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Item 7. Management’s Discussion and Analysis

2020-11-20 compared with 2019-11-25 · 381 added, 259 removed, 461 unchanged (58% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations — Fiscal Year 2019 Overview

Sales prices for both new and resale homes have increased across most of our markets over the past several years, which has generally reduced housing affordability.

During fiscal 2018, interest rates on mortgage loans increased, which further impacted affordability.

These conditions resulted in some moderation of demand for new homes across most of our markets in late fiscal 2018 and early fiscal 2019, and in response, we increased our sales incentives to improve sales pace.

Later in fiscal 2019, interest rates on mortgage loans decreased, and we reduced sales incentives as demand strengthened compared to earlier in the year.

We continue to see solid economic fundamentals and a limited supply of homes at affordable prices across most of our markets.

We believe our business is well positioned with a broad geographic footprint, affordable product offerings, a balanced supply of finished lots, land and homes, a strong balance sheet and liquidity position and experienced personnel across our operating markets.

We remain focused on growing our revenues and profitability, generating consistently strong annual cash flows from operations and managing our product offerings, pricing, sales pace and inventory levels to optimize the return on our inventory investments.

In fiscal 2019 , our number of homes closed and home sales revenues increased 10% and 9% , respectively, compared to the prior year.

Our pre-tax income was $2.1 billion in both fiscal 2019 and 2018 .

Our pre-tax operating margin was 12.1% in fiscal 2019 compared to 12.8% in fiscal 2018 .

Results of Operations — Overview

Fiscal 2020 Operating Results

In fiscal 2020, our number of homes closed and home sales revenues increased 15% and 16%, respectively, compared to the prior year, and our consolidated revenues increased 15% to $20.3 billion compared to $17.6 billion in the prior year.

Our pre-tax income was $3.0 billion in fiscal 2020 compared to $2.1 billion in fiscal 2019, and our pre-tax operating margin was 14.7% compared to 12.1%.

Net income was $2.4 billion in fiscal 2020 compared to $1.6 billion in the prior year.

The current year results include a tax benefit of $93.4 million related to the retroactive reinstatement of the federal energy efficient homes tax credit.

Cash provided by our homebuilding operations was $1.9 billion in fiscal 2020 compared to $1.4 billion in fiscal 2019.

In fiscal 2019 , our homebuilding return on inventory (ROI) was 18.1% compared to 20.2% in fiscal 2018 .

Homebuilding ROI is calculated as homebuilding pre-tax income for the year divided by average inventory.

Average inventory in the ROI calculation is the sum of ending inventory balances for the trailing five quarters divided by five.

In fiscal 2020, our return on equity (ROE) was 22.1% compared to 17.2% in fiscal 2019, and our homebuilding return on inventory (ROI) was 24.6% compared to 18.1%.

ROE is calculated as net income attributable to D.R.

Horton for the year divided by average stockholders’ equity, where average stockholders’ equity is the sum of ending stockholders’ equity balances of the trailing five quarters divided by five.

Homebuilding ROI is calculated as homebuilding pre-tax income for the year divided by average inventory, where average inventory is the sum of ending homebuilding inventory balances for the trailing five quarters divided by five.

Within our homebuilding land and lot portfolio, our lots controlled under purchase contracts represent 70% of the lots owned and controlled at September 30, 2020 compared to 60% at September 30, 2019.

Growing our majority-owned Forestar lot development operations is advancing our homebuilding strategy of increasing our controlled finished lot pipeline .

We believe that housing demand in our individual operating markets is tied closely to each market’s economy.

Therefore, we expect that housing market conditions will vary across our markets.

economy continues to grow, we expect to see solid housing demand, concentrated in markets where job growth is occurring and new home prices remain affordable relative to household incomes.

The pace and sustainability of new home demand and our future results could be negatively affected by weakening economic conditions, decreases in the level of employment and housing demand, decreased home affordability, increases in mortgage interest rates or tightening of mortgage lending standards.

Our operating strategy focuses on enhancing long-term value to our shareholders by leveraging our financial and competitive position in our core homebuilding business to increase the returns on our inventory investments and generate strong profitability and cash flows, while managing risk and maintaining financial flexibility to make opportunistic strategic investments.

This strategy includes the following initiatives:

Our relationship with Forestar and expanded relationships with other land developers across the country have allowed us to increase the controlled portion of our finished lot pipeline.

During the latter part of March 2020, the impacts of C-19 and the related widespread reductions in economic activity across the United States began to adversely affect our business.

However, residential construction and financial services were designated as essential businesses in almost all of our markets, which allowed us to continue to operate during that time.

We implemented operational protocols to comply with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities.

During April 2020 when restrictive stay-at-home orders were in place for many markets across the United States, we experienced increases in sales cancellations and decreases in sales orders, and net sales orders for April were 1% lower than the same month in the prior year.

However, as economic activity began to resume and restrictive orders began to be lifted, our weekly sales pace increased significantly, and our cancellation rate returned to normal levels.

For the third and fourth quarters of fiscal 2020, our net sales orders increased by 38% and 81%, respectively, compared to the prior year quarters.

We believe the increase in demand in the second half of the year was fueled by increased buyer urgency due to lower interest rates on mortgage loans, the limited supply of homes at affordable price points across most of our markets and to some extent the lower levels of home sales from mid-March through early April, which caused some pent-up demand.

We were and remain well positioned for increased demand with our affordable product offerings, lot supply and housing inventory.

However, even with the resurgence of demand in our third and fourth quarters, we remain cautious as to the ongoing impact of C-19 on our operations and on the overall economy.

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 our homes and availability of mortgage loans to homebuyers.

The extent to which this impacts our operational and financial performance will depend on future developments, including the duration and spread of C-19 and the impact on our customers, trade partners and employees, all of which are highly uncertain and cannot be predicted.

We believe our strong balance sheet and liquidity position provide us with the flexibility to operate effectively through changing economic conditions.

We plan to continue to generate strong cash flows from our homebuilding operations and manage our product offerings, incentives, home pricing, sales pace and inventory levels to optimize the return on our inventory investments in each of our communities based on local housing market conditions.

We have made operational adjustments as a result of C-19;

however, our strategy remains consistent and includes the following initiatives:

• Developing and retaining highly experienced and productive teams of personnel throughout our company that are aligned and focused on continuous improvement in our operational execution and financial performance.

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• Managing our inventory of homes under construction relative to demand in each of our markets including starting construction on unsold homes to capture new home demand and actively controlling the number of unsold, completed homes in inventory.

Investing in land and land development in desirable markets, while controlling the level of land and lots we own in each of our markets relative to the local new home demand.

Increasing the amount of land and finished lots controlled through purchase contracts by expanding relationships with land developers across the country and continuing to assist our majority-owned Forestar lot development subsidiary with the growth of their operations.

Opportunistically pursuing acquisitions to enhance our operations and improve returns.

• Investing in land and land development in desirable markets, while controlling the level of land and lots we own in each market relative to the local new home demand.

• Continuing to seek opportunities to expand the portion of our land and finished lots controlled through purchase contracts by assisting Forestar with its operations and expanding our relationships with land developers across the country.

• Controlling the cost of goods purchased from both vendors and subcontractors.

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• Controlling our selling, general and administrative (SG&A) expense infrastructure to match production levels.

• Opportunistically evaluating potential acquisitions to enhance our operations and improve returns.

• Ensuring that our financial services business provides high quality mortgage and title services to homebuyers efficiently and effectively.

Investing in the construction of garden style multi-family rental properties to meet rental demand in high growth suburban markets, and selling these properties profitably.

We believe our operating strategy, which has produced positive results in recent years, will allow us to maintain and improve our financial and competitive position and balance sheet strength.

• Investing in the construction of single-family and multi-family rental properties to meet rental demand in high growth suburban markets and selling these properties profitably.

We believe our operating strategy, which has produced positive results in recent years, will allow us to successfully operate through changing economic conditions to maintain and improve our financial and competitive position.

However, we cannot provide any assurances that the initiatives listed above will continue to be successful, and we may need to adjust components of our strategy to meet future market conditions.

Key financial results as of and for our fiscal year ended September 30, 2019 , as compared to fiscal 2018 (or from the acquisition date of October 5, 2017 through September 30, 2018 for Forestar’s results), were as follows:

Key financial results as of and for our fiscal year ended September 30, 2020, as compared to fiscal 2019, were as follows:

Homebuilding:

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• Homebuilding return on inventory was 24.6% compared to 18.1%.

Net cash provided by homebuilding operations was $1.4 billion compared to $1.0 billion .

• Cash provided by homebuilding operations was $1.9 billion compared to $1.4 billion.

• Homebuilding cash and cash equivalents totaled $2.6 billion compared to $1.0 billion.

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• Owned lots totaled 112,600 compared to 121,400, and lots controlled through purchase contracts increased to 264,300 from 185,900.

Homebuilding debt decreased to $2.0 billion from $2.4 billion .

Homebuilding debt to total capital improved to 17.0% compared to 21.4% .

• Homebuilding debt was $2.5 billion compared to $2.0 billion.

• Homebuilding debt to total capital was 17.5% compared to 17.0%.

• Forestar’s revenues increased 118% to $931.8 million compared to $428.3 million.

Revenues in fiscal 2020 and 2019 included $887.4 million and $326.6 million, respectively, of revenue from land and lot sales to our homebuilding segment.

Forestar’s lot sales increased 223% to 4,132 compared to 1,279 .

Lot sales to D.R.

Horton were 3,728 compared to 642 .

• Forestar’s lots sold increased 151% to 10,373 compared to 4,132.

Lots sold to D.R.

Horton totaled 10,164 compared to 3,728.

• Forestar’s pre-tax income was $78.1 million compared to $45.7 million.

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• Forestar’s cash and cash equivalents totaled $394.3 million compared to $382.8 million.

Forestar’s inventories totaled $1.0 billion compared to $498.0 million .

Owned and controlled lots totaled 38,300 compared to 20,100 .

• Forestar’s inventories totaled $1.3 billion compared to $1.0 billion.

• Forestar’s owned and controlled lots totaled 60,500 compared to 38,300.

Of these lots, 30,400 were under contract to sell to or subject to a right of first offer with D.R.

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• Forestar’s debt was $641.1 million compared to $460.5 million.

• Forestar’s debt to total capital was 42.4% compared to 36.3%.

Financial Services:

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Consolidated Results:

Consolidated pre-tax income increased 3% to $2.1 billion .

• Consolidated pre-tax income increased 40% to $3.0 billion compared to $2.1 billion.

• Consolidated pre-tax income was 14.7% of consolidated revenues compared to 12.1%.

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Horton increased 49% to $6.41 compared to $4.29.

Net cash provided by operations was $892.1 million compared to $545.2 million .

• Cash provided by operations was $1.4 billion compared to $892.1 million.

• Stockholders’ equity was $11.8 billion compared to $10.0 billion.

• Book value per common share increased to $32.53 compared to $27.20.

Debt to total capital improved to 25.3% compared to 26.3% .

• Debt to total capital was 26.6% compared to 25.3%.

Results of Operations — Homebuilding

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Net Sales Orders (1)

Fiscal Year Ended September 30,

Net Homes Sold

Value (In millions)

Average Selling Price

Year Ended September 30,

Net Homes Sold Value (In millions) Average Selling Price

Change 2020 2019 %

East 10,621 7,941 34 % $ 3,202.1 $ 2,291.1 40 % $ 301,500 $ 288,500 5 %

Midwest 5,010 3,224 55 % 1,794.8 1,127.8 59 % 358,200 349,800 2 %

Southeast 25,216 18,609 36 % 6,995.1 5,011.2 40 % 277,400 269,300 3 %

South Central 23,289 16,278 43 % 5,978.5 4,123.5 45 % 256,700 253,300 1 %

Southwest 4,180 2,797 49 % 1,219.0 750.6 62 % 291,600 268,400 9 %

West 10,142 7,716 31 % 4,416.8 3,539.2 25 % 435,500 458,700 (5) %

78,458 56,565 39 % $ 23,606.3 $ 16,843.4 40 % $ 300,900 $ 297,800 1 %

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(1) Net sales orders represent the number and dollar value of new sales contracts executed with customers (gross sales orders), net of cancelled sales orders.

Sales Order Cancellations

Fiscal Year Ended September 30,

Cancelled Sales Orders

Value (In millions)

Cancellation Rate (1)

Year Ended September 30,

Cancelled Sales Orders Value (In millions) Cancellation Rate (1)

2020 2019 2020 2019 2020 2019

East 2,722 2,155 $ 779.6 $ 607.3 20 % 21 %

Midwest 1,027 680 338.0 229.2 17 % 17 %

Southeast 6,750 5,410 1,856.8 1,444.4 21 % 23 %

South Central 6,140 4,751 1,583.6 1,193.2 21 % 23 %

Southwest 899 969 253.2 247.0 18 % 26 %

West 1,628 1,323 717.7 614.0 14 % 15 %

19,166 15,288 $ 5,528.9 $ 4,335.1 20 % 21 %

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(1) Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.

Net Sales Orders

The number of net sales orders increased 7% during 2019 compared to 2018 , with increases in most of our regions.

The number of net sales orders increased 39% during 2020 compared to 2019, with significant increases in all of our regions.

The value of net sales orders increased 40% to $23.6 billion (78,458 homes) in 2020 from $16.8 billion (56,565 homes) in 2019.

The average selling price of homes sold during fiscal 2019 was $297,800 , essentially unchanged from the prior year.

Higher sales volumes in our East and Midwest regions reflect our acquisitions of the homebuilding operations of Terramor Homes, Westport Homes and Classic Builders in early fiscal 2019, which added 262 net sales orders to the East region’s results and 1,199 net sales orders to the Midwest region's results.

Lower sales volume in our Southwest region during 2019 was due to a decrease in sales orders in our Phoenix market.

The average selling price of net sales orders during fiscal 2020 was $300,900, up 1% from the prior year.

The markets contributing most to the increases in sales volumes in our regions were as follows:

the Carolina markets (particularly Myrtle Beach and Charlotte) in the East;

the Denver, Minneapolis and Indiana markets in the Midwest;

the Florida markets (particularly Tampa) in the Southeast;

the Houston and Dallas markets in the South Central;

the Phoenix market in the Southwest;

and the California and Nevada markets in the West.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 20% in 2020 compared to 21% in 2019.

We believe our business is well positioned to continue to generate increased sales volume;

however, our future sales volumes will depend on new home demand in each of our operating markets and our ability to successfully implement our operating strategies.

The increase in our sales orders reflects the increase in demand for our homes in the second half of the year fueled by increased buyer urgency due to lower interest rates on mortgage loans, the limited supply of homes at affordable price points across most of our markets and to some extent the lower levels of home sales from mid-March through early April, which caused some pent-up demand.

Sales Order Backlog

As of September 30,

Homes in Backlog

Value (In millions)

Average Selling Price

Homes in Backlog Value (In millions) Average Selling Price

Change 2020 2019 %

East 3,583 1,916 87 % $ 1,137.4 $ 576.1 97 % $ 317,400 $ 300,700 6 %

Midwest 2,016 1,063 90 % 731.5 364.7 101 % 362,800 343,100 6 %

Southeast 8,256 4,277 93 % 2,378.5 1,219.5 95 % 288,100 285,100 1 %

South Central 7,913 4,166 90 % 2,076.9 1,084.0 92 % 262,500 260,200 1 %

Southwest 2,005 815 146 % 596.2 241.6 147 % 297,400 296,400 — %

West 2,910 1,376 111 % 1,265.1 654.2 93 % 434,700 475,400 (9) %

26,683 13,613 96 % $ 8,185.6 $ 4,140.1 98 % $ 306,800 $ 304,100 1 %

Sales Order Backlog

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Homes Closed and Home Sales Revenue

Fiscal Year Ended September 30,

Value (In millions)

Average Selling Price

Year Ended September 30,

Homes Closed Value (In millions) Average Selling Price

Change 2020 2019 %

East 8,954 7,928 13 % $ 2,640.8 $ 2,285.0 16 % $ 294,900 $ 288,200 2 %

Midwest 4,057 3,193 27 % 1,428.0 1,113.8 28 % 352,000 348,800 1 %

Southeast 21,237 18,553 14 % 5,836.1 4,964.0 18 % 274,800 267,600 3 %

South Central 19,542 16,604 18 % 4,985.6 4,191.3 19 % 255,100 252,400 1 %

Southwest 2,990 2,910 3 % 864.4 760.6 14 % 289,100 261,400 11 %

West 8,608 7,787 11 % 3,805.9 3,610.3 5 % 442,100 463,600 (5) %

65,388 56,975 15 % $ 19,560.8 $ 16,925.0 16 % $ 299,100 $ 297,100 1 %

Home Sales Revenue

Revenues from home sales increased 16% to $19.6 billion (65,388 homes closed) in 2020 from $16.9 billion (56,975 homes closed) in 2019.

Home sales revenues increased in most of our regions primarily due to an increase in the number of homes closed.

Home sales revenues increased in all of our regions primarily due to an increase in the number of homes closed.

The number of homes closed in fiscal 2020 increased 15% from 2019.

The increases in our East and Midwest regions reflect our acquisitions of the homebuilding operations of Terramor Homes, Westport Homes and Classic Builders in early fiscal 2019, which added 266 closings to the East region’s results and 1,157 closings to the Midwest region's results.

Lower home closings volume in our Southwest region during 2019 was due to a decrease in closings in our Phoenix market.

The average selling price of homes closed during fiscal 2019 was $297,100 , down slightly from the prior year.

Decreases in the average selling price of homes closed in the Midwest and West regions were largely offset by an increase in the average selling price in the Southwest region.

The markets contributing most to the increase in closing volumes in our regions were as follows:

the New Jersey, Myrtle Beach and Charlotte markets in the East;

the Denver and Indianapolis markets in the Midwest;

the Florida markets (particularly Tampa) in the Southeast;

the Houston, Dallas and San Antonio markets in the South Central;

the Tucson market in the Southwest;

and the Portland and Southern California markets in the West.

Homebuilding Operating Margin Analysis

Percentages of Related Revenues

Fiscal Year Ended September 30,

Year Ended September 30,

Gross profit — home sales 21.8 % 20.2 %

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Selling, general and administrative expense 8.2 % 8.7 %

Gain on sale of assets

Other (income) (0.1) % (0.1) %

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Home Sales Gross Profit

Gross profit from home sales increased 4% to $3.4 billion in 2019 from $3.3 billion in 2018 and decreased 110 basis points to 20.2% as a percentage of home sales revenues.

The percentage decrease resulted from decreases of 130 basis points due to the average selling price of our homes closed decreasing while the average cost increased and 10 basis points from an increase in the amount of purchase accounting adjustments for recent acquisitions, partially offset by improvements of 20 basis points due to a reduction in warranty and construction defect expenses and 10 basis points due to a decrease in the amortization of capitalized interest.

Gross profit from home sales increased to $4.3 billion in 2020 from $3.4 billion in 2019 and increased 160 basis points to 21.8% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 150 basis points due to a decrease in the average cost of our homes closed while the average selling price increased slightly, 20 basis points from a decrease in the amount of purchase accounting adjustments related to prior year acquisitions and 10 basis points due to a decrease in the amortization of capitalized interest, partially offset by increased warranty and construction defect costs of 20 basis points.

We remain focused on managing the pricing, incentives and sales pace in each of our communities to optimize the returns on our inventory investments and adjust to local market conditions and new home demand.

These actions could cause our gross profit margins to fluctuate in future periods.

If a prolonged economic recession and a resulting decline in new home demand occur due to C-19 or otherwise, we would expect our gross profit margins to decline from current levels.

Land/Lot Sales and Other Revenues

Land sales and other revenues from our homebuilding operations were $91.9 million and $121.8 million in fiscal 2019 and 2018 , respectively.

Land/lot sales and other revenues from our homebuilding operations were $83.1 million and $91.9 million in fiscal 2020 and 2019, respectively.

We continually evaluate our land and lot supply, and fluctuations in revenues and profitability from land sales occur based on how we manage our inventory levels in various markets.

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Inventory and Land Option Charges

At the end of each quarter during fiscal 2019 , we reviewed the performance and outlook for all of our communities and land inventories for indicators of potential impairment and performed detailed impairment evaluations and analyses when necessary.

As of September 30, 2019 , we performed detailed impairment evaluations of communities and land inventories with a combined carrying value of $55.0 million and recorded impairment charges of $6.3 million during the fourth quarter to reduce the carrying value of impaired communities to fair value.

Total homebuilding impairment charges during fiscal 2019 and 2018 were $24.9 million and $10.9 million , respectively.

At the end of each quarter, we review the performance and outlook for all of our communities and land inventories for indicators of potential impairment and perform detailed impairment evaluations and analyses when necessary.

As of September 30, 2020, we performed detailed impairment evaluations of communities with a combined carrying value of $36.1 million and determined that no communities were impaired.

Homebuilding impairment charges during fiscal 2020 and 2019 were $1.7 million and $24.9 million, respectively.

As we manage our inventory investments across our operating markets to optimize returns and cash flows, we may modify our 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.

Also, if housing or economic conditions weaken in specific markets in which we operate, or if conditions weaken in the broader economy or homebuilding industry, we may be required to evaluate additional communities for potential impairment.

These evaluations could result in additional impairment charges.

If the housing market or economic conditions are adversely affected for a prolonged period due to C-19 or otherwise, we may be required to evaluate additional communities for potential impairment.

These evaluations could result in additional impairment charges that could be significant.

During fiscal 2020 and 2019, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $21.2 million and $28.3 million, respectively.

Total inventory and land option charges for fiscal 2018 also included a charge of $24.5 million related to the settlement of an outstanding dispute associated with a land transaction.

Selling, General and Administrative (SG&A) Expense

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SG&A expense as a percentage of homebuilding revenues was 8.2% and 8.7% in fiscal 2020 and 2019, respectively.

Employee compensation and related costs represented 72% of SG&A costs in both fiscal 2019 and 2018 .

These costs increased 11% to $1.1 billion in 2019 from $964.2 million in 2018 due to an increase in the number of employees as compared to the prior year.

Employee compensation and related costs represented 75% of SG&A costs in fiscal 2020 compared to 72% in fiscal 2019.

These costs increased 13% to $1.2 billion in 2020 from $1.1 billion in 2019.

Our homebuilding operations employed 7,281 and 6,810 employees at September 30, 2020 and 2019, respectively.

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Interest incurred by our homebuilding operations decreased 11% to $93.0 million in fiscal 2020 from $104.7 million in fiscal 2019.

The decrease was due to a decrease in our average homebuilding debt in fiscal 2019 compared to the prior year.

The decrease was due to lower average interest rates on our homebuilding debt, as well as a 2% decrease in our average homebuilding debt in fiscal 2020 compared to the prior year.

Interest charged to cost of sales was 0.8% and 0.9% of total cost of sales (excluding inventory and land option charges) in fiscal 2020 and 2019, respectively.

Gain on Sale of Assets

Gain on sale of assets from our homebuilding operations was $2.0 million in fiscal 2019 compared to $15.8 million in fiscal 2018 .

The higher gain on sale during the prior year primarily resulted from the sale of rental units in our homebuilding segment’s Southeast region.

Other income, net of other expenses, included in our homebuilding operations was $11.7 million in fiscal 2020 compared to $9.5 million in fiscal 2019.

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The activities that result in this ancillary income are not significant, either individually or in the aggregate.

Business Acquisitions

During fiscal 2019, we acquired the homebuilding operations of Westport Homes, Classic Builders and Terramor Homes for $325.9 million .

The assets acquired included approximately 700 homes in inventory, 4,500 lots and control of approximately 4,300 additional lots through land purchase contracts.

Business Acquisition

In October 2020, we acquired the homebuilding operations of Braselton Homes for approximately $23 million in cash.

Braselton Homes operates in Corpus Christi, Texas.

The assets acquired included approximately 90 homes in inventory, 95 lots and control of approximately 840 additional lots through purchase contracts.

We also acquired a sales order backlog of approximately 125 homes.

Westport Homes operates in Indianapolis and Fort Wayne, Indiana, and Columbus, Ohio;

Classic Builders operates in Des Moines, Iowa;

and Terramor Homes operates in Raleigh, North Carolina.

Homebuilding Results by Reporting Region

Fiscal Year Ended September 30,

Year Ended September 30,

Revenues Homebuilding

Income (1) % of

Revenues Homebuilding

Income (1) % of

(In millions)

East $ 2,642.3 $ 357.0 13.5 % $ 2,290.2 $ 238.8 10.4 %

Midwest 1,429.0 128.8 9.0 % 1,123.1 57.7 5.1 %

Southeast 5,845.2 841.0 14.4 % 4,977.8 584.7 11.7 %

South Central 4,998.1 758.0 15.2 % 4,202.4 551.1 13.1 %

Southwest 881.6 136.9 15.5 % 772.6 100.4 13.0 %

West 3,847.7 443.3 11.5 % 3,650.8 378.0 10.4 %

$ 19,643.9 $ 2,665.0 13.6 % $ 17,016.9 $ 1,910.7 11.2 %

_____________

(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 our corporate office.

The amortization of capitalized interest and property taxes is allocated to each segment based on the segment’s cost of sales, while expenses associated with the corporate office are allocated to each segment based on the segment’s inventory balances.

East Region — Homebuilding revenues increased 21% in fiscal 2019 compared to fiscal 2018 , primarily due to an increase in the number of homes closed in our Carolina markets.

The acquisition of Terramor Homes in early fiscal 2019 contributed $85.0 million of revenues in the current year.

East Region — Homebuilding revenues increased 15% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in our New Jersey, Myrtle Beach and Charlotte markets.

The region generated pre-tax income of $357.0 million in 2020 compared to $238.8 million in 2019.

Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) decreased by 130 basis points in 2019 compared to 2018 , due to the average cost of homes closed increasing by more than the average selling price.

As a percentage of homebuilding revenues, SG&A expenses decreased by 30 basis points in 2019 compared to 2018 .

Midwest Region — Homebuilding revenues increased 31% in fiscal 2019 compared to fiscal 2018 .

The acquisitions of Westport Homes and Classic Builders in early fiscal 2019 contributed $328.8 million of revenues in the current year.

Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased by 250 basis points in 2020 compared to 2019, due to an increase in the average selling price of homes closed and a decrease in the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 50 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.

Midwest Region — Homebuilding revenues increased 27% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in our Denver and Indianapolis markets.

The region generated pre-tax income of $128.8 million in 2020 compared to $57.7 million in 2019.

Home sales gross profit percentage decreased by 360 basis points in 2019 compared to 2018 , largely due to purchase accounting adjustments related to the two acquisitions.

As a percentage of homebuilding revenues, SG&A expenses increased by 80 basis points in 2019 compared to 2018 , primarily due to the increases in employee compensation and other costs associated with the two acquisitions.

Southeast Region — Homebuilding revenues increased 9% in fiscal 2019 compared to fiscal 2018 , primarily due to an increase in the number of homes closed in our Florida markets.

Home sales gross profit percentage increased by 270 basis points in 2020 compared to 2019, due to decreases in purchase accounting adjustments in the current year related to the acquisitions of Westport Homes and Classic Builders.

As a percentage of homebuilding revenues, SG&A expenses decreased by 110 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.

Southeast Region — Homebuilding revenues increased 17% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in all of our markets.

The region generated pre-tax income of $841.0 million in 2020 compared to $584.7 million in 2019.

The region’s fiscal 2018 results include a $24.5 million inventory and land option charge related to the settlement of an outstanding dispute associated with a land transaction and a $13.4 million gain on the sale of multi-family rental units in one community.

Home sales gross profit percentage decreased by 10 basis points in 2019 compared to 2018 .

As a percentage of homebuilding revenues, SG&A expenses increased by 10 basis points in 2019 compared to 2018 .

South Central Region — Homebuilding revenues increased 11% in fiscal 2019 compared to fiscal 2018 , primarily due to an increase in the number of homes closed in our Houston and Fort Worth markets.

Home sales gross profit percentage increased by 220 basis points in 2020 compared to 2019, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 40 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.

South Central Region — Homebuilding revenues increased 19% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in our Houston, Dallas and San Antonio markets.

The region generated pre-tax income of $758.0 million in 2020 compared to $551.1 million in 2019.

Home sales gross profit percentage decreased by 50 basis points in 2019 compared to 2018 , due to the average cost of homes closed increasing by more than the average selling price.

As a percentage of homebuilding revenues, SG&A expenses decreased by 30 basis points in 2019 compared to 2018 .

Southwest Region — Homebuilding revenues increased 1% in fiscal 2019 compared to fiscal 2018 .

Home sales gross profit percentage increased by 130 basis points in 2020 compared to 2019, primarily due to an increase in the average selling price of homes closed and a decrease in the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 70 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.

Southwest Region — Homebuilding revenues increased 14% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the average selling price of homes closed in all markets.

The region generated pre-tax income of $136.9 million in 2020 compared to $100.4 million in 2019.

Home sales gross profit percentage increased by 190 basis points in 2020 compared to 2019, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

The gross profit percentage was also positively impacted by a decrease in warranty and construction defect costs.

The region’s fiscal 2018 results include $13.1 million of profit generated from a land sale in our Phoenix market.

As a percentage of homebuilding revenues, SG&A expenses increased by 20 basis points in 2019 compared to 2018 .

West Region — Homebuilding revenues decreased 3% in fiscal 2019 compared to fiscal 2018 , due to a decrease in the average selling price of homes closed.

As a percentage of homebuilding revenues, SG&A expenses decreased by 40 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.

West Region — Homebuilding revenues increased 5% in fiscal 2020 compared to fiscal 2019, due to increases in the number of homes closed in our Portland, Southern California, Las Vegas and Spokane markets, partially offset by decreases in the average selling price of homes closed in many markets.

The region generated pre-tax income of $443.3 million in 2020 compared to $378.0 million in 2019.

Home sales gross profit percentage decreased by 270 basis points in 2019 compared to 2018 , primarily due to the average selling price decreasing while the average cost of those homes increased slightly.

As a percentage of homebuilding revenues, SG&A expenses increased by 50 basis points in 2019 compared to 2018 .

Home sales gross profit percentage decreased by 10 basis points in 2020 compared to 2019, primarily due to the average selling price of homes closed decreasing by more than the average cost of those homes.

The region also benefited from lower inventory and land option charges, which were $4.3 million in 2020 compared to $24.2 million in 2019.

As a percentage of homebuilding revenues, SG&A expenses decreased by 60 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.

Homebuilding Inventories, Land and Lot Position and Homes in Inventory

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Construction in Progress and

Finished Homes

Residential Land/Lots Developed

and Under Development

for Development

Total Inventory

Finished Homes Residential Land/Lots Developed

and Under Development Land Held

for Development Land Held

for Sale Total Inventory

(In millions)

East $ 785.3 $ 531.2 $ 5.5 $ 6.3 $ 1,328.3

Midwest 497.0 459.0 1.8 0.7 958.5

Southeast 1,655.5 1,231.5 32.3 0.6 2,919.9

South Central 1,596.3 1,282.3 0.3 1.0 2,879.9

Southwest 244.2 449.7 1.6 0.3 695.8

West 1,137.3 847.1 5.7 19.0 2,009.1

Corporate and unallocated (1)

121.9 100.6 0.6 0.4 223.5

$ 6,037.5 $ 4,901.4 $ 47.8 $ 28.3 $ 11,015.0

September 30, 2019

Construction in Progress and

Finished Homes

Residential Land/Lots Developed

and Under Development

for Development

Total Inventory

Finished Homes Residential Land/Lots Developed

and Under Development Land Held

for Development Land Held

for Sale Total Inventory

(In millions)

East $ 697.1 $ 581.2 $ 10.5 $ — $ 1,288.8

Midwest 473.9 361.1 1.8 — 836.8

Southeast 1,434.7 1,299.9 31.8 1.6 2,768.0

South Central 1,215.4 1,317.5 0.3 — 2,533.2

Southwest 221.8 335.6 1.6 15.4 574.4

West 1,089.0 950.6 13.9 2.5 2,056.0

Corporate and unallocated (1)

117.1 110.2 0.8 0.3 228.4

$ 5,249.0 $ 4,956.1 $ 60.7 $ 19.8 $ 10,285.6

_____________

(1) Corporate and unallocated inventory consists primarily of capitalized interest and property taxes.

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Land and Lot Purchase

Contracts (2)(3)

Total Land/Lots

Contracts (2)(3) Total Land/Lots

Controlled Homes in

Inventory (4)

East 11,300 50,500 61,800 4,900

Midwest 8,000 17,800 25,800 2,600

Southeast 28,700 95,700 124,400 11,500

South Central 40,100 65,200 105,300 12,600

Southwest 7,200 7,600 14,800 1,800

West 17,300 27,500 44,800 4,600

112,600 264,300 376,900 38,000

30 % 70 % 100 %

September 30, 2019

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Land and Lot Purchase

Contracts (2)(3)

Total Land/Lots

Contracts (2)(3) Total Land/Lots

Controlled Homes in

Inventory (4)

East 11,000 30,500 41,500 3,900

Midwest 8,300 10,900 19,200 2,200

Southeast 34,800 73,300 108,100 8,900

South Central 41,600 51,400 93,000 7,900

Southwest 6,700 5,800 12,500 1,300

West 19,000 14,000 33,000 3,500

121,400 185,900 307,300 27,700

40 % 60 % 100 %

_____________

(1) Land/lots owned include approximately 33,800 and 36,100 owned lots that are fully developed and ready for home construction at September 30, 2020 and 2019, respectively.

Land/lots owned also include land held for development representing 1,700 lots at both September 30, 2019 and 2018 .

Land/lots owned also include land held for development representing 1,600 and 1,700 lots at September 30, 2020 and 2019, respectively.

(2) The total remaining purchase price of lots controlled through land and lot purchase contracts at September 30, 2020 and 2019 was $9.9 billion and $7.2 billion, respectively, secured by earnest money deposits of $653.4 million and $515.4 million, respectively.

The total remaining purchase price of lots controlled through land and lot purchase contracts at September 30, 2019 and 2018 included $953.8 million and $522.2 million , respectively, related to lot purchase contracts with Forestar, secured by $88.7 million and $48.0 million , respectively, of earnest money.

The total remaining purchase price of lots controlled through land and lot purchase contracts at September 30, 2020 and 2019 included $1.0 billion and $953.8 million, respectively, related to lot purchase contracts with Forestar, secured by $98.2 million and $88.7 million, respectively, of earnest money.

(3) Lots controlled at September 30, 2020 include approximately 30,400 lots owned or controlled by Forestar, 14,000 of which our homebuilding divisions have under contract to purchase and 16,400 of which our homebuilding divisions have a right of first offer to purchase.

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Results of Operations — Forestar

On October 5, 2017 , we acquired 75% of the outstanding shares of Forestar and as of September 30, 2019 owned approximately 66% of its outstanding shares.

Forestar is a publicly traded residential lot development company with operations in 51 markets and 20 states as of September 30, 2019 .

In October 2017, we acquired 75% of the outstanding shares of Forestar and at September 30, 2020, we owned 65% of its outstanding shares.

Forestar is a publicly traded residential lot development company with operations in 49 markets across 21 states as of September 30, 2020.

Forestar’s segment results are presented on their historical cost basis, consistent with the manner in which management evaluates segment performance.

(See Note B for additional Forestar segment information and purchase accounting adjustments.)

Results of operations for the Forestar segment for fiscal 2019 and from the date of acquisition through September 30, 2018 (referred to as fiscal 2018 in the discussion below) were as follows:

Results of operations for the Forestar segment for the fiscal years ended September 30, 2020 and 2019 were as follows.

Year Ended September 30,

For the Period from October 5, 2017 to

September 30, 2018

(In millions)

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Commercial tract sales 2.5 18.5

Other 0.4 2.3

Total revenues 931.8 428.3

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Gain on sale of assets (0.1) (3.0)

Interest expense

Other (income) expense (4.9) (5.5)

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Year Ended September 30,

For the Period from October 5, 2017 to

September 30, 2018

(Dollars in millions)

($ in millions)

Total residential single-family lots sold 10,373 4,132

Residential single-family lots sold to D.R.

Horton 10,164 3,728

Residential lot sales revenues from sales to D.R.

Horton $ 861.8 $ 315.7

Residential tract acres sold to D.R.

Horton 143 290

Residential land sales revenues from sales to D.R.

Horton $ 25.6 $ 10.9

SG&A expense for fiscal 2020 and 2019 includes charges of $5.0 million and $2.1 million, respectively, related to the shared services agreement between Forestar and D.R.

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Horton provides Forestar with certain administrative, compliance, operational and procurement services.

SG&A expense for fiscal 2018 also includes $6.3 million of severance and change of control charges for Forestar’s executive officers that were triggered shortly after the acquisition date.

Equity in earnings of unconsolidated entities for fiscal 2018 primarily relates to the sale of a multi-family joint venture project in Nashville, Tennessee.

Gain on sale of assets during fiscal 2018 was primarily due to gains of $14.6 million related to the sale of Forestar’s interest in a multi-family venture and $9.1 million related to the sale of water rights in East Texas.

Results of Operations — Financial Services

The following tables and related discussion set forth key operating and financial data for our financial services operations, comprising DHI Mortgage and our subsidiary title companies, for the fiscal years ended September 30, 2020 and 2019.

Fiscal Year Ended September 30,

Year Ended September 30,

2020 2019 % Change

Number of first-lien loans originated or brokered by DHI Mortgage for D.R.

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Number of homes closed by D.R.

Horton 65,388 56,975 15 %

Percentage of D.R.

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Loans sold by DHI Mortgage to third parties 44,423 32,849 35 %

Fiscal Year Ended September 30,

Year Ended September 30,

2020 2019 % Change

(In millions)

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Financial Services Revenues

Fiscal Year Ended September 30,

Year Ended September 30,

General and administrative expense 62.4 % 66.3 %

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The volume of loans originated by our mortgage operations is directly related to the number of homes closed by our homebuilding operations.

In fiscal 2019 , the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 13% from the prior year, primarily as a result of an increase in the number of homes closed by our homebuilding operations of 10% .

The percentage of homes closed for which DHI Mortgage handled the homebuyers’ financing was 58% and 56% in fiscal 2019 and 2018 , respectively.

In fiscal 2020, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 35% from the prior year, due to an increase in the percentage of homes closed for which DHI Mortgage handled the homebuyers’ financing, as well a 15% increase in the number of homes closed by our homebuilding operations.

The percentage of homes closed for which DHI Mortgage handled the homebuyers’ financing was 68% in fiscal 2020 compared to 58% in the prior year.

The increase in this percentage was primarily due to the Company’s program to offer below market interest rates to D.R.

Horton homebuyers, expanded coverage in certain markets and increased efficiencies resulting from technology advances.

Homes closed by our homebuilding operations constituted 97% and 98% of DHI Mortgage loan originations in fiscal 2020 and 2019, respectively.

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Virtually all of the mortgage loans held for sale on September 30, 2020 were eligible for sale to Fannie Mae, Freddie Mac or Ginnie Mae.

Approximately 93% of the mortgage loans sold by DHI Mortgage during fiscal 2019 were sold to four major financial entities, the largest of which purchased 32% of the total loans sold.

During fiscal 2020, approximately 66% of our mortgage loans were sold directly to Fannie Mae or into securities backed by Ginnie Mae and 28% were sold to two other major financial entities.

Changes in market conditions could result in a greater concentration of our mortgage sales in future periods to fewer financial entities and directly to Fannie Mae or Ginnie Mae, and we may need to make other adjustments to our mortgage operations.

Due to the disruption in the secondary mortgage markets beginning in late March 2020 caused by C-19 and the uncertainty of the impact of the CARES Act, many financial entities began offering lower pricing and limiting their purchases of our mortgages and servicing rights.

As a result of the rapid decline in servicing values at the end of March, we began retaining the servicing rights on a portion of our loan originations.

Servicing values have since improved, and we expect to sell these rights to third parties.

Financial Services Revenues and Expenses

Revenues from our mortgage operations increased 19% to $355.5 million in fiscal 2019 from $298.8 million in fiscal 2018 , while the number of loan originations increased 12% over that same period.

Revenues increased at a higher rate than origination volume primarily due to improved loan sale execution in the secondary market.

Our mortgage operations revenues were reduced by $0.8 million and $1.3 million in fiscal 2019 and 2018 , respectively, to increase our loss reserves for estimated future recourse obligations and other mortgage loans, and to adjust certain mortgage loans held for sale to fair value.

Our loss reserves for loan recourse obligations are estimated based upon analysis of the volume of mortgages originated, loan repurchase requests received, actual repurchases and losses through the disposition of such loans or requests and discussions with our mortgage purchasers.

Actual losses on mortgage loans may differ from our estimates, which may result in future changes to our loss reserves.

General and administrative (G&A) expense related to financial services operations increased 7% to $293.0 million in fiscal 2019 from $272.6 million in the prior year.

The increase was primarily due to an increase in employee related costs.

Revenues from our mortgage operations increased 34% to $476.7 million in fiscal 2020 from $355.5 million in fiscal 2019, primarily due to a 36% increase in loan originations.

During the fourth quarter, due to better clarity related to the CARES Act, pricing and execution in the secondary market improved from the previous nine months ended June 30, 2020, which caused revenues in the fourth quarter to increase at a higher rate than origination volume.

Revenues from our title operations increased 26% to $108.2 million in fiscal 2020 from $86.2 million in fiscal 2019, primarily due to a 28% increase in escrow closings.

General and administrative (G&A) expense related to our financial services operations increased 24% to $364.7 million in fiscal 2020 from $293.0 million in the prior year.

The increase was primarily due to an increase in employee related costs to support a higher volume of transactions.

Our financial services operations employed 2,163 and 1,924 employees at September 30, 2020 and 2019, respectively.

As a percentage of financial services revenues, G&A expense was 62.4% in fiscal 2020 compared to 66.3% in the prior year.

The lower percentage in fiscal 2019 was primarily due to improved loan sale execution on mortgage loan originations and increased mortgage loan origination volume allowing us to better leverage G&A expenses.

Fluctuations in financial services G&A expense as a percentage of revenues can be expected to occur, as some components of revenue may fluctuate differently than loan volumes, and some expenses are not directly related to mortgage loan volume or to changes in the amount of revenue earned.

Fluctuations in financial services G&A expense as a percentage of revenues occur because some components of revenue fluctuate differently than loan volumes, and some expenses are not directly related to mortgage loan volume or to changes in the amount of revenue earned.

Other income, net of other expense, included in our financial services operations consists primarily of the interest income of our mortgage subsidiary.

As a result of the revenue increases from higher volumes of mortgage originations and escrow closings, which also allowed us to better leverage our G&A expenses, pre-tax income from our financial services operations increased 47% to $245.2 million in fiscal 2020 from $166.3 million in fiscal 2019.

Results of Operations — Other Businesses

The combined pre-tax income of all of our subsidiaries engaged in other business activities was $55.1 million in fiscal 2020 compared to $55.5 million in fiscal 2019.

Income generated by our other businesses can vary significantly based on the timing of sales of multi-family rental properties.

Through DHI Communities, a 100% owned subsidiary, we develop, construct and own multi-family residential properties that produce rental income.

DHI Communities is primarily focused on constructing garden style multi-family products, which typically accommodate 200 to 400 dwelling units, in high growth suburban markets.

After DHI Communities has completed construction and achieved a stabilized occupancy rate, the property is typically marketed for sale.

We currently have four projects under active construction and two projects that are substantially complete, one of which was under contract to sell at September 30, 2019 .

During fiscal 2019, DHI Communities sold two multi-family rental properties for $133.4 million and recorded gains on sale totaling $51.9 million .

DHI Communities is primarily focused on constructing garden style multi-family communities, which typically accommodate 200 to 400 dwelling units, in high growth suburban markets.

After DHI Communities has completed construction and achieved a stabilized level of leased occupancy, the property is typically marketed for sale.

During fiscal 2020 and 2019, DHI Communities sold multi-family rental properties for a total of $128.5 million and $133.4 million, respectively, and recorded gains on sale totaling $59.4 million and $51.9 million.

DHI Communities had five projects under active construction and one project that was substantially complete at September 30, 2020.

These six projects represent 1,730 multi-family units, including 1,430 units under active construction and 300 completed units.

Results of Operations — Consolidated

Income before Income Taxes

Pre-tax income was $2.1 billion in both fiscal 2019 and 2018 .

In fiscal 2019 , our homebuilding, financial services and other businesses generated pre-tax income of $1.9 billion , $166.3 million and $55.5 million , respectively.

In fiscal 2018 , our homebuilding and financial services businesses generated pre-tax income of $2.0 billion and $117.8 million , respectively.

Pre-tax income was $3.0 billion in fiscal 2020 compared to $2.1 billion in fiscal 2019.

The increase was primarily due to an increase in pre-tax income generated by our homebuilding operations as a result of higher revenues from increased home closings and an increase in home sales gross margin.

In fiscal 2020, our homebuilding, financial services and other businesses generated pre-tax income of $2.7 billion, $245.2 million and $55.1 million, respectively, compared to pre-tax income of $1.9 billion, $166.3 million and $55.5 million, respectively, in fiscal 2019.

Our income tax expense was $602.5 million and $506.7 million in fiscal 2020 and 2019, respectively, and our effective tax rate was 20.2% and 23.8% in those years.

The effective tax rates reflect the impact of the Tax Cuts and Jobs Act (Tax Act), which was enacted into law in December 2017 .

The Tax Act reduced the federal corporate tax rate from 35% to 21% for all corporations effective January 1, 2018.

For fiscal year companies, the change in law required the application of a blended tax rate in the year of change, which for us was 24.5% for the fiscal year ended September 30, 2018.

For the fiscal year ended September 30, 2019 and thereafter, the applicable statutory federal tax rate is 21% .

The Tax Act also repealed the domestic production activities deduction effective for us beginning October 1, 2018.

The effective tax rates also include a tax benefit related to stock-based compensation and an expense for state income taxes.

The fiscal year 2018 effective tax rate also included the remeasurement of our deferred tax assets and liabilities as a result of the Tax Act, the release of a valuation allowance against deferred tax assets related to Forestar and the enactment of the Bipartisan Budget Act of 2018, which retroactively extended the expiration date of the federal energy efficient home credit from December 31, 2016 until December 31, 2017.

The effective tax rate for fiscal 2020 includes a tax benefit of $93.4 million 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 rate for fiscal 2020 also includes a tax benefit of $11.2 million related to the release of a valuation allowance against our state deferred tax assets.

The effective tax rates for both years include an expense for state income taxes, reduced by tax benefits related to stock-based compensation.

Our deferred tax assets, net of deferred tax liabilities, were $152.4 million at September 30, 2020 compared to $181.8 million at September 30, 2019.

We have a valuation allowance related to state deferred tax assets for net operating loss (NOL) carryforwards of $18.7 million at September 30, 2019 and $17.7 million at September 30, 2018 related to state deferred tax assets for NOL carryforwards that are more likely than not to expire before being realized.

We have a valuation allowance of $7.5 million and $18.7 million at September 30, 2020 and 2019, respectively, related to state deferred tax assets for net operating loss (NOL) carryforwards that are more likely than not to expire before being realized.

The decrease in the valuation allowance is primarily attributable to our determination that we will have sufficient future taxable income in certain state tax jurisdictions to realize a portion of our state NOL carryforwards.

We will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to our remaining state NOL carryforwards.

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Of the total amount, $5.4 million of the tax benefits expire over the next ten years and the remaining $10.4 million expires from fiscal years 2031 to 2040.

Forestar has $11.4 million of tax benefits for federal NOL carryforwards which have no expiration date.

Additionally, Forestar has $3.7 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction.

Forestar has $1.7 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction.

The accounting for deferred taxes is based upon estimates of future results.

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Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of our deferred tax assets.

Unrecognized tax benefits are the differences between tax positions taken or expected to be taken in a tax return and the benefits recognized in our financial statements.

Our unrecognized tax benefits totaled $8.9 million at September 30, 2020 and were insignificant at September 30, 2019.

Horton is subject to federal income tax and state income tax in multiple jurisdictions.

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Horton’s major tax jurisdictions remains open for examination for fiscal years 2017 through 2020.

Horton is currently being audited by various states;

however, to date, we are not aware of any significant findings identified by the taxing authorities.

Horton is not currently under audit for federal income tax, but is under audit by various states.

We are not aware of any significant findings by the state taxing authorities.

Forestar is subject to federal income tax and state income tax in multiple jurisdictions.

The federal statute of limitations for tax years prior to 2017 is effectively closed.

The statute of limitations in major state jurisdictions for tax years prior to 2015 is closed.

The Internal Revenue Service recently completed an audit of Forestar’s 2016 tax year with no changes.

Forestar is not currently being audited by any state jurisdictions.

The statute of limitations for Forestar’s major tax jurisdictions remains open for examination for tax years 2016 through 2020.

Forestar is not currently under audit for federal or state income taxes.

Capital Resources and Liquidity

We have historically funded our operations with cash flows from operating activities, borrowings under bank credit facilities and the issuance of new debt securities.

Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to changes in market conditions, to increase our investments in homes, finished lots, land and land development to expand our operations and grow our revenues and profitability, as well as to consider opportunistic strategic investments as they arise.

Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to changes in economic and market conditions.

We remain cautious as to the ongoing impact of C-19 on the U.S.

economy and will adjust our strategy as appropriate should market conditions change due to the pandemic or otherwise.

In the current market, we are increasing our investments in homebuilding inventories and single-family and multi-family rental properties to expand our operations and grow our revenues and profitability, as well as considering opportunistic strategic investments as they arise.

We are also maintaining higher homebuilding cash balances than in prior years to support the increased scale and level of activity in our business and to provide flexibility to adjust to changing conditions and opportunities.

At September 30, 2020, our ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 26.6% compared to 25.3% at September 30, 2019.

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We exclude the debt of Forestar and our financial services business because they are separately capitalized and not guaranteed by our parent company or any of our homebuilding entities.

We regularly assess our projected capital requirements to fund growth in our business, repay debt obligations, pay dividends, repurchase our common stock and support other general corporate and operational needs, and we regularly evaluate our opportunities to raise additional capital.

We regularly assess our projected capital requirements to fund growth in our business, repay debt obligations, pay dividends, repurchase our common stock and maintain sufficient cash levels to support our other operational needs, and we regularly evaluate our opportunities to raise additional capital.

Horton has an automatically effective universal shelf registration statement filed with the SEC in August 2018, registering debt and equity securities that may be issued 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, of which $394.3 million remains available.

Forestar also has an effective shelf registration statement filed with the SEC in September 2018, registering $500 million of equity securities.

At September 30, 2020, $394.3 million remained available under Forestar’s shelf registration statement, $100 million of which is reserved for sales under its at-the-market equity offering program.

As market conditions permit, we may issue new debt or equity securities through the capital markets or obtain additional bank financing to fund our projected capital requirements or provide additional liquidity.

We believe that our existing cash resources, revolving credit facilities, mortgage repurchase facility and ability to access the capital markets will provide sufficient liquidity to fund our near-term working capital needs and debt obligations, including the maturity of $500 million principal amount of homebuilding senior notes and $118.9 million principal amount of Forestar’s convertible senior notes in fiscal 2020 .

We believe that our existing cash resources, revolving credit facilities, mortgage repurchase facility and ability to access the capital markets or obtain additional bank financing will provide sufficient liquidity to fund our near-term working capital needs and debt obligations, including the maturity of $400 million aggregate principal amount of our homebuilding senior notes in fiscal 2021.

However, due to the current economic uncertainties related to C-19, we may be limited in accessing the capital markets or obtaining additional bank financing or the cost of accessing this financing could become more expensive for funding our longer-term capital needs.

Capital Resources - Homebuilding

Cash and Cash Equivalents — At September 30, 2020, cash and cash equivalents of our homebuilding segment totaled $2.6 billion.

Bank Credit Facility — At September 30, 2019 , we had a $1.325 billion senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $1.9 billion , subject to certain conditions and availability of additional bank commitments.

The facility also provided for the issuance of letters of credit with a sublimit equal to approximately 50% of the revolving credit commitment.

Bank Credit Facilities — We have 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 London Interbank Offered Rate (LIBOR) plus an applicable margin, as defined in the credit agreement governing the facility.

At September 30, 2019 , there were no borrowings outstanding and $141.2 million of letters of credit issued under the revolving credit facility, resulting in available capacity of approximately $1.2 billion .

The maturity date of the facility is October 2, 2024.

Borrowings and repayments under the facility totaled $1.06 billion each during fiscal 2020.

In October 2019 , the homebuilding revolving credit facility was amended to increase its capacity to $1.59 billion 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 amendment also extended the facility’s maturity date from September 25, 2023 to October 2, 2024 and increased the letter of credit sublimit to 100% of the revolving credit commitment.

Our homebuilding revolving credit facility imposes restrictions on our operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if our leverage ratio exceeds a certain level.

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.

The credit agreement governing the facility imposes restrictions on the creation of secured debt and liens.

At September 30, 2019 , we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facility.

Public Unsecured Debt — We have $1.95 billion principal amount of homebuilding senior notes outstanding as of September 30, 2019 that mature from February 2020 through August 2023 .

In March 2019 , we repaid $500 million principal amount of our 3.75% senior notes at maturity.

The indenture governing our senior notes imposes restrictions on the creation of secured debt and liens.

At September 30, 2020, there were no borrowings outstanding and $142.9 million of letters of credit issued under the revolving credit facility, resulting in available capacity of approximately $1.45 billion.

In May 2020, we 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 September 30, 2020.

Our homebuilding revolving credit facilities impose restrictions on our operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if our 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 impose restrictions on the creation of secured debt and liens.

At September 30, 2020, we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facilities.

Public Unsecured Debt — We have $2.45 billion principal amount of homebuilding senior notes outstanding as of September 30, 2020 that mature from December 2020 through October 2025.

In October 2019, we 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, we repaid $500 million principal amount of our 4.0% senior notes at maturity.

In May 2020, we 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%.

The indentures governing our senior notes impose restrictions on the creation of secured debt and liens.

At September 30, 2020, we were in compliance with all of the limitations and restrictions associated with our public debt obligations.

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Repurchases of Common Stock — During fiscal 2020, we repurchased 7.0 million shares of our common stock for $360.4 million.

Debt and Equity Repurchase Authorizations — Effective July 30, 2019 , our Board of Directors authorized the repurchase of up to $500 million of debt securities and $1.0 billion of our common stock, which replaced the previous authorizations.

The new authorizations have no expiration date.

Debt and Equity Repurchase Authorizations — Effective July 30, 2019, our Board of Directors authorized the repurchase of up to $500 million of debt securities and $1.0 billion of our common stock.

At September 30, 2020, the full amount of the debt repurchase authorization was remaining, and $535.3 million of the equity repurchase authorization was remaining.

These authorizations have no expiration date.

Capital Resources - Forestar

At September 30, 2019 , Forestar had cash and cash equivalents of $382.8 million .

Forestar obtained a $380 million senior unsecured bank credit facility in August 2018 and issued $350 million principal amount of senior notes in April 2019 .

In September 2018 , Forestar filed an effective shelf registration statement with the SEC, registering $500 million of equity securities, and in September 2019 , Forestar issued common stock that provided net proceeds of $100.7 million .

Forestar’s ability to achieve its long-term growth objectives will depend on its ability to obtain financing in sufficient capacities.

As market conditions permit, Forestar may issue new debt or equity securities through the capital markets or obtain additional bank financing to provide capital for future growth and additional liquidity.

Cash and Cash Equivalents — At September 30, 2020, Forestar had cash and cash equivalents of $394.3 million.

Bank Credit Facility — 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 calculation 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 September 30, 2019 , there were no borrowings outstanding and $29.7 million of letters of credit issued under the revolving credit facility.

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.

At September 30, 2019 , the borrowing base limited the available capacity under the revolving credit facility to $339.6 million .

Borrowings and repayments under the facility totaled $85 million each during fiscal 2019 .

In October 2019 , the Forestar revolving credit facility was amended to extend its maturity date from August 16, 2021 to October 2, 2022 .

The maturity date may 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 revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants.

At September 30, 2020, there were no borrowings outstanding and $36.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $344.0 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.

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At September 30, 2019 , Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility.

Unsecured Debt — Forestar has $118.9 million principal amount of 3.75% convertible senior notes outstanding as of September 30, 2019 that are expected to be settled in cash upon their maturity on March 1, 2020.

In April 2019 , Forestar issued $350 million principal amount of 8.0% senior notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended.

The notes mature April 15, 2024 , with interest payable semi-annually and represent unsecured obligations of Forestar.

Unsecured Debt — 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 mature March 1, 2028, with interest payable semi-annually, 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’s revolving credit facility, its senior notes and its convertible senior notes are not guaranteed by D.R.

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.

or any of the subsidiaries that guarantee our homebuilding debt.

Equity Offering — On September 30, 2019 , Forestar issued 6.0 million shares of its common stock for $17.50 per share in a public underwritten offering.

Net proceeds to Forestar from this offering after deducting underwriting discounts and commissions and other expenses were $100.7 million .

As a result of the issuance, our ownership of Forestar's outstanding common shares decreased from 75% to approximately 66% .

Following the offering, $394.3 million remains available for issuance under Forestar’s shelf registration statement.

At September 30, 2020, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations.

Debt Repurchase Authorization — Effective April 30, 2020, Forestar’s Board of Directors authorized the repurchase of up to $30 million of Forestar’s debt securities.

The authorization has no expiration date.

All of the $30 million authorization was remaining at September 30, 2020.

Capital Resources - Financial Services

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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.

The total capacity of the facility is $900 million ;

however, the capacity increases, without requiring additional commitments, to $1.1 billion for approximately 45 days at fiscal year end.

The total capacity of the facility is $1.35 billion;

however, the capacity increased, without requiring additional commitments, to $1.575 billion for approximately 45 days around September 30, 2020 and increases again for approximately 30 days around December 31, 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 September 30, 2019 , $1.0 billion of mortgage loans held for sale with a collateral value of $972.0 million were pledged under the mortgage repurchase facility.

DHI Mortgage had an obligation of $888.9 million outstanding under the mortgage repurchase facility at September 30, 2019 at a 3.7% annual interest rate.

As of September 30, 2020, $1.42 billion of mortgage loans held for sale with a collateral value of $1.39 billion were pledged under the mortgage repurchase facility.

As a result of advance paydowns totaling $255.8 million, DHI Mortgage had an obligation of $1.13 billion outstanding under the mortgage repurchase facility at September 30, 2020 at a 2.4% annual interest rate.

The mortgage repurchase facility is not guaranteed by D.R.

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Operating Cash Flow Activities

In fiscal 2019 , net cash provided by operating activities was $892.1 million compared to $545.2 million in fiscal 2018 .

Cash provided by operating activities in the current year consisted of $1.4 billion of cash provided by our homebuilding segment, partially offset by $395.7 million and $150.2 million of cash used in our Forestar and financial services segments, respectively.

Cash provided from a decrease in construction in progress and finished homes inventory was $84.6 million in fiscal 2019 as our homes in inventory at September 30, 2019 remained relatively flat with the prior year.

Cash used to increase construction in progress and finished homes inventory was $482.8 million in fiscal 2018 as our homes in inventory increased by approximately 3,300 homes at September 30, 2018 compared to September 30, 2017 .

During fiscal 2019 , cash used to increase residential land and lots was $676.4 million compared to $573.8 million in fiscal 2018 .

In fiscal 2020, net cash provided by operating activities was $1.4 billion compared to $892.1 million in fiscal 2019.

Cash provided by operating activities in the current year primarily consisted of $1.9 billion of cash provided by our homebuilding segment, partially offset by $292.8 million and $168.5 million of cash used in our financial services and Forestar segments, respectively.

Cash used to increase construction in progress and finished home inventory was $739.1 million in fiscal 2020 as our homes in inventory increased by approximately 10,300 homes at September 30, 2020 compared to September 30, 2019.

Cash provided from a decrease in construction in progress and finished home inventory was $84.6 million in fiscal 2019 as our homes in inventory at September 30, 2019 remained relatively flat compared to September 30, 2018.

Cash used to increase residential land and lots was $324.4 million in fiscal 2020 compared to $676.4 million in fiscal 2019.

Of these amounts, $281.5 million and $513.2 million, respectively, related to Forestar.

The most significant source of cash provided by operating activities in all years was net income.

The most significant source of cash provided by operating activities in both years was net income.

Investing Cash Flow Activities

In fiscal 2019 , net cash used in investing activities was $394.0 million compared to cash provided by investing activities of $19.0 million in fiscal 2018 .

In fiscal 2019 , we paid $315.8 million to purchase the homebuilding operations of Westport Homes, Classic Builders and Terramor Homes.

Proceeds from the sale of assets in fiscal 2019 included $133.4 million related to the sale of two multi-family rental properties constructed by DHI Communities.

In fiscal 2018 , we paid $558.3 million to purchase 75% of the outstanding shares of Forestar, which had $401.9 million of cash on the acquisition date.

Proceeds from the sale of assets in fiscal 2018 included $258.3 million related to Forestar, primarily from the strategic sale of assets.

In fiscal 2020, net cash used in investing activities was $166.1 million compared to $394.0 million in fiscal 2019.

In fiscal 2020, uses of cash included expenditures related to our rental properties totaling $190.3 million and purchases of property and equipment totaling $96.5 million, partially offset by proceeds from the sale of assets primarily consisting of $128.5 million related to the sale of two multi-family rental properties.

In fiscal 2019, the most significant uses of cash were the purchases of the homebuilding operations of Westport Homes, Classic Builders and Terramor Homes.

Proceeds from the sale of assets in fiscal 2019 included $133.4 million related to the sale of two multi-family rental properties.

Financing Cash Flow Activities

We expect the short-term financing needs of our operations will be funded with existing cash, cash generated from operations and borrowings under our credit facilities.

Long-term financing needs for the growth of our homebuilding and Forestar operations may be funded with the issuance of senior unsecured debt securities or equity securities through the capital markets.

In fiscal 2019 , net cash used in financing activities was $490.1 million , consisting primarily of note repayments, repurchases of common stock and payments of cash dividends, largely offset by note proceeds.

Note repayments of $2.7 billion included repayments of amounts drawn on our revolving credit facilities of $2.2 billion and repayment of $500 million principal amount of our 3.75% homebuilding senior notes at maturity.

We also used cash of $479.8 million to repurchase 11.9 million shares of our common stock and used $223.4 million to pay dividends to our common stockholders.

Note proceeds of $2.5 billion included draws of $2.2 billion on our revolving credit facilities and Forestar’s issuance of $350 million principal amount of 8.0% senior notes due April 2024 .

Our financial services segment received proceeds of $251.2 million from net advances under its mortgage repurchase facility.

Additionally, Forestar’s issuance of common stock resulted in $100.7 million of cash proceeds.

In fiscal 2018 , net cash used in financing activities was $82.5 million , consisting primarily of note repayments, payments of cash dividends and repurchases of common stock, largely offset by note proceeds.

Note repayments of $2.2 billion included repayments of amounts drawn on our homebuilding revolving credit facility of $1.8 billion and our early redemption of $400 million principal amount of our 3.625% senior notes due February 2018.

We also used cash of $188.4 million to pay dividends to our common stockholders and used $127.5 million to repurchase 2.8 million shares of our common stock.

Note proceeds of $2.2 billion included draws of $1.8 billion on our homebuilding revolving credit facility and our issuance of $400 million principal amount of 2.55% senior notes due December 2020 .

Our financial services segment received proceeds of $217.7 million from net advances under its mortgage repurchase facility.

Long-term financing needs for our homebuilding and Forestar operations may be funded with the issuance of senior unsecured debt securities or equity securities through the capital markets.

In fiscal 2020, net cash provided by financing activities was $270.6 million, consisting primarily of note proceeds of $1.1 billion from draws on our homebuilding revolving credit facility, our issuance of $500 million principal amount of 2.5% homebuilding senior notes, our issuance of $500 million principal amount of 2.6% homebuilding senior notes, Forestar’s issuance of $300 million principal amount of 5.0% senior notes and net advances of $243.7 million on our mortgage repurchase facility.

Note proceeds were partially offset by repayment of amounts drawn on our homebuilding revolving credit facility totaling $1.1 billion, repayment of $500 million principal amount of our 4.0% homebuilding senior notes at maturity, Forestar’s repayment of $118.9 million principal amount of its 3.75% convertible senior notes at maturity, cash used to repurchase 7.0 million shares of our common stock for $360.4 million and payment of cash dividends totaling $256.0 million.

In fiscal 2019, net cash used in financing activities was $490.1 million, consisting primarily of repayment of amounts drawn on our homebuilding and Forestar revolving credit facilities totaling $2.2 billion, repayment of $500 million principal amount of our 3.75% homebuilding senior notes at maturity, cash used to repurchase 11.9 million shares of our common stock for $479.8 million and payment of cash dividends totaling $223.4 million.

These uses of cash were partially offset by note proceeds of $2.2 billion from draws on our homebuilding and Forestar revolving credit facilities, Forestar’s issuance of $350 million principal amount of 8.0% senior notes, net advances of $251.2 million on our mortgage repurchase facility and proceeds of $100.7 million from Forestar’s issuance of common stock.

Our Board of Directors approved and paid quarterly cash dividends of $0.175 per common share in fiscal 2020 and $0.15 per common share in fiscal 2019.

In November 2019 , our Board of Directors approved a cash dividend of $0.175 per common share, payable on December 11, 2019 , to stockholders of record on November 27, 2019 .

In November 2020, our Board of Directors approved a quarterly cash dividend of $0.20 per common share, payable on December 14, 2020, to stockholders of record on December 4, 2020.

The declaration of future cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, our future earnings, cash flows, capital requirements, financial condition and general business conditions.

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Payments Due by Period

> 3 - 5 Years

Total Less Than

1 Year 1 - 3 Years > 3 - 5 Years More Than

(In millions)

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$ 4,863.2 $ 1,798.6 $ 1,284.3 $ 942.5 $ 837.8

_______________

(1) Notes payable represents principal and interest payments due on our senior notes, our secured notes, our mortgage subsidiary’s repurchase facility and our homebuilding and Forestar revolving credit facilities.

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The interest obligation associated with our mortgage repurchase facility is based on its annual effective rate of 2.4% and principal balance outstanding at September 30, 2020.

Purchase obligations relate to our land and lot purchase contracts which enable us to control significant lot positions with limited capital investment.

Among our homebuilding land and lot purchase contracts at September 30, 2019 , there were a limited number of contracts, representing $59.8 million of remaining purchase price, subject to specific performance provisions that may require us to purchase the land or lots upon the land sellers meeting their respective contractual obligations.

(2) Purchase obligations relate to a limited number of land and lot purchase contracts with $32.6 million of remaining purchase price, subject to specific performance provisions that may require us to purchase the land or lots upon the land sellers meeting their respective contractual obligations.

Of this amount, $1.4 million related to contracts between our homebuilding segment and Forestar.

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Further discussion of these commitments is provided in Item 7A “Quantitative and Qualitative Disclosures About Market Risk” under Part II of this annual report on Form 10-K.

Supplemental Guarantor Financial Information

As of September 30, 2020, D.R.

had outstanding $2.45 billion principal amount of homebuilding senior notes due through October 2025 and no amounts outstanding on its homebuilding revolving credit facilities.

All of the homebuilding senior notes and the homebuilding revolving credit facilities are fully and unconditionally guaranteed, on a joint and several basis, by certain subsidiaries of D.R.

(Guarantors or Guarantor Subsidiaries).

Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by D.R.

Our subsidiaries associated with the Forestar lot development operation, financial services operations, multi-family residential construction and certain other subsidiaries do not guarantee the homebuilding senior notes or the homebuilding revolving credit facilities (collectively, Non-Guarantor Subsidiaries).

The guarantees are senior unsecured obligations of each Guarantor and rank equal with all existing and future senior debt of such Guarantor and senior to all subordinated debt of such Guarantor.

The guarantees are effectively subordinated to any secured debt of such Guarantor to the extent of the value of the assets securing such debt.

The guarantees will be structurally subordinated to indebtedness and other liabilities of Non-Guarantor Subsidiaries of the Guarantors.

The guarantees by a Guarantor Subsidiary will be automatically and unconditionally released and discharged upon:

(1) the sale or other disposition of its common stock whereby it is no longer a subsidiary of ours;

(2) the sale or other disposition of all or substantially all of its assets (other than to us or another Guarantor);

(3) its merger or consolidation with an entity other than us or another Guarantor;

or (4) its ceasing to guarantee any of our publicly traded debt securities and ceasing to guarantee any of our obligations under our homebuilding revolving credit facility.

The following tables present summarized financial information for D.R.

and the Guarantor Subsidiaries on a combined basis after intercompany transactions and balances have been eliminated among D.R.

and the Guarantor Subsidiaries, as well as their investment in, and equity in earnings from the Non-Guarantor Subsidiaries.

and Guarantor Subsidiaries

Summarized Balance Sheet Data September 30, 2020

(In millions)

Amount due from Non-Guarantor Subsidiaries

Liabilities & Stockholders’ Equity

Notes payable

Total liabilities

Stockholders’ equity

Summarized Statement of Operations Data Year Ended September 30, 2020

(In millions)

Revenues $ 19,630.0

Cost of sales 15,379.2

Selling, general and administrative expense 1,584.4

Income before income taxes 2,666.4

Net income 2,134.7

A court could void or subordinate any Guarantor’s guarantee under the fraudulent conveyance laws if existing or future creditors of any such Guarantor were successful in establishing that:

• such guarantee was incurred with fraudulent intent;

• such Guarantor did not receive fair consideration or reasonably equivalent value for issuing its guarantee;

• was insolvent at the time of the guarantee;

• was rendered insolvent by reason of the guarantee;

• was engaged in a business or transaction for which its assets constituted unreasonably small capital to carry on its business;

• intended to incur, or believed that it would incur, debt beyond its ability to pay such debt as it matured.

The measures of insolvency for purposes of determining whether a fraudulent conveyance occurred would vary depending upon the laws of the relevant jurisdiction and upon the valuation assumptions and methodology applied by the court.

Generally, however, a company would be considered insolvent for purposes of the foregoing if:

• the sum of the company’s debts, including contingent, unliquidated and unmatured liabilities, is greater than all of such company’s property at a fair valuation;

• the present fair saleable value of the company’s assets is less than the amount that will be required to pay the probable liability on its existing debts as they become absolute and matured.

The indentures governing our homebuilding senior notes contain a “savings clause,” which limits the liability of each Guarantor on its guarantee to the maximum amount that such Guarantor can incur without risk that its guarantee will be subject to avoidance as a fraudulent transfer.

This provision may not be effective to protect such guarantees from fraudulent transfer challenges or, if it does, it may reduce such Guarantor’s obligation such that the remaining amount due and collectible under the guarantees would not suffice, if necessary, to pay the notes in full when due.

On the basis of historical financial information, operating history and other factors, we believe that each of the Guarantors, after giving effect to the issuance of the guarantees when such guarantees were issued, was not insolvent, did not have unreasonably small capital for the business in which it engaged and did not and has not incurred debts beyond its ability to pay such debts as they mature.

We cannot assure you, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.

Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again in the future, we generally close more homes and generate greater revenues and operating income in the third and fourth quarters of our fiscal year.

The seasonal nature of our business can also cause significant variations in our working capital requirements in our homebuilding, land development and financial services operations.

The seasonal nature of our business can also cause significant variations in our working capital requirements in our homebuilding, lot development and financial services operations.

As a result of seasonal activity, our quarterly results of operations and financial position at the end of a particular fiscal quarter are not necessarily representative of the balance of our fiscal year.

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These risks, uncertainties and other factors include, but are not limited to:

• the effects of public health issues such as a major epidemic or pandemic, including the impact of C-19 on the economy and our businesses;

• the cyclical nature of the homebuilding and lot development industries and changes in economic, real estate and other conditions;

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• the effects of health and safety incidents;

the effects of negative publicity;

• supply shortages and other risks of acquiring land, building materials and skilled labor;

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• the effects of governmental regulations on our financial services operations;

• competitive conditions within the homebuilding, lot development and financial services industries;

• our ability to manage and service our debt and comply with related debt covenants, restrictions and limitations;

competitive conditions within the homebuilding and financial services industries;

• the effects of negative publicity;

• the effects of the loss of key personnel;

information technology failures and data security breaches.

• information technology failures, data security breaches and our ability to satisfy privacy and data protection laws and regulations.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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We recognize financial services revenues associated with our title operations as closing services are rendered and title insurance policies are issued, both of which generally occur simultaneously as each home is closed.

We transfer substantially all underwriting risk associated with title insurance policies to third-party insurers.

Revenues associated with our mortgage operations primarily include net gains on the sale of mortgage loans and servicing rights.

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Expected gains and losses from the sale of servicing rights are included in the measurement of all written loan commitments that are accounted for at fair value through revenues at the time of commitment.

We sell substantially all of the mortgages we originate and the related servicing rights to third-party purchasers.

We sell substantially all of the mortgages we originate and the majority of the related servicing rights to third-party purchasers.

Interest income is earned from the date a mortgage loan is originated until the loan is sold.

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When a home is closed, we generally have not paid all incurred costs necessary to complete the home.

We record a liability and a charge to cost of sales for the amount estimated to ultimately be paid related to completed homes that have been closed.

We record a liability and a corresponding charge to cost of sales for the amount estimated to ultimately be paid related to completed homes that have been closed.

We compare our home construction budgets to actual recorded costs to determine the additional costs remaining to be paid on each closed home.

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Although actual costs to be paid in the future on previously closed homes could differ from our current accruals, such differences have not been significant.

Each quarter, we review our communities and land inventories for indicators of potential impairment.

At the end of each quarter, we review the performance and outlook for all of our communities and land inventories for indicators of potential impairment.

We generally review our inventory for impairment indicators at the community level, and the inventory within each community is categorized as land held for development, residential land and lots developed and under development, land held for sale and construction in progress and finished homes, based on the stage of production or plans for future development or sale.

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Impairment charges are also recorded on finished homes in substantially completed communities when events or circumstances indicate that the carrying values are greater than the fair values less estimated costs to sell these homes.

For the inventory impairment analyses performed during fiscal 2019 , we assumed that for the majority of communities, 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.

The remaining lives of the communities evaluated were estimated to be in a range from one month to five years , and we utilized a range of discount rates for communities from 12% to 18% .

We rarely purchase land for resale.

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Although regulations vary from state to state, construction defect issues can generally be reported for up to ten years after the home has closed in many states in which we operate.

Historical data and trends regarding the frequency of claims incurred and the costs to resolve claims relative to the types of products and markets where we operate are used to estimate the construction defect liabilities for both existing and

anticipated future claims.

These estimates are subject to ongoing revision as the circumstances of individual pending claims and historical data and trends change.

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Pending Accounting Pronouncements

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 is effective for us beginning October 1, 2019 and will not have a material impact on our consolidated financial position, results of operations or cash flows.

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.

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 us beginning October 1, 2020 and is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

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The guidance is effective for us beginning October 1, 2020 and is not expected to have a material impact on our 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 us beginning October 1, 2021, although early adoption is permitted.

We are currently evaluating the impact of this guidance, and it is not expected to have a material impact on our 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.

We will adopt this standard when LIBOR is discontinued and do not expect it to have a material impact on our consolidated financial statements or related disclosures.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis