HORTON D R INC /DE/ - Quarter Report: 2011 June (Form 10-Q)

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

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

Commission file number 1-14122

D.R. Horton, Inc.

(Exact name of registrant as specified in its charter)

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

(817) 390-8200
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ      No o

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No þ

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 – 316,016,099 shares as of July 25, 2011

D.R. HORTON, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

				Page
PART I.		FINANCIAL INFORMATION
ITEM 1.		Financial Statements
		Consolidated Balance Sheets at June 30, 2011 (unaudited) and September 30, 2010 (unaudited)			3
		Consolidated Statements of Operations for the three and nine months ended June 30, 2011 and 2010 (unaudited)			4
		Consolidated Statements of Cash Flows for the nine months ended June 30, 2011 and 2010 (unaudited)			5
		Notes to Consolidated Financial Statements (unaudited)			6
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk			56
ITEM 4.		Controls and Procedures			57
PART II.		OTHER INFORMATION
ITEM 1.		Legal Proceedings			58
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			58
ITEM 6.		Exhibits			59
SIGNATURE					60
EX-12.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

     PART I. FINANCIAL INFORMATION

     ITEM 1. FINANCIAL STATEMENTS

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		June 30,				September 30,
		2011				2010
		(In millions)
		(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents		$	824.2			$	1,282.6
Marketable securities, available-for-sale			297.1				297.7
Restricted cash			50.4				53.7
Inventories:
Construction in progress and finished homes			1,427.6				1,286.0
Residential land and lots — developed and under development			1,336.3				1,406.1
Land held for development			736.9				749.3
Land inventory not owned			—				7.6
			3,500.8				3,449.0
Income taxes receivable			14.0				16.0
Deferred income taxes, net of valuation allowance of $849.0 million and $902.6 million at June 30, 2011 and September 30, 2010, respectively			—				—
Property and equipment, net			58.9				60.5
Other assets			391.2				434.8
Goodwill			15.9				15.9
			5,152.5				5,610.2
Financial Services:
Cash and cash equivalents			16.8				26.7
Mortgage loans held for sale			286.2				253.8
Other assets			49.3				47.9
			352.3				328.4
Total assets		$	5,504.8			$	5,938.6
LIABILITIES
Homebuilding:
Accounts payable		$	181.7			$	135.1
Accrued expenses and other liabilities			812.4				957.2
Notes payable			1,764.1				2,085.3
			2,758.2				3,177.6
Financial Services:
Accounts payable and other liabilities			36.7				51.6
Mortgage repurchase facility			116.3				86.5
			153.0				138.1
Total liabilities			2,911.2				3,315.7
Commitments and contingencies (Note M)
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, 323,166,103 shares issued and 315,966,032 shares outstanding at June 30, 2011 and 322,478,467 shares issued and 318,823,234 shares outstanding at September 30, 2010			3.2				3.2
Additional paid-in capital			1,911.6				1,894.8
Retained earnings			810.7				810.6
Treasury stock, 7,200,071 shares at June 30, 2011 and 3,655,233 shares at September 30, 2010, at cost			(134.3	)			(95.7	)
Accumulated other comprehensive income			0.3				0.3
Total stockholders’ equity			2,591.5				2,613.2
Noncontrolling interests			2.1				9.7
Total equity			2,593.6				2,622.9
Total liabilities and equity		$	5,504.8			$	5,938.6

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In millions, except per share data)
		(Unaudited)
Homebuilding:
Revenues:
Home sales		$	974.5			$	1,378.2			$	2,468.6			$	3,381.1
Land/lot sales			0.9				0.1				6.9				2.9
			975.4				1,378.3				2,475.5				3,384.0
Cost of sales:
Home sales			813.5				1,141.1				2,069.9				2,793.5
Land/lot sales			0.7				0.1				6.7				2.2
Inventory impairments and land option cost write-offs			9.9				30.3				32.6				33.9
			824.1				1,171.5				2,109.2				2,829.6
Gross profit:
Home sales			161.0				237.1				398.7				587.6
Land/lot sales			0.2				—				0.2				0.7
Inventory impairments and land option cost write-offs			(9.9	)			(30.3	)			(32.6	)			(33.9	)
			151.3				206.8				366.3				554.4
Selling, general and administrative expense			113.7				143.5				355.8				401.2
Interest expense			10.1				19.6				41.0				69.3
Loss on early retirement of debt, net			6.5				8.3				10.7				6.7
Other (income)			(1.2	)			(2.0	)			(6.8	)			(7.4	)
			22.2				37.4				(34.4	)			84.6
Financial Services:
Revenues, net of recourse and reinsurance expense			23.8				27.8				63.0				67.7
General and administrative expense			19.3				21.2				56.4				57.2
Interest expense			0.3				0.7				0.7				1.4
Interest and other (income)			(2.5	)			(3.0	)			(6.7	)			(7.5	)
			6.7				8.9				12.6				16.6
Income (loss) before income taxes			28.9				46.3				(21.8	)			101.2
Provision for (benefit from) income taxes			0.2				(4.2	)			(57.8	)			(152.7	)
Net income		$	28.7			$	50.5			$	36.0			$	253.9
Basic net income per common share		$	0.09			$	0.16			$	0.11			$	0.80
Net income per common share assuming dilution		$	0.09			$	0.16			$	0.11			$	0.78
Cash dividends declared per common share		$	0.0375			$	0.0375			$	0.1125			$	0.1125

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended
		June 30,
		2011				2010
		(In millions)
		(Unaudited)
OPERATING ACTIVITIES
Net income		$	36.0			$	253.9
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation			14.9				13.6
Amortization of discounts and fees			27.6				22.2
Stock based compensation expense			9.9				9.7
Income tax benefit from stock option exercises			—				(2.9	)
Loss on early retirement of debt, net			10.7				6.7
Gain on sale of marketable securities			(0.1	)			—
Inventory impairments and land option cost write-offs			32.6				33.9
Changes in operating assets and liabilities:
(Increase) decrease in construction in progress and finished homes			(148.2	)			26.6
Decrease in residential land and lots – developed, under development, and held for development			34.7				35.9
Decrease in other assets			39.3				15.3
Decrease in income taxes receivable			2.0				260.5
Increase in mortgage loans held for sale			(32.4	)			(95.3	)
(Decrease) increase in accounts payable, accrued expenses and other liabilities			(102.3	)			7.0
Net cash (used in) provided by operating activities			(75.3	)			587.1
INVESTING ACTIVITIES
Purchases of property and equipment			(12.8	)			(15.6	)
Purchases of marketable securities			(259.7	)			(299.4	)
Proceeds from the sale or maturity of marketable securities			254.7				—
Decrease (increase) in restricted cash			3.3				(3.6	)
Net cash used in investing activities			(14.5	)			(318.6	)
FINANCING ACTIVITIES
Proceeds from notes payable			29.8				83.8
Repayment of notes payable			(336.5	)			(888.8	)
Proceeds from stock associated with certain employee benefit plans			2.7				4.6
Income tax benefit from stock option exercises			—				2.9
Cash dividends paid			(35.9	)			(35.8	)
Purchase of treasury stock			(38.6	)			—
Net cash used in financing activities			(378.5	)			(833.3	)
DECREASE IN CASH AND CASH EQUIVALENTS			(468.3	)			(564.8	)
Cash and cash equivalents at beginning of period			1,309.3				1,957.3
Cash and cash equivalents at end of period		$	841.0			$	1,392.5

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2011

NOTE A – BASIS OF PRESENTATION

     The accompanying unaudited, consolidated financial statements include the accounts of D.R. Horton, Inc. and all of its wholly-owned, majority-owned and controlled subsidiaries (which are referred to as the Company, unless the context otherwise requires). All significant intercompany accounts, transactions and balances have been eliminated in consolidation. The financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal, recurring accruals and the asset impairment charges, loss reserves and deferred tax asset valuation allowance discussed below) considered necessary for a fair presentation have been included. These financial statements do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2010.

  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.

  Reclassifications

     Certain reclassifications have been made in the prior year’s financial statements to conform to classifications used in the current year. The statement of operations for the three and nine months ended June 30, 2010 has been revised to reflect the reclassification of depreciation expense related to rental properties of $0.3 million and $0.9 million, respectively, from homebuilding other income to selling, general and administrative expense. Additionally, the statement of cash flows for the nine months ended June 30, 2010 has been revised to reflect this reclassification.

  Business

     The Company is a national homebuilder that is engaged in the construction and sale of single-family housing in 71 markets and 26 states in the United States as of June 30, 2011. The Company designs, builds and sells single-family detached homes on lots it develops and on finished lots purchased ready for home construction. To a lesser extent, the Company also builds and sells attached homes, such as town homes, duplexes, triplexes and condominiums (including some mid-rise buildings), which share common walls and roofs. Periodically, the Company sells land and lots. The Company also provides title agency and mortgage financing services, primarily to its homebuyers. The Company generally does not retain or service the mortgages that it originates; rather, it seeks to sell the mortgages and related servicing rights to third-party purchasers.

  Seasonality

     Historically, the homebuilding industry has experienced seasonal fluctuations; therefore, the operating results for the three and nine-month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2011 or subsequent periods.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

NOTE B – COMPREHENSIVE INCOME

     The following table provides a reconciliation of net income reported in the consolidated statements of operations to comprehensive income for the three and nine-month periods ended June 30, 2011 and 2010.

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In millions)
Net income		$	28.7			$	50.5			$	36.0			$	253.9
Other comprehensive income:
Unrealized gain related to available-for-sale securities (see Note C)			0.3				0.2				—				0.1
Comprehensive income		$	29.0			$	50.7			$	36.0			$	254.0

NOTE C – MARKETABLE SECURITIES

     The Company invests a portion of its cash on hand by purchasing marketable securities with maturities in excess of three months. These securities are held in the custody of a single financial institution. The Company considers its investment portfolio to be available-for-sale. The Company’s marketable securities at June 30, 2011 and September 30, 2010 consisted of the following:

		June 30, 2011
						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In millions)
Type of security:
U.S. Treasury securities		$	9.1			$	—			$	—			$	9.1
Obligations of U.S. government agencies			73.2				0.1				—				73.3
Corporate debt securities issued under the FDIC Temporary Liquidity Guarantee Program			114.0				0.1				—				114.1
Corporate debt securities			95.5				0.1				—				95.6
Total debt securities			291.8				0.3				—				292.1
Certificates of deposit			5.0				—				—				5.0
Total marketable securities, available-for-sale		$	296.8			$	0.3			$	—			$	297.1
		September 30, 2010
						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In millions)
Type of security:
U.S. Treasury securities		$	1.0			$	—			$	—			$	1.0
Obligations of U.S. government agencies			131.0				0.2				—				131.2
Corporate debt securities issued under the FDIC Temporary Liquidity Guarantee Program			100.9				0.1				—				101.0
Corporate debt securities			39.9				—				—				39.9
Foreign government securities			14.6				—				—				14.6
Total debt securities			287.4				0.3				—				287.7
Certificates of deposit			10.0				—				—				10.0
Total marketable securities, available-for-sale		$	297.4			$	0.3			$	—			$	297.7

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

     Of the $297.1 million in marketable securities at June 30, 2011, $172.1 million mature in the next twelve months and $125.0 million mature between twelve and twenty-four months. Gains and losses realized upon the sale of marketable securities are determined by specific identification and are included in homebuilding other income. The Company’s realized gains related to these sales during the three and nine months ended June 30, 2011 were $0 and $0.1 million, respectively.

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

     At June 30, 2011, when the Company performed its quarterly inventory impairment analysis, the assumptions utilized reflected the Company’s expectation of continued challenging conditions and uncertainties in the homebuilding industry and in its markets. The impairment evaluation indicated communities with a combined carrying value of $405.4 million had indicators of potential impairment, and these communities were evaluated for impairment. The analysis of the large majority of these communities assumed that sales prices in future periods will be equal to or lower than current sales order prices in each community, or in comparable communities, in order to generate an acceptable absorption rate. For a minority of communities that the Company does not intend to develop or operate in current market conditions, slight increases over current sales prices were assumed. While it is difficult to determine a timeframe for a given community in the current market conditions, the remaining lives of these communities were estimated to be in a range from six months to in excess of ten years. In performing this analysis, the Company utilized a range of discount rates for communities of 14% to 20%. Through this evaluation process, it was determined that communities with a carrying value of $28.1 million as of June 30, 2011 were impaired. As a result, during the three months ended June 30, 2011, impairment charges of $7.8 million were recorded to reduce the carrying value of the impaired communities to their estimated fair value, as compared to $29.1 million of impairment charges in the same period of 2010. During the nine months ended June 30, 2011 and 2010, impairment charges totaled $27.2 million and $33.2 million, respectively. In the three months ended June 30, 2011, approximately 83% of the impairment charges were recorded to residential land and lots and land held for development, and approximately 17% of the charges were recorded to construction in progress and finished homes inventory, compared to 93% and 7%, respectively, in the same period of 2010. In the nine months ended June 30, 2011, approximately 76% of the impairment charges were recorded to residential land and lots and land held for development, and approximately 24% of the charges were recorded to construction in progress and finished homes inventory, compared to 91% and 9%, respectively, in the same period of 2010.

     The Company’s estimate of undiscounted cash flows from communities analyzed may change and could result in a future need to record impairment charges to adjust the carrying value of these assets to their estimated fair value. There are several factors which could lead to changes in the estimates of undiscounted future cash flows for a given community. The most significant of these include pricing and incentive levels actually realized by the community, the rate at which the homes are sold and the costs incurred to develop the lots and construct the homes. The pricing and incentive levels are often inter-related with sales pace within a community, such that a price reduction can typically be expected to increase the sales pace. Further, both of these factors are heavily influenced by the competitive pressures facing a given community from both new homes and existing homes, some of which may result from foreclosures. If conditions in the broader economy, homebuilding industry or specific markets in which the Company operates worsen, and as the Company re-evaluates specific community pricing and incentives, construction and development plans, and its overall land sale strategies, it may be required to evaluate additional communities or re-evaluate previously impaired communities for potential impairment. These evaluations may result in additional impairment charges.

     At June 30, 2011 and September 30, 2010, the Company had $27.5 million and $3.3 million, respectively, of land held for sale, consisting of land held for development and land under development that met the criteria of land held for sale.

     During the three-month periods ended June 30, 2011 and 2010, the Company wrote off $2.1 million and $1.2 million, respectively, of earnest money deposits and pre-acquisition costs related to land option contracts which are not expected to be acquired. During the nine-month periods ended June 30, 2011 and 2010, the Company wrote off $5.4 million and $0.7 million, respectively, of these deposits and costs.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

NOTE E – LAND INVENTORY NOT OWNED

     The Company enters into land and lot option purchase contracts to procure land or lots for the construction of homes. Under these contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, many of the option deposits are not refundable at the Company’s discretion.

     Certain option purchase contracts result in the creation of a variable interest in the entity holding the land parcel under option. The current guidance for determining which entity is the primary beneficiary is based on the ability of an entity to control both (1) the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity. Upon adoption of this guidance on October 1, 2010, all of the variable interest entities that were reported as land inventory not owned in the consolidated balance sheet at September 30, 2010 were deconsolidated because the Company determined it did not control the activities that most significantly impact the variable interest entity’s economic performance.

NOTE F – NOTES PAYABLE

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

		June 30,				September 30,
		2011				2010
		(In millions)
Homebuilding:
Unsecured:
6% senior notes due 2011, net		$	—			$	70.1
7.875% senior notes due 2011, net			106.0				118.8
5.375% senior notes due 2012			—				146.6
6.875% senior notes due 2013			171.7				174.3
6.125% senior notes due 2014, net			145.2				146.0
2% convertible senior notes due 2014, net			411.3				391.9
5.625% senior notes due 2014, net			137.5				147.1
5.25% senior notes due 2015, net			189.1				199.7
5.625% senior notes due 2016, net			204.8				225.5
6.5% senior notes due 2016, net			392.7				430.1
Other secured			5.8				35.2
		$	1,764.1			$	2,085.3
Financial Services:
Mortgage repurchase facility, maturing 2012		$	116.3			$	86.5

   Homebuilding:

     In July 2010, the Board of Directors authorized the early repurchase of up to $500 million of the Company’s debt securities effective through July 31, 2011. At June 30, 2011, $241.7 million of the authorization was remaining. On August 1, 2011, the Board of Directors authorized the repurchase of up to $500 million of the Company’s debt securities effective through July 31, 2012.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

     Following is a summary of the retirement activity related to the Company’s senior notes for the three and nine months ended June 30, 2011:

		Principal Amount
		Three Months				Nine Months
		Ended				Ended
		June 30, 2011				June 30, 2011
		(In millions)
Maturities:
6% senior notes, matured April 2011		$	70.1			$	70.1
Early Redemptions:
5.375% senior notes due 2012, redeemed April 2011			112.3				112.3
Repurchases:
7.875% senior notes due 2011			—				12.9
5.375% senior notes due 2012			—				34.3
6.875% senior notes due 2013			2.6				2.6
6.125% senior notes due 2014			—				1.0
5.625% senior notes due 2014			—				9.7
5.25% senior notes due 2015			—				10.8
5.625% senior notes due 2016			—				21.0
6.5% senior notes due 2016			—				37.5
Total repurchases			2.6				129.8
Total retirements		$	185.0			$	312.2

     These senior notes were redeemed or repurchased for an aggregate purchase price of $191.4 million and $322.4 million, respectively, plus accrued interest. The transactions resulted in a net loss on early retirement of debt of $6.5 million and $10.7 million for the three and nine months ended June 30, 2011, respectively, which included the write off of unamortized discounts and fees.

     During the quarter, the Company provided a deed in lieu of foreclosure on a parcel of undeveloped land, which secured a non-recourse note payable, in exchange for a return of the note payable. The Company’s basis in the inventory parcel and the balance of the note were both $17.5 million. There was no gain or loss on the transaction.

     The indentures governing the Company’s senior notes impose restrictions on the creation of secured debt and liens. At June 30, 2011, the Company was in compliance with all of the limitations and restrictions that form a part of the public debt obligations.

  Financial Services:

     The Company’s mortgage subsidiary, DHI Mortgage, has a mortgage repurchase facility that is accounted for as a secured financing. The mortgage repurchase facility provides financing and liquidity to DHI Mortgage by facilitating purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties against the transfer of funds by the counterparties, thereby becoming purchased loans. DHI Mortgage then has the right and obligation to repurchase the purchased loans upon their sale to third-party purchasers in the secondary market or within specified time frames from 45 to 120 days in accordance with the terms of the mortgage repurchase facility. The total capacity of the facility is $100 million; however, through a recent amendment to the repurchase agreement, the capacity was increased to $150 million for the period from June 29, 2011 through October 20, 2011, after which time it will return to $100 million. The maturity date of the facility is March 4, 2012.

     As of June 30, 2011, $258.1 million of mortgage loans held for sale were pledged under the mortgage repurchase facility. These mortgage loans had a collateral value of $242.1 million. DHI Mortgage has the option to fund a

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

portion of its repurchase obligations in advance. As a result of advance paydowns totaling $125.8 million, DHI Mortgage had an obligation of $116.3 million outstanding under the mortgage repurchase facility at June 30, 2011 at a 3.8% annual interest rate.

     The mortgage repurchase facility is not guaranteed by either D.R. Horton, Inc. or any of the subsidiaries that guarantee the Company’s homebuilding debt. The facility contains financial covenants as to the mortgage subsidiary’s minimum required tangible net worth, its maximum allowable ratio of debt to tangible net worth and its minimum required liquidity. At June 30, 2011, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

NOTE G – HOMEBUILDING INTEREST

     The Company capitalizes homebuilding interest costs to inventory during active development and construction. Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. Additionally, the Company writes off a portion of the capitalized interest related to communities for which inventory impairments are recorded. The Company’s inventory under active development and construction was lower than its debt level at June 30, 2011 and 2010; therefore, a portion of the interest incurred is reflected as interest expense.

     The following table summarizes the Company’s homebuilding interest costs incurred, capitalized, expensed as interest expense, charged to cost of sales and written off during the three and nine-month periods ended June 30, 2011 and 2010:

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In millions)
Capitalized interest, beginning of period		$	88.6			$	117.2			$	91.5			$	128.8
Interest incurred			31.4				41.3				100.5				136.9
Interest expensed:
Directly to interest expense			(10.1	)			(19.6	)			(41.0	)			(69.3	)
Amortized to cost of sales			(25.3	)			(38.3	)			(65.7	)			(95.6	)
Written off with inventory impairments			(0.2	)			(0.9	)			(0.9	)			(1.1	)
Capitalized interest, end of period		$	84.4			$	99.7			$	84.4			$	99.7

NOTE H – MORTGAGE LOANS

     To manage the interest rate risk inherent in its mortgage operations, the Company hedges its risk using various derivative instruments, which include forward sales of mortgage-backed securities (MBS), Eurodollar Futures Contracts (EDFC) and put options on both MBS and EDFC. Use of the term “hedging instruments” in the following discussion refers to these securities collectively, or in any combination. The Company does not enter into or hold derivatives for trading or speculative purposes.

  Mortgage Loans Held for Sale

     Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. Newly originated loans that have been closed but not committed to third-party purchasers are hedged to mitigate the risk of changes in their fair value. Hedged loans are committed to third-party purchasers typically within three days after origination. Approximately 87% of the mortgage loans sold by DHI Mortgage during the nine months ended June 30, 2011 were sold to two major financial institutions pursuant to their loan purchase agreements. At June 30, 2011, mortgage loans held for sale had an aggregate fair value of $286.2 million and an aggregate outstanding principal balance of $281.7 million. During the three months ended June 30, 2011 and 2010, the Company had net gains on sales of loans of $11.1 million and $13.9 million, respectively. During the nine

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

months ended June 30, 2011 and 2010, the Company had net gains on sales of loans of $30.9 million and $32.9 million, respectively, which includes the effect of recording recourse expense, as discussed below in “Other Mortgage Loans and Loss Reserves,” of $7.7 million and $11.7 million, respectively.

     The notional amounts of the hedging instruments used to hedge mortgage loans held for sale vary in relationship to the underlying loan amounts, depending on the movements in the value of each hedging instrument relative to the value of the underlying mortgage loans. The fair value change related to the hedging instruments generally offsets the fair value change in the mortgage loans held for sale, which for the three and nine months ended June 30, 2011 and 2010 was not significant, and is recognized in current earnings. As of June 30, 2011, the Company had $79.4 million in mortgage loans held for sale not committed to third-party purchasers and the notional amounts of the hedging instruments related to those loans totaled $79.7 million.

  Other Mortgage Loans and Loss Reserves

     Mortgage loans are sold with limited recourse provisions which include industry-standard representations and warranties, primarily involving the absence of misrepresentations by the borrower or other parties and, depending on the agreement, may include requiring a minimum number of payments to be made by the borrower. The Company generally does not retain any other continuing interest related to mortgage loans sold in the secondary market. Other mortgage loans generally consist of loans repurchased due to these limited recourse obligations. Typically, these loans are impaired and often become real estate owned through the foreclosure process. At June 30, 2011 and September 30, 2010, the Company’s total other mortgage loans and real estate owned, before loss reserves were as follows:

		June 30,				September 30,
		2011				2010
		(In millions)
Other mortgage loans		$	42.6			$	43.0
Real estate owned			1.3				4.9
		$	43.9			$	47.9

     Based on historical performance and current housing and credit market conditions, the Company has recorded reserves for estimated losses on other mortgage loans, real estate owned and future loan repurchase obligations due to the limited recourse provisions, all of which are recorded as reductions of financial services revenue. The reserve balances at June 30, 2011 and September 30, 2010 were as follows:

		June 30,				September 30,
		2011				2010
		(In millions)
Loss reserves related to:
Other mortgage loans		$	5.8			$	9.0
Real estate owned			0.7				1.8
Loan repurchase obligations – known and expected			24.1				28.2
		$	30.6			$	39.0

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

     A subsidiary of the Company reinsured a portion of the private mortgage insurance written on loans originated by DHI Mortgage in prior years. At June 30, 2011 and September 30, 2010, reserves for expected future losses under the reinsurance program totaled $0.8 million and $9.7 million, respectively, and are included in financial services accounts payable and other liabilities in the accompanying consolidated balance sheets. It is possible that future losses may exceed the amount of reserves and, if so, additional charges will be required.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

  Loan Commitments and Related Derivatives

     The Company is party to interest rate lock commitments (IRLCs) which are extended to borrowers who have applied for loan funding and meet defined credit and underwriting criteria. The expected net future cash flows related to the associated servicing of a loan are included in the measurement of all written loan commitments that are accounted for at fair value through earnings at the time of commitment. At June 30, 2011, IRLCs, which are accounted for as derivative instruments recorded at fair value, totaled $228.7 million.

     The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments and hedging instruments. These instruments are considered derivatives in an economic hedge and are accounted for at fair value with gains and losses recognized in current earnings. As of June 30, 2011, the Company had approximately $22.4 million of best-efforts whole loan delivery commitments and $185.0 million of hedging instruments related to IRLCs not yet committed to purchasers.

NOTE I – FAIR VALUE MEASUREMENTS

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

	•		Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities. The Company’s U.S. Treasury securities are measured at fair value using Level 1 inputs.
	•		Level 2 – Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market. The Company’s assets/liabilities measured at fair value using Level 2 inputs are as follows:

	§		government agency securities, corporate debt securities, foreign government securities and certificates of deposit;
	§		mortgage loans held for sale;
	§		over-the-counter derivatives such as forward sales of MBS, put options on MBS and best-efforts and mandatory commitments; and
	§		IRLCs.

•

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

	§		inventory held and used;
	§		other mortgage loans; and
	§		real estate owned.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

     The following tables summarize the Company’s assets and liabilities at June 30, 2011 and September 30, 2010 measured at fair value on a recurring basis:

				Fair Value at June 30, 2011
		Balance Sheet Location		Level 1				Level 2				Total
				(In millions)
Homebuilding:
Marketable securities, available-for-sale		Marketable securities		$	9.1			$	288.0			$	297.1
Financial Services:
Mortgage loans held for sale (a)		Mortgage loans held for sale			—				286.2				286.2
Derivatives (b):
Interest rate lock commitments		Other assets			—				0.3				0.3
Forward sales of MBS		Other liabilities			—				(0.1	)			(0.1	)
Best-efforts and mandatory commitments		Other assets			—				1.5				1.5
				Fair Value at September 30, 2010
		Balance Sheet Location		Level 1				Level 2				Total
				(In millions)
Homebuilding:
Marketable securities, available-for-sale		Marketable securities		$	1.0			$	296.7			$	297.7
Financial Services:
Mortgage loans held for sale (a)		Mortgage loans held for sale			—				253.8				253.8
Derivatives (b):
Interest rate lock commitments		Other assets			—				1.8				1.8
Forward sales of MBS		Other liabilities			—				(1.8	)			(1.8	)
Best-efforts and mandatory commitments		Other assets			—				0.2				0.2

(a)		Mortgage loans held for sale are reflected at fair value. Interest income earned on mortgage loans held for sale is based on contractual interest rates and included in financial services interest and other income.
(b)		Fair value measurements of these derivatives represent changes in fair value since inception. These changes are reflected in the balance sheet and included in financial services revenues on the consolidated statement of operations.

     The following table summarizes the Company’s assets at June 30, 2011 and September 30, 2010 measured at fair value on a nonrecurring basis:

				Fair Value at				Fair Value at
				June 30, 2011				September 30, 2010
		Balance Sheet Location		Level 3				Level 3
				(In millions)
Homebuilding:
Inventory held and used (a)		Inventories		$	20.3			$	34.0
Financial Services:
Other mortgage loans (a)		Other assets			30.8				27.5
Real estate owned (a)		Other assets			0.6				3.1

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

     The fair values of cash and cash equivalents approximate their carrying amounts due to their short-term nature. The Company determines the fair values of its senior and convertible senior notes based on quoted market prices. The aggregate fair value of these notes at June 30, 2011 and September 30, 2010 was $1,956.2 million and $2,244.0 million, respectively, compared to an aggregate carrying value of $1,758.3 million and $2,050.1 million, respectively. The aggregate fair value of the Company’s senior notes includes fair values for the 2% convertible senior notes of $556.6 million and $553.8 million at June 30, 2011 and September 30, 2010, respectively, compared to their carrying values of $411.3 million and $391.9 million, respectively. The carrying value of the equity component of the 2% convertible senior notes was $136.7 million at June 30, 2011 and September 30, 2010. For other secured notes and balances due under the mortgage repurchase facility, the fair values approximate their carrying amounts due to their short maturity or floating interest rate terms, as applicable.

NOTE J – INCOME TAXES

     In the three and nine months ended June 30, 2011, respectively, the Company’s provision for income taxes attributable to continuing operations was $0.2 million and its benefit from income taxes was $57.8 million, compared to benefits from income taxes of $4.2 million and $152.7 million in the comparable periods of the prior year. The benefit from income taxes in the nine months ended June 30, 2011 was due to the Company receiving a favorable result from the Internal Revenue Service (IRS) on a ruling request concerning the capitalization of inventory costs, allowing the Company to reduce its unrecognized tax benefits and corresponding interest by $59.2 million. The benefit from income taxes in the nine months ended June 30, 2010 resulted from net operating loss (NOL) carrybacks. The Company does not have meaningful effective tax rates for these periods because its net deferred tax assets are offset fully by a valuation allowance.

     The Company had income taxes receivable of $14.0 million and $16.0 million at June 30, 2011 and September 30, 2010, respectively. The income taxes receivable at June 30, 2011 relates to federal and state income tax refunds the Company expects to receive.

     At June 30, 2011 and September 30, 2010, the Company’s net deferred tax assets, which are fully offset by a valuation allowance, were $849.0 million and $902.6 million, respectively. The realization of the Company’s deferred tax assets ultimately depends upon the existence of sufficient taxable income in future periods. The Company continues to analyze the positive and negative evidence in determining the need for a valuation allowance with respect to its deferred tax assets. The valuation allowance could be reduced in future periods if there is sufficient evidence indicating it is more likely than not that a portion or all of the Company’s deferred tax assets will be realized. The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on the Company’s deferred tax assets and consolidated results of operations or financial position.

     The Company classifies interest and penalties on income taxes as income tax expense. At June 30, 2011, the amount of the Company’s unrecognized tax benefits was $18.5 million, with a related accrual for interest of $5.6 million. A reduction of $3.3 million in the amount of unrecognized tax benefits and accrued interest with respect to state issues is reasonably possible within the next 12 months and would result in a benefit from income taxes in the consolidated statement of operations.

     The Company is subject to federal income tax and to income tax in multiple states. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for fiscal years 2004 through 2010. The Company is currently being audited by the IRS for fiscal years 2006 and 2007, and by various states. Its federal NOL refunds from losses in fiscal 2008 and 2009 are subject to Congressional Joint Committee review.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

NOTE K – EARNINGS PER SHARE

     The following table sets forth the numerators and denominators used in the computation of basic and diluted earnings per share for the three and nine months ended June 30, 2011 and 2010. Due to their antidilutive effect, the computation of diluted earnings per share excluded options to purchase 9.6 million and 9.5 million shares of common stock for the three and nine months ended June 30, 2011, respectively, and options to purchase 9.5 million and 9.7 million shares of common stock for the same periods of 2010. Additionally, for all periods except the nine-month period ended June 30, 2010, the convertible senior notes were excluded from the computation because their effect would have been antidilutive.

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In millions)
Numerator:
Net income		$	28.7			$	50.5			$	36.0			$	253.9
Effect of dilutive securities:
Interest expense and amortization of issuance costs associated with convertible senior notes			—				—				—				23.1
Numerator for diluted earnings per share after assumed conversions		$	28.7			$	50.5			$	36.0			$	277.0
Denominator:
Denominator for basic earnings per share— weighted average common shares			318.7				318.2				319.0				318.0
Effect of dilutive securities:
Employee stock awards			0.3				0.9				0.3				0.6
Convertible senior notes			—				—				—				38.3
Denominator for diluted earnings per share— adjusted weighted average common shares			319.0				319.1				319.3				356.9

NOTE L – STOCKHOLDERS’ EQUITY

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

     In July 2010, the Board of Directors renewed the authorization to repurchase up to $100 million of the Company’s common stock effective through July 31, 2011. During the three months ended June 30, 2011, the Company repurchased 3,544,838 shares of its common stock at a total cost of $38.6 million, resulting in a remaining authorization of $61.4 million at June 30, 2011. On August 1, 2011, the Board of Directors authorized the repurchase of up to $100 million of the Company’s common stock effective through July 31, 2012.

     During the three months ended June 30, 2011, the Board of Directors approved a quarterly cash dividend of $0.0375 per common share, which was paid on May 24, 2011 to stockholders of record on May 12, 2011. In July 2011, the Board of Directors approved a quarterly cash dividend of $0.0375 per common share, payable on August 24, 2011 to stockholders of record on August 12, 2011. Quarterly cash dividends of $0.0375 per common share were declared in the comparable quarters of fiscal 2010.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

NOTE M – COMMITMENTS AND CONTINGENCIES

  Warranty Claims

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

     At June 30, 2011, the Company had liabilities of $1.5 million for the remaining repair costs of homes in its Florida and Louisiana markets constructed during 2005 through 2007 which contain or are suspected to contain allegedly defective drywall manufactured in China (Chinese Drywall) that may be responsible for accelerated corrosion of certain metals in the home. Through June 30, 2011, the Company has spent approximately $6.0 million to remediate these homes. While the Company will seek reimbursement for these remediation costs from various sources, it has not recorded a receivable for potential recoveries as of June 30, 2011. If additional homes in these or other markets are found to contain Chinese Drywall, the Company would likely be required to further increase its warranty reserve for this matter in the future. The Company has been named as a defendant in several lawsuits in Louisiana and Florida pertaining to Chinese Drywall. As these actions are still in their early stages, the Company is unable to express an opinion as to the amount of damages, if any, beyond what has been reserved for repair as discussed above.

     Changes in the Company’s warranty liability during the three and nine-month periods ended June 30, 2011 and 2010 were as follows:

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In millions)
Warranty liability, beginning of period		$	43.8			$	49.6			$	46.2			$	59.6
Warranties issued			4.3				6.3				10.9				15.5
Changes in liability for pre-existing warranties			0.7				0.6				3.7				(6.6	)
Settlements made			(7.8	)			(7.3	)			(19.8	)			(19.3	)
Warranty liability, end of period		$	41.0			$	49.2			$	41.0			$	49.2

  Insurance and Legal Claims

     The Company has been named as a defendant in various claims, complaints and other legal actions including construction defect claims on closed homes and other claims and lawsuits incurred in the ordinary course of business, including employment matters, personal injury claims, land development issues, contract disputes and claims related to its mortgage activities. The Company has established reserves for these contingencies, based on the expected costs of the claims. The Company’s estimate of the required reserve is based on the facts and circumstances of individual pending claims and historical data and trends, including costs relative to revenues, home closings and product types, and include estimates of the costs of construction defect claims incurred but not yet reported. 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. The Company’s liabilities for these items were $523.2 million and $571.3 million at June 30, 2011 and September 30, 2010, respectively, and are included in homebuilding accrued expenses and other liabilities in the consolidated balance sheets. Related to the contingencies for construction defect claims and estimates of construction defect claims incurred but not yet reported, and other legal claims and lawsuits incurred in the ordinary course of business, the Company estimates and records insurance receivables for these matters under applicable insurance policies when recovery is probable. Additionally, the Company may have the ability to recover a portion of its legal expenses from its subcontractors when the Company has been named as an additional insured on their insurance policies. Estimates of the Company’s insurance receivables related to these

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

matters totaled $214.2 million and $251.5 million at June 30, 2011 and September 30, 2010, respectively, and are included in homebuilding other assets in the consolidated balance sheets. Expenses related to these items were approximately $18.7 million and $34.6 million in the nine months ended June 30, 2011 and 2010, respectively.

     Due to the high degree of judgment required in establishing reserves for these contingencies, it is not possible for the Company to make a reasonable estimate of the possible loss or range of loss in excess of its reserves. To the extent the losses arising from the ultimate resolution of any matter exceeds management’s estimates reflected in the recorded reserves relating to these matters, the Company would incur additional charges that could be significant.

  Land and Lot Option Purchase Contracts

     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, 2011, the Company had total deposits of $14.8 million, consisting of cash deposits of $12.8 million and promissory notes and surety bonds of $2.0 million, to purchase land and lots with a total remaining purchase price of $981.7 million. Within the land and lot option purchase contracts at June 30, 2011, there were a limited number of contracts, representing $12.0 million of remaining purchase price, subject to specific performance clauses which may require the Company to purchase the land or lots upon the land sellers meeting their obligations. The majority of land and lots under contract are currently expected to be purchased within three years, based on the Company’s assumptions as to the extent it will exercise its options to purchase such land and lots.

  Other Commitments

     To secure performance under various contracts, the Company had outstanding letters of credit of $47.8 million and surety bonds of $741.3 million at June 30, 2011. The Company has secured letter of credit agreements that require it to deposit cash, in an amount approximating the balance of letters of credit outstanding, as collateral with the issuing banks. At June 30, 2011 and September 30, 2010, the amount of cash restricted for this purpose totaled $48.4 million and $52.6 million, respectively, and is included in homebuilding restricted cash on the Company’s consolidated balance sheets.

NOTE N – OTHER ASSETS AND ACCRUED EXPENSES AND OTHER LIABILITIES

     The Company’s homebuilding other assets were as follows:

		June 30,				September 30,
		2011				2010
		(In millions)
Insurance receivables		$	214.2			$	251.5
Accounts and notes receivable			20.5				18.5
Prepaid assets			17.9				28.9
Other assets			138.6				135.9
		$	391.2			$	434.8

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

		June 30,				September 30,
		2011				2010
		(In millions)
Construction defect and other litigation liabilities		$	523.2			$	571.3
Employee compensation and related liabilities			82.8				90.4
Warranty liability			41.0				46.2
Accrued interest			27.1				39.8
Federal and state income tax liabilities			23.9				83.8
Other liabilities			114.4				125.7
		$	812.4			$	957.2

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

NOTE O – RECENT ACCOUNTING PRONOUNCEMENTS

     In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” which requires additional disclosures about transfers between Levels 1 and 2 of the fair value hierarchy and disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. This guidance was effective for the Company in fiscal 2010, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010. The adoption of this guidance, which is related to disclosure only, did not and will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” which clarifies when a loan modification or restructuring is considered a troubled debt restructuring. In determining whether a loan modification represents a troubled debt restructuring, a creditor must separately conclude that the restructuring constitutes a concession and that the debtor is experiencing financial difficulties. The guidance was effective for the Company on July 1, 2011 and is to be applied retrospectively to the beginning of the annual period of adoption. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     In April 2011, the FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” This guidance amends the sale accounting requirement concerning a transferor’s ability to repurchase transferred financial assets even in the event of default by the transferee, which typically is facilitated in a repurchase agreement by the presence of a collateral maintenance provision. Specifically, the level of cash collateral received by a transferor will no longer be relevant in determining whether a repurchase agreement constitutes a sale. As a result of this amendment, more repurchase agreements will be treated as secured financings rather than sales. This guidance is effective prospectively for new transfers and existing transactions that are modified in the first interim or annual period beginning on or after December 15, 2011. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

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

     In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which eliminates the option to present the components of other comprehensive income as part of the statement of equity. Instead, an entity must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but continuous statements. The guidance is effective for the Company beginning October 1, 2012 and is to be applied retrospectively. The adoption of this guidance, which relates to presentation only, is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

NOTE P – SEGMENT INFORMATION

     The Company’s 31 homebuilding operating divisions and its financial services operation are its operating segments. The homebuilding operating segments are aggregated into six reporting segments and the financial services operating segment is its own reporting segment. The Company’s reportable homebuilding segments are: East, Midwest, Southeast, South Central, Southwest and West. These reporting segments have homebuilding operations located in the following states:

East:		Delaware, Georgia (Savannah only), Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina and Virginia
Midwest:		Colorado, Illinois, Minnesota and Wisconsin
Southeast:		Alabama, Florida and Georgia
South Central:		Louisiana, New Mexico (Las Cruces only), Oklahoma and Texas
Southwest:		Arizona and New Mexico
West:		California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington

     During the three months ended September 30, 2010, a change in the composition of the Company’s operating divisions required that the Las Cruces, New Mexico market, previously included in the Southwest reporting segment, now be included in the South Central reporting segment. Consequently, the Company has restated the prior year segment information provided in this note to conform to the current year presentation.

     Homebuilding is the Company’s core business, generating 98% of consolidated revenues during the nine months ended June 30, 2011 and 2010. The Company’s homebuilding segments are primarily engaged in the acquisition and development of land and the construction and sale of residential homes on the land, in 26 states and 71 markets in the United States. The homebuilding segments generate most of their revenues from the sale of completed homes, and to a lesser extent from the sale of land and lots.

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

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

     The accounting policies of the reporting segments are described throughout Note A included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2010.

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
						Restated								Restated
		2011				2010				2011				2010
		(In millions)
Revenues
Homebuilding revenues:
East		$	114.7			$	150.6			$	308.9			$	381.8
Midwest			74.0				99.3				186.7				259.2
Southeast			194.2				247.9				484.8				575.8
South Central			294.6				462.8				752.6				1,111.9
Southwest			56.0				112.5				164.1				271.6
West			241.9				305.2				578.4				783.7
Total homebuilding revenues			975.4				1,378.3				2,475.5				3,384.0
Financial services revenues			23.8				27.8				63.0				67.7
Consolidated revenues		$	999.2			$	1,406.1			$	2,538.5			$	3,451.7
Inventory Impairments
East		$	0.1			$	5.3			$	2.1			$	7.4
Midwest			0.1				17.0				0.1				17.0
Southeast			5.1				6.4				9.8				7.9
South Central			—				0.2				0.2				0.4
Southwest			0.1				—				2.2				0.3
West			2.4				0.2				12.8				0.2
Total inventory impairments		$	7.8			$	29.1			$	27.2			$	33.2
Income (Loss) Before Income Taxes (1)
Homebuilding income (loss) before income taxes:
East		$	(1.0	)		$	(4.3	)		$	(13.6	)		$	(6.6	)
Midwest			0.1				(18.8	)			(13.1	)			(23.7	)
Southeast			(3.0	)			4.3				(16.8	)			2.5
South Central			19.0				40.4				30.1				82.1
Southwest			(0.5	)			7.8				(2.5	)			12.8
West			7.6				8.0				(18.5	)			17.5
Total homebuilding income (loss) before income taxes			22.2				37.4				(34.4	)			84.6
Financial services income before income taxes			6.7				8.9				12.6				16.6
Consolidated income (loss) before income taxes		$	28.9			$	46.3			$	(21.8	)		$	101.2

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
June 30, 2011

		June 30,				September 30,
		2011				2010
		(In millions)
Homebuilding Inventories (1)
East		$	484.4			$	511.5
Midwest			272.3				297.3
Southeast			691.0				656.4
South Central			780.8				760.1
Southwest			212.6				218.7
West			963.2				898.8
Corporate and unallocated (2)			96.5				106.2
Total homebuilding inventory		$	3,500.8			$	3,449.0