HORTON D R INC /DE/ 10-Q

ITEM 1. FINANCIAL STATEMENTS D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2020 September 30, 2019 (In millions) (Unaudited) ASSETS Cash and cash equivalents $ 2,353.5 $ 1,494.3 Restricted cash 19.2 19.7 Total cash, cash equivalents and restricted cash 2,372.7 1,514.0 Inventories: Construction in progress and finished homes 5,847.3 5,245.0 Residential land and lots — developed and under development 6,198.8 5,939.4 Land held for development 64.5 77.8 Land held for sale 28.1 19.8 Total inventory 12,138.7 11,282.0 Mortgage loans held for sale 1,502.6 1,072.0 Deferred income taxes, net of valuation allowance of $ 13.6 million and $ 18.7 million at June 30, 2020 and September 30, 2019, respectively 158.6 163.1 Property and equipment, net 631.9 499.2 Other assets 1,005.9 912.8 Goodwill 163.5 163.5 Total assets $ 17,973.9 $ 15,606.6 LIABILITIES Accounts payable $ 761.2 $ 634.0 Accrued expenses and other liabilities 1,588.3 1,278.1 Notes payable 4,297.3 3,399.4 Total liabilities 6,646.8 5,311.5 Commitments and contingencies (Note L) 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, 394,374,575 shares issued and 363,633,208 shares outstanding at June 30, 2020 and 392,172,821 shares issued and 368,431,454 shares outstanding at September 30, 2019 3.9 3.9 Additional paid-in capital 3,214.2 3,179.1 Retained earnings 8,992.5 7,640.1 Treasury stock, 30,741,367 shares and 23,741,367 shares at June 30, 2020 and September 30, 2019, respectively, at cost ( 1,162.6 ) ( 802.2 ) Stockholders’ equity 11,048.0 10,020.9 Noncontrolling interests 279.1 274.2 Total equity 11,327.1 10,295.1 Total liabilities and equity $ 17,973.9 $ 15,606.6 See accompanying notes to consolidated financial statements. 3 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (In millions, except per share data) (Unaudited) Revenues $ 5,390.0 $ 4,906.3 $ 13,910.8 $ 12,554.0 Cost of sales 4,084.7 3,831.6 10,619.7 9,839.4 Selling, general and administrative expense 527.5 480.0 1,450.1 1,327.0 Gain on sale of assets — ( 22.6 ) ( 59.5 ) ( 53.9 ) Other (income) expense ( 4.6 ) ( 9.4 ) ( 26.4 ) ( 23.7 ) Income before income taxes 782.4 626.7 1,926.9 1,465.2 Income tax expense 149.5 153.1 377.6 350.5 Net income 632.9 473.6 1,549.3 1,114.7 Net income (loss) attributable to noncontrolling interests 2.2 ( 1.2 ) 4.6 1.5 Net income attributable to D.R. Horton, Inc. $ 630.7 $ 474.8 $ 1,544.7 $ 1,113.2 Basic net income per common share attributable to D.R. Horton, Inc. $ 1.73 $ 1.28 $ 4.22 $ 2.98 Weighted average number of common shares 363.8 372.3 366.0 373.5 Diluted net income per common share attributable to D.R. Horton, Inc. $ 1.72 $ 1.26 $ 4.17 $ 2.94 Adjusted weighted average number of common shares 367.7 376.9 370.4 378.2 See accompanying notes to consolidated financial statements. 4 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF TOTAL EQUITY Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Non-controlling Interests Total Equity (In millions, except common stock share data) (Unaudited) Balances at September 30, 2019 ( 368,431,454 shares) $ 3.9 $ 3,179.1 $ 7,640.1 $ ( 802.2 ) $ 274.2 $ 10,295.1 Net income — — 431.3 — 1.2 432.5 Exercise of stock options ( 258,800 shares) — 4.1 — — — 4.1 Stock issued under employee benefit plans ( 582,936 shares) — — — — — — Cash paid for shares withheld for taxes — ( 17.3 ) — — — ( 17.3 ) Stock-based compensation expense — 16.6 — — — 16.6 Cash dividends declared ($ 0.175 per share) — — ( 64.6 ) — — ( 64.6 ) Repurchases of common stock ( 3,000,000 shares) — — — ( 163.1 ) — ( 163.1 ) Distributions to noncontrolling interests — — — — ( 0.4 ) ( 0.4 ) Change of ownership interest in Forestar — ( 0.5 ) — — 0.5 — Balances at December 31, 2019 ( 366,273,190 shares) $ 3.9 $ 3,182.0 $ 8,006.8 $ ( 965.3 ) $ 275.5 $ 10,502.9 Net income — — 482.7 — 1.3 484.0 Exercise of stock options ( 310,032 shares) — 6.2 — — — 6.2 Stock issued under employee benefit plans ( 954,588 shares) — 2.6 — — — 2.6 Cash paid for shares withheld for taxes — ( 20.8 ) — — — ( 20.8 ) Stock-based compensation expense — 21.3 — — — 21.3 Cash dividends declared ($ 0.175 per share) — — ( 64.1 ) — — ( 64.1 ) Repurchases of common stock ( 4,000,000 shares) — — — ( 197.3 ) — ( 197.3 ) Balances at March 31, 2020 ( 363,537,810 shares) $ 3.9 $ 3,191.3 $ 8,425.4 $ ( 1,162.6 ) $ 276.8 $ 10,734.8 Net income — — 630.7 — 2.2 632.9 Exercise of stock options ( 93,491 shares) — 2.1 — — — 2.1 Stock issued under employee benefit plans ( 1,907 shares) — — — — — — Cash paid for shares withheld for taxes — ( 0.1 ) — — — ( 0.1 ) Stock-based compensation expense — 21.3 — — — 21.3 Cash dividends declared ($ 0.175 per share) — — ( 63.6 ) — — ( 63.6 ) Distributions to noncontrolling interests — — — — ( 0.3 ) ( 0.3 ) Change of ownership interest in Forestar — ( 0.4 ) — — 0.4 — Balances at June 30, 2020 ( 363,633,208 shares) $ 3.9 $ 3,214.2 $ 8,992.5 $ ( 1,162.6 ) $ 279.1 $ 11,327.1 See accompanying notes to consolidated financial statements. 5 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF TOTAL EQUITY (Continued) Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Non-controlling Interests Total Equity (In millions, except common stock share data) (Unaudited) Balances at September 30, 2018 ( 376,261,635 shares) $ 3.9 $ 3,085.0 $ 6,217.9 $ ( 322.4 ) $ 174.5 $ 9,158.9 Cumulative effect of adoption of ASC 606 — — 27.1 — — 27.1 Net income (loss) — — 287.2 — ( 0.5 ) 286.7 Exercise of stock options ( 806,817 shares) — 8.6 — — — 8.6 Stock issued under employee benefit plans ( 273,608 shares) — — — — — — Cash paid for shares withheld for taxes — ( 4.1 ) — — — ( 4.1 ) Stock-based compensation expense — 18.1 — — — 18.1 Cash dividends declared ($ 0.15 per share) — — ( 56.0 ) — — ( 56.0 ) Repurchases of common stock ( 4,100,000 shares) — — — ( 140.6 ) — ( 140.6 ) Distributions to noncontrolling interests — — — — ( 0.5 ) ( 0.5 ) Balances at December 31, 2018 ( 373,242,060 shares) $ 3.9 $ 3,107.6 $ 6,476.2 $ ( 463.0 ) $ 173.5 $ 9,298.2 Net income — — 351.3 — 3.1 354.4 Exercise of stock options ( 831,489 shares) — 11.4 — — — 11.4 Stock issued under employee benefit plans ( 1,059,415 shares) — 2.0 — — 0.3 2.3 Cash paid for shares withheld for taxes — ( 15.4 ) — — — ( 15.4 ) Stock-based compensation expense — 17.8 — — — 17.8 Cash dividends declared ($ 0.15 per share) — — ( 55.9 ) — — ( 55.9 ) Repurchases of common stock ( 2,000,000 shares) — — — ( 75.6 ) — ( 75.6 ) Distributions to noncontrolling interests — — — — ( 3.2 ) ( 3.2 ) Balances at March 31, 2019 ( 373,132,964 shares) $ 3.9 $ 3,123.4 $ 6,771.6 $ ( 538.6 ) $ 173.7 $ 9,534.0 Net income (loss) — — 474.8 — ( 1.2 ) 473.6 Exercise of stock options ( 271,186 shares) — 4.6 — — — 4.6 Stock issued under employee benefit plans ( 2,524 shares) — — — — — — Stock-based compensation expense — 18.0 — — — 18.0 Cash dividends declared ($ 0.15 per share) — — ( 56.0 ) — — ( 56.0 ) Repurchases of common stock ( 3,658,462 shares) — — — ( 159.3 ) — ( 159.3 ) Distributions to noncontrolling interests — — — — ( 0.2 ) ( 0.2 ) Balances at June 30, 2019 ( 369,748,212 shares) $ 3.9 $ 3,146.0 $ 7,190.4 $ ( 697.9 ) $ 172.3 $ 9,814.7 See accompanying notes to consolidated financial statements. 6 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended June 30, 2020 2019 (In millions) (Unaudited) OPERATING ACTIVITIES Net income $ 1,549.3 $ 1,114.7 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 57.4 52.4 Amortization of discounts and fees 7.8 8.1 Stock-based compensation expense 59.2 53.9 Equity in earnings of unconsolidated entities ( 0.6 ) ( 0.5 ) Distributions of earnings of unconsolidated entities — 0.5 Deferred income taxes 1.0 11.7 Inventory and land option charges 17.8 41.0 Gain on sale of assets ( 59.5 ) ( 53.9 ) Changes in operating assets and liabilities: Increase in construction in progress and finished homes ( 602.3 ) ( 393.0 ) Increase in residential land and lots – developed, under development, held for development and held for sale ( 361.9 ) ( 606.2 ) Increase in other assets ( 62.2 ) ( 138.1 ) Net increase in mortgage loans held for sale ( 430.7 ) ( 158.5 ) Increase in accounts payable, accrued expenses and other liabilities 413.6 148.6 Net cash provided by operating activities 588.9 80.7 INVESTING ACTIVITIES Expenditures for property and equipment ( 66.8 ) ( 105.3 ) Proceeds from sale of assets 129.8 143.8 Expenditures related to rental properties ( 153.6 ) ( 56.3 ) Return of investment in unconsolidated entities 2.4 4.4 Net principal increase of other mortgage loans and real estate owned ( 3.7 ) ( 2.0 ) Payments related to business acquisitions ( 8.5 ) ( 310.9 ) Net cash used in investing activities ( 100.4 ) ( 326.3 ) FINANCING ACTIVITIES Proceeds from notes payable 2,346.3 2,528.2 Repayment of notes payable ( 1,679.5 ) ( 2,536.1 ) Advances on mortgage repurchase facility, net 284.0 158.8 Proceeds from stock associated with certain employee benefit plans 15.0 26.8 Cash paid for shares withheld for taxes ( 38.2 ) ( 19.5 ) Cash dividends paid ( 192.3 ) ( 167.9 ) Repurchases of common stock ( 360.4 ) ( 361.5 ) Distributions to noncontrolling interests, net ( 0.7 ) ( 3.9 ) Other financing activities ( 4.0 ) — Net cash provided by (used in) financing activities 370.2 ( 375.1 ) Net increase (decrease) in cash, cash equivalents and restricted cash 858.7 ( 620.7 ) Cash, cash equivalents and restricted cash at beginning of period 1,514.0 1,506.0 Cash, cash equivalents and restricted cash at end of period $ 2,372.7 $ 885.3 SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES: Notes payable issued for inventory $ 2.8 $ 83.6 Stock issued under employee incentive plans $ 84.4 $ 49.1 Accrued expenditures for property and equipment $ 10.6 $ 18.9 Accrual for holdback payment related to acquisition $ 1.9 $ 15.0 Repurchase of common stock not settled $ — $ 14.0 See accompanying notes to consolidated financial statements. 7 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2020 NOTE A – BASIS OF PRESENTATION The accompanying unaudited, consolidated financial statements include the accounts of D.R. Horton, Inc. and all of its 100% owned, majority-owned and controlled subsidiaries, which are collectively referred to as the Company, unless the context otherwise requires. Noncontrolling interests represent the proportionate equity interests in consolidated entities that are not 100% owned by the Company. The Company owns a 65 % controlling interest in Forestar Group Inc. (Forestar) and therefore is required to consolidate 100% of Forestar within its consolidated financial statements, and the 35 % interest the Company does not own is accounted for as noncontrolling interests. All 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, these financial statements reflect all adjustments considered necessary to fairly state the results for the interim periods shown, including normal recurring accruals and other items. These financial statements, including the consolidated balance sheet as of September 30, 2019, which was derived from audited 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, 2019. Reclassifications Certain prior period amounts have been reclassified to conform to the current year presentation. At the beginning of fiscal 2020, the Company reclassified its single-family rental properties from other assets to property and equipment in its homebuilding segment. Reclassification of the prior period amount resulted in a $ 37.0 million decrease in other assets with a corresponding increase in property and equipment at September 30, 2019. This reclassification had no effect on the Company’s consolidated financial position or results of operations. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Seasonality Historically, the homebuilding industry has experienced seasonal fluctuations; therefore, the operating results for the three and nine months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2020 or subsequent periods. Adoption of New Accounting Standards In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases,” which requires that lease assets and liabilities be recognized on the balance sheet and that key information about leasing arrangements be disclosed. The guidance was effective for the Company beginning October 1, 2019 and did not have a material impact on its consolidated financial position, results of operations or cash flows. As a result of the adoption of this standard on October 1, 2019, the Company recorded right of use assets of $ 39.0 million and lease liabilities of $ 40.3 million. Lease right of use assets are included in other assets and lease liabilities are included in accrued expenses and other liabilities in the consolidated balance sheet. 8 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 In March 2020, the Securities and Exchange Commission (SEC) adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees, in Rule 3-10 of Regulation S-X. The amended rule focuses on providing material, relevant and decision-useful information regarding guarantees and other credit enhancements, while eliminating certain prescriptive requirements. The rule is effective January 4, 2021 but earlier compliance is permitted. The Company adopted these amendments on March 31, 2020. Accordingly, summarized financial information has been presented only for the issuers and guarantors of the Company's registered securities for the most recent fiscal year and the year-to-date interim period, and the location of the required disclosures has been moved from Notes to Consolidated Financial Statements to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Pending Accounting Standards In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” which replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information in determining credit loss estimates. The guidance is effective for the Company beginning October 1, 2020 and is not expected to have a material impact on its consolidated financial position, results of operations or cash flows. In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other,” which simplifies the measurement of goodwill impairment by removing the second step of the goodwill impairment test and requires the determination of the fair value of individual assets and liabilities of a reporting unit. Under the new guidance, goodwill impairment is measured as the amount by which a reporting unit’s carrying amount exceeds its fair value with the loss recognized limited to the total amount of goodwill allocated to the reporting unit. The guidance is effective for the Company beginning October 1, 2020 and is not expected to have a material impact on its consolidated financial position, results of operations or cash flows. In December 2019, the FASB issued ASU 2019-12 related to simplifying the accounting for income taxes. The guidance is effective for the Company beginning October 1, 2021, although early adoption is permitted. The Company is currently evaluating the impact of this guidance, and it is not expected to have a material impact on its consolidated financial position, results of operations or cash flows. In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued. The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022. The Company will adopt this standard when LIBOR is discontinued, and does not expect it to have a material impact on its consolidated financial statements or related disclosures. 9 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 NOTE B – SEGMENT INFORMATION The Company is a national homebuilder that is primarily engaged in the acquisition and development of land and the construction and sale of residential homes, with operations in 88 markets across 29 states. The Company’s operating segments are its 52 homebuilding divisions, its majority-owned Forestar residential lot development operations, its financial services operations and its other business activities. The Company’s reporting segments are its homebuilding reporting segments, its Forestar lot development segment and its financial services segment. The homebuilding operating segments are aggregated into the following six reporting segments: 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, Indiana, Iowa, Minnesota and Ohio Southeast: Alabama, Florida, Georgia, Mississippi and Tennessee South Central: Louisiana, Oklahoma and Texas Southwest: Arizona and New Mexico West: California, Hawaii, Nevada, Oregon, Utah and Washington The Company’s homebuilding divisions design, build and sell single-family detached homes on lots they develop and on fully developed lots purchased ready for home construction. To a lesser extent, the homebuilding divisions also build and sell attached homes, such as townhomes, duplexes and triplexes. Most of the revenue generated by the Company’s homebuilding operations is from the sale of completed homes and to a lesser extent from the sale of land and lots. The Forestar segment is a residential lot development company with operations in 51 markets across 22 states. Forestar has made significant investments in land acquisition and development to expand its business across the United States. The homebuilding divisions acquire finished lots from Forestar in accordance with the master supply agreement between the two companies. Forestar’s segment results are presented on their historical cost basis, consistent with the manner in which management evaluates segment performance. The Company’s financial services segment provides mortgage financing and title agency services to homebuyers in many of the Company’s homebuilding markets. The segment generates the substantial majority of its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services. The Company sells substantially all of the mortgages it originates and the majority of the related servicing rights to third-party purchasers. In addition to its homebuilding, Forestar and financial services operations, the Company has subsidiaries that engage in other business activities. These subsidiaries conduct insurance-related operations, construct and own income-producing multi-family rental properties, own non-residential real estate including ranch land and improvements and own and operate oil and gas related assets. The operating results of these subsidiaries are immaterial for separate reporting and therefore are grouped together and presented as other. One of these subsidiaries, DHI Communities, constructs multi-family rental properties and had four projects under active construction and one project that was substantially complete at June 30, 2020. DHI Communities sold two multi-family rental properties during the current fiscal year, one in November 2019 and another in February 2020, for a total of $ 128.5 million and recorded gains on sale totaling $ 59.4 million. At June 30, 2020 and September 30, 2019, the consolidated balance sheets included $ 224.8 million and $ 204.0 million, respectively, of assets owned by DHI Communities. 10 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 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, 2019. Financial information relating to the Company’s reporting segments is as follows: June 30, 2020 Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated (In millions) Assets Cash and cash equivalents $ 1,896.8 $ 355.6 $ 75.1 $ 26.0 $ — $ — $ 2,353.5 Restricted cash 9.0 — 10.0 0.2 — — 19.2 Inventories: Construction in progress and finished homes 5,886.0 — — — ( 38.7 ) — 5,847.3 Residential land and lots — developed and under development 4,953.6 1,271.7 — — ( 28.0 ) 1.5 6,198.8 Land held for development 49.1 15.4 — — — — 64.5 Land held for sale 28.1 — — — — — 28.1 10,916.8 1,287.1 — — ( 66.7 ) 1.5 12,138.7 Mortgage loans held for sale — — 1,502.6 — — — 1,502.6 Deferred income taxes, net 154.6 — — — 10.0 ( 6.0 ) 158.6 Property and equipment, net 344.0 1.2 3.7 284.8 ( 1.8 ) — 631.9 Other assets 880.7 41.5 128.9 50.3 ( 100.6 ) 5.1 1,005.9 Goodwill 134.3 — — — — 29.2 163.5 $ 14,336.2 $ 1,685.4 $ 1,720.3 $ 361.3 $ ( 159.1 ) $ 29.8 $ 17,973.9 Liabilities Accounts payable $ 720.7 $ 26.0 $ 0.1 $ 14.4 $ — $ — $ 761.2 Accrued expenses and other liabilities 1,423.1 171.9 103.7 8.7 ( 100.9 ) ( 18.2 ) 1,588.3 Notes payable 2,490.3 640.6 1,172.9 — ( 6.5 ) — 4,297.3 $ 4,634.1 $ 838.5 $ 1,276.7 $ 23.1 $ ( 107.4 ) $ ( 18.2 ) $ 6,646.8 ______________ (1) Amounts are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance. All purchase accounting adjustments are included in the Other Adjustments column. (2) Amounts represent the aggregate balances of certain subsidiaries that are immaterial for separate reporting. (3) Amounts represent the elimination of intercompany transactions. (4) Amounts represent purchase accounting adjustments related to the Forestar acquisition. 11 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 September 30, 2019 Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated (In millions) Assets Cash and cash equivalents $ 1,043.0 $ 382.8 $ 43.4 $ 25.1 $ — $ — $ 1,494.3 Restricted cash 8.0 — 11.6 0.1 — — 19.7 Inventories: Construction in progress and finished homes 5,249.0 — — — ( 4.0 ) — 5,245.0 Residential land and lots — developed and under development 4,956.1 1,011.8 — — ( 31.4 ) 2.9 5,939.4 Land held for development 60.7 17.1 — — — — 77.8 Land held for sale 19.8 — — — — — 19.8 10,285.6 1,028.9 — — ( 35.4 ) 2.9 11,282.0 Mortgage loans held for sale — — 1,072.0 — — — 1,072.0 Deferred income taxes, net 146.4 17.4 — — 5.1 ( 5.8 ) 163.1 Property and equipment, net 272.4 2.4 3.2 221.2 — — 499.2 Other assets 826.2 24.2 68.3 71.5 ( 88.5 ) 11.1 912.8 Goodwill 134.3 — — — — 29.2 163.5 $ 12,715.9 $ 1,455.7 $ 1,198.5 $ 317.9 $ ( 118.8 ) $ 37.4 $ 15,606.6 Liabilities Accounts payable $ 598.6 $ 16.8 $ 7.0 $ 11.6 $ — $ — $ 634.0 Accrued expenses and other liabilities 1,152.5 169.5 53.0 9.3 ( 93.6 ) ( 12.6 ) 1,278.1 Notes payable 2,047.6 460.5 888.9 — — 2.4 3,399.4 $ 3,798.7 $ 646.8 $ 948.9 $ 20.9 $ ( 93.6 ) $ ( 10.2 ) $ 5,311.5 ______________ (1) Amounts are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance. All purchase accounting adjustments are included in the Other Adjustments column. (2) Amounts represent the aggregate balances of certain subsidiaries that are immaterial for separate reporting. (3) Amounts represent the elimination of intercompany transactions. (4) Amounts represent purchase accounting adjustments related to the Forestar acquisition. 12 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 Three Months Ended June 30, 2020 Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated (In millions) Revenues Home sales $ 5,207.6 $ — $ — $ — $ — $ — $ 5,207.6 Land/lot sales and other 14.5 177.9 — 8.9 ( 175.5 ) — 25.8 Financial services — — 156.6 — — — 156.6 5,222.1 177.9 156.6 8.9 ( 175.5 ) — 5,390.0 Cost of sales Home sales (5) 4,082.3 — — — ( 16.8 ) — 4,065.5 Land/lot sales and other 10.2 157.0 — — ( 152.7 ) ( 0.3 ) 14.2 Inventory and land option charges 4.9 0.1 — — — — 5.0 4,097.4 157.1 — — ( 169.5 ) ( 0.3 ) 4,084.7 Selling, general and administrative expense 415.1 11.2 93.9 7.1 — 0.2 527.5 Other (income) expense ( 0.2 ) ( 0.7 ) ( 6.1 ) 2.4 — — ( 4.6 ) Income (loss) before income taxes $ 709.8 $ 10.3 $ 68.8 $ ( 0.6 ) $ ( 6.0 ) $ 0.1 $ 782.4 ______________ (1) Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance. All purchase accounting adjustments are included in the Other Adjustments column. (2) Amounts represent the aggregate results of certain subsidiaries that are immaterial for separate reporting. (3) Amounts represent the elimination of intercompany transactions. (4) Amounts represent purchase accounting adjustments related to the Forestar acquisition. (5) Amount in the Eliminations column represents the profit on lots sold from Forestar to the homebuilding segment. Intercompany profit is eliminated in the consolidated financial statements when Forestar sells lots to the homebuilding segment and is recognized in the consolidated financial statements when the homebuilding segment closes homes on the lots to homebuyers. 13 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 Nine Months Ended June 30, 2020 Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated (In millions) Revenues: Home sales $ 13,434.2 $ — $ — $ — $ — $ — $ 13,434.2 Land/lot sales and other 49.7 584.3 — 27.2 ( 548.6 ) — 112.6 Financial services — — 364.0 — — — 364.0 13,483.9 584.3 364.0 27.2 ( 548.6 ) — 13,910.8 Cost of sales: Home sales (5) 10,569.2 — — — ( 34.4 ) — 10,534.8 Land/lot sales and other 34.9 509.8 — — ( 476.6 ) ( 1.0 ) 67.1 Inventory and land option charges 17.3 0.5 — — — — 17.8 10,621.4 510.3 — — ( 511.0 ) ( 1.0 ) 10,619.7 Selling, general and administrative expense 1,135.3 32.8 257.7 23.9 — 0.4 1,450.1 Gain on sale of assets — ( 0.1 ) — ( 59.4 ) — — ( 59.5 ) Other (income) expense ( 9.7 ) ( 4.8 ) ( 17.7 ) 5.8 — — ( 26.4 ) Income before income taxes $ 1,736.9 $ 46.1 $ 124.0 $ 56.9 $ ( 37.6 ) $ 0.6 $ 1,926.9 Summary Cash Flow Information: Depreciation and amortization $ 49.8 $ 0.2 $ 1.2 $ 5.8 $ — $ 0.4 $ 57.4 Cash provided by (used in) operating activities $ 1,157.0 $ ( 205.7 ) $ ( 347.7 ) $ 2.1 $ ( 16.8 ) $ — $ 588.9 ______________ (1) Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance. All purchase accounting adjustments are included in the Other Adjustments column. (2) Amounts represent the aggregate results of certain subsidiaries that are immaterial for separate reporting. (3) Amounts represent the elimination of intercompany transactions. (4) Amounts represent purchase accounting adjustments related to the Forestar acquisition. (5) Amount in the Eliminations column represents the profit on lots sold from Forestar to the homebuilding segment. Intercompany profit is eliminated in the consolidated financial statements when Forestar sells lots to the homebuilding segment and is recognized in the consolidated financial statements when the homebuilding segment closes homes on the lots to homebuyers. 14 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 Three Months Ended June 30, 2019 Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated (In millions) Revenues Home sales $ 4,734.6 $ — $ — $ — $ — $ — $ 4,734.6 Land/lot sales and other 27.5 88.2 — 9.6 ( 73.2 ) — 52.1 Financial services — — 119.6 — — — 119.6 4,762.1 88.2 119.6 9.6 ( 73.2 ) — 4,906.3 Cost of sales Home sales (5) 3,773.0 — — — ( 1.3 ) — 3,771.7 Land/lot sales and other 23.2 75.3 — — ( 66.0 ) 8.2 40.7 Inventory and land option charges 19.2 — — — — — 19.2 3,815.4 75.3 — — ( 67.3 ) 8.2 3,831.6 Selling, general and administrative expense 387.4 7.9 76.4 8.2 — 0.1 480.0 Gain on sale of assets — ( 1.5 ) — ( 22.6 ) — 1.5 ( 22.6 ) Other (income) expense ( 2.5 ) ( 1.9 ) ( 4.9 ) ( 0.1 ) — — ( 9.4 ) Income before income taxes $ 561.8 $ 8.4 $ 48.1 $ 24.1 $ ( 5.9 ) $ ( 9.8 ) $ 626.7 ______________ (1) Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance. All purchase accounting adjustments are included in the Other Adjustments column. (2) Amounts represent the aggregate results of certain subsidiaries that are immaterial for separate reporting. (3) Amounts represent the elimination of intercompany transactions. (4) Amounts represent purchase accounting adjustments related to the Forestar acquisition. (5) Amount in the Eliminations column represents the profit on lots sold from Forestar to the homebuilding segment. Intercompany profit is eliminated in the consolidated financial statements when Forestar sells lots to the homebuilding segment and is recognized in the consolidated financial statements when the homebuilding segment closes homes on the lots to homebuyers. 15 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 Nine Months Ended June 30, 2019 Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated (In millions) Revenues: Home sales $ 12,125.8 $ — $ — $ — $ — $ — $ 12,125.8 Land/lot sales and other 49.2 192.0 — 22.4 ( 141.8 ) — 121.8 Financial services — — 306.4 — — — 306.4 12,175.0 192.0 306.4 22.4 ( 141.8 ) — 12,554.0 Cost of sales: Home sales (5) 9,716.5 — — — ( 3.1 ) — 9,713.4 Land/lot sales and other 37.6 149.6 — — ( 122.2 ) 20.0 85.0 Inventory and land option charges 41.0 — — — — — 41.0 9,795.1 149.6 — — ( 125.3 ) 20.0 9,839.4 Selling, general and administrative expense 1,071.4 19.8 213.4 22.1 — 0.3 1,327.0 Gain on sale of assets ( 2.0 ) ( 2.4 ) — ( 51.9 ) — 2.4 ( 53.9 ) Other (income) expense ( 6.1 ) ( 4.6 ) ( 12.6 ) ( 0.4 ) — — ( 23.7 ) Income before income taxes $ 1,316.6 $ 29.6 $ 105.6 $ 52.6 $ ( 16.5 ) $ ( 22.7 ) $ 1,465.2 Summary Cash Flow Information: Depreciation and amortization $ 46.4 $ 0.2 $ 1.1 $ 4.3 $ — $ 0.4 $ 52.4 Cash provided by (used in) operating activities $ 605.7 $ ( 450.1 ) $ ( 65.5 ) $ ( 2.5 ) $ ( 2.5 ) $ ( 4.4 ) $ 80.7 ______________ (1) Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance. All purchase accounting adjustments are included in the Other Adjustments column. (2) Amounts represent the aggregate results of certain subsidiaries that are immaterial for separate reporting. (3) Amounts represent the elimination of intercompany transactions. (4) Amounts represent purchase accounting adjustments related to the Forestar acquisition. (5) Amount in the Eliminations column represents the profit on lots sold from Forestar to the homebuilding segment. Intercompany profit is eliminated in the consolidated financial statements when Forestar sells lots to the homebuilding segment and is recognized in the consolidated financial statements when the homebuilding segment closes homes on the lots to homebuyers. 16 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 Homebuilding Inventories by Reporting Segment (1) June 30, 2020 September 30, 2019 (In millions) East $ 1,262.3 $ 1,288.8 Midwest 917.8 836.8 Southeast 2,805.1 2,768.0 South Central 2,903.2 2,533.2 Southwest 669.6 574.4 West 2,129.0 2,056.0 Corporate and unallocated (2) 229.8 228.4 $ 10,916.8 $ 10,285.6 _________________ (1) Homebuilding inventories are the only assets included in the measure of homebuilding segment assets used by the Company’s chief operating decision makers. (2) Corporate and unallocated consists primarily of capitalized interest and property taxes. Homebuilding Results by Reporting Segment Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (In millions) Revenues East $ 736.3 $ 675.2 $ 1,836.5 $ 1,640.9 Midwest 373.3 303.3 964.6 800.5 Southeast 1,629.1 1,388.1 4,096.4 3,607.2 South Central 1,376.4 1,178.0 3,401.5 3,040.8 Southwest 216.1 240.6 626.8 557.5 West 890.9 976.9 2,558.1 2,528.1 $ 5,222.1 $ 4,762.1 $ 13,483.9 $ 12,175.0 Inventory and Land Option Charges East $ 0.2 $ 0.6 $ ( 0.1 ) $ 2.3 Midwest 0.4 1.3 1.9 1.8 Southeast 2.0 5.1 6.3 8.6 South Central 1.9 3.0 6.3 4.9 Southwest 0.1 0.3 0.1 0.5 West 0.3 8.9 2.8 22.9 $ 4.9 $ 19.2 $ 17.3 $ 41.0 Income before Income Taxes (1) East $ 106.9 $ 74.1 $ 240.1 $ 158.0 Midwest 34.1 18.7 76.4 38.8 Southeast 233.5 168.4 567.4 411.6 South Central 201.8 164.3 490.7 389.6 Southwest 29.7 33.5 95.0 69.8 West 103.8 102.8 267.3 248.8 $ 709.8 $ 561.8 $ 1,736.9 $ 1,316.6 _________________ (1) Expenses maintained at the corporate level consist primarily of interest and property taxes, which are capitalized and amortized to cost of sales or expensed directly, and the expenses related to operating the Company’s corporate office. The amortization of capitalized interest and property taxes is allocated to each homebuilding segment based on the segment’s cost of sales, while expenses associated with the corporate office are allocated to each homebuilding segment based on the segment’s inventory balances. 17 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 NOTE C – INVENTORIES At the end of each quarter, the Company reviews the performance and outlook for all of its communities and land inventories for indicators of potential impairment and performs detailed impairment evaluations and analyses when necessary. As of June 30, 2020, the Company performed detailed impairment evaluations of communities and land inventories with a combined carrying value of $ 52.1 million and determined that no communities or land inventories were impaired. Accordingly, no impairment charges were recorded during the three months ended June 30, 2020 compared to $ 6.8 million of impairment charges recorded in the prior year period. During the nine months ended June 30, 2020 and 2019, impairment charges totaled $ 1.7 million and $ 18.6 million, respectively. Inventory impairments and the land option charges discussed below are included in cost of sales in the consolidated statements of operations. As the Company manages its inventory investments across its operating markets to optimize returns and cash flows, it may modify its pricing and incentives, construction and development plans or land sale strategies in individual active communities and land held for development, which could result in the affected communities being evaluated for potential impairment. During the latter part of March and into April, the impacts of the COVID-19 (C-19) pandemic and the related widespread reductions in economic activity began to adversely affect the Company’s business operations and the demand for its homes. Although demand for the Company’s homes was strong in May and June, there is significant uncertainty regarding the extent to which and how long C-19 and its related effects will impact the U.S. economy and level of employment, capital markets, secondary mortgage markets, consumer confidence, demand for the Company’s homes and availability of mortgage loans to homebuyers. The extent to which this impacts the Company’s operational and financial performance will depend on future developments, including the duration and spread of C-19 and the impact on its customers, trade partners and employees, all of which are highly uncertain and cannot be predicted. If the housing market or economic conditions are adversely affected for a prolonged period due to C-19 or otherwise, the Company may be required to evaluate additional communities for potential impairment. These evaluations could result in additional impairment charges which could be significant. During the three and nine months ended June 30, 2020, earnest money and pre-acquisition cost write-offs related to land purchase contracts that the Company has terminated or expects to terminate were $ 5.0 million and $ 16.1 million, respectively, compared to $ 12.4 million and $ 22.4 million in the same periods of fiscal 2019. 18 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 NOTE D – NOTES PAYABLE The Company’s notes payable at their carrying amounts consist of the following: June 30, 2020 September 30, 2019 (In millions) Homebuilding: Unsecured: Revolving credit facility $ — $ — 364-day revolving credit facility — — 4.0 % senior notes due 2020 (1) — 499.6 2.55 % senior notes due 2020 (1) 399.6 398.9 4.375 % senior notes due 2022 (1) 349.1 348.8 4.75 % senior notes due 2023 (1) 299.2 298.9 5.75 % senior notes due 2023 (1) 398.6 398.4 2.5 % senior notes due 2024 (1) 496.2 — 2.6 % senior notes due 2025 (1) 494.8 — Other secured notes (2) 46.3 103.0 2,483.8 2,047.6 Forestar: Unsecured: Revolving credit facility — — 3.75 % convertible senior notes due 2020 (3) — 119.1 8.0 % senior notes due 2024 (4) 344.8 343.8 5.0 % senior notes due 2028 (4) 295.8 — 640.6 462.9 Financial Services: Mortgage repurchase facility 1,172.9 888.9 $ 4,297.3 $ 3,399.4 ____________________________ (1) Debt issuance costs that were deducted from the carrying amounts of the homebuilding senior notes totaled $ 11.7 million and $ 5.4 million at June 30, 2020 and September 30, 2019, respectively. (2) Homebuilding other secured notes at June 30, 2020 excludes $ 6.5 million of earnest money notes payable due to Forestar. These intercompany notes are eliminated in consolidation. (3) Forestar’s 3.75 % convertible senior notes due March 2020 included an unamortized fair value adjustment of $ 2.4 million at September 30, 2019. (4) Debt issuance costs that were deducted from the carrying amount of Forestar’s senior notes totaled $ 9.4 million and $ 6.2 million at June 30, 2020 and September 30, 2019, respectively. Homebuilding: The Company has a $ 1.59 billion senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $ 2.5 billion, subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to 100 % of the revolving credit commitment. Letters of credit issued under the facility reduce the available borrowing capacity. The interest rate on borrowings under the revolving credit facility may be based on either the Prime Rate or LIBOR plus an applicable margin, as defined in the credit agreement governing the facility. The maturity date of the facility is October 2, 2024. Borrowings and repayments under the facility were $ 1.06 billion each during the nine months ended June 30, 2020. At June 30, 2020, there were no borrowings outstanding and $ 127.8 million of letters of credit issued under the revolving credit facility, resulting in available capacity of approximately $ 1.46 billion. 19 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 In May 2020, the Company entered into a credit agreement providing for a $ 375 million 364-day senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $ 550 million, subject to certain conditions and availability of additional bank commitments. The interest rate on borrowings under the 364-day revolving credit facility may be based on either the Prime Rate or LIBOR plus an applicable margin, as defined in the credit agreement governing the facility. The maturity date of the facility is May 27, 2021. There were no borrowings under the facility for the period from its inception through June 30, 2020. The Company’s homebuilding revolving credit facilities impose restrictions on its operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if the leverage ratio exceeds a certain level. Both facilities include substantially the same affirmative and negative covenants, events of default and financial covenants. These covenants are measured as defined in the credit agreements governing the facilities and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facilities or cause any outstanding borrowings to become due and payable prior to maturity. The credit agreements governing the facilities and the indentures governing the senior notes also impose restrictions on the creation of secured debt and liens. At June 30, 2020, the Company was in compliance with all of the covenants, limitations and restrictions of its homebuilding revolving credit facilities and public debt obligations. D.R. Horton has an automatically effective universal shelf registration statement filed with the SEC in August 2018, registering debt and equity securities that the Company may issue from time to time in amounts to be determined. In October 2019, the Company issued $ 500 million principal amount of 2.5 % senior notes due October 15, 2024, with interest payable semi-annually. The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 2.7 %. In February 2020, the Company repaid $ 500 million principal amount of its 4.0 % senior notes at maturity. In May 2020, the Company issued $ 500 million principal amount of 2.6 % senior notes due October 15, 2025 with interest payable semi-annually. The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 2.8 %. Effective July 30, 2019, the Board of Directors authorized the repurchase of up to $ 500 million of the Company’s debt securities. The authorization has no expiration date. All of the $ 500 million authorization was remaining at June 30, 2020. Forestar: Forestar has a $ 380 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $ 570 million, subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of $ 100 million and 50 % of the revolving credit commitment. Borrowings under the revolving credit facility are subject to a borrowing base based on Forestar’s book value of its real estate assets and unrestricted cash. Letters of credit issued under the facility reduce the available borrowing capacity. At June 30, 2020, there were no borrowings outstanding and $ 31.6 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $ 348.4 million. The maturity date of the facility is October 2, 2022, which can be extended by up to one year on up to two additional occasions, subject to the approval of lenders holding a majority of the commitments. The Forestar revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require Forestar to maintain a minimum level of tangible net worth, a minimum level of liquidity and a maximum allowable leverage ratio. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. 20 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 In February 2020, Forestar issued $ 300 million principal amount of 5.0 % senior notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The notes are due March 1, 2028, with interest payable semiannually, and represent unsecured obligations of Forestar. The annual effective interest rate of these notes after giving effect to the amortization of financing costs is 5.2 %. These notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreement. Forestar also has $ 350 million principal amount of 8.0 % senior notes that mature April 15, 2024. In March 2020, Forestar repaid $ 118.9 million principal amount of its 3.75 % convertible senior notes in cash at maturity. Forestar’s revolving credit facility and its senior notes are not guaranteed by D.R. Horton, Inc. or any of the subsidiaries that guarantee the Company’s homebuilding debt. At June 30, 2020, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations. Financial Services: The Company’s mortgage subsidiary, DHI Mortgage, has a mortgage repurchase facility that provides financing and liquidity to DHI Mortgage by facilitating purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties upon receipt of funds from the counterparties. 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 60 days in accordance with the terms of the mortgage repurchase facility. In May 2020, the mortgage repurchase facility was amended to increase its total capacity to $ 1.35 billion; however, the capacity increases without requiring additional commitments to $ 1.575 billion for approximately 30 days at the end of the third quarter of fiscal 2020 and first quarter of fiscal 2021 and for approximately 45 days at the end of fiscal 2020. The capacity of the facility can also be increased to $ 1.8 billion subject to the availability of additional commitments. The maturity date of the facility is February 19, 2021. As of June 30, 2020, $ 1.39 billion of mortgage loans held for sale with a collateral value of $ 1.36 billion were pledged under the mortgage repurchase facility. DHI Mortgage had an obligation of $ 1.2 billion outstanding under the mortgage repurchase facility at June 30, 2020 at a 2.4 % annual interest rate. The mortgage repurchase facility is not guaranteed by 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 leverage ratio and its minimum required liquidity. These covenants are measured and reported to the lenders monthly. At June 30, 2020, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility. 21 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 NOTE E – CAPITALIZED INTEREST The Company capitalizes interest costs incurred to inventory during active development and construction (active inventory). Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. During periods in which the Company’s active inventory is lower than its debt level, a portion of the interest incurred is reflected as interest expense in the period incurred. During the first nine months of fiscal 2020 and fiscal 2019, the Company’s active inventory exceeded its debt level, and all interest incurred was capitalized to inventory. The following table summarizes the Company’s interest costs incurred, capitalized and expensed during the three and nine months ended June 30, 2020 and 2019: Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (In millions) Capitalized interest, beginning of period $ 200.5 $ 173.9 $ 180.1 $ 162.7 Interest incurred (1) 38.0 38.1 113.3 104.8 Interest charged to cost of sales ( 32.8 ) ( 34.3 ) ( 87.7 ) ( 89.8 ) Capitalized interest, end of period $ 205.7 $ 177.7 $ 205.7 $ 177.7 _______________ (1) Interest incurred included interest on the Company's mortgage repurchase facility of $ 4.3 million and $ 14.0 million in the three and nine months ended June 30, 2020, respectively, and $ 4.5 million and $ 10.8 million in the same periods of fiscal 2019. Also included in interest incurred is Forestar interest of $ 11.4 million and $ 29.8 million in the three and nine months ended June 30, 2020, respectively, and $ 7.9 million and $ 10.7 million in the same periods of fiscal 2019. 22 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 NOTE F – PROPERTY AND EQUIPMENT The Company’s property and equipment balances and the related accumulated depreciation at June 30, 2020 and September 30, 2019 are summarized below. These balances include properties related to the operations of DHI Communities, which develops, constructs and owns multi-family residential properties that produce rental income. DHI Communities had four projects under active construction and one project that was substantially complete at June 30, 2020. June 30, 2020 September 30, 2019 (In millions) Buildings and improvements (1) (2) $ 349.7 $ 329.4 Multi-family rental properties under construction 86.2 65.2 Single-family rental properties 118.9 37.0 Model home furniture 136.4 128.3 Office furniture and equipment 129.1 128.6 Land (1) (2) 100.3 71.6 Total property and equipment $ 920.6 $ 760.1 Accumulated depreciation ( 288.7 ) ( 260.9 ) Property and equipment, net $ 631.9 $ 499.2 _____________ (1) At June 30, 2020, buildings and improvements included $ 63.5 million related to completed multi-family rental properties and $ 65.1 million related to the Company’s oil and gas related assets. Additionally, at June 30, 2020, land included $ 60.0 million related to the Company’s multi-family rental operations. (2) At September 30, 2019, buildings and improvements included $ 50.7 million related to completed multi-family rental properties and $ 56.9 million related to the Company’s oil and gas related assets. Additionally, at September 30, 2019, land included $ 38.0 million related to the Company’s multi-family rental operations. Depreciation expense was $ 17.1 million and $ 51.6 million during the three and nine months ended June 30, 2020, respectively, compared to $ 16.7 million and $ 48.4 million in the same periods of fiscal 2019. 23 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 NOTE G – MORTGAGE LOANS Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. At June 30, 2020, mortgage loans held for sale had an aggregate carrying value of $ 1.5 billion and an aggregate outstanding principal balance of $ 1.4 billion. At September 30, 2019, mortgage loans held for sale had an aggregate carrying value of $ 1.1 billion and an aggregate outstanding principal balance of $ 1.0 billion. During the nine months ended June 30, 2020 and 2019, mortgage loans originated totaled $ 8.4 billion and $ 6.0 billion, respectively, and mortgage loans sold totaled $ 8.0 billion and $ 5.8 billion, respectively. The Company had gains on sales of loans and servicing rights of $ 116.7 million and $ 263.7 million during the three and nine months ended June 30, 2020, respectively, compared to $ 85.4 million and $ 218.3 million in the prior year periods. Net gains on sales of loans and servicing rights are included in revenues in the consolidated statements of operations. Approximately 93 % of the mortgage loans sold by DHI Mortgage during the nine months ended June 30, 2020 were sold to four major financial entities, of which one entity purchased 36 %. In response to C-19, the U.S. government has taken various actions to support the economy and the continued functioning of the financial markets. On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which included changes to current forbearance options for government-backed loans designed to keep homeowners in their homes. Due to the uncertainty surrounding these forbearance options, servicing values declined rapidly at the end of March. The Company began retaining the servicing rights on some of its loan originations during the three months ended June 30, 2020. At June 30, 2020, the fair value of mortgage servicing rights was $ 10.0 million and is included in other assets in the consolidated balance sheet. The Company also occasionally uses hedging instruments as part of a program to offer below market interest rate financing to its homebuyers in certain markets. At June 30, 2020, the Company had mortgage-backed securities (MBS) totaling $ 1.3 billion that did not yet have interest rate lock commitments or closed loans created or assigned and recorded a liability of $ 11.7 million for the fair value of such MBS position. NOTE H – INCOME TAXES The Company’s income tax expense for the three and nine months ended June 30, 2020 was $ 149.5 million and $ 377.6 million, respectively, compared to $ 153.1 million and $ 350.5 million in the prior year periods. The effective tax rate was 19.1 % and 19.6 % for the three and nine months ended June 30, 2020, respectively, compared to 24.4 % and 23.9 % in the prior year periods. The effective tax rate for the three and nine months ended June 30, 2020 includes a tax benefit of $ 38.1 million and $ 77.6 million, respectively, from the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Act). The Act retroactively reinstated the federal energy efficient homes tax credit that expired on December 31, 2017 to homes closed from January 1, 2018 to December 31, 2020. The effective tax rates for all periods include an expense for state income taxes, reduced by tax benefits related to stock-based compensation. The Company’s deferred tax assets, net of deferred tax liabilities, were $ 172.2 million at June 30, 2020 compared to $ 181.8 million at September 30, 2019. The Company has a valuation allowance of $ 13.6 million at June 30, 2020 and $ 18.7 million at September 30, 2019 related to state deferred tax assets for net operating loss (NOL) carryforwards that are more likely than not to expire before being realized. The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to the remaining state NOL carryforwards. Any reversal of the valuation allowance in future periods will impact the Company’s effective tax rate. 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 consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of the Company’s deferred tax assets. 24 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 NOTE I – EARNINGS PER SHARE The following table sets forth the numerators and denominators used in the computation of basic and diluted earnings per share. Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (In millions) Numerator: Net income attributable to D.R. Horton, Inc. $ 630.7 $ 474.8 $ 1,544.7 $ 1,113.2 Denominator: Denominator for basic earnings per share — weighted average common shares 363.8 372.3 366.0 373.5 Effect of dilutive securities: Employee stock awards 3.9 4.6 4.4 4.7 Denominator for diluted earnings per share — adjusted weighted average common shares 367.7 376.9 370.4 378.2 Basic net income per common share attributable to D.R. Horton, Inc. $ 1.73 $ 1.28 $ 4.22 $ 2.98 Diluted net income per common share attributable to D.R. Horton, Inc. $ 1.72 $ 1.26 $ 4.17 $ 2.94 NOTE J – STOCKHOLDERS’ EQUITY D.R. Horton has an automatically effective universal shelf registration statement, filed with the SEC in August 2018, registering debt and equity securities that it may issue from time to time in amounts to be determined. Forestar also has an effective shelf registration statement filed with the SEC in September 2018, registering $ 500 million of equity securities. On September 30, 2019, Forestar issued approximately 6.0 million shares of its common stock for $ 17.50 per share in a public underwritten offering. Following the offering, $ 394.3 million remains available for issuance under Forestar’s shelf registration statement. Effective July 30, 2019, the Board of Directors authorized the repurchase of up to $ 1.0 billion of the Company’s common stock. The authorization has no expiration date. During the nine months ended June 30, 2020, the Company repurchased 7.0 million shares of its common stock for $ 360.4 million, none of which were purchased in the three months ended June 30, 2020. The Company’s remaining authorization at June 30, 2020 was $ 535.3 million. During each of the first three quarters of fiscal 2020, the Board of Directors approved and paid quarterly cash dividends of $ 0.175 per common share, the most recent of which was paid on May 21, 2020 to stockholders of record on May 11, 2020. In July 2020, the Board of Directors approved a quarterly cash dividend of $ 0.175 per common share, payable on August 24, 2020 to stockholders of record on August 12, 2020. Cash dividends of $ 0.15 per common share were approved and paid in each quarter of fiscal 2019. 25 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 NOTE K – EMPLOYEE BENEFIT PLANS Restricted Stock Units (RSUs) The Company’s Stock Incentive Plan provides for the granting of stock options and restricted stock units to executive officers, other key employees and non-management directors. Restricted stock unit awards may be based on performance (performance-based) or on service over a requisite time period (time-based). Performance-based and time-based RSU equity awards represent the contingent right to receive one share of the Company’s common stock per RSU if the vesting conditions and/or performance criteria are satisfied. The RSUs have no dividend or voting rights until vested. In November 2019, a total of 360,000 performance-based RSU equity awards were granted to the Company’s executive officers. These awards vest at the end of a three -year performance period ending September 30, 2022. The number of units that ultimately vest depends on the Company’s relative position as compared to its peers in achieving certain performance criteria and can range from 0 % to 200 % of the number of units granted. The performance criteria are total shareholder return; return on investment; selling, general and administrative expense containment; and gross profit. The grant date fair value of these equity awards was $ 52.54 per unit. Compensation expense related to this grant was $ 2.5 million and $ 7.0 million in the three and nine months ended June 30, 2020, respectively, based on the Company’s performance against its peer group, the elapsed portion of the performance period and the grant date fair value of the award. During the nine months ended June 30, 2020, a total of 1.7 million time-based RSUs were granted to approximately 960 recipients, including the Company’s executive officers, other key employees and non-management directors. The weighted average grant date fair value of these equity awards was $ 35.98 per unit, and they vest annually in equal installments over periods of three to five years. Compensation expense related to these grants was $ 3.4 million and $ 7.5 million in the three and nine months ended June 30, 2020, respectively, of which $ 3.5 million related to expense recognized for employees that were retirement eligible on the date of grant. Total stock-based compensation expense related to the Company’s restricted stock units during the three and nine months ended June 30, 2020 was $ 20.4 million and $ 56.6 million, respectively, compared to $ 16.8 million and $ 51.1 million during the three and nine months ended June 30, 2019, respectively. 26 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 NOTE L – COMMITMENTS AND CONTINGENCIES Warranty Claims The Company 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 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 during the three and nine months ended June 30, 2020 and 2019 were as follows: Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (In millions) Warranty liability, beginning of period $ 262.7 $ 213.9 $ 247.3 $ 202.0 Warranties issued 29.4 25.8 75.1 64.7 Changes in liability for pre-existing warranties 5.7 9.4 14.0 20.9 Settlements made ( 16.5 ) ( 20.1 ) ( 55.1 ) ( 58.6 ) Warranty liability, end of period $ 281.3 $ 229.0 $ 281.3 $ 229.0 Legal Claims and Insurance The Company is named as a defendant in various claims, complaints and other legal actions in the ordinary course of business. At any point in time, the Company is managing several hundred individual claims related to construction defect matters, personal injury claims, employment matters, land development issues, contract disputes and other matters. The Company has established reserves for these contingencies based on the estimated costs of pending claims and the estimated costs of anticipated future claims related to previously closed homes. The estimated liabilities for these contingencies were $ 461.3 million and $ 434.7 million at June 30, 2020 and September 30, 2019, respectively, and are included in accrued expenses and other liabilities in the consolidated balance sheets. Approximately 99 % of these reserves related to construction defect matters at both June 30, 2020 and September 30, 2019. Expenses related to the Company’s legal contingencies were $ 41.1 million and $ 19.9 million in the nine months ended June 30, 2020 and 2019, respectively. Changes in the Company’s legal claims reserves during the nine months ended June 30, 2020 and 2019 were as follows: Nine Months Ended June 30, 2020 2019 (In millions) Reserves for legal claims, beginning of period $ 434.7 $ 408.1 Increase in reserves 57.1 45.5 Payments ( 30.5 ) ( 12.7 ) Reserves for legal claims, end of period $ 461.3 $ 440.9 27 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 The Company estimates and records receivables under its applicable insurance policies related to its estimated contingencies for known claims and anticipated future construction defect claims on previously closed homes and other legal claims and lawsuits incurred in the ordinary course of business when recovery is probable. Additionally, the Company may have the ability to recover a portion of its losses from its subcontractors and their insurance carriers when the Company has been named as an additional insured on their insurance policies. The Company’s receivables related to its estimates of insurance recoveries from estimated losses for pending legal claims and anticipated future claims related to previously closed homes totaled $ 82.4 million, $ 75.1 million and $ 69.8 million at June 30, 2020, September 30, 2019 and June 30, 2019, respectively, and are included in other assets in the consolidated balance sheets. The estimation of losses related to these reserves and the related estimates of recoveries from insurance policies are subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to the Company’s markets and the types of products built, claim frequency, claim settlement costs and patterns, insurance industry practices and legal interpretations, among others. Due to the high degree of judgment required in establishing reserves for these contingencies, actual future costs and recoveries from insurance could differ significantly from current estimated amounts, and 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. Land and Lot Purchase Contracts The Company enters into land and lot purchase contracts to acquire 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 many of the purchase contracts, the deposits are not refundable in the event the Company elects to terminate the contract. Land purchase contract deposits and capitalized pre-acquisition costs are expensed to inventory and land option charges when the Company believes it is probable that it will not acquire the property under contract and will not be able to recover these costs through other means. At June 30, 2020, the Company’s homebuilding segment had total deposits of $ 561.9 million, consisting of cash deposits of $ 517.4 million and promissory notes of $ 44.5 million, related to contracts to purchase land and lots with a total remaining purchase price of approximately $ 8.5 billion. The majority of land and lots under contract are currently expected to be purchased within three years. Of these amounts, $ 97.9 million of the deposits related to contracts with Forestar to purchase land and lots with a remaining purchase price of $ 1.0 billion. A limited number of the homebuilding land and lot purchase contracts at June 30, 2020, representing $ 50.8 million of remaining purchase price, were subject to specific performance provisions that may require the Company to purchase the land or lots upon the land sellers meeting their respective contractual obligations. Of the $ 50.8 million remaining purchase price subject to specific performance provisions, $ 11.5 million related to contracts between the homebuilding segment and Forestar. During the three and nine months ended June 30, 2020, Forestar reimbursed the homebuilding segment $ 7.0 million and $ 23.2 million, respectively, for previously paid earnest money and $ 12.9 million and $ 26.2 million, respectively, for pre-acquisition and other due diligence costs related to land purchase contracts whereby the homebuilding segment assigned its rights under contract to Forestar. During the three and nine months ended June 30, 2019, Forestar reimbursed the homebuilding segment $ 10.8 million and $ 27.6 million, respectively, for previously paid earnest money and $ 4.7 million and $ 8.4 million, respectively, for pre-acquisition and other due diligence costs. Other Commitments At June 30, 2020, the Company had outstanding surety bonds of $ 1.7 billion and letters of credit of $ 159.4 million to secure performance under various contracts. Of the total letters of credit, $ 127.8 million were issued under the homebuilding revolving credit facility and $ 31.6 million were issued under Forestar’s revolving credit facility. 28 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 NOTE M – OTHER ASSETS, ACCRUED EXPENSES AND OTHER LIABILITIES The Company’s other assets at June 30, 2020 and September 30, 2019 were as follows: June 30, 2020 September 30, 2019 (In millions) Earnest money and refundable deposits $ 560.1 $ 540.0 Insurance receivables 82.4 75.1 Other receivables 130.2 103.6 Prepaid assets 35.0 49.6 Interest rate lock commitments 28.9 19.2 Margin deposits 29.2 19.6 Multi-family rental property held for sale — 28.9 Contract assets - insurance agency commissions 44.9 39.3 Lease right of use assets 35.5 — Mortgage servicing rights 10.0 — Other 49.7 37.5 $ 1,005.9 $ 912.8 The Company’s accrued expenses and other liabilities at June 30, 2020 and September 30, 2019 were as follows: June 30, 2020 September 30, 2019 (In millions) Reserves for legal claims $ 461.3 $ 434.7 Employee compensation and related liabilities 309.9 282.1 Warranty liability 281.3 247.3 Mortgage hedging instruments and loan commitments 36.6 — Accrued interest 36.5 26.3 Federal and state income tax liabilities 168.3 33.4 Inventory related accruals 53.3 61.5 Customer deposits 74.0 57.7 Accrued property taxes 30.2 40.1 Lease liabilities 38.1 — Other 98.8 95.0 $ 1,588.3 $ 1,278.1 29 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 NOTE N – FAIR VALUE MEASUREMENTS The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2020 and September 30, 2019. Changes in the fair value of the Level 3 assets during the nine months ended June 30, 2020 and 2019 were not material. Fair Value at June 30, 2020 Balance Sheet Location Level 1 Level 2 Level 3 Total (In millions) Debt securities collateralized by residential real estate Other assets $ — $ — $ 3.9 $ 3.9 Mortgage loans held for sale (a) Mortgage loans held for sale — 1,474.8 17.7 1,492.5 Mortgage servicing rights (b) Other assets — — 10.0 10.0 Derivatives not designated as hedging instruments (c): Interest rate lock commitments Other assets — 28.9 — 28.9 Forward sales of mortgage-backed securities Other liabilities — ( 33.0 ) — ( 33.0 ) Best-efforts and mandatory commitments Other liabilities — ( 0.7 ) — ( 0.7 ) Fair Value at September 30, 2019 Balance Sheet Location Level 1 Level 2 Level 3 Total (In millions) Debt securities collateralized by residential real estate Other assets $ — $ — $ 3.9 $ 3.9 Mortgage loans held for sale (a) Mortgage loans held for sale — 1,055.3 9.8 1,065.1 Derivatives not designated as hedging instruments (c): Interest rate lock commitments Other assets — 19.2 — 19.2 Forward sales of mortgage-backed securities Other liabilities — ( 4.1 ) — ( 4.1 ) Best-efforts and mandatory commitments Other liabilities — ( 1.0 ) — ( 1.0 ) ___________________ (a) The Company typically elects the fair value option upon origination for mortgage loans held for sale. Interest income earned on mortgage loans held for sale is based on contractual interest rates and included in other income. Mortgage loans held for sale valued using Level 3 inputs at June 30, 2020 and September 30, 2019 include $ 17.7 million and $ 9.8 million, respectively, of loans for which the Company elected the fair value option upon origination and did not sell into the secondary market. The fair value of these mortgage loans held for sale is generally calculated considering pricing in the secondary market and adjusted for the value of the underlying collateral, including interest rate risk, liquidity risk and prepayment risk. The Company plans to sell these loans as market conditions permit. (b) Although the majority of the Company’s mortgage loans are sold on a servicing-released basis, when the servicing rights are retained, the Company records them at fair value using third-party valuations. The key assumptions used in the valuation, which are generally unobservable inputs, are mortgage prepayment rates, discount rates and delinquency rates, which were 13 %, 11 % and 5 %, respectively, for the three months ended June 30, 2020. (c) Fair value measurements of these derivatives represent changes in fair value, as calculated by reference to quoted prices for similar assets, and are reflected in the balance sheet as other assets or accrued expenses and other liabilities. Changes in the fair value of these derivatives are included in revenues in the consolidated statements of operations. The net fair value change for the three and nine months ended June 30, 2020 and 2019 recognized in revenues in the consolidated statements of operations was not significant. 30 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 The following table summarizes the Company’s assets measured at fair value on a nonrecurring basis at June 30, 2020 and September 30, 2019: Fair Value at June 30, 2020 Fair Value at September 30, 2019 Balance Sheet Location Level 2 Level 3 Level 2 Level 3 (In millions) Inventory held and used (a) (b) Inventories $ — $ — $ — $ 4.5 Mortgage loans held for sale (a) (c) Mortgage loans held for sale — 4.2 — 2.7 Other mortgage loans (a) (d) Other assets — 2.8 — 1.8 ___________________ (a) The fair values included in the table above represent only those assets whose carrying values were adjusted to fair value as a result of impairment in the respective period and were held at the end of the period. (b) In performing its impairment analysis of communities, discount rates ranging from 16 % to 18 % were used in the periods presented. (c) These mortgage loans have some degree of impairment affecting their marketability and are valued at the lower of carrying value or fair value. When available, quoted prices in the secondary market are used to determine fair value (Level 2); otherwise, a cash flow valuation model is used to determine fair value (Level 3). (d) The fair values of other mortgage loans was determined based on the value of the underlying collateral. For the financial assets and liabilities that the Company does not reflect at fair value, the following tables present both their respective carrying value and fair value at June 30, 2020 and September 30, 2019: Carrying Value Fair Value at June 30, 2020 Level 1 Level 2 Level 3 Total (In millions) Cash and cash equivalents (a) $ 2,353.5 $ 2,353.5 $ — $ — $ 2,353.5 Restricted cash (a) 19.2 19.2 — — 19.2 Notes payable (b) (c) 4,297.3 — 3,253.4 1,219.2 4,472.6 Carrying Value Fair Value at September 30, 2019 Level 1 Level 2 Level 3 Total (In millions) Cash and cash equivalents (a) $ 1,494.3 $ 1,494.3 $ — $ — $ 1,494.3 Restricted cash (a) 19.7 19.7 — — 19.7 Notes payable (b) (c) 3,399.4 — 2,533.9 991.9 3,525.8 ___________________ (a) The fair values of cash, cash equivalents and restricted cash approximate their carrying values due to their short-term nature and are classified as Level 1 within the fair value hierarchy. (b) The fair value of the senior notes is determined based on quoted prices, which is classified as Level 2 within the fair value hierarchy. (c) The fair values of other secured notes and borrowings on the revolving credit facilities and the mortgage repurchase facility approximate carrying value due to their short-term nature or floating interest rate terms, as applicable, and are classified as Level 3 within the fair value hierarchy. 31 Table of Contents D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued) June 30, 2020 NOTE O – RELATED PARTY TRANSACTIONS In March 2019, the Company assigned its rights under a land purchase contract it entered into in December 2017 to R&R Riverview LLC (R&R), an entity owned by Ryan Horton and Reagan Horton, the adult sons of Donald R. Horton, the Company’s Chairman. In March 2019, R&R exercised its rights under the purchase contract and paid $ 77.5 million for 119 acres of undeveloped land in Arizona. In connection with the transaction, Donald R. Horton loaned R&R $ 77.5 million at a 2.55 % annual interest rate and obtained a security interest in the land. Concurrent with the contract assignment to R&R, the Company entered into a land purchase contract with R&R to purchase the 119 acres for R&R’s cost plus an annualized return of 16 %. In accordance with the Company’s policy on related party transactions, this transaction was reviewed and approved by a committee of the Board of Directors composed of independent directors. The Company determined that R&R was a variable interest entity, and the Company had the power through its rights in its land purchase contract with R&R to control the activities that most significantly impact the entity’s economic performance, and the Company is the primary beneficiary. Accordingly, the Company consolidated the variable interest entity in its consolidated financial statements by increasing inventory and notes payable by $ 77.5 million, and this amount was included in those balances at September 30, 2019. In October 2019, the Company paid R&R $ 84.2 million for all 119 acres of land and deconsolidated the variable interest entity from the financial statements. The purchase transaction was also reviewed and approved by a committee of the Board of Directors composed of independent directors. 32 Table of Contents