e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2007
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From To
Commission file number 1-14122
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
75-2386963 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer Identification No.) |
|
|
|
301 Commerce Street, Suite 500, Fort Worth, Texas
|
|
76102 |
|
(Address of principal executive offices)
|
|
(Zip Code) |
(817) 390-8200
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
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
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common stock, $.01 par value 314,740,604 shares as of August 1, 2007
D.R. HORTON, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
|
|
(Unaudited) |
|
ASSETS |
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4.9 |
|
|
$ |
457.8 |
|
Inventories: |
|
|
|
|
|
|
|
|
Construction in progress and finished homes |
|
|
4,207.5 |
|
|
|
4,322.8 |
|
Residential land and lots developed and under development |
|
|
5,869.5 |
|
|
|
6,737.0 |
|
Land held for development |
|
|
359.4 |
|
|
|
182.9 |
|
Land inventory not owned |
|
|
150.9 |
|
|
|
100.4 |
|
|
|
|
|
|
|
|
|
|
|
10,587.3 |
|
|
|
11,343.1 |
|
Property and equipment, net |
|
|
117.9 |
|
|
|
131.4 |
|
Deferred income taxes |
|
|
735.9 |
|
|
|
374.0 |
|
Earnest money deposits and other assets |
|
|
315.3 |
|
|
|
442.4 |
|
Goodwill |
|
|
153.3 |
|
|
|
578.9 |
|
|
|
|
|
|
|
|
|
|
|
11,914.6 |
|
|
|
13,327.6 |
|
|
|
|
|
|
|
|
Financial Services: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
55.9 |
|
|
|
129.8 |
|
Restricted cash |
|
|
|
|
|
|
248.3 |
|
Mortgage loans held for sale |
|
|
469.0 |
|
|
|
1,022.9 |
|
Other assets |
|
|
54.5 |
|
|
|
92.1 |
|
|
|
|
|
|
|
|
|
|
|
579.4 |
|
|
|
1,493.1 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
12,494.0 |
|
|
$ |
14,820.7 |
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
807.6 |
|
|
$ |
982.3 |
|
Accrued expenses and other liabilities |
|
|
982.0 |
|
|
|
1,143.0 |
|
Notes payable |
|
|
4,598.0 |
|
|
|
4,886.9 |
|
|
|
|
|
|
|
|
|
|
|
6,387.6 |
|
|
|
7,012.2 |
|
|
|
|
|
|
|
|
Financial Services: |
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
|
24.8 |
|
|
|
58.8 |
|
Notes payable to financial institutions |
|
|
318.8 |
|
|
|
1,191.7 |
|
|
|
|
|
|
|
|
|
|
|
343.6 |
|
|
|
1,250.5 |
|
|
|
|
|
|
|
|
|
|
|
6,731.2 |
|
|
|
8,262.7 |
|
|
|
|
|
|
|
|
Minority interests |
|
|
85.1 |
|
|
|
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, 318,289,660
shares
issued and 314,634,427 shares outstanding at June 30, 2007 and 316,899,545
shares issued and 313,246,745 shares outstanding at September 30, 2006 |
|
|
3.2 |
|
|
|
3.2 |
|
Additional capital |
|
|
1,686.7 |
|
|
|
1,658.4 |
|
Retained earnings |
|
|
4,083.5 |
|
|
|
4,887.0 |
|
Treasury stock, 3,655,233 shares at June 30, 2007 and 3,652,800 shares at
September 30, 2006, at cost |
|
|
(95.7 |
) |
|
|
(95.7 |
) |
|
|
|
|
|
|
|
|
|
|
5,677.7 |
|
|
|
6,452.9 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
12,494.0 |
|
|
$ |
14,820.7 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
-3-
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions, except per share data) |
|
|
|
(Unaudited) |
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales |
|
$ |
2,470.5 |
|
|
$ |
3,581.4 |
|
|
$ |
7,753.1 |
|
|
$ |
9,842.7 |
|
Land/lot sales |
|
|
77.6 |
|
|
|
12.2 |
|
|
|
212.7 |
|
|
|
119.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,548.1 |
|
|
|
3,593.6 |
|
|
|
7,965.8 |
|
|
|
9,961.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales |
|
|
2,058.8 |
|
|
|
2,727.8 |
|
|
|
6,380.2 |
|
|
|
7,328.8 |
|
Land/lot sales |
|
|
65.6 |
|
|
|
6.7 |
|
|
|
187.6 |
|
|
|
46.2 |
|
Inventory impairments and land option cost
write-offs |
|
|
852.0 |
|
|
|
60.9 |
|
|
|
1,010.8 |
|
|
|
71.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,976.4 |
|
|
|
2,795.4 |
|
|
|
7,578.6 |
|
|
|
7,446.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales |
|
|
411.7 |
|
|
|
853.6 |
|
|
|
1,372.9 |
|
|
|
2,513.9 |
|
Land/lot sales |
|
|
12.0 |
|
|
|
5.5 |
|
|
|
25.1 |
|
|
|
73.0 |
|
Inventory impairments and land option cost
write-offs |
|
|
(852.0 |
) |
|
|
(60.9 |
) |
|
|
(1,010.8 |
) |
|
|
(71.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(428.3 |
) |
|
|
798.2 |
|
|
|
387.2 |
|
|
|
2,515.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense |
|
|
267.5 |
|
|
|
356.4 |
|
|
|
858.9 |
|
|
|
1,046.9 |
|
Goodwill impairment |
|
|
425.6 |
|
|
|
|
|
|
|
425.6 |
|
|
|
|
|
Loss on early retirement of debt |
|
|
12.1 |
|
|
|
|
|
|
|
12.1 |
|
|
|
15.0 |
|
Other (income) |
|
|
(3.9 |
) |
|
|
(2.9 |
) |
|
|
(5.7 |
) |
|
|
(13.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,129.6 |
) |
|
|
444.7 |
|
|
|
(903.7 |
) |
|
|
1,466.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
50.0 |
|
|
|
74.2 |
|
|
|
158.3 |
|
|
|
206.6 |
|
General and administrative expense |
|
|
36.0 |
|
|
|
50.8 |
|
|
|
119.3 |
|
|
|
147.6 |
|
Interest expense |
|
|
4.1 |
|
|
|
8.7 |
|
|
|
20.5 |
|
|
|
24.7 |
|
Other (income) |
|
|
(8.3 |
) |
|
|
(12.8 |
) |
|
|
(34.2 |
) |
|
|
(40.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.2 |
|
|
|
27.5 |
|
|
|
52.7 |
|
|
|
74.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(1,111.4 |
) |
|
|
472.2 |
|
|
|
(851.0 |
) |
|
|
1,541.3 |
|
Provision for (benefit from) income taxes |
|
|
(287.6 |
) |
|
|
179.4 |
|
|
|
(188.7 |
) |
|
|
585.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(823.8 |
) |
|
$ |
292.8 |
|
|
$ |
(662.3 |
) |
|
$ |
955.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
(2.62 |
) |
|
$ |
0.94 |
|
|
$ |
(2.11 |
) |
|
$ |
3.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
assuming dilution |
|
$ |
(2.62 |
) |
|
$ |
0.93 |
|
|
$ |
(2.11 |
) |
|
$ |
3.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
0.15 |
|
|
$ |
0.10 |
|
|
$ |
0.45 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
-4-
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
|
|
(Unaudited) |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(662.3 |
) |
|
$ |
955.6 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
48.3 |
|
|
|
40.7 |
|
Amortization of debt discounts and fees |
|
|
4.9 |
|
|
|
3.6 |
|
Stock option compensation expense |
|
|
9.1 |
|
|
|
8.1 |
|
Income tax benefit from stock option exercises |
|
|
(8.0 |
) |
|
|
(8.2 |
) |
Deferred income taxes |
|
|
(361.9 |
) |
|
|
(28.5 |
) |
Loss on redemption of senior and senior subordinated notes |
|
|
12.1 |
|
|
|
10.6 |
|
Inventory impairments and land option cost write-offs |
|
|
1,010.8 |
|
|
|
71.8 |
|
Goodwill impairment |
|
|
425.6 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Increase in construction in progress and finished homes |
|
|
(96.7 |
) |
|
|
(2,192.7 |
) |
Increase in residential land and lots developed, under development,
and held for development |
|
|
(84.2 |
) |
|
|
(1,379.2 |
) |
Decrease (increase) in earnest money deposits and other assets |
|
|
129.4 |
|
|
|
(12.2 |
) |
Decrease in mortgage loans held for sale |
|
|
553.9 |
|
|
|
512.6 |
|
Decrease in accounts payable, accrued expenses and other liabilities |
|
|
(433.8 |
) |
|
|
(46.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By (Used In) Operating Activities |
|
|
547.2 |
|
|
|
(2,064.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(32.7 |
) |
|
|
(66.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Used In Investing Activities |
|
|
(32.7 |
) |
|
|
(66.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from notes payable |
|
|
2,560.0 |
|
|
|
4,829.2 |
|
Repayment of notes payable |
|
|
(3,745.3 |
) |
|
|
(3,577.9 |
) |
Decrease in restricted cash |
|
|
248.3 |
|
|
|
|
|
Increase in book overdraft |
|
|
18.9 |
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
(36.8 |
) |
Proceeds from stock associated with certain employee benefit plans |
|
|
10.0 |
|
|
|
8.5 |
|
Income tax benefit from stock option exercises |
|
|
8.0 |
|
|
|
8.2 |
|
Cash dividends paid |
|
|
(141.2 |
) |
|
|
(90.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (Used In) Provided By Financing Activities |
|
|
(1,041.3 |
) |
|
|
1,140.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(526.8 |
) |
|
|
(989.7 |
) |
Cash and cash equivalents at beginning of period |
|
|
587.6 |
|
|
|
1,149.8 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
60.8 |
|
|
$ |
160.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash activities: |
|
|
|
|
|
|
|
|
Notes payable issued for inventory |
|
$ |
4.3 |
|
|
$ |
38.8 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
-5-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2007
NOTE A BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements include the accounts of D.R.
Horton, Inc. and all of its wholly-owned, majority-owned and controlled subsidiaries (which are
referred to as the Company, unless the context otherwise requires), as well as certain variable
interest entities required to be consolidated pursuant to Interpretation No. 46, Consolidation of
Variable Interest Entities an interpretation of ARB No. 51, as amended (FIN 46), issued by the
Financial Accounting Standards Board (FASB). All significant intercompany accounts, transactions
and balances have been eliminated in consolidation. The financial statements have been prepared in
accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion
of management, all adjustments (consisting of normal, recurring accruals and the asset impairment
charges discussed below) considered necessary for a fair presentation have been included. These
financial statements do not include all of the information and notes required by GAAP for complete
financial statements and should be read in conjunction with the consolidated financial statements
and accompanying notes included in the Companys annual report on Form 10-K for the fiscal year
ended September 30, 2006. Certain reclassifications have been made in the prior years financial
statements to conform to classifications used in the current year.
Seasonality
Historically, the homebuilding industry has experienced seasonal fluctuations; therefore, the
operating results for the three and nine-month periods ended June 30, 2007 are not necessarily
indicative of the results that may be expected for the fiscal year ending September 30, 2007.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
Business
The Company is a national homebuilder that is engaged primarily in the construction and sale
of single-family housing in 83 markets and 27 states in the United States at June 30, 2007. The
Company designs, builds and sells single-family detached houses on lots developed by the Company
and on finished lots which it purchases, ready for home construction. To a lesser extent, the
Company also builds and sells attached homes, such as town homes, duplexes, triplexes and
condominiums (including some mid-rise buildings), which share common walls and roofs. Periodically,
the Company sells land and lots it has developed or bought. The Company also provides title agency
and mortgage brokerage services, principally to its homebuyers. The Company generally does not
retain or service the mortgages that it originates but, rather, sells the mortgages and related
servicing rights to investors.
NOTE B INVENTORIES AND COST OF SALES
In accordance
with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, 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. The Companys determination of fair value is
primarily based on discounting the
-6-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
June 30, 2007
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, valuation adjustments are 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 the third quarter of fiscal 2007, the difficult conditions within the homebuilding
industry became more challenging. Continued high inventory levels of both new and existing homes,
elevated cancellation rates, low sales absorption rates, affordability issues and overall weak
consumer confidence persisted, and the effects of these factors were further magnified by a decline
in availability of mortgage products due to further credit tightening in the mortgage markets.
These factors, combined with the Companys disappointing sales results, further declines in sales
order prices and the decline in gross profits from home sales revenues during the quarter, have led
to the Companys more cautious outlook for the homebuilding industry and its impact on the
Companys business. This outlook reflects the Companys belief that housing market conditions will
continue to be challenging and may deteriorate further, and that the timing of a recovery in the
housing market is increasingly unclear.
When the Company
performed its quarterly inventory impairment analysis in accordance with SFAS
No. 144, the assumptions utilized in the analysis incorporated this more cautious outlook, which
reflects the expectation that the challenging conditions in the homebuilding industry will last
longer and have a greater impact than the Company believed in prior periods. Consequently, the
Companys strategy to reduce its inventory and lot position will
likely take longer and require additional price concessions and
incentives than previously
anticipated. Therefore, the Companys impairment evaluation indicated a significantly greater
number of projects with impairment indicators than in prior periods. The analysis of each of these
projects 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. While it is difficult to determine a
timeframe for a given project in the current market conditions, the Company estimated the remaining
lives of these projects to range from six months to in excess of ten years. Through this evaluation
process, the Company determined that projects with a carrying value of $2,117.4 million, the
largest portions of which were in the California, West, Southeast and Southwest regions, were
impaired. As a result, during the three months ended June 30, 2007, the Company recorded impairment
charges totaling $835.8 million to reduce the carrying value of the impaired projects to their
estimated fair value. During the nine months ended June 30, 2007 and 2006, impairment charges
totaled $943.9 million and $4.2 million, respectively.
If conditions in the homebuilding industry or specific markets in which the Company operates
worsen in the future beyond current expectations, and as the Company re-evaluates specific project
pricing and incentive strategies, the Company 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.
From time to time, the Company writes off earnest money deposits and pre-acquisition costs
related to land and lot option contracts which it no longer plans to pursue. During the three-month
periods ended June 30, 2007 and 2006, the Company wrote off $16.2 million and $57.1 million,
respectively, of earnest money deposits and pre-acquisition costs related to land option contracts.
During the nine-month periods ended June 30, 2007 and 2006, the Company wrote off $66.9 million and
$67.6 million of such deposits and costs, respectively.
NOTE C 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. At June 30, 2007,
the Company 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
current market conditions in the homebuilding industry and the decline in the Companys stock
price.
-7-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
June 30, 2007
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.
At June 30, 2007, the Company, with the assistance of an independent valuation firm, completed the
first step of its goodwill impairment analysis.
The Company estimated the fair value of its 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 reporting units within its Northeast, Southeast, California and West reporting segments. Based
on the results of the first step of the Companys goodwill impairment analysis, the goodwill
balances in the Southeast, California and West reporting segments were estimated to be completely
impaired, and the goodwill balance related to the Northeast reporting segment was estimated to be
partially impaired. As a result, during the three months ended June 30, 2007, the Company recorded
non-cash impairment charges totaling $425.6 million related to the write-off of goodwill in these
reporting segments. Only approximately 17% of these goodwill impairment charges is deductible for
tax purposes.
The Company, with the assistance of an independent valuation firm, is still in the process of
finalizing its goodwill evaluation, and expects to complete the full evaluation during the fourth
quarter of fiscal 2007. It is possible that there may be additional impairment in the Northeast
reporting segment, up to the balance of the remaining goodwill, or other adjustments to the
Companys preliminary estimates once the second step of the goodwill impairment analysis has been
completed. Any further adjustments to the Companys preliminary estimates as a result of completing
this evaluation will be recorded in the financial statements and disclosed in the Companys annual
report on Form 10-K for the year ended September 30, 2007.
After recording the current quarter write-offs, the Companys goodwill balances by reporting
segment as of June 30, 2007 and September 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Goodwill: |
|
|
|
|
|
|
|
|
Northeast |
|
$ |
35.0 |
|
|
$ |
74.4 |
|
Southeast |
|
|
|
|
|
|
11.5 |
|
South Central |
|
|
15.9 |
|
|
|
15.9 |
|
Southwest |
|
|
102.4 |
|
|
|
102.4 |
|
California |
|
|
|
|
|
|
300.3 |
|
West |
|
|
|
|
|
|
74.4 |
|
|
|
|
|
|
|
|
Total Goodwill |
|
$ |
153.3 |
|
|
$ |
578.9 |
|
|
|
|
|
|
|
|
NOTE D EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based on the weighted average number of shares of common
stock outstanding during the period. Diluted earnings (loss) per share is based on the weighted
average number of shares of common stock and dilutive securities outstanding during the period.
-8-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
June 30, 2007
The following table sets forth the denominators used in the computation of basic earnings
(loss) and diluted earnings per share for the three and nine months ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, |
|
|
Nine
Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
Denominator for basic
earnings (loss) per share
weighted average common
shares |
|
|
314.3 |
|
|
|
312.8 |
|
|
|
313.9 |
|
|
|
312.7 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
|
|
|
|
3.0 |
|
|
|
|
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted
earnings (loss) per share
adjusted weighted average
common shares |
|
|
314.3 |
|
|
|
315.8 |
|
|
|
313.9 |
|
|
|
316.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended June 30, 2007, all outstanding stock options were excluded
from the computation of the diluted loss per share because they were antidilutive due to the net
losses recorded during the periods. For the three and nine months ended June 30, 2006, options to
purchase 3.0 million shares of common stock were excluded from the computation of diluted earnings
per share because the exercise price was greater than the average market price of the common shares
and, therefore, their effect would have been antidilutive.
NOTE E LAND INVENTORY NOT OWNED
In the ordinary course of its homebuilding business, the Company enters into land and lot
option purchase contracts to procure land or lots for the construction of homes. Under such option
purchase contracts, the Company will fund a stated deposit in consideration for the right, but not
the obligation, to purchase land or lots at a future point in time with predetermined terms. Under
the terms of the option purchase contracts, many of the option deposits are not refundable at the
Companys discretion. Under the requirements of FIN 46, certain of the Companys 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, the Company evaluates those land and lot option purchase
contracts with variable interest entities to determine whether the Company is the primary
beneficiary based upon analysis of the variability of the expected gains and losses of the entity.
Based on this evaluation, if the Company is the primary beneficiary of an entity with which the
Company has entered into a land or lot option purchase contract, the variable interest entity is
consolidated.
The consolidation of these variable interest entities added $82.5 million in land inventory
not owned and minority interests related to entities not owned to the Companys balance sheet at
June 30, 2007. The Companys obligations related to these land or lot option contracts are
guaranteed by cash deposits totaling $13.0 million and performance letters of credit, promissory
notes and surety bonds totaling $0.8 million. Creditors, if any, of these variable interest
entities have no recourse against the Company.
For the variable interest entities which are unconsolidated because the Company is not subject
to a majority of the risk of loss or entitled to receive a majority of the entities residual
returns, the maximum exposure to loss is generally limited to the amounts of the Companys option
deposits, which totaled $87.5 million at June 30, 2007.
Additionally, the Company evaluates land and lot option purchase contracts in accordance with
SFAS No. 49, Accounting for Product Financing Arrangements, and added $68.4 million in land
inventory not owned, with a corresponding increase to accrued expenses and other liabilities, to
the Companys balance sheet at June 30, 2007 as a result of this evaluation.
-9-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
June 30, 2007
NOTE F NOTES PAYABLE
The Companys notes payable at their principal amounts, net of unamortized discounts, as
applicable, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Homebuilding: |
|
|
|
|
|
|
|
|
Unsecured: |
|
|
|
|
|
|
|
|
Revolving credit facility |
|
$ |
750.0 |
|
|
$ |
800.0 |
|
7.5% senior notes due 2007 |
|
|
215.0 |
|
|
|
215.0 |
|
5% senior notes due 2009, net |
|
|
199.8 |
|
|
|
199.7 |
|
8% senior notes due 2009, net |
|
|
384.5 |
|
|
|
384.3 |
|
4.875% senior notes due 2010, net |
|
|
249.2 |
|
|
|
249.0 |
|
9.75% senior subordinated notes due 2010, net |
|
|
149.5 |
|
|
|
149.4 |
|
7.875% senior notes due 2011, net |
|
|
199.1 |
|
|
|
199.0 |
|
6% senior notes due 2011, net |
|
|
249.5 |
|
|
|
249.4 |
|
8.5% senior notes due 2012, net |
|
|
|
|
|
|
248.6 |
|
5.375% senior notes due 2012 |
|
|
300.0 |
|
|
|
300.0 |
|
6.875% senior notes due 2013 |
|
|
200.0 |
|
|
|
200.0 |
|
5.875% senior notes due 2013 |
|
|
100.0 |
|
|
|
100.0 |
|
6.125% senior notes due 2014, net |
|
|
197.8 |
|
|
|
197.7 |
|
5.625% senior notes due 2014, net |
|
|
248.4 |
|
|
|
248.3 |
|
5.25% senior notes due 2015, net |
|
|
298.1 |
|
|
|
297.9 |
|
5.625% senior notes due 2016, net |
|
|
297.8 |
|
|
|
297.7 |
|
6.5% senior notes due 2016, net |
|
|
499.1 |
|
|
|
499.0 |
|
Secured and other |
|
|
60.2 |
|
|
|
51.9 |
|
|
|
|
|
|
|
|
|
|
$ |
4,598.0 |
|
|
$ |
4,886.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services: |
|
|
|
|
|
|
|
|
Mortgage warehouse facility |
|
$ |
118.8 |
|
|
$ |
371.7 |
|
Commercial paper conduit facility |
|
|
200.0 |
|
|
|
820.0 |
|
|
|
|
|
|
|
|
|
|
$ |
318.8 |
|
|
$ |
1,191.7 |
|
|
|
|
|
|
|
|
The Company has an automatically effective universal shelf registration statement filed with
the Securities and Exchange Commission, registering debt and equity securities that the Company may
issue from time to time in amounts to be determined.
Homebuilding:
In November 2006, the Company increased the size of its $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, with the consent of the lenders, to increase the facility to $2.9
billion. The Companys borrowing capacity under this facility is reduced by the amount of letters
of credit outstanding. At June 30, 2007, the Companys borrowing capacity under the facility was
$1.7 billion. The facility is guaranteed by substantially all of the Companys wholly-owned
subsidiaries other than its financial services subsidiaries. Borrowings bear interest at rates
based upon the London Interbank Offered Rate (LIBOR) plus a spread based upon the Companys ratio
of homebuilding debt to total capitalization and its senior unsecured debt rating. The interest
rate of the unsecured revolving credit facility at June 30, 2007 was 6.1% per annum. In addition to
the stated interest rates, the revolving credit facility requires the Company to pay certain fees.
-10-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
In November 2006, the Board of Directors authorized the repurchase of up to $500 million of
the Companys outstanding debt securities, replacing the previous debt securities repurchase
authorization of $200 million, and extending its term to November 30, 2007. All of the $500 million
authorization was remaining at June 30, 2007.
On April 15, 2007, the Company redeemed its 8.5% senior notes due 2012 at an aggregate
redemption price of approximately $260.6 million, plus accrued interest. Concurrent with the
redemption, the Company 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.
The revolving credit facility and the indenture governing the senior subordinated notes impose
restrictions on the Companys 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
certain levels of leverage, interest coverage and tangible net worth. In addition, the indentures
governing the senior notes impose restrictions on the creation of liens.
At June 30, 2007, under the most restrictive covenants in effect, cash dividend payments for
the remainder of fiscal 2007 were limited to $442.3 million, and approximately $2.4 billion was
available for all restricted payments in the future.
In July 2007, the Company amended its revolving credit facility agreement to change the
restriction on cash dividends. Under the amended agreement, payment of dividends is permitted
provided there is no payment default under the facility, the Company is in compliance with certain
financial covenants under the agreement, and such payments do not cause the Company not to be in
compliance with those financial covenants.
Financial Services:
The Companys mortgage subsidiary has a $540 million mortgage warehouse loan facility, which
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 consent of the lenders. The mortgage warehouse facility is secured by certain mortgage
loans held for sale and is not guaranteed by D.R. Horton, Inc. or any of the guarantors of its
homebuilding debt. The 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 drawn on the facility may not exceed 98% of all eligible
mortgage loans held for sale and made available to the lenders to secure any borrowings under the
facility. Borrowings bear daily interest at the 30-day LIBOR rate plus a fixed premium. The
interest rate of the mortgage warehouse line payable at June 30, 2007 was 6.1% per annum.
The Companys mortgage subsidiary
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 June 2007, was further amended to reduce the capacity to $600 million. The CP
conduit facility is secured by certain mortgage loans held for sale and is not guaranteed by D.R.
Horton, Inc. or any of the guarantors of its homebuilding debt. Additionally, at
September 30, 2006, borrowings under the CP conduit facility were secured by cash arising from
borrowings under the facility made prior to the assignment of mortgage loans held for sale as
collateral. At June 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. 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. The interest rate
of the CP conduit line payable at June 30, 2007 was 5.6% per annum.
-11-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
NOTE G 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, the Company impairs 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 three and nine-month periods ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Capitalized interest, beginning of period |
|
$ |
334.7 |
|
|
$ |
246.8 |
|
|
$ |
288.9 |
|
|
$ |
200.6 |
|
Interest incurred |
|
|
76.0 |
|
|
|
85.4 |
|
|
|
232.5 |
|
|
|
236.0 |
|
Interest amortized to cost of sales |
|
|
(60.8 |
) |
|
|
(60.1 |
) |
|
|
(171.5 |
) |
|
|
(164.5 |
) |
Interest impaired |
|
|
(25.1 |
) |
|
|
|
|
|
|
(25.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest, end of period |
|
$ |
324.8 |
|
|
$ |
272.1 |
|
|
$ |
324.8 |
|
|
$ |
272.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE H 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. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Warranty liability, beginning of period |
|
$ |
120.8 |
|
|
$ |
124.7 |
|
|
$ |
130.4 |
|
|
$ |
121.6 |
|
Warranties issued |
|
|
11.6 |
|
|
|
18.8 |
|
|
|
36.9 |
|
|
|
51.7 |
|
Changes in liability for pre-existing warranties |
|
|
(4.2 |
) |
|
|
(1.8 |
) |
|
|
(12.8 |
) |
|
|
(7.7 |
) |
Settlements made |
|
|
(12.2 |
) |
|
|
(13.3 |
) |
|
|
(38.5 |
) |
|
|
(37.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability, end of period |
|
$ |
116.0 |
|
|
$ |
128.4 |
|
|
$ |
116.0 |
|
|
$ |
128.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE I MORTGAGE LOANS
Mortgage Loans - Mortgage loans held for sale consist primarily of single-family residential
loans collateralized by the underlying property. Loans that have been closed but not committed to a
third-party investor are matched primarily with either forward sales of mortgage-backed securities
(FMBS) or Eurodollar Futures Contracts (EDFC) that are designated as fair value hedges. Hedged
loans are either committed to third-party investors within three days of origination or pooled and
committed in bulk to third-party investors typically within 30 days of origination. The notional
amounts of the FMBS and the EDFC used to hedge mortgage loans held for sale can vary in
relationship to the underlying loan amounts, depending on the typical movements in the value of
each hedging instrument relative to the value of the underlying mortgage loans. The effectiveness
of the fair value hedges is continuously monitored and any ineffectiveness, which for the three and
nine months ended June 30, 2007 and 2006 was not significant, is recognized in current earnings. As
of June 30, 2007, the Company had $126.3 million in loans not committed to third-party investors
which were hedged with $209.0 million of FMBS, EDFC and put options on both EDFC and
mortgage-backed securities (MBS).
-12-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
Mortgage loans held for sale are stated at the lower of aggregate cost or fair market value.
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.
The Company records loss allowances for loans held in portfolio and loans held for sale, and
reserves for losses related to loans sold with recourse, utilizing estimates based on historical
experience and current market conditions. The Company has recorded total loss allowances and
reserves for loans held in portfolio, loans held for sale and loans sold with recourse of $26.5
million and $15.6 million at June 30, 2007 and September 30, 2006, respectively.
Loan Commitments - To meet the financing needs of its customers, the Company is party to
interest rate lock commitments (IRLCs) which are extended to borrowers who have applied for loan
funding and meet 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. At June 30, 2007, the Companys IRLCs totaled $419.2 million.
The Company manages interest rate risk related to its IRLCs through the use of best-efforts
whole loan delivery commitments, FMBS and the purchase of EDFC. These instruments are considered
non-designated derivatives and are accounted for at fair value with gains and losses recognized in
current earnings. As of June 30, 2007, the Company had approximately $159.2 million of best-efforts
whole loan delivery commitments and $398.7 million outstanding of FMBS, EDFC and put options on
both EDFC and MBS related to its uncommitted IRLCs.
In an effort to stimulate home sales by potentially offering homebuyers a below market
interest rate on their home financing, the Company began a program during the third quarter of
fiscal 2006 which protects it from future increases in interest rates related to potential mortgage
originations. To accomplish this, the Company purchases forward rate agreements (FRAs) and economic
interest rate hedges in the form of FMBS and put options on both EDFC and MBS. Additionally, during
the second quarter of fiscal 2007, in response to heightened volatility in the secondary mortgage
markets, the Company entered into FRAs to secure the delivery and sale of certain potential
non-traditional mortgage originations, characterized by high combined loan-to-value ratios in
combination with less required documentation. These FRAs generally related to loan commitments for
borrowers with sales contracts in the Companys homebuilding backlog. At June 30, 2007, these
potential mortgage loan originations totaled approximately $115.0 million. The notional amount of
the FRAs was $78.4 million, while the remaining $36.6 million in mortgage loan commitments was
hedged with economic interest rate hedges of $516.0 million in EDFC put options and $14.0 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 three and nine months ended June 30, 2007 were not significant.
NOTE J STOCKHOLDERS EQUITY
During the three months ended June 30, 2007, the Board of Directors declared a quarterly cash
dividend of $0.15 per common share, which was paid on May 18, 2007 to stockholders of record on May
4, 2007. A quarterly cash dividend of $0.10 per common share was declared during the three months
ended June 30, 2006.
In August 2007, the Board of Directors declared a quarterly cash dividend of $0.15 per common
share, payable on August 27, 2007 to stockholders of record on August 17, 2007. A quarterly cash
dividend of $0.15 per common share was declared in the comparable quarter of fiscal 2006.
The Company has an automatically effective universal shelf registration statement registering
debt and equity securities that it may issue from time to time in amounts to be determined. Also,
at June 30, 2007, the Company had the capacity to issue approximately 22.5 million shares of common
stock under its acquisition shelf registration statement, to effect, in whole or in part, possible
future business acquisitions.
-13-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
In November 2006, the Board of Directors authorized the repurchase of up to $463.2 million of
the Companys common stock, representing the remaining amount of the previous common stock
repurchase authorization of $500 million, and extended its term to November 30, 2007. All of the
$463.2 million authorization was remaining at June 30, 2007.
Under the terms
of the Companys 2006 Stock Incentive Plan and 1991 Stock
Incentive Plan, employees may use shares
owned to satisfy the exercise price of stock options, which results in the Companys purchase of
those shares. Treasury stock at
June 30, 2007 included 2,433 shares delivered to the Company during the three months ended
June 30, 2007 due to such transactions. These shares were not purchased under the Companys share
repurchase program and therefore, had no effect on the remaining stock repurchase authorization.
NOTE K PROVISION FOR (BENEFIT FROM) INCOME TAXES
The Companys effective income tax rate for the three and nine-month periods of 2007 was 25.9%
and 22.2%, respectively, compared to an effective tax rate of 38.0% in the same periods of 2006.
The effective tax rates during the three and nine-month periods of 2007 were lower, resulting in a
reduced benefit from income taxes related to the losses in these periods, because only
approximately 17% of the $425.6 million goodwill impairment charge recorded in the three months
ended June 30, 2007 is deductible for tax purposes. Excluding the goodwill impairment charge, the
effective tax rate was 38.0% for the three and nine months ended June 30, 2007.
NOTE L RECENT ACCOUNTING PRONOUNCEMENTS
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. The Company is currently evaluating the impact of the adoption of SFAS No.
159; however, it is not expected to have a material impact on the Companys 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 Company is currently evaluating the impact of the adoption of
EITF 06-8; however, it is not expected to have a material impact on the Companys consolidated
financial position, results of operations or cash flows.
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. The Company is currently evaluating the
impact of the adoption of SFAS No. 157; however, it is not expected to have a material impact on
the Companys consolidated financial position, results of operations or cash flows.
In 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 Company is currently evaluating the impact of the adoption of FIN 48; however, it is not
expected to have a material impact on the Companys consolidated financial position, results of
operations or cash flows.
-14-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
NOTE M COMMITMENTS AND CONTINGENCIES
The Company has been named as defendant in various claims, complaints and other legal actions
arising in the ordinary course of business, including warranty and construction defect claims on
closed homes and claims related to its mortgage activities. The Company has established reserves
for such contingencies, based on the expected costs of the self-insured portion of such claims. The
Companys estimates of such reserves are based on the facts and circumstances of individual pending
claims and historical data and trends, including estimates of the costs of unreported claims
related to past operations. These reserve estimates are subject to ongoing revision as the
circumstances of individual pending claims and historical data and trends change. Adjustments to
estimated reserves are recorded in the accounting period in which the change in estimate occurs.
Management believes that, while the outcome of such contingencies cannot be predicted with
certainty, the liabilities arising from these matters will not have a material adverse effect on
the Companys consolidated financial position, results of operations or cash flows. However, to the
extent the liability arising from the ultimate resolution of any matter exceeds managements
estimates reflected in the reserves relating to such matter, the Company could incur additional
charges that could be significant.
On June 15, 2007, a putative class action, John R. Yeatman, et al. v. D.R. Horton, Inc.,
et al., was filed by one of the Companys customers against it and its affiliated mortgage company
subsidiary in the United States District Court for the Southern District of Georgia. The complaint
seeks certification of a class alleged to include persons who, within the year preceding the filing
of the suit, purchased a home from the Company and obtained a mortgage for such purchase from its
affiliated mortgage company subsidiary. The complaint alleges that the Company violated Section 8
of the Real Estate Settlement Procedures Act by effectively requiring its homebuyers to use its
affiliated mortgage company to finance their home purchases by offering certain discounts and
incentives. The action seeks damages in an unspecified amount and injunctive relief. Management
believes the claims alleged in this action are without merit and will defend them vigorously.
However, due to the early stages of this matter, the Company is unable to express an opinion as to the
likelihood of an unfavorable outcome or the amount of damages, if
any; consequently, the Company
has not recorded any associated liabilities in the accompanying consolidated balance sheet.
In the ordinary course of business, the Company enters into land and lot option purchase
contracts in order to procure land or lots for the construction of homes. At June 30, 2007, the
Company had total deposits of $133.7 million, comprised of cash deposits of $119.7 million,
promissory notes of $7.3 million, and letters of credit and surety bonds of $6.7 million to
purchase land and lots with a total remaining purchase price of $2.3 billion. Within the land and
lot option purchase contracts in force at June 30, 2007, there were a limited number of contracts,
representing only $64.8 million of remaining purchase price, subject to specific performance
clauses which may require the Company to purchase the land or lots upon the land sellers meeting
their obligations.
Included in the total deposits of $133.7 million, were $29.6 million of deposits related to
land option purchase contracts for which the Company does not expect to exercise its option to
purchase the land or lots, but the contract has not yet been terminated. The remaining purchase
price of those contracts was $598.4 million. Consequently, the deposits relating to these contracts
have been written off, resulting in a net deposit balance of $104.1 million at
June 30, 2007. The majority of land and lots under contract are currently expected to be
purchased within three years, based on the Companys assumptions as to the extent it will exercise
its options to purchase such land and lots.
Additionally, in the normal course of its business activities, the Company provides standby
letters of credit and surety bonds, issued by third parties, to secure performance under various
contracts. At June 30, 2007, outstanding standby letters of credit were $96.6 million and surety
bonds were $2.2 billion. The Company has additional capacity of $903.4 million for standby letters
of credit under its revolving credit facility.
-15-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
NOTE N REPORTABLE SEGMENT INFORMATION
The Companys seven homebuilding operating regions and its financial services operation are
its operating segments under SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. The homebuilding operating segments were historically aggregated into a single
reportable homebuilding segment. During the fourth quarter of fiscal 2006, the Company reassessed
the aggregation of its operating segments, and as a result, restated its disclosure to include six
separate reportable homebuilding segments and one financial services segment. Two of the
homebuilding operating segments were aggregated into one reporting segment based on their economic
similarities. Under this revised presentation, the Companys reportable homebuilding segments and
the states in which they have homebuilding operations are as follows:
|
|
|
|
|
|
|
Northeast:
|
|
Delaware, Georgia (Savannah only), Illinois, Maryland, Minnesota, New Jersey,
North Carolina, Pennsylvania, South Carolina, Virginia and Wisconsin |
|
|
|
|
|
|
|
Southeast:
|
|
Alabama, Florida and Georgia |
|
|
|
|
|
|
|
South Central:
|
|
Louisiana, Mississippi, Oklahoma and Texas |
|
|
|
|
|
|
|
Southwest:
|
|
Arizona, Colorado, New Mexico and Utah |
|
|
|
|
|
|
|
California:
|
|
California and Nevada (Reno only) |
|
|
|
|
|
|
|
West:
|
|
Hawaii, Idaho, Nevada, Oregon and Washington |
Consequently, the Company has restated the prior period segment information provided in this
note to conform to the current period presentation.
The Companys homebuilding operations are by far the most substantial part of its business,
generating approximately 98% of consolidated revenues during the nine months ended June 30, 2007
and 2006. The Companys homebuilding segments are primarily engaged in the acquisition and
development of land for residential purposes and the construction and sale of residential homes on
such land, in 27 states and 83 markets in the United States. The homebuilding segments generate
most of their revenues from the sale of completed homes, with a lesser amount from the sale of land
and lots.
The Companys financial services segment provides mortgage banking and title agency services
principally to customers of the Companys homebuilding segments. The Company generally does not
retain or service the mortgages that it originates, but, rather, sells the mortgages and related
servicing rights to investors. The financial services segment generates its revenues from
originating and selling mortgages and collecting fees for title insurance agency and closing
services.
-16-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
The accounting policies of the reporting segments are described throughout Note A in the
Companys annual report on Form 10-K for the fiscal year ended September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
Restated |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast |
|
$ |
389.7 |
|
|
$ |
561.7 |
|
|
$ |
1,204.9 |
|
|
$ |
1,480.2 |
|
Southeast |
|
|
367.9 |
|
|
|
497.1 |
|
|
|
1,082.3 |
|
|
|
1,422.3 |
|
South Central |
|
|
493.4 |
|
|
|
623.9 |
|
|
|
1,422.4 |
|
|
|
1,557.2 |
|
Southwest |
|
|
559.2 |
|
|
|
745.7 |
|
|
|
1,778.6 |
|
|
|
1,985.0 |
|
California |
|
|
473.9 |
|
|
|
791.4 |
|
|
|
1,671.9 |
|
|
|
2,431.2 |
|
West |
|
|
264.0 |
|
|
|
373.8 |
|
|
|
805.7 |
|
|
|
1,086.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homebuilding revenues |
|
$ |
2,548.1 |
|
|
$ |
3,593.6 |
|
|
$ |
7,965.8 |
|
|
$ |
9,961.9 |
|
Financial services revenues |
|
$ |
50.0 |
|
|
$ |
74.2 |
|
|
$ |
158.3 |
|
|
$ |
206.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues |
|
$ |
2,598.1 |
|
|
$ |
3,667.8 |
|
|
$ |
8,124.1 |
|
|
$ |
10,168.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Impairments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast |
|
$ |
79.4 |
|
|
$ |
|
|
|
$ |
88.9 |
|
|
$ |
|
|
Southeast |
|
|
136.5 |
|
|
|
0.4 |
|
|
|
138.9 |
|
|
|
0.4 |
|
South Central |
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
Southwest |
|
|
119.0 |
|
|
|
|
|
|
|
146.1 |
|
|
|
|
|
California |
|
|
319.4 |
|
|
|
3.4 |
|
|
|
388.2 |
|
|
|
3.8 |
|
West |
|
|
181.5 |
|
|
|
|
|
|
|
181.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory impairments |
|
$ |
835.8 |
|
|
$ |
3.8 |
|
|
$ |
943.9 |
|
|
$ |
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill Impairments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast |
|
$ |
39.4 |
|
|
$ |
|
|
|
$ |
39.4 |
|
|
$ |
|
|
Southeast |
|
|
11.5 |
|
|
|
|
|
|
|
11.5 |
|
|
|
|
|
South Central |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southwest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
|
300.3 |
|
|
|
|
|
|
|
300.3 |
|
|
|
|
|
West |
|
|
74.4 |
|
|
|
|
|
|
|
74.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill impairments |
|
$ |
425.6 |
|
|
$ |
|
|
|
$ |
425.6 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income
Taxes (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding income (loss) before
income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast |
|
$ |
(105.2 |
) |
|
$ |
57.3 |
|
|
$ |
(76.4 |
) |
|
$ |
137.6 |
|
Southeast |
|
|
(129.6 |
) |
|
|
83.2 |
|
|
|
(83.0 |
) |
|
|
278.1 |
|
South Central |
|
|
38.1 |
|
|
|
50.1 |
|
|
|
101.2 |
|
|
|
114.9 |
|
Southwest |
|
|
(84.0 |
) |
|
|
120.2 |
|
|
|
(34.1 |
) |
|
|
343.7 |
|
California |
|
|
(619.0 |
) |
|
|
54.4 |
|
|
|
(632.2 |
) |
|
|
320.1 |
|
West |
|
|
(229.9 |
) |
|
|
79.5 |
|
|
|
(179.2 |
) |
|
|
272.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homebuilding income (loss)
before income taxes |
|
$ |
(1,129.6 |
) |
|
$ |
444.7 |
|
|
$ |
(903.7 |
) |
|
$ |
1,466.6 |
|
Financial services income before
income taxes |
|
$ |
18.2 |
|
|
$ |
27.5 |
|
|
$ |
52.7 |
|
|
$ |
74.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income (loss)
before income taxes |
|
$ |
(1,111.4 |
) |
|
$ |
472.2 |
|
|
$ |
(851.0 |
) |
|
$ |
1,541.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-17-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Homebuilding Inventories (2): |
|
|
|
|
|
|
|
|
Northeast |
|
$ |
1,568.7 |
|
|
$ |
1,698.3 |
|
Southeast |
|
|
1,801.6 |
|
|
|
1,808.4 |
|
South Central |
|
|
1,421.0 |
|
|
|
1,405.3 |
|
Southwest |
|
|
1,738.2 |
|
|
|
1,883.5 |
|
California |
|
|
2,004.4 |
|
|
|
2,535.7 |
|
West |
|
|
1,671.8 |
|
|
|
1,684.8 |
|
Corporate and unallocated (3) |
|
|
381.6 |
|
|
|
327.1 |
|
|
|
|
|
|
|
|
Total homebuilding inventory |
|
$ |
10,587.3 |
|
|
$ |
11,343.1 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Expenses maintained at the corporate level are allocated to each segment based on the
segments average inventory. These expenses consist primarily of capitalized interest and
property taxes, which are amortized to cost of sales, and the expenses related to the
operations of the Companys corporate office. |
|
(2) |
|
Homebuilding inventories are the only assets included in the measure of segment assets
used by the Companys chief operating decision maker, its CEO. |
|
(3) |
|
Primarily consists of capitalized interest and property taxes. |
-18-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION
All of the Companys senior and senior subordinated notes and the $2.5 billion unsecured
revolving credit facility are fully and unconditionally guaranteed, on a joint and several basis,
by all of the Companys direct and indirect subsidiaries (collectively, Guarantor Subsidiaries),
other than financial services subsidiaries and certain other inconsequential subsidiaries
(collectively, Non-Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is wholly-owned. In
lieu of providing separate audited financial statements for the Guarantor Subsidiaries,
consolidated condensed financial statements are presented below. Separate financial statements and
other disclosures concerning the Guarantor Subsidiaries are not presented because management has
determined that they are not material to investors.
Consolidating Balance Sheet
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
(In millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
89.7 |
|
|
$ |
60.6 |
|
|
$ |
(89.5 |
) |
|
$ |
60.8 |
|
Investments in subsidiaries |
|
|
2,891.9 |
|
|
|
|
|
|
|
|
|
|
|
(2,891.9 |
) |
|
|
|
|
Inventories |
|
|
3,139.2 |
|
|
|
7,334.9 |
|
|
|
113.2 |
|
|
|
|
|
|
|
10,587.3 |
|
Property and equipment, net |
|
|
35.7 |
|
|
|
65.1 |
|
|
|
17.1 |
|
|
|
|
|
|
|
117.9 |
|
Deferred income taxes |
|
|
232.2 |
|
|
|
503.7 |
|
|
|
|
|
|
|
|
|
|
|
735.9 |
|
Earnest money deposits and other assets |
|
|
98.0 |
|
|
|
184.9 |
|
|
|
91.4 |
|
|
|
(4.5 |
) |
|
|
369.8 |
|
Mortgage loans held for sale |
|
|
|
|
|
|
|
|
|
|
469.0 |
|
|
|
|
|
|
|
469.0 |
|
Goodwill |
|
|
|
|
|
|
153.3 |
|
|
|
|
|
|
|
|
|
|
|
153.3 |
|
Intercompany receivables |
|
|
4,574.0 |
|
|
|
|
|
|
|
|
|
|
|
(4,574.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
10,971.0 |
|
|
$ |
8,331.6 |
|
|
$ |
751.3 |
|
|
$ |
(7,559.9 |
) |
|
$ |
12,494.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
701.4 |
|
|
$ |
1,117.3 |
|
|
$ |
89.7 |
|
|
$ |
(94.0 |
) |
|
$ |
1,814.4 |
|
Intercompany payables |
|
|
|
|
|
|
4,535.8 |
|
|
|
38.2 |
|
|
|
(4,574.0 |
) |
|
|
|
|
Notes payable |
|
|
4,591.9 |
|
|
|
6.1 |
|
|
|
318.8 |
|
|
|
|
|
|
|
4,916.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
5,293.3 |
|
|
|
5,659.2 |
|
|
|
446.7 |
|
|
|
(4,668.0 |
) |
|
|
6,731.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
85.1 |
|
|
|
|
|
|
|
85.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity |
|
|
5,677.7 |
|
|
|
2,672.4 |
|
|
|
219.5 |
|
|
|
(2,891.9 |
) |
|
|
5,677.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Equity |
|
$ |
10,971.0 |
|
|
$ |
8,331.6 |
|
|
$ |
751.3 |
|
|
$ |
(7,559.9 |
) |
|
$ |
12,494.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-19-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Balance Sheet
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
73.5 |
|
|
$ |
379.8 |
|
|
$ |
134.3 |
|
|
$ |
|
|
|
$ |
587.6 |
|
Restricted cash |
|
|
|
|
|
|
|
|
|
|
248.3 |
|
|
|
|
|
|
|
248.3 |
|
Investments in subsidiaries |
|
|
3,428.5 |
|
|
|
|
|
|
|
|
|
|
|
(3,428.5 |
) |
|
|
|
|
Inventories |
|
|
3,249.8 |
|
|
|
7,964.1 |
|
|
|
129.2 |
|
|
|
|
|
|
|
11,343.1 |
|
Property and equipment, net |
|
|
40.5 |
|
|
|
73.2 |
|
|
|
17.7 |
|
|
|
|
|
|
|
131.4 |
|
Deferred income taxes |
|
|
374.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374.0 |
|
Earnest money deposits and other assets |
|
|
126.1 |
|
|
|
299.0 |
|
|
|
122.9 |
|
|
|
(13.5 |
) |
|
|
534.5 |
|
Mortgage loans held for sale |
|
|
|
|
|
|
|
|
|
|
1,022.9 |
|
|
|
|
|
|
|
1,022.9 |
|
Goodwill |
|
|
|
|
|
|
578.9 |
|
|
|
|
|
|
|
|
|
|
|
578.9 |
|
Intercompany receivables |
|
|
4,814.7 |
|
|
|
|
|
|
|
|
|
|
|
(4,814.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
12,107.1 |
|
|
$ |
9,295.0 |
|
|
$ |
1,675.3 |
|
|
$ |
(8,256.7 |
) |
|
$ |
14,820.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
776.3 |
|
|
$ |
1,288.6 |
|
|
$ |
132.7 |
|
|
$ |
(13.5 |
) |
|
$ |
2,184.1 |
|
Intercompany payables |
|
|
|
|
|
|
4,748.5 |
|
|
|
66.2 |
|
|
|
(4,814.7 |
) |
|
|
|
|
Notes payable |
|
|
4,877.9 |
|
|
|
9.0 |
|
|
|
1,191.7 |
|
|
|
|
|
|
|
6,078.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
5,654.2 |
|
|
|
6,046.1 |
|
|
|
1,390.6 |
|
|
|
(4,828.2 |
) |
|
|
8,262.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
105.1 |
|
|
|
|
|
|
|
105.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity |
|
|
6,452.9 |
|
|
|
3,248.9 |
|
|
|
179.6 |
|
|
|
(3,428.5 |
) |
|
|
6,452.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Equity |
|
$ |
12,107.1 |
|
|
$ |
9,295.0 |
|
|
$ |
1,675.3 |
|
|
$ |
(8,256.7 |
) |
|
$ |
14,820.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-20-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Statement of Income
Three Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
557.9 |
|
|
$ |
1,974.2 |
|
|
$ |
16.0 |
|
|
$ |
|
|
|
$ |
2,548.1 |
|
Cost of sales |
|
|
715.0 |
|
|
|
2,252.0 |
|
|
|
9.4 |
|
|
|
|
|
|
|
2,976.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
(157.1 |
) |
|
|
(277.8 |
) |
|
|
6.6 |
|
|
|
|
|
|
|
(428.3 |
) |
Selling, general and administrative expense |
|
|
85.6 |
|
|
|
178.8 |
|
|
|
3.1 |
|
|
|
|
|
|
|
267.5 |
|
Goodwill impairment |
|
|
|
|
|
|
425.6 |
|
|
|
|
|
|
|
|
|
|
|
425.6 |
|
Equity in loss of subsidiaries |
|
|
860.7 |
|
|
|
|
|
|
|
|
|
|
|
(860.7 |
) |
|
|
|
|
Loss on early retirement of debt |
|
|
12.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.1 |
|
Other (income) expense |
|
|
(4.1 |
) |
|
|
(0.4 |
) |
|
|
0.6 |
|
|
|
|
|
|
|
(3.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,111.4 |
) |
|
|
(881.8 |
) |
|
|
2.9 |
|
|
|
860.7 |
|
|
|
(1,129.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
50.0 |
|
|
|
|
|
|
|
50.0 |
|
General and administrative expense |
|
|
|
|
|
|
|
|
|
|
36.0 |
|
|
|
|
|
|
|
36.0 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
4.1 |
|
|
|
|
|
|
|
4.1 |
|
Other (income) |
|
|
|
|
|
|
|
|
|
|
(8.3 |
) |
|
|
|
|
|
|
(8.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.2 |
|
|
|
|
|
|
|
18.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(1,111.4 |
) |
|
|
(881.8 |
) |
|
|
21.1 |
|
|
|
860.7 |
|
|
|
(1,111.4 |
) |
Provision for (benefit from) income taxes |
|
|
(287.6 |
) |
|
|
(200.2 |
) |
|
|
8.0 |
|
|
|
192.2 |
|
|
|
(287.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(823.8 |
) |
|
$ |
(681.6 |
) |
|
$ |
13.1 |
|
|
$ |
668.5 |
|
|
$ |
(823.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-21-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Statement of Income
Nine Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,654.0 |
|
|
$ |
6,283.8 |
|
|
$ |
28.0 |
|
|
$ |
|
|
|
$ |
7,965.8 |
|
Cost of sales |
|
|
1,539.4 |
|
|
|
6,022.0 |
|
|
|
17.2 |
|
|
|
|
|
|
|
7,578.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
114.6 |
|
|
|
261.8 |
|
|
|
10.8 |
|
|
|
|
|
|
|
387.2 |
|
Selling, general and administrative expense |
|
|
301.7 |
|
|
|
549.7 |
|
|
|
7.5 |
|
|
|
|
|
|
|
858.9 |
|
Goodwill impairment |
|
|
|
|
|
|
425.6 |
|
|
|
|
|
|
|
|
|
|
|
425.6 |
|
Equity in loss of subsidiaries |
|
|
656.8 |
|
|
|
|
|
|
|
|
|
|
|
(656.8 |
) |
|
|
|
|
Loss on early retirement of debt |
|
|
12.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.1 |
|
Other (income) expense |
|
|
(5.0 |
) |
|
|
(1.9 |
) |
|
|
1.2 |
|
|
|
|
|
|
|
(5.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(851.0 |
) |
|
|
(711.6 |
) |
|
|
2.1 |
|
|
|
656.8 |
|
|
|
(903.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
158.3 |
|
|
|
|
|
|
|
158.3 |
|
General and administrative expense |
|
|
|
|
|
|
|
|
|
|
119.3 |
|
|
|
|
|
|
|
119.3 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
20.5 |
|
|
|
|
|
|
|
20.5 |
|
Other (income) |
|
|
|
|
|
|
|
|
|
|
(34.2 |
) |
|
|
|
|
|
|
(34.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52.7 |
|
|
|
|
|
|
|
52.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(851.0 |
) |
|
|
(711.6 |
) |
|
|
54.8 |
|
|
|
656.8 |
|
|
|
(851.0 |
) |
Provision for (benefit from) income taxes |
|
|
(188.7 |
) |
|
|
(135.5 |
) |
|
|
20.8 |
|
|
|
114.7 |
|
|
|
(188.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(662.3 |
) |
|
$ |
(576.1 |
) |
|
$ |
34.0 |
|
|
$ |
542.1 |
|
|
$ |
(662.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-22-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Statement of Income
Three Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
746.7 |
|
|
$ |
2,839.9 |
|
|
$ |
7.0 |
|
|
$ |
|
|
|
$ |
3,593.6 |
|
Cost of sales |
|
|
556.4 |
|
|
|
2,234.7 |
|
|
|
4.3 |
|
|
|
|
|
|
|
2,795.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
190.3 |
|
|
|
605.2 |
|
|
|
2.7 |
|
|
|
|
|
|
|
798.2 |
|
Selling, general and administrative expense |
|
|
123.7 |
|
|
|
230.2 |
|
|
|
2.5 |
|
|
|
|
|
|
|
356.4 |
|
Equity in income of subsidiaries |
|
|
(403.4 |
) |
|
|
|
|
|
|
|
|
|
|
403.4 |
|
|
|
|
|
Other (income) expense |
|
|
(2.2 |
) |
|
|
(1.5 |
) |
|
|
0.8 |
|
|
|
|
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
472.2 |
|
|
|
376.5 |
|
|
|
(0.6 |
) |
|
|
(403.4 |
) |
|
|
444.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
74.2 |
|
|
|
|
|
|
|
74.2 |
|
General and administrative expense |
|
|
|
|
|
|
|
|
|
|
50.8 |
|
|
|
|
|
|
|
50.8 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
8.7 |
|
|
|
|
|
|
|
8.7 |
|
Other (income) |
|
|
|
|
|
|
|
|
|
|
(12.8 |
) |
|
|
|
|
|
|
(12.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.5 |
|
|
|
|
|
|
|
27.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
472.2 |
|
|
|
376.5 |
|
|
|
26.9 |
|
|
|
(403.4 |
) |
|
|
472.2 |
|
Provision for income taxes |
|
|
179.4 |
|
|
|
143.1 |
|
|
|
10.2 |
|
|
|
(153.3 |
) |
|
|
179.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
292.8 |
|
|
$ |
233.4 |
|
|
$ |
16.7 |
|
|
$ |
(250.1 |
) |
|
$ |
292.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-23-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Statement of Income
Nine Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
(In millions) |
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
2,238.2 |
|
|
$ |
7,712.4 |
|
|
$ |
11.3 |
|
|
$ |
|
|
|
$ |
9,961.9 |
|
Cost of sales |
|
|
1,519.4 |
|
|
|
5,920.7 |
|
|
|
6.7 |
|
|
|
|
|
|
|
7,446.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
718.8 |
|
|
|
1,791.7 |
|
|
|
4.6 |
|
|
|
|
|
|
|
2,515.1 |
|
Selling, general and administrative expense |
|
|
328.8 |
|
|
|
711.0 |
|
|
|
7.1 |
|
|
|
|
|
|
|
1,046.9 |
|
Equity in income of subsidiaries |
|
|
(1,157.1 |
) |
|
|
|
|
|
|
|
|
|
|
1,157.1 |
|
|
|
|
|
Loss on early retirement of debt |
|
|
15.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.0 |
|
Other (income) |
|
|
(9.2 |
) |
|
|
(2.8 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
(13.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,541.3 |
|
|
|
1,083.5 |
|
|
|
(1.1 |
) |
|
|
(1,157.1 |
) |
|
|
1,466.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
206.6 |
|
|
|
|
|
|
|
206.6 |
|
General and administrative expense |
|
|
|
|
|
|
|
|
|
|
147.6 |
|
|
|
|
|
|
|
147.6 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
24.7 |
|
|
|
|
|
|
|
24.7 |
|
Other (income) |
|
|
|
|
|
|
|
|
|
|
(40.4 |
) |
|
|
|
|
|
|
(40.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74.7 |
|
|
|
|
|
|
|
74.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
1,541.3 |
|
|
|
1,083.5 |
|
|
|
73.6 |
|
|
|
(1,157.1 |
) |
|
|
1,541.3 |
|
Provision for income taxes |
|
|
585.7 |
|
|
|
411.7 |
|
|
|
28.0 |
|
|
|
(439.7 |
) |
|
|
585.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
955.6 |
|
|
$ |
671.8 |
|
|
$ |
45.6 |
|
|
$ |
(717.4 |
) |
|
$ |
955.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-24-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Statement of Cash Flows
Nine Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
(In millions) |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities |
|
$ |
30.3 |
|
|
$ |
(56.5 |
) |
|
$ |
573.4 |
|
|
$ |
|
|
|
$ |
547.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(11.9 |
) |
|
|
(20.4 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
(32.7 |
) |
Investment in subsidiary |
|
|
(5.5 |
) |
|
|
|
|
|
|
|
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(17.4 |
) |
|
|
(20.4 |
) |
|
|
(0.4 |
) |
|
|
5.5 |
|
|
|
(32.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in notes payable |
|
|
(312.4 |
) |
|
|
|
|
|
|
(872.9 |
) |
|
|
|
|
|
|
(1,185.3 |
) |
Decrease in restricted cash |
|
|
|
|
|
|
|
|
|
|
248.3 |
|
|
|
|
|
|
|
248.3 |
|
Increase in book overdraft |
|
|
108.4 |
|
|
|
|
|
|
|
|
|
|
|
(89.5 |
) |
|
|
18.9 |
|
Net change in intercompany
receivables/payables |
|
|
240.8 |
|
|
|
(213.2 |
) |
|
|
(27.6 |
) |
|
|
|
|
|
|
|
|
Proceeds from stock associated with certain
employee benefit plans |
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.0 |
|
Income tax benefit from stock option exercises |
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.0 |
|
Capital contribution from parent |
|
|
|
|
|
|
|
|
|
|
5.5 |
|
|
|
(5.5 |
) |
|
|
|
|
Cash dividends paid |
|
|
(141.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(141.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing
activities |
|
|
(86.4 |
) |
|
|
(213.2 |
) |
|
|
(646.7 |
) |
|
|
(95.0 |
) |
|
|
(1,041.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(73.5 |
) |
|
|
(290.1 |
) |
|
|
(73.7 |
) |
|
|
(89.5 |
) |
|
|
(526.8 |
) |
Cash and cash equivalents at beginning of period |
|
|
73.5 |
|
|
|
379.8 |
|
|
|
134.3 |
|
|
|
|
|
|
|
587.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
89.7 |
|
|
$ |
60.6 |
|
|
$ |
(89.5 |
) |
|
$ |
60.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-25-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
June 30, 2007
NOTE O SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
Consolidating Statement of Cash Flows
Nine Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.R. |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Horton, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating
activities |
|
$ |
(883.0 |
) |
|
$ |
(1,762.5 |
) |
|
$ |
582.7 |
|
|
$ |
(1.3 |
) |
|
$ |
(2,064.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(17.1 |
) |
|
|
(45.0 |
) |
|
|
(4.1 |
) |
|
|
|
|
|
|
(66.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(17.1 |
) |
|
|
(45.0 |
) |
|
|
(4.1 |
) |
|
|
|
|
|
|
(66.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in notes payable |
|
|
1,776.7 |
|
|
|
(0.2 |
) |
|
|
(525.2 |
) |
|
|
|
|
|
|
1,251.3 |
|
Net change in intercompany
receivables/payables |
|
|
(1,492.5 |
) |
|
|
1,523.2 |
|
|
|
(30.7 |
) |
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(36.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36.8 |
) |
Proceeds from stock associated with certain
employee benefit plans |
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.5 |
|
Income tax benefit from stock option exercises |
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.2 |
|
Cash dividends paid |
|
|
(90.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
173.5 |
|
|
|
1,523.0 |
|
|
|
(555.9 |
) |
|
|
|
|
|
|
1,140.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(726.6 |
) |
|
|
(284.5 |
) |
|
|
22.7 |
|
|
|
(1.3 |
) |
|
|
(989.7 |
) |
Cash and cash equivalents at beginning of period |
|
|
726.6 |
|
|
|
381.0 |
|
|
|
42.2 |
|
|
|
|
|
|
|
1,149.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
96.5 |
|
|
$ |
64.9 |
|
|
$ |
(1.3 |
) |
|
$ |
160.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-26-
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and related notes included
in this quarterly report and with our annual report on Form 10-K for the fiscal year ended
September 30, 2006. Some of the information contained in this discussion and analysis constitutes
forward-looking statements that involve risks and uncertainties. Actual results could differ
materially from those discussed in these forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to, those described in the
Forward-Looking Statements section following this discussion.
BUSINESS
We are the largest homebuilding company in the United States based on homes closed during the
twelve months ended June 30, 2007. We construct and sell high quality homes through our operating
divisions in 27 states and 83 metropolitan markets of the United States as of June 30, 2007,
primarily under the name of D.R. Horton, Americas Builder. Our homebuilding operations primarily
include the construction and sale of single-family homes with sales prices generally ranging from
$90,000 to $900,000, with an average closing price of $261,600 during the nine months ended June
30, 2007. Approximately 81% and 80% of home sales revenues were generated from the sale of
single-family detached homes in the nine months ended June 30, 2007 and 2006, respectively. The
remainder of home sales revenues were generated from the sale of attached homes, such as town
homes, duplexes, triplexes and condominiums (including some mid-rise buildings), which share common
walls and roofs.
Through our financial services operations, we provide mortgage 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 purchasers of homes we build and
sell. We originate mortgage loans, then package and sell them and their servicing rights to
third-party investors shortly after origination on a non-recourse or limited recourse basis. Our
subsidiary title companies serve as title insurance agents by providing title insurance policies,
examination and closing services primarily to purchasers of homes we build and sell.
-27-
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.
The names of the regions and the markets comprising each region reflect the aggregation of our
homebuilding operating segments into six separate reportable segments.
|
|
|
|
|
|
|
State |
|
Reporting Region/Market |
|
State |
|
Reporting Region/Market |
|
|
|
|
|
|
|
|
|
Northeast Region
|
|
|
|
Southwest Region |
Delaware
|
|
Central Delaware
|
|
Arizona
|
|
Casa Grande |
|
|
Delaware Shore
|
|
|
|
Phoenix |
Georgia
|
|
Savannah
|
|
|
|
Tucson |
Illinois
|
|
Chicago
|
|
Colorado
|
|
Colorado Springs |
Maryland
|
|
Baltimore
|
|
|
|
Denver |
|
|
Suburban Washington, D.C.
|
|
|
|
Ft. Collins |
Minnesota
|
|
Minneapolis/St. Paul
|
|
New Mexico
|
|
Albuquerque |
New Jersey
|
|
North New Jersey
|
|
|
|
Las Cruces |
|
|
South New Jersey
|
|
Utah
|
|
Salt Lake City |
North Carolina
|
|
Brunswick County |
|
|
|
|
|
|
Charlotte
|
|
|
|
California Region |
|
|
Greensboro/Winston-Salem
|
|
California
|
|
Bay Area |
|
|
Raleigh/Durham
|
|
|
|
Central Valley |
Pennsylvania
|
|
Philadelphia
|
|
|
|
Lancaster/Palmdale |
|
|
Lancaster
|
|
|
|
Imperial Valley |
South Carolina
|
|
Charleston
|
|
|
|
Los Angeles County |
|
|
Columbia
|
|
|
|
Orange County |
|
|
Hilton Head
|
|
|
|
Riverside/San Bernardino |
|
|
Myrtle Beach
|
|
|
|
Sacramento |
Virginia
|
|
Northern Virginia
|
|
|
|
San Diego County |
Wisconsin
|
|
Kenosha
|
|
|
|
Ventura County |
|
|
|
|
Nevada
|
|
Reno |
|
|
Southeast Region |
|
|
|
|
Alabama
|
|
Birmingham
|
|
|
|
West Region |
|
|
Huntsville
|
|
Hawaii
|
|
Hawaii |
|
|
Mobile
|
|
|
|
Kauai |
Florida
|
|
Daytona Beach
|
|
|
|
Maui |
|
|
Fort Myers/Naples
|
|
|
|
Oahu |
|
|
Jacksonville
|
|
Idaho
|
|
Boise |
|
|
Melbourne
|
|
Nevada
|
|
Las Vegas |
|
|
Miami/West Palm Beach
|
|
|
|
Laughlin |
|
|
Ocala
|
|
Oregon
|
|
Albany |
|
|
Orlando
|
|
|
|
Bend |
|
|
Pensacola
|
|
|
|
Eugene |
|
|
Tampa
|
|
|
|
Portland |
Georgia
|
|
Atlanta
|
|
Washington
|
|
Bellingham |
|
|
Macon
|
|
|
|
Eastern Washington |
|
|
|
|
|
|
Olympia |
|
|
South Central Region
|
|
|
|
Seattle/Tacoma |
Louisiana
|
|
Baton Rouge
|
|
|
|
Vancouver |
Mississippi
|
|
Mississippi Gulf Coast |
|
|
|
|
Oklahoma
|
|
Oklahoma City |
|
|
|
|
Texas
|
|
Austin |
|
|
|
|
|
|
Dallas |
|
|
|
|
|
|
Fort Worth |
|
|
|
|
|
|
Houston |
|
|
|
|
|
|
Killeen/Temple |
|
|
|
|
|
|
Laredo |
|
|
|
|
|
|
Rio Grande Valley |
|
|
|
|
|
|
San Antonio |
|
|
|
|
|
|
Waco |
|
|
|
|
-28-
OVERVIEW
Our third quarter of fiscal 2007 included the majority of the typical peak selling season in
the homebuilding industry. During the quarter, the already difficult conditions within the industry
became more challenging as demand for new homes continued to decline in many markets. Our third
quarter sales results were significantly below expectations and our sales cancellation rate
increased. The volume of our net sales orders this quarter was 40% lower than in the third quarter
of fiscal 2006, and the average selling price of those orders was down 11%. Consequently, the value
of our sales order backlog at June 30, 2007 was 41% lower than a year ago. Our gross profit from
home sales revenues has continued to decline as we offer higher levels of incentives and price
concessions in attempts to stimulate demand in our communities.
Our disappointing sales results, further declines in our sales order prices, the decline in
our gross profits from home sales revenues and the more challenging market conditions have 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 is increasingly unclear. Our revised
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;
increased sales cancellations; continued weak housing affordability in many markets that
experienced rapid price appreciation over the past few years; and a decline in the availability of
mortgage products due to further 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
analysis. Additionally, we determined that an interim test to assess the recoverability of goodwill
was necessary as of June 30, 2007. These 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 quarter, resulting in a net loss for both the three and nine months ended June
30, 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 and renegotiating or canceling land 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. |
|
|
|
|
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. |
We expect that our operating strategy will generate positive cash flows in fiscal 2007 and
allow us to strengthen our balance sheet and liquidity position.
-29-
KEY RESULTS
Key financial results as of and for the three months ended June 30, 2007, as compared to the
same period of 2006, were as follows:
|
|
|
Net loss per share was $2.62, compared to diluted earnings per share of $0.93. |
|
|
|
|
Net loss was $823.8 million, compared to net income of $292.8 million. |
|
|
|
|
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, declined 71% to $148.0 million, from $505.6 million in the same
period of 2006. |
|
|
|
|
Homebuilding revenues decreased 29% to $2.5 billion. |
|
|
|
|
Homes closed decreased 28% to 9,643 homes and the average selling price of those
homes decreased 4% to $256,200. |
|
|
|
|
Net sales orders decreased 40% to 8,559 homes. |
|
|
|
|
Sales order backlog decreased 41% to $4.4 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 830 basis
points to 15.5%. |
|
|
|
|
Homebuilding SG&A expenses as a percentage of homebuilding revenues increased 60
basis points to 10.5%. |
|
|
|
|
Homebuilding debt decreased by $891.7 million to $4,598.0 million at June 30, 2007,
from $5,489.7 million at June 30, 2006. |
|
|
|
|
Stockholders equity decreased 8% to $5.7 billion at June 30, 2007, from $6.2
billion at June 30, 2006. |
|
|
|
|
Net homebuilding debt to total capital improved 170 basis points to 44.7%, and gross
homebuilding debt to total capital improved 220 basis points to 44.7%. |
|
|
|
|
Net cash provided by operations was $73.4 million during the quarter ended June 30,
2007. |
Key financial results for the nine months ended June 30, 2007, as compared to the same period
of 2006, were as follows:
|
|
|
Net loss per share was $2.11, compared to diluted earnings per share of $3.02. |
|
|
|
|
Net loss was $662.3 million, compared to net income of $955.6 million. |
|
|
|
|
Homebuilding revenues decreased 20% to $8.0 billion. |
|
|
|
|
Homes closed decreased 17% to 29,637 homes and the average selling price of those
homes decreased 5% to $261,600. |
|
|
|
|
Net sales orders decreased 34% to 27,313 homes. |
|
|
|
|
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 820 basis
points to 17.2%. |
|
|
|
|
Homebuilding SG&A expenses as a percentage of homebuilding revenues increased 30
basis points to 10.8%. |
|
|
|
|
Net cash provided by operations was $547.2 million during the nine months ended June
30, 2007. |
-30-
RESULTS OF OPERATIONS HOMEBUILDING
The following tables set forth key operating and financial data for our homebuilding
operations by reporting segment as of and for the three and nine months ended June 30, 2007 and
2006. Based on our revised aggregation of operating segments, we have restated the 2006 amounts
between reporting segments to conform to the 2007 presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET SALES ORDERS |
|
|
|
Three Months Ended June 30, |
|
|
|
Homes Sold |
|
|
Value (In millions) |
|
|
Average Selling Price |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast |
|
|
1,148 |
|
|
|
1,979 |
|
|
|
(42 |
)% |
|
$ |
308.3 |
|
|
$ |
510.3 |
|
|
|
(40 |
)% |
|
$ |
268,600 |
|
|
$ |
257,900 |
|
|
|
4 |
% |
Southeast |
|
|
1,500 |
|
|
|
2,010 |
|
|
|
(25 |
)% |
|
|
323.7 |
|
|
|
497.1 |
|
|
|
(35 |
)% |
|
|
215,800 |
|
|
|
247,300 |
|
|
|
(13 |
)% |
South Central |
|
|
2,541 |
|
|
|
4,290 |
|
|
|
(41 |
)% |
|
|
443.5 |
|
|
|
744.2 |
|
|
|
(40 |
)% |
|
|
174,500 |
|
|
|
173,500 |
|
|
|
1 |
% |
Southwest |
|
|
1,894 |
|
|
|
3,227 |
|
|
|
(41 |
)% |
|
|
409.2 |
|
|
|
880.5 |
|
|
|
(54 |
)% |
|
|
216,100 |
|
|
|
272,900 |
|
|
|
(21 |
)% |
California |
|
|
804 |
|
|
|
1,708 |
|
|
|
(53 |
)% |
|
|
307.1 |
|
|
|
805.1 |
|
|
|
(62 |
)% |
|
|
382,000 |
|
|
|
471,400 |
|
|
|
(19 |
)% |
West |
|
|
672 |
|
|
|
1,102 |
|
|
|
(39 |
)% |
|
|
237.0 |
|
|
|
395.8 |
|
|
|
(40 |
)% |
|
|
352,700 |
|
|
|
359,200 |
|
|
|
(2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,559 |
|
|
|
14,316 |
|
|
|
(40 |
)% |
|
$ |
2,028.8 |
|
|
$ |
3,833.0 |
|
|
|
(47 |
)% |
|
$ |
237,000 |
|
|
$ |
267,700 |
|
|
|
(11 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET SALES ORDERS |
|
|
|
Nine Months Ended June 30, |
|
|
|
Homes Sold |
|
|
Value (In millions) |
|
|
Average Selling Price |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast |
|
|
3,867 |
|
|
|
5,663 |
|
|
|
(32 |
)% |
|
$ |
1,030.6 |
|
|
$ |
1,478.0 |
|
|
|
(30 |
)% |
|
$ |
266,500 |
|
|
$ |
261,000 |
|
|
|
2 |
% |
Southeast |
|
|
4,301 |
|
|
|
5,845 |
|
|
|
(26 |
)% |
|
|
961.1 |
|
|
|
1,489.1 |
|
|
|
(35 |
)% |
|
|
223,500 |
|
|
|
254,800 |
|
|
|
(12 |
)% |
South Central |
|
|
7,198 |
|
|
|
11,178 |
|
|
|
(36 |
)% |
|
|
1,282.2 |
|
|
|
1,920.8 |
|
|
|
(33 |
)% |
|
|
178,100 |
|
|
|
171,800 |
|
|
|
4 |
% |
Southwest |
|
|
6,364 |
|
|
|
9,477 |
|
|
|
(33 |
)% |
|
|
1,395.0 |
|
|
|
2,535.1 |
|
|
|
(45 |
)% |
|
|
219,200 |
|
|
|
267,500 |
|
|
|
(18 |
)% |
California |
|
|
3,247 |
|
|
|
6,037 |
|
|
|
(46 |
)% |
|
|
1,413.2 |
|
|
|
2,754.2 |
|
|
|
(49 |
)% |
|
|
435,200 |
|
|
|
456,200 |
|
|
|
(5 |
)% |
West |
|
|
2,336 |
|
|
|
3,350 |
|
|
|
(30 |
)% |
|
|
838.9 |
|
|
|
1,185.8 |
|
|
|
(29 |
)% |
|
|
359,100 |
|
|
|
354,000 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,313 |
|
|
|
41,550 |
|
|
|
(34 |
)% |
|
$ |
6,921.0 |
|
|
$ |
11,363.0 |
|
|
|
(39 |
)% |
|
$ |
253,400 |
|
|
$ |
273,500 |
|
|
|
(7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES ORDER BACKLOG |
|
|
|
As of June 30, |
|
|
|
Homes in Backlog |
|
|
Value (In millions) |
|
|
Average Selling Price |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast |
|
|
2,531 |
|
|
|
4,116 |
|
|
|
(39 |
)% |
|
$ |
695.6 |
|
|
$ |
1,149.0 |
|
|
|
(39 |
)% |
|
$ |
274,800 |
|
|
$ |
279,200 |
|
|
|
(2 |
)% |
Southeast |
|
|
1,952 |
|
|
|
3,343 |
|
|
|
(42 |
)% |
|
|
518.6 |
|
|
|
981.9 |
|
|
|
(47 |
)% |
|
|
265,700 |
|
|
|
293,700 |
|
|
|
(10 |
)% |
South Central |
|
|
3,475 |
|
|
|
4,961 |
|
|
|
(30 |
)% |
|
|
641.3 |
|
|
|
893.4 |
|
|
|
(28 |
)% |
|
|
184,500 |
|
|
|
180,100 |
|
|
|
2 |
% |
Southwest |
|
|
4,937 |
|
|
|
7,155 |
|
|
|
(31 |
)% |
|
|
1,211.6 |
|
|
|
1,962.8 |
|
|
|
(38 |
)% |
|
|
245,400 |
|
|
|
274,300 |
|
|
|
(11 |
)% |
California |
|
|
1,801 |
|
|
|
3,690 |
|
|
|
(51 |
)% |
|
|
857.6 |
|
|
|
1,763.9 |
|
|
|
(51 |
)% |
|
|
476,200 |
|
|
|
478,000 |
|
|
|
|
% |
West |
|
|
1,105 |
|
|
|
1,691 |
|
|
|
(35 |
)% |
|
|
428.3 |
|
|
|
604.5 |
|
|
|
(29 |
)% |
|
|
387,600 |
|
|
|
357,500 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,801 |
|
|
|
24,956 |
|
|
|
(37 |
)% |
|
$ |
4,353.0 |
|
|
$ |
7,355.5 |
|
|
|
(41 |
)% |
|
$ |
275,500 |
|
|
$ |
294,700 |
|
|
|
(7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-31-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOMES CLOSED |
|
|
|
Three Months Ended June 30, |
|
|
|
Homes Closed |
|
|
Value (In millions) |
|
|
Average Selling Price |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast |
|
|
1,404 |
|
|
|
2,014 |
|
|
|
(30 |
)% |
|
$ |
384.8 |
|
|
$ |
561.4 |
|
|
|
(31 |
)% |
|
$ |
274,100 |
|
|
$ |
278,700 |
|
|
|
(2 |
)% |
Southeast |
|
|
1,575 |
|
|
|
1,998 |
|
|
|
(21 |
)% |
|
|
367.6 |
|
|
|
494.9 |
|
|
|
(26 |
)% |
|
|
233,400 |
|
|
|
247,700 |
|
|
|
(6 |
)% |
South Central |
|
|
2,746 |
|
|
|
3,656 |
|
|
|
(25 |
)% |
|
|
490.7 |
|
|
|
623.3 |
|
|
|
(21 |
)% |
|
|
178,700 |
|
|
|
170,500 |
|
|
|
5 |
% |
Southwest |
|
|
2,298 |
|
|
|
2,839 |
|
|
|
(19 |
)% |
|
|
548.0 |
|
|
|
738.7 |
|
|
|
(26 |
)% |
|
|
238,500 |
|
|
|
260,200 |
|
|
|
(8 |
)% |
California |
|
|
913 |
|
|
|
1,818 |
|
|
|
(50 |
)% |
|
|
425.1 |
|
|
|
789.3 |
|
|
|
(46 |
)% |
|
|
465,600 |
|
|
|
434,200 |
|
|
|
7 |
% |
West |
|
|
707 |
|
|
|
1,052 |
|
|
|
(33 |
)% |
|
|
254.3 |
|
|
|
373.8 |
|
|
|
(32 |
)% |
|
|
359,700 |
|
|
|
355,300 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,643 |
|
|
|
13,377 |
|
|
|
(28 |
)% |
|
$ |
2,470.5 |
|
|
$ |
3,581.4 |
|
|
|
(31 |
)% |
|
$ |
256,200 |
|
|
$ |
267,700 |
|
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOMES CLOSED |
|
|
|
Nine Months Ended June 30, |
|
|
|
Homes Closed |
|
|
Value (In millions) |
|
|
Average Selling Price |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast |
|
|
4,238 |
|
|
|
5,441 |
|
|
|
(22 |
)% |
|
$ |
1,131.8 |
|
|
$ |
1,477.9 |
|
|
|
(23 |
)% |
|
$ |
267,100 |
|
|
$ |
271,600 |
|
|
|
(2 |
)% |
Southeast |
|
|
4,497 |
|
|
|
5,621 |
|
|
|
(20 |
)% |
|
|
1,076.3 |
|
|
|
1,416.6 |
|
|
|
(24 |
)% |
|
|
239,300 |
|
|
|
252,000 |
|
|
|
(5 |
)% |
South Central |
|
|
7,936 |
|
|
|
9,192 |
|
|
|
(14 |
)% |
|
|
1,418.7 |
|
|
|
1,551.6 |
|
|
|
(9 |
)% |
|
|
178,800 |
|
|
|
168,800 |
|
|
|
6 |
% |
Southwest |
|
|
7,181 |
|
|
|
7,390 |
|
|
|
(3 |
)% |
|
|
1,733.6 |
|
|
|
1,955.1 |
|
|
|
(11 |
)% |
|
|
241,400 |
|
|
|
264,600 |
|
|
|
(9 |
)% |
California |
|
|
3,534 |
|
|
|
5,269 |
|
|
|
(33 |
)% |
|
|
1,597.4 |
|
|
|
2,394.1 |
|
|
|
(33 |
)% |
|
|
452,000 |
|
|
|
454,400 |
|
|
|
(1 |
)% |
West |
|
|
2,251 |
|
|
|
2,925 |
|
|
|
(23 |
)% |
|
|
795.3 |
|
|
|
1,047.4 |
|
|
|
(24 |
)% |
|
|
353,300 |
|
|
|
358,100 |
|
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,637 |
|
|
|
35,838 |
|
|
|
(17 |
)% |
|
$ |
7,753.1 |
|
|
$ |
9,842.7 |
|
|
|
(21 |
)% |
|
$ |
261,600 |
|
|
$ |
274,600 |
|
|
|
(5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL HOMEBUILDING REVENUES |
|
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
|
(In millions) |
|
Northeast |
|
$ |
389.7 |
|
|
$ |
561.7 |
|
|
|
(31 |
)% |
|
$ |
1,204.9 |
|
|
$ |
1,480.2 |
|
|
|
(19 |
)% |
Southeast |
|
|
367.9 |
|
|
|
497.1 |
|
|
|
(26 |
)% |
|
|
1,082.3 |
|
|
|
1,422.3 |
|
|
|
(24 |
)% |
South Central |
|
|
493.4 |
|
|
|
623.9 |
|
|
|
(21 |
)% |
|
|
1,422.4 |
|
|
|
1,557.2 |
|
|
|
(9 |
)% |
Southwest |
|
|
559.2 |
|
|
|
745.7 |
|
|
|
(25 |
)% |
|
|
1,778.6 |
|
|
|
1,985.0 |
|
|
|
(10 |
)% |
California |
|
|
473.9 |
|
|
|
791.4 |
|
|
|
(40 |
)% |
|
|
1,671.9 |
|
|
|
2,431.2 |
|
|
|
(31 |
)% |
West |
|
|
264.0 |
|
|
|
373.8 |
|
|
|
(29 |
)% |
|
|
805.7 |
|
|
|
1,086.0 |
|
|
|
(26 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,548.1 |
|
|
$ |
3,593.6 |
|
|
|
(29 |
)% |
|
$ |
7,965.8 |
|
|
$ |
9,961.9 |
|
|
|
(20 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-32-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVENTORY IMPAIRMENTS AND LAND OPTION COST WRITE-OFFS |
|
|
|
Three Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Land |
|
|
|
|
|
|
|
|
|
|
Land |
|
|
|
|
|
|
Inventory |
|
|
Option Cost |
|
|
|
|
|
|
Inventory |
|
|
Option Cost |
|
|
|
|
|
|
Impairments |
|
|
Write-offs |
|
|
Total |
|
|
Impairments |
|
|
Write-offs |
|
|
Total |
|
|
|
(In millions) |
|
Northeast |
|
$ |
79.4 |
|
|
$ |
11.0 |
|
|
$ |
90.4 |
|
|
$ |
|
|
|
$ |
8.7 |
|
|
$ |
8.7 |
|
Southeast |
|
|
136.5 |
|
|
|
1.9 |
|
|
|
138.4 |
|
|
|
0.4 |
|
|
|
4.8 |
|
|
|
5.2 |
|
South Central |
|
|
|
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
|
|
|
|
0.8 |
|
|
|
0.8 |
|
Southwest |
|
|
119.0 |
|
|
|
0.3 |
|
|
|
119.3 |
|
|
|
|
|
|
|
7.0 |
|
|
|
7.0 |
|
California |
|
|
319.4 |
|
|
|
2.3 |
|
|
|
321.7 |
|
|
|
3.4 |
|
|
|
35.1 |
|
|
|
38.5 |
|
West |
|
|
181.5 |
|
|
|
0.2 |
|
|
|
181.7 |
|
|
|
|
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
835.8 |
|
|
$ |
16.2 |
|
|
$ |
852.0 |
|
|
$ |
3.8 |
|
|
$ |
57.1 |
|
|
$ |
60.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Land |
|
|
|
|
|
|
|
|
|
|
Land |
|
|
|
|
|
|
Inventory |
|
|
Option Cost |
|
|
|
|
|
|
Inventory |
|
|
Option Cost |
|
|
|
|
|
|
Impairments |
|
|
Write-offs |
|
|
Total |
|
|
Impairments |
|
|
Write-offs |
|
|
Total |
|
|
|
(In millions) |
|
Northeast |
|
$ |
88.9 |
|
|
$ |
17.5 |
|
|
$ |
106.4 |
|
|
$ |
|
|
|
$ |
10.6 |
|
|
$ |
10.6 |
|
Southeast |
|
|
138.9 |
|
|
|
10.6 |
|
|
|
149.5 |
|
|
|
0.4 |
|
|
|
5.5 |
|
|
|
5.9 |
|
South Central |
|
|
0.3 |
|
|
|
4.4 |
|
|
|
4.7 |
|
|
|
|
|
|
|
1.1 |
|
|
|
1.1 |
|
Southwest |
|
|
146.1 |
|
|
|
5.3 |
|
|
|
151.4 |
|
|
|
|
|
|
|
9.8 |
|
|
|
9.8 |
|
California |
|
|
388.2 |
|
|
|
18.3 |
|
|
|
406.5 |
|
|
|
3.8 |
|
|
|
39.3 |
|
|
|
43.1 |
|
West |
|
|
181.5 |
|
|
|
10.8 |
|
|
|
192.3 |
|
|
|
|
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
943.9 |
|
|
$ |
66.9 |
|
|
$ |
1,010.8 |
|
|
$ |
4.2 |
|
|
$ |
67.6 |
|
|
$ |
71.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GOODWILL IMPAIRMENTS |
|
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
Northeast |
|
$ |
39.4 |
|
|
$ |
|
|
|
$ |
39.4 |
|
|
$ |
|
|
Southeast |
|
|
11.5 |
|
|
|
|
|
|
|
11.5 |
|
|
|
|
|
South Central |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southwest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
|
300.3 |
|
|
|
|
|
|
|
300.3 |
|
|
|
|
|
West |
|
|
74.4 |
|
|
|
|
|
|
|
74.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
425.6 |
|
|
$ |
|
|
|
$ |
425.6 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-33-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOMEBUILDING INCOME (LOSS) BEFORE INCOME TAXES (1) |
|
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
Northeast |
|
$ |
(105.2 |
) |
|
$ |
57.3 |
|
|
$ |
(76.4 |
) |
|
$ |
137.6 |
|
Southeast |
|
|
(129.6 |
) |
|
|
83.2 |
|
|
|
(83.0 |
) |
|
|
278.1 |
|
South Central |
|
|
38.1 |
|
|
|
50.1 |
|
|
|
101.2 |
|
|
|
114.9 |
|
Southwest |
|
|
(84.0 |
) |
|
|
120.2 |
|
|
|
(34.1 |
) |
|
|
343.7 |
|
California |
|
|
(619.0 |
) |
|
|
54.4 |
|
|
|
(632.2 |
) |
|
|
320.1 |
|
West |
|
|
(229.9 |
) |
|
|
79.5 |
|
|
|
(179.2 |
) |
|
|
272.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,129.6 |
) |
|
$ |
444.7 |
|
|
$ |
(903.7 |
) |
|
$ |
1,466.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Expenses maintained at the corporate level are allocated to each segment based on the
segments average inventory. These expenses consist primarily of capitalized interest and
property taxes, which are amortized to cost of sales, and the expenses related to the
operations of our corporate office. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOMEBUILDING
OPERATING MARGIN ANALYSIS Percentages of Related Revenues |
|
|
Three Months Ended June 30, |
|
Nine Months Ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Gross profit Home sales |
|
|
16.7 |
% |
|
|
23.8 |
% |
|
|
17.7 |
% |
|
|
25.5 |
% |
Gross profit Land/lot sales |
|
|
15.5 |
% |
|
|
45.1 |
% |
|
|
11.8 |
% |
|
|
61.2 |
% |
Effect of inventory impairments and land option cost
write-offs on total homebuilding gross profit (loss) |
|
|
(33.4 |
)% |
|
|
(1.7 |
)% |
|
|
(12.7 |
)% |
|
|
(0.7 |
)% |
Gross profit (loss) Total homebuilding |
|
|
(16.8 |
)% |
|
|
22.2 |
% |
|
|
4.9 |
% |
|
|
25.2 |
% |
Selling, general and administrative expense |
|
|
10.5 |
% |
|
|
9.9 |
% |
|
|
10.8 |
% |
|
|
10.5 |
% |
Goodwill impairment |
|
|
16.7 |
% |
|
|
|
% |
|
|
5.3 |
% |
|
|
|
% |
Loss on early retirement of debt |
|
|
0.5 |
% |
|
|
|
% |
|
|
0.2 |
% |
|
|
0.2 |
% |
Other (income) |
|
|
(0.2 |
)% |
|
|
(0.1 |
)% |
|
|
(0.1 |
)% |
|
|
(0.1 |
)% |
Income (loss) before income taxes |
|
|
(44.3 |
)% |
|
|
12.4 |
% |
|
|
(11.3 |
)% |
|
|
14.7 |
% |
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 47%, to
$2,028.8 million (8,559 homes) for the three months ended June 30, 2007, from $3,833.0 million
(14,316 homes) for the same period of 2006. The value of net sales orders decreased 39%, to
$6,921.0 million (27,313 homes) for the nine months ended June 30, 2007, from $11,363.0 million
(41,550 homes) for the same period of 2006. The number of net sales orders decreased 40% and 34%
for the three and nine-month periods ended June 30, 2007, respectively, reflecting the continued
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 some 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 have
limited the impact of our pricing efforts.
-34-
In comparing the three and nine-month periods ended June 30, 2007 to the same periods of
2006, the value of net sales orders decreased significantly in all six 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, the 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.
Similar to our second quarter results, the most significant decline in net sales orders in the
third quarter of fiscal 2007 occurred in our California region, with 53% fewer homes sold than in
the same period of fiscal 2006. Home sales in our California markets have been negatively impacted
by a reduction in the pool of qualified buyers due to a lack of housing affordability and the
decline of mortgage availability, as well as a pricing strategy that has not resulted in acceptable
home sales levels. We are closely monitoring, on a project by project basis, the effects of our
pricing strategy in the California region, and will further modify pricing as necessary, as we
attempt to generate a higher volume of home sales in this region.
Our sales order cancellation rates (sales orders cancelled divided by gross sales orders)
during the three and nine months ended June 30, 2007 were 38% and 34%, respectively, compared to
29% and 25% during the three and nine months ended June 30, 2006 and 32% during the three months
ended March 31, 2007. These elevated cancellation rates, which continue to exceed our typical
historical range of 16% to 20%, reflect the ongoing challenges in most homebuilding markets,
including the inability of some prospective homebuyers to sell their existing homes, the increasing
level of sales incentives and home price reductions in our markets and further credit tightening in
the mortgage markets.
The average price of our net sales orders in the three months ended June 30, 2007 was
$237,000, a decrease of 11% from the $267,700 average in the comparable period of 2006. The average
price of our net sales orders in the nine months ended June 30, 2007 was $253,400, a decrease of 7%
from the $273,500 average in the comparable period of 2006. The average price of our net sales
orders decreased 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 three and nine-month periods 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, which 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.
In the past, 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 change.
At June 30, 2007, the value of our backlog of sales orders was $4,353.0 million (15,801
homes), a decrease of 41% from $7,355.5 million (24,956 homes) at June 30, 2006. The average sales
price of homes in backlog was $275,500 at June 30, 2007, down 7% from the $294,700 average at June
30, 2006. The value of our sales order backlog decreased in all of our market regions, with the
largest percentage decreases occurring in our California and Southeast regions. We continue to
operate in a difficult sales environment with higher than normal cancellation rates in most of our
markets.
Home Sales Revenue and Gross Profit
Revenues from home sales decreased 31%, to $2,470.5 million (9,643 homes closed) for the three
months ended June 30, 2007, from $3,581.4 million (13,377 homes closed) for the comparable period
of 2006. Revenues from home sales decreased 21%, to $7,753.1 million (29,637 homes closed) for the
nine months ended June 30, 2007, from $9,842.7 million (35,838 homes closed) for the comparable
period of 2006. The average selling price of homes closed during the three months ended June 30,
2007 was $256,200, down 4% from the $267,700 average for the
-35-
same period of 2006. The average selling price of homes closed during the nine months ended
June 30, 2007 was $261,600, down 5% from the $274,600 average for the same period of 2006. During
the three and nine months ended June 30, 2007, home sales revenues decreased in all six of our
market regions, led by our California region with decreases of 46% and 33%, respectively, in those
periods. The decreases in our current period home sales revenues were the result of slowing demand
and the resulting decline in net sales order volume and pricing in recent quarters.
The number of homes closed in the three and nine months ended June 30, 2007 decreased 28% and
17%, respectively, due to decreases in all six of our market regions. As a result of the decline in
net sales orders in recent quarters, we expect to close fewer homes in the fourth quarter and in
the full year of fiscal 2007 than we did in the same periods of fiscal 2006. 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.
Total homebuilding gross loss was $428.3 million for the three months ended June 30, 2007,
declining from a gross profit of $798.2 million for the comparable period of 2006. For the nine
months ended June 30, 2007, total homebuilding gross profit decreased by 85%, to $387.2 million,
from $2,515.1 million for the comparable period of 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 2,030 basis points, to 4.9% in the nine
months ended June 30, 2007, from 25.2% in the comparable period of 2006. Approximately 1,200 basis
points of the decrease in the nine-month period was due to the effect of the impairment charges and
land option cost write-offs during the period.
Gross profit from home sales decreased by 52%, to $411.7 million for the three months ended
June 30, 2007, from $853.6 million for the comparable period of 2006, and, as a percentage of home
sales revenues, decreased 710 basis points, to 16.7%. 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 810 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 unsold homes,
which is at a higher than desired level. This strategy has helped reduce our unsold homes in
inventory by approximately 1,300 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 120 basis points due to an increase in the amortization of capitalized interest as a
percentage of home sales revenues. These decreases were partially offset by improvements in home
sales gross margin of 100 basis points due primarily to an increase in the relative number of home
closings in our more profitable Arizona markets, and 120 basis points resulting from the
recognition of $33.1 million of previously deferred gross profit in accordance with SFAS No. 66,
Accounting for Sales of Real Estate, during the three-month period ended June 30, 2007.
Gross profit from home sales decreased by 45%, to $1,372.9 million for the nine months ended
June 30, 2007, from $2,513.9 million for the comparable period of 2006, and, as a percentage of
home sales revenues, decreased 780 basis points, to 17.7%. Generally, the factors impacting gross
margin for the nine-month period ended June 30, 2007 were similar to those discussed for the
three-month period. Specifically, the weaker market conditions contributed 820 basis points to the
decline, while the relative increase in closings from the higher margin markets offset the decline
by 60 basis points. Additionally, our home sales revenue and gross profit in the nine-month period
ended June 30, 2007 benefited from the recognition of $49.6 million which had been previously
deferred in accordance with SFAS No. 66, which contributed 40 basis points to home sales gross
profit. The remaining 60 basis point decrease was primarily the result of an increase in the
amortization of capitalized interest as a percentage of home sales revenues.
In accordance with Statement of Financial Accounting Standards (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
-36-
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, valuation adjustments are 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 the third quarter of fiscal 2007, the difficult conditions within the homebuilding
industry became more challenging. Continued high inventory levels of both new and existing homes,
elevated cancellation rates, low sales absorption rates, affordability issues and overall weak
consumer confidence persisted, and the effects of these factors were further magnified by a decline
in availability of mortgage products due to further credit tightening in the mortgage markets.
These factors, combined with our disappointing sales results, further declines in sales order
prices and the decline in gross profits from home sales revenues during the quarter, have led to
our more cautious outlook for the homebuilding industry and its impact on our business. This
outlook reflects our belief that housing market conditions will continue to be challenging and may
deteriorate further, and that the timing of a recovery in the housing market is increasingly
unclear.
When we performed our quarterly inventory impairment analysis in accordance with SFAS No. 144,
the assumptions utilized in the analysis incorporated this more cautious outlook, which reflects
our expectation that the challenging conditions in the homebuilding industry will last longer and
have a greater impact than we believed in prior periods. Consequently, our strategy to reduce our
inventory and lot position will likely take longer and require
additional price concessions and incentives than previously anticipated. Therefore, our
impairment evaluation indicated a significantly greater number of projects with impairment
indicators than in prior periods. Communities under development with a combined carrying value of
approximately $3,287.3 million at June 30, 2007, had indicators of potential impairment and were
evaluated for impairment. The analysis of each of these projects 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. 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 this evaluation process, we determined that projects with
a carrying value of $2,117.4 million, the largest portions of which were in the California, West,
Southeast and Southwest regions, were impaired. As a result, during the three months ended June 30,
2007, we recorded impairment charges totaling $835.8 million to reduce the carrying value of the
impaired projects to their estimated fair value. Approximately 75% of these impairment charges were
recorded to residential land and lots and land held for development, and approximately 25% of these
charges were recorded to residential construction in progress and finished homes in inventory.
During the nine months ended June 30, 2007 and 2006, impairment charges totaled $943.9 million and
$4.2 million, respectively.
Of the remaining $1,169.9 million of such projects with impairment indicators which were
determined not to be impaired, 46% are in California, 14% are in Nevada and 13% are in Arizona. 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.
We periodically write off earnest money deposits and pre-acquisition costs related to land and
lot option contracts which we no longer plan to pursue. During the three months ended June 30, 2007
and 2006, we wrote off $16.2 million and $57.1 million, respectively, of earnest money deposits and
pre-acquisition costs related to land purchase option contracts which we determined we would not
pursue. During the nine months ended June 30, 2007 and 2006, we wrote off $66.9 million and $67.6
million, respectively, of earnest money deposits and pre-acquisition costs related to land purchase
option contracts which we determined we would not pursue. 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.
-37-
In the three and nine-month periods ended June 30, 2007, 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 3,340 basis points and 1,270 basis points,
respectively, compared to 170 basis points and 70 basis points, respectively, in the same periods
of 2006.
Land Sales Revenue and Gross Profit
Land sales revenues increased 536%, to $77.6 million for the three months ended June 30, 2007,
and 78% to $212.7 million for the nine months ended June 30, 2007, from $12.2 million and $119.2
million, respectively, in the comparable periods of 2006. The gross profit percentage from land
sales decreased to 15.5% for the three months ended June 30, 2007, from 45.1% in the comparable
period of the prior year, and to 11.8% for the nine months ended June 30, 2007 from 61.2% in the
prior year. The fluctuations in revenues and gross profit percentages from land sales are a
function of how we manage our inventory levels in various markets. We generally purchase land and
lots with the intent to build and sell homes on them; however, we occasionally purchase land that
includes commercially zoned parcels which we typically sell to commercial developers, and we also
sell residential lots or land parcels to manage our land and lot supply. Land and lot sales occur
at unpredictable intervals and varying degrees of profitability. Therefore, the revenues and gross
profit from land sales can fluctuate significantly from period to period.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses from homebuilding activities decreased by
25% to $267.5 million in the three months ended June 30, 2007, and decreased 18%, to $858.9
million, in the nine months ended June 30, 2007, from the comparable periods of 2006. As a
percentage of homebuilding revenues, SG&A expenses increased 60 basis points, to 10.5% in the
three-month period ended June 30, 2007, and increased 30 basis points, to 10.8%, in the nine-month
period ended June 30, 2007, due to decreases in revenues in both periods. The largest component of
our homebuilding SG&A is employee compensation and related costs, which represented approximately
59% of SG&A costs in the three and nine-month periods of fiscal 2007, and approximately 63% of SG&A
costs in the comparable periods of fiscal 2006. Those costs decreased by 29% and 24%, to $158.6
million and $502.7 million, respectively, in the three and nine months ended June 30, 2007, from
the comparable periods of 2006. These decreases were largely due to decreases in incentive
compensation, which is primarily based on profitability, and our continued efforts to align the
number of employees to match our current and anticipated home closing levels. Our homebuilding
operations employed approximately 5,700 and 8,000 employees at June 30, 2007 and 2006,
respectively.
Our homebuilding SG&A expense as a percentage of revenues can vary significantly between
quarters, depending largely on the fluctuations in quarterly revenue levels. We will continually
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 future home closings are lower than our expectations, our future SG&A
percentage may continue to increase.
Goodwill Impairment
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. 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 current market
conditions in the homebuilding industry and the decline in the Companys stock price.
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. Impairment is determined to exist when the estimated fair value of
goodwill is less than its carrying value. At June 30, 2007, we completed the first step of our
goodwill impairment analysis with the assistance of an independent valuation firm.
-38-
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 reporting units within our Northeast, Southeast, California and West reporting segments. Based
on the results of the first step of our goodwill impairment analysis, the goodwill balances in our
Southeast, California and West reporting segments were estimated to be completely impaired, and the
goodwill balance related to our Northeast reporting segment was estimated to be partially impaired.
As a result, during the three months 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. Only
approximately 17% of these goodwill impairment charges is deductible for tax purposes.
We, with the assistance of an independent valuation firm, are still in the process of
finalizing our goodwill evaluation, and we expect to complete the full evaluation during the fourth
quarter of fiscal 2007. It is possible that there may be additional impairment in our Northeast
reporting segment, up to the balance of the remaining goodwill, or other adjustments to our
preliminary estimates once the second step of the goodwill impairment analysis has been completed.
Any further adjustments to our preliminary estimates as a result of completing this evaluation will
be recorded in the financial statements and disclosed in our annual report on Form 10-K for the
year ended September 30, 2007.
After recording the current quarter write-offs, our goodwill balances by reporting segment as
of June 30, 2007 and September 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Goodwill: |
|
|
|
|
|
|
|
|
Northeast |
|
$ |
35.0 |
|
|
$ |
74.4 |
|
Southeast |
|
|
|
|
|
|
11.5 |
|
South Central |
|
|
15.9 |
|
|
|
15.9 |
|
Southwest |
|
|
102.4 |
|
|
|
102.4 |
|
California |
|
|
|
|
|
|
300.3 |
|
West |
|
|
|
|
|
|
74.4 |
|
|
|
|
|
|
|
|
Total Goodwill |
|
$ |
153.3 |
|
|
$ |
578.9 |
|
|
|
|
|
|
|
|
Interest Incurred
We capitalize interest costs only to inventory under construction or development. During the
three and nine-month periods in both 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 2.9% of total home and land/lot cost
of sales in the three months ended June 30, 2007, compared to 2.2% in the same period of 2006.
Interest amortized to cost of sales, excluding interest impaired, was 2.6% of total home and
land/lot cost of sales in the nine months ended June 30, 2007, compared to 2.2% in the same period
of 2006.
Interest incurred is directly related to the average level of our homebuilding debt
outstanding during the period. Comparing the three months ended June 30, 2007 with the same period
of 2006, interest incurred related to homebuilding debt decreased by 11%, to $76.0 million, due to
a 12% decrease in our average homebuilding debt. Comparing the nine months ended June 30, 2007 with
the same period of 2006, interest incurred was relatively flat, decreasing only 1%, to $232.5
million, due to similar levels of average homebuilding debt outstanding during the periods.
Loss on Early Retirement of Debt
During the three and nine months ended June 30, 2007, we recorded a loss of $12.1 million
related to the early retirement of debt. The loss represents the charge for the call premium and
the unamortized discount and fees related to the early redemption of our 8.5% senior notes due 2012
in April 2007.
During the nine months ended June 30, 2006, we recorded a loss of $15.0 million related to the
early retirement of debt. The loss was comprised of a $4.4 million charge for the unamortized fees
associated with the early renewal
-39-
of our revolving credit facility in the first quarter of fiscal 2006, and a $10.6 million
charge for the call premium and the unamortized discount and issuance costs related to the early
redemption of our 9.375% senior subordinated notes due 2011 in the second quarter of fiscal 2006.
Other Income
Other income, net of other expenses, associated with homebuilding activities was $3.9 million
in the three months ended June 30, 2007, compared to $2.9 million in the comparable period of 2006.
Other income, net of other expenses, associated with homebuilding activities was $5.7 million in
the nine months ended June 30, 2007, compared to $13.4 million in the comparable period of 2006.
Major components of other income in all four periods were interest income, an increase in the fair
value of our interest rate swaps and gain on the sale of assets.
Homebuilding Income (Loss) Before Income Taxes
Loss before income taxes from homebuilding activities for the three and nine months ended June
30, 2007, was $1,129.6 million and $903.7 million, respectively, compared to income before income
taxes from homebuilding activities of $444.7 million and $1,466.6 million, respectively, for the
same periods of 2006. Our results in the 2007 periods reflect the significant inventory impairment
and goodwill impairment charges recorded during the three-month period ended June 30, 2007.
Additionally, the decline in home sales revenues and the decreases in gross margins before
impairments compared to the 2006 periods contributed to the contrast in our results.
Further
deterioration of market conditions in the homebuilding industry and
related availability of mortgage financing may further reduce profitability, and may also result in
further asset impairment charges against income in future periods.
Homebuilding Results by Reporting Segment
Northeast Region Homebuilding revenues decreased 31% and 19% in the three and nine months
ended June 30, 2007, respectively, from the comparable periods of 2006, primarily due to decreases
in the number of homes closed, as well as slight decreases in the average selling price of those
homes. The region reported losses before income taxes of $105.2 million and $76.4 million in the
three and nine months ended June 30, 2007, respectively, compared to income of $57.3 million and
$137.6 million for the same periods of 2006. The losses were primarily due to inventory impairment
charges and earnest money and pre-acquisition cost write-offs of $90.4 million and $106.4 million
in the three and nine months ended June 30, 2007, respectively, and goodwill impairment charges of
$39.4 million in both periods of 2007. 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 370 and 380 basis points in the three and nine months ended
June 30, 2007, respectively, compared to the same periods of 2006 also contributed to the reduction
in income before income taxes. The core home sales gross profit percentage decline in our New
Jersey and South Carolina markets had the greatest impact on the overall decreases.
Southeast Region Homebuilding revenues decreased 26% and 24% in the three and nine months
ended June 30, 2007, respectively, from the comparable periods of 2006, primarily due to decreases
in the number of homes closed, as well as decreases in the average selling price of those homes.
The region reported losses of $129.6 million and $83.0 million in the three and nine months ended
June 30, 2007, respectively, compared to income of $83.2 million and $278.1 million for the same
periods of 2006. The losses were primarily due to inventory impairment charges and earnest money
and pre-acquisition cost write-offs of $138.4 million and $149.5 million in the three and nine
months ended June 30, 2007, respectively, and goodwill impairment charges of $11.5 million in both
periods of 2007. All of the inventory impairments came from our Florida markets. A decrease in the
regions core home sales gross profit percentage of 1,210 basis points and 1,160 basis points in
the three and nine months ended June 30, 2007, respectively, compared to the same periods of 2006
also contributed to the reduction in income before income taxes. The core home sales gross profit
percentage declines in our Florida markets had the greatest impact on the overall decreases. The
Florida markets experienced rapid price increases in previous years which contributed to gross
profit increases in 2005 and continued elevated gross profits in 2006. In 2007, high inventory
levels of new and existing homes and increased levels of sales incentives and home price reductions
are typical throughout Florida, resulting in gross profit declines.
-40-
South Central Region Homebuilding revenues decreased 21% and 9% in the three and nine
months ended June 30, 2007, respectively, from the comparable periods of 2006, primarily due to
decreases in the number of homes closed, partially offset by slight increases in the average
selling price of those homes. Income before income taxes for the region decreased 24% and 12% in
the three and nine months ended June 30, 2007, respectively, compared to the same periods of 2006.
Income before income taxes as a percentage of revenues (operating margin) decreased 30 basis
points, to 7.7% and 7.1% for the three and nine months ended June 30, 2007, respectively, from the
comparable periods of 2006. The decrease in operating margin for the three months ended June 30,
2007 was primarily due to a 20 basis point increase in SG&A expenses as a percentage of revenues.
The decrease in operating margin for the nine months ended June 30, 2007 was primarily due to a
decrease in the regions core home sales gross profit percentage largely due to softening in the
Fort Worth, Dallas and San Antonio markets, 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 of
$0.5 million and $4.7 million in the three and nine months ended June 30, 2007, respectively, also
contributed to the decline in the regions profitability.
Southwest Region Homebuilding revenues decreased 25% and 10% in the three and nine months
ended June 30, 2007, respectively, from the comparable periods of 2006, due to decreases in both the
number of homes closed and the average selling price of those homes. The region reported losses
before income taxes of $84.0 million and $34.1 million in the three and nine months ended June 30,
2007, respectively, compared to income of $120.2 million and $343.7 million for the same periods of
2006. The losses were primarily due to inventory impairment charges and earnest money and
pre-acquisition cost write-offs of $119.3 million and $151.4 million in the three and nine months
ended June 30, 2007, respectively. 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 1,150 and
1,200 basis points in the three and nine months ended June 30, 2007, respectively, compared to the
same periods of 2006 also contributed to the reduction in income before income taxes. The core home
sales gross profit percentage decline in our Phoenix market had the greatest impact on the overall
decreases. The Phoenix market experienced significant price increases in previous years which
contributed to gross profit increases in 2005 and continued elevated gross profits in 2006. In
2007, higher inventory levels of new and existing homes and increased sales incentives and home
price reductions are more common in Phoenix, resulting in gross profit declines.
California Region Homebuilding revenues decreased 40% and 31% in the three and nine months
ended June 30, 2007, respectively, from the comparable periods of 2006, due to decreases in the
number of homes closed. The region reported losses before income taxes of $619.0 million and $632.2
million in the three and nine months ended June 30, 2007, respectively, compared to income of $54.4
million and $320.1 million for the same periods of 2006. The losses were primarily due to inventory
impairment charges and earnest money and pre-acquisition cost write-offs of $321.7 million and
$406.5 million in the three and nine months ended June 30,
2007, respectively, and goodwill
impairment charges of $300.3 million in both periods of 2007. The largest concentration of
inventory impairments was attributable to our Southern California markets. A decrease in the
regions core home sales gross profit percentage of 810 and 940 basis points in the three and nine
months ended June 30, 2007, respectively, compared to the same periods of 2006 also contributed to
the reduction in income before income taxes. The core home sales gross profit percentage declines
in our Northern California markets had the greatest impact on the overall decreases. 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 challenged 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 have been typical throughout
California as builders have 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 29% and 26% in the three and nine months ended
June 30, 2007, respectively, from the comparable periods of 2006, due to decreases in the number of
homes closed. The region reported losses before income taxes of $229.9 million and $179.2 million
in the three and nine months ended June 30, 2007, respectively, compared to income of $79.5 million
and $272.2 million for the same periods of 2006. The losses were primarily due to inventory
impairment charges and earnest money and pre-acquisition cost write-offs of $181.7 million and
$192.3 million in the three and nine months ended June 30,
2007, respectively, and goodwill
impairment charges of $74.4 million in both periods of 2007. 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 900 and 1,190
-41-
basis points in the three and nine months ended June 30, 2007, respectively, compared to the
same periods of 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 decreases. 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
profits 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 are high and increased levels of sales incentives
and home price reductions are typical in Las Vegas new home communities, as builders attempt to
increase demand for homes and address affordability concerns, resulting in gross profit declines.
RESULTS OF OPERATIONS FINANCIAL SERVICES
The following tables set forth key operating and financial data for our financial services
operations, comprising DHI Mortgage and our subsidiary title companies, for the three and
nine-month periods ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
Number of first-lien loans originated
or brokered by DHI Mortgage for
D.R. Horton homebuyers |
|
|
6,181 |
|
|
|
9,011 |
|
|
|
(31)% |
|
|
|
19,902 |
|
|
|
23,723 |
|
|
|
(16)% |
|
Number of homes closed by D.R. Horton |
|
|
9,643 |
|
|
|
13,377 |
|
|
|
(28)% |
|
|
|
29,637 |
|
|
|
35,838 |
|
|
|
(17)% |
|
DHI Mortgage capture rate |
|
|
64% |
|
|
|
67% |
|
|
|
|
|
|
|
67% |
|
|
|
66% |
|
|
|
|
|
Number of total loans originated or
brokered by DHI Mortgage for
D.R. Horton homebuyers |
|
|
7,178 |
|
|
|
12,547 |
|
|
|
(43)% |
|
|
|
26,176 |
|
|
|
33,037 |
|
|
|
(21)% |
|
Total number of loans originated or
brokered by DHI Mortgage |
|
|
7,573 |
|
|
|
13,400 |
|
|
|
(43)% |
|
|
|
27,629 |
|
|
|
35,180 |
|
|
|
(21)% |
|
Captive business percentage |
|
|
95% |
|
|
|
94% |
|
|
|
|
|
|
|
95% |
|
|
|
94% |
|
|
|
|
|
Loans sold by DHI Mortgage to third parties |
|
|
7,845 |
|
|
|
11,686 |
|
|
|
(33)% |
|
|
|
28,250 |
|
|
|
34,299 |
|
|
|
(18)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
Loan origination fees |
|
$ |
9.6 |
|
|
$ |
13.6 |
|
|
|
(29 |
)% |
|
$ |
33.6 |
|
|
$ |
38.8 |
|
|
|
(13 |
)% |
Sale of
servicing rights and gains from sale of mortgages |
|
|
24.6 |
|
|
|
38.7 |
|
|
|
(36 |
)% |
|
|
75.2 |
|
|
|
107.6 |
|
|
|
(30 |
)% |
Other revenues |
|
|
6.0 |
|
|
|
7.9 |
|
|
|
(24 |
)% |
|
|
18.7 |
|
|
|
22.8 |
|
|
|
(18 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking revenues |
|
|
40.2 |
|
|
|
60.2 |
|
|
|
(33 |
)% |
|
|
127.5 |
|
|
|
169.2 |
|
|
|
(25 |
)% |
Title policy premiums, net |
|
|
9.8 |
|
|
|
14.0 |
|
|
|
(30 |
)% |
|
|
30.8 |
|
|
|
37.4 |
|
|
|
(18 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
50.0 |
|
|
|
74.2 |
|
|
|
(33 |
)% |
|
|
158.3 |
|
|
|
206.6 |
|
|
|
(23 |
)% |
General and administrative expense |
|
|
36.0 |
|
|
|
50.8 |
|
|
|
(29 |
)% |
|
|
119.3 |
|
|
|
147.6 |
|
|
|
(19 |
)% |
Interest expense |
|
|
4.1 |
|
|
|
8.7 |
|
|
|
(53 |
)% |
|
|
20.5 |
|
|
|
24.7 |
|
|
|
(17 |
)% |
Other (income) |
|
|
(8.3 |
) |
|
|
(12.8 |
) |
|
|
(35 |
)% |
|
|
(34.2 |
) |
|
|
(40.4 |
) |
|
|
(15 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
18.2 |
|
|
$ |
27.5 |
|
|
|
(34 |
)% |
|
$ |
52.7 |
|
|
$ |
74.7 |
|
|
|
(29 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-42-
FINANCIAL SERVICES OPERATING MARGIN ANALYSIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentages of Financial Services Revenues |
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
General and administrative expense |
|
|
72.0 |
% |
|
|
68.5 |
% |
|
|
75.4 |
% |
|
|
71.4 |
% |
Interest expense |
|
|
8.2 |
% |
|
|
11.7 |
% |
|
|
13.0 |
% |
|
|
12.0 |
% |
Other (income) |
|
|
(16.6 |
)% |
|
|
(17.3 |
)% |
|
|
(21.6 |
)% |
|
|
(19.6 |
)% |
Income before income taxes |
|
|
36.4 |
% |
|
|
37.1 |
% |
|
|
33.3 |
% |
|
|
36.2 |
% |
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. In the three and nine-month
periods ended June 30, 2007, total first-lien loans originated or brokered by DHI Mortgage for our
homebuyers decreased by 31% and 16%, respectively, corresponding to the decreases in the number of
homes closed of 28% and 17%, respectively. In the three-month period, 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 64% in the current quarter, from 67% in
the prior year quarter. In the nine-month current year period, our mortgage capture rate increased
slightly to 67%, from 66% in the comparable prior year period.
Home closings from our homebuilding operations constituted 95% of DHI Mortgage loan
originations in both the three and nine-month periods ended June 30, 2007, compared to 94% in the
respective prior year periods. Maintaining this rate reflects DHI Mortgages continued focus on
supporting the captive business provided by our homebuilding operations.
The number of loans sold to third-party investors decreased 33% and 18% in the three and nine
months ended June 30, 2007, respectively, from the comparable periods of 2006. The decreases were
primarily due to decreases in the number of mortgage loans originated as compared to the prior year
periods.
During recent months, 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. These 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 over the past year, but
such products declined substantially as a percentage of total originations during the quarter ended
June 30, 2007. Corresponding with this reduction in non-traditional mortgage loans, originations of
traditional conforming, conventional loans and FHA or VA insured loans increased significantly in
the quarter ended June 30, 2007.
Financial Services Revenues and Expenses
Revenues from the financial services segment decreased 33% and 23%, to $50.0 million and
$158.3 million in the three and nine months ended June 30, 2007, respectively, from the comparable
periods of 2006. These decreases were primarily due to decreases 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 reserve for loss allowances from $15.6 million at September 30,
2006, to $26.5 million at June 30, 2007 to reserve for losses for loans held in portfolio and loans
held for sale, and for expected losses related to loans sold with recourse. The increase in the
reserve resulted in a corresponding decrease to gains from the sale of mortgages of $10.9 million
during the nine-month period. The increase in the loss allowances and reserves reflect the current
market conditions on 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 29% and
19%, to $36.0 million and $119.3 million in the three and nine months ended June 30, 2007,
respectively, from the comparable
-43-
periods of 2006. The largest component of our financial services G&A expenses is employee
compensation and related costs, which represented approximately 75% of G&A costs in all four
periods presented. Those costs decreased 31%, to $26.4 million and 21% to $89.3 million in the
three and nine months ended June 30, 2007, respectively, compared to the respective prior year
periods, as we have aligned the number of employees with current and anticipated loan origination
and title service levels. Our financial services operations employed approximately 1,200 and 1,900
employees at June 30, 2007 and 2006, respectively. As a percentage of financial services revenues,
G&A expenses in the three and nine-month periods ended June 30, 2007 increased 350 basis points, to
72.0%, and 400 basis points, to 75.4%, respectively, from the comparable periods of 2006. These
increases were primarily due to the reduction in revenue resulting from the decrease in mortgage
loan volume during the 2007 periods.
RESULTS OF OPERATIONS CONSOLIDATED
Income (Loss) Before Income Taxes
Loss before income taxes for the three months ended June 30, 2007 was $1,111.4 million,
compared to income before income taxes of $472.2 million for the same period of 2006. Loss before
income taxes for the nine months ended June 30, 2007 was $851.0 million, compared to income before
income taxes of $1,541.3 million for the same period of 2006. The primary factors contributing to
the decrease in consolidated earnings during the three and nine-month periods of fiscal 2007 were a
decrease in our homebuilding gross profit, which was negatively affected by significant inventory
impairment charges during the 2007 periods, as well as goodwill impairment charges during the
current quarter.
Provision for (benefit from) Income Taxes
In the three and nine months ended June 30, 2007, the benefit from income taxes was $287.6
million and $188.7 million, respectively, corresponding to the loss before income taxes in those
periods. In the three and nine months ended June 30, 2006, the provision for income taxes was
$179.4 million and $585.7 million, respectively, corresponding to the income before income taxes in
those periods.
Our effective income tax rate for the three and nine-month periods of 2007 was 25.9% and
22.2%, respectively, compared to an effective tax rate of 38.0% in the same periods of 2006. The
effective tax rates during the 2007 periods of loss were lower than the effective tax rate in the
2006 periods, resulting in a reduced benefit from income taxes related to the losses in these
periods, because only approximately 17% of the $425.6 million goodwill impairment charge recorded
in the three months ended June 30, 2007 is deductible for tax purposes. Excluding the goodwill
impairment charge, the effective tax rate was 38.0% for the three and nine months ended June 30,
2007.
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 June 30, 2007, our ratio of net homebuilding debt to total capital was 44.7%, increasing
from 40.7% at September 30, 2006, but decreasing from 46.4% at June 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). Our target operating range
for net homebuilding debt to total capital is below 45%, so the 44.7% ratio at June 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.
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 June 30, 2007 and 2006, and at September 30, 2006, our ratios of homebuilding
debt to total capital, without netting cash balances, were 44.7%, 46.9%, and 43.1%, respectively.
-44-
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, cash flows from operations, our existing or renewed credit facilities
and, if needed, the issuance of new debt securities through the public capital markets.
Homebuilding Capital Resources
Cash and Cash Equivalents At June 30, 2007, we had available homebuilding cash and cash
equivalents of $4.9 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, with the consent
of the lenders, to increase the facility to $2.9 billion. 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 debt securities.
We had $750.0 million in cash borrowings outstanding on our homebuilding revolving credit
facility at June 30, 2007, and $800.0 million in cash borrowings outstanding at September 30, 2006.
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 Corporation, our additional homebuilding borrowing capacity under the facility
is limited to the lesser of the unused portion of the facility, $1.7 billion at June 30, 2007, or
an amount determined under a borrowing base arrangement. Under the borrowing base limitation, the
sum of our senior debt and the amount drawn on our revolving credit facility may not exceed certain
percentages of the various categories of our unencumbered inventory. We currently hold investment
grade ratings from all three rating agencies, so the borrowing base limitation is not currently in
effect. However, our ratings are in the lowest investment grade category at each agency, and in
June 2007, our ratings were placed on negative outlook by two of the three rating agencies.
Our revolving credit facility also 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 noncash gains and losses to interest incurred. At June 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, the debt rating agencies could downgrade our debt rating, which could make it more
difficult and expensive to obtain additional financing.
In July 2007, through amendment to the revolving credit facility, a restriction that limited
our ability to pay cash dividends was changed. 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.
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 June
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.
-45-
Financial Services Capital Resources
Cash and Cash Equivalents At June 30, 2007, we had available financial services cash and
cash equivalents of $55.9 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 consent of the lenders. At June 30, 2007, we had borrowings of $118.8 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 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 June 2007, was further amended to reduce the
capacity to $600 million. At June 30, 2007, we had borrowings of $200.0 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. Although we do not anticipate any problems in renewing
or extending these facilities or obtaining temporary additional commitments in the future, the
liquidity of our financial services business depends upon our continued ability to do so.
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. Additionally, at September 30,
2006, borrowings under the CP conduit facility were secured by restricted cash arising from
borrowings under the facility prior to the assignment of mortgage loans held for sale as
collateral. At June 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. 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 June 30, 2007,
our mortgage loans held for sale totaled $469.0 million. All mortgage company activities are
financed with the mortgage warehouse facility, the CP conduit facility or internally generated
funds. Both of our 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. At June 30, 2007, our mortgage subsidiary
was in compliance with all of these covenants.
Operating Cash Flow Activities
For the nine months ended June 30, 2007, net cash provided by our operating activities was
$547.2 million, as compared to $2.1 billion of cash used in such activities during the comparable
period of the prior year. The net cash provided by operations for the nine months ended June 30,
2007 was primarily the result of cash provided from net income before non-cash inventory and
goodwill impairment charges and a decrease in mortgage loans held for sale, offset by a decrease in
accounts payable, accrued expenses and other liabilities and an increase in deferred income taxes.
The principal reason for the increase in operating cash flows for the nine months ended June
30, 2007 was our decision to limit our investments in inventory, as evidenced by only a $180.9
million increase in owned inventory in the period, compared to a $3.6 billion cash investment for
inventory growth in the same period of 2006. In light of the challenging market conditions, we have
substantially slowed our purchases of land and lots and have restricted
-46-
the number of homes under construction to better match our expected current rate of home sales
and closings. We do continue to invest in the development of land that we own in order to provide
lots for our expected future home sales and closings. We plan to significantly reduce our number of
homes under construction in the fourth quarter of fiscal 2007 by starting construction on fewer
homes than we close in the quarter. We expect this plan will reduce inventory levels sufficient to
generate significant positive cash flows from operating activities in the fourth quarter of fiscal
2007. Our ability to reduce our inventory levels is, however, primarily dependent upon our ability
to close a sufficient number of homes the fourth quarter.
Another significant factor affecting our operating cash flows for the nine months ended June
30, 2007 was the decrease in mortgage loans held for sale of $553.9 million during the period. The
decrease in mortgage loans held for sale was due to a decrease in the number of loans originated
during the third quarter of fiscal 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.
Investing Cash Flow Activities
For the nine months ended June 30, 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 and
typically do not vary significantly from period to period.
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.
During the three months ended June 30, 2007, our Board of Directors declared a quarterly cash
dividend of $0.15 per common share, which was paid on May 18, 2007 to stockholders of record on May
4, 2007. A quarterly cash dividend of $0.10 per common share was declared during the three months
ended June 30, 2006.
In August 2007, our Board of Directors declared a quarterly cash dividend of $0.15 per common
share, payable on August 27, 2007 to stockholders of record on August 17, 2007. A quarterly cash
dividend of $0.15 per common share was declared in the comparable quarter of fiscal 2006.
Changes in Capital Structure
In November 2006, our Board of Directors authorized the repurchase of up to $463.2 million of
the Companys 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.
Additionally, both authorizations were extended to November 30, 2007. As of June 30, 2007, the full
amount of both authorizations remained available for repurchases.
OTHER COMMITMENTS
In the normal course of business, we provide standby letters of credit and surety bonds,
issued by third parties, to secure performance under various contracts. At June 30, 2007,
outstanding standby letters of credit and surety bonds, the majority of which mature in less than
one year, were $96.6 million and $2.2 billion, respectively.
-47-
LAND AND LOT POSITION AND HOMES IN INVENTORY
The following is a summary of our land and lot position and homes in inventory at June 30,
2007 and September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007 |
|
As of September 30, 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 |
|
|
20,000 |
|
|
|
22,000 |
|
|
|
42,000 |
|
|
|
3,800 |
|
|
|
22,000 |
|
|
|
31,000 |
|
|
|
53,000 |
|
|
|
4,200 |
|
Southeast |
|
|
29,000 |
|
|
|
19,000 |
|
|
|
48,000 |
|
|
|
4,600 |
|
|
|
32,000 |
|
|
|
33,000 |
|
|
|
65,000 |
|
|
|
5,200 |
|
South Central |
|
|
31,000 |
|
|
|
20,000 |
|
|
|
51,000 |
|
|
|
6,500 |
|
|
|
34,000 |
|
|
|
36,000 |
|
|
|
70,000 |
|
|
|
7,400 |
|
Southwest |
|
|
45,000 |
|
|
|
9,000 |
|
|
|
54,000 |
|
|
|
5,500 |
|
|
|
52,000 |
|
|
|
12,000 |
|
|
|
64,000 |
|
|
|
5,800 |
|
California |
|
|
15,000 |
|
|
|
11,000 |
|
|
|
26,000 |
|
|
|
4,200 |
|
|
|
19,000 |
|
|
|
15,000 |
|
|
|
34,000 |
|
|
|
3,900 |
|
West |
|
|
29,000 |
|
|
|
2,000 |
|
|
|
31,000 |
|
|
|
2,500 |
|
|
|
31,000 |
|
|
|
6,000 |
|
|
|
37,000 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,000 |
|
|
|
83,000 |
|
|
|
252,000 |
|
|
|
27,100 |
|
|
|
190,000 |
|
|
|
133,000 |
|
|
|
323,000 |
|
|
|
28,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67% |
|
|
|
33% |
|
|
|
100% |
|
|
|
|
|
|
|
59% |
|
|
|
41% |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 a minimal capital investment and substantially reduce the risks
associated with land ownership and development. At June 30, 2007, we owned or controlled
approximately 252,000 lots, 33% of which were lots under option or similar contracts, compared with
approximately 323,000 lots at September 30, 2006. We plan to
continue to reduce our owned and controlled lot position through the
construction and sale of homes, opportunistic sale of land and lots,
along with critical evaluation of acquiring lots currently controlled
under option.
At June 30, 2007, we controlled approximately 83,000 lots with a total remaining purchase
price of approximately $2.3 billion under land and lot option purchase contracts, with a total of
$133.7 million in earnest money deposits. Our lots controlled include approximately 21,000 optioned
lots with a remaining purchase price of approximately $598.4 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.
Therefore, we have written off $29.6 million in earnest money deposits related to these 21,000
lots, resulting in a net earnest money deposit balance of $104.1 million at June 30, 2007.
Within the land and lot option purchase contracts in force at June 30, 2007, there were a
limited number of contracts, representing only $64.8 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 their 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 $82.5 million related to some of our outstanding land and lot
option purchase contracts. Additionally, pursuant to SFAS No. 49, Accounting for Product Financing
Arrangements, we recorded $68.4 million of land inventory not owned related to some of our
outstanding land and lot option purchase contracts.
At June 30, 2007, we had a total of approximately 27,100 homes in inventory, including
approximately 2,000 model homes. At September 30, 2006, we had a total of approximately 28,500
homes in inventory, including approximately 1,900 model homes. Of our total homes in inventory, 48%
and 50% were unsold at June 30, 2007 and September 30, 2006, respectively. At June 30, 2007,
approximately 3,700 of our unsold homes were completed, and approximately 1,100 unsold homes had
been completed for more than six months. At September 30, 2006, approximately 5,000 of our unsold
homes were completed, and approximately 440 homes had been completed for more than six months. We
expect to reduce our total number of homes in inventory by September 30, 2007. We also expect to
further reduce both our number of unsold homes in inventory, and unsold homes as a percentage of
total homes in inventory, by September 30, 2007.
-48-
CRITICAL ACCOUNTING POLICIES
As disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2006,
our most critical accounting policies relate to revenue recognition, inventories and cost of sales,
the consolidation of variable interest entities, warranty and insurance claim costs, goodwill,
income taxes and stock-based compensation. Since September 30, 2006, there have been no significant
changes to the assumptions and estimates related to those critical accounting policies, other than
our outlook on the homebuilding industry and its impact on our inventory and goodwill impairment
testing.
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 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, our results of operations and financial position at the end of the third fiscal quarter
were not necessarily representative of the balance of our fiscal year.
In fiscal 2006, 57% of our consolidated revenues was attributable to operations in the third
and fourth fiscal quarters. In contrast to our typical seasonal results, due to softening
homebuilding market conditions during fiscal 2006, only 46% of our consolidated operating income
was attributable to operations in the third and fourth fiscal quarters. This decrease was primarily
due to the increased use of incentives to sell homes and inventory impairment charges and land
option cost write-offs recorded during the third and fourth quarters of fiscal 2006.
In fiscal 2007, increasingly challenging market conditions caused further weakening in sales
volume, pricing and margins during our typical peak selling season. Given the current market
conditions and the reduced number of homes in our sales order backlog, we can make no assurances
that our typical historical seasonal patterns will occur in our fourth quarter of fiscal 2007.
-49-
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:
|
|
|
changes in general economic, real estate, construction and other business
conditions; |
|
|
|
|
changes in interest rates, the availability of mortgage financing or the effective
cost of owning a home; |
|
|
|
|
the effects of governmental regulations and environmental matters; |
|
|
|
|
our substantial debt; |
|
|
|
|
competitive conditions within our industry; |
|
|
|
|
the availability of capital; |
|
|
|
|
our ability to effect our operational strategies successfully; and |
|
|
|
|
the uncertainties inherent in home warranty and construction defect claims matters. |
We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. However, any further
disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be
consulted. Additional information about issues that could lead to material changes in performance
and risk factors that have the potential to affect us is contained in our annual report on Form
10-K, including the section entitled Risk Factors, which is filed with the Securities and
Exchange Commission.
-50-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk on our long-term debt. We monitor our exposure to changes
in interest rates and utilize both fixed and variable rate debt. For fixed rate debt, changes in
interest rates generally affect the value of the debt instrument, but not our earnings or cash
flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the
fair value of the debt instrument, but may affect our future earnings and cash flows. We 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. We are exposed to
market risk associated with changes in the fair values of the swaps, and such changes are reflected
in our income statements.
We are exposed to interest rate risk associated with our mortgage loan origination services.
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. We manage interest rate risk related to uncommitted IRLCs through the use
of forward sales of mortgage-backed securities (FMBS) and the purchase of Eurodollar Futures
Contracts (EDFC) on certain loan types. FMBS and EDFC related to IRLCs are classified and accounted
for as non-designated derivative instruments, with gains and losses recognized in current earnings.
FMBS and EDFC 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 three and nine months ended June
30, 2007 and 2006 was not significant, is recognized in current earnings. At
June 30, 2007, FMBS, EDFC and put options on both EDFC and mortgage-backed securities (MBS) to
mitigate interest rate risk related to uncommitted mortgage loans held for sale and uncommitted
IRLCs totaled $607.7 million. Uncommitted IRLCs, the duration of which are generally less than six
months, totaled approximately $260.0 million, and uncommitted mortgage loans held for sale totaled
approximately $126.3 million at June 30, 2007. The fair value of the FMBS, EDFC and IRLCs at June
30, 2007 was an insignificant amount.
In an effort to stimulate home sales by potentially offering homebuyers a below market
interest rate on their home financing, we began a program during the third quarter of fiscal 2006
which protects us from future increases in interest rates related to potential mortgage
originations. To accomplish this, we purchase forward rate agreements (FRAs) and economic interest
rate hedges in the form of FMBS and put options on both EDFC and MBS. Additionally, during the
second quarter of fiscal 2007, in response to heightened volatility in the secondary mortgage
markets, we entered into FRAs to secure the delivery and sale of potential non-traditional mortgage
originations, characterized by high combined loan-to-value ratios in combination with less required
documentation. These FRAs generally related to loan commitments for borrowers with sales contracts
in our homebuilding backlog. At June 30, 2007, these potential mortgage loan originations totaled
approximately $115.0 million. The notional amount of the FRAs was $78.4 million, while the
remaining $36.6 million in mortgage loan commitments was hedged with economic interest rate hedges
of $516.0 million in EDFC put options and $14.0 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 three and nine months
ended June 30, 2007 were not significant.
-51-
The following table sets forth principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair value of our debt obligations as of June 30, 2007. The interest
rates for our variable rate debt represent the weighted average interest rates in effect at June
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 June 30, 2007 are included in the variable rate
maturities for the three months ended September 30, 2007. At June 30, 2007, the fair value of the
interest rate swaps was a $0.4 million asset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
September 30, |
|
Fiscal Year Ending September 30, |
|
|
|
|
|
|
|
|
|
at |
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
Thereafter |
|
Total |
|
6/30/07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
22.1 |
|
|
$ |
221.9 |
|
|
$ |
592.6 |
|
|
$ |
409.0 |
|
|
$ |
450.0 |
|
|
$ |
314.6 |
|
|
$ |
1,850.0 |
|
|
$ |
3,860.2 |
|
|
$ |
3,743.3 |
|
Average interest rate |
|
|
8.3 |
% |
|
|
7.6 |
% |
|
|
7.3 |
% |
|
|
6.9 |
% |
|
|
7.0 |
% |
|
|
5.4 |
% |
|
|
6.1 |
% |
|
|
6.5 |
% |
|
|
|
|
Variable rate |
|
$ |
318.8 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
750.0 |
|
|
$ |
|
|
|
$ |
1,068.8 |
|
|
$ |
1,068.8 |
|
Average interest rate |
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.1 |
% |
|
|
|
|
|
|
6.0 |
% |
|
|
|
|
Interest Rate Swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable to fixed |
|
$ |
200.0 |
|
|
$ |
200.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.4 |
|
Average pay rate |
|
|
5.1 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average receive rate |
|
90-day LIBOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was performed under the
supervision and with the participation of the Companys management, including the Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Companys disclosure
controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934.
Based on that evaluation, the CEO and CFO concluded that the Companys disclosure controls and
procedures were effective in providing reasonable assurance that information required to be
disclosed in the reports the Company files, furnishes, submits or otherwise provides the Securities
and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SECs rules and forms, and that information required to be
disclosed in reports filed by the Company under the Exchange Act is accumulated and communicated to
the Companys management, including the CEO and CFO, in such a manner as to allow timely decisions
regarding the required disclosure.
There have been no changes in the Companys internal controls over financial reporting during
the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
-52-
PART II. OTHER INFORMATION
ITEM 1. 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, due to the early stages of this matter, we are unable to express an opinion as to the
likelihood of an unfavorable outcome or the amount of damages, if
any; consequently, the Company
has not recorded any associated liabilities in the accompanying consolidated balance sheet.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company may repurchase shares of its common stock from time to time pursuant to our
publicly announced share repurchase program. All such share repurchases are made in accordance with
the safe harbor provisions of Rule 10b-18 under the Securities Exchange Act of 1934 and pursuant to
the Companys publicly announced program. Additionally, under the terms of the Companys 2006 Stock
Incentive Plan and 1991 Stock Incentive Plan, employees and directors may use shares owned to
satisfy the exercise price of stock options, which results in the Companys purchase of those
shares.
The following table sets forth information concerning the Companys common stock purchases
during the three months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Value of Shares that |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
may yet be Purchased |
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
|
Under the Plans or |
|
|
|
Total Number of |
|
|
Average Price |
|
|
Announced Plans or |
|
|
Programs (1) |
|
Month |
|
Shares Purchased |
|
|
Paid per Share |
|
|
Programs |
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
463.2 |
|
May |
|
|
1,423 |
|
|
$ |
22.53 |
|
|
|
|
|
|
$ |
463.2 |
|
June |
|
|
1,010 |
|
|
$ |
21.15 |
|
|
|
|
|
|
$ |
463.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,433 |
(2) |
|
$ |
21.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In November 2006, our Board of Directors authorized the repurchase of up to $463.2
million of the Companys common stock. The repurchase authorization will expire on November
30, 2007 unless renewed by the Board of Directors prior to such expiration. The Company did
not make any common stock repurchases under this authorization during the third quarter of
fiscal 2007. All of the $463.2 million authorized was remaining at June 30, 2007. |
|
(2) |
|
All shares purchased during the three months ended June 30, 2007 represent shares of
common stock delivered by employees to satisfy the exercise price upon the exercise of
employee stock options as authorized by the Companys 1991 Stock Incentive Plan. These
share purchases are not considered repurchases pursuant to the Companys publicly announced
share repurchase program. |
-53-
ITEM 6. EXHIBITS
|
|
|
|
|
|
|
(a)
|
|
Exhibits.
|
|
|
|
|
|
|
|
|
|
|
|
3.1 |
|
|
Certificate of Amendment of the Amended and Restated
Certificate of Incorporation, as amended, of the Company
dated January 31, 2006, and the Amended and Restated
Certificate of Incorporation, as amended, of the Company
dated March 18, 1992. (1) |
|
|
|
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated Bylaws of the Company. (2) |
|
|
|
|
|
|
|
|
|
10.1 |
|
|
Second Omnibus Amendment to the Second Amended and Restated
Loan Agreement between CH Funding LLC and certain other
parties dated June 29, 2007. (3) |
|
|
|
|
|
|
|
|
|
10.2 |
|
|
Third Amendment to Revolving Credit Agreement, dated July
6, 2007, among D.R. Horton, Inc., the lenders and
guarantors set forth therein and Wachovia Bank, National
Association, as Administrative Agent. (4) |
|
|
|
|
|
|
|
|
|
31.1 |
|
|
Certificate of Chief Executive Officer provided pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002. (*) |
|
|
|
|
|
|
|
|
|
31.2 |
|
|
Certificate of Chief Financial Officer provided pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002. (*) |
|
|
|
|
|
|
|
|
|
32.1 |
|
|
Certificate provided pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by the Companys Chief Executive Officer. (*) |
|
|
|
|
|
|
|
|
|
32.2 |
|
|
Certificate provided pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by the Companys Chief Financial Officer. (*) |
|
|
|
* |
|
Filed herewith. |
|
(1) |
|
Incorporated by reference from Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for
the quarter ended December 31, 2005, filed with the SEC on February 2, 2006. |
|
(2) |
|
Incorporated by reference from Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998, filed with the SEC on February 16, 1999. |
|
(3) |
|
Incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K dated
June 29, 2007, filed with the SEC on July 3, 2007. |
|
(4) |
|
Incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K dated
July 6, 2007, filed with the SEC on July 10, 2007. |
-54-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
D.R. HORTON, INC.
|
|
Date: August 8, 2007 |
By: |
/s/ Bill W. Wheat
|
|
|
|
Bill W. Wheat, on behalf of D.R. Horton, Inc., |
|
|
|
as Executive Vice President and
Chief Financial Officer (Principal Financial and
Principal Accounting Officer) |
|
-55-