e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-14122
D.R. Horton, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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75-2386963
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.
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)
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301 Commerce Street, Suite 500
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76102
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Fort Worth, Texas
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(Zip Code
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)
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(Address of principal executive
offices)
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(817) 390-8200
Registrants telephone number, including area code
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $.01 per share
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The New York Stock Exchange
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7.5% Senior Notes due 2007
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The New York Stock Exchange
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8% Senior Notes due 2009
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The New York Stock Exchange
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9.75% Senior Subordinated Notes due 2010
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The New York Stock Exchange
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7.875% Senior Notes due 2011
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The New York Stock Exchange
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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 þ No o
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 o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark 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 registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of March 31, 2007, the aggregate market value of the
outstanding shares held by non-affiliates of the registrant was
approximately $6,302,292,000. Solely for purposes of this
calculation, all directors and executive officers were excluded
as affiliates of the registrant.
As of November 16, 2007, there were 318,607,529 shares
of Common Stock, par value $.01 per share, issued and
314,952,296 shares outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for
the 2008 Annual Meeting of Stockholders are incorporated herein
by reference in Part III.
D.R.
HORTON, INC. AND SUBSIDIARIES
2007 ANNUAL REPORT ON
FORM 10-K
TABLE OF CONTENTS
D.R. Horton, Inc. is the largest homebuilding company in the
United States, based on homes closed during the twelve months
ended September 30, 2007. We construct and sell high
quality homes through our operating divisions in 27 states
and 83 metropolitan markets of the United States, primarily
under the name of D.R. Horton, Americas Builder. We
are a Fortune 500 company, and 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. The growth of our company 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 numerous
other homebuilding companies, which strengthened our market
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 5,000 square feet and
in price from $90,000 to $900,000. Although we have maintained
our position as the nations largest homebuilder, the
current downturn in our industry has resulted in a decrease in
the size of our operations during fiscal 2007, as we have been
affected by, and have reacted to, the weakened market for new
homes. For the year ended September 30, 2007, we closed
41,370 homes with an average closing sales price of
approximately $259,200.
Through our financial services operations, we provide mortgage
banking and title agency services to homebuyers in many of our
homebuilding markets. DHI Mortgage, our wholly-owned subsidiary,
provides mortgage financing services, principally to the
purchasers of the homes we build. We generally do not seek to
retain or service the mortgages we originate but, rather, seek
to sell the mortgages and related servicing rights to investors.
Our subsidiary title companies serve as title insurance agents
by providing title insurance policies, examination and closing
services, primarily to the purchasers of our homes.
Our financial reporting segments consist of seven homebuilding
segments and a financial services segment. Our homebuilding
operations are by far the most substantial part of our business,
comprising approximately 98% of consolidated revenues, which
were $11.3 billion in fiscal 2007. 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 (including some mid-rise
buildings), which share common walls and roofs. The sale of
detached homes generated approximately 81%, 80%, and 83% of home
sales revenues in fiscal 2007, 2006 and 2005, respectively. Our
financial services segment generates its revenues from
originating and selling mortgages and collecting fees for title
insurance agency and closing services.
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. These reports include
our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
beneficial ownership reports on Forms 3, 4, and 5, proxy
statements and amendments to such reports. These reports may be
accessed by going to our Internet website and clicking on the
Investor Relations link. We will also provide these
reports in electronic or paper format to our stockholders free
of charge upon request made to our Investor Relations
department. Information on our Internet website is not part of
this annual report on
Form 10-K.
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.
1
Operating
Strategy
For the greatest part of our companys
30-year
existence, we maintained significant year-over-year growth and
profitability. We achieved this success through an operating
strategy focused on capturing greater market share, while also
maintaining a strong balance sheet. To execute our strategy, we
invested available capital in our existing homebuilding markets
through our capital allocation process, and entered new markets
as opportunities were available. We also actively evaluated
homebuilding acquisition opportunities as they arose, some of
which resulted in acquisitions and contributed to our growth.
During fiscal 2006 and 2007, however, due to the progressive
softening of demand in our homebuilding markets, we have
experienced declines in revenues and gross profit, and we
incurred a loss in fiscal 2007. Although we believe the
long-term fundamentals which support housing demand remain solid
and the current negative conditions will moderate over time, the
timing of a recovery in the housing market is unclear.
Consequently, while our long-term strategy remains to continue
to profitably grow our homebuilding business, our primary focus
while market conditions are weak is to strengthen our financial
condition by reducing inventories of homes and land, controlling
and reducing construction and overhead costs, generating
positive cash flows from operations and using the cash primarily
to reduce outstanding debt.
Geographic
Diversity
From 1978 to late 1987, our homebuilding activities were
conducted in the Dallas/Fort Worth area. We then began
diversifying geographically by entering additional markets, both
through
start-up
operations and acquisitions. We now operate in 27 states
and 83 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 2007. By the same
measure, we are also either the largest or one of the five
largest builders in many of our markets in fiscal 2007. We
believe that our national, regional and local scale of
operations has provided us with benefits that may not be
available in the same degree to some other smaller homebuilders,
such as:
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Negotiation of volume discounts and rebates from national,
regional and local materials suppliers and lower labor rates
from certain subcontractors;
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Enhanced leverage of our general and administrative costs, which
allows us greater flexibility to compete for greater market
share in each of our markets;
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Efficient land entitlement processes, as we often dedicate
full-time staff to work with municipalities to resolve difficult
land and lot entitlement concerns; and
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Greater access to and lower cost of capital, due to our strong
balance sheet and our lending and capital markets relationships
with national commercial and investment banking institutions.
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Decentralized
Operations
We decentralize our homebuilding activities to give operating
flexibility to our local division presidents on certain key
operating decisions. At September 30, 2007, we had 38
separate homebuilding operating divisions, some of which are in
the same market area and some 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 decisions regarding local
operations. Our division presidents receive performance bonuses
based upon achieving targeted financial and operational measures
in their operating divisions.
2
Operating
Division Responsibilities
Each operating division is responsible for:
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Site selection, which involves
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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;
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Negotiating lot option or similar contracts;
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Obtaining all necessary land development and home construction
approvals;
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Overseeing land development;
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Selecting building plans and architectural schemes;
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Selecting and managing construction subcontractors and suppliers;
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Planning and managing homebuilding schedules; and
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Developing and implementing marketing plans.
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Centralized
Controls
We centralize the key risk elements of our homebuilding business
through our regional and corporate offices. We have seven
separate homebuilding regional offices. Generally, each regional
office consists of a region president, legal counsel, a chief
financial officer, a purchasing manager and limited office
support staff. Each of our region presidents and their
management teams are responsible for oversight of the operations
of up to seven homebuilding operating divisions, including:
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Review and approval of division business plans and budgets;
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Review and approval of all land and lot acquisition contracts;
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Allocation of inventory investments within corporate guidelines;
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Oversight of land and home inventory levels; and
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Review of major personnel decisions and division president
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:
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Financing;
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Cash management;
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Risk and litigation management;
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Allocation of capital;
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Issuance and monitoring of inventory investment guidelines to
regional homebuilding operations;
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Environmental assessments of land and lot acquisitions;
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Approval and funding of land and lot acquisitions;
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Accounting and management reporting;
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Internal audit;
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Information technology systems;
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Administration of payroll and employee benefits;
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Negotiation of national purchasing contracts;
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Management of major national or regional supply chain
initiatives;
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Monitoring and analysis of margins, returns and
expenses; and
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Administration of customer satisfaction surveys and reporting of
results.
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Cost
Management
We control our overhead costs by centralizing certain
administrative and accounting functions and by closely
monitoring the number of administrative personnel and management
positions in our operating divisions, as well as in our regional
and corporate offices. We also minimize advertising costs by
participating in promotional activities sponsored by local real
estate brokers.
We control construction costs by striving to design our homes
efficiently and by obtaining competitive bids for construction
materials and labor. We also 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 monitor our construction costs on each
house through our purchasing and construction budgeting systems,
and we monitor our inventory levels, margins, returns and
expenses through our management information systems.
Acquisitions
We are currently focused on strengthening our balance sheet and
increasing our liquidity. However, we will continue to evaluate
opportunities for strategic acquisitions. We believe that the
current housing industry downturn may provide us selected
opportunities to enhance our operations through the acquisition
of existing homebuilding companies at attractive valuations. In
certain instances, such acquisitions can provide us benefits not
found in
start-up
operations, such as: established land positions and inventories;
and existing relationships with municipalities, land owners,
developers, subcontractors and suppliers. 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 only acquiring homebuilding companies that we
believe will have a positive impact on our earnings within an
acceptable period of time.
4
Markets
We conduct our homebuilding operations in all of the geographic
regions, states and markets listed below, and we conduct our
mortgage and title operations in many of these markets. Our
homebuilding operating segments are our homebuilding reportable
regions and are comprised of the following markets:
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State
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Reporting Region/Market
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Northeast Region
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Delaware
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Central Delaware
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Delaware Shore
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Georgia
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Savannah
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Maryland
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Baltimore
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Suburban Washington, D.C.
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New Jersey
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North New Jersey
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South New Jersey
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North Carolina
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Brunswick County
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Charlotte
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Greensboro/Winston-Salem
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Raleigh/Durham
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Pennsylvania
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Philadelphia
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Lancaster
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South Carolina
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Charleston
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Columbia
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Hilton Head
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Myrtle Beach
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Virginia
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Northern Virginia
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Midwest Region
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Colorado
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Colorado Springs
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Denver
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Fort Collins
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Illinois
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Chicago
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Minnesota
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Minneapolis/St. Paul
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Wisconsin
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Kenosha
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Southeast Region
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Alabama
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Birmingham
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Huntsville
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Mobile
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Florida
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Daytona Beach
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Fort Myers/Naples
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Jacksonville
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Melbourne
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Miami/West Palm Beach
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Ocala
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Orlando
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Pensacola
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Tampa
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Georgia
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Atlanta
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Macon
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South Central Region
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Louisiana
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Baton Rouge
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Mississippi
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Mississippi Gulf Coast
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Oklahoma
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Oklahoma City
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State
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Reporting Region/Market
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Texas
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Austin
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Dallas
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Fort Worth
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Houston
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Killeen/Temple
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Laredo
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Rio Grande Valley
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San Antonio
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Waco
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Southwest Region
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Arizona
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Casa Grande
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Phoenix
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Tucson
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New Mexico
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Albuquerque
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Las Cruces
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Utah
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Salt Lake City
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California Region
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California
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Bay Area
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Central Valley
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Lancaster/Palmdale
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Imperial Valley
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Los Angeles County
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Orange County
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Riverside/San Bernardino
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Sacramento
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San Diego County
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Ventura County
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Nevada
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Reno
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West Region
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Hawaii
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Hawaii
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Kauai
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Maui
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Oahu
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Idaho
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Boise
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Nevada
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Las Vegas
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Laughlin
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Oregon
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Albany
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Bend
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Eugene
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Portland
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Washington
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Bellingham
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Eastern Washington
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Olympia
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Seattle/Tacoma
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Vancouver
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5
When evaluating new or existing homebuilding markets for
purposes of capital allocation, we consider the following local,
market-specific factors, among others:
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Economic conditions;
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Job growth;
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Median income level of potential homebuyers;
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Local housing affordability and typical mortgage products
utilized;
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Land availability;
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Land entitlement and development processes;
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New home sales activity;
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Competition;
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Secondary home sales activity; and
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Prevailing housing products, features and pricing.
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Land
Policies
Typically, we acquire land after we have completed appropriate
due diligence and generally after we have obtained the rights
(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,
and 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 also
sell lots and land to other developers and homebuilders.
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 land 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 preacquisition due diligence costs incurred
by us. This enables us to control significant land and lot
positions with limited capital investment, which substantially
reduces the risks associated with land ownership and development.
Almost all of our land positions are acquired directly by us. We
avoid entering into joint venture arrangements due to their
increased costs and complexity, as well as the loss of
operational control inherent in such arrangements. We are a
party to a very small number of joint ventures that were
acquired through acquisitions of other homebuilders. All of
these joint ventures are consolidated in our financial
statements.
We attempt to mitigate our exposure to real estate inventory
risks by:
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Managing our supply of land/lots controlled (owned and optioned)
in each market based on anticipated future home closing levels;
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Monitoring local market and demographic trends, housing
preferences and related economic developments, such as new job
opportunities, local growth initiatives and personal income
trends;
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Utilizing land/lot option contracts, where possible;
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Limiting the size of acquired land parcels to smaller tracts,
where possible;
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Generally commencing construction of custom features or optional
upgrades on homes under contract only after the buyers
receipt of mortgage approval and receipt of satisfactory
deposits from the buyer; and
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Monitoring and managing the number of speculative homes (homes
under construction without an executed sales contract) built in
each subdivision.
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6
Construction
Our home designs are selected or prepared in each of our markets
to appeal to local tastes and preferences of 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.
Substantially all of our construction work is performed by
subcontractors. Subcontractors typically are retained for a
specific subdivision 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. We compete with
other homebuilders for qualified subcontractors, raw materials
and lots in the markets where we operate. 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 four 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 a 30 day notice. In recent years, we
have not experienced delays in construction due to shortages of
materials or labor that have materially affected 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 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. In the current weak market conditions, we
have significantly increased the level of incentives we are
offering to homebuyers in most markets.
We advertise in our local markets as necessary through
newspapers, marketing brochures and newsletters. We also use
billboards, radio and television advertising and our Internet
website to market the location, price range and availability of
our homes. To minimize advertising costs, we attempt to operate
in subdivisions in conspicuous locations that permit us to take
advantage of local traffic patterns. We also believe that model
homes play a substantial role in our marketing efforts, so we
expend significant effort to create an attractive atmosphere in
our model homes.
In addition to using model homes, in certain markets we build a
limited number of speculative homes in each subdivision. 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 60 days. 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, seasonality, current sales contract cancellation trends
and our past experience in the market. We determine the number
of speculative homes to build in each subdivision based on our
then current and planned sales pace, and we
7
monitor and adjust speculative homes inventory on an ongoing
basis as conditions warrant. We typically have sold a
substantial majority of our speculative homes while they are
under construction or soon after completion; however, the
softness in our housing markets and related high cancellation
rates during fiscal 2006 and 2007 have caused our speculative
homes inventory to remain higher than our target levels. While
we plan to reduce both total and speculative homes in inventory
from current levels, we do expect to maintain a level of
speculative home inventory in our markets to be in line with our
expectations of future sales and closings volume. We believe
these speculative homes help to provide us with opportunities to
sell additional homes, reduce our inventory and generate
positive cash flows.
Our sales contracts require an earnest money deposit of at least
$500. The amount of earnest money required varies between
markets and subdivisions, and may significantly exceed $500.
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 occasionally choose to refund such deposits. Our sales
contracts also include a financing contingency which permits
customers to cancel and receive a refund of their deposits 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 2007 were 38%, and our cancellation
rate in the fourth quarter was 48%. These cancellation rates are
significantly higher than our typical historical rate of
approximately 20%, reflecting the current weak housing market
conditions. The length of time between the signing of a sales
contract for a home and delivery of the home to the buyer
(closing) averages 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 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 significant repeat
and referral business from the real estate community and
homebuyers. We provide our homebuyers with a limited one-year
warranty on workmanship and building materials. 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, we typically provide a supplemental ten-year limited
warranty that covers major construction defects, and some of our
suppliers provide manufacturers warranties on specified
products installed in the home.
Customer
Mortgage Financing
We provide mortgage financing services principally to purchasers
of our homes in the majority of our homebuilding markets through
our wholly-owned subsidiary, DHI Mortgage. DHI Mortgage
coordinates and expedites the entire sales transaction by
ensuring that mortgage commitments are received and that
closings take place in a timely and efficient manner. DHI
Mortgage originates mortgage loans for a substantial portion of
our homebuyers and, when necessary to fulfill the needs of some
homebuyers, also brokers loans to third-party lenders who
directly originate the mortgage loans. During the year ended
September 30, 2007, approximately 95% of DHI
Mortgages loan volume related to homes closed by our
homebuilding operations, and DHI Mortgage provided mortgage
financing services for approximately 66% of our total homes
closed.
To limit the risks associated with our mortgage operations, DHI
Mortgage only originates loan products that it believes may be
sold to third-party investors. DHI Mortgage does not seek to
service the loans it originates, but rather packages and sells
the loans and their servicing rights to third-party investors
shortly after origination on a limited recourse basis, generally
limited to early payment defaults or fraud and
misrepresentation. 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.
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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 to purchasers of
homes we build and sell. We currently assume little or no
underwriting risk associated with these title policies.
Employees
At September 30, 2007, we employed 6,231 persons, of
whom 1,229 were sales and marketing personnel, 2,031 were
executive, administrative and clerical personnel, 1,869 were
involved in construction and 1,102 worked in mortgage and title
operations. We had fewer than 20 employees covered by
collective bargaining agreements. Employees of some of the
subcontractors which we use are represented by labor unions or
are subject to collective bargaining agreements. We believe that
our relations with our employees and subcontractors are good.
Competition
The homebuilding industry is highly competitive. We compete in
each of our markets with numerous other national, regional and
local homebuilders for homebuyers, desirable properties, raw
materials, skilled labor and financing. We also compete with
resales of existing homes and with the rental housing market.
Our homes compete on the basis of quality, price, design,
mortgage financing terms and location. In the current soft
housing conditions, competition among homebuilders has greatly
intensified, especially as to pricing and incentives, as
builders attempt to maximize sales volume despite the slowdown
in housing demand. Our financial services business competes with
other mortgage lenders, including national, regional and local
mortgage bankers and other financial institutions, some of which
have greater access to capital markets, different lending
criteria and potentially 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
various federal, state and local laws and regulations, including
zoning, density and development requirements, building,
environmental, advertising and real estate sales rules and
regulations. These 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 FHA and 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 and other public
improvements.
Our homebuilding operations are also subject to a 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 also
comply with various federal and state laws and regulations.
These include eligibility and other requirements for
participation in the programs offered by the FHA, VA, GNMA,
Fannie Mae and Freddie Mac. These also include required
compliance with consumer lending and other laws and regulations
such as disclosure requirements, prohibitions against
discrimination and real estate settlement procedures. All of
these laws and regulations may subject our operations to
examination by the applicable agencies.
Seasonality
We have typically experienced seasonal variations in our
quarterly operating results and capital requirements. In prior
years, we generally had more homes under construction, closed
more homes and had greater revenues and operating income in the
third and fourth quarters of our fiscal year. This seasonal
activity
9
increased our working capital requirements for our homebuilding
operations during the third and fourth fiscal quarters and
increased our funding requirements for the mortgages we
originated in our financial services segment at the end of these
quarters. As a result of seasonal activity, our results of
operations and financial position at the end of a particular
fiscal quarter are not necessarily representative of the balance
of our fiscal year.
In contrast to our typical seasonal results, due to further
deterioration of homebuilding market conditions during fiscal
2007, we incurred consolidated operating losses in our third and
fourth fiscal quarters. These results were primarily due to
recording significant inventory and goodwill impairment charges.
Also, the increasingly challenging market conditions caused
further weakening in sales volume, pricing and margins as the
fiscal year progressed. Although we may experience our typical
historical seasonal pattern in the future, given the current
market conditions, we can make no assurances as to when or
whether this pattern will recur.
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 to which we are or
may become subject. These risks and uncertainties, together with
other factors described elsewhere in this report, have the
potential to affect our business, financial condition, results
of operations, cash flows, strategies or prospects in a material
and adverse manner.
The
homebuilding industry is undergoing a significant downturn, and
its duration and ultimate severity are uncertain. Further
deterioration in industry conditions or in the broader economic
conditions of the markets where we operate could further
decrease demand and pricing for new homes and have additional
adverse effects on our operations and financial
results.
The homebuilding industry is cyclical and is significantly
affected by changes in industry conditions, as well as in
general and local economic conditions, such as:
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employment levels;
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availability of financing for homebuyers;
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interest rates;
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consumer confidence;
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levels of new and existing homes for sale;
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demographic trends; and
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housing demand.
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These may occur on a national scale or may affect some of the
regions or markets in which we operate more than others. When
adverse conditions affect any of our larger markets, they have a
proportionately greater impact on us than on some other
homebuilding companies. Our operations in previously strong
markets, particularly California, Florida and Nevada, where we
have significant inventory, have more adversely affected our
financial results than our other markets in the current downturn.
An oversupply of alternatives to new homes, such as existing
homes, including homes held for sale by investors and
speculators, foreclosed homes, and rental properties, can also
reduce our ability to sell new homes and depress new home prices
and reduce our margins on the sales of new homes.
During fiscal 2007, the already difficult conditions within the
industry became progressively more challenging as demand for new
homes continued to decline in most of our markets. The slowing
demand, combined with the continued elevation in our sales
cancellation rate, caused our sales results to be significantly
below expectations. Also, our gross profit from home sales
revenues continued to decline as we offered higher levels of
incentives and price concessions in attempts to stimulate demand
in our communities.
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We believe that housing market conditions will continue to be
challenging and may deteriorate further. We cannot predict the
duration or ultimate severity of these challenging conditions.
The
reduction in availability of mortgage financing and the
volatility and reduction in liquidity in the financial markets
have adversely affected our business, and the duration and
ultimate severity of the effects are uncertain.
During fiscal 2007, the mortgage lending industry experienced
significant instability due to, among other things, defaults on
subprime loans and a resulting decline in the market value of
such loans. In light of these developments, lenders, investors,
regulators and other third parties questioned the adequacy of
lending standards and other credit requirements for several loan
programs made available to borrowers in recent years. This has
led to reduced investor demand for mortgage loans and
mortgage-backed securities, tightened credit requirements,
reduced liquidity and increased credit risk premiums. A
deterioration in credit quality among subprime and other
nonconforming loans has caused almost all lenders to eliminate
subprime mortgages and most other loan products that are not
conforming loans, FHA/VA-eligible loans or jumbo loans (which
meet conforming underwriting guidelines other than loan size).
Fewer loan products and tighter loan qualifications in turn make
it more difficult for some borrowers to finance the purchase of
our homes and for some buyers of existing homes from our move-up
buyers to finance the purchase of the move-up buyers
existing home. These factors have served to reduce the pool of
qualified homebuyers and made it more difficult to sell to first
time and first time
move-up
buyers which have long made up a substantial part of our
customers. These reductions in demand have adversely affected
our operations and financial results, and the duration and
severity of the effects are uncertain.
We believe that the liquidity provided by Fannie Mae and Freddie
Mac to the mortgage industry is very important to the housing
market. These entities have recently reported losses as a result
of deteriorating housing and credit market conditions. These
losses have reduced their equity, which may limit their ability
to acquire mortgages. The federal government recently sought to
limit the size of the home-loan portfolios and operations of
these government-sponsored enterprises. Any limitations or
restrictions on the availability of the financing or on the
liquidity provided by them could adversely affect interest
rates, mortgage availability and our sales of new homes and
mortgage loans.
Our
strategies in responding to the adverse conditions in the
homebuilding industry have had limited success, and the
continued implementation of these and other strategies may not
be successful.
While we have been successful in generating positive operating
cash flow and reducing our inventories in fiscal 2007, we have
done so at significantly reduced gross profit levels and have
incurred significant asset impairment charges. These have
contributed to the net loss we recognized in fiscal 2007. Also,
in fiscal 2007, notwithstanding our sales strategies, we
continued to experience an elevated rate of sales contract
cancellations. We believe that the increase in the cancellation
rate is largely due to a decrease in homebuyer confidence, due
principally to continued price declines and increases in the
level of sales incentives for both new and existing homes. A
more restrictive mortgage lending environment and the inability
of some buyers to sell their existing homes have also impacted
cancellations. Many of the factors that affect new sales and
cancellation rates are beyond our control. It is uncertain how
long the reduction in sales and the increased level of
cancellations will continue.
The
homebuilding industry continues to be cyclical and affected by
changes in general economic, real estate or other business
conditions that could adversely affect our business or financial
results.
Inventory Risks. Inventory risks are
substantial for our homebuilding business. The risks inherent in
controlling or purchasing and developing land increase as
consumer demand for housing decreases. Thus, we may have
acquired options on or bought and developed land at a cost we
will not be able to recover fully or on which we cannot build
and sell homes profitably. Our deposits for building lots
controlled under option or similar contracts may be put at risk.
The value of undeveloped land, building lots and housing
inventories can also fluctuate significantly as a result of
changing market conditions. In addition, inventory carrying
costs can be significant and can result in reduced margins or
losses in a poorly performing project or market. In the
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present weak market conditions, we have sold homes and land for
lower profit margins than in the past and we have recorded
significant inventory impairment charges.
Historically, our goals for years of supply for ownership and
control of land and building lots were based on
managements expectations for future volume growth. In
light of the much weaker market conditions encountered in fiscal
2006, which further deteriorated in fiscal 2007, our
expectations changed and we significantly slowed our purchases
of land and lots as part of our strategy to reduce our inventory
to better match our reduced rate of production. We terminated
numerous land option contracts and wrote off earnest money
deposits and pre-acquisition costs related to these option
contracts. We cannot make any assurances that the measures we
employ to manage inventory risks and costs will be successful.
Supply Risks. The homebuilding industry has
from time to time experienced significant difficulties that can
affect the cost or timing of construction, including:
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difficulty in acquiring land suitable for residential building
at affordable prices in locations where our potential customers
want to live;
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shortages of qualified trades people;
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reliance on local subcontractors, who may be inadequately
capitalized;
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shortages of materials; and
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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.
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Risks from Nature. 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
and Texas, where we have some of our larger operations, present
increased risks of adverse weather or natural disaster.
Risks Related to National Security. Continued
military deployments in the Middle East and other overseas
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 national economy.
Consequences. As a result of the foregoing
matters, potential customers may be less able or willing to buy
our homes, or we may take longer or incur more costs to build
them. Because of current market conditions, we have not been
able to recapture any increased costs by raising prices. In the
future, our ability to do so may also be limited by market
conditions or because we fix our prices in advance of delivery
by signing home sales contracts. We may be unable to change the
mix of our home offerings or the affordability of our homes to
maintain our margins or satisfactorily address changing market
conditions in other ways. In addition, cancellations of home
sales contracts in backlog may increase as homebuyers cancel or
do not honor their contracts.
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 may
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 repurchase obligations for previous
originations.
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Increases
in interest rates, reductions in mortgage availability or
increases in other costs of owning a home could prevent
potential customers from buying our homes and adversely affect
our business or our financial results. During fiscal 2007, we
experienced a reduction in the mortgage financing available to
our customers.
Most of our customers finance their home purchases through
lenders providing mortgage financing. Prior to the recent
volatility in the financial markets, interest rates were at
historical lows and a variety of mortgage products were
available. As a result, homeownership became more accessible.
The mortgage products available included features that allowed
buyers to obtain financing for a significant portion, up to all,
of the purchase price of the home, had very limited underwriting
requirements or provided for lower initial monthly payments. As
a result, more people were able to qualify for mortgage
financing. During fiscal 2007, there was a significant decrease
in the type of mortgage products available and a general
increase in the qualification requirements for mortgages such
that fewer people are able to qualify for and obtain mortgage
financing. This, coupled with higher mortgage interest rates has
reduced demand for new homes.
Some of our homebuyers use down payment assistance programs,
which allow homebuyers to receive gift funds from non-profit
corporations to be used as a down payment. Homebuilders are a
source of funding for these programs. The Department of Housing
and Urban Development (HUD) and Congress are considering
limitations and further regulation of these programs. New
restrictions may limit the ability of seller-funded non-profit
corporations to fund down payment assistance programs for
government-insured mortgage loans. HUD has issued a rule that
eliminates seller-funded down payment assistance as an
acceptable minimum investment in the property for FHA insured
loans. However, the implementation of that rule has been delayed
as a result of litigation filed by certain down payment
assistance providers. The ultimate outcome of this litigation is
uncertain. If, as a result of legislative, regulatory or other
action, the gift fund programs that some of our customers use
would no longer be available to them, we would expect to seek
other financing alternatives, and seek different down payment
programs for those customers who meet applicable guidelines.
There can be no assurance, however, that any such alternative
programs would be as attractive to our customers as the programs
offered today and that our sales would not suffer.
We believe that the availability of FHA and VA mortgage
financing is an important factor in marketing some of our homes.
Any limitations or restrictions on the availability of the
financing provided by them could adversely affect interest
rates, mortgage financing and our sales of new homes and
mortgage loans.
Even if potential customers do not need financing, changes in
interest rates and the availability of mortgage financing
products may make it harder for them to sell their current homes
to potential buyers who need financing.
Significant expenses of owning a home, including mortgage
interest expense and real estate taxes, generally are deductible
expenses for an individuals 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,
to eliminate or substantially modify these income tax
deductions, the after-tax cost of owning a new home could
increase for many of our potential customers. The resulting 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.
These matters may adversely affect the sales or pricing of our
homes and may also reduce the volume or margins in our financial
services business. The impact on our financial services business
may be compounded to the extent we are unable to match interest
rates and amounts on loans we have committed to originate
through the various hedging strategies we employ.
Governmental
regulations could increase the cost and limit the availability
of our development and homebuilding projects or affect our
related financial services operations 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
13
broad discretion to the administering governmental authorities
as to the conditions we must meet prior to 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. In addition, in many markets
government authorities have implemented no growth or growth
control initiatives. Any of these can limit, delay or increase
the costs of development or home construction.
New housing developments may be subject to various assessments
for schools, parks, streets and other public improvements, which
could cause an increase in the total cost of homeownership. In
addition, increases in property tax rates by local governmental
authorities, as experienced in response to reduced federal and
state funding, can adversely affect the ability of potential
customers to obtain financing or their desire to purchase new
homes.
We are subject to a variety of local, state and federal laws and
regulations concerning protection of health, safety 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.
Our financial services operations are also subject to numerous
federal, state and local laws and regulations. These include
eligibility requirements for participation in federal loan
programs, compliance with consumer lending and similar
requirements such as disclosure requirements, prohibitions
against discrimination and real estate settlement procedures.
They may also subject our operations to examination by the
applicable agencies. These factors may limit our ability to
provide mortgage financing or title services to potential
purchasers of our homes.
Our
substantial debt could adversely affect our financial
condition.
We have a significant amount of debt. As of September 30,
2007, our consolidated debt was $4,376.8 million. In the
ordinary course of business, we may incur significant additional
debt, to the extent permitted by our revolving credit facility,
our indentures and the credit facilities of our financial
services subsidiaries.
Possible Consequences. The amount of our debt
could have important consequences. For example, it could:
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limit our ability to obtain future financing for working
capital, capital expenditures, acquisitions, debt service
requirements or other requirements;
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require us to dedicate a substantial portion of our cash flow
from operations to payment of our debt and reduce our ability to
use our cash flow for other purposes;
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limit our flexibility in planning for, or reacting to, the
changes in our business;
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place us at a competitive disadvantage because we have more debt
than some of our competitors; and
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make us more vulnerable in the event of a downturn in our
business or in general economic conditions.
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Dependence on Future Performance. Our ability
to meet our debt service and other obligations will depend upon
our future financial performance. We are engaged in businesses
that are substantially affected by changes in industry and
economic conditions. Our revenues and earnings vary with the
level of general economic activity in the markets we serve. Our
businesses are also affected by financial, political, business
and other factors, many of which are beyond our control. The
factors that affect our ability to generate cash can also affect
our ability to raise additional funds for these purposes through
the sale of debt or equity securities, 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 credit facilities bear interest at floating
rates and our interest rate swap agreements fix our interest
rate for only a portion of these borrowings.
As of September 30, 2007, the scheduled maturities of
principal on our outstanding debt for the subsequent
12 months totaled $631.2 million, including
$387.8 million in financial services debt that must be
renewed annually. Based on the current level of operations, we
believe our cash flow from operations, available cash,
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available borrowings under our credit facilities and our ability
to access the capital markets and to refinance or renew our
facilities in a timely manner will be adequate to meet our
future cash needs. We cannot, however, make any assurances that
in the future our business will generate sufficient cash flow
from operations or that borrowings or access to the capital
markets or refinancing or renewal facilities will be available
to us in amounts sufficient to enable us to pay or refinance our
indebtedness or to fund other cash needs.
Indenture and Credit Facility
Restrictions. Our revolving credit facility and
the indenture governing our senior subordinated notes impose
restrictions on our operations and activities. The most
significant restrictions relate to limits on investments, cash
dividends, stock repurchases and other restricted payments,
incurrence of indebtedness, creation of liens and asset
dispositions, and require maintenance of a maximum leverage
ratio, a minimum ratio of earnings before interest, income
taxes, depreciation and amortization to interest incurred,
minimum levels of tangible net worth and compliance with other
financial covenants. In addition, the indentures governing our
senior notes impose restrictions on the creation of liens. If we
fail to comply with any of these restrictions or covenants, the
trustees, the noteholders or the lending banks, as applicable,
could cause our debt to become due and payable prior to
maturity. In addition, if the margins by which we meet the
financial covenants in our revolving credit facility are reduced
significantly in the future, we or our lenders may seek to
negotiate revised terms for the facility that could increase the
cost, reduce the availability or change other conditions of the
facility.
The credit facilities of our financial services subsidiaries
also require the maintenance of minimum levels of tangible net
worth, ratio of debt to tangible net worth and net income. A
failure to comply with these requirements could allow the
lending banks to terminate the availability of funds to the
financial services subsidiaries or cause their debt to become
due and payable prior to maturity.
Change in Debt Rating. Until November 2007, we
had investment grade ratings on our senior debt from all three
of the major rating agencies. In November one of the agencies
lowered our rating below investment grade while another placed
us on watch for a possible downgrade from investment grade. The
third agency has a negative outlook on its investment grade
rating of our debt. If we do not maintain our investment grade
credit ratings from both of the remaining agencies, available
credit under our revolving credit facility is subject to
limitations based on specified percentages of unsold homes,
developed lots and lots under development included in inventory
and the amount of other senior unsecured indebtedness and the
cost of such capital may increase. Further, the loss of our
investment grade rating can make accessing the public debt
markets more difficult and expensive.
Change of Control Purchase Options. If a
change of control occurs as defined in the indentures governing
many series of our senior and senior subordinated notes,
constituting $1.9 billion principal amount in the aggregate
as of September 30, 2007, 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. Moreover, a change
of control may also result in the acceleration of our revolving
credit facility and our financial services credit facilities. If
purchase offers were required under the indentures for these
notes or these credit facilities were accelerated, we can give
no assurance that we would have sufficient funds to pay the
amounts that we would be required to purchase or repay. At
September 30, 2007, we did not have sufficient funds
available to purchase or pay all of such outstanding debt upon a
change of control.
Impact of Financial Services Debt. Our
financial services business is conducted through subsidiaries
that are not restricted by our indentures or revolving credit
facility. The ability of our financial services subsidiaries to
provide funds to our homebuilding operations, however, is
subject to restrictions in their own credit facilities. These
funds would not be available to us upon the occurrence and
during the continuance of defaults under these facilities.
Moreover, our right to receive assets from these subsidiaries
upon liquidation or recapitalization will be subject to the
prior claims of the creditors of these subsidiaries. Any claims
we may have to funds from this segment would be subordinate to
subsidiary indebtedness to the extent of any security for such
indebtedness and to any indebtedness otherwise recognized as
senior to our claims.
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Homebuilding
and financial services are very competitive, and competitive
conditions could adversely affect our business or our 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 other local, regional and national homebuilders,
often within larger subdivisions designed, planned and developed
by such homebuilders. We also compete with existing home sales
and rental properties. The competitive conditions in the
homebuilding industry can result in:
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lower sales;
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lower selling prices;
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increased selling incentives;
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lower profit margins;
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impairments in the value of our inventory, goodwill and other
assets;
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difficulty in effecting our strategies to reduce inventory;
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difficulty in acquiring suitable land, raw materials, and
skilled labor at acceptable prices; or
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delays in construction of our homes;
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Our financial services business competes with other mortgage
lenders, including national, regional and local mortgage banks
and other financial institutions. Mortgage lenders with greater
access to capital markets or different lending criteria may be
able to offer more attractive financing to potential customers.
When we are affected by these competitive conditions, our
business and financial results could be adversely affected. In
the current downturn in the homebuilding industry, the reactions
of our competitors may have reduced the effectiveness of our
efforts to achieve pricing stability and reduce our inventory
levels.
Our
future operations may require additional capital, which may not
be available.
Our operations require significant amounts of cash. We may be
required to seek additional capital, whether from sales of
equity, debt issuances or additional bank borrowings, for our
business. We can give no assurance as to the availability of
such additional capital or, if available, whether it would be on
terms acceptable to us. Moreover, the indentures for our
outstanding public debt and the covenants of our credit
facilities contain provisions that may restrict the debt we may
incur in the future. If we are not successful in obtaining
sufficient capital, it could reduce the level of our business
and may adversely affect our financial results.
We
cannot make any assurances that any future growth strategies
will be successful.
Since 1993, we acquired many homebuilding companies. Although we
focused on internal growth in recent years, we may make
strategic acquisitions of homebuilding companies in the future.
Successful strategic acquisitions require the integration of
operations and management and other efforts to realize the
benefits that may be available. Although we believe that we have
been successful in doing so in the past, we can give no
assurance that we would be able to identify, acquire and
integrate successfully 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 related to such
acquisitions based on the subsequent results of the operating
segments to which the acquired businesses were assigned. The
risk of write-offs related to goodwill impairment increases
during a cyclical housing downturn when profitability of our
operating segments may decline, as evidenced by the goodwill
impairment charges we recognized in fiscal 2007. Moreover, we
may not be able to implement successfully our operating and
future growth strategies within our existing markets.
16
Homebuilding
is subject to home warranty and construction defect claims in
the ordinary course of business that can be
significant.
As a homebuilder, we are subject to home warranty and
construction defect claims arising in the ordinary course of
business. As a consequence, we maintain product liability
insurance, obtain indemnities and certificates of insurance from
subcontractors generally covering claims related to workmanship
and materials, and create 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 warranty and construction
defect claims in the future. Contractual indemnities can be
difficult to enforce, we may be responsible for applicable
self-insured retentions and some types of claims may not be
covered by insurance or may exceed applicable coverage limits.
Additionally, the coverage offered by and the availability of
product liability insurance for construction defects are
currently limited and costly. We have responded to increases in
insurance costs and coverage limitations in recent years 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.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
In addition to our inventories of land, lots and homes, we own
several office buildings totaling approximately
186,000 square feet and we lease approximately
1,511,000 square feet of office space under leases expiring
through January 2015, in our various operating markets to house
our homebuilding and financial services operating divisions, as
well as 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 ultimate outcome of the
lawsuits and contingencies cannot be predicted with certainty,
we believe the ultimate liability, if any, will not have a
material adverse effect on our financial position or operations.
On June 15, 2007, a putative class action, John R.
Yeatman, et al. v. D.R. Horton, Inc., et al., was filed
by one of our customers against us and our affiliated mortgage
company subsidiary in the United States District Court for the
Southern District of Georgia. The complaint seeks certification
of a class alleged to include persons who, within the year
preceding the filing of the suit, purchased a home from us and
obtained a mortgage for such purchase from our affiliated
mortgage company subsidiary. The complaint alleges that we
violated Section 8 of the Real Estate Settlement Procedures
Act by effectively requiring our homebuyers to use our
affiliated mortgage company to finance their home purchases by
offering certain discounts and incentives. The action seeks
damages in an unspecified amount and injunctive relief. We
believe the claims alleged in this action are without merit and
will defend them vigorously. However, as this action is still in
its early stages, we are unable to express an opinion as to the
likelihood of an unfavorable outcome or the amount of damages,
if any; consequently, we have not recorded any associated
liabilities in the accompanying consolidated balance sheet.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None.
17
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS 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.
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|
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|
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|
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|
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|
Year Ended September 30, 2007
|
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|
Year Ended September 30, 2006
|
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|
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Declared
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Declared
|
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High
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Low
|
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Dividends
|
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|
High
|
|
|
Low
|
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|
Dividends
|
|
|
1st Quarter
|
|
$
|
27.81
|
|
|
$
|
21.51
|
|
|
$
|
0.15
|
|
|
$
|
38.56
|
|
|
$
|
28.78
|
|
|
$
|
0.09
|
|
2nd Quarter
|
|
|
31.13
|
|
|
|
21.79
|
|
|
|
0.15
|
|
|
|
41.66
|
|
|
|
30.80
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|
0.10
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|
3rd Quarter
|
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|
24.49
|
|
|
|
19.76
|
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|
|
0.15
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|
|
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35.27
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|
|
22.55
|
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|
|
0.10
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|
4th Quarter
|
|
|
20.75
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|
|
|
12.46
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|
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|
0.15
|
|
|
|
25.43
|
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|
|
19.52
|
|
|
|
0.15
|
|
As of November 16, 2007, the closing price of our common
stock on the NYSE was $12.16, and there were approximately 642
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. We are required to
comply with certain covenants contained in the bank agreements
and our senior subordinated note indenture. In July 2007,
through amendment to the revolving credit facility agreement, a
restriction that limited our ability to pay cash dividends on
our common stock in an amount, on a cumulative basis, not to
exceed 50% of consolidated net income was removed. Under the
amended agreement, payment of dividends is permitted provided
there is no payment default under the facility, we are in
compliance with certain financial covenants under the agreement,
and such payments do not cause us not to be in compliance with
those financial covenants. However, payment of cash dividends is
still limited to the extent our total restricted payments are
limited. At September 30, 2007, under the most restrictive
debt covenants in effect, approximately $2.3 billion was
available for all restricted payments.
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 2007, 2006 and 2005, we did not sell any
securities that were not registered under the Securities Act of
1933, as amended.
In November 2005, our Board of Directors authorized the
repurchase of up to $500 million of our common stock,
replacing the previous common stock repurchase authorization.
During fiscal 2006, we repurchased 1,000,000 shares of our
common stock at a total cost of $36.8 million. In November
2006, our Board of Directors extended the remaining
$463.2 million common stock repurchase authorization to
November 30, 2007. We made no repurchases of common stock
under the share repurchase program during fiscal 2007, and
therefore, all of the $463.2 million authorization was
remaining at September 30, 2007. In November 2007, our
Board of Directors extended the $463.2 million common stock
repurchase authorization to November 30, 2008.
During the third quarter of fiscal 2007, we repurchased
2,433 shares of our common stock, representing shares
delivered by employees to satisfy the exercise price of stock
options as authorized by our 1991 Stock Incentive Plan. These
shares were not purchased under our share repurchase program
and, therefore, had no effect on the remaining stock repurchase
authorization. There were no such transactions during the fourth
quarter of fiscal 2007.
18
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, 2007, compared to the S&P
500 Index and the S&P 500 Homebuilding Index. The
comparison assumes an investment in D.R. Horton common stock and
in each of the foregoing indices of $100 at September 30,
2002, 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
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
D.R. Horton, Inc.
|
|
$
|
100.00
|
|
|
$
|
177.68
|
|
|
$
|
272.56
|
|
|
$
|
401.53
|
|
|
$
|
269.84
|
|
|
$
|
148.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Index
|
|
$
|
100.00
|
|
|
$
|
124.40
|
|
|
$
|
141.65
|
|
|
$
|
159.01
|
|
|
$
|
176.17
|
|
|
$
|
205.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Homebuilding Index
|
|
$
|
100.00
|
|
|
$
|
154.88
|
|
|
$
|
245.09
|
|
|
$
|
351.18
|
|
|
$
|
254.35
|
|
|
$
|
129.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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19
|
|
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, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Item 1A Risk Factors, Item 8,
Consolidated Financial Statements and related Notes,
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.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions, except per share data)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
$
|
11,088.8
|
|
|
$
|
14,760.5
|
|
|
$
|
13,628.6
|
|
|
$
|
10,658.0
|
|
|
$
|
8,552.1
|
|
Financial Services
|
|
|
207.7
|
|
|
|
290.8
|
|
|
|
235.1
|
|
|
|
182.8
|
|
|
|
176.0
|
|
Gross profit Homebuilding
|
|
|
603.7
|
|
|
|
3,342.2
|
|
|
|
3,488.3
|
|
|
|
2,460.7
|
|
|
|
1,746.3
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
|
(1,020.0
|
)
|
|
|
1,878.7
|
|
|
|
2,273.0
|
|
|
|
1,508.2
|
|
|
|
914.7
|
|
Financial Services
|
|
|
68.8
|
|
|
|
108.4
|
|
|
|
105.6
|
|
|
|
74.7
|
|
|
|
93.5
|
|
Net income (loss)
|
|
|
(712.5
|
)
|
|
|
1,233.3
|
|
|
|
1,470.5
|
|
|
|
975.1
|
|
|
|
626.0
|
|
Net income (loss) per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(2.27
|
)
|
|
|
3.94
|
|
|
|
4.71
|
|
|
|
3.14
|
|
|
|
2.11
|
|
Diluted (2)
|
|
|
(2.27
|
)
|
|
|
3.90
|
|
|
|
4.62
|
|
|
|
3.09
|
|
|
|
1.99
|
|
Cash dividends declared per common share (1)
|
|
|
0.60
|
|
|
|
0.44
|
|
|
|
0.3075
|
|
|
|
0.215
|
|
|
|
0.135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
9,343.5
|
|
|
$
|
11,343.1
|
|
|
$
|
8,486.8
|
|
|
$
|
6,567.4
|
|
|
$
|
5,082.3
|
|
Total assets
|
|
|
11,556.3
|
|
|
|
14,820.7
|
|
|
|
12,514.8
|
|
|
|
8,985.2
|
|
|
|
7,279.4
|
|
Notes payable
|
|
|
4,376.8
|
|
|
|
6,078.6
|
|
|
|
4,909.6
|
|
|
|
3,499.2
|
|
|
|
2,963.2
|
|
Stockholders equity
|
|
|
5,586.9
|
|
|
|
6,452.9
|
|
|
|
5,360.4
|
|
|
|
3,960.7
|
|
|
|
3,031.3
|
|
|
|
|
(1) |
|
All basic and diluted income per share amounts and cash
dividends declared per share amounts reflect the effects of the
three-for-two stock split (effected as a 50% stock dividend) of
January 12, 2004 and the four-for-three stock split
(effected as a
331/3%
stock dividend) of March 16, 2005. |
|
(2) |
|
In October 2004, the Financial Accounting Standards Board
ratified Emerging Issues Task Force Issue
No. 04-8,
The Effect of Contingently Convertible Instruments on
Diluted Earnings per Share (EITF
04-8). EITF
04-8
requires that shares underlying contingently convertible debt be
included in diluted earnings per share computations using the
if-converted method regardless of whether the market price
trigger or other contingent features have been met. The
effective date for EITF
04-8 was for
reporting periods ending after December 15, 2004. EITF
04-8 also
requires restatement of earnings per share amounts for prior
periods presented during which the instrument was outstanding.
In May 2001, we issued zero coupon convertible senior notes,
which were converted into shares of our common stock in June
2003. During certain quarters of the year ended
September 30, 2003, the market price trigger was not met
and the convertible shares were not included in the computation
of diluted net income per share. The adoption of EITF
04-8 reduced
our diluted net income per share for the year ended
September 30, 2003 by $0.06 (adjusted to reflect the
effects of the three-for-two common stock split, effected as a
50% stock dividend and paid on January 12, 2004 and the
four-for-three common stock split, effected as a
331/3%
stock dividend and paid on March 16, 2005). |
20
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Results
of Operations Fiscal Year 2007 Overview
Our fiscal 2007 results reflect the challenges that the
homebuilding industry faced during the year. Fiscal 2006 marked
the beginning of the current housing downturn, and in fiscal
2007 the factors hurting demand for new homes persisted, grew in
intensity and became more pervasive across the United States.
Throughout the year, the already difficult conditions within the
industry became progressively more challenging. High inventory
levels of both new and existing homes, elevated cancellation
rates, low sales absorption rates, affordability issues and
overall weak consumer confidence persisted through the year. The
effects of these factors were further magnified by a decline in
availability of mortgage products and higher mortgage interest
rates on certain loan products, due to credit tightening in the
mortgage markets. These factors, combined with our continued
elevated sales cancellation rate, caused our sales volume to be
significantly below expectations. Also, our gross profit from
home sales revenues continued to decline as we offered higher
levels of incentives and price concessions in attempts to
stimulate demand in our communities.
As we progressed though fiscal 2007, our disappointing sales
results, further declines in our sales order prices, continued
declines in our gross profit from home sales revenues and the
more challenging market conditions caused us to have a more
cautious outlook for the homebuilding industry and its impact on
our business. We believe that housing market conditions will
continue to be challenging and may deteriorate further, and that
the timing of a recovery in the housing market remains unclear.
Our outlook incorporates several factors, including continued
margin pressure from increased price reductions and sales
incentives; continued high levels of new and existing homes
available for sale; weak demand from new home consumers as they
continue to see home prices adjust downward; continued high
sales cancellations; continued weak housing affordability in
many markets that experienced rapid price appreciation over the
past few years; and permanent restrictions on the availability
of certain mortgage products as a result of the recent credit
tightening in the mortgage markets.
Due to the declining market conditions and our increased use of
price reductions and sales incentives, we evaluated a
significant portion of our inventory in our quarterly impairment
analyses during fiscal 2007. Additionally, we evaluated the
recoverability of our goodwill. Our goodwill and inventory
impairment evaluations reflected our expectation of continued
and increasing challenges in the homebuilding industry, and our
belief that these challenging conditions may last longer and
have a greater impact on our business than we previously
believed. Based on our evaluations, we recorded significant
impairment charges to our inventory and goodwill balances during
the year, which resulted in a net loss for fiscal 2007.
Strategy
We believe the long-term fundamentals which support housing
demand, namely population growth and household formation, remain
solid. We also believe the current negative market conditions,
the effects of which have been more severe and more prolonged
than previously expected, will moderate over the long term. In
the interim, we remain committed to the following initiatives
related to our operating strategy in the current homebuilding
business environment:
|
|
|
|
|
Reducing our land and lot inventory from current levels by
|
|
|
|
|
|
constructing and selling homes,
|
|
|
|
opportunistically selling land and lots,
|
|
|
|
significantly restricting our spending for land and lot
purchases,
|
|
|
|
decreasing our land development spending or in some instances,
suspending development in certain projects until market
conditions improve; and
|
|
|
|
renegotiating or canceling land option purchase contracts.
|
|
|
|
|
|
Reducing our inventory of homes under construction by limiting
the construction of unsold homes.
|
|
|
|
Continuing to offer incentives and price reductions to increase
sales as necessary to maximize returns and cash flows.
|
21
|
|
|
|
|
Decreasing our cost of goods purchased from both vendors and
subcontractors.
|
|
|
|
Continuing to modify our product offerings to provide more
affordable homes.
|
|
|
|
Decreasing our SG&A infrastructure to be in line with our
reduced expectations of production levels.
|
|
|
|
Reducing our level of debt by utilizing cash flows from
operations.
|
These initiatives allowed us to generate significant cash flows
from operations during fiscal 2007, which we utilized to reduce
our outstanding debt by a substantial amount. Although we cannot
provide any assurances that these initiatives will continue to
be successful, we expect that our operating strategy will allow
us to continue to strengthen our balance sheet and liquidity
position.
Key
Results
Key financial results as of and for our fiscal year ended
September 30, 2007, as compared to fiscal 2006, were as
follows:
Homebuilding
Operations:
|
|
|
|
|
Homebuilding pre-tax income, before pre-tax charges for goodwill
impairment, inventory impairments and write-offs of deposits and
pre-acquisition costs related to land option contracts, was
$783.6 million, down 64% from $2,149.6 million in
fiscal 2006.
|
|
|
|
Homebuilding revenues decreased 25% to $11.1 billion.
|
|
|
|
Homes closed decreased 22% to 41,370 homes and the average
selling price of those homes decreased 5% to $259,200.
|
|
|
|
Net sales orders decreased 35% to 33,687 homes.
|
|
|
|
Sales order backlog decreased 48% to $2.7 billion.
|
|
|
|
Home sales gross margins before inventory impairments, land
option cost write-offs and the effect of the change in profit
deferred under SFAS No. 66 decreased 720 basis
points to 16.8%.
|
|
|
|
Homebuilding SG&A expenses as a percentage of homebuilding
revenues increased 40 basis points to 10.3%.
|
|
|
|
Homebuilding debt decreased by $897.9 million to
$3,989.0 million.
|
|
|
|
Net homebuilding debt to total capital improved 50 basis
points to 40.2%, and gross homebuilding debt to total capital
improved 140 basis points to 41.7%.
|
Financial
Services Operations:
|
|
|
|
|
Total financial services revenues decreased by 29% to
$207.7 million.
|
|
|
|
Financial services pre-tax income decreased by 37% to
$68.8 million.
|
|
|
|
Financial services debt decreased by $803.9 million to
$387.8 million.
|
Consolidated
Results:
|
|
|
|
|
Net loss per share was $2.27, compared to diluted earnings per
share of $3.90.
|
|
|
|
Net loss was $712.5 million, compared to net income of
$1,233.3 million.
|
|
|
|
Stockholders equity decreased to $5.6 billion at
September 30, 2007, from $6.5 billion at
September 30, 2006.
|
|
|
|
Net cash provided by operations was $1.4 billion during
fiscal 2007.
|
22
Results
of Operations Homebuilding
Our operating segments are our seven homebuilding operating
regions, which we present as separate reportable segments.
Previously, we presented six homebuilding reporting segments,
aggregating both our Northeast and Midwest operating regions
into our Northeast reporting segment. However, because of a
realignment of our management structure during the fourth
quarter of fiscal 2007, our Colorado markets are now included in
our Midwest operating region, rather than in our Southwest
operating region. As a result, we determined that each of our
seven operating regions constitutes a reportable segment, as
reflected in our current year presentation. All prior year
segment information has been restated to conform to the fiscal
2007 presentation. These reporting segments, which we also refer
to as reporting regions, have homebuilding operations located in
the following states:
|
|
|
Northeast:
|
|
Delaware, Georgia (Savannah only), Maryland, New Jersey, North
Carolina, Pennsylvania, South Carolina and Virginia
|
Midwest:
|
|
Colorado, Illinois, Minnesota and Wisconsin
|
Southeast:
|
|
Alabama, Florida and Georgia
|
South Central:
|
|
Louisiana, Mississippi, Oklahoma and Texas
|
Southwest:
|
|
Arizona, New Mexico and Utah
|
California:
|
|
California and Nevada (Reno only)
|
West:
|
|
Hawaii, Idaho, Nevada, Oregon and Washington
|
Fiscal
Year Ended September 30, 2007 Compared to Fiscal Year Ended
September 30, 2006
The following tables set forth key operating and financial data
for our homebuilding operations by reporting segment as of and
for the fiscal years ended September 30, 2007 and 2006.
Based on our revised disaggregation of operating segments and
the states within those segments, we have restated the 2006
amounts between reporting segments to conform to the 2007
presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Orders
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
Homes Sold
|
|
|
Value (In millions)
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Northeast
|
|
|
3,085
|
|
|
|
4,999
|
|
|
|
(38
|
)%
|
|
$
|
792.3
|
|
|
$
|
1,233.5
|
|
|
|
(36
|
)%
|
|
$
|
256,800
|
|
|
$
|
246,700
|
|
|
|
4
|
%
|
Midwest
|
|
|
3,065
|
|
|
|
5,007
|
|
|
|
(39
|
)%
|
|
|
887.0
|
|
|
|
1,471.3
|
|
|
|
(40
|
)%
|
|
|
289,400
|
|
|
|
293,800
|
|
|
|
(1
|
)%
|
Southeast
|
|
|
5,206
|
|
|
|
7,082
|
|
|
|
(26
|
)%
|
|
|
1,130.4
|
|
|
|
1,753.8
|
|
|
|
(36
|
)%
|
|
|
217,100
|
|
|
|
247,600
|
|
|
|
(12
|
)%
|
South Central
|
|
|
9,740
|
|
|
|
14,682
|
|
|
|
(34
|
)%
|
|
|
1,723.5
|
|
|
|
2,536.4
|
|
|
|
(32
|
)%
|
|
|
177,000
|
|
|
|
172,800
|
|
|
|
2
|
%
|
Southwest
|
|
|
6,244
|
|
|
|
9,065
|
|
|
|
(31
|
)%
|
|
|
1,210.4
|
|
|
|
2,210.8
|
|
|
|
(45
|
)%
|
|
|
193,900
|
|
|
|
243,900
|
|
|
|
(21
|
)%
|
California
|
|
|
3,670
|
|
|
|
7,050
|
|
|
|
(48
|
)%
|
|
|
1,539.6
|
|
|
|
3,238.6
|
|
|
|
(52
|
)%
|
|
|
419,500
|
|
|
|
459,400
|
|
|
|
(9
|
)%
|
West
|
|
|
2,677
|
|
|
|
4,095
|
|
|
|
(35
|
)%
|
|
|
947.4
|
|
|
|
1,450.8
|
|
|
|
(35
|
)%
|
|
|
353,900
|
|
|
|
354,300
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,687
|
|
|
|
51,980
|
|
|
|
(35
|
)%
|
|
$
|
8,230.6
|
|
|
$
|
13,895.2
|
|
|
|
(41
|
)%
|
|
$
|
244,300
|
|
|
$
|
267,300
|
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Order Backlog
|
|
|
|
September 30,
|
|
|
|
Homes in Backlog
|
|
|
Value (In millions)
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Northeast
|
|
|
1,194
|
|
|
|
2,228
|
|
|
|
(46
|
)%
|
|
$
|
306.6
|
|
|
$
|
587.3
|
|
|
|
(48
|
)%
|
|
$
|
256,800
|
|
|
$
|
263,600
|
|
|
|
(3
|
)%
|
Midwest
|
|
|
600
|
|
|
|
1,037
|
|
|
|
(42
|
)%
|
|
|
192.1
|
|
|
|
342.2
|
|
|
|
(44
|
)%
|
|
|
320,200
|
|
|
|
330,000
|
|
|
|
(3
|
)%
|
Southeast
|
|
|
1,198
|
|
|
|
2,148
|
|
|
|
(44
|
)%
|
|
|
309.6
|
|
|
|
633.8
|
|
|
|
(51
|
)%
|
|
|
258,400
|
|
|
|
295,100
|
|
|
|
(12
|
)%
|
South Central
|
|
|
2,693
|
|
|
|
4,213
|
|
|
|
(36
|
)%
|
|
|
496.2
|
|
|
|
777.8
|
|
|
|
(36
|
)%
|
|
|
184,300
|
|
|
|
184,600
|
|
|
|
|
%
|
Southwest
|
|
|
3,198
|
|
|
|
5,391
|
|
|
|
(41
|
)%
|
|
|
706.5
|
|
|
|
1,417.5
|
|
|
|
(50
|
)%
|
|
|
220,900
|
|
|
|
262,900
|
|
|
|
(16
|
)%
|
California
|
|
|
941
|
|
|
|
2,088
|
|
|
|
(55
|
)%
|
|
|
430.9
|
|
|
|
1,041.7
|
|
|
|
(59
|
)%
|
|
|
457,900
|
|
|
|
498,900
|
|
|
|
(8
|
)%
|
West
|
|
|
618
|
|
|
|
1,020
|
|
|
|
(39
|
)%
|
|
|
252.5
|
|
|
|
384.8
|
|
|
|
(34
|
)%
|
|
|
408,600
|
|
|
|
377,300
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,442
|
|
|
|
18,125
|
|
|
|
(42
|
)%
|
|
$
|
2,694.4
|
|
|
$
|
5,185.1
|
|
|
|
(48
|
)%
|
|
$
|
258,000
|
|
|
$
|
286,100
|
|
|
|
(10
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes Closed
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
Homes Closed
|
|
|
Value (In millions)
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Northeast
|
|
|
4,119
|
|
|
|
5,304
|
|
|
|
(22
|
)%
|
|
$
|
1,072.9
|
|
|
$
|
1,392.9
|
|
|
|
(23
|
)%
|
|
$
|
260,500
|
|
|
$
|
262,600
|
|
|
|
(1
|
)%
|
Midwest
|
|
|
3,502
|
|
|
|
6,050
|
|
|
|
(42
|
)%
|
|
|
1,037.1
|
|
|
|
1,761.7
|
|
|
|
(41
|
)%
|
|
|
296,100
|
|
|
|
291,200
|
|
|
|
2
|
%
|
Southeast
|
|
|
6,156
|
|
|
|
8,053
|
|
|
|
(24
|
)%
|
|
|
1,454.6
|
|
|
|
2,029.4
|
|
|
|
(28
|
)%
|
|
|
236,300
|
|
|
|
252,000
|
|
|
|
(6
|
)%
|
South Central
|
|
|
11,260
|
|
|
|
13,444
|
|
|
|
(16
|
)%
|
|
|
2,005.2
|
|
|
|
2,282.9
|
|
|
|
(12
|
)%
|
|
|
178,100
|
|
|
|
169,800
|
|
|
|
5
|
%
|
Southwest
|
|
|
8,437
|
|
|
|
8,023
|
|
|
|
5
|
%
|
|
|
1,921.4
|
|
|
|
1,945.6
|
|
|
|
(1
|
)%
|
|
|
227,700
|
|
|
|
242,500
|
|
|
|
(6
|
)%
|
California
|
|
|
4,817
|
|
|
|
7,884
|
|
|
|
(39
|
)%
|
|
|
2,150.4
|
|
|
|
3,600.8
|
|
|
|
(40
|
)%
|
|
|
446,400
|
|
|
|
456,700
|
|
|
|
(2
|
)%
|
West
|
|
|
3,079
|
|
|
|
4,341
|
|
|
|
(29
|
)%
|
|
|
1,079.6
|
|
|
|
1,532.1
|
|
|
|
(30
|
)%
|
|
|
350,600
|
|
|
|
352,900
|
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,370
|
|
|
|
53,099
|
|
|
|
(22
|
)%
|
|
$
|
10,721.2
|
|
|
$
|
14,545.4
|
|
|
|
(26
|
)%
|
|
$
|
259,200
|
|
|
$
|
273,900
|
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Homebuilding Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Northeast
|
|
$
|
1,092.0
|
|
|
$
|
1,393.9
|
|
|
|
(22
|
)%
|
Midwest
|
|
|
1,111.5
|
|
|
|
1,795.7
|
|
|
|
(38
|
)%
|
Southeast
|
|
|
1,478.3
|
|
|
|
2,040.5
|
|
|
|
(28
|
)%
|
South Central
|
|
|
2,009.9
|
|
|
|
2,311.0
|
|
|
|
(13
|
)%
|
Southwest
|
|
|
1,966.6
|
|
|
|
1,978.4
|
|
|
|
(1
|
)%
|
California
|
|
|
2,245.5
|
|
|
|
3,643.1
|
|
|
|
(38
|
)%
|
West
|
|
|
1,185.0
|
|
|
|
1,597.9
|
|
|
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,088.8
|
|
|
$
|
14,760.5
|
|
|
|
(25
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Inventory
Impairments and Land Option Cost Write-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Land Option
|
|
|
|
|
|
|
|
|
Land Option
|
|
|
|
|
|
|
Inventory
|
|
|
Cost
|
|
|
|
|
|
Inventory
|
|
|
Cost
|
|
|
|
|
|
|
Impairments
|
|
|
Write-Offs
|
|
|
Total
|
|
|
Impairments
|
|
|
Write-Offs
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Northeast
|
|
$
|
72.3
|
|
|
$
|
9.2
|
|
|
$
|
81.5
|
|
|
$
|
14.4
|
|
|
$
|
12.5
|
|
|
$
|
26.9
|
|
Midwest
|
|
|
152.8
|
|
|
|
14.5
|
|
|
|
167.3
|
|
|
|
12.2
|
|
|
|
20.3
|
|
|
|
32.5
|
|
Southeast
|
|
|
181.6
|
|
|
|
28.6
|
|
|
|
210.2
|
|
|
|
14.2
|
|
|
|
20.2
|
|
|
|
34.4
|
|
South Central
|
|
|
10.4
|
|
|
|
14.2
|
|
|
|
24.6
|
|
|
|
|
|
|
|
2.2
|
|
|
|
2.2
|
|
Southwest
|
|
|
25.6
|
|
|
|
1.2
|
|
|
|
26.8
|
|
|
|
|
|
|
|
4.8
|
|
|
|
4.8
|
|
California
|
|
|
541.2
|
|
|
|
23.4
|
|
|
|
564.6
|
|
|
|
105.4
|
|
|
|
60.4
|
|
|
|
165.8
|
|
West
|
|
|
238.3
|
|
|
|
16.2
|
|
|
|
254.5
|
|
|
|
|
|
|
|
4.3
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,222.2
|
|
|
$
|
107.3
|
|
|
$
|
1,329.5
|
|
|
$
|
146.2
|
|
|
$
|
124.7
|
|
|
$
|
270.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
Impairments
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Northeast
|
|
$
|
39.4
|
|
|
$
|
|
|
Midwest
|
|
|
48.5
|
|
|
|
|
|
Southeast
|
|
|
11.5
|
|
|
|
|
|
South Central
|
|
|
|
|
|
|
|
|
Southwest
|
|
|
|
|
|
|
|
|
California
|
|
|
300.3
|
|
|
|
|
|
West
|
|
|
74.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
474.1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
Income (Loss) Before Income Taxes (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Region
|
|
|
|
|
|
Region
|
|
|
|
$s
|
|
|
Revenues
|
|
|
$s
|
|
|
Revenues
|
|
|
|
(In millions)
|
|
|
Northeast
|
|
$
|
(66.1
|
)
|
|
|
(6.1
|
)%
|
|
$
|
112.9
|
|
|
|
8.1
|
%
|
Midwest
|
|
|
(205.3
|
)
|
|
|
(18.5
|
)%
|
|
|
111.3
|
|
|
|
6.2
|
%
|
Southeast
|
|
|
(131.6
|
)
|
|
|
(8.9
|
)%
|
|
|
346.4
|
|
|
|
17.0
|
%
|
South Central
|
|
|
122.2
|
|
|
|
6.1
|
%
|
|
|
171.2
|
|
|
|
7.4
|
%
|
Southwest
|
|
|
204.6
|
|
|
|
10.4
|
%
|
|
|
424.8
|
|
|
|
21.5
|
%
|
California
|
|
|
(784.1
|
)
|
|
|
(34.9
|
)%
|
|
|
346.3
|
|
|
|
9.5
|
%
|
West
|
|
|
(159.7
|
)
|
|
|
(13.5
|
)%
|
|
|
365.8
|
|
|
|
22.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,020.0
|
)
|
|
|
(9.2
|
)%
|
|
$
|
1,878.7
|
|
|
|
12.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Expenses maintained at the corporate level are allocated to each
region based on the regions average inventory. These
expenses consist primarily of capitalized interest and property
taxes, which are amortized to cost of sales, and the expenses
related to the operations of our corporate office. |
25
Homebuilding
Operating Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
Percentages of
|
|
|
|
Related Revenues
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Gross profit Home sales
|
|
|
17.2
|
%
|
|
|
24.0
|
%
|
Gross profit Land/lot sales
|
|
|
22.9
|
%
|
|
|
53.7
|
%
|
Effect of inventory impairments and land option cost write-offs
on total homebuilding gross profit
|
|
|
(12.0
|
)%
|
|
|
(1.8
|
)%
|
Gross profit Total homebuilding
|
|
|
5.4
|
%
|
|
|
22.6
|
%
|
Selling, general and administrative expense
|
|
|
10.3
|
%
|
|
|
9.9
|
%
|
Goodwill impairment
|
|
|
4.3
|
%
|
|
|
|
%
|
Loss on early retirement of debt
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Other (income)
|
|
|
|
%
|
|
|
(0.1
|
)%
|
Income (loss) before income taxes
|
|
|
(9.2
|
)%
|
|
|
12.7
|
%
|
Net
Sales Orders and Backlog
Net sales orders represent the number and dollar value of new
sales contracts executed with customers, net of sales contract
cancellations. The value of net sales orders decreased 41%, to
$8,230.6 million (33,687 homes) in 2007 from
$13,895.2 million (51,980 homes) in 2006. The value of net
sales orders decreased 48%, to $1,309.5 million (6,374
homes) in the fourth quarter of fiscal 2007 from
$2,532.2 million (10,430 homes) in the same period of
fiscal 2006. The decreases in our net sales orders reflect the
softening of demand for new homes in most homebuilding markets.
We believe the most significant factors contributing to the
slowing of demand for new homes in most of our markets include
an increase in the supply of existing homes for sale, a
reduction in investor purchases, a decrease in the availability
of mortgage financing for many potential homebuyers and a
decline in homebuyer consumer confidence. Additionally, we
believe that the rapid price appreciation of new and existing
homes in many markets over the past several years has reduced
the number of potential homebuyers able to afford a home. Many
prospective homebuyers continue to approach the purchase
decision more tentatively due to continued increases in price
concessions and sales incentives offered on both new and
existing homes, concern over their ability to sell an existing
home or obtain mortgage financing and the general uncertainty
surrounding the housing market. We have attempted to increase
sales by providing increased sales incentives and lowering
prices, but the factors above, combined with the continued
pricing responses of our competitors, have limited the impact of
our pricing efforts. Subsequent to fiscal year 2007, the volume
of our net sales orders for the month ended October 31,
2007 decreased 54% compared to the month ended October 31,
2006.
In comparing fiscal 2007 to fiscal 2006, the value of net sales
orders decreased significantly in all seven of our market
regions. These decreases were primarily due to similar decreases
in the number of homes sold in each region, although in our
Southeast, Southwest and California regions, a decline in
average selling prices was also a significant factor. The
decreases in average selling prices were primarily due to the
increased use of price concessions and sales incentives and, to
a lesser extent, a shift to more affordable products in those
regions.
The most significant decline in net sales orders in fiscal 2007
occurred in our California region, with 48% fewer homes sold
than in fiscal 2006. We believe that home sales in our
California markets have been negatively impacted, to a greater
extent than our other regions, by a reduction in the pool of
qualified buyers due to a lack of housing affordability and the
decline of mortgage availability. We are closely monitoring, on
a project by project basis, our products, pricing and other
operational strategies in the California region. We will further
modify product offerings and pricing as necessary, as we attempt
to improve our sales in this region.
Our annual cancellation rate (sales orders cancelled divided by
gross sales orders) was 38% in fiscal 2007, compared to 28% in
fiscal 2006. Our cancellation rate in the fourth quarter of
fiscal 2007 was 48% and
26
cancellations in the month ended October 31, 2007 were at a
similar rate. The higher overall cancellation rate for fiscal
2007 was primarily attributable to cancellations in many of our
Arizona, California and Florida markets. These elevated
cancellation rates reflect the ongoing challenges in most
homebuilding markets, including the inability of many
prospective homebuyers to sell their existing homes, the
increasing level of sales incentives and home price reductions
in our markets continuing to erode buyer confidence and further
credit tightening in the mortgage markets. The impact of the
credit tightening became apparent in our cancellation rates in
late August and continued through September and October as the
mortgage products many buyers had selected were no longer
available or they could not qualify due to stricter underwriting
guidelines.
The average price of our net sales orders in fiscal 2007 was
$244,300, a decrease of 9% from the $267,300 average in fiscal
2006. The average price of our net sales orders decreased
significantly in our Southeast, Southwest and California
regions, due primarily to price reductions and increased
incentives in our Florida, Arizona and California markets. In
general, our pricing is dependent on the demand for our homes,
and declines in our average selling prices during the year were
due in large part to increases in the use of price reductions
and sales incentives. Further, as the inventory of existing
homes for sale has continued to rise, it has led to the need to
ensure our pricing is competitive with comparable existing home
sales prices. We continually monitor and may adjust our product
mix, geographic mix and pricing within our homebuilding markets
in an effort to keep our core product offerings affordable for
our target customer base, typically first-time and
move-up
homebuyers. To a lesser extent than the competitive factors
discussed above, this has also contributed to decreases in the
average selling price.
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. Before the current housing
downturn, our backlog has been a reliable indicator of the level
of home closings in our two subsequent fiscal quarters; however,
due to our current elevated cancellation rates, higher level of
unsold homes in inventory and difficult conditions in many of
our markets, this relationship between backlog and future home
closings may have changed.
At September 30, 2007, the value of our backlog of sales
orders was $2,694.4 million (10,442 homes), a decrease of
48% from $5,185.1 million (18,125 homes) at
September 30, 2006. The average sales price of homes in
backlog was $258,000 at September 30, 2007, down 10% from
the $286,100 average at September 30, 2006. The value of
our sales order backlog decreased significantly in all of our
market regions, with the largest percentage decrease occurring
in our California region.
Home
Sales Revenue and Gross Profit
Revenues from home sales decreased 26%, to
$10,721.2 million (41,370 homes closed) in 2007 from
$14,545.4 million (53,099 homes closed) in 2006. Revenues
from home sales decreased in all seven of our market regions,
led by the Midwest and California regions, with decreases of 41%
and 40%, respectively. The average selling price of homes closed
during 2007 was $259,200, down 5% from $273,900 in 2006. The
decrease in our fiscal 2007 home sales revenues was the result
of slowing demand and the resulting decline in net sales order
volume and pricing during the year.
The number of homes closed in 2007 decreased 22% due to
decreases in six of our seven market regions. As a result of the
decline in net sales orders during the year and the decline in
our sales order backlog, we expect to close fewer homes in
fiscal 2008 than we did in fiscal 2007. As conditions change in
the housing markets in which we operate, our ongoing level of
net sales orders will determine the number of home closings and
amount of revenue we will generate.
Revenues from home sales in fiscal 2007 and 2006 were increased
by $58.0 million and $1.6 million, respectively, from
changes in profit deferred pursuant to Statement of Financial
Accounting Standards (SFAS) No. 66, Accounting for
Sales of Real Estate. The home sales profit related to our
mortgage loans held for sale is deferred in instances where a
buyer finances a home through our wholly-owned mortgage company
and has not made an adequate initial or continuing investment as
prescribed by SFAS No. 66. As of September 30,
27
2007, the balance of deferred profit related to such mortgage
loans held for sale was $32.6 million, compared to
$90.6 million at September 30, 2006. The decline is
attributable to both the drop in the number of homes closed and
a decline in the availability of the mortgage types whose use
generally resulted in the SFAS No. 66 profit deferral.
Total homebuilding gross profit decreased by 82%, to
$603.7 million in 2007 from $3,342.2 million in 2006.
Including sales of both homes and land/lots, as well as
impairment charges and land option cost write-offs, total
homebuilding gross profit as a percentage of homebuilding
revenues decreased 1,720 basis points, to 5.4% in 2007 from
22.6% in 2006. Approximately 1,020 basis points of the
decrease was due to the effect of inventory impairment charges
and land option cost write-offs. As a percentage of homebuilding
revenues, these were 12.0% in fiscal 2007 versus 1.8% in fiscal
2006.
Gross profit from home sales decreased by 47%, to
$1,848.9 million in 2007, from $3,497.6 million in
2006, and, as a percentage of home sales revenues, decreased
680 basis points, to 17.2%. The primary factor reducing our
home sales gross profit margin was the difficult market
conditions discussed above, which narrowed the range between our
selling prices and costs of our homes in most of our markets,
causing a decline of approximately 650 basis points in home
sales gross profit as a percentage of home sales revenues. Due
to the current sales environment in many of our markets, we have
offered a variety of incentives and price concessions, which
affect our gross profit margin by reducing the selling price of
the home or increasing the cost of the home without a
proportional increase in the selling price. We are also offering
greater discounts and incentives to sell our inventory of homes,
which is at a higher than desired level. This strategy has
helped reduce our total homes in inventory by approximately
8,600 units from September 30, 2006, but has also
contributed to a decline in our home sales gross profit.
Additionally, our home sales gross margin decreased
approximately 60 basis points due to an increase in the
amortization of capitalized interest and 30 basis points
due to an increase in warranty and construction defect expenses
as a percentage of home sales revenues. These decreases were
partially offset by improvements in home sales gross margin of
20 basis points due primarily to an increase in the
relative number of home closings in our more profitable markets,
and 40 basis points resulting from the recognition of
$58.0 million of previously deferred gross profit in
accordance with SFAS No. 66 during 2007, compared to
$1.6 million in 2006.
In accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, land
inventory and related development costs are reviewed for
potential write-downs when impairment indicators are present.
SFAS No. 144 requires that in the event the
undiscounted cash flows estimated to be generated by those
assets are less than their carrying amounts, impairment charges
are required to be recorded if the fair value of such assets is
less than their carrying amounts. These estimates of cash flows
are significantly impacted by estimates of the amounts and
timing of revenues and costs and other factors which, in turn,
are impacted by local market economic conditions and the actions
of competitors. Due to uncertainties in the estimation process,
actual results could differ from such estimates. For those
assets deemed to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Our determination
of fair value is primarily based on discounting the estimated
cash flows at a rate commensurate with the inherent risks
associated with the assets and related estimated cash flow
streams.
In accordance with SFAS No. 144, impairment charges
are also recorded on finished homes in substantially completed
projects when events or circumstances indicate that the carrying
values are greater than the fair value less costs to sell these
homes.
During fiscal 2007, the difficult conditions within the
homebuilding industry became more challenging. High inventory
levels of both new and existing homes, elevated cancellation
rates, low sales absorption rates, affordability issues and
overall weak consumer confidence persisted throughout the year.
The effects of these factors were further magnified by a decline
in availability of mortgage products and higher mortgage
interest rates on certain loan products, due to credit
tightening in the mortgage markets. These factors, combined with
our disappointing sales results, further declines in sales order
prices and continued declines in gross profit from home sales
revenues throughout the year, caused our outlook for the
homebuilding industry and its impact on our business to become
more cautious as the year progressed. Our current outlook is
that we believe
28
housing market conditions will continue to be challenging and
may deteriorate further, and that the timing of a recovery in
the housing market remains unclear.
During fiscal 2007, our quarterly inventory impairment analyses
performed in accordance with SFAS No. 144 utilized
assumptions that incorporated our cautious outlook, which
reflects the expectation that the challenging conditions in the
homebuilding industry will persist and have a greater impact
than we believed when the year began. Consequently, our strategy
to reduce our inventory and lot position in a number of markets
will likely take longer and require additional price concessions
and incentives than previously anticipated. Therefore, our
impairment evaluations during the fourth quarter of fiscal 2007
indicated a significant number of projects with impairment
indicators. Communities with a combined carrying value of
$2,622.4 million as of September 30, 2007, had
indicators of potential impairment and were evaluated for
impairment. The analysis of each of these projects generally
assumed that sales prices in future periods will be equal to or
lower than current sales order prices in each project or for
comparable projects in order to generate an acceptable
absorption rate. While it is difficult to determine a timeframe
for a given project in the current market conditions, we
estimated the remaining lives of these projects to range from
six months to in excess of ten years. Through these evaluations,
we determined that projects with a carrying value of
$940.5 million as of September 30, 2007, the largest
portions of which were in the California, West and Southeast
regions, were impaired. As a result, during the fourth quarter
of fiscal 2007, we recorded impairment charges totaling
$278.3 million to reduce the carrying value of the impaired
projects to their estimated fair value. These fourth quarter
charges combined with impairment charges recorded earlier in the
year resulted in total inventory impairment charges of
$1,222.2 million during fiscal 2007. Approximately 74% of
these impairment charges were recorded to residential land and
lots and land held for development, and approximately 26% of
these charges were recorded to residential construction in
progress and finished homes in inventory. During fiscal 2006, we
recorded impairment charges totaling $146.2 million related
to projects with a carrying value of $459.3 million, the
majority of which were in California.
Of the remaining $1,681.9 million of such projects with
impairment indicators which were determined not to be impaired
at September 30, 2007, the largest concentrations are in
California (28%), Florida (20%), and Arizona (16%). It is
possible that our estimate of undiscounted cash flows from these
projects may change and could result in a future need to record
impairment charges to write these assets down to fair value.
Additionally, if conditions in the homebuilding industry or
specific markets in which we operate worsen in the future beyond
current expectations, and as we re-evaluate specific project
pricing and incentive strategies, we may be required to evaluate
additional projects or re-evaluate previously impaired projects
for potential impairment. These evaluations may result in
additional impairment charges, and such charges could be
material.
Based on a review of land and lot option contracts performed
each quarter, we write off earnest money deposits and
pre-acquisition costs related to land and lot option contracts
which we no longer plan to pursue. During fiscal 2007 and 2006,
we wrote off $107.3 million and $124.7 million,
respectively, of earnest money deposits and pre-acquisition
costs related to land purchase option contracts. Should the
current weak homebuilding market conditions persist and we are
unable to successfully renegotiate certain land purchase
contracts, we may write off additional earnest money deposits
and pre-acquisition costs.
The inventory impairment charges and write-offs of earnest money
deposits and pre-acquisition costs reduced total homebuilding
gross profit as a percentage of homebuilding revenues by
approximately 1,200 basis points in fiscal 2007, compared
to 180 basis points in fiscal 2006.
Selling,
General and Administrative (SG&A) Expense
SG&A expenses from homebuilding activities decreased by
$315.1 million, or 22%, to $1,141.5 million in 2007
from $1,456.6 million in 2006. As a percentage of
homebuilding revenues, SG&A expenses increased
40 basis points, to 10.3% in 2007 from 9.9% in 2006, due to
a decrease in revenues. The largest component of our
homebuilding SG&A is employee compensation and related
costs, which represented 59% and 64% of SG&A costs in 2007
and 2006, respectively. Those costs decreased
$260.2 million, or 28%, to $672.2 million in 2007 from
$932.4 million in 2006, largely due to our continued
efforts to align the number of employees to
29
match our current and anticipated home closing levels, as well
as a decrease in incentive compensation, which is primarily
based on profitability. Our homebuilding operations employed
approximately 5,100 and 7,100 employees at
September 30, 2007 and 2006, respectively. The remaining
decrease in SG&A of $54.9 million was primarily
attributable to decreases in subdivision maintenance,
advertising costs and professional consulting fees.
We continue to adjust our SG&A infrastructure to support
our expected closings volume; however, we cannot make assurances
that our actions will permit us to maintain or improve upon the
current SG&A expense as a percentage of revenues. If our
volume of future home closings is lower than fiscal 2007 levels,
our future SG&A percentage may increase further.
Interest
Incurred
We capitalize interest costs only to inventory under
construction or development. During both fiscal years, our
inventory under construction or development exceeded our debt;
therefore, we capitalized all interest from homebuilding debt.
Interest amortized to cost of sales, excluding interest written
off with inventory impairment charges, was 2.4% of total home
and land/lot cost of sales in 2007, compared to 2.1% in 2006.
Interest incurred is directly related to the average level of
our homebuilding debt outstanding during the period. Comparing
fiscal 2007 with fiscal 2006, interest incurred related to
homebuilding debt decreased by 6%, to $304.3 million,
primarily due to a 5% decrease in our average homebuilding debt.
Loss
on Early Retirement of Debt
In fiscal 2007, in connection with the early retirement of our
8.5% senior notes due 2012, we recorded a loss of
approximately $12.1 million for the call premium and the
unamortized discount and fees related to the redeemed notes. In
fiscal 2006, in connection with the early retirement of our
9.375% senior subordinated notes due 2011 and our
10.5% senior subordinated notes due 2011, we recorded a
loss of approximately $13.4 million for the call premium
and the unamortized discount and fees, net of any unamortized
premium related to these redeemed notes. Similarly, we recorded
a loss of approximately $4.4 million related to the
unamortized fees associated with the redemption and replacement
of our revolving credit facility in fiscal 2006.
Other
Income
Other income, net of other expenses, associated with
homebuilding activities was $4.0 million in 2007, compared
to $11.0 million in 2006. Major components of other income
in both years were interest income and gain on the sale of
assets, while in fiscal 2006, the increase in the fair value of
our interest rate swaps was also a major component.
Goodwill
In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, we have restated our goodwill
balances between reporting segments to reflect the revised
aggregation of our operating regions that resulted from a
realignment of our management structure during the fourth
quarter of fiscal 2007. Our Colorado markets, which were
previously included in our Southwest operating region, are now
included in our Midwest operating region. Consequently, we
determined that our Midwest operating region, which was
previously included in our Northeast reporting segment,
constitutes a separate reporting segment. The following
discussion of goodwill balances and related impairment charges
is based on the revised alignment and disaggregation.
Goodwill represents the excess of purchase price over net assets
acquired. We test goodwill for potential impairment annually as
of September 30 or more frequently if an event occurs or
circumstances change that indicate the remaining balance of
goodwill may not be recoverable. In analyzing the potential
impairment of goodwill, SFAS No. 142 prescribes a
two-step process that begins with the estimation of the fair
value of the
30
reporting units. If the results of the first step indicate that
impairment potentially exists, the second step is performed to
measure the amount of the impairment, if any. Impairment is
determined to exist when the estimated fair value of goodwill is
less than its carrying value.
At June 30, 2007, we determined that an interim test to
assess the recoverability of goodwill was necessary because of
the significant amount of inventory tested for impairment under
SFAS No. 144, the market conditions in the
homebuilding industry and the decline in our stock price. We
completed the first step of our goodwill impairment analysis as
of June 30, 2007. We estimated the fair value of our
reporting units primarily utilizing the expected present values
of future cash flows, supported with a market based assessment
of fair value for the reporting units, and concluded an
impairment loss was probable and could be reasonably estimated
for operating regions within our Northeast, Southeast,
California and West reporting segments. As a result, during the
quarter ended June 30, 2007, we recorded non-cash
impairment charges totaling $425.6 million related to the
write-off of goodwill in these reporting segments.
During the quarter ended September 30, 2007, we completed
the second step of our goodwill impairment analyses, through
which we confirmed the appropriateness of our prior quarter
write-offs and determined that the goodwill balance related to
our Midwest reporting segment was completely impaired.
Consequently, the goodwill balance in our Midwest reporting
segment of $48.5 million, which included $13.5 million
transferred from the Southwest reporting segment due to changing
our management structure, was written off in the fourth quarter.
Total goodwill impairment charges for fiscal 2007 were
$474.1 million.
In addition, at September 30, 2007, we completed our annual
impairment test and determined that the fair values of our South
Central and Southwest reporting segments were greater than their
carrying values and no impairment of goodwill existed in those
segments.
Reflecting the fiscal 2007 impairment charges and restatement of
the prior year segment balances to conform to the current year
presentation, our goodwill balances by reporting segment as of
September 30, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
Restated
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
|
|
|
$
|
39.4
|
|
Midwest
|
|
|
|
|
|
|
48.5
|
|
Southeast
|
|
|
|
|
|
|
11.5
|
|
South Central
|
|
|
15.9
|
|
|
|
15.9
|
|
Southwest
|
|
|
79.4
|
|
|
|
88.9
|
|
California
|
|
|
|
|
|
|
300.3
|
|
West
|
|
|
|
|
|
|
74.4
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
95.3
|
|
|
$
|
578.9
|
|
|
|
|
|
|
|
|
|
|
The goodwill assessment procedures of SFAS No. 142
require us to make comprehensive estimates of future revenues
and costs. Due to the uncertainties associated with such
estimates, actual results could differ from such estimates.
Continued softness in the homebuilding industry may result in
the determination that some or all of our remaining goodwill
balance has become impaired, which could result in additional
goodwill impairment charges.
Income
Taxes
In fiscal 2007, the benefit from income taxes was
$238.7 million, corresponding to the loss before income
taxes for the year. In fiscal 2006, the provision for income
taxes was $753.8 million, corresponding to the income
before income taxes for the year.
31
Our effective income tax rate for fiscal 2007 was 25.1%,
compared to an effective tax rate of 37.9% in fiscal 2006. The
effective tax rate during 2007 was lower than the effective tax
rate in 2006, resulting in a reduced benefit from income taxes
related to the loss in the year, because only approximately 23%
of the $474.1 million goodwill impairment charge recorded
in fiscal 2007 is deductible for tax purposes. Excluding the
goodwill impairment charge, the effective tax rate was 40.9% for
fiscal 2007.
Primarily as a result of recording significant inventory
impairment charges during fiscal 2007, the balance of our
deferred tax asset increased substantially. The net deferred tax
asset of $863.8 million at September 30, 2007 assumes
that we will be able to realize the full value of these assets,
which will be dependent in part on our ability to generate
sufficient profits in future periods. If market conditions
within the homebuilding industry do not improve or continue to
worsen, it may affect our ability to fully realize the value of
these assets, which may require a valuation adjustment and
additional income tax expense in our consolidated statements of
operations, and such expense could be material.
Homebuilding
Results by Reporting Region
Northeast Region Homebuilding revenues
decreased 22% in 2007 compared to 2006, primarily due to a 22%
decrease in the number of homes closed, as well as a slight
decrease in the average selling price of those homes. The region
reported a loss before income taxes of $66.1 million in
2007, compared to income of $112.9 million in 2006. The
loss in fiscal 2007 was primarily due to inventory impairment
charges and earnest money and pre-acquisition cost write-offs
totaling $81.5 million, and goodwill impairment charges of
$39.4 million. A decrease in the regions core home
sales gross profit percentage (home sales gross profit
percentage excluding impairments and earnest money and
pre-acquisition cost write-offs) of 450 basis points in
2007 compared to 2006 also contributed to the reduction in
income before income taxes. The core home sales gross profit
percentage decline in our South Carolina and New Jersey markets
had the greatest impact on the overall decrease in the
regions profitability.
Midwest Region Homebuilding revenues
decreased 38% in 2007 compared to 2006, primarily due to a 42%
decrease in the number of homes closed, partially offset by a
slight increase in the average selling price of those homes. The
region reported a loss before income taxes of
$205.3 million in 2007, compared to income of
$111.3 million in 2006. The loss in fiscal 2007 was
primarily due to inventory impairment charges and earnest money
and pre-acquisition cost write-offs totaling
$167.3 million, and goodwill impairment charges of
$48.5 million. The majority of the inventory impairments
relate to projects in our Denver market. A decrease in the
regions core home sales gross profit percentage of
210 basis points in 2007 compared to 2006, as well as an
increase in construction defect expense in Denver also
contributed to the reduction in income before income taxes.
Southeast Region Homebuilding revenues
decreased 28% in 2007 compared to 2006, primarily due to a 24%
decrease in the number of homes closed, as well as a 6% decrease
in the average selling price of those homes. The region reported
a loss before income taxes of $131.6 million in 2007,
compared to income of $346.4 million in 2006. The loss in
fiscal 2007 was primarily due to inventory impairment charges
and earnest money and pre-acquisition cost write-offs totaling
$210.2 million, and goodwill impairment charges of
$11.5 million. A decrease in the regions core home
sales gross profit percentage of 1,140 basis points in 2007
compared to 2006 also contributed to the reduction in income
before income taxes. The core home sales gross profit percentage
decline in our Florida markets had the greatest impact on the
overall decrease. The Florida markets experienced rapid price
increases in previous years which contributed to gross profit
increases in 2005 and continued elevated gross profit in 2006.
In 2007, high inventory levels of new and existing homes and
increased levels of sales incentives and home price reductions
were typical throughout Florida, resulting in substantial gross
profit declines.
South Central Region Homebuilding revenues
decreased 13% in 2007 compared to 2006, primarily due to a 16%
decrease in the number of homes closed, partially offset by a 5%
increase in the average selling price of those homes. Income
before income taxes for the region was $122.2 million in
2007, down 29% from 2006. Income before income taxes as a
percentage of the regions revenues (operating margin)
decreased 130 basis points, to 6.1%, from 7.4% in 2006. The
decrease in operating margin in 2007 was primarily due to
32
a decrease in the regions core home sales gross profit
percentage of 70 basis points in 2007 compared to 2006. The
core home sales gross profit change was largely due to softening
in the San Antonio market, where inventories of new and
existing homes have increased, resulting in increased levels of
sales incentives being offered by builders. The recording of
inventory impairment charges and earnest money and
pre-acquisition cost write-offs totaling $24.6 million in
fiscal 2007 compared to $2.2 million in 2006, also
contributed to the decline in the regions profitability.
Southwest Region Homebuilding revenues
remained relatively flat, decreasing only 1% in 2007 compared to
2006, due to a 6% decrease in the average selling price of homes
closed, offset by a 5% increase in the number of homes closed.
Income before income taxes for the region was
$204.6 million in 2007, down 52% from 2006. Operating
margin decreased 1,110 basis points, to 10.4%, from 21.5%
in 2006. The decrease in operating margin in 2007 was primarily
due to a decrease in the regions core home sales gross
profit percentage of 1,080 basis points in 2007 compared to
2006. The core home sales gross profit change was largely due to
declines in our Phoenix market. The Phoenix market experienced
significant price increases in previous years which contributed
to gross profit increases in 2005 and continued elevated gross
profit in 2006. In 2007, higher inventory levels of new and
existing homes and increased sales incentives and home price
reductions were more common in Phoenix, resulting in gross
profit declines. The recording of inventory impairment charges
and earnest money and pre-acquisition cost write-offs totaling
$26.8 million in fiscal 2007 compared to $4.8 million
in 2006, also contributed to the decline in the regions
profitability.
California Region Homebuilding revenues
decreased 38% in 2007 compared to 2006, due to a 39% decrease in
the number of homes closed, as well as a slight decrease in the
average selling price of those homes. The region reported a loss
before income taxes of $784.1 million in 2007, compared to
income of $346.3 million in 2006. The loss in fiscal 2007
was primarily due to inventory impairment charges and earnest
money and pre-acquisition cost write-offs totaling
$564.6 million, and goodwill impairment charges of
$300.3 million. All of our California markets have incurred
inventory impairments, with a larger concentration attributable
to our Southern California markets. A decrease in the
regions core home sales gross profit percentage of
890 basis points in 2007 compared to 2006 also contributed
to the reduction in income before income taxes. Core home sales
gross profit percentage declines in our Northern California
markets had the greatest impact on the overall decrease, as
these formerly strong markets weakened in fiscal 2007 from 2006.
Most of our California markets experienced rapid, significant
home price increases in previous years which contributed to
gross profit increases in 2005, but they also strained housing
affordability for most potential homebuyers in California.
Housing affordability remains an issue in California, and credit
tightening in the mortgage markets has significantly limited the
availability of many mortgage products used extensively by
California homebuyers in recent years. In 2006 and 2007,
increased levels of sales incentives and home price reductions
were typical throughout California as builders attempted to
increase demand for homes to reduce high inventory levels and to
address affordability concerns, resulting in gross profit
declines.
West Region Homebuilding revenues decreased
26% in 2007 compared to 2006, due to a 29% decrease in the
number of homes closed, as well as a slight decrease in the
average selling price of those homes. The region reported a loss
before income taxes of $159.7 million in 2007, compared to
income of $365.8 million in 2006. The loss in fiscal 2007
was primarily due to inventory impairment charges and earnest
money and pre-acquisition cost write-offs totaling
$254.5 million, and goodwill impairment charges of
$74.4 million. The majority of the inventory impairments
relate to projects in our Las Vegas market. A decrease in the
regions core home sales gross profit of 750 basis
points in 2007, compared to 2006 also contributed to the
reduction in income before income taxes. The core home sales
gross profit percentage decline in our Las Vegas market had the
greatest impact on the overall decrease. The Las Vegas market
experienced rapid, significant home price increases in previous
years which contributed to gross profit increases in 2005 and
continued elevated gross profit in 2006, but these price
increases also strained housing affordability for many potential
homebuyers there. Credit tightening in the mortgage markets has
also significantly limited the availability of many mortgage
products used extensively by Las Vegas homebuyers in recent
years. In 2007, inventory levels of new and existing homes were
high and increased levels of sales incentives and home price
reductions were typical in Las Vegas new home communities, as
builders attempted to increase demand for homes and address
affordability concerns, resulting in gross profit declines.
33
Fiscal
Year Ended September 30, 2006 Compared to Fiscal Year Ended
September 30, 2005
The following tables set forth key operating and financial data
for our homebuilding operations by reporting segment as of and
for the fiscal years ended September 30, 2006 and 2005.
Based on our revised disaggregation of operating segments and
the states within those segments, we have restated the 2006 and
2005 amounts between reporting segments to conform to the 2007
presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Orders
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
Homes Sold
|
|
|
Value (In millions)
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Northeast
|
|
|
4,999
|
|
|
|
5,203
|
|
|
|
(4
|
)%
|
|
$
|
1,233.5
|
|
|
$
|
1,366.4
|
|
|
|
(10
|
)%
|
|
$
|
246,700
|
|
|
$
|
262,600
|
|
|
|
(6
|
)%
|
Midwest
|
|
|
5,007
|
|
|
|
6,293
|
|
|
|
(20
|
)%
|
|
|
1,471.3
|
|
|
|
1,754.4
|
|
|
|
(16
|
)%
|
|
|
293,800
|
|
|
|
278,800
|
|
|
|
5
|
%
|
Southeast
|
|
|
7,082
|
|
|
|
8,050
|
|
|
|
(12
|
)%
|
|
|
1,753.8
|
|
|
|
2,012.6
|
|
|
|
(13
|
)%
|
|
|
247,600
|
|
|
|
250,000
|
|
|
|
(1
|
)%
|
South Central
|
|
|
14,682
|
|
|
|
12,391
|
|
|
|
18
|
%
|
|
|
2,536.4
|
|
|
|
2,068.2
|
|
|
|
23
|
%
|
|
|
172,800
|
|
|
|
166,900
|
|
|
|
4
|
%
|
Southwest
|
|
|
9,065
|
|
|
|
9,191
|
|
|
|
(1
|
)%
|
|
|
2,210.8
|
|
|
|
2,202.4
|
|
|
|
|
%
|
|
|
243,900
|
|
|
|
239,600
|
|
|
|
2
|
%
|
California
|
|
|
7,050
|
|
|
|
8,171
|
|
|
|
(14
|
)%
|
|
|
3,238.6
|
|
|
|
3,862.9
|
|
|
|
(16
|
)%
|
|
|
459,400
|
|
|
|
472,800
|
|
|
|
(3
|
)%
|
West
|
|
|
4,095
|
|
|
|
3,933
|
|
|
|
4
|
%
|
|
|
1,450.8
|
|
|
|
1,376.5
|
|
|
|
5
|
%
|
|
|
354,300
|
|
|
|
350,000
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,980
|
|
|
|
53,232
|
|
|
|
(2
|
)%
|
|
$
|
13,895.2
|
|
|
$
|
14,643.4
|
|
|
|
(5
|
)%
|
|
$
|
267,300
|
|
|
$
|
275,100
|
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Order Backlog
|
|
|
|
September 30,
|
|
|
|
Homes in Backlog
|
|
|
Value (In millions)
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Northeast
|
|
|
2,228
|
|
|
|
2,533
|
|
|
|
(12
|
)%
|
|
$
|
587.3
|
|
|
$
|
746.7
|
|
|
|
(21
|
)%
|
|
$
|
263,600
|
|
|
$
|
294,800
|
|
|
|
(11
|
)%
|
Midwest
|
|
|
1,037
|
|
|
|
2,080
|
|
|
|
(50
|
)%
|
|
|
342.2
|
|
|
|
632.6
|
|
|
|
(46
|
)%
|
|
|
330,000
|
|
|
|
304,100
|
|
|
|
9
|
%
|
Southeast
|
|
|
2,148
|
|
|
|
3,119
|
|
|
|
(31
|
)%
|
|
|
633.8
|
|
|
|
909.4
|
|
|
|
(30
|
)%
|
|
|
295,100
|
|
|
|
291,600
|
|
|
|
1
|
%
|
South Central
|
|
|
4,213
|
|
|
|
2,975
|
|
|
|
42
|
%
|
|
|
777.8
|
|
|
|
524.2
|
|
|
|
48
|
%
|
|
|
184,600
|
|
|
|
176,200
|
|
|
|
5
|
%
|
Southwest
|
|
|
5,391
|
|
|
|
4,349
|
|
|
|
24
|
%
|
|
|
1,417.5
|
|
|
|
1,152.4
|
|
|
|
23
|
%
|
|
|
262,900
|
|
|
|
265,000
|
|
|
|
(1
|
)%
|
California
|
|
|
2,088
|
|
|
|
2,922
|
|
|
|
(29
|
)%
|
|
|
1,041.7
|
|
|
|
1,403.8
|
|
|
|
(26
|
)%
|
|
|
498,900
|
|
|
|
480,400
|
|
|
|
4
|
%
|
West
|
|
|
1,020
|
|
|
|
1,266
|
|
|
|
(19
|
)%
|
|
|
384.8
|
|
|
|
466.1
|
|
|
|
(17
|
)%
|
|
|
377,300
|
|
|
|
368,200
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,125
|
|
|
|
19,244
|
|
|
|
(6
|
)%
|
|
$
|
5,185.1
|
|
|
$
|
5,835.2
|
|
|
|
(11
|
)%
|
|
$
|
286,100
|
|
|
$
|
303,200
|
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes Closed
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
Homes Closed
|
|
|
Value (In millions)
|
|
|
Average Selling Price
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Northeast
|
|
|
5,304
|
|
|
|
4,417
|
|
|
|
20
|
%
|
|
$
|
1,392.9
|
|
|
$
|
1,113.4
|
|
|
|
25
|
%
|
|
$
|
262,600
|
|
|
$
|
252,100
|
|
|
|
4
|
%
|
Midwest
|
|
|
6,050
|
|
|
|
5,977
|
|
|
|
1
|
%
|
|
|
1,761.7
|
|
|
|
1,664.0
|
|
|
|
6
|
%
|
|
|
291,200
|
|
|
|
278,400
|
|
|
|
5
|
%
|
Southeast
|
|
|
8,053
|
|
|
|
7,911
|
|
|
|
2
|
%
|
|
|
2,029.4
|
|
|
|
1,800.2
|
|
|
|
13
|
%
|
|
|
252,000
|
|
|
|
227,600
|
|
|
|
11
|
%
|
South Central
|
|
|
13,444
|
|
|
|
12,737
|
|
|
|
6
|
%
|
|
|
2,282.9
|
|
|
|
2,103.9
|
|
|
|
9
|
%
|
|
|
169,800
|
|
|
|
165,200
|
|
|
|
3
|
%
|
Southwest
|
|
|
8,023
|
|
|
|
8,218
|
|
|
|
(2
|
)%
|
|
|
1,945.6
|
|
|
|
1,697.0
|
|
|
|
15
|
%
|
|
|
242,500
|
|
|
|
206,500
|
|
|
|
17
|
%
|
California
|
|
|
7,884
|
|
|
|
7,671
|
|
|
|
3
|
%
|
|
|
3,600.8
|
|
|
|
3,533.5
|
|
|
|
2
|
%
|
|
|
456,700
|
|
|
|
460,600
|
|
|
|
(1
|
)%
|
West
|
|
|
4,341
|
|
|
|
4,241
|
|
|
|
2
|
%
|
|
|
1,532.1
|
|
|
|
1,464.6
|
|
|
|
5
|
%
|
|
|
352,900
|
|
|
|
345,300
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,099
|
|
|
|
51,172
|
|
|
|
4
|
%
|
|
$
|
14,545.4
|
|
|
$
|
13,376.6
|
|
|
|
9
|
%
|
|
$
|
273,900
|
|
|
$
|
261,400
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Total
Homebuilding Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Northeast
|
|
$
|
1,393.9
|
|
|
$
|
1,126.6
|
|
|
|
24
|
%
|
Midwest
|
|
|
1,795.7
|
|
|
|
1,688.0
|
|
|
|
6
|
%
|
Southeast
|
|
|
2,040.5
|
|
|
|
1,816.7
|
|
|
|
12
|
%
|
South Central
|
|
|
2,311.0
|
|
|
|
2,114.8
|
|
|
|
9
|
%
|
Southwest
|
|
|
1,978.4
|
|
|
|
1,697.2
|
|
|
|
17
|
%
|
California
|
|
|
3,643.1
|
|
|
|
3,621.0
|
|
|
|
1
|
%
|
West
|
|
|
1,597.9
|
|
|
|
1,564.3
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,760.5
|
|
|
$
|
13,628.6
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
Impairments and Land Option Cost Write-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Land Option
|
|
|
|
|
|
|
|
|
Land Option
|
|
|
|
|
|
|
Inventory
|
|
|
Cost
|
|
|
|
|
|
Inventory
|
|
|
Cost
|
|
|
|
|
|
|
Impairments
|
|
|
Write-Offs
|
|
|
Total
|
|
|
Impairments
|
|
|
Write-Offs
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Northeast
|
|
$
|
14.4
|
|
|
$
|
12.5
|
|
|
$
|
26.9
|
|
|
$
|
|
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
Midwest
|
|
|
12.2
|
|
|
|
20.3
|
|
|
|
32.5
|
|
|
|
|
|
|
|
1.9
|
|
|
|
1.9
|
|
Southeast
|
|
|
14.2
|
|
|
|
20.2
|
|
|
|
34.4
|
|
|
|
|
|
|
|
3.8
|
|
|
|
3.8
|
|
South Central
|
|
|
|
|
|
|
2.2
|
|
|
|
2.2
|
|
|
|
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Southwest
|
|
|
|
|
|
|
4.8
|
|
|
|
4.8
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.3
|
|
California
|
|
|
105.4
|
|
|
|
60.4
|
|
|
|
165.8
|
|
|
|
|
|
|
|
9.2
|
|
|
|
9.2
|
|
West
|
|
|
|
|
|
|
4.3
|
|
|
|
4.3
|
|
|
|
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
146.2
|
|
|
$
|
124.7
|
|
|
$
|
270.9
|
|
|
$
|
|
|
|
$
|
17.1
|
|
|
$
|
17.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
Income Before Income Taxes (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Region
|
|
|
|
|
|
Region
|
|
|
|
$s
|
|
|
Revenues
|
|
|
$s
|
|
|
Revenues
|
|
|
|
(In millions)
|
|
|
Northeast
|
|
$
|
112.9
|
|
|
|
8.1
|
%
|
|
$
|
136.0
|
|
|
|
12.1
|
%
|
Midwest
|
|
|
111.3
|
|
|
|
6.2
|
%
|
|
|
108.9
|
|
|
|
6.5
|
%
|
Southeast
|
|
|
346.4
|
|
|
|
17.0
|
%
|
|
|
354.8
|
|
|
|
19.5
|
%
|
South Central
|
|
|
171.2
|
|
|
|
7.4
|
%
|
|
|
136.2
|
|
|
|
6.4
|
%
|
Southwest
|
|
|
424.8
|
|
|
|
21.5
|
%
|
|
|
368.4
|
|
|
|
21.7
|
%
|
California
|
|
|
346.3
|
|
|
|
9.5
|
%
|
|
|
750.1
|
|
|
|
20.7
|
%
|
West
|
|
|
365.8
|
|
|
|
22.9
|
%
|
|
|
418.6
|
|
|
|
26.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,878.7
|
|
|
|
12.7
|
%
|
|
$
|
2,273.0
|
|
|
|
16.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Expenses maintained at the corporate level are allocated to each
region based on the regions average inventory. These
expenses consist primarily of capitalized interest and property
taxes, which are amortized to cost of sales, and the expenses
related to the operations of our corporate office. |
35
Homebuilding
Operating Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
Percentages of
|
|
|
|
Related Revenues
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Gross profit Home sales
|
|
|
24.0
|
%
|
|
|
25.5
|
%
|
Gross profit Land/lot sales
|
|
|
53.7
|
%
|
|
|
35.5
|
%
|
Effect of inventory impairments and land option cost write-offs
on
total homebuilding gross profit
|
|
|
(1.8
|
)%
|
|
|
(0.1
|
)%
|
Gross profit Total homebuilding
|
|
|
22.6
|
%
|
|
|
25.6
|
%
|
Selling, general and administrative expense
|
|
|
9.9
|
%
|
|
|
9.0
|
%
|
Loss on early retirement of debt
|
|
|
0.1
|
%
|
|
|
|
%
|
Other (income)
|
|
|
(0.1
|
)%
|
|
|
(0.1
|
)%
|
Income before income taxes
|
|
|
12.7
|
%
|
|
|
16.7
|
%
|
Net
Sales Orders and Backlog
The value of net sales orders decreased 5%, to
$13,895.2 million (51,980 homes) in 2006 from
$14,643.4 million (53,232 homes) in 2005. The number of net
sales orders decreased 2% in fiscal 2006 compared to fiscal
2005, reflecting the industry-wide softening of demand for new
homes in most homebuilding markets, which began in fiscal 2006.
Factors that contributed to the slowing of demand included an
increase in the supply of existing homes for sale, a reduction
in investor purchases, an increase in incentives offered by
homebuilders and sellers of existing homes and an increase in
sales contract cancellation rates. These factors affected our
business most significantly in the fourth fiscal quarter, when
our net sales orders decreased 25% compared to the same quarter
of fiscal 2005.
Our annual cancellation rate increased to 28% in fiscal 2006,
and our cancellation rate in the fourth quarter of fiscal 2006
increased to approximately 40%, exceeding our typical historical
range of 16% to 20%. The higher overall cancellation rate for
fiscal 2006 was primarily attributable to cancellations in many
of our Arizona, California and Florida markets. A significant
portion of the increase in cancellations was due to our
prospective homebuyers being unable to sell their existing homes.
Decreases in both the number and value of net sales orders in
fiscal 2006 compared to fiscal 2005 occurred in our Northeast,
Midwest, Southeast and California regions. The decreases in
sales in these regions were primarily attributable to the
changes in market conditions described above. Partially
offsetting the decreases in net sales orders was an 18% increase
in net sales orders in our South Central region, where many of
our markets did not experience the same slowdown in demand
during fiscal 2006.
The average price of a net sales order in fiscal 2006 was
$267,300, a decrease of 3% from the $275,100 average in fiscal
2005. During the year, slight to moderate increases and
decreases in average sales prices occurred among our regions,
resulting in our relatively flat average price compared to 2005.
In general, our ability to raise prices is dependent on the
demand for our homes; therefore, the lack of any significant
overall price appreciation during 2006 was due in large part to
the decrease in demand and our increased use of sales incentives
in many markets. Particularly, the home price appreciation that
occurred in many of our California, Arizona and Florida markets
during fiscal 2005 moderated and, in many instances reversed,
during fiscal 2006. As part of our efforts to keep our core
product offerings affordable for our target customer base,
adjustments to our product and geographic mix and pricing within
our homebuilding markets also contributed to decreases in the
average selling price.
At September 30, 2006, the value of our backlog of sales
orders was $5,185.1 million (18,125 homes), down 11% from
$5,835.2 million (19,244 homes) at September 30, 2005.
The average sales price of homes in backlog was $286,100 at
September 30, 2006, down 6% from the $303,200 average at
September 30, 2005. The value of our sales order backlog
decreased in five of our seven market regions, led by decreases
of 46% and 30% in our Midwest and Southeast regions,
respectively, which is reflective of the difficult sales
36
environment. The average selling price of homes in backlog at
September 30, 2006 as compared to September 30, 2005
reflected only slight to moderate increases and decreases among
our regions.
Home
Sales Revenue and Gross Profit
Revenues from home sales increased 9%, to $14,545.4 million
(53,099 homes closed) in 2006 from $13,376.6 million
(51,172 homes closed) in 2005. Revenues from home sales
increased in all seven of our market regions, led by the
Northeast, Southwest and Southeast regions, with increases of
25%, 15% and 13%, respectively. The average selling price of
homes closed during 2006 was $273,900, up 5% from $261,400 in
2005. The average selling price of homes closed increased by
slight to moderate amounts in six of our seven market regions,
led by the Southwest and Southeast regions with increases of 17%
and 11%, respectively. Many markets, especially some of the
California, Arizona and Florida markets which experienced the
most price appreciation during fiscal 2005, experienced
weakening demand in the latter part of fiscal 2006, resulting in
declines in total and per home revenue. As reflected in our net
sales order volume, demand slowed in a number of our markets
during fiscal 2006, and in general, we offered more incentives
and price concessions to obtain home sales. Revenues from home
sales in fiscal 2006 were increased by $1.6 million, while
revenues from home sales in fiscal 2005 were reduced by
$92.2 million, from changes in profit deferred pursuant to
SFAS No. 66.
Total homebuilding gross profit decreased by 4%, to
$3,342.2 million in 2006 from $3,488.3 million in
2005. Including sales of both homes and land/lots, total
homebuilding gross profit as a percentage of homebuilding
revenues decreased 300 basis points, to 22.6% in 2006 from
25.6% in 2005.
Gross profit from home sales as a percentage of home sales
revenues decreased 150 basis points, to 24.0% in 2006 from
25.5% in 2005. The primary factors reducing our home sales gross
profit margin were the difficult market conditions discussed
above, which narrowed the range between our selling prices and
costs of our homes in many of our markets and caused a decline
of approximately 200 basis points in home sales gross
margin. In fiscal 2006, we had to utilize additional incentives
in many of our markets due to the challenging sales environment.
Sales incentives affect our gross profit margin by reducing the
selling price of the home, or by increasing the cost of the home
without a proportional increase in the selling price. An
additional 45 basis points of home sales gross margin
decline was a result of the decrease in the relative number of
closings in markets such as California and Nevada, which had
significant price appreciation in preceding years and,
therefore, had above average gross margins in fiscal 2005. These
declines were partially offset by an improvement of
approximately 55 basis points related to the increase in
home sales revenues and gross profit from the recognition of
profit previously deferred in accordance with
SFAS No. 66. The remaining improvement of
40 basis points was primarily due to a reduction in
warranty and construction defect expenses as a percentage of
home sales revenues.
During fiscal 2006, several communities under development that
demonstrated potential impairment indicators, with a combined
carrying value of $739.5 million at September 30,
2006, were evaluated for potential impairment in accordance with
SFAS No. 144. Our analyses of these projects generally
assumed flat to reduced revenues as compared with current sales
orders for the particular project or revenues realized from
comparable projects. We determined that projects with a carrying
value of $459.3 million, the majority of which were in
California, were impaired. Consequently, we recorded impairment
charges of $146.2 million to reduce the carrying value of
the impaired projects to their estimated fair value.
During fiscal 2006 and 2005, we wrote off $124.7 million
and $17.1 million, respectively, of earnest money deposits
and pre-acquisition costs related to land purchase option
contracts which we determined we would not pursue. The inventory
impairment charges and write-offs of earnest money deposits and
pre-acquisition costs reduced total homebuilding gross profit as
a percentage of homebuilding revenues by approximately
180 basis points in fiscal 2006.
Selling,
General and Administrative (SG&A) Expense
SG&A expenses from homebuilding activities increased by
$230.0 million, or 19%, to $1,456.6 million in 2006
from $1,226.6 million in 2005. As a percentage of revenues,
SG&A expenses increased 90 basis points,
37
to 9.9% in 2006 from 9.0% in 2005. The largest component of our
homebuilding SG&A is employee compensation and related
costs, which represented 64% and 67% of SG&A costs in 2006
and 2005, respectively. Those costs increased
$115.1 million, or 14%, to $932.4 million in 2006 from
$817.3 million in 2005, largely due to the addition of
employees to support our previously planned growth. The
remaining increase in SG&A of $114.9 million was
primarily attributable to increases in advertising costs,
property taxes, rent expense and subdivision maintenance. These
increases were due to the growth in our inventory levels and the
competitive selling environment.
Interest
Incurred
We capitalize interest costs only to inventory under
construction or development. During both fiscal years, our
inventory under construction or development exceeded our debt;
therefore, we capitalized all interest from homebuilding debt.
Interest amortized to cost of sales, excluding interest
impaired, was 2.1% of total home and land/lot cost of sales in
2006, compared to 2.2% in 2005.
Interest incurred is directly related to the average level of
our homebuilding debt outstanding during the period. Comparing
fiscal 2006 with fiscal 2005, interest incurred related to
homebuilding debt increased by 19%, to $325.4 million, due
to a 34% increase in our average homebuilding debt. Interest
incurred increased at a slower rate than our debt primarily
because our debt during 2006 was more heavily weighted to our
revolving credit facility, which carried a lower interest rate
than the weighted average interest rate of our senior and senior
subordinated notes. Our efforts to replace older, higher
interest rate notes with notes bearing lower interest rates also
contributed to the improvement in relative interest costs.
Loss
on Early Retirement of Debt
In fiscal 2006, in connection with the early retirement of our
9.375% senior subordinated notes due 2011 and our
10.5% senior subordinated notes due 2011, we recorded a
loss of approximately $13.4 million for the call premium
and the unamortized discount and fees, net of any unamortized
premium related to these redeemed notes. Similarly, we recorded
a loss of approximately $4.4 million related to the
unamortized fees associated with the redemption and replacement
of our revolving credit facility in fiscal 2006. In fiscal 2005,
in connection with the early retirement of our
9.375% senior notes due 2009, we recorded interest expense
of approximately $4.4 million for the call premium and
unamortized fees, net of the unamortized premium related to
these redeemed notes.
Other
Income
Other income, net of other expenses, associated with
homebuilding activities was $11.0 million in 2006, compared
to $15.7 million in 2005. The major component of other
income in both 2006 and 2005 was the increase in the fair value
of our interest rate swaps of $3.1 million and
$9.5 million, respectively. Also included in other income
in 2006 and 2005 was interest income of $6.9 million and
$3.9 million, respectively.
Homebuilding
Results by Reporting Region
Northeast Region Homebuilding revenues
increased 24% in 2006 compared to 2005, primarily due to a 20%
increase in the number of homes closed, as well as a slight
increase in the average selling price of those homes. Income
before income taxes for the region was 17% lower in 2006
compared to 2005 and as a percentage of the regions
revenues, decreased 400 basis points to 8.1%, from 12.1% in
2005. This decrease was due to a decrease in the regions
core home sales gross profit percentage (home sales gross profit
percentage excluding impairments and earnest money and
pre-acquisition cost write-offs), with the gross margin declines
in our Virginia and Coastal Carolina markets having the greatest
impact on the overall decrease. Additionally, profitability was
negatively affected by the recording of inventory impairment
charges and land option cost write-offs of $26.9 million in
fiscal 2006 versus $0.4 million in fiscal 2005.
Midwest Region Homebuilding revenues
increased 6% in 2006 compared to 2005, primarily due to a 5%
increase in the average selling price of homes closed, as well
as a slight increase in the number of homes closed. Income
before income taxes for the region was relatively flat between
the two years, and as a
38
percentage of the regions revenues, it decreased
30 basis points to 6.2%, from 6.5% in 2005. This decrease
was due to the effect of recording of inventory impairment
charges and land option cost write-offs of $32.5 million in
fiscal 2006 versus $1.9 million in fiscal 2005, largely
offset by an increase in land sales gross profit and gross
profit related to the recognition of profit previously deferred
in accordance with SFAS No. 66.
Southeast Region Homebuilding revenues
increased 12% in 2006 compared to 2005, primarily due to an 11%
increase in the average selling price of homes closed, as well
as a slight increase in the number of homes closed. Income
before income taxes for the region was relatively flat between
the two years; however, as a percentage of the regions
revenues, it decreased 250 basis points to 17.0%, from
19.5% in 2005. This decrease was primarily due to a decrease in
the regions gross profit percentage, which was negatively
affected by the recording of inventory impairment charges and
land option cost write-offs of $34.4 million in fiscal 2006
versus $3.8 million in fiscal 2005. Excluding these
charges, we experienced similar core home sales gross profit
margins in both fiscal years; however, we did experience a sharp
decline in these margins during the second half of fiscal 2006,
reflecting the softening market conditions, especially in
Florida.
South Central Region Homebuilding revenues
increased 9% in 2006 compared to 2005, primarily due to an
increase in the number of homes closed, as well as a slight
increase in the average selling price of those homes. Income
before income taxes for the region was 26% higher in 2006
compared to 2005, and as a percentage of the regions
revenues, increased 100 basis points to 7.4%, from 6.4% in
2005. This increase in income before income taxes was primarily
due to a decrease in the regions selling, general and
administrative costs as a percentage of revenues, as gross
margin for the region was comparable from fiscal 2005 to fiscal
2006.
Southwest Region Homebuilding revenues
increased 17% in 2006 compared to 2005, due to a 17% increase in
the average selling price of homes closed, while the number of
homes closed decreased 2%. Income before income taxes for the
region was 15% higher in 2006 compared to 2005; however, as a
percentage of the regions revenues, it decreased
20 basis points to 21.5%, from 21.7% in 2005. While core
homebuilding margin was relatively flat in the Phoenix market
for the full fiscal year 2006 as compared with fiscal year 2005,
we did experience a sharp decline in the Phoenix market home
sales gross margin in the fourth quarter of fiscal 2006 as
compared with the earlier quarters.
California Region Homebuilding revenues
remained relatively flat, increasing only 1% in 2006 compared to
2005, reflecting a slight increase in the number of homes closed
and a slight decline in the average selling price of those
homes. Income before income taxes for the region was 54% lower
in 2006 compared to 2005 and as a percentage of the
regions revenues, decreased 1,120 basis points to
9.5%, from 20.7% in 2005. This decrease was due to a decrease in
the regions gross profit percentage, which was
significantly affected by a decline of approximately
600 basis points in the regions core home sales gross
margins with the largest declines in the Sacramento and
San Diego markets. In addition, the recording of inventory
impairment charges and earnest money and pre-acquisition cost
write-offs of $165.8 million in fiscal 2006 versus
$9.2 million in fiscal 2005 had a significant negative
impact on gross margins.
West Region Homebuilding revenues remained
relatively flat, increasing only 2% in 2006 compared to 2005,
due to slight increases in both the number of homes closed and
in the average selling price of those homes. Income before
income taxes for the region was 13% lower in 2006 compared to
2005 and as a percentage of the regions revenues,
decreased 390 basis points to 22.9%, from 26.8% in 2005.
This decrease was due to a decrease in the regions gross
profit percentage, primarily attributable to lower gross margins
in the Las Vegas market.
39
Results
of Operations Financial Services
Fiscal
Year Ended September 30, 2007 Compared to Fiscal Year Ended
September 30, 2006
The following tables set forth key operating and financial data
for our financial services operations, comprising DHI Mortgage
and our subsidiary title companies, for the fiscal years ended
September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
Number of first-lien loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers
|
|
|
27,411
|
|
|
|
35,964
|
|
|
|
(24
|
)%
|
Number of homes closed by D.R. Horton
|
|
|
41,370
|
|
|
|
53,099
|
|
|
|
(22
|
)%
|
DHI Mortgage capture rate
|
|
|
66%
|
|
|
|
68%
|
|
|
|
|
|
Number of total loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers
|
|
|
34,394
|
|
|
|
50,383
|
|
|
|
(32
|
)%
|
Total number of loans originated or brokered by DHI Mortgage
|
|
|
36,180
|
|
|
|
53,360
|
|
|
|
(32
|
)%
|
Captive business percentage
|
|
|
95%
|
|
|
|
94%
|
|
|
|
|
|
Loans sold by DHI Mortgage to third parties
|
|
|
36,147
|
|
|
|
50,620
|
|
|
|
(29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Loan origination fees
|
|
$
|
43.5
|
|
|
$
|
57.6
|
|
|
|
(24
|
)%
|
Sale of servicing rights and gains from sale of mortgages
|
|
|
97.8
|
|
|
|
145.5
|
|
|
|
(33
|
)%
|
Other revenues
|
|
|
24.1
|
|
|
|
33.5
|
|
|
|
(28
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking revenues
|
|
|
165.4
|
|
|
|
236.6
|
|
|
|
(30
|
)%
|
Title policy premiums, net
|
|
|
42.3
|
|
|
|
54.2
|
|
|
|
(22
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
207.7
|
|
|
|
290.8
|
|
|
|
(29
|
)%
|
General and administrative expense
|
|
|
153.8
|
|
|
|
202.2
|
|
|
|
(24
|
)%
|
Interest expense
|
|
|
23.6
|
|
|
|
37.1
|
|
|
|
(36
|
)%
|
Interest and other (income)
|
|
|
(38.5
|
)
|
|
|
(56.9
|
)
|
|
|
(32
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
68.8
|
|
|
$
|
108.4
|
|
|
|
(37
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services Operating Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
Percentages of
|
|
|
|
Financial Services
|
|
|
|
Revenues
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
General and administrative expense
|
|
|
74.0
|
%
|
|
|
69.5
|
%
|
Interest expense
|
|
|
11.4
|
%
|
|
|
12.8
|
%
|
Interest and other (income)
|
|
|
(18.5
|
)%
|
|
|
(19.6
|
)%
|
Income before income taxes
|
|
|
33.1
|
%
|
|
|
37.3
|
%
|
Mortgage
Loan Activity
The volume of loans originated and brokered by our mortgage
operations is directly related to the number and value of homes
closed by our homebuilding operations. Total first-lien loans
originated or brokered by DHI Mortgage for our homebuyers
decreased by 24% in fiscal 2007 compared to fiscal 2006,
corresponding to
40
the decrease in the number of homes closed of 22%. The
percentage decrease in loans originated was greater than the
percentage decrease in homes closed due to a decline in our
mortgage capture rate (the percentage of total home closings by
our homebuilding operations for which DHI Mortgage handled the
homebuyers financing), to 66% in 2007, from 68% in 2006.
Home closings from our homebuilding operations constituted 95%
of DHI Mortgage loan originations in 2007, compared to 94% in
2006. These rates reflect DHI Mortgages continued focus on
supporting the captive business provided by our homebuilding
operations. The number of loans sold to third-party investors
decreased by 29% in 2007 as compared to 2006. The decrease was
primarily due to the decrease in the number of mortgage loans
originated.
During fiscal 2007, the market for certain non-traditional
mortgage loans changed substantially, resulting in the reduced
availability of some loan products that had previously been
available to borrowers. The affected loan products were
generally characterized by high combined loan-to-value ratios in
combination with less required documentation than traditional
mortgage loans. Such loans constituted approximately half of our
total originations during fiscal 2006, but such products
declined substantially as a percentage of total originations
during fiscal 2007, primarily in the third and fourth quarters.
As a percentage of total loans originated, originations of
traditional conforming, conventional loans and FHA or VA insured
loans increased significantly during the fourth quarter of
fiscal 2007, to approximately 90%, corresponding to the
reduction in non-traditional mortgage loans.
Financial
Services Revenues and Expenses
Revenues from the financial services segment decreased 29%, to
$207.7 million in 2007 from $290.8 million in 2006.
The decrease was primarily due to the decrease in the number of
mortgage loans originated and sold. The majority of the revenues
associated with our mortgage operations are recognized when the
mortgage loans and related servicing rights are sold to
third-party investors. Additionally, we increased our loan loss
reserves from $15.6 million at September 30, 2006, to
$24.6 million at September 30, 2007 to cover estimated
losses on loans held in portfolio, loans held for sale, and
future obligations related to loans sold with recourse. The
increase in this reserve resulted in a corresponding decrease to
the gains on sale of mortgages, and reflects the current market
conditions related to non-traditional products as described
above, as well as potential repurchase obligations that exist on
certain loans previously sold.
General and administrative (G&A) expenses associated with
financial services decreased 24%, to $153.8 million in 2007
from $202.2 million in 2006. The largest component of our
financial services G&A expense is employee compensation and
related costs, which represented 75% and 77% of G&A costs
in 2007 and 2006, respectively. Those costs decreased 26%, to
$114.9 million in 2007 from $155.4 million in 2006, as
we have aligned the number of employees with current and
anticipated loan origination and title service levels. Our
financial services operations employed approximately 1,100 and
1,700 employees at September 30, 2007 and 2006,
respectively. As a percentage of financial services revenues,
G&A expenses increased by 450 basis points, to 74.0%
in 2007, from 69.5% in 2006. The increase was primarily due to
the reduction in revenue resulting from the decrease in mortgage
loan volume during fiscal 2007 and an increase in loan loss
expense discussed above. Fluctuations in financial services
general and administrative expense as a percentage of revenues
can be expected to occur due to changes in the amount of revenue
earned, as some expenses are not directly related to mortgage
loan volume.
Interest and other income decreased 32%, to $38.5 million
in 2007 from $56.9 million in 2006, primarily due to the
decreased volume of loan originations.
41
Fiscal
Year Ended September 30, 2006 Compared to Fiscal Year Ended
September 30, 2005
The following tables set forth key operating and financial data
for our financial services operations for the fiscal years ended
September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
% Change
|
|
|
Number of first-lien loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers
|
|
35,964
|
|
32,404
|
|
|
11
|
%
|
Number of homes closed by D.R. Horton
|
|
53,099
|
|
51,172
|
|
|
4
|
%
|
DHI Mortgage capture rate
|
|
68%
|
|
63%
|
|
|
|
|
Number of total loans originated or brokered by
DHI Mortgage for D.R. Horton homebuyers
|
|
50,383
|
|
43,581
|
|
|
16
|
%
|
Total number of loans originated or brokered by DHI Mortgage
|
|
53,360
|
|
46,648
|
|
|
14
|
%
|
Captive business percentage
|
|
94%
|
|
93%
|
|
|
|
|
Loans sold by DHI Mortgage to third parties
|
|
50,620
|
|
35,962
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
|
(In millions)
|
|
|
Loan origination fees
|
|
$
|
57.6
|
|
|
$
|
40.0
|
|
|
|
44
|
%
|
Sale of servicing rights and gains from sale of mortgages
|
|
|
145.5
|
|
|
|
113.5
|
|
|
|
28
|
%
|
Other revenues
|
|
|
33.5
|
|
|
|
32.7
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking revenues
|
|
|
236.6
|
|
|
|
186.2
|
|
|
|
27
|
%
|
Title policy premiums, net
|
|
|
54.2
|
|
|
|
48.9
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
290.8
|
|
|
|
235.1
|
|
|
|
24
|
%
|
General and administrative expense
|
|
|
202.2
|
|
|
|
147.6
|
|
|
|
37
|
%
|
Interest expense
|
|
|
37.1
|
|
|
|
16.8
|
|
|
|
121
|
%
|
Interest and other (income)
|
|
|
(56.9
|
)
|
|
|
(34.9
|
)
|
|
|
63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
108.4
|
|
|
$
|
105.6
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services Operating Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
Percentages of
|
|
|
|
Financial Services
|
|
|
|
Revenues
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
General and administrative expense
|
|
|
69.5
|
%
|
|
|
62.8
|
%
|
Interest expense
|
|
|
12.8
|
%
|
|
|
7.1
|
%
|
Interest and other (income)
|
|
|
(19.6
|
)%
|
|
|
(14.8
|
)%
|
Income before income taxes
|
|
|
37.3
|
%
|
|
|
44.9
|
%
|
Mortgage
Loan Activity
Total first-lien loans originated or brokered by DHI Mortgage
for our homebuyers increased 11% in fiscal 2006 compared to
fiscal 2005. The increase in loans originated or brokered was
greater than our 4% increase in the number of homes closed
because our mortgage capture rate increased to 68% in 2006 from
63% in 2005. Home closings from our homebuilding operations
constituted 94% of DHI Mortgage loan originations in 2006,
compared to 93% in 2005, reflecting DHI Mortgages
continued focus on supporting the captive business provided by
our homebuilding operations.
42
The number of loans sold to third-party investors increased 41%
in 2006 as compared to 2005. The increase was primarily due to
the increase in the number of mortgage loans originated, as well
as the implementation of more efficient loan sale processes
during fiscal 2006. Additionally, the increase in fiscal 2006
includes the effect of the sales of an unusually high volume of
mortgage loans held at September 30, 2005.
Financial
Services Revenues and Expenses
Revenues from the financial services segment increased 24%, to
$290.8 million in 2006 from $235.1 million in 2005.
The increase in financial services revenues was primarily due to
the increase in the number of mortgage loans originated and
sold, partially offset by a slight decrease in the average
mortgage revenues earned per loan sold. The decline in revenue
per loan was largely due to less favorable selling conditions
for mortgage originations and the interest rate environment in
fiscal 2006 compared to 2005. The majority of the revenues
associated with our mortgage operations are recognized when the
mortgage loans and related servicing rights are sold to
third-party investors.
G&A expenses associated with financial services increased
37%, to $202.2 million in 2006 from $147.6 million in
2005. The largest component of our financial services G&A
expense is employee compensation and related costs, which
represented 77% and 76% of G&A costs in 2006 and 2005,
respectively. Those costs increased 39%, to $155.4 million
in 2006 from $111.6 million in 2005, largely due to the
addition of employees to support our previously planned growth.
As a percentage of financial services revenues, G&A
expenses increased by 670 basis points, to 69.5% in 2006
from 62.8% in 2005, reflecting the growth of our financial
services infrastructure at a faster rate than the growth in
revenues during fiscal 2006.
Interest and other income increased 63%, to $56.9 million
in 2006 from $34.9 million in 2005, primarily due to
increases in loan origination volume and interest rates.
Overview
of Current Capital Resources and Liquidity
We have historically funded our homebuilding and financial
services operations with cash flows from operating activities,
borrowings under our bank credit facilities and the issuance of
new debt securities. As we utilize our capital resources and
liquidity to fund our operations, we have focused on maintaining
a strong balance sheet.
At September 30, 2007, our ratio of net homebuilding debt
to total capital was 40.2%, a decrease of 50 basis points
from 40.7% at September 30, 2006. Net homebuilding debt to
total capital consists of homebuilding notes payable net of cash
divided by total capital net of cash (homebuilding notes payable
net of cash plus stockholders equity). The decrease in our
ratio of net homebuilding debt to total capital at
September 30, 2007 as compared with the ratio a year
earlier was primarily due to paying down our homebuilding debt
with cash flows from operations, partially offset by the
decrease in retained earnings and cash. Our target operating
range for net homebuilding debt to total capital is below 45%,
so the 40.2% ratio at September 30, 2007 is in line with
our operating target. We remain focused on maintaining our
liquidity and strengthening our balance sheet so we can be
flexible in reacting to market conditions; however, future
fiscal year-end net homebuilding debt to total capital ratios
may be higher than the fiscal 2007 year-end ratio.
We believe that the ratio of net homebuilding debt to total
capital is useful in understanding the leverage employed in our
homebuilding operations and comparing us with other
homebuilders. We exclude the debt of our financial services
business because it is separately capitalized and its debt is
substantially collateralized and not guaranteed by our parent
company or any of our homebuilding entities. Because of its
capital function, we include homebuilding cash as a reduction of
our homebuilding debt and total capital. For comparison to our
ratios of net homebuilding debt to capital above, at
September 30, 2007 and 2006, our ratios of homebuilding
debt to total capital, without netting cash balances, were 41.7%
and 43.1%, respectively.
We believe that we will be able to continue to fund our
homebuilding and financial services operations and our future
cash needs (including debt maturities) through a combination of
our existing cash resources,
43
cash flows from operations, our existing, renewed or amended
credit facilities and, if needed, the issuance of new securities
through the public capital markets.
Homebuilding
Capital Resources
Cash and Cash Equivalents At
September 30, 2007, we had available homebuilding cash and
cash equivalents of $228.3 million.
Bank Credit Facility During November 2006, we
increased the size of our $2.15 billion unsecured revolving
credit facility, which includes a $1.0 billion letter of
credit sub-facility, to $2.5 billion and extended its
maturity by one year to December 16, 2011. The revolving
credit facility has an uncommitted $400 million accordion
provision which could be used to increase the facility to
$2.9 billion upon obtaining additional commitments from
lenders. The facility is guaranteed by substantially all of our
wholly-owned subsidiaries other than our financial services
subsidiaries. We borrow funds through the revolving credit
facility throughout the year to fund working capital
requirements, and we repay such borrowings with cash generated
from our operations and from the issuance of public securities.
We had $150.0 million in cash borrowings outstanding on our
homebuilding revolving credit facility at September 30,
2007, and $800.0 million in cash borrowings outstanding at
September 30, 2006.
Our revolving credit facility imposes restrictions on our
operations and activities, including limits on investments, cash
dividends, stock repurchases and incurrence of indebtedness, and
requires maintenance of a maximum leverage ratio, a minimum
level of tangible net worth and a minimum ratio of earnings
before income taxes, depreciation, amortization, asset valuation
adjustments and non-cash gains and losses to interest incurred.
At September 30, 2007, we were in compliance with all of
the covenants, limitations and restrictions that form a part of
our bank revolving credit facility and our public debt
obligations. Our continued borrowing availability depends on our
ability to remain in compliance with these covenants,
limitations and restrictions. Additionally, if it appears that
we will not be able to comply with these requirements in the
future, it could be more difficult and expensive to obtain
additional financing.
The following table presents the levels required to maintain our
compliance with the financial debt covenants associated with our
revolving credit facility, and the levels achieved as of and for
the fiscal year ended September 30, 2007. These debt
covenants are required to be maintained by us and all of our
direct and indirect subsidiaries (collectively, Guarantor
Subsidiaries), other than the financial services subsidiaries
and certain inconsequential subsidiaries (collectively,
Non-Guarantor Subsidiaries).
|
|
|
|
|
|
|
|
|
Level Achieved
|
|
|
|
|
as of or for the
|
|
|
|
|
Year Ended
|
|
|
Required
|
|
September 30,
|
|
|
Level
|
|
2007
|
|
Leverage Ratio (1)
|
|
0.60 to 1.0 or less
|
|
0.42 to 1.0
|
Ratio of Adjusted EBITDA to Interest Incurred (2)
|
|
At least 2.0 to 1.0
|
|
3.6 to 1.0
|
Minimum Tangible Net Worth (3) (in millions)
|
|
$4,301.5
|
|
$5,314.4
|
|
|
|
(1) |
|
The Leverage Ratio is calculated by deducting a portion of cash
and cash equivalents from our notes payable (net notes payable)
and dividing by the sum of stockholders equity and net
notes payable. |
|
(2) |
|
Adjusted EBITDA is calculated by adding the following items to
pre-tax income: |
|
|
|
|
|
Interest expensed and amortized to cost of sales
|
|
|
|
Depreciation and amortization
|
|
|
|
Inventory impairments, land option cost write-offs and goodwill
impairments
|
|
|
|
(3) |
|
Minimum Tangible Net Worth is calculated by deducting goodwill
from stockholders equity. |
In July 2007, through amendment to the revolving credit
facility, a restriction was removed that limited our ability to
pay cash dividends to an annual amount not to exceed 50% of
prior year consolidated net income. Under the amended agreement,
payment of dividends is permitted provided there is no payment
44
default under the facility, we are in compliance with certain
financial covenants under the agreement, and such payments do
not cause us to be in noncompliance with those financial
covenants.
Under the debt covenants associated with our revolving credit
facility, if we have fewer than two investment grade senior
unsecured debt ratings from Moodys Investors Service,
Fitch Ratings and Standard and Poors Ratings Services, we
would be subject to a borrowing base limitation and restrictions
on unsold homes and residential land and lots.
The borrowing base covenant limits our additional homebuilding
borrowing capacity to the amount determined under the
arrangement, which was in excess of our borrowing capacity under
the revolving credit facility. The borrowing capacity under our
homebuilding revolving credit facility was $2.3 billion at
September 30, 2007 and would not have been affected had the
restriction been in place. Additional restrictions limit the
ratio of our unsold homes to the trailing twelve months
unit home closings to 40%, and limit the ratio of our
residential land and lots to tangible net worth to 150%. At
September 30, 2007, these ratios were approximately 26% and
110%, respectively. Although our ratings were in the lowest
investment grade category at each agency, and during fiscal 2007
they were placed on negative outlook by all the three rating
agencies, at September 30, 2007, we still held investment
grade ratings from all three rating agencies, so the borrowing
base limitation was not in effect.
In October 2007, Moodys Investors Service placed our
senior debt rating under review for downgrade, and in November
2007, Standard and Poors Ratings Services downgraded our
senior debt rating by one level to BB+, which is below
investment grade status.
Repayments of Public Unsecured Debt On
April 15, 2007, we redeemed our 8.5% senior notes due
2012 at an aggregate redemption price of approximately
$260.6 million, plus accrued interest. Concurrent with the
redemption, we recorded a loss related to the early retirement
of debt of approximately $12.1 million, representing the
call premium and the unamortized discount and fees related to
the redeemed notes. We used proceeds from our revolving credit
facility for the redemption.
Shelf Registration Statements We have an
automatically effective universal shelf registration statement
filed with the Securities and Exchange Commission, registering
debt and equity securities which we may issue from time to time
in amounts to be determined. Also, at September 30, 2007,
we had the capacity to issue approximately 22.5 million
shares of common stock under our acquisition shelf registration
statement, to effect, in whole or in part, possible future
business acquisitions.
Financial
Services Capital Resources
Cash and Cash Equivalents At
September 30, 2007, we had available financial services
cash and cash equivalents of $41.3 million.
Mortgage Warehouse Loan Facility DHI Mortgage
has a $540 million mortgage warehouse loan facility that
was renewed on March 30, 2007 to extend its maturity from
April 6, 2007 to March 28, 2008. Under the accordion
provision of the credit agreement, the total capacity may be
increased to $750 million upon obtaining additional
commitments from lenders. At September 30, 2007, we had
borrowings of $267.8 million outstanding under the mortgage
warehouse facility.
Our borrowing capacity under this facility is limited to the
lesser of the unused portion of the facility or an amount
determined under a borrowing base arrangement. Under the
borrowing base limitation, the amount that may be drawn on our
mortgage warehouse facility varies based upon the underlying
product type of each eligible mortgage loan. Substantially all
of our mortgage originations are eligible, with advance rates
typically ranging from 95% to 98% of the unpaid principal
balance of each mortgage loan.
Commercial Paper Conduit Facility DHI
Mortgage also has a $600 million commercial paper conduit
facility (the CP conduit facility) that matures
June 27, 2009, subject to the annual renewal of the
364-day
backup liquidity feature. This credit facility, which previously
had a capacity of $1.2 billion, was amended in December
2006 to reduce the capacity to $800 million, and upon
renewal of the backup liquidity feature in
45
June 2007, was further amended to reduce the capacity to
$600 million. At September 30, 2007, we had borrowings
of $120.0 million outstanding under the CP conduit facility.
In the past, we have been able to renew or extend the mortgage
warehouse loan facility and the CP conduit facility on
satisfactory terms prior to their maturities and obtain
temporary additional commitments through amendments of the
respective credit agreements during periods of higher than
normal volumes of mortgages held for sale. The liquidity of our
financial services business depends upon our continued ability
to renew and extend these facilities or to obtain other
additional financing in sufficient capacities. The recent credit
tightening in the mortgage markets has increased the financing
costs related to mortgage-secured borrowings and may affect our
ability to renew and extend these borrowing facilities on
similar terms.
The mortgage warehouse loan facility and the CP conduit facility
are not guaranteed by either D.R. Horton, Inc. or any of
the subsidiaries that guarantee our homebuilding debt.
Borrowings under both facilities are secured by certain mortgage
loans held for sale, and by restricted cash to the extent
borrowings under the facility occur prior to the assignment of
mortgage loans held for sale as collateral. The mortgage loans
assigned to secure the CP conduit facility are used as
collateral for asset-backed commercial paper issued by
multi-seller conduits in the commercial paper market. At
September 30, 2007, our financial services subsidiaries
held total mortgage loans for sale of $523.5 million. All
mortgage company activities have been financed with the mortgage
warehouse facility, the CP conduit facility or internally
generated funds. Both of the financial services credit
facilities contain financial covenants as to our mortgage
subsidiarys minimum required tangible net worth, its
maximum allowable ratio of debt to tangible net worth and its
minimum required net income. In addition, the CP conduit
facility contains certain advance cessation triggers based on
specified performance metrics of the Company and its Guarantor
Subsidiaries which govern the availability of credit under the
facility. At September 30, 2007, our financial services
subsidiaries were in compliance with all of the conditions and
covenants of the mortgage warehouse loan facility and the CP
conduit facility.
Operating
Cash Flow Activities
During the year ended September 30, 2007, net cash provided
by our operating activities was $1.4 billion, as compared
to cash used in operating activities during the prior year of
$1.2 billion. During fiscal 2007, we generated positive
cash flows from operating activities as we produced operating
profits, excluding the impact of asset impairments and
write-offs. We also limited our investments in inventory during
fiscal 2007, as evidenced by a $737.6 million decrease in
owned inventory (excluding the impact of impairments and
write-offs) during the fiscal year, compared to
$3.1 billion of inventory growth in fiscal 2006. In light
of the challenging market conditions, we have substantially
slowed our purchases of land and lots and our development
spending on land we own, and have restricted the number of homes
under construction to better match our expected current rate of
home sales and closings. We plan to continue to reduce our
number of homes under construction during fiscal 2008 by
starting construction on fewer homes than we close, and continue
to significantly limit our development spending. Our ability to
reduce our inventory levels is, however, heavily dependent upon
our ability to close a sufficient number of homes during the
year, which may be negatively impacted if our sales order
cancellation rate remains at elevated levels. To the extent our
inventory levels decrease during fiscal 2008, we expect to
generate net positive cash flows from operating activities in
fiscal 2008, should all other factors remain constant.
Another significant factor affecting our operating cash flows in
fiscal 2007 was the decrease in mortgage loans held for sale of
$499.4 million during the year. The decrease in mortgage
loans held for sale was due to a decrease in the number of loans
originated during the fourth quarter of fiscal 2007 compared to
the fourth quarter of fiscal 2006. We expect to continue to use
cash to fund an increase in mortgage loans held for sale in
quarters when our homebuilding closings grow. However, in
periods when home closings are flat or decline as compared to
prior periods, or if our mortgage capture rate declines, the
amounts of net cash used may be reduced or we may generate
positive cash flows from reductions in the balances of mortgage
loans held for sale as we did in fiscal 2007.
46
Investing
Cash Flow Activities
In fiscal 2007 and 2006, cash used in investing activities
represented net purchases of property and equipment, primarily
model home furniture and office equipment. Such purchases are
not significant relative to our total assets or cash flows, but
were reduced in fiscal 2007 in light of the weaker market
conditions.
Financing
Cash Flow Activities
The majority of our short-term financing needs are funded with
cash generated from operations and borrowings available under
our homebuilding and financial services credit facilities.
Long-term financing needs of our homebuilding operations are
generally funded with the issuance of new senior unsecured debt
securities through the public capital markets. Our homebuilding
senior and senior subordinated notes and borrowings under our
homebuilding revolving credit facility are guaranteed by
substantially all of our wholly-owned subsidiaries other than
our financial services subsidiaries.
Borrowings by our mortgage subsidiary under the CP conduit
facility are secured by the assignment of mortgage loans held
for sale and restricted cash arising from borrowings under the
facility prior to the assignment of the mortgage loans as
collateral. At September 30, 2007, there were no borrowings
under the facility prior to the assignment of mortgage loans
held for sale, and therefore, no cash was restricted under this
facility for this purpose. At September 30, 2006, the
balance of cash restricted for this purpose was
$248.3 million.
During fiscal 2007, our Board of Directors declared four
quarterly cash dividends of $0.15 per common share, the last of
which was paid on August 27, 2007 to stockholders of record
on August 17, 2007. On October 24, 2007, our Board of
Directors declared a cash dividend of $0.15 per common share,
which was paid on November 16, 2007, to stockholders of
record on November 5, 2007. The declaration of future cash
dividends is at the discretion of our Board of Directors and
will depend upon, among other things, future earnings, cash
flows, capital requirements, our financial condition and general
business conditions.
Changes
in Capital Structure
In November 2006, our Board of Directors authorized the
repurchase of up to $463.2 million of our common stock and
the repurchase of debt securities of up to $500 million.
These authorizations replaced the previous common stock and debt
securities repurchase authorizations and were in effect through
November 30, 2007. As of September 30, 2007, the full
amount of both authorizations remained available for
repurchases. In November 2007, our Board of Directors renewed
and extended both authorizations to November 30, 2008.
In fiscal 2007, our primary non-operating uses of our available
capital were the repayment of debt, and dividend payments, which
we expect to remain as our top priorities in fiscal 2008. We
continue to evaluate our alternatives for future non-operating
uses of our available capital, including the amounts of planned
debt repayments, dividend payments, maintenance of cash balances
and possible common stock repurchases, based on market
conditions and other circumstances, and within the constraints
of our balance sheet leverage targets, our liquidity targets and
the restrictions in our bank agreements and indentures.
Contractual
Cash Obligations, Commercial Commitments and Off-Balance Sheet
Arrangements
Our primary contractual cash obligations for our homebuilding
and financial services segments are payments under short-term
and long-term debt agreements and lease payments under operating
leases. Purchase obligations of our homebuilding segment
represent specific performance requirements under lot option
purchase agreements that may require us to purchase land
contingent upon the land seller meeting certain obligations. We
expect to fund our contractual obligations in the ordinary
course of business through our operating cash flows, our
homebuilding and financial services credit facilities and by
accessing the public capital markets.
47
Our future cash requirements for contractual obligations as of
September 30, 2007 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1 3 Years
|
|
|
3 5 Years
|
|
|
5 Years
|
|
|
|
(In millions)
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable (1)
|
|
$
|
5,181.0
|
|
|
$
|
483.5
|
|
|
$
|
1,385.8
|
|
|
$
|
1,197.8
|
|
|
$
|
2,113.9
|
|
Operating Leases
|
|
|
85.6
|
|
|
|
24.5
|
|
|
|
37.9
|
|
|
|
15.7
|
|
|
|
7.5
|
|
Purchase Obligations
|
|
|
60.8
|
|
|
|
27.8
|
|
|
|
33.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
5,327.4
|
|
|
$
|
535.8
|
|
|
$
|
1,456.7
|
|
|
$
|
1,213.5
|
|
|
$
|
2,121.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable (2)
|
|
$
|
410.6
|
|
|
$
|
410.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating Leases
|
|
|
7.2
|
|
|
|
3.1
|
|
|
|
3.5
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
417.8
|
|
|
$
|
413.7
|
|
|
$
|
3.5
|
|
|
$
|
0.6
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Homebuilding notes payable represent principal and interest
payments due on our senior and senior subordinated notes, our
revolving credit facility and our secured notes. The principal
amount of our revolving credit facility is assumed to be
$150 million through its maturity, and the related interest
obligation is based on the effective rate of 6.0% as of
September 30, 2007. |
|
(2) |
|
Financial services notes payable represent principal and
interest payments due on our mortgage subsidiarys
warehouse loan facility and commercial paper conduit facility.
The interest obligations associated with these variable rate
facilities are based on their effective rates of 5.9% on both
facilities, and principal balances outstanding at
September 30, 2007. |
At September 30, 2007, our homebuilding operations had
outstanding letters of credit of $97.7 million and surety
bonds of $2.1 billion, issued by third parties, to secure
performance under various contracts. We expect that our
performance obligations secured by these letters of credit and
bonds will generally be completed in the ordinary course of
business and in accordance with the applicable contractual
terms. When we complete our performance obligations, the related
letters of credit and bonds are generally released shortly
thereafter, leaving us with no continuing obligations. We have
no material third-party guarantees.
Our financial services subsidiary enters into various
commitments related to the lending activities of our mortgage
operations. Further discussion of these commitments is provided
in Item 7A Quantitative and Qualitative Disclosures
About Market Risk under Part II of this annual report
on
Form 10-K.
In the ordinary course of business, we enter into land and lot
option purchase contracts to procure land or lots for the
construction of homes. Lot option contracts enable us to control
significant lot positions with limited capital investment and
substantially reduce the risks associated with land ownership
and development. Within the land and lot option purchase
contracts in force at September 30, 2007, there were a
limited number of contracts, representing only
$60.8 million of remaining purchase price, subject to
specific performance clauses which may require us to purchase
the land or lots upon the land sellers meeting certain
obligations. Also, pursuant to the provisions of Interpretation
No. 46, Consolidation of Variable Interest
Entities an interpretation of ARB No. 51
as amended (FIN 46), issued by the Financial Accounting
Standards Board (FASB), we consolidated certain variable
interest entities with assets of $65.8 million related to
some of our outstanding land and lot option purchase contracts.
Creditors, if any, of these variable interest entities have no
recourse against us. Additionally, pursuant to
SFAS No. 49, Accounting for Product Financing
Arrangements, we recorded $56.1 million of land
inventory not owned related to some of our outstanding land and
lot option purchase contracts. Further discussion of our land
option contracts is provided in the Land and Lot Position
and Homes in Inventory section that follows.
48
Land and
Lot Position and Homes in Inventory
The following is a summary of our land and lot position and
homes in inventory at September 30, 2007 and 2006:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Lots
|
|
|
|
|
|
|
|
|
|
|
|
Lots
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlled
|
|
|
|
|
|
|
|
|
|
|
|
Controlled
|
|
|
|
|
|
|
|
|
|
Lots Owned -
|
|
|
Under Lot
|
|
|
Total
|
|
|
|
|
|
Lots Owned -
|
|
|
Under Lot
|
|
|
Total
|
|
|
|
|
|
|
Developed
|
|
|
Option and
|
|
|
Land/Lots
|
|
|
Homes
|
|
|
Developed
|
|
|
Option and
|
|
|
Land/Lots
|
|
|
Homes
|
|
|
|
and Under
|
|
|
Similar
|
|
|
Owned and
|
|
|
in
|
|
|
and Under
|
|
|
Similar
|
|
|
Owned and
|
|
|
in
|
|
|
|
Development
|
|
|
Contracts
|
|
|
Controlled
|
|
|
Inventory
|
|
|
Development
|
|
|
Contracts
|
|
|
Controlled
|
|
|
Inventory
|
|
|
Northeast
|
|
|
14,000
|
|
|
|
12,000
|
|
|
|
26,000
|
|
|
|
1,800
|
|
|
|
16,000
|
|
|
|
19,000
|
|
|
|
35,000
|
|
|
|
2,800
|
|
Midwest
|
|
|
10,000
|
|
|
|
3,000
|
|
|
|
13,000
|
|
|
|
1,900
|
|
|
|
12,000
|
|
|
|
15,000
|
|
|
|
27,000
|
|
|
|
2,900
|
|
Southeast
|
|
|
32,000
|
|
|
|
14,000
|
|
|
|
46,000
|
|
|
|
3,400
|
|
|
|
32,000
|
|
|
|
33,000
|
|
|
|
65,000
|
|
|
|
5,200
|
|
South Central
|
|
|
31,000
|
|
|
|
15,000
|
|
|
|
46,000
|
|
|
|
4,400
|
|
|
|
34,000
|
|
|
|
36,000
|
|
|
|
70,000
|
|
|
|
7,400
|
|
Southwest
|
|
|
38,000
|
|
|
|
8,000
|
|
|
|
46,000
|
|
|
|
3,100
|
|
|
|
46,000
|
|
|
|
9,000
|
|
|
|
55,000
|
|
|
|
4,300
|
|
California
|
|
|
14,000
|
|
|
|
9,000
|
|
|
|
23,000
|
|
|
|
3,300
|
|
|
|
19,000
|
|
|
|
15,000
|
|
|
|
34,000
|
|
|
|
3,900
|
|
West
|
|
|
28,000
|
|
|
|
2,000
|
|
|
|
30,000
|
|
|
|
2,000
|
|
|
|
31,000
|
|
|
|
6,000
|
|
|
|
37,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,000
|
|
|
|
63,000
|
|
|
|
230,000
|
|
|
|
19,900
|
|
|
|
190,000
|
|
|
|
133,000
|
|
|
|
323,000
|
|
|
|
28,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73%
|
|
|
|
27%
|
|
|
|
100%
|
|
|
|
|
|
|
|
59%
|
|
|
|
41%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007, we owned or controlled approximately
230,000 lots, 27% of which were lots under option or similar
contracts, compared with approximately 323,000 lots at
September 30, 2006. Our current strategy is to continue to
reduce our owned and controlled lot position in line with our
reduced expectations for future home sales and closings, through
the construction and sale of homes, opportunistic sales of land
and lots, along with critical evaluation of acquiring lots
currently controlled under option.
At September 30, 2007, we controlled approximately 63,000
lots with a total remaining purchase price of approximately
$1.8 billion under land and lot option purchase contracts,
with a total of $109.3 million in earnest money deposits.
Our lots controlled included approximately 18,200 optioned lots
with a remaining purchase price of approximately
$548.5 million and secured by deposits totaling
$34.4 million, for which we do not expect to exercise our
option to purchase the land or lots, but the contract has not
yet been terminated. Consequently, we have written off the
deposits related to these contracts, resulting in a net earnest
money deposit balance of $74.9 million at
September 30, 2007.
We had a total of approximately 19,900 homes in inventory,
including approximately 2,000 model homes at September 30,
2007, compared to approximately 28,500 homes in inventory,
including approximately 1,900 model homes at September 30,
2006. Of our total homes in inventory, approximately 10,600 and
14,200 were unsold at September 30, 2007 and 2006,
respectively. At September 30, 2007, approximately 5,000 of
our unsold homes were completed, of which approximately 1,100
had been completed for more than six months. At
September 30, 2006, approximately 5,000 of our unsold homes
were completed, of which approximately 440 homes had been
completed for more than six months. Our strategy is to continue
to reduce our total number of homes in inventory and our number
of unsold homes in inventory during fiscal 2008, in line with
our reduced expectations for future home sales and closings.
Seasonality
We have typically experienced seasonal variations in our
quarterly operating results and capital requirements. Before the
current housing downturn, we generally had more homes under
construction, closed more homes and had greater revenues and
operating income in the third and fourth quarters of our fiscal
year. This seasonal activity increased our working capital
requirements for our homebuilding operations during the third
and fourth fiscal quarters and increased our funding
requirements for the mortgages we originated in our financial
services segment at the end of these quarters. As a result of
seasonal activity, our results of
49
operations and financial position at the end of a particular
fiscal quarter are not necessarily representative of the balance
of our fiscal year.
In contrast to our typical seasonal results, due to further
deterioration of homebuilding market conditions during fiscal
2007, we incurred consolidated operating losses in our third and
fourth fiscal quarters. These results were primarily due to
recording significant inventory and goodwill impairment charges.
Also, the increasingly challenging market conditions caused
further weakening in sales volume, pricing and margins as the
fiscal year progressed. Although we may experience our typical
historical seasonal pattern in the future, given the current
market conditions, we can make no assurances as to when or
whether this pattern will recur.
Inflation
We and the homebuilding industry in general may be adversely
affected during periods of high inflation, primarily because of
higher land, financing, labor and material construction costs.
In addition, higher mortgage interest rates can significantly
affect the affordability of permanent mortgage financing to
prospective homebuyers. We attempt to pass through to our
customers any increases in our costs through increased sales
prices. However, during periods of soft housing market
conditions, we may not be able to offset our cost increases,
particularly higher land costs, with higher selling prices.
Forward-Looking
Statements
Some of the statements contained in this report, as well as in
other materials we have filed or will file with the Securities
and Exchange Commission, statements made by us in periodic press
releases and oral statements we make to analysts, stockholders
and the press in the course of presentations about us, may be
construed as forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933,
Section 21E of the Securities Exchange Act of 1934 and the
Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on managements
beliefs as well as assumptions made by, and information
currently available to, management. These forward-looking
statements typically include the words anticipate,
believe, consider, estimate,
expect, forecast, goal,
intend, objective, plan,
predict, projection, seek,
strategy, target or other words of
similar meaning. Any or all of the forward-looking statements
included in this report and in any other of our reports or
public statements may not approximate actual experience, and the
expectations derived from them may not be realized, due to
risks, uncertainties and other factors. As a result, actual
results may differ materially from the expectations or results
we discuss in the forward-looking statements. These risks,
uncertainties and other factors include, but are not limited to:
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further deterioration in industry conditions;
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the reduction of liquidity in the financial markets;
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limitations on our strategies in responding to adverse
conditions in the industry;
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changes in general economic, real estate, construction and other
business conditions;
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changes in interest rates, the availability of mortgage
financing or other costs of owning a home;
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the effects of governmental regulations and environmental
matters;
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our substantial debt;
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competitive conditions within our industry;
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the availability of capital;
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our ability to effect any future growth strategies successfully;
and
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the uncertainties inherent in home warranty and construction
defect claims matters.
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We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise. However, any further
disclosures made on related subjects in subsequent reports on
Forms 10-K,
10-Q and
8-K should
be consulted.
Further discussion of these and other risk considerations is
provided in Item 1A Risk Factors under
Part I of this annual report on
Form 10-K.
Critical
Accounting Policies
General A comprehensive enumeration of the
significant accounting policies of D.R. Horton, Inc. and
subsidiaries is presented in Note A to the accompanying
financial statements as of September 30, 2007 and 2006, and
for the years ended September 30, 2007, 2006 and 2005. Each
of our accounting policies has been chosen based upon current
authoritative literature that collectively comprises
U.S. Generally Accepted Accounting Principles (GAAP). In
instances where alternative methods of accounting are
permissible under GAAP, we have chosen the method that most
appropriately reflects the nature of our business, the results
of our operations and our financial condition, and have
consistently applied those methods over each of the periods
presented in the financial statements. The Audit Committee of
our Board of Directors has reviewed and approved the accounting
policies selected.
Basis of Presentation Our financial
statements include the accounts of D.R. Horton, Inc. and all of
its wholly-owned, majority-owned and controlled subsidiaries. We
have also consolidated certain variable interest entities from
which we are purchasing lots under option purchase contracts,
under the requirements of FIN 46. All significant
intercompany accounts, transactions and balances have been
eliminated in consolidation.
Use of Estimates The preparation of financial
statements in conformity with GAAP requires us to make estimates
and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results
could differ materially from those estimates.
Revenue Recognition We generally recognize
homebuilding revenue and related profit at the time of the
closing of a sale, when title to and possession of the property
are transferred to the buyer. In situations where the
buyers financing is originated by DHI Mortgage, our
wholly-owned mortgage subsidiary, and the buyer has not made an
adequate initial or continuing investment as prescribed by
SFAS No. 66, the profit on such sales is deferred
until the sale of the related mortgage loan to a third-party
investor has been completed. We include amounts in transit from
title companies at the end of each reporting period in
homebuilding cash. When we execute sales contracts with our
homebuyers, or when we require advance payment from homebuyers
for custom changes, upgrades or options related to their homes,
we record the cash deposits received as liabilities until the
homes are closed or the contracts are canceled. We either retain
or refund to the homebuyer deposits on canceled sales contracts,
depending upon the applicable provisions of the contract or
other circumstances.
We recognize financial services revenues associated with our
title operations as closing services are rendered and title
insurance policies are issued, both of which generally occur
simultaneously as each home is closed. We transfer substantially
all underwriting risk associated with title insurance policies
to third-party insurers. We recognize the majority of the
revenues associated with our mortgage operations when the
mortgage loans and related servicing rights are sold to
third-party investors. Origination fees and direct origination
costs are deferred and recognized as revenues and expenses,
respectively, along with the associated gains and losses on the
sales of the loans and related servicing rights, when the loans
are sold. We generally do not retain or service the mortgages
that we originate but, rather, sell the mortgages and related
servicing rights to third-party investors. Interest income is
accrued from the date a mortgage loan is originated until the
loan is sold.
Mortgage loans held for sale are generally carried at cost
adjusted for changes in fair value after the date of designation
of an effective accounting hedge, based on either sale
commitments or current market quotes. Some of the loans sold by
DHI Mortgage are sold with limited recourse provisions and may
be required to be repurchased under certain conditions including
if certain specified payment(s), generally initial payment(s),
are not made by the borrowers. We record loss allowances for
loans held in portfolio and loans held for sale, and
51
reserves for losses related to loans sold with recourse,
utilizing estimates based on historical experience and current
market conditions. Unhedged loans are stated at the lower of
cost or market. Market is determined by either sales commitments
or current market conditions.
Inventories and Cost of Sales Inventory
includes the costs of direct land acquisition, land development
and home construction, capitalized interest, real estate taxes
and direct overhead costs incurred during development and home
construction. Applicable direct overhead costs that we incur
after development projects or homes are substantially complete,
such as utilities, maintenance, and cleaning, are charged to
SG&A expense as incurred. All indirect overhead costs, such
as compensation of construction superintendents, sales personnel
and division and region management, advertising and
builders risk insurance are charged to SG&A expense
as incurred.
Land and development costs are typically allocated to individual
residential lots on a pro-rata basis, and the costs of
residential lots are transferred to construction in progress
when home construction begins. We use the specific
identification method for the purpose of accumulating home
construction costs. Cost of sales for homes closed includes the
specific construction costs of each home and all applicable land
acquisition, land development and related costs (both incurred
and estimated to be incurred) based upon the total number of
homes expected to be closed in each project. Any changes to the
estimated total development costs subsequent to the initial home
closings in a project are generally allocated on a pro-rata
basis to the remaining homes in the project.
When a home is closed, we generally have not yet paid and
recorded all incurred costs necessary to complete the home. Each
month we record as a liability and as a charge to cost of sales
the amount we determine will ultimately be paid related to
completed homes that have been closed as of the end of that
month. We compare our home construction budgets to actual
recorded costs to determine the additional costs remaining to be
paid on each closed home. We monitor the accuracy of each
months accrual by comparing actual costs incurred on
closed homes in subsequent months to the amount previously
accrued. Although actual costs to be paid in the future on
previously closed homes could differ from our current accruals,
historically, differences in amounts have not been significant.
In accordance with SFAS No. 144, land inventory and
related communities under development are reviewed for potential
write-downs when impairment indicators are present.
SFAS No. 144 requires that in the event the
undiscounted cash flows estimated to be generated by those
assets are less than their carrying amounts, impairment charges
are required to be recorded if the fair value of such assets is
less than their carrying amounts. These estimates of cash flows
are significantly impacted by estimates of the amounts and
timing of revenues and costs and other factors which, in turn,
are impacted by local market economic conditions and the actions
of competitors. Due to uncertainties in the estimation process,
actual results could differ from such estimates. For those
assets deemed to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Our determination
of fair value is primarily based on discounting the estimated
cash flows at a rate commensurate with the inherent risks
associated with the assets and related estimated cash flow
streams.
In accordance with SFAS No. 144, impairment charges
are also recorded on finished homes in substantially completed
projects when events or circumstances indicate that the carrying
values are greater than the fair value less costs to sell these
homes.
Land Inventory Not Owned We account for our
land and lot option purchase contracts in accordance with the
provisions of FIN 46. FIN 46 provides guidance for the
financial accounting and reporting of interests in certain
variable interest entities, which FIN 46 defines as certain
business entities that either have equity investors with no
voting rights or have equity investors that do not provide
sufficient financial resources for the entities to support their
activities. FIN 46 requires consolidation of such entities
by any company that is subject to a majority of the risk of loss
from the entities activities or is entitled to receive a
majority of the entities residual returns or both, defined
as the primary beneficiary of the variable interest entity.
In the ordinary course of our homebuilding business, we enter
into land and lot option purchase contracts to procure land or
lots for the construction of homes. Under such option purchase
contracts, we will fund a
52
stated deposit in consideration for the right, but not the
obligation, to purchase land or lots at a future point in time
with predetermined terms. Under the terms of the option purchase
contracts, many of our option deposits are not refundable at our
discretion. Under the requirements of FIN 46, certain of
the option purchase contracts result in the creation of a
variable interest in the entity holding the land parcel under
option.
In applying the provisions of FIN 46, we evaluate those
land and lot option purchase contracts with variable interest
entities to determine whether we are the primary beneficiary
based upon analysis of the variability of the expected gains and
losses of the entity. Based on this evaluation, if we are the
primary beneficiary of an entity with which we have entered into
a land or lot option purchase contract, the variable interest
entity is consolidated.
Since we own no equity interest in any of the unaffiliated
variable interest entities that we must consolidate pursuant to
FIN 46, we generally have little or no control or influence
over the operations of these entities or their owners. When our
requests for financial information are denied by the land
sellers, certain assumptions about the assets and liabilities of
such entities are required. In most cases, the fair value of the
assets of the consolidated entities has been assumed to be the
remaining contractual purchase price of the land or lots we are
purchasing. In these cases, it is assumed that the entities have
no debt obligations and the only asset recorded is the land or
lots we have the option to buy with a related offset to minority
interest for the assumed third party investment in the variable
interest entity. Creditors, if any, of these variable interest
entities have no recourse against us.
Goodwill Goodwill represents the excess of
purchase price over net assets acquired. In accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets, we test goodwill for potential impairment annually
as of September 30 or more frequently if an event occurs or
circumstances change that indicate the remaining balance of
goodwill may not be recoverable. In analyzing the potential
impairment of goodwill, SFAS No. 142 prescribes a
two-step process that begins with the estimation of the fair
value of the reporting units. If the results of the first step
indicate that impairment potentially exists, the second step is
performed to measure the amount of the impairment, if any.
Impairment is determined to exist when the estimated fair value
of goodwill is less than its carrying value.
Warranty Costs We have established warranty
reserves by charging cost of sales and crediting a warranty
liability for each home closed. We estimate the amounts charged
to be adequate to cover expected warranty-related costs for
materials and labor required under one- and ten-year warranty
obligation periods. The one-year warranty is comprehensive for
all parts and labor; the ten-year period is for major
construction defects. Our warranty cost accruals are based upon
our historical warranty cost experience in each market in which
we operate and are adjusted as appropriate to reflect
qualitative risks associated with the type of homes we build and
the geographic areas in which we build them. Actual future
warranty costs could differ from our currently estimated
amounts. A 10% change in the historical warranty rates used to
estimate our warranty accrual would not result in a material
change in our accrual.
Insurance Claim Costs We have, and require
the majority of the subcontractors we use to have, general
liability insurance (including construction defect coverage) and
workers compensation insurance. These insurance policies protect
us against a portion of our risk of loss from claims, subject to
certain self-insured retentions, deductibles and other coverage
limits. In some states where we believe it is too difficult or
expensive for the subcontractors to obtain general liability
insurance, we have waived our traditional subcontractor general
liability insurance requirements to obtain lower bids from
subcontractors. We self-insure a portion of our overall risk,
partially through the use of a captive insurance entity which
issues a general liability policy to us, naming some
subcontractors as additional insureds.
We record expenses and liabilities related to the costs to cover
our self-insured and deductible amounts under our insurance
policies and for any estimated costs of potential claims and
lawsuits (including expected legal costs) in excess of our
coverage limits or not covered by our policies, based on an
analysis of our historical claims, which includes an estimate of
construction defect claims incurred but not yet reported.
Projection of losses related to these liabilities is subject to
a high degree of variability due to uncertainties such as trends
in construction defect claims relative to our markets and the
types of products we build, claim settlement patterns, insurance
industry practices and legal interpretations, among others.
Because of the high
53
degree of judgment required in determining these estimated
liability amounts, actual future costs could differ
significantly from our currently estimated amounts. A 10% change
in the claim rate and the average cost per claim used to
estimate the self-insured accruals would result in a change of
approximately $50.0 million in our accrual.
Income Taxes We calculate a provision for
income taxes using the asset and liability method, under which
deferred tax assets and liabilities are recognized by
identifying the temporary differences arising from the different
treatment of items for tax and accounting purposes. In assessing
the realizability of deferred tax assets, we consider whether it
is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of
deferred tax assets is primarily dependent upon the generation
of future taxable income during the periods in which those
temporary differences become deductible. In determining the
future tax consequences of events that have been recognized in
our financial statements or tax returns, judgment is required.
Differences between the anticipated and actual outcomes of these
future tax consequences could have a material impact on our
consolidated results of operations or financial position.
Stock-based Compensation With the approval of
our compensation committee, consisting of independent members of
our Board of Directors, we from time to time issue to employees
and directors options to purchase our common stock. The
committee approves grants only out of amounts remaining
available for grant from amounts formally authorized by our
common stockholders. We typically grant approved options with
exercise prices equal to the market price of our common stock on
the date of the option grant. The majority of the options
granted vest ratably over a ten-year period.
On October 1, 2005, we adopted the provisions of
SFAS No. 123(R), Share Based Payment,
which requires that companies measure and recognize compensation
expense at an amount equal to the fair value of share-based
payments granted under compensation arrangements. We calculate
the fair value of stock options using the Black- Scholes option
pricing model. Determining the fair value of share-based awards
at the grant date requires judgment in developing assumptions,
which involve a number of variables. These variables include,
but are not limited to, the expected stock price volatility over
the term of the awards, the expected dividend yield and expected
stock option exercise behavior. In addition, we also use
judgment in estimating the number of share-based awards that are
expected to be forfeited.
Recent
Accounting Pronouncements
In November 2007, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 109, Written Loan
Commitments Recorded at Fair Value Through Earnings.
SAB No. 109, which revises and rescinds portions of
SAB No. 105, Application of Accounting
Principles to Loan Commitments, specifically states that
the expected net future cash flows related to the associated
servicing of a loan should be included in the measurement of all
written loan commitments that are accounted for at fair value
through earnings. The provisions of SAB No. 109 are
applicable to written loan commitments issued or modified
beginning on January 1, 2008. We are currently evaluating
the impact of the adoption of SAB No. 109.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115. The statement permits entities to choose to
measure certain financial assets and liabilities at fair value.
Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings.
SFAS No. 159 is effective as of the beginning of an
entitys fiscal year that begins after November 15,
2007. We are currently evaluating the impact of the adoption of
SFAS No. 159; however, it is not expected to have a
material impact on our consolidated financial position, results
of operations or cash flows.
In November 2006, the FASB issued Emerging Issues Task Force
Issue (EITF)
No. 06-8,
Applicability of the Assessment of a Buyers
Continuing Investment under FASB Statement No. 66 for Sales
of Condominiums.
EITF 06-8
establishes that an entity should evaluate the adequacy of the
buyers continuing investment in determining whether to
recognize profit under the percentage-of-completion method.
EITF 06-8
is effective for the first annual reporting period beginning
after March 15, 2007. The adoption of
EITF 06-8
will not have a material impact on our consolidated financial
position, results of operations or cash flows.
54
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. The statement defines fair
value, establishes a framework for measuring fair value in GAAP,
and expands disclosures about fair value measurements.
SFAS No. 157 is effective as of the beginning of an
entitys fiscal year that begins after November 15,
2007. We are currently evaluating the impact of the adoption of
SFAS No. 157; however, it is not expected to have a
material impact on our consolidated financial position, results
of operations or cash flows.
In June 2006, the FASB issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement 109.
FIN 48 prescribes a comprehensive model for recognizing,
measuring, presenting and disclosing in the financial statements
tax positions taken or expected to be taken on a tax return,
including a decision whether to file or not to file in a
particular jurisdiction. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The impact of the
adoption of FIN 48 will not have a material impact on our
consolidated financial position, results of operations or cash
flows.
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ITEM 7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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We are subject to interest rate risk on our long-term debt. We
monitor our exposure to changes in interest rates and utilize
both fixed and variable rate debt. For fixed rate debt, changes
in interest rates generally affect the value of the debt
instrument, but not our earnings or cash flows. Conversely, for
variable rate debt, changes in interest rates generally do not
impact the fair value of the debt instrument, but may affect our
future earnings and cash flows. We have mitigated our exposure
to changes in interest rates on our variable rate bank debt by
entering into interest rate swap agreements to obtain a fixed
interest rate for a portion of the variable rate borrowings. We
generally do not have an obligation to prepay fixed-rate debt
prior to maturity and, as a result, interest rate risk and
changes in fair value would not have a significant impact on our
cash flows related to our fixed-rate debt until such time as we
are required to refinance, repurchase or repay such debt.
Our interest rate swaps are not designated as hedges under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. We are exposed to
market risk associated with changes in the fair values of the
swaps, and such changes are reflected in our statements of
operations.
We are exposed to interest rate risk associated with our
mortgage loan origination services. We manage interest rate risk
through the use of forward sales of mortgage-backed securities
(FMBS), Eurodollar Futures Contracts (EDFC) and put options on
mortgage-backed securities (MBS) and EDFC. Use of the term
hedging instruments in the following discussion
refers to these securities collectively, or in any combination.
We do not enter into or hold derivatives for trading or
speculative purposes.
Interest rate lock commitments (IRLCs) are extended to borrowers
who have applied for loan funding and who meet defined credit
and underwriting criteria. Typically, the IRLCs have a duration
of less than six months. Some IRLCs are committed immediately to
a specific investor through the use of best-efforts whole loan
delivery commitments, while other IRLCs are funded prior to
being committed to third-party investors. The hedging
instruments related to IRLCs are classified and accounted for as
non-designated derivative instruments, with gains and losses
recognized in current earnings. Hedging instruments related to
funded, uncommitted loans are designated as fair value hedges,
with changes in the value of the derivative instruments
recognized in current earnings, along with changes in the value
of the funded, uncommitted loans. The effectiveness of the fair
value hedges is continuously monitored and any ineffectiveness,
which for the years ended September 30, 2007, 2006 and 2005
was not significant, is recognized in current earnings. At
September 30, 2007, hedging instruments to mitigate
interest rate risk related to uncommitted mortgage loans held
for sale and uncommitted IRLCs totaled $630.4 million.
Uncommitted IRLCs, the duration of which are generally less than
six months, totaled approximately $154.4 million, and
uncommitted mortgage loans held for sale totaled approximately
$129.2 million at September 30, 2007. The fair value
of the hedging instruments and IRLCs at September 30, 2007
was an insignificant amount.
We also purchase forward rate agreements (FRAs) and economic
interest rate hedges as part of a program to potentially offer
homebuyers a below market interest rate on their home financing.
At September 30, 2007, these potential mortgage loan
originations totaled approximately $124.9 million and were
hedged with FRAs
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of $72.1 million and economic interest rate hedges of
$526.9 million in EDFC put options and $29.6 million
in MBS put options. Both the FRAs and economic interest rate
hedges have various maturities not exceeding twelve months.
These instruments are considered non-designated derivatives and
are accounted for at fair value with gains and losses recognized
in current earnings. The gains and losses for the year ended
September 30, 2007 were not significant.
The following table sets forth principal cash flows by expected
maturity, weighted average interest rates and estimated fair
value of our debt obligations as of September 30, 2007. The
interest rates for our variable rate debt represent the weighted
average interest rates in effect at September 30, 2007. In
addition, the table sets forth the notional amounts, weighted
average interest rates and estimated fair value of our interest
rate swaps. Because the mortgage warehouse credit facility and
CP conduit facility are secured by certain mortgage loans held
for sale which are typically sold within 60 days, the
outstanding balances at September 30, 2007 are included in
the variable rate maturities for the fiscal year ending
September 30, 2008. At September 30, 2007, the fair
value of the interest rate swaps was a $0.1 million
liability.
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Fair
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Fiscal Year Ending September 30,
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value @
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2008
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2009
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2010
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2011
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2012
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Thereafter
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Total
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9/30/07
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(In millions)
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Debt:
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Fixed rate
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$
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243.4
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$
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592.6
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$
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400.0
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$
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450.0
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$
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314.6
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$
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1,850.0
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$
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3,850.6
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$
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3,487.2
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Average interest rate
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7.7%
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7.3%
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6.9%
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7.0%
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5.4%
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6.1%
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6.5%
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Variable rate
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$
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387.8
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$
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$
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$
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$
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150.0
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$
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$
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537.8
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$
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537.8
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Average interest rate
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5.9%
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6.0%
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5.9%
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Interest Rate Swaps:
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Variable to fixed
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$
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200.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.1
|
|
Average pay rate
|
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average receive rate
|
|
90-day LIBOR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of D.R. Horton, Inc.
We have audited the accompanying consolidated balance sheets of
D.R. Horton, Inc. and subsidiaries (the Company) as
of September 30, 2007 and 2006, and the related
consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period
ended September 30, 2007. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of D.R. Horton, Inc. and subsidiaries at
September 30, 2007 and 2006, and the consolidated results
of their operations and their cash flows for each of the three
years in the period ended September 30, 2007, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of D.R. Horton, Inc.s internal control over
financial reporting as of September 30, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
November 26, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Fort Worth, Texas
November 26, 2007
57
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
D.R.
HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
ASSETS
|
Homebuilding:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
228.3
|
|
|
$
|
457.8
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Construction in progress and finished homes
|
|
|
3,346.8
|
|
|
|
4,322.8
|
|
Residential land and lots developed and under
development
|
|
|
5,334.7
|
|
|
|
6,737.0
|
|
Land held for development
|
|
|
540.1
|
|
|
|
182.9
|
|
Land inventory not owned
|
|
|
121.9
|
|
|
|
100.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,343.5
|
|
|
|
11,343.1
|
|
Property and equipment, net
|
|
|
110.2
|
|
|
|
131.4
|
|
Deferred income taxes
|
|
|
863.8
|
|
|
|
374.0
|
|
Earnest money deposits and other assets
|
|
|
291.2
|
|
|
|
442.4
|
|
Goodwill
|
|
|
95.3
|
|
|
|
578.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,932.3
|
|
|
|
13,327.6
|
|
|
|
|
|
|
|
|
|
|
Financial Services:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
41.3
|
|
|
|
129.8
|
|
Restricted cash
|
|
|
|
|
|
|
248.3
|
|
Mortgage loans held for sale
|
|
|
523.5
|
|
|
|
1,022.9
|
|
Other assets
|
|
|
59.2
|
|
|
|
92.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
624.0
|
|
|
|
1,493.1
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,556.3
|
|
|
$
|
14,820.7
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Homebuilding:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
566.2
|
|
|
$
|
982.3
|
|
Accrued expenses and other liabilities
|
|
|
933.3
|
|
|
|
1,143.0
|
|
Notes payable
|
|
|
3,989.0
|
|
|
|
4,886.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,488.5
|
|
|
|
7,012.2
|
|
|
|
|
|
|
|
|
|
|
Financial Services:
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities
|
|
|
24.7
|
|
|
|
58.8
|
|
Notes payable to financial institutions
|
|
|
387.8
|
|
|
|
1,191.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
412.5
|
|
|
|
1,250.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,901.0
|
|
|
|
8,262.7
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
68.4
|
|
|
|
105.1
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
Preferred stock, $.10 par value, 30,000,000 shares
authorized, no shares issued
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 1,000,000,000 shares
authorized, 318,569,673 shares issued and
314,914,440 shares outstanding at September 30, 2007
and 316,899,545 shares issued and 313,246,745 shares
outstanding at September 30, 2006
|
|
|
3.2
|
|
|
|
3.2
|
|
Additional capital
|
|
|
1,693.3
|
|
|
|
1,658.4
|
|
Retained earnings
|
|
|
3,986.1
|
|
|
|
4,887.0
|
|
Treasury stock, 3,655,233 shares at September 30, 2007
and 3,652,800 shares at September 30, 2006, at cost
|
|
|
(95.7
|
)
|
|
|
(95.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
5,586.9
|
|
|
|
6,452.9
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
11,556.3
|
|
|
$
|
14,820.7
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
58
D.R.
HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except per share data)
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales
|
|
$
|
10,721.2
|
|
|
$
|
14,545.4
|
|
|
$
|
13,376.6
|
|
Land/lot sales
|
|
|
367.6
|
|
|
|
215.1
|
|
|
|
252.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,088.8
|
|
|
|
14,760.5
|
|
|
|
13,628.6
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales
|
|
|
8,872.3
|
|
|
|
11,047.8
|
|
|
|
9,960.6
|
|
Land/lot sales
|
|
|
283.3
|
|
|
|
99.6
|
|
|
|
162.6
|
|
Inventory impairments and land option cost write-offs
|
|
|
1,329.5
|
|
|
|
270.9
|
|
|
|
17.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,485.1
|
|
|
|
11,418.3
|
|
|
|
10,140.3
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales
|
|
|
1,848.9
|
|
|
|
3,497.6
|
|
|
|
3,416.0
|
|
Land/lot sales
|
|
|
84.3
|
|
|
|
115.5
|
|
|
|
89.4
|
|
Inventory impairments and land option cost write-offs
|
|
|
(1,329.5
|
)
|
|
|
(270.9
|
)
|
|
|
(17.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
603.7
|
|
|
|
3,342.2
|
|
|
|
3,488.3
|
|
Selling, general and administrative expense
|
|
|
1,141.5
|
|
|
|
1,456.6
|
|
|
|
1,226.6
|
|
Goodwill impairment
|
|
|
474.1
|
|
|
|
|
|
|
|
|
|
Loss on early retirement of debt
|
|
|
12.1
|
|
|
|
17.9
|
|
|
|
4.4
|
|
Other (income)
|
|
|
(4.0
|
)
|
|
|
(11.0
|
)
|
|
|
(15.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,020.0
|
)
|
|
|
1,878.7
|
|
|
|
2,273.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
207.7
|
|
|
|
290.8
|
|
|
|
235.1
|
|
General and administrative expense
|
|
|
153.8
|
|
|
|
202.2
|
|
|
|
147.6
|
|
Interest expense
|
|
|
23.6
|
|
|
|
37.1
|
|
|
|
16.8
|
|
Interest and other (income)
|
|
|
(38.5
|
)
|
|
|
(56.9
|
)
|
|
|
(34.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68.8
|
|
|
|
108.4
|
|
|
|
105.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(951.2
|
)
|
|
|
1,987.1
|
|
|
|
2,378.6
|
|
Provision for (benefit from) income taxes
|
|
|
(238.7
|
)
|
|
|
753.8
|
|
|
|
908.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(712.5
|
)
|
|
$
|
1,233.3
|
|
|
$
|
1,470.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$
|
(2.27
|
)
|
|
$
|
3.94
|
|
|
$
|
4.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share assuming dilution
|
|
$
|
(2.27
|
)
|
|
$
|
3.90
|
|
|
$
|
4.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
0.60
|
|
|
$
|
0.44
|
|
|
$
|
0.3075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
59
D.R.
HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Additional
|
|
|
Retained
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
Equity
|
|
|
|
(In millions, except common stock share data)
|
|
|
Balances at September 30, 2004 (311,393,020 shares)
|
|
$
|
3.1
|
|
|
$
|
1,599.2
|
|
|
$
|
2,417.3
|
|
|
$
|
(58.9
|
)
|
|
$
|
3,960.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,470.5
|
|
|
|
|
|
|
|
1,470.5
|
|
Issuances under employee benefit plans (95,669 shares)
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
Exercise of stock options (1,450,179 shares)
|
|
|
0.1
|
|
|
|
23.7
|
|
|
|
|
|
|
|
|
|
|
|
23.8
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(96.5
|
)
|
|
|
|
|
|
|
(96.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2005 (312,938,868 shares)
|
|
$
|
3.2
|
|
|
$
|
1,624.8
|
|
|
$
|
3,791.3
|
|
|
$
|
(58.9
|
)
|
|
$
|
5,360.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,233.3
|
|
|
|
|
|
|
|
1,233.3
|
|
Issuances under employee benefit plans (158,444 shares)
|
|
|
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
4.5
|
|
Exercise of stock options (1,149,433 shares)
|
|
|
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
7.9
|
|
Stock option compensation expense
|
|
|
|
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
11.8
|
|
Income tax benefit from exercise of stock options
|
|
|
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
9.4
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(137.6
|
)
|
|
|
|
|
|
|
(137.6
|
)
|
Treasury stock purchases (1,000,000 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36.8
|
)
|
|
|
(36.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2006 (313,246,745 shares)
|
|
$
|
3.2
|
|
|
$
|
1,658.4
|
|
|
$
|
4,887.0
|
|
|
$
|
(95.7
|
)
|
|
$
|
6,452.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(712.5
|
)
|
|
|
|
|
|
|
(712.5
|
)
|
Issuances under employee benefit plans (156,543 shares)
|
|
|
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
Exercise of stock options (1,513,585 shares)
|
|
|
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
9.1
|
|
Stock option compensation expense
|
|
|
|
|
|
|
12.4
|
|
|
|
|
|
|
|
|
|
|
|
12.4
|
|
Income tax benefit from exercise of stock options
|
|
|
|
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
9.9
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(188.4
|
)
|
|
|
|
|
|
|
(188.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2007 (314,914,440 shares)
|
|
$
|
3.2
|
|
|
$
|
1,693.3
|
|
|
$
|
3,986.1
|
|
|
$
|
(95.7
|
)
|
|
$
|
5,586.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
60
D.R.
HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(712.5
|
)
|
|
$
|
1,233.3
|
|
|
$
|
1,470.5
|
|
Adjustments to reconcile net income (loss) to net cash provided
by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
64.4
|
|
|
|
56.5
|
|
|
|
52.8
|
|
Amortization of debt premiums, discounts and fees
|
|
|
6.6
|
|
|
|
5.2
|
|
|
|
4.3
|
|
Stock option compensation expense
|
|
|
12.4
|
|
|
|
11.8
|
|
|
|
|
|
Income tax benefit from stock option exercises
|
|
|
(9.9
|
)
|
|
|
(9.4
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
(489.0
|
)
|
|
|
(108.9
|
)
|
|
|
(84.7
|
)
|
Loss on redemption of senior and senior subordinated notes
|
|
|
12.1
|
|
|
|
13.4
|
|
|
|
|
|
Inventory impairments and land option cost write-offs
|
|
|
1,329.5
|
|
|
|
270.9
|
|
|
|
17.1
|
|
Goodwill impairment
|
|
|
474.1
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in construction in progress and finished
homes
|
|
|
657.8
|
|
|
|
(1,261.7
|
)
|
|
|
(227.4
|
)
|
Decrease (increase) in residential land and lots
developed, under development, and held for development
|
|
|
79.8
|
|
|
|
(1,847.3
|
)
|
|
|
(1,640.2
|
)
|
Decrease (increase) in earnest money deposits and other assets
|
|
|
123.3
|
|
|
|
71.8
|
|
|
|
(66.9
|
)
|
Decrease (increase) in mortgage loans held for sale
|
|
|
499.4
|
|
|
|
335.8
|
|
|
|
(735.4
|
)
|
(Decrease) increase in accounts payable, accrued expenses and
other liabilities
|
|
|
(692.5
|
)
|
|
|
37.8
|
|
|
|
589.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
1,355.5
|
|
|
|
(1,190.8
|
)
|
|
|
(620.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(39.8
|
)
|
|
|
(83.3
|
)
|
|
|
(68.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(39.8
|
)
|
|
|
(83.3
|
)
|
|
|
(68.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
2,980.0
|
|
|
|
5,824.2
|
|
|
|
4,060.2
|
|
Repayment of notes payable
|
|
|
(4,696.2
|
)
|
|
|
(4,711.4
|
)
|
|
|
(2,667.8
|
)
|
Decrease (increase) in restricted cash
|
|
|
248.3
|
|
|
|
(248.3
|
)
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
(36.8
|
)
|
|
|
|
|
Proceeds from stock associated with certain employee benefit
plans
|
|
|
12.7
|
|
|
|
12.4
|
|
|
|
24.8
|
|
Income tax benefit from stock option exercises
|
|
|
9.9
|
|
|
|
9.4
|
|
|
|
|
|
Cash dividends paid
|
|
|
(188.4
|
)
|
|
|
(137.6
|
)
|
|
|
(96.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,633.7
|
)
|
|
|
711.9
|
|
|
|
1,320.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(318.0
|
)
|
|
|
(562.2
|
)
|
|
|
631.8
|
|
Cash and cash equivalents at beginning of year
|
|
|
587.6
|
|
|
|
1,149.8
|
|
|
|
518.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
269.6
|
|
|
$
|
587.6
|
|
|
$
|
1,149.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of amounts capitalized
|
|
$
|
37.3
|
|
|
$
|
11.0
|
|
|
$
|
20.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
325.6
|
|
|
$
|
956.3
|
|
|
$
|
895.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued for inventory
|
|
$
|
3.7
|
|
|
$
|
38.8
|
|
|
$
|
17.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
61
D.R.
HORTON, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE A
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The consolidated financial statements have been prepared in
accordance with U.S. Generally Accepted Accounting
Principles (GAAP) and include the accounts of D. R. Horton, Inc.
and all of its wholly-owned, majority-owned and controlled
subsidiaries (which are referred to as the Company, unless the
context otherwise requires), as well as certain variable
interest entities required to be consolidated pursuant to
Interpretation No. 46, Consolidation of Variable
Interest Entities an interpretation of ARB
No. 51, as amended (FIN 46), issued by the
Financial Accounting Standards Board (FASB). All significant
intercompany accounts, transactions and balances have been
eliminated in consolidation.
Reclassifications
The prior year balance of the deferred tax asset has been
reclassified from earnest money deposits and other assets to
deferred income taxes on the September 30, 2006
consolidated balance sheet to conform to the fiscal 2007
presentation. Additionally, the corresponding changes to the
consolidated statements of cash flows for the years ended
September 30, 2006 and 2005 have been made.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from
those estimates.
Revenue
Recognition
Homebuilding revenue and related profit are generally recognized
at the time of the closing of a sale, when title to and
possession of the property are transferred to the buyer. In
situations where the buyers financing is originated by DHI
Mortgage, the Companys wholly-owned mortgage subsidiary,
and the buyer has not made an adequate initial or continuing
investment as prescribed by Statement of Financial Accounting
Standards (SFAS) No. 66, Accounting for Sales of Real
Estate, the profit on such sales is deferred until the
sale of the related mortgage loan to a third-party investor has
been completed. At September 30, 2007 and 2006, the Company
had deferred profit on such sales in the amounts of
$32.6 million and $90.6 million, respectively.
Financial services revenues associated with the Companys
title operations are recognized as closing services are rendered
and title insurance policies are issued, both of which generally
occur simultaneously as each home is closed. The Company
transfers substantially all underwriting risk associated with
title insurance policies to third-party insurers. The majority
of the revenues associated with the Companys mortgage
operations is recognized when the mortgage loans and related
servicing rights are sold to third-party investors. Origination
fees and direct origination costs are deferred and recognized as
revenues and expenses, respectively, along with the associated
gains and losses on the sales of the loans and related servicing
rights, when the loans are sold. The Company generally does not
retain or service the mortgages that it originates but, rather,
sells the mortgages and related servicing rights to third-party
investors. Interest income is accrued from the date a mortgage
loan is originated until the loan is sold.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with an
initial maturity of three months or less when purchased to be
cash equivalents. Amounts in transit from title companies for
home closings at the end of each reporting period are included
in homebuilding cash.
62
D.R.
HORTON, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
Cash
The Company holds cash that is restricted as to its use.
Restricted cash related to the Companys homebuilding
operations includes customer deposits that are temporarily
restricted in accordance with regulatory requirements. At
September 30, 2007 and 2006, the balances of restricted
cash were $5.4 million and $38.8 million,
respectively, and are included in other assets on the
Companys balance sheet.
Borrowings by the Companys mortgage subsidiary under the
CP conduit facility are secured by the assignment of mortgage
loans held for sale and restricted cash arising from borrowings
under the facility prior to the assignment of the mortgage loans
as collateral. At September 30, 2007, there were no
borrowings under the facility prior to the assignment of
mortgage loans held for sale, and therefore, no cash was
restricted under this facility for this purpose. At
September 30, 2006, the balance of cash restricted for this
purpose was $248.3 million.
Inventories
and Cost of Sales
Inventory includes the costs of direct land acquisition, land
development and home construction, capitalized interest, real
estate taxes and direct overhead costs incurred during
development and home construction. Applicable direct overhead
costs incurred after development projects or homes are
substantially complete, such as utilities, maintenance and
cleaning, are charged to selling, general and administrative
(SG&A) expense as incurred. All indirect overhead costs,
such as compensation of construction superintendents, sales
personnel and division and region management, advertising and
builders risk insurance are charged to SG&A expense
as incurred.
Land and development costs are typically allocated to individual
residential lots on a pro-rata basis, and the costs of
residential lots are transferred to construction in progress
when home construction begins. The specific identification
method is used for the purpose of accumulating home construction
costs. Cost of sales for homes closed includes the specific
construction costs of each home and all applicable land
acquisition, land development and related costs (both incurred
and estimated to be incurred) based upon the total number of
homes expected to be closed in each project. Any changes to the
estimated total development costs subsequent to the initial home
closings in a project are generally allocated on a pro-rata
basis to the remaining homes in the project.
When a home is closed, the Company generally has not yet paid
and recorded all incurred costs necessary to complete the home.
Each month a liability and a charge to cost of sales is recorded
for the amount that is determined will ultimately be paid
related to completed homes that have been closed as of the end
of that month. The home construction budgets are compared to
actual recorded costs to determine the additional costs
remaining to be paid on each closed home. The accuracy of each
months accrual is monitored by comparing actual costs
incurred on closed homes in subsequent months to the amount
previously accrued. Although actual costs to be paid in the
future on previously closed homes could differ from the
Companys current accruals, historically, differences in
amounts have not been significant.
Each quarter, all components of inventory are reviewed for the
purpose of determining whether recorded costs and costs required
to complete each home or project are recoverable. If the review
indicates that an impairment loss is required under the
guidelines of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, an estimate
of the loss is made and recorded to cost of sales in that
quarter. See Note B.
Homebuilding
Interest
The Company capitalizes homebuilding interest costs to inventory
during development and construction. Capitalized interest is
charged to cost of sales as the related inventory is delivered
to the buyer. Additionally,
63
D.R.
HORTON, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Company writes off a portion of the capitalized interest
related to projects for which inventory impairments are recorded
in accordance with SFAS No. 144.
The following table summarizes the Companys homebuilding
interest costs incurred (which does not include losses on early
retirement of debt), capitalized, charged to cost of sales and
impaired during the years ended September 30, 2007, 2006
and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Capitalized interest, beginning of year
|
|
$
|
288.9
|
|
|
$
|
200.6
|
|
|
$
|
152.7
|
|
Interest incurred
|
|
|
304.3
|
|
|
|
325.4
|
|
|
|
272.9
|
|
Interest amortized to cost of sales
|
|
|
(220.3
|
)
|
|
|
(237.1
|
)
|
|
|
(225.0
|
)
|
Interest written off with inventory impairments
|
|
|
(34.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest, end of year
|
|
$
|
338.7
|
|
|
$
|
288.9
|
|
|
$
|
200.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
Inventory Not Owned
The Company accounts for its land and lot option purchase
contracts in accordance with the provisions of FIN 46.
FIN 46 provides guidance for the financial accounting and
reporting of interests in certain variable interest entities,
which FIN 46 defines as certain business entities that
either have equity investors with no voting rights or have
equity investors that do not provide sufficient financial
resources for the entities to support their activities.
FIN 46 requires consolidation of such entities by any
company that is subject to a majority of the risk of loss from
the entities activities or is entitled to receive a
majority of the entities residual returns or both, defined
as the primary beneficiary of the variable interest entity. See
Note C.
Property
and Equipment
Property and equipment is stated at cost less accumulated
depreciation. Repairs and maintenance costs are expensed as
incurred. Depreciation generally is recorded using the
straight-line method over the estimated useful life of the
asset. Depreciable lives for model home furniture typically
range from 2 to 3 years, depreciable lives for office
furniture and equipment typically range from 2 to 5 years,
and depreciable lives for buildings and improvements typically
range from 5 to 20 years. Accumulated depreciation was
$157.9 million and $130.0 million as of
September 30, 2007 and 2006, respectively. Depreciation
expense was $64.3 million, $56.5 million and
$52.8 million in fiscal 2007, 2006 and 2005, respectively.
Goodwill
Goodwill represents the excess of purchase price over net assets
acquired. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, the Company
tests goodwill for potential impairment annually as of September
30 or more frequently if an event occurs or circumstances change
that indicate the remaining balance of goodwill may not be
recoverable. In analyzing the potential impairment of goodwill,
SFAS No. 142 prescribes a two-step process that begins
with the estimation of the fair value of the reporting units. If
the results of the first step indicate that impairment
potentially exists, the second step is performed to measure the
amount of the impairment, if any. Impairment is determined to
exist when the estimated fair value of goodwill is less than its
carrying value. See Note D.
Warranty
Costs
The Company typically provides its homebuyers a one-year
comprehensive limited warranty for all parts and labor and a
ten-year limited warranty for major construction defects. Since
the Company subcontracts its
64
D.R.
HORTON, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
homebuilding work to subcontractors who typically provide it
with an indemnity and a certificate of insurance prior to
receiving payments for their work, claims relating to
workmanship and materials are generally the primary
responsibility of the subcontractors. Warranty liabilities have
been established by charging cost of sales for each home
delivered. The amounts charged are based on managements
estimate of expected warranty-related costs under all unexpired
warranty obligation periods. The Companys warranty
liability is based upon historical warranty cost experience in
each market in which it operates and is adjusted as appropriate
to reflect qualitative risks associated with the types of homes
built and the geographic areas in which they are built.
Changes in the Companys warranty liability were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Warranty liability, beginning of year
|
|
$
|
130.4
|
|
|
$
|
121.6
|
|
Warranties issued
|
|
|
51.0
|
|
|
|
75.2
|
|
Changes in liability for pre-existing warranties
|
|
|
(12.3
|
)
|
|
|
(15.5
|
)
|
Settlements made
|
|
|
(53.1
|
)
|
|
|
(50.9
|
)
|
|
|
|
|
|
|
|
|
|
Warranty liability, end of year
|
|
$
|
116.0
|
|
|
$
|
130.4
|
|
|
|
|
|
|
|
|
|
|
Insurance
Claim Costs
The Company has, and requires the majority of its subcontractors
to have, general liability insurance (including construction
defect coverage) and workers compensation insurance. These
insurance policies protect the Company against a portion of its
risk of loss from claims, subject to certain self-insured
retentions, deductibles and other coverage limits. In certain
states where the Company believes it is too difficult or
expensive for subcontractors to obtain general liability
insurance, the Company has waived its traditional subcontractor
general liability insurance requirements to obtain lower bids
from subcontractors. The Company self-insures a portion of its
overall risk, partially through the use of a captive insurance
entity which issues a general liability policy to the Company,
naming certain subcontractors as additional insureds. The
Company records expenses and liabilities related to the costs to
cover its self-insured and deductible amounts under those
policies and for any estimated costs of potential claims and
lawsuits (including expected legal costs) in excess of its
coverage limits or not covered by such policies, based on an
analysis of the Companys historical claims, which includes
an estimate of claims incurred but not yet reported. Expenses
related to such claims were approximately $95.0 million,
$41.7 million and $101.2 million in fiscal 2007, 2006
and 2005, respectively.
Advertising
Costs
The Company expenses advertising costs as they are incurred.
Advertising expense was approximately $90.6 million,
$110.6 million and $78.9 million in fiscal 2007, 2006
and 2005, respectively.
Income
Taxes
The provision for, or benefit from, income taxes is calculated
using the asset and liability method, under which deferred tax
assets and liabilities are recorded based on the difference
between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. In assessing the
realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is primarily dependent upon
the generation of future taxable income during the periods in
which those temporary differences become deductible. In
determining the future tax consequences of events that have been
recognized in the Companys financial statements or tax
returns,
65
D.R.
HORTON, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
judgment is required. Differences between the anticipated and
actual outcomes of these future tax consequences could have a
material impact on the Companys consolidated results of
operations or financial position. See Note G.
Earnings
(Loss) Per Share
Basic earnings, or loss, per share is based upon the weighted
average number of shares of common stock outstanding during each
year. Diluted earnings per share is based upon the weighted
average number of shares of common stock and dilutive securities
outstanding during each year. In periods with a loss, the
computation of loss per share excludes outstanding stock options
because their effect would be antidilutive. See Note H.
Stock-Based
Compensation
With the approval of the compensation committee, consisting of
independent members of the Board of Directors, the Company from
time to time issues to employees and directors options to
purchase its common stock. The committee approves grants only
out of amounts remaining available for grant from amounts
formally authorized by the common stockholders.
On October 1, 2005, the Company adopted the provisions of
SFAS No. 123(R), Share Based Payment,
which requires that companies measure and recognize compensation
expense at an amount equal to the fair value of share-based
payments granted under compensation arrangements.
SFAS No. 123(R) was adopted using the modified
prospective method. Under this method, the provisions of
SFAS No. 123(R) apply to all awards granted or
modified after the date of adoption. In addition, compensation
expense must be recognized for any unvested stock option awards
outstanding as of the date of adoption on a straight-line basis
over the remaining vesting period. The fair values of the
options are calculated using a Black-Scholes option pricing
model. Results for fiscal 2005 have not been restated. In
addition, SFAS No. 123(R) requires the benefits of tax
deductions in excess of recognized compensation expense to be
reported in the Statement of Cash Flows as a financing cash flow
rather than an operating cash flow as previously reported. See
Note J.
Mortgage
Loans Held for Sale, Loan Commitments and Related
Derivatives
Mortgage loans held for sale are generally carried at cost
adjusted for changes in fair value after the date of designation
of an effective accounting hedge, based on either sale
commitments or current market quotes. Any gain or loss on the
sale of loans is recognized at the time of sale. Some of the
loans sold by DHI Mortgage are sold with limited recourse
provisions. Based on historical experience, the Company
estimates and records an allowance or reserve for loans held in
portfolio or loans held for sale or for losses related to loans
sold with recourse. The derivative instruments associated with
uncommitted, funded loans are designated as fair value hedges of
the risk of changes in the overall fair value of the related
loans. Accordingly, changes in the value of the derivative
instruments are recognized in current earnings, as are changes
in the value of the loans. Unhedged loans are stated at the
lower of cost or market. Market is determined by either sales
commitments or current market conditions.
To meet the financing needs of its customers, the Company is
party to interest rate lock commitments (IRLCs) which are
extended to borrowers who have applied for loan funding and meet
certain defined credit and underwriting criteria. In accordance
with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and related
Derivatives Implementation Group conclusions, the Company
classifies and accounts for IRLCs as non-designated derivative
instruments at fair value. The interest rate risk related to
IRLCs is managed through the use of best-efforts whole loan
delivery commitments and various hedging instruments, which are
considered non-designated derivatives and are accounted for at
fair value with gains and losses recognized in current earnings.
66
D.R.
HORTON, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Cont