the near term. Our strong balance sheet and liquidity provide us flexibility to execute the appropriate operating strategy in each of our markets based on the relative strength or weakness of housing conditions in each market.

Geographic Diversity

Our homebuilding business began in the Dallas/Fort Worth area, which is still one of our largest local homebuilding operations and home to our corporate headquarters. We significantly expanded our business across the United States by entering additional markets through start-up operations and acquisitions, and we currently operate in 26 states and 77 markets. This provides us with geographic diversification in our homebuilding inventory investments and our sources of revenues and earnings. We believe our diversification strategy helps to mitigate the effects of local and regional economic cycles and enhances our long-term potential.

Economies of Scale

We are the largest homebuilding company in the United States in terms of number of homes closed in fiscal 2012. By the same measure, we are also one of the five largest builders in many of our markets in fiscal 2012. We believe that our national, regional and local scale of operations provides us with benefits that may not be available in the same degree to some other smaller homebuilders, such as:


•	Greater access to and lower cost of capital, due to our strong balance sheet and our lending and capital markets relationships;


•	Negotiation of volume discounts and rebates from national, regional and local materials suppliers and lower labor rates from certain subcontractors; and


•	Enhanced leverage of our general and administrative activities, which allows us greater flexibility to compete for greater market share in each of our markets.

Decentralized Operations

We decentralize our homebuilding activities to give operating flexibility to our local division presidents on certain key operating decisions. At September 30, 2012, we had 32 separate homebuilding operating divisions, many of which operate in more than one market area. Generally, each operating division consists of a division president; land entitlement, acquisition and development personnel; a sales manager and sales personnel; a construction manager and construction superintendents; customer service personnel; a controller; a purchasing manager and office staff. We believe that division presidents and their management teams, who are familiar with local conditions, generally have better information on which to base many decisions regarding their operations. Our division presidents receive performance bonuses based upon achieving targeted financial and operating metrics related to their operating divisions.

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Operating Division Responsibilities

Each operating division is responsible for:


•	Site selection, which involves

— A feasibility study;

— Soil and environmental reviews;

— Review of existing zoning and other governmental requirements; and

— Review of the need for and extent of offsite work required to meet local building codes;


•	Negotiating lot option, land acquisition and related contracts;


•	Obtaining all necessary land development and home construction approvals;


•	Selecting land development subcontractors and ensuring their work meets our contracted scopes;


•	Selecting building plans and architectural schemes;


•	Selecting construction subcontractors and ensuring their work meets our contracted scopes;


•	Planning and managing homebuilding schedules;


•	Developing and implementing local marketing plans;


•	Determining the pricing for each house plan in a given community; and


•	Coordinating post-closing customer service and warranty repairs.

Centralized Controls

We centralize the key risk elements of our homebuilding business through our regional and corporate offices. We have four separate homebuilding regional offices. Generally, each regional office consists of a region president, legal counsel, a chief financial officer and limited office support staff. Each of our region presidents and their management teams are responsible for oversight of the operations of certain homebuilding operating divisions, including:


•	Review and approval of division business plans and budgets;


•	Review of all land and lot acquisition contracts;


•	Review of all business and financial analysis for potential land and lot inventory investments;


•	Oversight of land and home inventory levels; and


•	Review of major personnel decisions and division incentive compensation plans.

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Our corporate executives and corporate office departments are responsible for establishing our operational policies and internal control standards and for monitoring compliance with established policies and controls throughout our operations. The corporate office also has primary responsibility for direct management of certain key risk elements and initiatives through the following centralized functions:


•	Financing;


•	Cash management;


•	Risk and litigation management;


•	Allocation of capital;


•	Issuance and monitoring of inventory investment guidelines to our operating divisions;


•	Monitoring and analysis of margins, expenses, profitability and inventory levels;


•	Environmental assessments of land and lot acquisitions;


•	Approval and funding of land and lot acquisitions;


•	Accounting and management reporting;


•	Internal audit;


•	Information technology systems;


•	Administration of payroll and employee benefits;


•	Negotiation of national purchasing contracts;


•	Administration of customer satisfaction surveys and reporting of results; and


•	Approval of major personnel decisions and management incentive compensation plans.

Cost Management

We control overhead costs by centralizing certain administrative and accounting functions and by monitoring staffing and compensation levels of administrative and management personnel. We review other general and administrative costs to identify efficiencies and savings opportunities in our operating divisions and our regional and corporate offices. We also direct many of our promotional activities toward local real estate brokers, which we believe is an efficient use of our advertising expenditures.

We control construction costs by striving to design our homes efficiently and by obtaining competitive bids for construction materials and labor. We also seek to negotiate favorable pricing from our primary subcontractors and suppliers based on the volume of services and products we purchase from them on a local, regional and national basis. We compare our land development expenditures to budgeted amounts and monitor our construction costs on each house. We review our overall inventory levels, margins, expenses and profitability through our management information systems.

Acquisitions

We routinely evaluate opportunities to profitably expand our operations, including potential acquisitions of other homebuilding or related businesses. In fiscal 2012, we acquired the homebuilding operations of a company that operates in our Southeast region. Acquisitions of homebuilding businesses can provide us with immediate land and home inventories, as well as control of additional land and lot positions through option contracts. In addition, employees may have specialized knowledge of local market conditions, including existing relationships with municipalities, land owners, developers, subcontractors and suppliers. These inventory positions and local market knowledge and relationships could take us several years to develop through our own start-up efforts. We seek to limit the risks associated with acquiring other companies by conducting extensive operational, financial and legal due diligence on each acquisition and by performing financial analysis to determine that each acquisition will have a positive impact on our earnings within an acceptable period of time.

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Markets

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		Midland/Odessa
	Wilmington		Rio Grande Valley
Pennsylvania	Lancaster		San Antonio
	Philadelphia
South Carolina	Charleston		Southwest Region
	Columbia	Arizona	Phoenix
	Greenville		Tucson
	Hilton Head	New Mexico	Albuquerque
	Myrtle Beach
Virginia	Northern Virginia		West Region
		California	Bay Area
	Midwest Region		Central Valley
Colorado	Colorado Springs		Imperial Valley
	Denver		Los Angeles County
	Fort Collins		Riverside County
Illinois	Chicago		Sacramento
Minnesota	Minneapolis/St. Paul		San Bernardino County
			San Diego County
	Southeast Region		Ventura County
Alabama	Birmingham	Hawaii	Hawaii
	Huntsville		Maui
	Mobile		Oahu
	Montgomery	Idaho	Boise
	Tuscaloosa	Nevada	Las Vegas
Florida	Fort Myers/Naples		Reno
	Jacksonville	Oregon	Portland
	Lakeland	Utah	Salt Lake City
	Melbourne/Vero Beach	Washington	Seattle/Tacoma
	Miami/West Palm Beach		Vancouver
	Orlando
	Pensacola/Panama City
	Tampa/Sarasota
	Volusia County
Georgia	Atlanta
	Middle Georgia
Mississippi	Gulf Coast

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When evaluating new or existing homebuilding markets for purposes of capital allocation, we consider local, market-specific factors, including among others:


•	Economic conditions;


•	Employment levels and job growth;


•	Income level of potential homebuyers;


•	Local housing affordability and typical mortgage products utilized;


•	Market for homes at our targeted price points;


•	Availability of land and lots on acceptable terms;


•	Land entitlement and development processes;


•	New and secondary home sales activity;


•	Competition; and


•	Prevailing housing products, features, cost and pricing.

Land Policies

We acquire land after we have completed due diligence and generally after we have obtained the rights (known as entitlements) to begin development or construction work resulting in an acceptable number of residential lots. Before we acquire lots or tracts of land, we will, among other things, complete a feasibility study, which includes soil tests, independent environmental studies and other engineering work. We also evaluate the status of necessary zoning and other governmental entitlements required to develop and use the property for home construction. Although we purchase and develop land primarily to support our homebuilding activities, we may sell land and lots to other developers and homebuilders where we have excess land and lot positions.

We also enter into land/lot option contracts, in which we obtain the right, but generally not the obligation, to buy land or lots at predetermined prices on a defined schedule commensurate with anticipated home closings or planned development. Our option contracts generally are non-recourse, which limits our financial exposure to our earnest money deposited with land and lot sellers and any pre-acquisition due diligence costs we incurred. This enables us to control land and lot positions with limited capital investment, which substantially reduces the risks associated with land ownership and development.

Almost all of our land and lot positions are acquired directly by us. We are a party to a small number of joint ventures, all of which are consolidated in our financial statements.

We attempt to mitigate our exposure to real estate inventory risks by:


•	Managing our supply of land/lots controlled (owned and optioned) in each market based on anticipated future home closing levels;


•	Monitoring local market and demographic trends, housing preferences and related economic developments, including the identification of desirable housing submarkets based on the quality of local schools, new job opportunities, local growth initiatives and personal income trends;


•	Utilizing land/lot option contracts, where possible;


•	Seeking to acquire developed lots which are substantially ready for home construction, where possible;


•	Limiting the size of acquired land parcels to smaller tracts, where possible, and controlling our investments in land acquisition, land development and housing inventory to match the expected housing demand in each of our operating markets;


•	Generally commencing construction of custom features or optional upgrades on homes under contract only after the buyer’s receipt of mortgage approval and receipt of satisfactory deposits from the buyer; and


•	Monitoring and managing the number of speculative homes (homes under construction without an executed sales contract) built in each subdivision.

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Construction

Our home designs are selected or prepared in each of our markets to appeal to the tastes and preferences of local homebuyers in each community. We also offer optional interior and exterior features to allow homebuyers to enhance the basic home design and to allow us to generate additional revenues from each home sold. We continually adjust our product offerings to address our customers’ expectations for affordability, home size and features.

Substantially all of our construction work is performed by subcontractors. Subcontractors typically are selected after a competitive bidding process and retained for a specific subdivision or series of house plans pursuant to a contract that obligates the subcontractor to complete construction at an agreed-upon price. Agreements with the subcontractors and suppliers we use generally are negotiated for each subdivision or series of house plans. We employ construction superintendents to monitor homes under construction, participate in major design and building decisions, coordinate the activities of subcontractors and suppliers, review the work of subcontractors for quality and cost controls and monitor compliance with zoning and building codes. In addition, our construction superintendents play a significant role in working with our homebuyers by assisting with option selection and home modification decisions, educating buyers on the construction process and instructing buyers on post-closing home maintenance.

Construction time for our homes depends on the weather, availability of labor, materials and supplies, size of the home, and other factors. We typically complete the construction of a home within three to six months.

We typically do not maintain significant inventories of construction materials, except for work in progress materials for homes under construction. Generally, the construction materials used in our operations are readily available from numerous sources. We have contracts exceeding one year with certain suppliers of our building materials that are cancelable at our option with 30 days notice. As housing demand and activity began to increase in fiscal 2012, we experienced minor shortages and delays of materials and labor in some of our operating markets which we expect to be temporary and which have not had a material effect on our consolidated operating results.

Marketing and Sales

We market and sell our homes through commissioned employees and independent real estate brokers. We typically conduct home sales from sales offices located in furnished model homes in each subdivision, and we typically do not offer our model homes for sale until the completion of a subdivision. Our sales personnel assist prospective homebuyers by providing them with floor plans, price information, tours of model homes and assisting them with the selection of options and other custom features. We train and inform our sales personnel as to the availability of financing, construction schedules, and marketing and advertising plans. As our customers are typically first-time or move-up homebuyers, we attempt to adjust our product mix and pricing within our homebuilding markets to keep our homes affordable. As market conditions warrant, we may provide potential homebuyers with one or more of a variety of incentives, including discounts and free upgrades, to be competitive in a particular market.

We market our homes and communities to prospective homebuyers and real estate brokers in our local markets through electronic media, including email, social networking sites and our company Internet website, as well as brochures, flyers, newsletters and promotional events. We also use billboards, radio, television and newspaper advertising as necessary in each local market. We attempt to position our subdivisions in locations that are desirable to potential homebuyers and convenient to or visible from local traffic patterns, which helps to minimize advertising costs. We believe that model homes play a substantial role in our marketing efforts and therefore expend significant effort to create an attractive atmosphere in our model homes.

We also build speculative homes in most of our subdivisions. These homes enhance our marketing and sales efforts to prospective homebuyers who are relocating to these markets, as well as to independent brokers, who often represent homebuyers requiring a completed home within a short time frame. We determine our speculative homes strategy in each market based on local market factors, such as new job growth, the number of job relocations, housing demand and supply, seasonality, current sales contract cancellation trends and our past experience in the market. We maintain a level of speculative home inventory in each subdivision based on our current and planned sales pace, and we monitor and adjust speculative home inventory on an ongoing basis as conditions warrant. Speculative homes help to provide us with opportunities to sell additional homes at a profit and generate positive returns and cash flows on our inventory of owned lots.

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Our sales contracts require an earnest money deposit which varies in amount among our markets and subdivisions. Additionally, customers are generally required to pay additional deposits when they select options or upgrade features for their homes. Most of our sales contracts stipulate that when customers cancel their contracts with us, we have the right to retain their earnest money and option deposits; however, our operating divisions often choose to refund the deposit. Our sales contracts also include a financing contingency which permits customers to cancel and receive a refund of their deposit if they cannot obtain mortgage financing at prevailing or specified interest rates within a specified period. Our contracts may include other contingencies, such as the sale of an existing home. As a percentage of gross sales orders, cancellations of sales contracts in fiscal 2012 were 24%, compared to 27% in fiscal 2011. The length of time between the signing of a sales contract for a home and delivery of the home to the buyer (closing) is generally from two to six months.

Customer Service and Quality Control

Our operating divisions are responsible for pre-closing quality control inspections and responding to customers’ post-closing needs. We believe that a prompt and courteous response to homebuyers’ needs during and after construction reduces post-closing repair costs, enhances our reputation for quality and service and ultimately leads to repeat and referral business from the real estate community and homebuyers. We typically provide our homebuyers with a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems, a two-year limited warranty on major mechanical systems, and a one-year limited warranty on other construction components. The subcontractors who perform the actual construction also provide us with warranties on workmanship and are generally prepared to respond to us and the homeowner promptly upon request. In addition, some of our suppliers provide manufacturer’s warranties on specified products installed in the home.

Sales Order Backlog

At September 30, 2012, the value of our backlog of sales orders was $1,667.9 million (7,240 homes), an increase of 61% from $1,036.2 million (4,854 homes) at September 30, 2011. The average sales price of homes in backlog was $230,400 at September 30, 2012, up 8% from the $213,500 average at September 30, 2011. Sales order backlog represents homes under contract but not yet closed at the end of the period. Many of the contracts in our sales order backlog are subject to contingencies, including mortgage loan approval and buyers selling their existing homes, which can result in cancellations. A portion of the contracts in backlog will not result in closings due to cancellations. Substantially all of the homes in our sales backlog at September 30, 2012 are scheduled to close in fiscal year 2013. Further discussion of our backlog is provided in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of this annual report on Form 10-K.

Customer Mortgage Financing

We provide mortgage financing services principally to purchasers of our homes in the majority of our homebuilding markets through our 100% owned subsidiary, DHI Mortgage. DHI Mortgage assists in the sales transaction by coordinating the mortgage application, mortgage commitment and home closing processes to facilitate a timely and efficient home-buying experience for our buyers. DHI Mortgage originates mortgage loans for a substantial portion of our homebuyers. During the year ended September 30, 2012, DHI Mortgage provided mortgage financing services for approximately 59% of our total homes closed, and approximately 84% of DHI Mortgage’s loan volume related to homes closed by our homebuilding operations.

To limit the risks associated with our mortgage operations, DHI Mortgage originates loan products that we believe can be sold to third-party purchasers. DHI Mortgage generally sells the loans and their servicing rights to third-party purchasers shortly after origination with limited recourse provisions. In markets where we currently do not provide mortgage financing, we work with a variety of mortgage lenders that make available to homebuyers a range of mortgage financing programs.

Title Services

Through our subsidiary title companies, we serve as a title insurance agent in selected markets by providing title insurance policies, examination and closing services primarily to the purchasers of homes we build and sell. We currently assume little or no underwriting risk associated with these title policies.

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Employees

At September 30, 2012, we employed 3,477 persons, of whom 923 were sales and marketing personnel, 1,081 were executive, administrative and clerical personnel, 736 were involved in construction and 737 worked in mortgage and title operations. We believe that our relations with our employees are good.

Competition

The homebuilding industry is highly competitive. We compete with numerous other national, regional and local homebuilders for homebuyers, desirable properties, raw materials, skilled labor, employees, management talent and financing. We also compete with resales of existing homes, foreclosed homes and with the rental housing market. Our homes compete on the basis of quality, price, design, mortgage financing terms and location. Our financial services business competes with other mortgage lenders, including national, regional and local mortgage bankers and other financial institutions, some of which are subject to fewer government regulations or have greater access to capital, different lending criteria and broader product offerings.

Governmental Regulation and Environmental Matters

The homebuilding industry is subject to extensive and complex regulations. We and the subcontractors we use must comply with many federal, state and local laws and regulations, including zoning, density and development requirements, building, environmental, advertising, labor and real estate sales rules and regulations. These regulations and requirements affect the development process, as well as building materials to be used, building designs and minimum elevation of properties. Our homes are inspected by local authorities where required, and homes eligible for insurance or guarantees provided by the Federal Housing Administration (FHA) and the Department of Veteran Affairs (VA) are subject to inspection by them. These regulations often provide broad discretion to the administering governmental authorities. In addition, our new housing developments may be subject to various assessments for schools, parks, streets, utilities and other public improvements.

Our homebuilding operations are also subject to an extensive variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health, safety and the environment. The particular environmental laws for each site vary greatly according to location, environmental condition and the present and former uses of the site and adjoining properties.

Our mortgage company and title insurance agencies must comply with extensive federal and state laws and regulations as administered by numerous federal and state government agencies. These include eligibility and other requirements for participation in the programs offered by the FHA, VA, Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and the United States Department of Agriculture (USDA). These laws and regulations also require compliance with consumer lending laws and other regulations governing disclosure requirements, prohibitions against discrimination and real estate settlement procedures. These laws and regulations subject our operations to examination by the applicable agencies.

Seasonality

Prior to the recent downturn in the homebuilding industry which began to affect our seasonal patterns in fiscal 2007, we experienced relatively predictable seasonal variations in our quarterly operating results and capital requirements. We began to experience our normal seasonal pattern again in both fiscal 2011 and 2012. We generally have more homes under construction, close more homes and have greater revenues and operating income in the third and fourth quarters of our fiscal year. The seasonal activity increases our working capital requirements for our homebuilding operations during the third and fourth fiscal quarters and increases our funding requirements for the mortgages we originate in our financial services segment at the end of these quarters. As a result of seasonal activity, our quarterly results of operations and financial position at the end of a particular fiscal quarter are not necessarily representative of the balance of our fiscal year.

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ITEM 1A.	RISK FACTORS

Discussion of our business and operations included in this annual report on Form 10-K should be read together with the risk factors set forth below. They describe various risks and uncertainties we are or may become subject to, many of which are difficult to predict or beyond our control. These risks and uncertainties, together with other factors described elsewhere in this report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.

The homebuilding industry experienced a significant downturn in recent years. Although industry conditions improved during fiscal 2012, the general U.S. economy remains weak. A subsequent deterioration in industry conditions could adversely affect our business or financial results.

We experienced one of the most severe housing downturns in U.S. history from 2006 through 2011. During this downturn, we experienced significant reductions in our home sales and homebuilding revenues, and we incurred substantial asset impairments and write-offs. Our recent results and other national data indicate that the overall demand for new homes improved during fiscal 2012. However, both national new home sales and our company's home sales remain below historical levels due to the current weak U.S. economic conditions, the restrictive mortgage lending environment and variations in local housing market conditions. The U.S. economy could be negatively impacted in the short-term by potential changes in fiscal, tax and monetary policies currently under consideration by the federal government. Therefore, it remains uncertain whether homebuilding industry conditions will continue to improve, remain stable or deteriorate from current levels. A subsequent deterioration in industry conditions could adversely affect our business or financial results.

The homebuilding industry is cyclical and affected by changes in economic, real estate or other conditions that could adversely affect our business or financial results.

The homebuilding industry is cyclical and is significantly affected by changes in general and local economic and real estate conditions, such as:


•	employment levels;


•	availability of financing for homebuyers;


•	interest rates;


•	consumer confidence;


•	levels and prices of new homes for sale and alternatives to new homes, including foreclosed homes, homes held for sale by investors and speculators, other existing homes and rental properties;


•	demographic trends; and


•	housing demand.

Adverse changes in these general and local economic conditions or deterioration in the broader economy could have a negative impact on our business or financial results. Also, changes in these economic conditions may affect some of our regions or markets more than others. If adverse conditions affect any of our larger markets, they could have a proportionately greater impact on us than on some other homebuilding companies.

Weather conditions and natural disasters, such as hurricanes, tornadoes, earthquakes, wildfires, volcanic activity, droughts, and floods, can harm our homebuilding business. These can delay home closings, adversely affect the cost or availability of materials or labor, or damage homes under construction. The climates and geology of many of the states in which we operate, including California, Florida, Texas and other coastal areas, where we have some of our larger operations, present increased risks of adverse weather or natural disasters.

Deployments of U.S. military personnel to foreign regions, terrorist attacks, other acts of violence or threats to national security and any corresponding response by the United States or others, or related domestic or international instability, may adversely affect general economic conditions or cause a slowdown of the economy.

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As a result of the foregoing matters, potential customers may be less willing or able to buy our homes. In the future, our pricing and product strategies may also be limited by market conditions. We may be unable to change the mix of our home offerings, reduce the costs of the homes we build, offer more affordable homes or satisfactorily address changing market conditions in other ways without adversely affecting our profit margins. In addition, cancellations of home sales contracts in backlog may increase if homebuyers choose to not honor their contracts due to any of the factors discussed above.

Our financial services business is closely related to our homebuilding business, as it originates mortgage loans principally to purchasers of the homes we build. A decrease in the demand for our homes because of the foregoing matters will also adversely affect the financial results of this segment of our business. An increase in the default rate on the mortgages we originate may adversely affect our ability to sell the mortgages or the pricing we receive upon the sale of mortgages or may increase our recourse obligations for previous originations. We establish reserves related to mortgages we have sold; however, actual future obligations related to these mortgages could differ significantly from our currently estimated amounts.

Constriction of the credit markets could limit our ability to access capital and increase our costs of capital.

During the recent industry downturn we generated substantial operating cash flow, and we relied principally on our cash on hand to meet our working capital needs and repay outstanding indebtedness. During much of the downturn, the credit markets constricted and reduced some sources of liquidity that were previously available to us. There likely will be other periods in the future when financial market upheaval will limit our ability to access the public debt markets or obtain bank financing, or doing so will increase our cost of capital.

We recently obtained a revolving credit facility, which provides committed loan financing for five years in an amount currently totaling $600 million. Also, our mortgage subsidiary, DHI Mortgage, uses a mortgage repurchase facility to finance many of the loans it originates. The mortgage repurchase facility must be renewed annually, and it currently expires in March 2013. Adverse changes in market conditions could make the renewal of these facilities more difficult or could result in an increase in the cost of these facilities or a decrease in their committed availability. Such changes affecting our mortgage repurchase facility may also make it more difficult or costly to sell the mortgages that we originate.

We believe that our existing cash resources, our revolving credit facility and our mortgage repurchase facility provide sufficient liquidity to fund our near-term working capital needs and debt obligations. We regularly assess our projected capital requirements to fund future growth in our business, repay our longer-term debt obligations, and support our other general corporate and operational needs, and we regularly evaluate our opportunities to raise additional capital. As market conditions permit, we may issue new debt or equity securities through the public capital markets or obtain additional bank financing to fund our projected capital requirements or provide additional liquidity. Adverse changes in economic, homebuilding or capital market conditions could negatively impact our business, liquidity and financial results.

Reductions in the availability of mortgage financing and the liquidity provided by government-sponsored enterprises, the effects of government programs, a decrease in our ability to sell mortgage loans on attractive terms or an increase in mortgage interest rates could adversely affect our business or financial results.

During the last six years, the mortgage lending industry has experienced significant change and contraction. Credit requirements have tightened and investor demand for mortgage loans and mortgage-backed securities has been predominantly limited to securities backed by Fannie Mae, Freddie Mac or Ginnie Mae. As a result, it is difficult for some potential buyers to finance the purchase of our homes. Further tightening of credit requirements could adversely affect our business or financial results.

We believe that the liquidity provided by Fannie Mae, Freddie Mac and Ginnie Mae to the mortgage industry has been very important to the housing market. Fannie Mae and Freddie Mac have required substantial injections of capital from the federal government and may require additional government support in the future. There has been ongoing discussion by the government with regard to the long term structure and viability of Fannie Mae and Freddie Mac. These discussions include the downsizing of their portfolios as well as the tightening of guidelines for their loan products. In addition, increased lending volume and losses insured by the FHA have resulted in a reduction of its insurance fund. Any reduction in the availability of the financing or insuring provided by these institutions could adversely affect interest rates, mortgage availability and sales of new homes and mortgage loans. The FHA insures mortgage loans that generally have lower credit requirements and as a result, continue to be a particularly important source for financing the sale of our homes. In recent years, more restrictive guidelines have been placed on FHA insured loans, affecting minimum down payment and availability for condominium financing.

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Additional future restrictions may negatively affect the availability or affordability of FHA financing, which could adversely affect our ability to sell homes.

While the use of down payment assistance programs by our homebuyers has decreased significantly, some of our customers still utilize 100% financing through programs offered by the VA and United States Department of Agriculture (USDA). These government-sponsored loan programs are subject to changes in regulations, lending standards and government funding levels. There can be no assurances that these programs or other programs will continue to be available in our homebuilding markets or that they will be as attractive to our customers as the programs currently offered, which could negatively affect our sales.

The mortgage loans originated by our financial services operations are generally sold to third-party purchasers. During fiscal 2012, the majority of our mortgage loans were sold to one major financial institution that provided the best pricing and execution relative to other available loan purchasers. On an ongoing basis, we seek to establish additional loan purchase arrangements with multiple institutions. If we are unable to sell mortgage loans to additional purchasers on attractive terms, our ability to originate and sell mortgage loans at competitive prices could be limited, which would negatively affect our profitability.

Even if potential customers do not need financing, changes in the availability of mortgage products may make it more difficult for them to sell their current homes to potential buyers who need financing.

Mortgage rates are currently at historically low levels. If interest rates increase, the costs of owning a home will be affected and could result in a decline in the demand for our homes.

The risks associated with our land and lot inventory could adversely affect our business or financial results.

Inventory risks are substantial for our homebuilding business. We have recently begun to increase our investments in land and lot inventories in response to increased demand for our homes. There are risks inherent in controlling, owning and developing land and if housing demand declines, we may own land or lots at a cost we will not be able to recover fully, or on which we cannot build and sell homes profitably. Also, there can be significant fluctuations in the value of our owned undeveloped land, building lots and housing inventories related to changes in market conditions. As a result, our deposits for building lots controlled under option or similar contracts may be put at risk, we may have to sell homes or land for a lower profit margin or we may have to record inventory impairment charges on our developed and undeveloped land and lots. A significant deterioration in economic or homebuilding industry conditions may result in substantial inventory impairment charges.

Homebuilding is subject to home warranty and construction defect claims in the ordinary course of business that can be significant.

We are subject to home warranty and construction defect claims arising in the ordinary course of our homebuilding business. We rely on subcontractors to perform the actual construction of our homes, and in many cases, to select and obtain construction materials. Despite our detailed specifications and monitoring of the construction process, our subcontractors occasionally use improper construction processes or defective materials in the construction of our homes. When we find these issues, we repair them in accordance with our warranty obligations. We spend significant resources to repair items in homes we have sold to fulfill the warranties we issued to our homebuyers. Additionally, we are subject to construction defect claims which can be costly to defend and resolve in the legal system. Warranty and construction defect matters can also result in negative publicity in the media and on the internet which can damage our reputation and adversely affect our ability to sell homes.

Based on the large number of homes we have sold over the years, our potential liabilities related to warranty and construction defect claims are significant. As a consequence, we maintain product liability insurance, and we obtain indemnities and certificates of insurance from subcontractors covering claims related to their workmanship and materials. We establish warranty and other reserves for the homes we sell based on historical experience in our markets and our judgment of the qualitative risks associated with the types of homes built. Because of the uncertainties inherent to these matters, we cannot provide assurance that our insurance coverage, our subcontractor arrangements and our reserves will be adequate to address all of our future warranty and construction defect claims. Contractual indemnities can be difficult to enforce, we may be responsible for applicable self-insured retentions and some types of claims may not be covered by insurance or may exceed applicable coverage limits. Additionally, the coverage offered by and the availability of product liability insurance for

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construction defects is limited and costly. We have responded to increases in insurance costs and coverage limitations by increasing our self-insured retentions and claim reserves. There can be no assurance that coverage will not be further restricted or become more costly.

Supply shortages and other risks related to acquiring land, building materials and skilled labor could increase our costs and

delay deliveries.

The homebuilding industry has from time to time experienced significant difficulties that can affect the cost or timing of

construction, including:


•	difficulty in acquiring land suitable for residential building at affordable prices in desirable locations;


•	shortages of qualified trades people;


•	reliance on local subcontractors, manufacturers and distributors who may be inadequately capitalized;


•	shortages of materials; and


•	volatile increases in the cost of materials, particularly increases in the price of lumber, drywall and cement, which are significant components of home construction costs.

These factors may cause us to take longer or incur more costs to build our homes and adversely affect our revenues and margins. If the recent increases in home sales continue or accelerate in future periods, the potential risk of shortages in residential lots, labor and materials available to the homebuilding industry could increase in some markets where we operate.

We are required to obtain performance bonds, the unavailability of which could adversely affect our results of operations and cash flows.

We often are required to provide surety bonds to secure our performance or obligations under construction contracts, development agreements and other arrangements. Our ability to obtain surety bonds primarily depends upon our credit rating, financial condition, past performance and other factors, including the capacity of the surety market and the underwriting practices of surety bond issuers. The ability to obtain surety bonds also can be impacted by the willingness of insurance companies to issue performance bonds for construction and development activities. If we are unable to obtain surety bonds when required, our results of operations and cash flows could be adversely impacted.

Increases in the costs of owning a home could prevent potential customers from buying our homes and adversely affect our business or financial results.

Significant expenses of owning a home, including mortgage interest and real estate taxes, generally are deductible expenses for an individual’s federal, and in some cases state, income taxes, subject to various limitations under current tax law and policy. If the federal government or a state government changes its income tax laws, as has been discussed from time to time, to eliminate or substantially modify these income tax deductions, the after-tax cost of owning a new home would increase for many of our potential customers. The loss or reduction of homeowner tax deductions, if such tax law changes were enacted without offsetting provisions, could adversely impact demand for and sales prices of new homes.

In addition, increases in property tax rates by local governmental authorities, as experienced in some areas in response to reduced federal and state funding, could adversely affect the ability of potential customers to obtain financing or their desire to purchase new homes.

Governmental regulations and environmental matters could increase the cost and limit the availability of our development and homebuilding projects and adversely affect our business or financial results.

We are subject to extensive and complex regulations that affect land development and home construction, including zoning, density restrictions, building design and building standards. These regulations often provide broad discretion to the administering governmental authorities as to the conditions we must meet prior to development or construction being approved, if approved at all. We are subject to determinations by these authorities as to the adequacy of water or sewage facilities, roads or other local services. New housing developments may also be subject to various assessments for schools, parks, streets and other public improvements. In addition, in many markets government authorities have implemented no growth or growth control

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initiatives. Any of these can limit, delay or increase the costs of development or home construction.

We are also subject to a significant number and variety of local, state and federal laws and regulations concerning protection of health, safety, labor standards and the environment. The impact of environmental laws varies depending upon the prior uses of the building site or adjoining properties and may be greater in areas with less supply where undeveloped land or desirable alternatives are less available. These matters may result in delays, may cause us to incur substantial compliance, remediation, mitigation and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or areas. Government agencies also routinely initiate audits, reviews or investigations of our business practices to ensure compliance with these laws and regulations, which can cause us to incur costs or create other disruptions in our business that can be significant.

The subcontractors we rely on to perform the actual construction of our homes are also subject to a significant number of local, state and federal laws and regulations, including laws involving matters that are not within our control. If our subcontractors fail to comply with all applicable laws, we can suffer reputational damage, and may be exposed to possible liability.

We are also subject to an extensive number of laws and regulations because our common stock and debt securities are publicly traded in the capital markets. These regulations govern our communications with our shareholders and the capital markets, our financial statement disclosures and our legal processes, and they also impact the work required to be performed by our independent registered public accounting firm and our legal counsel. Changes in these laws and regulations, including the subsequent implementation of rules by the administering government authorities, can require us to incur additional compliance costs, and such costs can be significant.

In August 2012, the SEC adopted a final rule on conflict minerals as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) which was signed into law in July 2010. The rule requires an entity to file a new form to publicly disclose its use of conflict minerals, defined as tantalum, tin, tungsten and gold, if these minerals are necessary to the functionality or production of products it manufactures. Additional reporting is required if it is determined that the conflict minerals were mined from the Democratic Republic of the Congo (DRC) or adjoining countries. This new rule will require us to perform due diligence to determine whether our suppliers use any of these materials in their production processes and the sources of such materials, which will increase our administrative costs. These new requirements could also adversely affect the sourcing, supply and costs of materials used in the construction of our homes.

Governmental regulation of our financial services operations could adversely affect our business or financial results.

Our financial services operations are subject to a significant number of federal, state and local laws and regulations. These include eligibility requirements for participation in federal loan programs, compliance with consumer lending laws and other regulations governing disclosure requirements, prohibitions against discrimination and real estate settlement procedures. Our financial services operations are subject to examination by federal, state and local government agencies. These laws, regulations and examinations may limit our ability to provide mortgage financing or title services to potential purchasers of our homes.

The Dodd-Frank Act provides for a number of new requirements relating to residential mortgage lending practices, many of which are to be developed further by rules enacted by the appropriate government agencies responsible for regulating the mortgage industry. Many of these rules have not yet been finalized or implemented. These include, among others, minimum standards for mortgages and lender practices in making mortgages, limitations on certain fees and incentive arrangements, retention of credit risk and remedies for borrowers in foreclosure proceedings. The effect of such provisions on our financial services business will depend on the rules that are ultimately enacted. Key decisions that have yet to be made concern the characteristics of mortgages that would be exempt from risk retention, how risk retention requirements will be implemented and how derivative trading will be impacted. These factors could restrict the availability of and increase the cost of mortgage credit in addition to increasing the general and administrative costs within our financial services operations.

The turmoil caused by the significant number of defaults and resulting foreclosures during the recent downturn has encouraged consumer lawsuits and the investigation of financial services industry practices by governmental authorities. These investigations may include the examination of consumer lending practices, real estate settlement procedures, foreclosure and servicing policies or other practices in the financial services segments of homebuilding companies. These governmental inquiries could result in changes in regulations or homebuilding industry practices, and they could adversely affect the costs and potential profitability of homebuilding companies. Additionally, if pending legislation is enacted as currently proposed,

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regulations that favor financial services businesses that are not affiliated with homebuilding companies will place our financial services business at a competitive disadvantage in the marketplace, which would adversely affect its profitability.

Our debt obligations and our ability to comply with related covenants, restrictions or limitations could adversely affect our financial condition.

As of September 30, 2012, our consolidated debt was $2,493.1 million. We have $1,147.5 million principal amount of our debt maturing before the end of fiscal 2014, of which $500 million is in the form of convertible senior notes that will mature on May 15, 2014 and are convertible into approximately 38.3 million shares of our common stock at a price of $13.06 per share at maturity. The indentures governing our senior and convertible senior notes do not restrict the incurrence of future unsecured debt by us or our homebuilding subsidiaries or the incurrence of secured or unsecured debt by our financial services subsidiaries, and the agreement governing our revolving credit facility allows us to incur a substantial amount of future unsecured debt. Such instruments also permit us and our homebuilding subsidiaries to incur significant amounts of additional secured debt.

Possible consequences. The amount and the maturities of our debt could have important consequences. For example, they could:


•	require us to dedicate a substantial portion of our cash flow from operations to payment of our debt and reduce our ability to use our cash flow for other operating or investing purposes;


•	limit our flexibility in planning for, or reacting to, the changes in our business;


•	limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service requirements or other requirements;


•	place us at a competitive disadvantage if we have more debt than some of our competitors; and


•	make us more vulnerable to downturns in our business or general economic conditions.

In addition, the magnitude of our debt and the restrictions imposed by the instruments governing these obligations expose us to additional risks, including:

Dependence on future performance. Our ability to meet our debt service and other obligations and the financial covenants under our revolving credit facility will depend, in part, upon our future financial performance. Our future results are subject to the risks and uncertainties described in this report. Our revenues and earnings vary with the level of general economic activity in the markets we serve. Our businesses are also affected by financial, political, business and other factors, many of which are beyond our control. The factors that affect our ability to generate cash can also affect our ability to raise additional funds for these purposes through the sale of debt or equity, the refinancing of debt or the sale of assets. Changes in prevailing interest rates may affect our ability to meet our debt service obligations, because borrowings under our revolving credit facility and mortgage repurchase facility bear interest at floating rates.

Revolving credit facility. Our revolving credit facility contains financial covenants requiring the maintenance of a minimum level of tangible net worth, a maximum allowable leverage ratio and a borrowing base restriction if our leverage ratio exceeds a certain level. A failure to comply with these requirements could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. Any difficulty experienced in complying with these covenants could make renewal of the facility more difficult or costly.

Mortgage repurchase facility and other restrictions. The mortgage repurchase facility for our mortgage subsidiary requires the maintenance of a minimum level of tangible net worth, a maximum allowable ratio of debt to tangible net worth and a minimum level of liquidity by our mortgage subsidiary. A failure to comply with these requirements could allow the lending bank to terminate the availability of funds to the mortgage subsidiary or cause its debt to become due and payable prior to maturity. Any difficulty experienced in complying with these covenants could make the renewal of the mortgage repurchase facility more difficult or costly.

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In addition, although our financial services business is conducted through subsidiaries that are not restricted by our indentures, the ability of our mortgage subsidiary to provide funds to our homebuilding operations would be restricted in the event such distribution of funds would cause an event of default under the mortgage repurchase facility or if an event of default had occurred under this facility. Moreover, our right to receive assets from the mortgage subsidiary upon its liquidation or recapitalization will be subject to the prior claims of its creditors. Any claims we may have to funds from this segment would be subordinate to subsidiary indebtedness to the extent of any security for such indebtedness and to any indebtedness otherwise recognized as senior to our claims.

Changes in debt ratings. Our senior unsecured debt is currently rated at below investment grade. Any lowering of our debt ratings could make accessing the public capital markets or obtaining additional credit from banks more difficult and/or more expensive.

Change of control purchase options and change of control default. If a change of control occurs as defined in the indentures governing $455.5 million principal amount of our senior notes as of September 30, 2012, we would be required to offer to purchase such notes at 101% of their principal amount, together with all accrued and unpaid interest, if any. In addition, upon the occurrence of both a change of control and a ratings downgrade event, each as defined in the indenture governing $700 million principal amount of our senior notes as of September 30, 2012, we will be required in certain circumstances to offer to repurchase such notes at 101% of their principal amount, together with all accrued and unpaid interest, if any. If a fundamental change, including a change of control, occurs as defined in the indenture governing our convertible senior notes, which constituted $500 million principal amount as of September 30, 2012, we would be required to offer to purchase such notes at par, together with all accrued and unpaid interest, if any. Moreover, a change of control (as defined in the revolving credit facility) would constitute an event of default under the revolving credit facility, which could result in the acceleration of any borrowings outstanding under our revolving credit facility and the termination of the commitments thereunder. If more than $50 million outstanding under the revolving credit facility were accelerated and such acceleration were not rescinded within 30 days, an event of default would result under the indentures governing our senior notes, entitling holders of at least 25 percent in principal amount of the relevant series of notes then outstanding by notice to us and the trustee, to declare all such notes to be due and payable immediately. If purchase offers were required under the indentures for such notes or the borrowings under our revolving credit facility or senior notes were accelerated, we can give no assurance that we would have sufficient funds to pay the amounts that we would be required to purchase.

Homebuilding and financial services are very competitive industries, and competitive conditions could adversely affect our business or financial results.

The homebuilding industry is highly competitive. Homebuilders compete not only for homebuyers, but also for desirable properties, financing, raw materials and skilled labor. We compete with local, regional and national homebuilders, often within larger subdivisions designed, planned and developed by such homebuilders. We also compete with existing home sales, foreclosures and rental properties. The competitive conditions in the homebuilding industry can negatively impact our sales volumes, selling prices and incentive levels, reduce our profit margins, and cause impairments in the value of our inventory or other assets. Competition can also affect our ability to acquire suitable land, raw materials and skilled labor at acceptable prices or terms, or cause delays in the construction of our homes.

Our financial services business competes with other mortgage lenders, including national, regional and local mortgage banks and other financial institutions, some of which are subject to fewer government regulations. Mortgage lenders who are subject to fewer regulations or have greater access to capital or different lending criteria may be able to offer more attractive financing to potential customers.

Our homebuilding and financial services businesses compete with other companies, both from within and outside of these industries, to attract and retain highly skilled and experienced employees, managers and executives. Competition for the services of these individuals will likely increase as business conditions improve in the homebuilding and financial services industries or in the general economy. If we are unable to attract and retain key employees, managers or executives, our business could be adversely impacted.

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We cannot make any assurances that any future growth strategies will be successful or not expose us to additional risks.

Although we have focused on increasing our market share through internal growth in recent years, we acquired the homebuilding operations of a small company in fiscal 2012 and may make strategic acquisitions of other homebuilding companies or their assets in the future. Successful strategic acquisitions require the integration of operations and management. Although we believe that we have been successful in the past, we can give no assurance that we will be able to successfully identify, acquire and integrate strategic acquisitions in the future. Acquisitions can result in the dilution of existing stockholders if we issue our common stock as consideration, or reduce our liquidity or increase our debt if we fund them with cash. In addition, acquisitions can expose us to valuation risks, including the risk of writing off goodwill or impairing inventory and other assets related to such acquisitions. The risk of goodwill and other asset impairments increases during a cyclical housing downturn when our profitability may decline, as evidenced by the goodwill and other asset impairment charges we recognized during the recent downturn. In addition, we may not be able to successfully implement our operating or internal growth strategies within our existing markets.

Our business and financial results could be adversely affected by significant inflation or deflation.

Inflation can adversely affect us by increasing costs of land, materials and labor. In addition, significant inflation is often accompanied by higher interest rates, which have a negative impact on housing demand. In a highly inflationary environment, depending on industry and other economic conditions, we may be precluded from raising home prices enough to keep up with the rate of inflation, which could reduce our profit margins. Moreover, with inflation, the costs of capital increase and the purchasing power of our cash resources can decline. Current or future efforts by the government to stimulate the economy may increase the risk of significant inflation and its adverse impact on our business or financial results.

Alternatively, a significant period of deflation could cause a decrease in overall spending and borrowing levels. This could lead to a further deterioration in economic conditions, including an increase in the rate of unemployment. Deflation could also cause the value of our inventories to decline or reduce the value of existing homes below the related mortgage loan balance, which could potentially increase the supply of existing homes and have a negative impact on our results of operations.

Our deferred income tax asset may not be fully realizable.

As of September 30, 2012, we had a deferred income tax asset, net of deferred tax liabilities, of $751.4 million, against which we provided a valuation allowance of $41.9 million. The realization of all or a portion of our deferred income tax asset is dependent upon the generation of future taxable income during the statutory carryforward periods and in the jurisdictions in which the related temporary differences become deductible. We have provided the valuation allowance against our net deferred income tax asset because it is more likely than not that a portion of our state net operating loss carryforwards will not be realized due to the more limited carryforward periods that exist in certain states. Our ability to utilize our net operating losses to reduce future income tax obligations would be limited if we experienced an ownership change as defined by Section 382 of the Internal Revenue Code. Under the rules, such an ownership change is generally any change in ownership of more than 50% of its stock within a rolling three-year period, as calculated in accordance with the rules. The rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning directly or indirectly 5% or more of the stock of the company and any change in ownership arising from new issuances of stock by the company. If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our common stock, both the amount of and our ability to use any of our net operating loss carryforwards or tax credit carryforwards at the time of ownership change would be subject to the limitations of Section 382. In addition, these limitations may affect the expiration date of any net operating loss carryforwards or tax credit carryforwards, and we may not be able to use them before they expire. This could adversely affect our financial position, results of operations and cash flow. We do not believe we have experienced such an ownership change as of September 30, 2012. However, the amount by which our ownership may change in the future is affected by purchases and sales of stock by 5% stockholders, new issuances of stock by us and the potential conversion of our outstanding convertible senior notes and our decision as to whether to settle any such conversions completely or partially in stock. The accounting for deferred income taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated results of operations or financial position. Changes in tax laws also affect actual tax results and the valuation of deferred income tax assets over time. Specifically, a decrease in income tax rates would result in a decrease in our deferred tax assets.

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Information technology failures and data security breaches could harm our business.

We use information technology and other computer resources to carry out important operational and marketing activities and to maintain our business records. These information technology systems are dependent upon global communications providers, web browsers, telephone systems and other aspects of the Internet infrastructure that have experienced security breaches, cyber-attacks, significant systems failures and electrical outages in the past. A material network breach in the security of our information technology systems could include the theft of customer, employee or company data. In February 2012, we experienced a software security breach by unknown external sources in our Internet Loan Prequalification System, which could have resulted in some of our customers’ personal data being compromised. We investigated the breach with the assistance of information technology security experts, and we are working with local and federal law enforcement to aid in their investigation of the breach. Our investigations produced no evidence that any of our customers’ data was actually accessed or exported from our systems. A security breach such as the one we recently experienced or a significant and extended disruption in the functioning of our information technology systems could damage our reputation and cause us to lose customers, adversely impact our sales and revenue and require us to incur significant expense to address and remediate or otherwise resolve these kinds of issues. The release of confidential information as a result of a security breach may also lead to litigation or other proceedings against us by affected individuals or business partners, or by regulators, and the outcome of such proceedings, which could include penalties or fines, could have a significant negative impact on our business. We may also be required to incur significant costs to protect against damages caused by these information technology failures or security breaches in the future. We routinely utilize information technology security experts to assist us in our evaluations of the effectiveness of the security of our information technology systems, and we regularly enhance our security measures to protect our systems and data. However, we cannot provide assurances that a security breach, cyber-attack, data theft or other significant systems failures will not occur in the future, and such occurrences could have a material and adverse effect on our consolidated results of operations or financial position.

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ITEM 1B.	UNRESOLVED STAFF COMMENTS

None.


ITEM 2.	PROPERTIES

In addition to our inventories of land, lots and homes, we own several office buildings totaling approximately 460,000 square feet, and we lease approximately 600,000 square feet of office space under leases expiring through July 2016. These properties are located in our various operating markets to house our homebuilding and financial services operating divisions and our regional and corporate offices.


ITEM 3.	LEGAL PROCEEDINGS

We are involved in lawsuits and other contingencies in the ordinary course of business. While the outcome of such contingencies cannot be predicted with certainty, we believe that the liabilities arising from these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds our estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.

In August 2011, the Wage and Hour Division (WHD) of the U.S. Department of Labor notified the Company that it was initiating an investigation to determine the Company's compliance with the Fair Labor Standards Act (FLSA) and, to the extent applicable, other laws enforced by WHD. Subsequently, the WHD reviewed various aspects of our employment processes and practices in our corporate office and some of our operating divisions. To date, the WHD has not communicated any violations of labor laws to the Company. The Company believes that its business practices are in compliance with the FLSA and other applicable laws enforced by WHD. At this time, the Company cannot predict the outcome of this investigation, nor can it reasonably estimate the potential costs that may be associated with its eventual resolution. Consequently, the Company has not recorded any associated liabilities in the accompanying balance sheet.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.

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PART II


ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol “DHI.” The following table sets forth, for the periods indicated, the range of high and low sales prices for our common stock, as reported by the NYSE, and the quarterly cash dividends declared per common share.



	Year Ended September 30, 2012						Year Ended September 30, 2011
	High		Low		Declared Dividends		High		Low		Declared Dividends
1st Quarter	$	12.89	$	8.03	$	0.0375	$	12.30	$	9.77	$	0.0375
2nd Quarter	16.45		12.74		0.0375		13.50		11.19		0.0375
3rd Quarter	18.45		13.80		0.0375		12.68		10.62		0.0375
4th Quarter	22.46		16.93		0.0375		12.55		8.82		0.0375

As of November 9, 2012, the closing price of our common stock on the NYSE was $20.60, and there were approximately 492 holders of record.

The declaration of future cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, future earnings, cash flows, capital requirements, our financial condition and general business conditions.

The information required by this item with respect to equity compensation plans is set forth under Item 12 of this annual report on Form 10-K and is incorporated herein by reference.

During fiscal years 2012, 2011 and 2010, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

Effective August 1, 2012, our Board of Directors authorized the repurchase of up to $100 million of our common stock effective through July 31, 2013. All of the $100 million authorization was remaining at September 30, 2012, and no common stock has been repurchased subsequent to September 30, 2012.

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Stock Performance Graph

The following graph illustrates the cumulative total stockholder return on D.R. Horton common stock for the last five fiscal years through September 30, 2012, compared to the S&P 500 Index and the S&P 500 Homebuilding Index. The comparison assumes a hypothetical investment in D.R. Horton common stock and in each of the foregoing indices of $100 at September 30, 2007, and assumes that all dividends were reinvested. Shareholder returns over the indicated period are based on historical data and should not be considered indicative of future shareholder returns. The graph and related disclosure in no way reflect our forecast of future financial performance.

Comparison of Five-Year Cumulative Total Return

Among D.R. Horton, Inc., S&P 500 Index and S&P 500 Homebuilding Index



	Year Ended September 30,
	2007		2008		2009		2010		2011		2012
D.R. Horton, Inc.	$	100.00	$	105.26	$	93.78	$	92.61	$	76.31	$	175.86
S&P 500 Index	$	100.00	$	78.02	$	72.63	$	80.01	$	80.93	$	105.37
S&P 500 Homebuilding Index	$	100.00	$	84.62	$	70.88	$	65.75	$	46.87	$	129.62

This performance graph shall not be deemed to be incorporated by reference into our SEC filings and should not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

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ITEM 6.	SELECTED FINANCIAL DATA

The following selected consolidated financial data are derived from our Consolidated Financial Statements. The data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Item 1A, “Risk Factors,” Item 8, “Financial Statements and Supplementary Data,” and all other financial data contained in this annual report on Form 10-K. These historical results are not necessarily indicative of the results to be expected in the future.



	Year Ended September 30,
	2012			2011			2010			2009			2008
				(In millions, except per share data)
Operating Data:
Revenues:
Homebuilding	$	4,236.2		$	3,549.6		$	4,309.7		$	3,603.9		$	6,518.6
Financial Services	117.8			87.2			90.5			53.7			127.5
Gross profit (loss) — Homebuilding	743.8			526.3			682.1			65.2			(1,763.2		)
Income (loss) before income taxes:
Homebuilding	203.7			(7.0		)	78.1			(541.3		)	(2,666.9		)
Financial Services	39.2			19.1			21.4			(15.5		)	35.1
Income tax (benefit) expense	(713.4		)	(59.7		)	(145.6		)	(7.0		)	1.8
Net income (loss)	956.3			71.8			245.1			(549.8		)	(2,633.6		)
Net income (loss) per share:
Basic	3.01			0.23			0.77			(1.73		)	(8.34		)
Diluted	2.77			0.23			0.77			(1.73		)	(8.34		)
Cash dividends declared per common share	0.15			0.15			0.15			0.15			0.45



	September 30,
	2012		2011		2010		2009		2008
	(In millions)
Balance Sheet Data:
Cash and cash equivalents and marketable securities	$	1,345.7	$	1,030.2	$	1,607.0	$	1,957.3	$	1,387.3
Inventories	4,165.2		3,449.7		3,449.0		3,666.7		4,683.2
Total assets	7,248.2		5,358.4		5,938.6		6,756.8		7,950.6
Notes payable (1)	2,493.1		1,704.6		2,171.8		3,145.3		3,748.4
Total equity	3,594.7		2,623.5		2,622.9		2,400.6		2,864.8

_______________________________________


(1)	Includes both homebuilding notes payable and the amount outstanding on our mortgage repurchase facility.

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ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations — Fiscal Year 2012 Overview

In fiscal 2012, demand for new homes improved in most of our operating markets, as evidenced by the number and value of our net sales orders increasing 21% and 29% compared to the prior year. Revenues from home sales increased 19% to $4.2 billion in fiscal 2012 compared to $3.5 billion in fiscal 2011. The average selling prices of our homes closed increased 5% and our gross margins on homes closed increased by 160 basis points in fiscal 2012 as compared to fiscal 2011. Pre-tax income was $242.9 million in the current year compared to $12.1 million in the prior year. Our sales order backlog of $1.7 billion at September 30, 2012 is up 61% from a year ago, which positions us for a strong start in fiscal 2013. These results reflect our ability to operate profitably and grow in the current environment through our strategy of investing capital to expand and improve the profitability of our operations, managing inventory levels efficiently and controlling SG&A and interest costs.

Our recent results and other national data indicate that the overall demand for new homes has improved from the prior year. However, both national new home sales and our company's home sales remain below historical levels due to the current weak U.S. economic conditions, the restrictive mortgage lending environment and variations in local housing market conditions. Until there is a more robust U.S. economic recovery, we expect national demand for new homes to remain at historically low levels, with uneven improvement across our operating markets.

We believe our business is well-positioned to benefit from a housing recovery due to our strong balance sheet and liquidity, our finished lot position, our inventory of available homes and our broad geographic operating base, which have allowed us to profitably grow our business in the current market conditions. We have begun increasing our investments in land, lot and home inventories in response to increased demand for our homes and we will continue to adjust our business strategies based on housing demand in each of our markets. Nevertheless, our future results could be negatively impacted by weakening economic conditions, decreases in the level of employment, a significant increase in mortgage interest rates or further tightening of mortgage lending standards.

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Strategy

While we are encouraged by the recent improvement in new home demand, we are uncertain whether homebuilding industry conditions will continue to improve at the pace we experienced in fiscal 2012. We expect that further improvement in individual markets will be uneven, and will be largely dependent on local economic conditions. However, we believe our strategy through the downturn of generating significant cash flow from operations, increasing our cash balances, reducing our outstanding debt and controlling attractive land and lot positions through option contracts has positioned us to capitalize on improving demand across our markets. In response to increasing new home demand, we are using our liquidity and strong balance sheet to provide the capital and capacity to increase our investments in housing and land inventory, geographically expand our operations, opportunistically pursue business acquisitions and grow our profitability. 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, where possible, which mitigates many of the risks of land ownership.


•	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 relative to demand in each of our markets, including starting construction on unsold homes to capture new home demand, monitoring the number and aging of unsold homes and aggressively marketing unsold, completed homes in inventory.


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


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


•	Controlling our SG&A infrastructure to match production levels.

Our operating strategy produced positive results in fiscal 2012. However, we cannot provide any assurances that the initiatives listed above will continue to be successful, and we may need to adjust components of our strategy to meet future market conditions. 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 2013.

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Key Results

Key financial results as of and for our fiscal year ended September 30, 2012, as compared to fiscal 2011, were as follows:

Homebuilding Operations:


•	Homebuilding revenues increased 19% to $4.2 billion.


•	Homes closed increased 13% to 18,890 homes, and the average selling price of those homes increased 5% to $223,300.


•	Net sales orders increased 21% to 21,048 homes, and the value of net sales orders increased 29% to $4.8 billion.


•	Sales order backlog increased 61% to $1.7 billion.


•	Home sales gross margins increased 160 basis points to 17.7%.


•	Inventory impairments and land option cost write-offs were $6.2 million, compared to $45.4 million.


•	Homebuilding SG&A expenses decreased as a percentage of homebuilding revenues by 100 basis points to 12.5%.


•	Interest expensed directly decreased 53% to $23.6 million.


•	Interest amortized to cost of sales declined to 2.7% of total home and land/lot cost of sales, from 3.0%.


•	Homebuilding pre-tax income was $203.7 million, compared to a pre-tax loss of $7.0 million.


•	Homes in inventory totaled 13,000, compared to 10,500.


•	Owned and optioned lots totaled 152,700, compared to 112,700.


•	Homebuilding debt was $2.3 billion, compared to $1.6 billion.


•	Net homebuilding debt to total capital was 21.4%, up 340 basis points, and gross homebuilding debt to total capital was 39.1%, up 140 basis points.


•	Homebuilding cash and marketable securities totaled $1.3 billion, compared to $1.0 billion.


•	Homebuilding inventory totaled $4.2 billion, compared to $3.4 billion.

Financial Services Operations:


•	Total financial services revenues, net of recourse and reinsurance expenses, increased 35% to $117.8 million.


•	Financial services pre-tax income increased 105% to $39.2 million.

Consolidated Results:


•	Consolidated pre-tax income was $242.9 million, compared to $12.1 million.


•	Income tax benefit was $713.4 million, primarily due to the reduction in the valuation allowance on our deferred tax asset in the third quarter of fiscal 2012.


•	Net income was $956.3 million, compared to $71.8 million.


•	Diluted earnings per share was $2.77, compared to $0.23.


•	Total equity was $3.6 billion, compared to $2.6 billion.


•	Net cash used in operations was $298.1 million, compared to $14.9 million provided by operations.

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Results of Operations — Homebuilding

Our operating segments are our 32 homebuilding operating divisions, which we aggregate into six reporting segments. These reporting segments, which we also refer to as reporting regions, have homebuilding operations located in the following states:



	East:		Delaware, Georgia (Savannah only), Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina and Virginia
	Midwest:		Colorado, Illinois and Minnesota
	Southeast:		Alabama, Florida, Georgia and Mississippi
	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

Fiscal Year Ended September 30, 2012 Compared to Fiscal Year Ended September 30, 2011

The following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the fiscal years ended 2012 and 2011.



	Net Sales Orders (1)
	Fiscal Year Ended September 30,
	Net Homes Sold				Value (In millions)						Average Selling Price
	2012	2011	% Change		2012		2011		% Change		2012		2011		% Change
East	2,244	2,066	9	%	$	565.3	$	482.6	17	%	$	251,900	$	233,600	8	%
Midwest	1,301	1,005	29	%	386.2		272.0		42	%	296,800		270,600		10	%
Southeast	5,378	4,019	34	%	1,101.9		776.1		42	%	204,900		193,100		6	%
South Central	6,822	6,169	11	%	1,282.3		1,092.2		17	%	188,000		177,000		6	%
Southwest	1,715	1,284	34	%	327.7		239.6		37	%	191,100		186,600		2	%
West	3,588	2,878	25	%	1,139.9		865.1		32	%	317,700		300,600		6	%
	21,048	17,421	21	%	$	4,803.3	$	3,727.6	29	%	$	228,200	$	214,000	7	%



	Sales Order Cancellations
	Fiscal Year Ended September 30,
	Cancelled Sales Orders		Value (In millions)				Cancellation Rate (2)
	2012	2011	2012		2011		2012		2011
East	655	689	$	147.7	$	146.7	23	%	25	%
Midwest	192	177	53.9		45.9		13	%	15	%
Southeast	1,851	1,531	351.6		275.1		26	%	28	%
South Central	2,426	2,763	436.4		470.3		26	%	31	%
Southwest	705	639	120.0		109.9		29	%	33	%
West	828	769	256.3		233.5		19	%	21	%
	6,657	6,568	$	1,365.9	$	1,281.4	24	%	27	%

______________


(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.

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Net Sales Orders

The value of net sales orders increased 29%, to $4,803.3 million (21,048 homes) in 2012 from $3,727.6 million (17,421 homes) in 2011. The number of net sales orders increased 21% in fiscal 2012 compared to fiscal 2011, reflecting an increase in sales demand for our homes. While the improvement in our sales as compared to the prior year reflects improvement in new home demand and market conditions, overall demand for new homes remains at a historically low level.

In comparing fiscal 2012 to fiscal 2011, the volume of net sales orders increased in all six of our market regions. The largest percentage increases occurred in our Southeast and Southwest regions as a result of improved market conditions in the majority of our Florida markets and in our Phoenix market. Sales orders in our Southeast region were also positively impacted by our acquisition of the homebuilding operations of Breland Homes during the fourth quarter of fiscal 2012, which added 118 homes and $24.3 million to our net sales in fiscal 2012 subsequent to the acquisition date. 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 improving market conditions. 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 increased 7% to $228,200 in 2012, from $214,000 in 2011. The increase reflects slight increases in the average size and amenity levels of our homes sold, as well as small price increases we have been able to implement recently in some of our communities as demand for new homes has improved.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 24% in fiscal 2012, compared to 27% in fiscal 2011. While our cancellation rates have improved, they remain slightly higher than they were prior to the recent housing downturn, and are mainly reflective of tight mortgage lending standards.



	Sales Order Backlog
	As of September 30,
	Homes in Backlog				Value (In millions)						Average Selling Price
	2012	2011	% Change		2012		2011		% Change		2012		2011		% Change
East	663	606	9	%	$	170.5	$	147.6	16	%	$	257,200	$	243,600	6	%
Midwest	425	288	48	%	127.4		80.6		58	%	299,800		279,900		7	%
Southeast	2,209	1,285	72	%	465.0		246.9		88	%	210,500		192,100		10	%
South Central	2,232	1,710	31	%	433.5		309.5		40	%	194,200		181,000		7	%
Southwest	699	426	64	%	134.9		76.6		76	%	193,000		179,800		7	%
West	1,012	539	88	%	336.6		175.0		92	%	332,600		324,700		2	%
	7,240	4,854	49	%	$	1,667.9	$	1,036.2	61	%	$	230,400	$	213,500	8	%

Sales Order Backlog

Sales order backlog represents homes under contract but not yet closed at the end of the period. Many of the contracts in our sales order backlog are subject to contingencies, including mortgage loan approval and buyers selling their existing homes, which can result in cancellations. A portion of the contracts in backlog will not result in closings due to cancellations. Our homes in backlog at September 30, 2012 increased 49% from the prior year, with significant increases in most regions due to increases in net sales orders as compared with the prior year. The sales order backlog in the Southeast region at September 30, 2012 included the impact of our acquisition of the homebuilding operations of Breland Homes during the fourth quarter of fiscal 2012.

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	Homes Closed and Home Sales Revenue
	Fiscal Year Ended September 30,
	Homes Closed				Value (In millions)						Average Selling Price
	2012	2011	% Change		2012		2011		% Change		2012		2011		% Change
East	2,187	1,932	13	%	$	542.4	$	438.4	24	%	$	248,000	$	226,900	9	%
Midwest	1,164	964	21	%	339.3		261.5		30	%	291,500		271,300		7	%
Southeast	4,682	3,546	32	%	930.7		691.8		35	%	198,800		195,100		2	%
South Central	6,300	6,150	2	%	1,158.4		1,080.0		7	%	183,900		175,600		5	%
Southwest	1,442	1,263	14	%	269.4		234.8		15	%	186,800		185,900		—	%
West	3,115	2,840	10	%	978.2		835.8		17	%	314,000		294,300		7	%
	18,890	16,695	13	%	$	4,218.4	$	3,542.3	19	%	$	223,300	$	212,200	5	%

Home Sales Revenue

Revenues from home sales increased 19%, to $4,218.4 million (18,890 homes closed) in 2012 from $3,542.3 million (16,695 homes closed) in 2011. The average selling price of homes closed during 2012 was $223,300, up 5% from the $212,200 average in 2011, reflecting slight increases in the average size and amenity levels of our homes closed, as well as small price increases we have been able to implement recently in some of our communities as demand for new homes has improved. During fiscal 2012, home sales revenues increased in all of our market regions, resulting from increases in the number of homes closed and increases in average selling prices.

The number of homes closed in fiscal 2012 increased 13% from 2011 due to increases in all of our market regions. The most significant percentage increase in the current year occurred in our Southeast region, with the Florida markets contributing the most to the increase. Home closings in the Southeast region also benefited from our acquisition of the homebuilding operations of Breland Homes during the fourth quarter of fiscal 2012, which added 114 home closings and $22.4 million to our home sales revenue in fiscal 2012 subsequent to the acquisition date.

Homebuilding Operating Margin Analysis



	Percentages of Related Revenues
	Fiscal Year Ended September 30,
	2012		2011
Gross profit — Home sales	17.7	%	16.1	%
Gross profit — Land/lot sales and other	25.3	%	5.5	%
Effect of inventory impairments and land option cost write-offs on total homebuilding gross profit	(0.1	)%	(1.3	)%
Gross profit — Total homebuilding	17.6	%	14.8	%
Selling, general and administrative expense	12.5	%	13.5	%
Interest expense	0.6	%	1.4	%
Loss on early retirement of debt, net	—	%	0.3	%
Other (income)	(0.3	)%	(0.2	)%
Income (loss) before income taxes	4.8	%	(0.2	)%

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Home Sales Gross Profit

Gross profit from home sales increased by 30%, to $745.5 million in 2012, from $571.3 million in 2011, and, as a percentage of home sales revenues, increased 160 basis points, to 17.7%. Approximately 130 basis points of the increase in the home sales gross profit percentage was a result of the average selling price of our homes increasing by more than the average cost, reflecting improved market conditions from the prior year. Approximately 40 basis points of the increase was due to a decrease in the amortization of capitalized interest and property taxes as a percentage of homes sales revenues, resulting from reductions in our interest and property taxes incurred and capitalized and more closings occurring on recently acquired finished lots. These increases were partially offset by a 10 basis point decrease due to a $5.3 million out-of-period adjustment in the prior year period related to an error in recording the loss reserves of our 100% owned captive insurance subsidiary that increased gross profit in 2011.

Land Sales and Other Revenues

Land sales and other revenues increased to $17.8 million in 2012, from $7.3 million in 2011. Fluctuations in revenues from land sales are a function of how we manage our inventory levels in various markets. We generally purchase land and lots with the intent to build and sell homes on them; however, we occasionally purchase land that includes commercially zoned parcels which we typically sell to commercial developers, and we also sell residential lots or land parcels to manage our land and lot supply. Land and lot sales occur at unpredictable intervals and varying degrees of profitability. Therefore, the revenues and gross profit from land sales fluctuate from period to period. As of September 30, 2012, we had $32.6 million of land held for sale that we expect to sell in the next twelve months.

Included in land sales and other revenues, is revenue from a single long-term construction project in which we serve as the general contractor. Revenue is recognized on a percentage-of-completion basis as the construction is completed. In fiscal 2012, the revenue and gross profit related to this project was $6.5 million and $1.2 million, respectively.

Inventory Impairments and Land Option Cost Write-offs

During fiscal 2012, we performed our quarterly inventory impairment analyses by reviewing the performance and outlook for all of our land inventories and communities under development for indicators of potential impairment. Based on this review as of September 30, 2012, we then performed impairment evaluations of communities with a combined carrying value of $216.9 million. Through these evaluations, we determined that communities with a carrying value of $1.8 million as of September 30, 2012, were impaired. As a result, during the three months ended September 30, 2012, we recorded impairment charges of $0.6 million to reduce the carrying value of the impaired communities to their estimated fair value, as compared to $10.2 million of impairment charges in the same period of 2011. During fiscal 2012 and 2011, impairment charges totaled $3.2 million and $37.3 million, respectively. The decrease in the amount of impairment charges in fiscal 2012 reflects the overall improvement of housing industry conditions and our increased profitability compared to the prior year, which has significantly reduced the number of our communities and carrying value of inventories that have indicators of potential impairment.

It is possible that our estimate of undiscounted cash flows from these communities may change and could result in a future need to record impairment charges to adjust the carrying value of these assets to their estimated fair value. If conditions in the broader economy, homebuilding industry or specific markets in which we operate worsen, and as we re-evaluate specific community pricing and incentives, construction and development plans, and our overall land sale strategies, we may be required to evaluate additional communities or re-evaluate previously impaired communities for potential impairment. These evaluations may result in additional impairment charges.

During fiscal 2012 and 2011, we wrote off $3.0 million and $8.1 million, respectively, of earnest money deposits and land option costs related to land option contracts which are not expected to be acquired. At September 30, 2012, outstanding earnest money deposits associated with our portfolio of land and lot option purchase contracts totaled $35.0 million.

The inventory impairment charges and write-offs of earnest money deposits and land option costs reduced total homebuilding gross profit as a percentage of homebuilding revenues by approximately 10 basis points in fiscal 2012, compared to 130 basis points in fiscal 2011.

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Selling, General and Administrative (SG&A) Expense

SG&A expense from homebuilding activities increased 10% to $528.7 million in 2012 from $480.0 million in 2011. As a percentage of homebuilding revenues, SG&A expense decreased 100 basis points, to 12.5% in 2012 from 13.5% in 2011. The largest component of our homebuilding SG&A expense is employee compensation and related costs, which represented 63% and 60% of SG&A costs in 2012 and 2011, respectively. These costs increased by 17%, to $335.6 million in 2012 from $286.5 million in 2011, primarily due to an increase in the level of incentive compensation related to the significant increases in revenues, profitability and the price of our common stock in the current year as compared to the prior year. Our homebuilding operations employed approximately 2,740 and 2,380 employees at September 30, 2012 and 2011, respectively.

Interest Incurred

Homebuilding interest costs are incurred on our homebuilding debt outstanding during the period. Comparing fiscal 2012 with fiscal 2011, interest incurred related to homebuilding debt decreased 7% to $120.8 million, corresponding to a 7% decrease in our average homebuilding debt.

We capitalize homebuilding interest to inventory during active development and construction. Our inventory under active development and construction is currently lower than our debt level; therefore, a portion of our interest incurred is expensed. We expensed $23.6 million of homebuilding interest during fiscal 2012, compared to $50.5 million of interest during 2011. The reduction in interest expensed during the current year is a result of an increase in our inventory under active development and construction as well as the decline in interest incurred. Interest amortized to cost of sales, excluding interest written off with inventory impairment charges, declined to 2.7% of total home and land/lot cost of sales in fiscal 2012 from 3.0% in fiscal 2011 as a result of more home closings on recently acquired finished lots and decreases in construction times over the past year.

Gain/Loss on Early Retirement of Debt

During fiscal 2012, we retired $10.8 million principal amount of our senior notes prior to their maturity. During fiscal 2011, in addition to repaying $176.2 million principal amount of maturing senior notes, we retired $319.2 million principal amount of our senior notes prior to their maturity. As a result of the early retirement of these notes, we recognized a net gain of $0.1 million and a net loss of $10.8 million in fiscal 2012 and 2011, respectively. These amounts represent the difference between the principal amount of the notes and the aggregate purchase price, after the write-off of any unamortized discounts and fees.

Other Income

Other income, net of other expenses, included in our homebuilding operations was $12.1 million in 2012, compared to $8.0 million in 2011. Other income consists of interest income, rental income and various other types of income not directly associated with our core homebuilding activities. The largest component of other income in both years was interest income.

Acquisitions

In August 2012, we acquired the homebuilding operations of Breland Homes for $105.9 million in cash, of which $9.4 million was paid subsequent to September 30, 2012. Breland Homes operates in Huntsville and Mobile in Alabama and along the gulf coast of Mississippi. The assets acquired primarily included approximately 300 homes in inventory, 1,000 finished lots and control of approximately 3,700 additional lots through option contracts. We also acquired a sales order backlog of 228 homes valued at $46.9 million. The acquisition of the homebuilding operations of Breland Homes was not material to our results of operations or financial condition.

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Homebuilding Results by Reporting Region



	Fiscal Year Ended September 30,
	2012						2011
	Homebuilding Revenues		Homebuilding Income Before Income Taxes (1)		% of Region Revenues		Homebuilding Revenues		Homebuilding Income (Loss) Before Income Taxes (1)			% of Region Revenues
					(In millions)
East	$	542.4	$	16.0	2.9	%	$	438.5	$	(13.5	)	(3.1	)%
Midwest	339.3		1.1		0.3	%	261.5		(13.7		)	(5.2	)%
Southeast	934.6		38.0		4.1	%	696.8		(19.9		)	(2.9	)%
South Central	1,158.4		80.6		7.0	%	1,081.0		52.4			4.8	%
Southwest	270.7		16.8		6.2	%	234.8		(3.8		)	(1.6	)%
West	990.8		51.2		5.2	%	837.0		(8.5		)	(1.0	)%
	$	4,236.2	$	203.7	4.8	%	$	3,549.6	$	(7.0	)	(0.2	)%

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(1)

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

East Region — Homebuilding revenues increased 24% in 2012 compared to 2011, due to an increase in the number of homes closed as well as an increase in the average selling price in the majority of the region’s markets. The largest increases in closings volume occurred in our Greenville, Charlotte and Raleigh/Durham markets. The region reported pre-tax income of $16.0 million in 2012, compared to a pre-tax loss of $13.5 million in 2011, primarily as a result of increases in revenues and gross profit. Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased 240 basis points in fiscal 2012, compared to fiscal 2011. As a percentage of homebuilding revenues, SG&A expenses decreased by 160 basis points in 2012 due to the increase in revenues.

Midwest Region — Homebuilding revenues increased 30% in 2012 compared to 2011, due to an increase in the number of homes closed as well as an increase in the average selling price in the majority of the region’s markets. The largest increases in closings volume occurred in our Denver and Chicago markets. The region reported pre-tax income of $1.1 million in 2012, compared to a pre-tax loss of $13.7 million in 2011, primarily as a result of increases in revenues and gross profit. Home sales gross profit percentage increased 150 basis points in fiscal 2012, compared to fiscal 2011. As a percentage of homebuilding revenues, SG&A expenses decreased by 240 basis points in fiscal 2012 due to the increase in revenues.

Southeast Region — Homebuilding revenues increased 34% in 2012 compared to 2011, primarily due to an increase in the number of homes closed in the majority of the region’s markets. The largest increases in closings volume occurred in our Florida markets. The region reported pre-tax income of $38.0 million in 2012, compared to a pre-tax loss of $19.9 million in 2011, primarily as a result of increases in revenues and gross profit. Home sales gross profit percentage increased 140 basis points in fiscal 2012, compared to fiscal 2011. Total gross profit in the prior year was reduced by inventory impairment charges and earnest money and land option cost write-offs totaling $17.4 million. As a percentage of homebuilding revenues, SG&A expenses decreased by 170 basis points in fiscal 2012 due to the increase in revenues.

South Central Region — Homebuilding revenues increased 7% in 2012 compared to 2011, due to an increase in the average selling price in the majority of the region’s markets. The region reported pre-tax income of $80.6 million in 2012, compared to $52.4 million in 2011, primarily as a result of increases in revenues and gross profit. Home sales gross profit percentage increased 170 basis points in fiscal 2012, compared to fiscal 2011. As a percentage of homebuilding revenues, SG&A expenses increased by 50 basis points in fiscal 2012 as a result of higher employee incentive compensation costs.

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Southwest Region — Homebuilding revenues increased 15% in 2012 compared to 2011, primarily due to an increase in the number of homes closed in the Phoenix market. The region reported pre-tax income of $16.8 million in 2012, compared to a pre-tax loss of $3.8 million in 2011, primarily as a result of increases in revenues and gross profit. Home sales gross profit percentage increased 270 basis points in fiscal 2012, compared to fiscal 2011. As a percentage of homebuilding revenues, SG&A expenses decreased by 220 basis points in fiscal 2012 due to the increase in revenues and the reduction in total SG&A expenses.

West Region — Homebuilding revenues increased 18% in 2012 compared to 2011, due to an increase in the number of homes closed as well as an increase in the average selling price in the majority of the region's markets. The largest increases in closings volume occurred in our Seattle, Salt Lake City and Portland markets. The region reported pre-tax income of $51.2 million in 2012, compared to a pre-tax loss of $8.5 million in 2011, primarily as a result of increases in revenues and gross profit. The improvement in gross profit was the result of fewer inventory impairment charges and earnest money and land option cost write-offs, and an increase in the home sales gross profit percentage of 120 basis points in fiscal 2012, compared to fiscal 2011. As a percentage of homebuilding revenues, SG&A expenses decreased by 140 basis points in fiscal 2012 due to the increase in revenues.

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Land and Lot Position and Homes in Inventory

Our inventory investment strategy includes entering into new lot option contracts to purchase finished lots in our operating markets, where possible, and we attempt to renegotiate existing lot option contracts when necessary to reduce our lot costs and better match the scheduled lot purchases with new home demand in each community. We are also increasing our investments in land acquisition, land development and housing inventory to meet housing demand and expand our operations in desirable markets. We manage our inventory of homes under construction relative to demand in each of our markets, including starting construction on unsold homes to capture new home demand, monitoring the number and aging of unsold homes and aggressively marketing our unsold, completed homes in inventory.

The following is a summary of our land and lot position and homes in inventory at September 30, 2012 and 2011:



	As of September 30,
	2012							2011
	Land/Lots Owned		Lots Controlled Under Lot Option and Similar Contracts (1)		Total Land/Lots Owned and Controlled		Homes in Inventory	Land/Lots Owned		Lots Controlled Under Lot Option and Similar Contracts (1)		Total Land/Lots Owned and Controlled		Homes in Inventory
East	11,600		7,100		18,700		1,500	9,900		4,700		14,600		1,300
Midwest	5,000		1,100		6,100		800	5,300		500		5,800		600
Southeast	24,900		20,500		45,400		3,400	22,500		9,200		31,700		2,600
South Central	25,700		22,300		48,000		4,200	21,700		9,700		31,400		3,500
Southwest	5,200		4,200		9,400		1,000	5,300		1,100		6,400		900
West	22,200		2,900		25,100		2,100	21,100		1,700		22,800		1,600
	94,600		58,100		152,700		13,000	85,800		26,900		112,700		10,500
	62	%	38	%	100	%		76	%	24	%	100	%

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(1)	Excludes approximately 5,200 and 8,000 lots at September 30, 2012 and 2011, respectively, representing lots controlled under lot option contracts for which we do not expect to exercise our option to purchase the land or lots, but the underlying contracts have yet to be terminated. We have reserved the deposits related to these contracts.

At September 30, 2012, we owned or controlled approximately 152,700 lots, compared to approximately 112,700 lots at September 30, 2011. Of the 152,700 total lots, we controlled approximately 58,100 lots (38%), with a total remaining purchase price of approximately $1.7 billion, through land and lot option purchase contracts with a total of $35.0 million in earnest money deposits. At September 30, 2012, approximately 24,700 of our owned lots were finished.

We had a total of approximately 13,000 homes in inventory, including approximately 1,100 model homes at September 30, 2012, compared to approximately 10,500 homes in inventory, including approximately 1,100 model homes at September 30, 2011. Of our total homes in inventory, approximately 6,400 and 5,600 were unsold at September 30, 2012 and 2011, respectively. At September 30, 2012, approximately 2,100 of our unsold homes were completed, of which approximately 400 homes had been completed for more than six months. At September 30, 2011, approximately 2,800 of our unsold homes were completed, of which approximately 600 homes had been completed for more than six months.

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Fiscal Year Ended September 30, 2011 Compared to Fiscal Year Ended September 30, 2010

The following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the fiscal years ended September 30, 2011 and 2010.



	Net Sales Orders (1)
	Fiscal Year Ended September 30,
	Net Homes Sold				Value (In millions)						Average Selling Price
	2011	2010	% Change		2011		2010		% Change		2011		2010		% Change
East	2,066	2,027	2	%	$	482.6	$	469.0	3	%	$	233,600	$	231,400	1	%
Midwest	1,005	1,045	(4	)%	272.0		296.0		(8	)%	270,600		283,300		(4	)%
Southeast	4,019	3,892	3	%	776.1		728.7		7	%	193,100		187,200		3	%
South Central	6,169	7,375	(16	)%	1,092.2		1,273.4		(14	)%	177,000		172,700		2	%
Southwest	1,284	1,785	(28	)%	239.6		315.3		(24	)%	186,600		176,600		6	%
West	2,878	3,251	(11	)%	865.1		928.6		(7	)%	300,600		285,600		5	%
	17,421	19,375	(10	)%	$	3,727.6	$	4,011.0	(7	)%	$	214,000	$	207,000	3	%



	Sales Order Cancellations
	Fiscal Year Ended September 30,
	Cancelled Sales Orders		Value (In millions)				Cancellation Rate (2)
	2011	2010	2011		2010		2011		2010
East	689	581	$	146.7	$	127.2	25	%	22	%
Midwest	177	250	45.9		68.7		15	%	19	%
Southeast	1,531	1,409	275.1		250.0		28	%	27	%
South Central	2,763	3,076	470.3		514.1		31	%	29	%
Southwest	639	677	109.9		115.1		33	%	27	%
West	769	789	233.5		227.3		21	%	20	%
	6,568	6,782	$	1,281.4	$	1,302.4	27	%	26	%

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


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

Net Sales Orders

The value of net sales orders decreased 7%, to $3,727.6 million (17,421 homes) in 2011 from $4,011.0 million (19,375 homes) in 2010. The number of net sales orders decreased 10% in fiscal 2011 compared to fiscal 2010. Sales order volume during the first part of fiscal 2010 benefited from the federal homebuyer tax credit. During the last half of fiscal 2011, the number and value of our net sales orders were 2% and 8% higher, respectively, than in the last half of fiscal 2010.

In comparing fiscal 2011 to fiscal 2010, the value and volume of net sales orders decreased in most of our market regions, with much of the volume decrease resulting from the expiration of the federal homebuyer tax credit. The volume decline in our Southwest region also reflected weaker market conditions in all of its markets, combined with a reduction in the number of active communities during fiscal 2011. Our East and Southeast regions experienced slight increases in net sales orders as a result of operating more communities during fiscal 2011. Fluctuations in the value of net sales orders were primarily due to the change in the number of homes sold in each respective region and, to a lesser extent, to small fluctuations in the average selling price of those homes.

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The average price of our net sales orders in 2011 was $214,000, an increase of 3% from the $207,000 average in 2010. The largest percentage increases were in our Southwest and West regions and were primarily due to opening new communities and adjusting our product mix, with higher priced communities representing more of our sales.

Our annual sales order cancellation rate was 27% in fiscal 2011, compared to 26% in fiscal 2010. These cancellation rates were above historical levels, reflecting the challenges in most of our homebuilding markets.



	Sales Order Backlog
	As of September 30,
	Homes in Backlog				Value (In millions)						Average Selling Price
	2011	2010	% Change		2011		2010		% Change		2011		2010		% Change
East	606	472	28	%	$	147.6	$	103.4	43	%	$	243,600	$	219,100	11	%
Midwest	288	247	17	%	80.6		70.1		15	%	279,900		283,800		(1	)%
Southeast	1,285	812	58	%	246.9		162.5		52	%	192,100		200,100		(4	)%
South Central	1,710	1,691	1	%	309.5		297.3		4	%	181,000		175,800		3	%
Southwest	426	405	5	%	76.6		71.9		7	%	179,800		177,500		1	%
West	539	501	8	%	175.0		145.6		20	%	324,700		290,600		12	%
	4,854	4,128	18	%	$	1,036.2	$	850.8	22	%	$	213,500	$	206,100	4	%

Sales Order Backlog

Our homes in backlog at September 30, 2011 increased 18% from the prior year, with significant increases in our East, Midwest and Southeast regions. The number of homes in backlog in these regions benefited from more active communities and improved third and fourth quarter sales as compared with the same periods of the prior year.



	Homes Closed and Home Sales Revenue
	Fiscal Year Ended September 30,
	Homes Closed				Value (In millions)						Average Selling Price
	2011	2010	% Change		2011		2010		% Change		2011		2010		% Change
East	1,932	2,114	(9	)%	$	438.4	$	492.2	(11	)%	$	226,900	$	232,800	(3	)%
Midwest	964	1,187	(19	)%	261.5		330.9		(21	)%	271,300		278,800		(3