Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 387K
2: EX-3.1 Amended and Restated Certificate of Incorporation HTML 25K
3: EX-4.1 Twenty-Fifth Supplemental Indenture HTML 58K
4: EX-4.2 Fifth Supplemental Indenture HTML 72K
5: EX-4.3 Second Supplemental Indenture HTML 74K
6: EX-4.4 Second Supplemental Indenture HTML 69K
7: EX-10.6 2006 Stock Incentive Plan HTML 74K
8: EX-12.1 Computation of Ratio of Earnings to Fixed Charges HTML 19K
9: EX-31.1 Certification of CEO Pursuant to Section 302 HTML 13K
10: EX-31.2 Certification of CFO Pursuant to Section 302 HTML 12K
11: EX-32.1 Certification of CEO Pursuant to Section 906 HTML 9K
12: EX-32.2 Certification of CFO Pursuant to Section 906 HTML 9K
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer (as defined 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
Act).
Yes
o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date.
Common stock, $.01 par value — 312,422,971 shares as of January 27, 2006
Residential land and lots — developed and under development
6,274.5
5,174.3
Land held for development
60.9
6.2
Consolidated land inventory not owned
173.9
200.4
10,074.1
8,486.8
Property and equipment (net)
112.9
107.2
Earnest money deposits and other assets
812.1
756.0
Goodwill
578.9
578.9
11,760.5
11,040.5
Financial Services:
Cash and cash equivalents
42.7
38.2
Mortgage loans held for sale
907.1
1,358.7
Other assets
103.0
77.4
1,052.8
1,474.3
$
12,813.3
$
12,514.8
LIABILITIES
Homebuilding:
Accounts payable
$
765.5
$
820.7
Accrued expenses and other liabilities
1,123.9
1,196.9
Notes payable
4,300.0
3,660.1
6,189.4
5,677.7
Financial Services:
Accounts payable and other liabilities
20.3
24.0
Notes payable to financial institutions
814.7
1,249.5
835.0
1,273.5
7,024.4
6,951.2
Minority interests
176.0
203.2
STOCKHOLDERS’ EQUITY
Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued
—
—
Common stock, $.01 par value, 400,000,000 shares authorized, 315,872,995 shares
issued and 312,220,195 shares outstanding at December 31, 2005 and 315,591,668
shares issued and 312,938,868 shares outstanding at September 30, 2005
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 (the “Company”), as
well as certain variable interest entities from which we are purchasing land or lots under option
purchase contracts. All significant intercompany accounts, transactions and balances have been
eliminated in consolidation. The statements have been prepared in accordance with U.S. Generally
Accepted Accounting Principles (GAAP) for interim financial information and the instructions to
Form 10-Q and Regulation S-X. In the opinion of management, all adjustments (consisting of normal,
recurring accruals) considered necessary for a fair presentation have been included. These
statements do not include all of the information and notes required by generally accepted
accounting principles for complete financial statements and should be read in conjunction with the
consolidated financial statements and accompanying notes included in the Company’s annual report on
Form 10-K for the fiscal year ended September 30, 2005.
Seasonality - Historically, the homebuilding industry has experienced seasonal fluctuations;
therefore, the operating results for the three-month period ended December 31, 2005 are not
necessarily indicative of the results that may be expected for the fiscal year ending September 30,2006.
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 77 markets and 26 states in the United States. The Company
designs, builds and sells single-family houses on lots developed by the Company and on finished
lots which it purchases, ready for home construction. Periodically, the Company sells land and lots
it has developed or bought. The Company also provides title agency and mortgage brokerage services
to its homebuyers. The Company does not retain or service the mortgages that it originates but,
rather, sells the mortgages and related servicing rights to investors.
Stock Split – In February 2005, the Company’s Board of Directors declared a four-for-three stock
split (effected as a
331/3% stock dividend), paid on March 16, 2005 to common stockholders of record
on March 1, 2005. The earnings per share and cash dividends declared per share for the three months
ended December 31, 2004 have been adjusted to reflect the effects of the stock split.
NOTE B — SEGMENT INFORMATION
The Company’s reportable business segments consist of homebuilding and financial services.
Homebuilding is the Company’s core business, generating 98% of consolidated revenues and 96% of
consolidated income before income taxes during both three-month periods ended December 31, 2005 and
2004. The homebuilding reporting segment is comprised of the aggregate of the Company’s regional
homebuilding operations and generates most of its revenues from the sale of completed homes, with a
lesser amount from the sale of land and lots. The financial services segment generates its revenues
from originating and selling mortgages and collecting fees for title insurance agency and closing
services.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued) December 31, 2005
NOTE C — EARNINGS PER SHARE
Basic earnings per share for the three months ended December 31, 2005 and 2004 is based on the
weighted average number of shares of common stock outstanding. Diluted earnings per share is based
on the weighted average number of shares of common stock and dilutive securities outstanding.
The following table sets forth the denominators used in the computation of basic and diluted
earnings per share:
Denominator for basic earnings per
share— weighted average shares
312.9
311.3
Effect of dilutive securities:
Employee stock options
4.7
5.7
Denominator for diluted earnings per
share— adjusted weighted average shares
317.6
317.0
In February 2005, the Company’s Board of Directors declared a four-for-three stock split (effected
as a 331/3% stock dividend), paid on March 16, 2005 to common stockholders of record on March 1,2005. The share amounts presented above reflect the effects of the four-for-three stock split.
Options to purchase 30,000 shares of common stock at $36.92 outstanding during the three months
ended December 31, 2005 were not included in the computation of diluted earnings per share because
the exercise prices were greater than the average market price of the common shares and, therefore,
their effect would be antidilutive. All options outstanding during the three months ended December31, 2004 were included in the computation of diluted earnings per share.
NOTE D
— CONSOLIDATED LAND INVENTORY NOT OWNED
In the ordinary course of its homebuilding business, the Company enters into land and lot option
purchase contracts in order 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 Company’s discretion. Under the requirements of Financial Accounting Standards
Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), certain
of the Company’s 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 and other inventory obligations added $173.9
million in land inventory not owned and minority interests related to entities not owned to the
Company’s balance sheet at
December 31, 2005. The Company’s obligations related to these land or lot option contracts are
guaranteed by cash deposits totaling $20.0 million and performance letters of credit, promissory
notes and surety bonds totaling $7.2 million. Creditors of these variable interest entities have no
recourse against the Company.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued) December 31, 2005
At December 31, 2005, including the deposits with the variable interest entities above, the Company
had deposits amounting to $324.9 million to purchase land and lots with a total remaining purchase
price of $6.2 billion. 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
Company’s option deposits, which totaled $226.3 million at December 31, 2005.
NOTE E
— NOTES PAYABLE
The Company’s notes payable at their principal amounts, net of unamortized discount or premium, as
applicable, consist of the following:
The Company filed with the Securities and Exchange Commission a universal shelf registration
statement registering $3.0 billion in debt and equity securities effective in September 2005. At
December 31, 2005, the capacity to issue new debt or equity securities remained at $3.0 billion.
Homebuilding:
In December 2005, the Company entered into a $2.15 billion unsecured revolving credit facility,
which includes a $1.0 billion letter of credit sub-facility. The revolving credit facility has an
uncommitted $750 million accordion feature which could be used to increase the facility to $2.9
billion. The new credit facility, which matures on
December 16, 2010, replaced the Company’s previous $1.21 billion credit facility. The Company’s
borrowing capacity under the new facility is reduced by the amount of letters of credit
outstanding. At December 31, 2005, the Company’s borrowing capacity under the facility was $1.44
billion. The facility is guaranteed by substantially all of the Company’s wholly-owned subsidiaries
other than its financial services subsidiaries. Borrowings bear interest at
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued) December 31, 2005
rates based upon the London Interbank Offered Rate (LIBOR) plus a spread based upon the Company’s ratio of homebuilding
debt to total capitalization and its senior unsecured debt rating. The interest rate applicable to
the revolving credit facility at December 31, 2005 was 5.3% per annum. In addition to the stated
interest rates, the revolving credit facility requires the Company to pay certain fees.
The bank credit facilities and the indentures for most of the senior and senior subordinated notes
contain covenants which, taken together, limit cash dividends, certain investments, stock
repurchases and other restricted payments, asset dispositions, and creation of liens, and require
certain levels of leverage, interest coverage and tangible net worth. At December 31, 2005, under
the most restrictive covenants, cash dividend payments for the remainder of fiscal 2006 were
limited to $707.1 million, and a maximum of $1.5 billion was available for all restricted payments
in the future.
Financial Services:
The Company’s mortgage subsidiary has a $300 million mortgage warehouse loan facility that matures
April 7, 2006. During fiscal 2005, the Company obtained additional commitments of $150 million from
its lenders through the facility’s accordion provision and additional temporary commitments of $225
million from its lenders through amendments to the credit agreement, resulting in total capacity of
$675 million at September 30, 2005. Through amendments to the credit agreement in October and
November 2005, the commitments under the facility were adjusted to $450 million, effective from
October 28, 2005 through January 15, 2006. On January 16, 2006, the total capacity returned to $300
million. On January 30, 2006, the Company obtained additional commitments of $150 million from its
lenders through an amendment to the credit agreement, resulting in total capacity of $450 million
through the maturity of the facility on April 7, 2006.
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. Borrowings bear
daily interest at the 30-day LIBOR rate plus a fixed premium. The interest rate of the mortgage
warehouse line payable at December 31, 2005 was 5.2% per annum.
The Company’s mortgage subsidiary also has a $500 million commercial paper conduit facility (the CP
conduit facility), that expires on June 29, 2006. A temporary increase of $200 million was obtained
through amendments to the credit agreement in September 2005, resulting in a total capacity of $700
million. The temporary increase was effective through October 14, 2005, when the capacity decreased
to $600 million available through November 10, 2005. Beginning on November 11, 2005, the total
capacity returned to $500 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. 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 facility
at December 31, 2005 was 4.8% per annum.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued) December 31, 2005
NOTE F — 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. The following table summarizes the Company’s homebuilding interest costs
incurred, capitalized, charged to cost of sales and expensed directly during the three-month
periods ended December 31, 2005 and 2004:
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 Company’s
warranty liability is based upon historical warranty cost experience in each market in which it
operates and is adjusted as appropriate to reflect qualitative risks associated with the types of
homes built and the geographic areas in which they are built.
Changes in the Company’s warranty liability were as follows:
Changes in liabilities for pre-existing warranties
(3.1
)
(2.1
)
Settlements made
(11.7
)
(10.2
)
Warranty liability, end of period
$
121.5
$
96.6
NOTE H — 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 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. As of December 31, 2005, the Company had
$196.6 million in loans not committed to third-party investors which were hedged with $317.5
million of FMBS and EDFC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued) December 31, 2005
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 Statement of Financial
Accounting Standards (SFAS) No. 133 and related Derivatives Implementation Group conclusions, the
Company classifies and accounts for IRLCs as non-designated derivative instruments at fair value.
The effectiveness of the fair value hedges is continuously monitored and any ineffectiveness, which
for the three months ended December 31, 2005 and 2004 was not significant, is recognized in current
earnings. At December 31, 2005, the Company’s IRLCs totaled $489.9 million.
The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole
loan delivery commitments, forward sales of mortgage-backed securities and the purchase of
Eurodollar futures contracts. These instruments are considered non-designated derivatives and are
accounted for at fair market value with gains and losses recorded in current earnings. As of
December 31, 2005, the Company had approximately $91.0 million outstanding of FMBS and EDFC, and
$363.7 million of best efforts whole loan delivery commitments related to its IRLCs.
NOTE I — STOCKHOLDERS’ EQUITY
During the three months ended December 31, 2005, the Board of Directors declared a quarterly cash
dividend of $0.09 per common share, which was paid on October 31, 2005 to stockholders of record on
October 20, 2005. A quarterly cash dividend of $0.06 per common share (split-adjusted) was declared
during the three months ended December 31, 2004.
In January 2006, the Board of Directors declared a quarterly cash dividend of $0.10 per common
share, payable on February 10, 2006 to stockholders of record on January 27, 2006. A quarterly cash
dividend of $0.0675 per common share (split-adjusted) was declared in the comparable quarter of
fiscal 2005.
At December 31, 2005, the Company had the capacity to issue new debt or equity securities amounting
to $3.0 billion under its universal shelf registration statement. Also, at December 31, 2005, the
Company had the capacity to issue approximately 22.5 million shares of common stock under its
acquisition shelf registration statement, to effect, in whole or in part, possible future business
acquisitions.
In November 2005, the Board of Directors authorized the repurchase of up to $500 million of the
Company’s common stock, replacing the previous common stock repurchase authorization. During the
three months ended December 31, 2005, the Company repurchased 1,000,000 shares of its common stock
at a total cost of $36.8 million. As of December 31, 2005, the Company had $463.2 million remaining
of the Board of Directors’ authorization for repurchases of common stock.
On January 26, 2006, the Company’s shareholders approved an amendment to the Company’s charter
which increased the number of authorized shares of common stock to one billion shares.
NOTE J — STOCK-BASED COMPENSATION
On October 1, 2005, the Company adopted the provisions of SFAS No. 123(R), “Share Based Payment,”
which requires that companies measure and recognize compensation expense at an amount equal to the
fair value of share-based payments granted under compensation arrangements. Prior to October 1,2005, the Company accounted for stock option grants using the intrinsic value method in accordance
with the Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to
Employees,” and recognized no compensation expense for stock option grants since all options
granted had an exercise price equal to the market value of the underlying common stock on the date
of grant.
SFAS No. 123(R) was adopted using the “modified prospective” method. Under this method, the
provisions of SFAS No. 123(R) apply to all awards granted or modified after the date of adoption. In addition,
compensation
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued) December 31, 2005
expense must be recognized for any unvested stock option awards outstanding as of the date of
adoption on a straight-line basis over the remaining vesting period. The fair values of the options
are calculated using a Black-Scholes option pricing model. Results of prior periods have not been
restated. For the three months ended December 31, 2005, the Company’s compensation expense related
to stock option grants was $2.5 million. At December 31, 2005, there was $59.0 million of total
unrecognized compensation expense related to unvested stock option awards. This expense is expected
to be recognized over a weighted average period of 7.1 years. In addition, SFAS No. 123(R) requires
the benefits of tax deductions in excess of recognized compensation expense to be reported in the
Statement of Cash Flows as a financing cash flow rather than an operating cash flow as previously
reported.
SFAS No. 123(R) requires disclosure of pro forma information for periods prior to the adoption. The
following table sets forth the effect on net income and earnings per share as if SFAS No. 123(R)
had been applied to the three-month period ended December 31, 2004:
Add: Stock-based employee compensation expense
included in reported net income, net of tax
—
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of tax
(2.0
)
Pro forma net income
$
239.0
Reported basic earnings per share
$
$0.77
Pro forma basic earnings per share
$
0.77
Reported diluted earnings per share
$
0.76
Pro forma diluted earnings per share
$
0.75
The Company Stock Incentive Plans provide for the granting of stock options to certain key
employees of the Company to purchase shares of common stock. Options are granted at exercise prices
which equal the market value of the Company’s common stock at the date of grant. Options generally
expire 10 years after the dates on which they were granted. Options generally vest over periods of
5 to 9.75 years. The following table provides additional information related to the Company Stock
Incentive Plans:
The total intrinsic value of options exercised during the three months ended December 31, 2005
and 2004 was $8.2 million and $11.4 million, respectively. The intrinsic value of a stock option is
the amount by which the market value of the underlying stock exceeds the exercise price of the
option.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued) December 31, 2005
A summary of the Company’s nonvested options as of and for the three-month period ended December31, 2005 is as follows:
Weighted
Average
Grant-Date
Options
Fair Value
Nonvested at
beginning of period
9,527,341
$
7.52
Granted
—
—
Vested
(362,456
)
2.46
Canceled or expired
(149,386
)
8.31
Nonvested at
end of period
9,015,499
$
7.72
On January 26, 2006, the Company’s shareholders approved the D.R. Horton, Inc. 2006 Stock
Incentive Plan, which replaced the Company’s 1991 Stock Incentive Plan. The aggregate number of
shares available under the 2006 Stock Incentive Plan include the new authorization of 28.0 million
shares, plus 1.9 million shares that remained available for awards under the 1991 Stock Incentive
Plan on that date. Total shares available for awards under the 2006 Stock Incentive Plan are
subject to increase by subsequent specified terminations of awards under the 1991 Stock Incentive
Plan that were outstanding on January 26, 2006. For awards other than options or stock appreciation
rights, availability will be reduced at the rate of 1.75 shares for each share subject to the
award.
NOTE K — RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This
statement, which replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements,” changes the requirements for the accounting
for and reporting of a change in accounting principle. The statement requires retrospective
application of changes in accounting principle to prior periods’ financial statements unless it is
impracticable to determine the period-specific effects or the cumulative effect of the change. SFAS
No. 154 is effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material
impact on the Company’s consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued Staff Position 109-1, “Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by
the American Jobs Creation Act of 2004” (FSP 109-1). The American Jobs Creation Act, which was
signed into law in October 2004, provides a tax deduction on qualified domestic production
activities. When fully phased-in, the deduction will be up to 9% of the lesser of “qualified
production activities income” or taxable income. Based on the guidance provided by FSP 109-1, this
deduction should be accounted for as a special deduction under SFAS No. 109 and will reduce tax
expense in the period or periods that the amounts are deductible on the tax return. The tax benefit
resulting from the new deduction was effective beginning in the Company’s first quarter of fiscal
2006, and is reflected in the effective income tax rate of 38.0% for the three months ended
December 31, 2005, reduced from 38.5% for the three months ended December 31, 2004. The Company is
continuing to evaluate the impact of this law on its future financial statements and currently
estimates the fiscal 2006 reduction in its federal income tax rate from fiscal 2005 will be in the
range of 0.50% to 0.75% of taxable income.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued) December 31, 2005
NOTE L — CONTINGENCIES AND COMMITMENTS
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. The Company has established reserves for such contingencies, based on the expected
costs of the self-insured portion of such claims. The Company’s 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 Company’s financial position. However, to the extent the liability arising from the ultimate
resolution of any matter exceeds management’s estimates reflected in the reserves relating to such
matter, the Company could incur additional charges that could be significant.
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 December 31, 2005, the Company
had cash deposits of $293.8 million, promissory notes of $19.0 million, and letters of credit and
surety bonds of $12.1 million to purchase land and lots with a total remaining purchase price of
$6.2 billion. Only $148.6 million of the $6.2 billion in land and lot option purchase contracts
contain specific performance clauses which may require the Company to purchase the land or lots
upon the land seller meeting certain obligations. The majority of land and lots under contract are
expected to be purchased within three years.
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 December 31, 2005, outstanding standby letters of credit were $127.4 million and surety bonds
were $2.0 billion.
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued) December 31, 2005
NOTE M — SUMMARIZED FINANCIAL INFORMATION
All of the Company’s senior and senior subordinated notes and the $2.15 billion unsecured revolving
credit facility are fully and unconditionally guaranteed, on a joint and several basis, by all of
the Company’s direct and indirect subsidiaries (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.
Certain balances in the following Consolidating Statement of Income and Consolidating Statement of
Cash Flows for the three months ended December 31, 2004 have been revised to conform with the
current presentation and the presentation in the Company’s consolidated financial statements and
accompanying notes included in the Company’s annual report on Form 10-K for the fiscal year ended
September 30, 2005. These revisions primarily consist of separate reporting of equity in income of
subsidiaries and other income/expense in the Consolidating Statement of Income and the
reclassification of equity in income of subsidiaries from cash flows from financing activities to
cash flows from operating activities in the Consolidating Statement of Cash Flows. Such
reclassifications on the Statement of Cash Flows resulted in a decrease in operating cash flows and
an increase in financing cash flows for the D.R. Horton, Inc. column of $208.8 million for the
three months ended December 31, 2004.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We are the largest homebuilding company in the United States based on domestic homes closed in
2005. We construct and sell single-family homes in metropolitan areas in 26 states and 77 markets
primarily under the name of D.R. Horton, America’s Builder. Our homebuilding operations primarily
include the construction and sale of single-family homes with sales prices generally ranging from
$90,000 to $900,000. Approximately 84% of home sales revenues were generated from the sale of
single-family detached homes for the three months ended December 31, 2005 and 2004. 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. 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.
Our operating strategy in fiscal 2006 remains focused on taking advantage of opportunities to grow
our homebuilding business profitability through capturing greater market share, while continuing to
maintain a strong balance sheet. We plan to execute our growth strategy primarily by investing our
available capital in our existing homebuilding markets through our capital allocation process and
entering new markets, mainly through the opening of satellite operations in smaller markets near
our existing operating divisions, as opportunities are available. We will also continue to evaluate
homebuilding acquisition opportunities as they arise.
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 as indicated
below. New markets entered in the first quarter of fiscal 2006 are denoted by an asterisk (*).
Mortgage (M)
State
Region/Market
Title (T)
Mid-Atlantic Region
Delaware
Delaware Valley
M,T
Maryland
Baltimore
M,T
Suburban Washington D.C.
M,T
New Jersey
New Jersey
M,T
New York
Sullivan County *
North Carolina
Brunswick County
Charlotte
M
Greensboro/Winston-Salem
M
Raleigh/Durham
M
Pennsylvania
Philadelphia
Lancaster
M
South Carolina
Charleston
M
Columbia
M
Greenville
M
Hilton Head
M
Myrtle Beach
M
Virginia
Northern Virginia
M,T
Midwest Region
Illinois
Chicago
M
Minnesota
Minneapolis/St. Paul
M,T
Wisconsin
Kenosha
Southeast Region
Alabama
Birmingham
M
Huntsville
M
Georgia
Atlanta
M,T
Macon
Savannah
M
Florida
Daytona Beach
M
Fort Myers/Naples
M,T
Jacksonville
M,T
Melbourne
M,T
Miami/West Palm Beach
M,T
Orlando
M,T
Pensacola *
Tampa
M,T
Louisiana
Baton Rouge
Mortgage (M)
State
Region/Market
Title (T)
Southwest Region
Arizona
Casa Grande
M,T
Phoenix
M,T
Tucson
M
New Mexico
Albuquerque
M
Las Cruces
M
Oklahoma
Oklahoma City
M
Texas
Austin
M,T
Dallas
M,T
Fort Worth
M,T
Houston
M,T
Killeen/Temple
M,T
Laredo
M,T
Rio Grande Valley
M,T
San Antonio
M,T
Waco
M,T
West Region
California
Bakersfield/Lancaster/Palmdale
M
Fresno/Modesto
M
Imperial Valley *
Los Angeles County
M
Oakland/North Bay
M
Orange County
M
Riverside/San Bernardino
M
Sacramento
M
San Diego County
M
San Francisco
M
San Jose/Pleasanton/East Bay
M
Ventura County
M
Colorado
Colorado Springs
M
Denver
M
Ft. Collins
M
Hawaii
Hawaii
M
Maui
M
Oahu
M
Nevada
Las Vegas
M,T
Reno
M
Oregon
Albany
M
Bend
M
Eugene
M
Portland
M
Utah
Salt Lake City
M
Washington
Olympia
M
Seattle/Tacoma
M
Vancouver
M
We experienced increases in revenues and earnings during the three months ended December 31,2005 (the first quarter of fiscal 2006), as compared to the same period of fiscal 2005, driven by
the continued growth of our homebuilding operations and by improvements in homebuilding profit
margins. Key financial highlights as of and for the three months ended December 31, 2005 were as
follows:
•
Net sales orders increased 19% to $3.2 billion
•
Sales order backlog increased 30% to $6.2 billion
•
Consolidated revenue increased 15% to $2.9 billion
•
Homebuilding operating margin (homebuilding income before income taxes
divided by total homebuilding revenues) improved 180 basis points to 16.9%
•
Net income increased 29% to $310.1 million
•
Diluted earnings per share increased 29% to $0.98 per share
The following tables set forth key operating and financial data for our homebuilding operations by
geographic region as of and for the three months ended December 31, 2005 and 2004:
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 increased 19%, to
$3,166.8 million (11,463 homes) for the three months ended December 31, 2005, from $2,655.7 million
(9,901 homes) for the same period of 2004. The number and value of net sales orders during the
three-month period increased in each of our five market regions, reflecting the successful
execution of our organic growth strategies and the generally solid demand for our homes. The
largest percentage increases in the value of net sales orders during the three-month period
occurred in our Southwest and Midwest regions, which achieved increases of 37% and 25%,
respectively. The increase in the value of net sales orders in our Southwest region was due to
particularly strong sales performances from our operating divisions in Arizona, New Mexico and
Texas. The increase in the value of net sales orders in our Midwest region, which also generated
our largest percentage increase in the number of net sales orders of 30%, was due to strong sales
increases from our Chicago division.
The average price of a net sales order in the three months ended December 31, 2005 was $276,300, up
3% from the $268,200 average in the comparable period of 2004. The overall increase in the average
price of a net sales order was due to increases of 13% in both our Southeast and Southwest regions.
Our other three regions experienced slight decreases in average net sales order prices, reflecting
our efforts to continually adjust our product and geographic mix and pricing within many of our
homebuilding markets to ensure that our core product offerings remain affordable for our target
customer base, typically first-time and move-up homebuyers. In the West region, home price
appreciation in many California markets more than offset the impact of our product affordability
strategies during fiscal 2005, resulting in an increase in the average sales order price in the
region. During the three months ended December 31, 2005, home price appreciation moderated in
several of these California markets, which contributed to the decline in the West region average
sales order price during the quarter.
Sales order backlog represents homes under contract but not yet closed at the end of the period.
Some of the contracts in our sales order backlog are subject to contingencies, including mortgage
loan approval, which can result in cancellations. In the past, our backlog has been a reliable
indicator of the level of closings in our two subsequent fiscal quarters, although some contracts
in backlog will not result in closings.
At December 31, 2005, the value of our backlog of sales orders was $6,213.0 million (20,816 homes),
up 30% from $4,775.2 million (17,405 homes) at December 31, 2004. The average sales price of homes
in backlog was $298,500 at December 31, 2005, up 9% from the $274,400 average at December 31, 2004.
All regions produced double-digit percentage increases in the value of sales order backlog, led by
increases of 57% in our Southwest region and 49% in our Midwest region, as a result of particularly
strong sales in both regions.
Home Sales Revenue and Gross Profit
Revenues from home sales increased 14%, to $2,789.1 million (9,891 homes closed) for the three
months ended December 31, 2005, from $2,449.1 million (9,680 homes closed) for the comparable
period of 2004. The average selling price of homes we closed during the three months ended December31, 2005 was $282,000, up 11% from $253,000 for the same period in 2004. Revenues from home sales
increased in all five of our market regions, due to our continued execution of our organic growth
strategies in most of our markets and our ability to increase prices in the markets where demand
for our homes is strongest. The number of homes closed increased 2%, with increases in four of our
five market regions. Only the Southwest region experienced a decline in home closings during the
quarter, due primarily to the extraordinarily strong volume of home closings in several markets in
Texas and Arizona during the fourth quarter of fiscal 2005, which depleted the number of homes
available for closing during the three months ended December 31, 2005.
Gross profit from home sales increased by 25%, to $772.0 million for the three months ended
December 31, 2005, from $617.6 million for the comparable period of 2004. Gross profit from home
sales as a percentage of home sales revenues increased 250 basis points, to 27.7% for the three
months ended December 31, 2005, from 25.2% for the comparable period of 2004. The improvement in
gross profit from home sales as a percentage of revenue for the three-month period was attributable
to our ability to increase home prices in many of our markets, our ongoing efforts to control and
reduce construction costs through our local, regional and national purchasing programs, our
ongoing efforts to re-allocate capital to our more profitable markets and a decrease in capitalized
interest amortized to cost of sales as a percentage of revenues. Additionally, our home sales
revenues and gross profit in the three-month period ended December 31, 2005 benefited from the
recognition of $14.9 million which had been previously deferred in accordance with Statement of
Financial Accounting Standards (SFAS) No. 66. Our goal is to increase our gross profits as a
percentage of revenue in fiscal 2006 as compared to fiscal 2005; however, we expect that our gross
profit percentage changes will vary from quarter to quarter in fiscal 2006. Our gross profit
percentage may not increase as significantly in future quarters as we experienced in the first
quarter of fiscal 2006, and it is possible that our gross profit percentage in a future quarter may
decline as compared to the same quarter in the prior year or as compared to the first quarter of
fiscal 2006. Our gross profit percentages in the third and fourth quarters of fiscal 2006 will be
determined to a significant extent by our net sales orders during our second and third quarters of
fiscal 2006.
Land Sales Revenue and Gross Profit
Land sales revenues increased 111%, to $52.7 million for the three months ended December 31, 2005,
from $25.0 million for the three months ended December 31, 2004. The gross profit percentage from
land sales increased to 63.4% for the three months ended December 31, 2005, from 37.6% in the
comparable period of 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. Our land sales during the three-month period ended December 31, 2005 were primarily
commercially zoned properties adjacent to our homebuilding projects in various markets. When we
have the opportunity or need to sell land or lots, the resulting land 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 increased by 26%,
to $325.7 million in the three months ended December 31, 2005, from the comparable period of 2004.
As a percentage of homebuilding revenues, SG&A expenses increased 110 basis points, to 11.5% for
the three months ended December 31, 2005, from 10.4% in the comparable period of 2004. Our
homebuilding SG&A expense as a percentage of revenues can vary significantly between quarters,
depending largely on the relative fluctuations in quarterly revenue levels. Our homebuilding SG&A
expense is typically at its highest percentage of revenues in the first fiscal quarter. Throughout
fiscal 2005 and the first quarter of fiscal 2006, we increased the infrastructure of our
homebuilding operations to support the delivery of over 51,000 homes in fiscal 2005, a 17% increase
over the previous year, and in anticipation of further planned growth in home closings in fiscal
2006. Much of our fiscal 2006 growth in home closings is planned to occur during the second half of
fiscal 2006. As home closings increased only 2% during the quarter ended December 31, 2005, our
SG&A expenses as a percentage of revenues increased during the quarter. We expect our SG&A expense
ratio to decline later in fiscal 2006 from our first quarter levels.
Interest Expense
Interest incurred related to homebuilding debt increased by 26%, to $73.7 million in the three
months ended December 31, 2005, from $58.5 million in the comparable period of 2004, which
primarily resulted from a 21% increase in our average daily homebuilding debt from the prior year
period. Interest incurred increased at a faster rate than our debt due to increases over the past
year in the London Interbank Offered Rate (LIBOR), which is the basis of our interest rate on our
revolving credit facility.
We capitalize interest costs only to inventory under construction or development. During both
years, our inventory under construction or development exceeded our interest-bearing debt;
therefore, we capitalized virtually all interest from homebuilding debt. Interest amortized to cost
of sales was 2.2% of total cost of sales in the three months ended December 31, 2005, compared to
2.3% in the same period of 2004.
Other income, net of other expenses, associated with homebuilding activities was $4.9 million in
both of the three-month periods ended December 31, 2005 and 2004. The major components of other
income in both periods were interest income and increases in the fair values of our interest rate
swaps.
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 months ended
December 31, 2005 and 2004:
The volume of loans originated and brokered by our mortgage operations is directly related to the
number and value of homes closed by our homebuilding operations. Total first-lien loans originated
or brokered by DHI Mortgage for our homebuyers increased 6% in the three months ended December 31,2005, from the comparable period of 2004. This increase was greater than the 2% increase in the
number of homes closed because our mortgage capture rate
(the percentage of total home closings from our own homebuyers for which DHI Mortgage handled the
financing) increased to 64% in the three months ended December 31, 2005, from 62% in the comparable
prior year period.
Home closings from our own homebuyers constituted 93% of DHI Mortgage loan originations in the
three months ended December 31, 2005, compared to 92% in the comparable period of 2004, reflecting
DHI Mortgage’s continued focus on supporting the captive business provided by our homebuilding
operations.
The number of loans sold to third-party investors increased 49% in the three months ended December31, 2005 from the comparable period of 2004. This increase was primarily attributable to the high
volume of mortgage loans held at September 30, 2005, most of which were sold in the three-month
period ended December 31, 2005 and were the result of our homebuilding operations’ significant
increase in home closings during the fourth quarter of fiscal 2005, compared to the same period of
fiscal 2004.
Financial Services Revenues and Expenses
Revenues from the financial services segment increased 33% to $61.3 million in the three months
ended December 31, 2005, from the comparable period of 2004. The increase in financial services
revenues was primarily due to increases in the number of mortgage loans originated and sold, while
the average mortgage revenues earned per loan sold remained relatively constant. 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.
General and administrative expenses associated with financial services increased 45% to $47.3
million in the three months ended December 31, 2005, from the comparable period of 2004. As a
percentage of financial services revenues, general and administrative expenses was 77.2%, an
increase of 610 basis points over the comparable period of 2004. The increase in general and
administrative expense as a percentage of financial services revenue was due primarily to our
efforts to ensure that our financial services infrastructure will support our planned growth in our
homebuilding business, much of which is planned to occur during the second half of fiscal 2006.
RESULTS OF OPERATIONS — CONSOLIDATED
Income Before Income Taxes
Income before income taxes for the three months ended December 31, 2005, increased 28% from the
comparable period of 2004, to $500.1 million. As a percentage of revenues, income before income
taxes for the three months ended December 31, 2005 was 17.2%, an increase of 170 basis points from
the comparable period of 2004. The primary factor contributing to these improvements was a 180
basis point increase in the homebuilding segment’s pre-tax operating margin, which was slightly
offset by a decrease in the pre-tax operating margin of our financial services segment.
Provision for Income Taxes
The consolidated provision for income taxes for the three months ended December 31, 2005, increased
26% from the comparable period of 2004, to $190.0 million, due to the corresponding increase in
income before income taxes. The effective income tax rate for the three months ended December 31,2005 decreased to 38.0%, from 38.5% for the comparable period of 2004, due to the expected tax
benefits of the American Jobs Creation Act of 2004, which became effective in our first quarter of
fiscal 2006.
CAPITAL RESOURCES AND LIQUIDITY
We fund 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 the growth of our operations, we have
focused on maintaining strong balance sheet leverage ratios.
At December 31, 2005, our ratio of net homebuilding debt to total capital was 42.3%, increasing
from 32.2% at September 30, 2005, and decreasing from 43.4% at December 31, 2004. Net homebuilding
debt to total capital
consists of homebuilding notes payable net of cash divided by total capital (homebuilding notes
payable net of cash plus stockholders’ equity). The increase in our ratio of net homebuilding debt
to total capital at December 31, 2005 as compared with the ratio at September 30, 2005 was due to
the decrease in cash and the increase in borrowings associated with funding our planned first
quarter increase in inventory, and was partially offset by the increase in retained earnings. The
42.3% net homebuilding debt to total capital ratio at December 31, 2005 is in line with our
targeted fiscal year-end operating leverage level of less than 45%.
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 the business is separately capitalized,
its debt is substantially collateralized and our financial services debt is not guaranteed by our
parent company or any of our homebuilding entities. We include cash because of its capital
function. For comparison, at December 31, 2005 and 2004, our ratios of homebuilding debt to total
capital were 43.4% and 45.7%, respectively. At September 30, 2005, our ratio of homebuilding debt
to total capital was 40.6%.
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
the issuance of new debt securities through the public capital markets.
Homebuilding Capital Resources
Cash — At December 31, 2005, our available homebuilding cash and cash equivalents amounted to
$182.5 million.
Bank Credit Facility – We have a $2.15 billion unsecured revolving credit facility, which includes
a $1.0 billion letter of credit sub-facility, that matures on December 16, 2010. The revolving
credit facility has an uncommitted $750 million accordion provision which could be used 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 $600.0 million in cash borrowings outstanding on our homebuilding revolving credit facility
at December 31, 2005 and no outstanding borrowings on the facility at December 31, 2004. Under the
debt covenants associated with our revolving credit facility, when we have fewer than two
investment grade senior unsecured debt ratings from Moody’s Investors Service, Fitch Ratings and
Standard and Poor’s Corporation, our additional homebuilding borrowing capacity under the facility
is limited to the lesser of the unused portion of the facility, $1.44 billion at December 31, 2005,
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. Beginning November 7,2005, we had the two required investment grade debt ratings, so the borrowing base limitation is
not currently in effect. At December 31, 2005, we were in compliance with all of the covenants,
limitations and restrictions that form a part of our public debt obligations and our bank revolving
credit facility.
Redeemable Public Unsecured Debt – Our 9.375% senior subordinated notes due 2011 become redeemable
on March 15, 2006 at their principal amount of $200 million plus a 4.688% premium. Our 10.5% senior
subordinated notes due 2011 become redeemable on July 15, 2006 at their principal amount of $144.8
million plus a 5.25% premium. We are currently evaluating whether to redeem these notes during
fiscal 2006, as well as our capital resource requirements if we choose to redeem these notes.
Shelf Registration Statements — At December 31, 2005, we had the capacity to issue new debt or
equity securities amounting to $3.0 billion under our universal shelf registration statement. Also,
at December 31, 2005, 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.
Cash — At December 31, 2005, we had available financial services cash and cash equivalents of $42.7
million.
Mortgage Warehouse Loan Facility – Our wholly-owned mortgage company has a $300 million mortgage
warehouse loan facility that matures April 7, 2006. During fiscal 2005, we obtained additional
commitments of $150 million from our lenders through the facility’s accordion provision and
additional temporary commitments of $225 million from our lenders through amendments to the credit
agreement, resulting in total capacity of $675 million at September 30, 2005. Through amendments to
the credit agreement in October and November 2005, the commitments under the facility were adjusted
to $450 million, effective from October 28, 2005 through January 15, 2006. On January 16, 2006, the
total capacity returned to $300 million. On January 30, 2006, we obtained additional commitments of
$150 million from our lenders through an amendment to the credit agreement, resulting in total
capacity of $450 million through the maturity of the facility on April 7, 2006. At December 31,2005, we had borrowings of $419.7 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 drawn on our mortgage warehouse 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. We are planning to renew and extend this mortgage warehouse loan facility with a group of
financial institutions prior to its maturity, at a size and with terms similar to the current
facility.
Commercial Paper Conduit Facility – Our wholly-owned mortgage company also has a $500 million
commercial paper conduit facility (the “CP conduit facility”), which expires on June 29, 2006. A
temporary increase of $200 million was obtained through amendments to the credit agreement in
September 2005, resulting in a total capacity of $700 million effective through October 14, 2005,
when the capacity decreased to $600 million available through November 10, 2005. Beginning on
November 11, 2005, the total capacity returned to $500 million. At December 31, 2005, we had
borrowings of $395.0 million outstanding under the CP conduit facility. We are evaluating our
mortgage subsidiary’s financing needs, and we are planning to renew and extend the CP conduit
facility prior to its maturity or ensure sufficient borrowing capacity from other potential debt
capital sources.
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 our
parent company or any of the subsidiaries that guarantee our homebuilding debt. Borrowings under
both facilities are secured by certain mortgage loans held for sale. 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 December 31, 2005, our total mortgage
loans held for sale were $907.1 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 subsidiary’s
minimum required tangible net worth, its maximum allowable ratio of debt to tangible net worth and
its minimum required net income. Our mortgage subsidiary is in compliance with each of these
covenants.
Operating Cash Flow Activities
For the three months ended December 31, 2005, we used $1.0 billion of cash in our operating
activities, as compared to $559.1 million of cash used in such activities during the comparable
period of the prior year. The increase in cash used in operating activities was due to our decision
to fund inventory growth with $1.6 billion to support our planned growth in home closings volume in
the remainder of fiscal 2006 and future years.
A large portion of our cash invested in inventories represents purchases of land and lots that will
be used to generate revenues and cash flows in future years. Since we control the amounts and
timing of our investments in land and lots based on our inventory growth goals and our market
opportunities, we believe that cash flows from operating activities before increases in residential
land and lot inventories is currently a better indicator of our liquidity.
Investing Cash Flow Activities
For the three months ended December 31, 2005 and 2004, 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
funds available under our homebuilding and financial services credit facilities. Long-term
financing needs 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 December 31, 2005, our Board of Directors declared a quarterly cash
dividend of $0.09 per common share, which was paid on October 31, 2005 to stockholders of record on
October 20, 2005. A quarterly cash dividend of $0.06 per common share (split-adjusted) was declared
during the three months ended December 31, 2004.
In January 2006, our Board of Directors declared a quarterly cash dividend of $0.10 per common
share, payable on February 10, 2006 to stockholders of record on January 27, 2006. A quarterly cash
dividend of $0.0675 per common share (split-adjusted) was declared in the comparable quarter of
fiscal 2005.
Changes in Capital Structure
In November 2005, our Board of Directors authorized the repurchase of up to $500 million of our
common stock and up to $200 million of outstanding debt securities, replacing the previous common
stock and debt securities repurchase authorizations. During the three months ended December 31,2005, we repurchased 1,000,000 shares of our common stock at a total cost of $36.8 million. As of
December 31, 2005, we had $463.2 million remaining of the Board of Directors’ authorization for
repurchases of common stock and $200 million remaining of the authorization for repurchases of debt
securities. We continue to evaluate the amount and timing of our future capital investment
alternatives, including common stock repurchases, based on market conditions and other
circumstances.
On January 26, 2006, our shareholders approved an amendment to the D.R. Horton, Inc. charter which
increased the number of authorized shares of common stock to one billion shares.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we enter into land and lot option purchase contracts in order
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 December 31, 2005, we had $324.9 million in
deposits to purchase land and lots with a total remaining purchase price of $6.2 billion. Only
$148.6 million of the total remaining purchase price was subject to specific performance clauses
which may require us to purchase the land or lots upon the land seller meeting certain obligations.
Pursuant to FIN 46, we consolidated certain variable interest entities and other inventory
obligations with assets of $173.9 million.
In the normal course of business, we provide standby letters of credit and performance bonds,
issued by third parties, to secure performance under various contracts. At December 31, 2005,
outstanding standby letters of credit and performance bonds, the majority of which mature in less
than one year, were $127.4 million and $2.0 billion, respectively.
At December 31, 2005, we controlled approximately 359,000 lots, 51% of which were lots under option
or similar contracts. The following is a summary of our land/lot position at December 31, 2005:
Lots owned – developed and under development
177,000
Lots controlled under lot option and similar contracts
182,000
Total land/lots controlled
359,000
Percentage controlled under option
51
%
We had a total of approximately 30,000 homes under construction and in inventory at December 31,2005, including approximately 1,700 model homes and approximately 250 unsold homes that had been
completed for more than six months.
The major part of our homebuilding operations is in six states. The following are the percentages
of our total owned homebuilding inventory in those states:
As disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2005, 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, 2005, there have been no significant
changes to the assumptions and estimates related to those critical accounting policies, other than
those related to our accounting for stock-based compensation.
On October 1, 2005, we adopted the provisions of SFAS No. 123(R), “Share Based Payment,” which
requires that companies measure and recognize compensation expense at an amount equal to the fair
value of share-based payments granted under compensation arrangements. We calculate the fair value
of stock options using the Black-Scholes option pricing model. Determining the fair value of
share-based awards at the grant date requires judgment in developing assumptions, which involve a
number of variables. These variables include, but are not limited to, the expected stock price
volatility over the term of the awards, the expected dividend yield and expected stock option
exercise behavior. In addition, we also use judgment in estimating the number of share-based awards
that are expected to be forfeited. Prior to October 1, 2005, we accounted for stock option grants
using the intrinsic value method in accordance with the Accounting Principles Board Opinion (APB)
No. 25, “Accounting for Stock Issued to Employees,” and recognized no compensation expense for
stock option grants since all options granted had an exercise price equal to the market value of
the underlying common stock on the date of grant.
We have historically experienced variability in our results of operations from quarter to quarter
due to the seasonal nature of the homebuilding business. We typically have closed a greater number
of homes in our third and fourth fiscal quarters than in our first and second fiscal quarters. As a
result, our revenues and net income have been higher in the third and fourth quarters of our fiscal
year. In fiscal 2005, 61% of our consolidated revenues and 64% of our net income were attributable
to our operations in the third and fourth fiscal quarters. We expect similar seasonal fluctuations
in our results of operations to occur in fiscal 2006; however, we can make no assurances that this
trend will continue in this or any future fiscal years. The operating results for the three-month
period ended December 31, 2005 are not necessarily indicative of the results that may be expected
for the fiscal year ending September 30, 2006.
SAFE HARBOR STATEMENT AND RISKS
Certain 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 management’s
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,”“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 unknown 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 and other 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 growth strategies successfully; and
•
the uncertainties inherent in warranty and product liability 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, which is filed with
the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk on our long term debt. We monitor our exposure to changes in
interest rates and utilize both fixed and variable rate debt. For fixed rate debt, changes in
interest rates generally affect the value of the debt instrument, but not our earnings or cash
flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the
fair value of the debt instrument, but may affect our future earnings and cash flows. We 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 must be reflected in
our income statements.
Our mortgage company is exposed to interest rate risk associated with its 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
recorded 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 months
ended December 31, 2005 and 2004 was not significant, is recognized in current earnings. At
December 31, 2005, FMBS and EDFC to mitigate interest rate risk related to uncommitted mortgage
loans held for sale and uncommitted IRLCs totaled $408.5 million. Uncommitted IRLCs, the duration
of which was less than six months, totaled approximately $126.2 million, and uncommitted mortgage
loans held for sale totaled approximately $196.6 million at December 31, 2005. At December 31,2005, the fair value of the FMBS, EDFC and IRLCs was an insignificant amount.
The following table sets forth, as of December 31, 2005, for our debt obligations, principal cash
flows by scheduled maturity, weighted average interest rates and estimated fair market value. In
addition, the table sets forth the notional amounts, weighted average interest rates and estimated
fair market value of our interest rate swaps. At December 31, 2005, the fair value of the interest
rate swaps was a $1.7 million liability.
The Company’s management has long recognized its responsibilities for developing, implementing and
monitoring effective and efficient controls and procedures. As part of those responsibilities, as
of December 31, 2005, an evaluation was performed under the supervision and with the participation
of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the design and operation of the Company’s 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 Company’s disclosure controls and
procedures were effective in timely alerting them to material information relating to the Company,
including its consolidated subsidiaries, required to be included in the Company’s periodic filings
with the Securities and Exchange Commission. There have been no changes in the Company’s internal
controls over financial reporting during the quarter ended December 31, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
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. The following table sets forth information concerning the
Company’s common stock repurchases during the three months ended December 31, 2005. All share
repurchases were made in accordance with the safe harbor provisions of Rule 10b-18 under the
Securities Exchange Act of 1934 and pursuant to the Company’s publicly announced program. The
Company did not make any common stock repurchases during October or November, 2005.
On November 29, 2005, the Company publicly announced that our Board of Directors approved
increasing our common stock repurchase authorization to up to $500 million. The increased
repurchase authorization replaced the Company’s previous repurchase authorization. The new
repurchase authorization will expire on November 30, 2006, unless renewed by the Board of Directors
prior to such expiration. At December 31, 2005, we had approximately $463.2 million remaining on
our $500 million common stock repurchase authorization.
Twenty-Fifth Supplemental Indenture, dated as of January 23, 2006,
among the Company, the guarantors named therein and American Stock
Transfer & Trust Company, as Trustee.
4.2*
Fifth Supplemental Indenture, dated as of January 23, 2006, among the
Company, the guarantors named therein and American Stock Transfer &
Trust Company, as Trustee.
4.3*
Second Supplemental Indenture, dated as of January 23, 2006, among the
Company, the guarantors named therein and U.S. Bank National
Association.
4.4*
Second Supplemental Indenture, dated as of January 23, 2006, to the
Indenture, among the Company, the guarantors named therein and
American Stock Transfer & Trust Company, as Trustee.
10.1
Sixth Amendment to Amended and Restated Credit Agreement between DHI
Mortgage Company, Ltd. and U.S. Bank National Association dated October28, 2005. (1)
10.2
Seventh Amendment to Amended and Restated Credit Agreement between DHI
Mortgage Company, Ltd. and U.S. Bank National Association dated
November 30, 2005. (2)
10.3
Revolving Credit Agreement by and among D.R. Horton, Inc., Wachovia
Bank, National Association, as administrative agent, and the Lenders
named in the Revolving Credit Agreement dated December 16, 2005. (3)
10.4
Executive Compensation Summary – Named Executive Officers. (4)
10.5
Director Compensation Summary – Directors. (5)
10.6*†
D.R. Horton, Inc. 2006 Stock Incentive Plan, effective January 26, 2006.
10.7
Eighth Amendment to the Amended and Restated Credit Agreement dated
January 30, 2006, by and among DHI Mortgage Company, Ltd., U.S. Bank
National Association and the Lenders thereto. (6)
12.1*
Statement of Computation of Ratio of Earnings to Fixed Charges.
31.1*
Certificate of Chief Executive Officer provided pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002, is filed herewith.
31.2*
Certificate of Chief Financial Officer provided pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002, is filed herewith.
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
Company’s Chief Executive Officer, is filed herewith.
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
Company’s Chief Financial Officer, is filed herewith.
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.
Bill W. Wheat, on behalf of D.R. Horton, Inc.,
as Executive Vice President and
Chief Financial Officer (Principal Financial and
Principal Accounting Officer)
-36-
Dates Referenced Herein and Documents Incorporated by Reference
