What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2020-11-20 compared with 2019-11-25 · 548 added, 563 removed, 847 unchanged (57% of the section changed)

12 unchanged sentences

Total inventory 12,237.4 11,282.0

Investment in unconsolidated entities

Mortgage loans held for sale 1,529.0 1,072.0

2 unchanged sentences

Property and equipment, net 683.7 499.2

Other assets 1,113.7 912.8

Goodwill 163.5 163.5

Total assets $ 18,912.3 $ 15,606.6

Accounts payable $ 900.5 $ 634.0

2 unchanged sentences

Total liabilities 6,790.8 5,311.5

Commitments and contingencies (Note K)

Commitments and contingencies (Note L)

Preferred stock, $ .10 par value, 30,000,000 shares authorized, no shares issued

4 unchanged sentences

Retained earnings 9,757.8 7,640.1

Treasury stock, 23,741,367 shares and 11,858,608 shares at September 30, 2019 and 2018, respectively, at cost

Treasury stock, 30,741,367 shares and 23,741,367 shares

at September 30, 2020 and 2019, respectively, at cost

( 1,162.6 ) ( 802.2 )

Stockholders’ equity 11,840.0 10,020.9

Noncontrolling interests 281.5 274.2

Total equity 12,121.5 10,295.1

Total liabilities and equity $ 18,912.3 $ 15,606.6

3 unchanged sentences

Year Ended September 30,

2020 2019 2018

(In millions, except per share data)

Revenues $ 20,311.1 $ 17,592.9 $ 16,068.0

Cost of sales 15,373.2 13,720.9 12,398.1

5 unchanged sentences

Income tax expense 602.5 506.7 597.7

Net income 2,380.5 1,618.6 1,462.3

Net income attributable to noncontrolling interests 6.8 0.1 2.0

Net income attributable to D.R.

$ 2,373.7 $ 1,618.5 $ 1,460.3

Basic net income per common share attributable to D.R.

$ 6.49 $ 4.34 $ 3.88

Weighted average number of common shares 365.5 372.6 376.6

Diluted net income per common share attributable to D.R.

$ 6.41 $ 4.29 $ 3.81

Adjusted weighted average number of common shares 370.2 377.4 383.4

2 unchanged sentences

CONSOLIDATED STATEMENTS OF TOTAL EQUITY

Non-controlling

Stock Additional

Capital Retained

Earnings Treasury

Stock Non-controlling

Interests Total

(In millions, except common stock share data)

Balances at September 30, 2017 ( 374,986,079 shares)

$ 3.8 $ 2,992.2 $ 4,946.0 $ ( 194.9 ) $ 0.5 $ 7,747.6

Noncontrolling interest acquired — — — — 175.2 175.2

Net income — — 1,460.3 — 2.0 1,462.3

Exercise of stock options ( 2,547,139 shares)

Tax benefit from employee stock awards

0.1 43.3 — — — 43.4

Stock issued under employee benefit plans ( 1,536,954 shares)

— 4.0 — — — 4.0

Cash paid for shares withheld for taxes — ( 10.3 ) — — — ( 10.3 )

1 unchanged sentence

Cash dividends declared ($ 0.50 per share)

— — ( 188.4 ) — — ( 188.4 )

Repurchases of common stock ( 2,808,537 shares)

— — — ( 127.5 ) — ( 127.5 )

Distributions to noncontrolling interests — — — — ( 3.2 ) ( 3.2 )

Balances at September 30, 2018 ( 376,261,635 shares)

Noncontrolling interest acquired

$ 3.9 $ 3,085.0 $ 6,217.9 $ ( 322.4 ) $ 174.5 $ 9,158.9

Cumulative effect of adoption of ASC 606

— — 27.1 — — 27.1

Net income — — 1,618.5 — 0.1 1,618.6

Exercise of stock options ( 2,634,802 shares)

— 38.1 — — — 38.1

Stock issued under employee benefit plans ( 1,417,776 shares)

— 4.6 — — — 4.6

Cash paid for shares withheld for taxes — ( 19.7 ) — — — ( 19.7 )

1 unchanged sentence

Cash dividends declared ($ 0.60 per share)

— — ( 223.4 ) — — ( 223.4 )

Repurchases of common stock ( 11,882,759 shares)

— — — ( 479.8 ) — ( 479.8 )

Distributions to noncontrolling interests

— — — — ( 3.9 ) ( 3.9 )

Change of ownership interest in Forestar

— ( 2.1 ) — — 103.5 101.4

Balances at September 30, 2019 ( 368,431,454 shares)

Cumulative effect of adoption of ASC 606 (see Note A)

$ 3.9 $ 3,179.1 $ 7,640.1 $ ( 802.2 ) $ 274.2 $ 10,295.1

Net income — — 2,373.7 — 6.8 2,380.5

Exercise of stock options ( 959,742 shares)

— 17.8 — — — 17.8

Stock issued under employee benefit plans ( 1,608,786 shares)

— 5.6 — — — 5.6

Cash paid for shares withheld for taxes — ( 38.2 ) — — — ( 38.2 )

1 unchanged sentence

Cash dividends declared ($ 0.70 per share)

— — ( 256.0 ) — — ( 256.0 )

Repurchases of common stock ( 7,000,000 shares)

— — — ( 360.4 ) — ( 360.4 )

Distributions to noncontrolling interests

— — — — ( 0.7 ) ( 0.7 )

Change of ownership interest in Forestar

— ( 1.2 ) — — 1.2 —

Balances at September 30, 2020 ( 363,999,982 shares)

$ 3.9 $ 3,240.9 $ 9,757.8 $ ( 1,162.6 ) $ 281.5 $ 12,121.5

See accompanying notes to consolidated financial statements.

2 unchanged sentences

Year Ended September 30,

2020 2019 2018

(In millions)

OPERATING ACTIVITIES

Net income $ 2,380.5 $ 1,618.6 $ 1,462.3

Adjustments to reconcile net income to net cash provided by operating activities:

4 unchanged sentences

Distributions of earnings of unconsolidated entities — 0.5 2.0

Excess income tax benefit from employee stock awards

Deferred income taxes 14.1 20.1 170.9

2 unchanged sentences

Changes in operating assets and liabilities:

Decrease (increase) in construction in progress and finished homes

(Increase) decrease in construction in progress and finished homes ( 739.1 ) 84.6 ( 482.8 )

Increase in residential land and lots —

developed, under development, held for development and held for sale

( 324.4 ) ( 676.4 ) ( 573.8 )

Increase in other assets ( 150.7 ) ( 161.6 ) ( 110.6 )

Net (increase) decrease in mortgage loans held for sale

Net increase in mortgage loans held for sale ( 457.0 ) ( 275.6 ) ( 208.8 )

Increase in accounts payable, accrued expenses and other liabilities 566.2 126.2 129.1

5 unchanged sentences

Return of investment in unconsolidated entities 4.3 4.4 17.5

Net principal (increase) decrease of other mortgage loans and real estate owned

Proceeds from (purchases of) debt securities collateralized by residential real estate

Net principal increase of other mortgage loans and real estate owned ( 3.7 ) ( 2.3 ) ( 1.2 )

Proceeds from debt securities collateralized by residential real estate — — 7.3

Payments related to business acquisitions, net of cash acquired ( 9.7 ) ( 315.8 ) ( 159.2 )

3 unchanged sentences

Repayment of notes payable ( 1,682.9 ) ( 2,686.1 ) ( 2,181.7 )

Advances (payments) on mortgage repurchase facility, net

Advances on mortgage repurchase facility, net 243.7 251.2 217.7

Proceeds from stock associated with certain employee benefit plans 23.4 42.7 47.4

Excess income tax benefit from employee stock awards

Cash paid for shares withheld for taxes ( 38.2 ) ( 19.7 ) ( 10.3 )

1 unchanged sentence

Repurchases of common stock

( 360.4 ) ( 479.8 ) ( 127.5 )

Distributions to noncontrolling interests, net

( 0.7 ) ( 3.9 ) ( 3.2 )

Net proceeds from issuance of Forestar common stock

Net cash used in financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

Other financing activities ( 4.4 ) — —

Net cash provided by (used in) financing activities 270.6 ( 490.1 ) ( 82.5 )

Net increase in cash, cash equivalents and restricted cash 1,526.1 8.0 481.7

Cash, cash equivalents and restricted cash at beginning of year 1,514.0 1,506.0 1,024.3

3 unchanged sentences

Year Ended September 30,

2020 2019 2018

(In millions)

19 unchanged sentences

Reclassifications

In connection with the adoption of Accounting Standards Update (ASU) 2016-18 in fiscal 2019, restricted cash is now included with cash and cash equivalents when reconciling beginning and ending amounts in the consolidated statements of cash flows.

Prior year amounts have been reclassified to conform to the current year presentation, resulting in an increase in cash provided by investing activities of $ 16.4 million for fiscal 2018 and a decrease in cash used in investing activities of $ 7.0 million for fiscal 2017.

Certain prior period amounts have been reclassified to conform to the current year presentation.

At the beginning of fiscal 2020, the Company reclassified its single-family rental properties from other assets to property and equipment in its homebuilding segment.

Reclassification of the prior period amount resulted in a $ 37.0 million decrease in other assets with a corresponding increase in property and equipment at September 30, 2019.

This reclassification had no effect on the Company’s consolidated financial position or results of operations.

Use of Estimates

2 unchanged sentences

Actual results could differ materially from those estimates.

Adoption of New Accounting Standard

On October 1, 2018, the Company adopted Accounting Standards Codification 606, "Revenue from Contracts with Customers" (ASC 606), which is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services and satisfaction of performance obligations to a customer in an amount that reflects the consideration expected to be received in exchange for those goods or services.

The Company applied the modified retrospective method to contracts that were not completed as of October 1, 2018.

Results for fiscal 2019 are presented under ASC 606, while prior year amounts were not adjusted and will continue to be reported under the previous accounting standards.

The Company recorded an increase to retained earnings of $ 27.1 million , net of tax, as of October 1, 2018, due to the cumulative effect of adopting ASC 606, which was primarily related to the recognition of contract assets totaling $ 32.4 million for insurance brokerage commission renewals.

Under ASC 606, the Company recognizes revenue and a contract asset for estimated future renewals of these policies upon issuance of the initial policy, the date at which the performance obligation is satisfied.

There was not a material impact to fiscal 2019 revenues as a result of applying ASC 606, and there have not been significant changes to the Company’s business processes, systems, or internal controls as a result of implementing the standard.

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases,” which requires that lease assets and liabilities be recognized on the balance sheet and that key information about leasing arrangements be disclosed.

The guidance was effective for the Company beginning October 1, 2019 and did not have a material impact on its consolidated financial position, results of operations or cash flows.

As a result of the adoption of this standard on October 1, 2019, the Company recorded right of use assets of $ 39.0 million and lease liabilities of $ 40.3 million.

Lease right of use assets are included in other assets and lease liabilities are included in accrued expenses and other liabilities in the consolidated balance sheet.

In March 2020, the Securities and Exchange Commission (SEC) adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees, in Rule 3-10 of Regulation S-X.

The amended rule focuses on providing material, relevant and decision-useful information regarding guarantees and other credit enhancements, while eliminating certain prescriptive requirements.

The Company adopted these amendments on March 31, 2020.

Accordingly, summarized financial information has been presented only for the issuers and guarantors of the Company's registered securities for the most recent fiscal year and as permitted, this information is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In October 2020, the FASB issued ASU 2020-09, “Debt (Topic 470) - Amendments to SEC Paragraphs Pursuant to SEC Release No.

33-10762,” to reflect the SEC’s new disclosure rules on guaranteed debt securities offerings adopted by the Company in March 2020.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

2 unchanged sentences

Proceeds from home closings held for the Company’s benefit at title companies are included in homebuilding cash and cash equivalents in the consolidated balance sheets.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

When the Company executes sales contracts with its homebuyers, or when it requires advance payment from homebuyers for custom changes, upgrades or options related to their homes, the cash deposits received are recorded as liabilities until the homes are closed or the contracts are cancelled.

3 unchanged sentences

Financial services revenues associated with the Company’s title operations are recognized as closing services are rendered and title insurance policies are issued, both of which generally occur simultaneously as each home is closed.

The Company transfers substantially all underwriting risk associated with title insurance policies to third-party insurers.

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

1 unchanged sentence

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.

The Company sells substantially all of the mortgages it originates and the related servicing rights to third-party purchasers.

The Company sells substantially all of the mortgages it originates 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.

3 unchanged sentences

The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents.

Proceeds from home closings held for the Company’s benefit at title companies, which totaled $ 244.8 million at September 30, 2019 , are included in homebuilding cash and cash equivalents in the consolidated balance sheets.

Proceeds from home closings held for the Company’s benefit at title companies, which totaled $ 237.6 million and $ 244.8 million at September 30, 2020 and 2019, respectively, are included in homebuilding cash and cash equivalents in the consolidated balance sheets.

Cash balances of the Company’s captive insurance subsidiary, which are expected to be used to fund the subsidiary’s operations and pay future anticipated legal claims, were $ 51.3 million and $ 48.6 million at September 30, 2020 and 2019, respectively, and are included in cash and cash equivalents in the consolidated balance sheets.

3 unchanged sentences

Restricted cash related to financial services is mortgagor related funds held by the Company for taxes and insurance on an interim basis until the loans are sold.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Inventories and Cost of Sales

2 unchanged sentences

All indirect overhead costs, such as compensation of sales personnel, division and region management, and the costs of advertising and builder’s risk insurance are charged to SG&A expense as incurred.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Land and development costs are typically allocated to individual residential lots on a pro-rata basis, and the costs of residential lots are transferred to construction in progress when home construction begins.

9 unchanged sentences

The Company records land held for sale at the lesser of its carrying value or fair value less estimated costs to sell.

Each quarter, the Company reviews its communities and land inventories for indicators of potential impairment.

At the end of each quarter, the Company reviews the performance and outlook for all of its communities and land inventories for indicators of potential impairment.

If indicators of impairment are present for a community, the Company performs an impairment evaluation of the community, which includes an analysis to determine if the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts.

8 unchanged sentences

During fiscal 2020, 2019 and 2018, the Company’s active inventory exceeded its debt level, and all interest incurred was capitalized to inventory.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Land Purchase Contract Deposits and Pre-Acquisition Costs

3 unchanged sentences

Land purchase contract deposits and capitalized pre-acquisition costs are expensed to inventory and land option charges when the Company believes it is probable that it will not acquire the property under contract and will not be able to recover these costs through other means.

See Notes C and K .

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

See Notes C and L.

Variable Interests

Land purchase contracts can result in the creation of a variable interest in the entity holding the land parcel under contract.

At September 30, 2019 , there was one variable interest entity reported in the Company’s consolidated balance sheet as a result of the related party transaction described in Note N .

There were no variable interest entities reported in the consolidated balance sheet at September 30, 2018 because, with regard to each entity, the Company determined it did not control the activities that most significantly impact the variable interest entity’s economic performance, and it did not have an obligation to absorb losses of or the right to receive benefits from the entity.

There were no variable interest entities reported in the consolidated balance sheet at September 30, 2020 because, with regard to each entity, the Company determined it did not control the activities that most significantly impact the variable interest entity’s economic performance.

At September 30, 2019, there was one variable interest entity reported in the Company’s consolidated balance sheet as a result of the related party transaction described in Note O.

The maximum exposure to losses related to the Company’s unconsolidated variable interest entities is limited to the amounts of the Company’s related deposits.

5 unchanged sentences

Depreciation generally is recorded using the straight-line method over the estimated useful life of the asset.

The depreciable life of model home furniture is 2 years , depreciable lives of office furniture and equipment typically range from 2 to 5 years , and depreciable lives of buildings and improvements typically range from 5 to 30 years .

DHI Communities develops, constructs and owns multi-family residential properties that produce rental income.

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

The property balances related to these operations are presented in the table below.

The Company’s property and equipment balances and the related accumulated depreciation at September 30, 2019 and 2018 were as follows:

September 30,

(In millions)

Buildings and improvements (1) (2)

Multi-family rental properties under construction

Model home furniture

Office furniture and equipment

Total property and equipment

Accumulated depreciation

Property and equipment, net

_____________

At September 30, 2019 , buildings and improvements included $ 50.7 million related to completed multi-family rental properties and $ 56.9 million related to the Company’s oil and gas related assets.

Additionally, land included $ 38.0 million related to the Company’s multi-family rental operations.

At September 30, 2018 , buildings and improvements included $ 87.3 million related to completed multi-family rental properties and land included $ 36.7 million related to the Company’s multi-family rental operations.

Depreciation expense was $ 66.1 million , $ 58.2 million and $ 49.4 million in fiscal 2019 , 2018 and 2017 , respectively.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The depreciable life of model home furniture is 2 years, depreciable lives of other furniture and equipment typically range from 2 to 5 years, and depreciable lives of buildings and improvements typically range from 5 to 30 years.

The depreciable lives of single-family rental homes and multi-family rental buildings typically range from 25 to 30 years.

Business Acquisitions

5 unchanged sentences

Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.

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

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.

The Company’s allocation of the aggregate purchase price of these transactions was based on the estimated fair value of the assets and liabilities acquired as follows (in millions):

Intangible assets

Other liabilities

Net assets acquired

As a result of these transactions, the Company recorded goodwill of $ 54.3 million , of which $ 49.7 million was allocated to the Midwest region and $ 4.6 million was allocated to the East region.

The goodwill is tax deductible and relates to expected synergies from expanding the Company’s market presence in its Midwest and East regions, the experienced and knowledgeable workforce of these entities and their capital efficient operating processes.

The intangible assets will be amortized on a straight-line basis to SG&A expense over their expected lives, which range from one to three years .

The Company records goodwill associated with its acquisitions of businesses when the purchase price of the business exceeds the fair value of the net tangible and identifiable intangible assets acquired.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company records goodwill associated with its acquisitions of businesses when the purchase price of the business exceeds the fair value of the identifiable net assets acquired.

Goodwill balances are evaluated for potential impairment on at least an annual basis by performing a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of an operating segment with goodwill is less than its carrying amount.

3 unchanged sentences

As a result of the qualitative assessments performed in fiscal 2020, 2019 and 2018, no impairment charges were indicated or recorded.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company’s goodwill balances by reporting segment were as follows:

1 unchanged sentence

(In millions)

East $ 26.4 $ 26.4

Midwest 49.7 49.7

Southeast 40.1 40.1

South Central 15.9 15.9

Southwest — —

Forestar 29.2 29.2

Total goodwill $ 163.5 $ 163.5

10 unchanged sentences

Additionally, the Company may have the ability to recover a portion of its losses from its subcontractors and their insurance carriers when the Company has been named as an additional insured on their insurance policies.

Advertising Costs

The Company expenses advertising costs as incurred.

Advertising expense was approximately $ 47.0 million ,

$ 44.1 million and $ 45.4 million in fiscal 2019 , 2018 and 2017 , respectively.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Advertising Costs

The Company expenses advertising costs as incurred.

Advertising expense was approximately $ 41.7 million, $ 47.0 million and $ 44.1 million in fiscal 2020, 2019 and 2018, respectively.

The Company’s income tax expense is calculated using the asset and liability method, under which deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement amounts of assets and liabilities and their respective tax bases and attributable to net operating losses and tax credit carryforwards.

10 unchanged sentences

Changes in the recognition or measurement of uncertain tax positions could result in increases or decreases in the Company’s income tax expense in the period in which the change is made.

The Company’s unrecognized tax benefits and related accrued interest at September 30, 2019 and 2018 were immaterial.

The Company’s unrecognized tax benefits totaled $ 8.9 million at September 30, 2020 and were insignificant at September 30, 2019.

Earnings Per Share

8 unchanged sentences

Stock options are granted at exercise prices which equal the market value of the Company’s common stock at the date of the grant.

All stock options outstanding at September 30, 2019 were vested and expire 10 years after the dates on which they were granted.

All stock options outstanding at September 30, 2020 have vested and expire 10 years after the dates on which they were granted.

The compensation expense for stock-based awards is based on the fair value of the award and is recognized on a straight-line basis over the remaining vesting period.

3 unchanged sentences

These estimates include, but are not limited to, the expected stock price volatility over the term of the awards, the expected dividend yield and expected stock option exercise behavior.

In addition, judgment is used in estimating the number of stock awards that are expected to be forfeited.

AND SUBSIDIARIES

1 unchanged sentence

Fair Value Measurements

The Financial Accounting Standards Board’s (FASB) authoritative guidance for fair value measurements establishes a three-level hierarchy based upon the inputs to the valuation model of an asset or liability.

The FASB’s authoritative guidance for fair value measurements establishes a three-level hierarchy based upon the inputs to the valuation model of an asset or liability.

When available, the Company uses quoted market prices in active markets to determine fair value.

The Company considers the principal market and nonperformance risk associated with the Company’s counterparties when determining the fair value measurements, if applicable.

Fair value measurements are used for the Company’s mortgage loans held for sale, debt securities collateralized by residential real estate, interest rate lock commitments and other derivative instruments on a recurring basis and are used for inventories, other mortgage loans and real estate owned on a nonrecurring basis, when events and circumstances indicate that the carrying value is not recoverable.

Pending Accounting Pronouncements

In February 2016, the FASB issued 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 the Company beginning October 1, 2019 and will not have a material impact on its consolidated financial position, results of operations or cash flows.

Fair value measurements are used for the Company’s mortgage loans held for sale, debt securities collateralized by residential real estate, mortgage servicing rights, interest rate lock commitments and other derivative instruments on a recurring basis and are used for inventories, other mortgage loans and real estate owned on a nonrecurring basis, when events and circumstances indicate that the carrying value is not recoverable.

Pending Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” which replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information in determining credit loss estimates.

The guidance is effective for the Company beginning October 1, 2020 and is not expected to have a material impact on its consolidated financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other,” which simplifies the measurement of goodwill impairment by removing the second step of the goodwill impairment test and requires the determination of the fair value of individual assets and liabilities of a reporting unit.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other,” which simplifies the measurement of goodwill impairment by removing the second step of the goodwill impairment test that requires the determination of the fair value of individual assets and liabilities of a reporting unit.

Under the new guidance, goodwill impairment is measured as the amount by which a reporting unit’s carrying amount exceeds its fair value with the loss recognized limited to the total amount of goodwill allocated to the reporting unit.

The guidance is effective for the Company beginning October 1, 2020 and is not expected to have a material impact on its consolidated financial position, results of operations or cash flows.

In December 2019, the FASB issued ASU 2019-12 related to simplifying the accounting for income taxes.

The guidance is effective for the Company beginning October 1, 2021, although early adoption is permitted.

The Company is currently evaluating the impact of this guidance, and it is not expected to have a material impact on its consolidated financial position, results of operations or cash flows.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” which provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued.

The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022.

The Company will adopt this standard when LIBOR is discontinued and does not expect it to have a material impact on its consolidated financial statements or related disclosures.

AND SUBSIDIARIES

2 unchanged sentences

The Company’s operating segments are its 53 homebuilding divisions, its majority-owned Forestar residential lot development operations, its financial services operations and its other business activities.

The Company’s reporting segments are its homebuilding reporting segments, its Forestar land development segment and its financial services segment.

The Company’s reporting segments are its homebuilding reporting segments, its Forestar lot development segment and its financial services segment.

The homebuilding operating segments are aggregated into the following six reporting segments:

8 unchanged sentences

California, Hawaii, Nevada, Oregon, Utah and Washington

Homebuilding is the Company’s core business, generating 97 % of consolidated revenues in fiscal 2019 and 2018 and 98 % of consolidated revenues in fiscal 2017 .

The Company’s homebuilding divisions are primarily engaged in the acquisition and development of land and the construction and sale of residential homes, with operations in 90 markets in 29 states across the United States.

Homebuilding is the Company’s core business, generating 97 % of consolidated revenues in fiscal 2020, 2019 and 2018.

The Company’s homebuilding divisions are primarily engaged in the acquisition and development of land and the construction and sale of residential homes, with operations in 88 markets across 29 states.

Most of the revenue generated by the Company’s homebuilding operations is from the sale of completed homes and to a lesser extent from the sale of land and lots.

The Forestar segment is a residential lot development company with operations in 51 markets and 20 states.

Forestar is making significant investments in land acquisition and development to expand its business across a geographically diversified national platform.

The Forestar segment is a residential lot development company with operations in 49 markets across 21 states.

Forestar has made significant investments in land acquisition and development to expand its business across the United States.

The homebuilding divisions acquire finished lots from Forestar in accordance with the master supply agreement between the two companies.

2 unchanged sentences

The segment generates the substantial majority of its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services.

The Company sells substantially all of the mortgages it originates and the related servicing rights to third-party purchasers.

The Company sells substantially all of the mortgages it originates and the majority of the related servicing rights to third-party purchasers.

In addition to its homebuilding, Forestar and financial services operations, the Company has subsidiaries that engage in other business activities.

These subsidiaries conduct insurance-related operations, construct and own income-producing rental properties, own non-residential real estate including ranch land and improvements and own and operate oil and gas related assets.

These subsidiaries conduct insurance-related operations, construct and own income-producing multi-family rental properties, own non-residential real estate including ranch land and improvements and own and operate oil and gas related assets.

The operating results of these subsidiaries are immaterial for separate reporting and therefore are grouped together and presented as other.

One of these subsidiaries, DHI Communities, constructs multi-family rental properties and has four projects under active construction and two projects that are substantially complete, one of which was under contract to sell at September 30, 2019 .

In January 2019 , DHI Communities sold its first multi-family rental property for $ 73.4 million and recorded a gain on the sale of $ 29.3 million .

In June 2019 , DHI Communities sold its second multi-family rental property for $ 60.0 million and recorded a gain on the sale of $ 22.6 million .

At September 30, 2019 and 2018 , property and equipment in the consolidated balance sheets included $ 153.9 million and $ 171.4 million , respectively, of assets owned by DHI Communities.

One of these subsidiaries, DHI Communities, constructs multi-family rental properties and 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.

During fiscal 2020 and 2019, DHI Communities sold two properties each year representing 540 and 820 multi-family rental units, respectively, for $ 128.5 million and $ 133.4 million, and recorded gains on sale totaling $ 59.4 million and $ 51.9 million.

At September 30, 2020 and 2019, the consolidated balance sheets included $ 246.2 million and $ 204.0 million, respectively, of assets related to DHI Communities.

AND SUBSIDIARIES

3 unchanged sentences

September 30, 2020

Financial Services

Eliminations (3)

Other Adjustments (4)

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

(In millions)

Cash and cash equivalents

$ 2,551.1 $ 394.3 $ 55.6 $ 17.5 $ — $ — $ 3,018.5

Restricted cash

9.5 — 11.9 0.2 — — 21.6

Construction in progress and finished homes

6,037.5 — — — ( 53.4 ) — 5,984.1

Residential land and lots — developed and under development

4,901.4 1,304.3 — — ( 34.3 ) 0.4 6,171.8

Land held for development

47.8 5.4 — — — — 53.2

Land held for sale

Investment in unconsolidated entities

28.3 — — — — — 28.3

11,015.0 1,309.7 — — ( 87.7 ) 0.4 12,237.4

Mortgage loans held for sale

— — 1,529.0 — — — 1,529.0

Deferred income taxes, net

142.3 — — — 8.4 ( 5.8 ) 144.9

Property and equipment, net

372.8 1.1 3.9 308.9 ( 3.0 ) — 683.7

996.4 34.8 125.8 52.8 ( 103.6 ) 7.5 1,113.7

134.3 — — — — 29.2 163.5

$ 15,221.4 $ 1,739.9 $ 1,726.2 $ 379.4 $ ( 185.9 ) $ 31.3 $ 18,912.3

Accounts payable

$ 859.3 $ 29.2 $ — $ 12.0 $ — $ — $ 900.5

Accrued expenses and other liabilities 1,438.3 197.8 86.8 12.2 ( 112.4 ) ( 15.7 ) 1,607.0

1 unchanged sentence

2,514.4 641.1 1,132.6 — ( 4.8 ) — 4,283.3

$ 4,812.0 $ 868.1 $ 1,219.4 $ 24.2 $ ( 117.2 ) $ ( 15.7 ) $ 6,790.8

_____________

(1) Amounts are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.

6 unchanged sentences

September 30, 2019

Financial Services

Eliminations (3)

Other Adjustments (4)

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

(In millions)

5 unchanged sentences

Land held for sale 19.8 — — — — — 19.8

Investment in unconsolidated entities

10,285.6 1,028.9 — — ( 35.4 ) 2.9 11,282.0

Mortgage loans held for sale — — 1,072.0 — — — 1,072.0

1 unchanged sentence

Property and equipment, net 272.4 2.4 3.2 221.2 — — 499.2

Other assets 826.2 24.2 68.3 71.5 ( 88.5 ) 11.1 912.8

Goodwill 134.3 — — — — 29.2 163.5

$ 12,715.9 $ 1,455.7 $ 1,198.5 $ 317.9 $ ( 118.8 ) $ 37.4 $ 15,606.6

Accounts payable $ 598.6 $ 16.8 $ 7.0 $ 11.6 $ — $ — $ 634.0

2 unchanged sentences

$ 3,798.7 $ 646.8 $ 948.9 $ 20.9 $ ( 93.6 ) $ ( 10.2 ) $ 5,311.5

______________

(1) Amounts are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.

1 unchanged sentence

(2) Amounts represent the aggregate balances of certain subsidiaries that are immaterial for separate reporting.

Amounts represent the elimination of intercompany transactions and the reclassification of Forestar interest expense to inventory.

(3) Amounts represent the elimination of intercompany transactions.

(4) Amounts represent purchase accounting adjustments related to the Forestar acquisition.

2 unchanged sentences

Year Ended September 30, 2020

Financial Services

Eliminations (3)

Other Adjustments (4)

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

(In millions)

$ 19,560.8 $ — $ — $ — $ — $ — $ 19,560.8

Land/lot sales and other

83.1 931.8 — 37.9 ( 887.4 ) — 165.4

Financial services

— — 584.9 — — — 584.9

19,643.9 931.8 584.9 37.9 ( 887.4 ) — 20,311.1

Cost of sales

Home sales (5)

15,305.8 — — — ( 58.6 ) — 15,247.2

Land/lot sales and other

58.3 812.8 — — ( 769.0 ) 0.1 102.2

Inventory and land option charges

22.9 0.9 — — — — 23.8

15,387.0 813.7 — — ( 827.6 ) 0.1 15,373.2

Selling, general and administrative expense 1,603.6 45.7 364.7 33.3 — 0.5 2,047.8

Equity in earnings of unconsolidated entities

— ( 0.7 ) — — — — ( 0.7 )

Gain on sale of assets

— ( 0.1 ) — ( 59.4 ) — — ( 59.5 )

Other (income) expense ( 11.7 ) ( 4.9 ) ( 25.0 ) 8.9 — — ( 32.7 )

2 unchanged sentences

Depreciation and amortization

$ 68.2 $ 0.3 $ 1.6 $ 9.8 $ — $ 0.5 $ 80.4

Cash provided by (used in) operating activities

$ 1,904.2 $ ( 168.5 ) $ ( 292.8 ) $ ( 4.5 ) $ ( 16.8 ) $ — $ 1,421.6

_____________

(1) Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.

8 unchanged sentences

Year Ended September 30, 2019

Financial Services

Eliminations (3)

Other Adjustments (4)

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

(In millions)

$ 16,925.0 $ — $ — $ — $ — $ — $ 16,925.0

Land/lot sales and other

91.9 428.3 — 32.6 ( 326.6 ) — 226.2

Financial services

— — 441.7 — — — 441.7

17,016.9 428.3 441.7 32.6 ( 326.6 ) — 17,592.9

Cost of sales

Home sales (5)

13,507.1 — — — ( 8.3 ) — 13,498.8

Land/lot sales and other

75.1 361.9 — — ( 287.4 ) 18.5 168.1

Inventory and land option charges

53.2 0.8 — — — — 54.0

13,635.4 362.7 — — ( 295.7 ) 18.5 13,720.9

Selling, general and administrative expense 1,482.3 28.9 293.0 27.8 — 0.5 1,832.5

Equity in earnings of unconsolidated entities

— ( 0.5 ) — — — — ( 0.5 )

Gain on sale of assets ( 2.0 ) ( 3.0 ) — ( 51.9 ) — 3.0 ( 53.9 )

Interest expense

Other (income) expense ( 9.5 ) ( 5.5 ) ( 17.6 ) 1.2 — — ( 31.4 )

Income (loss) before income taxes

Income before income taxes $ 1,910.7 $ 45.7 $ 166.3 $ 55.5 $ ( 30.9 ) $ ( 22.0 ) $ 2,125.3

Summary Cash Flow Information

Depreciation and amortization

$ 63.7 $ 0.2 $ 1.5 $ 6.1 $ — $ 0.5 $ 72.0

Cash provided by (used in) operating activities

$ 1,438.0 $ ( 391.3 ) $ ( 150.2 ) $ 2.5 $ ( 2.5 ) $ ( 4.4 ) $ 892.1

Results are presented from the date of acquisition and on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.

_____________

(1) Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.

All purchase accounting adjustments are included in the Other Adjustments column.

(2) Amounts represent the aggregate results of certain subsidiaries that are immaterial for separate reporting.

Amounts represent the elimination of intercompany transactions and the reclassification of Forestar interest expense to inventory.

(3) Amounts represent the elimination of intercompany transactions.

(4) Amounts represent purchase accounting adjustments related to the Forestar acquisition.

4 unchanged sentences

Year Ended September 30, 2018

Financial Services

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

(In millions)

$ 15,502.0 $ — $ — $ — $ — $ — $ 15,502.0

Land/lot sales and other

121.8 109.2 — — ( 39.1 ) ( 1.2 ) 190.7

Financial services

— — 375.3 — — — 375.3

15,623.8 109.2 375.3 — ( 39.1 ) ( 1.2 ) 16,068.0

Cost of sales

Home sales (5)

12,195.5 — — — ( 1.2 ) — 12,194.3

Land/lot sales and other

99.1 68.0 — — ( 30.1 ) 16.4 153.4

Inventory and land option charges

48.8 1.0 — — — 0.6 50.4

12,343.4 69.0 — — ( 31.3 ) 17.0 12,398.1

Selling, general and administrative expense 1,346.2 32.8 272.6 24.7 — 0.5 1,676.8

Equity in earnings of unconsolidated entities

— ( 12.4 ) — — 2.5 7.1 ( 2.8 )

Gain on sale of assets ( 15.8 ) ( 27.7 ) — — — 24.7 ( 18.8 )

Interest expense — 5.8 — — ( 5.8 ) — —

Other (income) expense ( 7.2 ) ( 7.0 ) ( 15.1 ) ( 17.0 ) — 1.0 ( 45.3 )

2 unchanged sentences

Depreciation and amortization

$ 53.4 $ 0.3 $ 1.4 $ 6.8 $ — $ 0.5 $ 62.4

Cash provided by (used in) operating activities

$ 1,001.7 $ ( 320.3 ) $ ( 116.6 ) $ 0.8 $ ( 10.5 ) $ ( 9.9 ) $ 545.2

______________

(1) Results are presented from the date of acquisition and on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.

All purchase accounting adjustments are included in the Other Adjustments column.

(2) Amounts represent the aggregate results of certain subsidiaries that are immaterial for separate reporting.

(3) Amounts represent the elimination of intercompany transactions and the reclassification of Forestar interest expense to inventory.

(4) Amounts represent purchase accounting adjustments related to the Forestar acquisition.

(5) Amount in the Eliminations column represents the profit on lots sold from Forestar to the homebuilding segment.

Intercompany profit is eliminated in the consolidated financial statements when Forestar sells lots to the homebuilding segment and is recognized in the consolidated financial statements when the homebuilding segment closes homes on the lots to homebuyers.

AND SUBSIDIARIES

3 unchanged sentences

(In millions)

East $ 1,328.3 $ 1,288.8

Midwest 958.5 836.8

Southeast 2,919.9 2,768.0

South Central 2,879.9 2,533.2

Southwest 695.8 574.4

West 2,009.1 2,056.0

Corporate and unallocated (2)

$ 11,015.0 $ 10,285.6

________________________

(1) Homebuilding inventories are the only assets included in the measure of homebuilding segment assets used by the Company’s chief operating decision makers.

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

Homebuilding Results by Reporting Segment

Year Ended September 30,

Homebuilding Results by Reporting Segment Year Ended September 30,

2020 2019 2018

(In millions)

East $ 2,642.3 $ 2,290.2 $ 1,893.4

Midwest 1,429.0 1,123.1 858.9

Southeast 5,845.2 4,977.8 4,578.6

South Central 4,998.1 4,202.4 3,769.9

Southwest 881.6 772.6 768.7

West 3,847.7 3,650.8 3,754.3

$ 19,643.9 $ 17,016.9 $ 15,623.8

Inventory and Land Option Charges

East $ 1.8 $ 2.7 $ 2.3

Midwest 2.2 3.5 5.1

Southeast 7.8 10.7 28.8

South Central 6.7 11.6 4.6

Southwest 0.1 0.5 0.9

West 4.3 24.2 7.1

$ 22.9 $ 53.2 $ 48.8

Income Before Income Taxes (1)

East $ 357.0 $ 238.8 $ 217.3

Midwest 128.8 57.7 77.5

Southeast 841.0 584.7 536.0

South Central 758.0 551.1 506.1

Southwest 136.9 100.4 97.4

West 443.3 378.0 522.9

$ 2,665.0 $ 1,910.7 $ 1,957.2

________________________

(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 the Company’s corporate office.

3 unchanged sentences

NOTE C – INVENTORIES

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

As of September 30, 2019 , the Company performed detailed impairment evaluations of communities and land inventories with a combined carrying value of $ 55.9 million and recorded impairment charges of $ 7.1 million during the fourth quarter to reduce the carrying value of impaired communities and land to fair value.

Total impairment charges during fiscal 2019 , 2018 and 2017 were $ 25.7 million , $ 11.8 million and $ 23.2 million , respectively.

Inventory impairments and the land option charges discussed below are included in cost of sales in the consolidated statements of operations.

At the end of each quarter, the Company reviews the performance and outlook for all of its communities and land inventories for indicators of potential impairment and performs detailed impairment evaluations and analyses when necessary.

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

Impairment charges during fiscal 2020, 2019 and 2018 were $ 1.7 million, $ 25.7 million and $ 11.8 million, respectively.

During fiscal 2020, 2019 and 2018, earnest money and pre-acquisition cost write-offs related to land purchase contracts that the Company has terminated or expects to terminate were $ 22.1 million, $ 28.3 million and $ 14.1 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.

In fiscal 2018, the Forestar segment sold a portion of its assets for $ 232 million .

This strategic asset sale included projects owned both directly and indirectly through ventures.

The total net proceeds after certain purchase price adjustments, closing costs and other costs associated with selling these projects was $ 217.5 million , and a gain on the sale of these assets of $ 0.7 million is included in the Company’s consolidated statement of operations for the year ended September 30, 2018.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Inventory impairments and land option charges are included in cost of sales in the consolidated statements of operations.

NOTE D – NOTES PAYABLE

4 unchanged sentences

Revolving credit facility $ — $ —

364-day revolving credit facility — —

4.0 % senior notes due 2020 (1)

4 unchanged sentences

2.5 % senior notes due 2024 (1)

2.6 % senior notes due 2025 (1)

Other secured notes (2)

2,509.6 2,047.6

Revolving credit facility — —

1 unchanged sentence

8.0 % senior notes due 2024 (4)

5.0 % senior notes due 2028 (4)

Financial Services:

1 unchanged sentence

$ 4,283.3 $ 3,399.4

______________________

(1) Debt issuance costs that were deducted from the carrying amounts of the homebuilding senior notes totaled $ 10.7 million and $ 5.4 million at September 30, 2020 and 2019, respectively.

Forestar’s 3.75 % convertible senior notes due 2020 include an unamortized fair value adjustment of $ 2.4 million and $ 8.2 million at September 30, 2019 and 2018 , respectively.

Debt issuance costs that were deducted from the carrying amount of Forestar’s 8.0 % senior notes totaled $ 6.2 million at September 30, 2019 .

As of September 30, 2019 , maturities of consolidated notes payable, assuming the mortgage repurchase facility is not extended or renewed, are $ 1.6 billion in fiscal 2020 , $ 403.3 million in fiscal 2021 , $ 350.4 million in fiscal 2022 , $ 700.4 million in fiscal 2023 and $ 351.5 million in fiscal 2024 .

(2) Homebuilding other secured notes at September 30, 2020 excludes $ 4.8 million of earnest money notes payable due to Forestar.

These intercompany notes are eliminated in consolidation.

(3) Forestar’s 3.75 % convertible senior notes due March 2020 included an unamortized fair value adjustment of $ 2.4 million at September 30, 2019.

(4) Debt issuance costs that were deducted from the carrying amount of Forestar’s senior notes totaled $ 8.9 million and $ 6.2 million at September 30, 2020 and 2019, respectively.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of September 30, 2020, maturities of consolidated notes payable, assuming the mortgage repurchase facility is not extended or renewed, are $ 1.6 billion in fiscal 2021, $ 350.3 million in fiscal 2022, $ 700.4 million in fiscal 2023, $ 352.7 million in fiscal 2024, $ 500.4 million in fiscal 2025 and $ 800.8 million thereafter.

Homebuilding:

At September 30, 2019 , the Company 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.

The Company has a $ 1.59 billion senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $ 2.5 billion, subject to certain conditions and availability of additional bank commitments.

The facility also provides for the issuance of letters of credit with a sublimit equal to 100 % of the revolving credit commitment.

Letters of credit issued under the facility reduce the available borrowing capacity.

The interest rate on borrowings under the revolving credit facility may be based on either the Prime Rate or 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 interest rate on borrowings under the revolving credit facility may be based on either the Prime Rate or LIBOR plus an applicable margin, as defined in the credit agreement governing the facility.

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

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

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

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

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 and the indenture governing the senior notes also impose restrictions on the creation of secured debt and liens.

At September 30, 2019 , the Company was in compliance with all of the covenants, limitations and restrictions of its homebuilding revolving credit facility and public debt obligations.

Horton has an automatically effective universal shelf registration statement filed with the Securities and Exchange Commission (SEC) in August 2018 , registering debt and equity securities that the Company may issue from time to time in amounts to be determined.

In March 2019 , the Company repaid $ 500 million principal amount of its 3.75 % senior notes at maturity.

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, the Company entered into a credit agreement providing for a $ 375 million 364-day senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $ 550 million, subject to certain conditions and availability of additional bank commitments.

The interest rate on borrowings under the 364-day revolving credit facility may be based on either the Prime Rate or LIBOR plus an applicable margin, as defined in the credit agreement governing the facility.

The maturity date of the facility is May 27, 2021.

There were no borrowings under the facility for the period from its inception through September 30, 2020.

The Company’s homebuilding revolving credit facilities impose restrictions on its operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if the leverage ratio exceeds a certain level.

Both facilities include substantially the same affirmative and negative covenants, events of default and financial covenants.

These covenants are measured as defined in the credit agreements governing the facilities and are reported to the lenders quarterly.

A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facilities or cause any outstanding borrowings to become due and payable prior to maturity.

The credit agreements governing the facilities and the indentures governing the senior notes also impose restrictions on the creation of secured debt and liens.

At September 30, 2020, the Company was in compliance with all of the covenants, limitations and restrictions of its homebuilding revolving credit facilities and public debt obligations.

Horton has an automatically effective universal shelf registration statement filed with the SEC in August 2018, registering debt and equity securities that the Company may issue from time to time in amounts to be determined.

In October 2019, the Company issued $ 500 million principal amount of 2.5 % senior notes due October 15, 2024 , with interest payable semi-annually.

The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 2.7 %.

In February 2020, the Company repaid $ 500 million principal amount of its 4.0 % senior notes at maturity.

In May 2020, the Company issued $ 500 million principal amount of 2.6 % senior notes due October 15, 2025 with interest payable semi-annually.

The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 2.8 %.

In October 2020, the Company issued $ 500 million principal amount of 1.4 % senior notes due October 15, 2027 , 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 1.6 %.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The key terms of the Company’s homebuilding senior notes outstanding as of September 30, 2020 are summarized below.

Notes Payable

Principal Amount

Notes Payable Principal Amount Date Issued Date Due Redeemable

Maturity (1) Effective

Interest Rate (2)

(In millions)

4.0% senior notes

February 2015

February 15, 2020

2.55% senior notes

December 2017

December 1, 2020

4.375% senior notes

September 2012

September 15, 2022

4.75% senior notes

February 2013

February 15, 2023

5.75% senior notes

August 15, 2023

2.55% senior notes $ 400 December 2017 December 1, 2020 Yes 2.8 %

4.375% senior notes $ 350 September 2012 September 15, 2022 Yes 4.5 %

4.75% senior notes $ 300 February 2013 February 15, 2023 Yes 4.9 %

5.75% senior notes $ 400 August 2013 August 15, 2023 Yes 5.9 %

2.5% senior notes $ 500 October 2019 October 15, 2024 Yes 2.7 %

2.6% senior notes $ 500 May 2020 October 15, 2025 Yes 2.8 %

_____________

(1) The Company may redeem the notes in whole at any time or in part from time to time, at a redemption price equal to the greater of 100 % of their principal amount or the present value of the remaining scheduled payments discounted to the redemption date, plus accrued and unpaid interest.

In addition, the 4.375 % senior notes, 4.75 % senior notes and 5.75 % senior notes are redeemable at a redemption price of 100 % of their principal amount, plus accrued and unpaid interest, on or after the date that is three months prior to the final maturity date of the notes, and the 2.5 % senior notes and 2.6 % senior notes are redeemable at a redemption price of 100 % of their principal amount, plus accrued and unpaid interest, on or after the date that is one month prior to the final maturity date of the notes.

(2) Interest is payable semi-annually on each of the series of senior notes.

The annual effective interest rate is calculated after giving effect to the amortization of debt issuance costs.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

All series of homebuilding senior notes and borrowings under the homebuilding revolving credit facility are senior obligations and rank pari passu in right of payment to all existing and future unsecured indebtedness and senior to all existing and future indebtedness expressly subordinated to them.

The homebuilding senior notes and borrowings under the homebuilding revolving credit facility are guaranteed by entities that hold approximately 79 % of the Company’s assets.

Upon the occurrence of both a change of control of the Company and a ratings downgrade event, as defined in the indenture governing its senior notes, the Company would be required in certain circumstances to offer to repurchase these notes at 101 % of their principal amount, along with accrued and unpaid interest.

Also, a change of control as defined in the revolving credit facility would constitute an event of default under the revolving credit facility, which could result in the acceleration of any borrowings outstanding under the facility and the termination of the commitments thereunder.

The homebuilding senior notes and borrowings under the homebuilding revolving credit facilities are guaranteed by entities that hold approximately 79 % of the Company’s assets.

Upon the occurrence of both a change of control of the Company and a ratings downgrade event, as defined in the indentures governing its senior notes, the Company would be required in certain circumstances to offer to repurchase these notes at 101 % of their principal amount, along with accrued and unpaid interest.

Also, a change of control as defined in the revolving credit facility would constitute an event of default under the revolving credit facilities, which could result in the acceleration of any borrowings outstanding under the facilities and the termination of the commitments thereunder.

Effective July 30, 2019, the Board of Directors authorized the repurchase of up to $ 500 million of the Company’s debt securities.

3 unchanged sentences

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.

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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

2 unchanged sentences

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

At September 30, 2019 , the principal amount of Forestar’s 3.75 % convertible senior notes due March 2020 was $ 118.9 million .

Forestar intends to settle the principal amount of these notes in cash at maturity, with any excess conversion value to be settled in shares of its common stock.

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.

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 .

These notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreements.

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 the Company’s homebuilding debt.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

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.

Financial Services:

1 unchanged sentence

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 capacity can also be increased to $ 1.2 billion subject to the availability of additional commitments.

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.

3 unchanged sentences

At September 30, 2020, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE E – CAPITALIZED INTEREST

1 unchanged sentence

Year Ended September 30,

2020 2019 2018

(In millions)

1 unchanged sentence

Interest incurred (1)

153.3 140.2 125.4

Interest charged to cost of sales ( 125.7 ) ( 122.8 ) ( 130.6 )

2 unchanged sentences

(1) Interest incurred included interest on the Company's mortgage repurchase facility of $ 19.1 million, $ 16.1 million and $ 12.1 million in fiscal 2020, 2019 and 2018, respectively.

Also included in interest incurred is Forestar interest of $ 19.4 million and $ 3.4 million in fiscal 2019 and 2018 , respectively.

Also included in interest incurred is Forestar interest of $ 41.2 million, $ 19.4 million and $ 3.4 million in fiscal 2020, 2019 and 2018, respectively.

NOTE F – PROPERTY AND EQUIPMENT

The Company’s property and equipment balances and the related accumulated depreciation at September 30, 2020 and 2019 are summarized below.

September 30,

(In millions)

Buildings and improvements $ 267.4 $ 240.2

Model home furniture 134.0 128.3

Office furniture and equipment 108.1 107.4

Land 32.3 21.7

Single-family rental operations

Single-family rental properties 68.1 6.4

Total single-family rental operations 87.2 6.4

Accumulated depreciation ( 256.2 ) ( 231.6 )

Total homebuilding 372.8 272.4

Other Businesses

Multi-family rental operations

Multi-family rental properties 173.8 116.1

Land 58.3 38.0

Total multi-family rental operations 232.1 154.1

Oil and gas related assets 69.7 56.9

Office furniture and equipment 15.6 15.1

Land 19.7 16.0

Accumulated depreciation ( 28.2 ) ( 20.9 )

Total other businesses 308.9 221.2

Forestar, net 1.1 2.4

Financial services, net 3.9 3.2

Eliminations ( 3.0 ) —

Property and equipment, net $ 683.7 $ 499.2

Depreciation expense was $ 69.4 million, $ 66.1 million and $ 58.2 million in fiscal 2020, 2019 and 2018, respectively.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE F – MORTGAGE LOANS

NOTE G – MORTGAGE LOANS

Mortgage Loans Held for Sale and Related Derivatives

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At September 30, 2020, mortgage loans held for sale had an aggregate carrying value of $ 1.53 billion and an aggregate outstanding principal balance of $ 1.46 billion.

At September 30, 2018 , mortgage loans held for sale had an aggregate carrying value of $ 796.4 million and an aggregate outstanding principal balance of $ 776.1 million .

At September 30, 2019, mortgage loans held for sale had an aggregate carrying value of $ 1.07 billion and an aggregate outstanding principal balance of $ 1.04 billion.

During the years ended September 30, 2020, 2019 and 2018, mortgage loans originated totaled $ 12.2 billion, $ 8.7 billion and $ 7.6 billion, respectively, and mortgage loans sold totaled $ 11.8 billion, $ 8.4 billion and $ 7.4 billion, respectively.

1 unchanged sentence

Net gains on sales of loans and servicing rights are included in revenues in the consolidated statements of operations.

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

During fiscal 2020, approximately 66 % of the Company’s 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.

In response to C-19, the U.S.

government has taken various actions to support the economy and the continued functioning of the financial markets.

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, which included changes to current forbearance options for government-backed loans designed to keep homeowners in their homes.

Due to the uncertainty surrounding these forbearance options, servicing values declined rapidly at the end of March.

As a result, the Company began retaining the servicing rights on a portion of its loan originations.

Servicing values have since improved, and the Company expects to sell these rights to third parties.

At September 30, 2020, the fair value of mortgage servicing rights was $ 17.1 million and is included in other assets in the consolidated balance sheet.

To manage the interest rate risk inherent in its mortgage operations, the Company hedges its risk using derivative instruments, generally forward sales of mortgage-backed securities (MBS), which are referred to as “hedging instruments” in the following discussion.

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Hedged loans are committed to third-party purchasers typically within three days after origination.

The notional amounts of the hedging instruments used to hedge mortgage loans held for sale vary in relationship to the underlying loan amounts, depending on the movements in the value of each hedging instrument relative to the value of the underlying mortgage loans.

The notional amounts of the hedging instruments used to hedge mortgage loans held for sale may vary in relationship to the underlying loan amounts, depending on the movements in the value of each hedging instrument relative to the value of the underlying mortgage loans.

The fair value change related to the hedging instruments generally offsets the fair value change in the mortgage loans held for sale.

The net fair value change, which for the years ended September 30, 2020, 2019 and 2018 was not significant, is recognized in revenues in the consolidated statements of operations.

At September 30, 2019 and 2018 , the Company’s mortgage loans held for sale that were not committed to third-party purchasers totaled $ 663.8 million and $ 575.9 million , respectively, and the notional amounts of the hedging instruments related to those loans totaled $ 663.8 million and $ 575.8 million , respectively.

At September 30, 2020 and 2019, the Company’s mortgage loans held for sale that were not committed to third-party purchasers totaled $ 1.2 billion and $ 663.8 million, respectively.

The Company also uses hedging instruments as part of a program to offer below market interest rate financing to its homebuyers.

At September 30, 2020 and 2019, the Company had MBS totaling $ 1.1 billion and $ 111.4 million, respectively, that did not yet have interest rate lock commitments or closed loans created or assigned and recorded a liability of $ 5.3 million and $ 0.5 million for the fair value of such MBS position.

Loan Commitments and Related Derivatives

The Company is party to interest rate lock commitments (IRLCs), which are extended to borrowers who have applied for loan funding and meet defined credit and underwriting criteria.

At September 30, 2020 and 2019, the notional amount of IRLCs, which are accounted for as derivative instruments recorded at fair value, totaled $ 1.8 billion and $ 727.9 million, respectively.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments and hedging instruments.

These instruments are considered derivatives in an economic hedge and are accounted for at fair value with gains and losses recognized in revenues in the consolidated statements of operations.

At September 30, 2020 and 2019, the notional amount of best-efforts whole loan delivery commitments totaled $ 84.6 million and $ 25.2 million, respectively, and the notional amount of hedging instruments related to IRLCs not yet committed to purchasers totaled $ 1.6 billion and $ 636.2 million, respectively.

Other Mortgage Loans and Loss Reserves

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The reserve balances at September 30, 2020 and 2019 totaled $ 8.9 million and $ 8.7 million, respectively.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Other mortgage loans and real estate owned net of the related loss reserves are included in other assets, while loan repurchase obligations are included in accrued expenses and other liabilities in the Company’s consolidated balance sheets.

Loan Commitments and Related Derivatives

The Company is party to interest rate lock commitments (IRLCs), which are extended to borrowers who have applied for loan funding and meet defined credit and underwriting criteria.

At September 30, 2019 and 2018 , the notional amount of IRLCs, which are accounted for as derivative instruments recorded at fair value, totaled $ 727.9 million and $ 485.3 million , respectively.

The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments and hedging instruments.

These instruments are considered derivatives in an economic hedge and are accounted for at fair value with gains and losses recognized in revenues in the consolidated statements of operations.

At September 30, 2019 and 2018 , the notional amount of best-efforts whole loan delivery commitments totaled $ 25.2 million and $ 25.6 million , respectively, and the notional amount of hedging instruments related to IRLCs not yet committed to purchasers totaled $ 636.2 million and $ 430.2 million , respectively.

From time to time, the Company enters into forward sales of MBS as part of a program to offer below market interest rate financing to its homebuyers in certain markets.

At September 30, 2019 , the Company had MBS totaling $ 111.4 million that did not yet have interest rate lock commitments or closed loans created or assigned and recorded a liability of $ 0.5 million for the fair value of such MBS position.

NOTE G – INCOME TAXES

NOTE H – INCOME TAXES

Income Tax Expense

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Year Ended September 30,

2020 2019 2018

(In millions)

Current tax expense:

Deferred tax expense:

Federal $ 484.0 $ 407.3 $ 373.2

State 104.4 79.3 53.6

588.4 486.6 426.8

Deferred tax expense (benefit):

Federal 20.0 13.9 158.7

State ( 5.9 ) 6.2 12.2

14.1 20.1 170.9

Total income tax expense $ 602.5 $ 506.7 $ 597.7

2 unchanged sentences

The Company’s effective tax rate was 20.2 %, 23.8 % and 29.0 % in fiscal 2020, 2019 and 2018, respectively.

The effective tax rates for fiscal 2019 and 2018 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 the Company 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 the Company beginning October 1, 2018.

The effective tax rates for fiscal year 2019 and 2018 also include a tax benefit related to stock-based compensation.

The fiscal year 2018 effective tax rate also included the remeasurement of the Company’s 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 rates for all years include an expense for state income taxes.

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 the Company’s state deferred tax assets.

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

The effective tax rate for fiscal 2018 included the remeasurement of the Company’s deferred tax assets and liabilities as a result of the Tax Cuts and Jobs Act which, among other items, reduced the federal corporate tax rate from 35 % to 21 % and repealed the domestic production activities deduction effective for the Company beginning October 1, 2018.

For fiscal year companies, the change in law required an application of a blended tax rate in the year of change, which for the Company was 24.5 % for fiscal 2018.

The effective tax rate for fiscal 2018 also included a tax benefit related to the retroactive reinstatement of the federal energy efficient homes tax credit to homes closed through December 31, 2017 and the release of a valuation allowance against deferred tax assets related to Forestar.

Reconciliation of Expected Income Tax Expense

Differences between income tax expense and tax computed by applying the federal statutory rate of 21 % in fiscal 2019 , 24.5 % in fiscal 2018 and 35 % in fiscal 2017 to income before income taxes during each year is due to the following:

Differences between income tax expense and tax computed by applying the federal statutory rate of 21 % in fiscal 2020 and 2019, and 24.5 % in fiscal 2018 to income before income taxes during each year is due to the following:

Year Ended September 30,

2020 2019 2018

(In millions)

4 unchanged sentences

Valuation allowance ( 11.2 ) ( 0.2 ) ( 7.3 )

Tax credits ( 93.4 ) ( 1.6 ) ( 19.0 )

Excess tax benefit from stock-based compensation ( 22.3 ) ( 16.1 ) ( 21.2 )

Tax law change from enactment of Tax Act

Tax law change — — 108.7

Tax contingencies 8.9 — —

Other 15.0 9.2 8.8

Total income tax expense $ 602.5 $ 506.7 $ 597.7

13 unchanged sentences

Incentive compensation plans 68.3 65.1

Deferred income

Other 15.6 7.2

Total deferred tax assets 319.3 310.1

4 unchanged sentences

Depreciation of fixed assets 19.0 14.2

Other 16.0 18.7

Total deferred tax liabilities $ 166.9 $ 128.3

2 unchanged sentences

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.

1 unchanged sentence

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

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Valuation Allowance

The Company has a valuation allowance 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.

The Company has 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 NOL carryforwards that are more likely than not to expire before being realized.

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

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

Any reversal of the valuation allowance in future periods will impact the Company’s effective tax rate.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Unrecognized Tax Benefits

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

A reconciliation of the beginning and ending amounts of unrecognized tax benefits for fiscal 2020 is as follows.

Year Ended September 30, 2020

(In millions)

Unrecognized tax benefits, beginning of year $ —

Additions attributable to tax positions taken in the current year 8.9

Additions attributable to tax positions taken in prior years —

Settlements —

Unrecognized tax benefits, end of year $ 8.9

The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is $ 8.9 million.

The Company had no accrued interest or penalties related to unrecognized tax benefits at September 30, 2020.

The Company classifies interest expense and penalties on income taxes as income tax expense.

Regulations and Legislation

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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, management is 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.

The Company is 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.

NOTE H – EARNINGS PER SHARE

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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE I – EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share.

Year Ended September 30,

2020 2019 2018

(In millions)

Net income attributable to D.R.

$ 2,373.7 $ 1,618.5 $ 1,460.3

Denominator for basic earnings per share — weighted average common shares 365.5 372.6 376.6

3 unchanged sentences

Basic net income per common share attributable to D.R.

$ 6.49 $ 4.34 $ 3.88

Diluted net income per common share attributable to D.R.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE I – STOCKHOLDERS’ EQUITY

The Company has an automatically effective universal shelf registration statement, filed with the SEC in August 2018 , registering debt and equity securities that it may issue from time to time in amounts to be determined.

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

On September 30, 2019 , Forestar issued 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, D.R.

Horton's 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.

$ 6.41 $ 4.29 $ 3.81

NOTE J – STOCKHOLDERS’ EQUITY

Horton has an automatically effective universal shelf registration statement, filed with the SEC in August 2018, registering debt and equity securities that it may issue from time to time in amounts to be determined.

At September 30, 2020, the Company had 394,741,349 shares of common stock issued and 363,999,982 shares outstanding.

No shares of preferred stock were issued or outstanding.

Effective July 30, 2019, the Board of Directors authorized the repurchase of up to $ 1.0 billion of the Company’s common stock.

The authorization has no expiration date.

During fiscal 2020, the Company repurchased 7.0 million shares of its common stock for $ 360.4 million.

Effective July 30, 2019 , the Board of Directors authorized the repurchase of up to $ 1.0 billion of the Company’s common stock, which replaced the previous authorization.

The new authorization has no expiration date.

Shares repurchased under the new authorization reduced the remaining authorization amount to $ 895.7 million at September 30, 2019 .

The Board of Directors approved and paid quarterly cash dividends of $ 0.15 per common share and $ 0.125 per common share in fiscal 2019 and 2018 , respectively.

In November 2019 , the 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 .

NOTE J – EMPLOYEE BENEFIT PLANS

At September 30, 2020, the Company’s remaining stock repurchase authorization was $ 535.3 million.

The 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 2020, the 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.

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

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

As of September 30, 2020, no shares had been issued under the at-the-market equity offering program.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE K – EMPLOYEE BENEFIT PLANS

Deferred Compensation Plans

13 unchanged sentences

Related to this plan, the Company recorded expense of $ 5.3 million, $ 2.9 million and $ 5.8 million in fiscal 2020, 2019 and 2018, respectively.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Employee Stock Purchase Plan

12 unchanged sentences

At September 30, 2020, the Company had 16.4 million shares of common stock reserved for issuance and 9.4 million shares available for future grants under the Stock Incentive Plan.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Options

4 unchanged sentences

Year Ended September 30,

Stock Options

Weighted Average

Exercise Price

Stock Options

Weighted Average

Exercise Price

Stock Options

Weighted Average

2020 2019 2018

Stock Options Weighted Average

Exercise Price Stock Options Weighted Average

Exercise Price

Outstanding at beginning of year 3,184,157 $ 19.53 5,856,959 $ 17.25 8,431,348 $ 16.92

Exercised ( 959,742 ) 18.58 ( 2,634,802 ) 14.47 ( 2,547,139 ) 16.10

Cancelled or expired — — ( 38,000 ) 18.98 ( 27,250 ) 22.08

1 unchanged sentence

Exercisable at end of year 2,224,415 $ 19.94 3,184,157 $ 19.53 4,955,392 $ 17.07

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The aggregate intrinsic value of options exercised during fiscal 2020, 2019 and 2018 was $ 41.2 million, $ 70.6 million and $ 76.8 million, respectively.

3 unchanged sentences

The weighted average remaining contractual lives of options outstanding and exercisable at September 30, 2020 is 2.4 years.

For fiscal 2019 , 2018 and 2017 , compensation expense related to stock options was $ 1.0 million , $ 6.9 million and $ 15.1 million , respectively.

At September 30, 2019 , there was no unrecognized compensation expense related to stock option awards as all of the awards are fully expensed.

During fiscal 2020, there was no compensation expense related to stock options as all stock option awards were fully vested at September 30, 2019.

For fiscal 2019 and 2018, compensation expense related to stock options was $ 1.0 million and $ 6.9 million, respectively.

Performance-Based Restricted Stock Unit (RSU) Equity Awards

2 unchanged sentences

The performance criteria are total shareholder return, return on investment, SG&A expense containment and gross profit.

Each of these performance-based RSUs represents the contingent right to receive one share of the Company’s common stock if the vesting conditions and performance criteria are satisfied.

The performance-based RSUs have no dividend or voting rights during the performance period.

Each of these performance-based RSUs represents the contingent right to receive one share of the Company’s common stock if the vesting conditions are satisfied.

Compensation expense related to these grants is based on the Company’s performance against the peer group, the elapsed portion of the performance period and the grant date fair value of the award.

Compensation expense related to these grants is based on the Company’s performance against its peer group, the elapsed portion of the performance period and the grant date fair value of the award.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table provides additional information related to the performance-based RSUs outstanding at September 30, 2020.

Target Number of Performance Units

Grant Date Fair Value per Unit

Compensation Expense

Grant Date Vesting Date Target Number of Performance Units Grant Date Fair Value per Unit Compensation Expense

Year Ended September 30,

2020 2019 2018

(In millions)

November 2016

September 2019

November 2017

September 2020

November 2018

September 2021

November 2017 September 2020 330,000 $ 45.79 $ 7.7 $ 8.9 $ 4.8

November 2018 September 2021 360,000 37.75 6.7 6.1 —

November 2019 September 2022 360,000 52.54 9.3 — —

$ 23.7 $ 15.0 $ 4.8

In November 2020, the Compensation Committee approved the payout of the performance-based RSUs that vested in September 2020 in the form of 577,500 shares of common stock to satisfy the awards.

4 unchanged sentences

These awards vest annually in equal installments over periods of three to five years .

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table provides additional information related to time-based RSU activity during fiscal 2020, 2019 and 2018.

The number of restricted stock units vested in fiscal 2019 includes shares of common stock withheld by the Company on behalf of employees to satisfy the tax withholding requirements.

The number of restricted stock units vested in fiscal 2020 and 2019 includes shares of common stock withheld by the Company on behalf of employees to satisfy the tax withholding requirements.

Year Ended September 30,

Restricted Stock Units

Weighted Average

Grant Date Fair Value

Restricted Stock Units

Weighted Average

Grant Date Fair Value

Restricted Stock Units

Weighted Average

2020 2019 2018

Restricted Stock Units Weighted Average

Grant Date Fair Value Number of

Restricted Stock Units Weighted Average

Grant Date Fair Value Number of

Restricted Stock Units Weighted Average

Grant Date Fair Value

Outstanding at beginning of year 4,889,534 $ 33.01 4,797,922 $ 31.77 4,365,782 $ 26.09

Granted 1,657,935 35.98 1,796,200 33.75 1,747,870 41.82

Vested ( 1,651,840 ) 30.85 ( 1,430,826 ) 29.83 ( 1,149,055 ) 25.80

Cancelled ( 169,928 ) 33.24 ( 273,762 ) 32.82 ( 166,675 ) 29.56

Outstanding at end of year 4,725,701 $ 34.79 4,889,534 $ 33.01 4,797,922 $ 31.77

3 unchanged sentences

This expense is expected to be recognized over a weighted average period of 2.7 years.

NOTE K – COMMITMENTS AND CONTINGENCIES

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE L – COMMITMENTS AND CONTINGENCIES

Warranty Claims

12 unchanged sentences

Warranty liability, end of year $ 310.2 $ 247.3

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The change in liabilities for pre-existing warranties was $ 25.5 million and $ 32.0 million in fiscal 2020 and 2019, respectively.

15 unchanged sentences

Adjustments to estimated reserves are recorded in the accounting period in which the change in estimate occurs.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Historical trends in construction defect claims have been inconsistent, and the Company believes they may continue to fluctuate.

2 unchanged sentences

If the frequency of claims incurred or costs of existing and future legal claims significantly exceed the Company’s current estimates, they will have a significant negative impact on its future earnings and liquidity.

The Company’s reserves for legal claims increased from $ 408.1 million at September 30, 2018 to $ 434.7 million at September 30, 2019 .

The increase in reserves in fiscal 2019 was comparable to fiscal 2018 but there were fewer payments to resolve legal claims in fiscal 2019 compared to fiscal 2018.

Changes in the Company’s legal claims reserves during fiscal 2020 and 2019 were as follows:

3 unchanged sentences

Increase in reserves 83.2 49.2

Payments ( 44.1 ) ( 22.6 )

Reserves for legal claims, end of year $ 473.8 $ 434.7

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In the majority of states in which it operates, the Company has, and requires the majority of the subcontractors it uses to have, general liability insurance which includes construction defect coverage.

The Company’s general liability insurance policies protect it against a portion of its risk of loss from construction defect and other claims and lawsuits, subject to self-insured retentions and other coverage limits.

For policy years ended June 30, 2007 through 2020, the Company is self-insured for the first $ 10 million to $ 20 million of aggregate completed operations indemnity claims incurred, depending on the policy year.

After the aggregate self-insurance limits have been satisfied, the Company’s excess loss insurance coverage begins.

However, the Company must still pay $ 0.25 million of any indemnity claim and a portion of the legal fees incurred for each claim occurrence.

The Company’s general liability insurance policies protect it against a portion of its risk of loss from construction defect and other claims and lawsuits.

The Company estimates and records receivables under these policies for known claims and anticipated future construction defect claims on previously closed homes and other legal claims and lawsuits incurred in the ordinary course of business when recovery is probable.

However, because the self-insured retentions under these policies are significant, the Company anticipates it will largely be self-insured.

The Company’s estimated insurance receivables from estimated losses for pending legal claims and anticipated future claims relate to previously closed homes over the last 15 years.

These receivables totaled $ 81.2 million and $ 75.1 million at September 30, 2020 and 2019, respectively, and are included in other assets in the consolidated balance sheets.

In some states where the Company believes it is too difficult or expensive for its subcontractors to obtain general liability insurance, the Company has waived its normal subcontractor general liability insurance requirements to obtain lower costs from subcontractors.

1 unchanged sentence

The policies issued by the captive insurance subsidiary represent self-insurance of these risks by the Company.

The Company is self-insured under its captive policies for up to $ 25 million in aggregate completed operations indemnity claims per policy year and for the first $ 0.25 million for each claim occurrence.

For all policy years after April 2007 to July 2019, the captive insurance subsidiary has $ 15 million of excess loss insurance coverage with a third-party insurer.

For policy year July 2019 to July 2020, the reinsurance amount is $ 5 million .

For policy years 2018 and 2019 , after consideration of the aforementioned $ 15 million of risk transfer, the Company is self-insured under these captive policies for up to $ 10 million in aggregate completed operations indemnity claims, plus defense costs, per policy year and for up to $ 0.25 million for each claim occurrence.

For policy year 2020 , the Company is self-insured under these captive policies for up to $ 20 million in aggregate completed operations indemnity claims, plus defense costs, per policy year and for up to $ 0.25 million for each claim occurrence.

The Company is self-insured for the deductible amounts under its workers’ compensation insurance policies.

1 unchanged sentence

The deductible for the 2019, 2020 and 2021 policy years is $ 0.5 million per occurrence.

The Company estimates and records receivables under its applicable insurance policies related to its estimated contingencies for known claims and anticipated future construction defect claims on previously closed homes and other legal claims and lawsuits incurred in the ordinary course of business when recovery is probable.

The Company’s receivables related to its estimates of insurance recoveries from estimated losses for pending legal claims and anticipated future claims related to previously closed homes totaled $ 75.1 million and $ 54.6 million at September 30, 2019 and 2018 , respectively, and are included in other assets in the consolidated balance sheets.

The estimation of losses related to these reserves and the related estimates of recoveries from insurance policies are subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to the Company’s markets and the types of products built, claim frequency, claim settlement costs and patterns, insurance industry practices and legal interpretations, among others.

4 unchanged sentences

The Company enters into land and lot purchase contracts to acquire land or lots for the construction of homes.

At September 30, 2019 , the Company’s homebuilding segment had total deposits of $ 515.4 million , consisting of cash deposits of $ 496.0 million and promissory notes of $ 19.4 million , related to contracts to purchase land and lots with a total remaining purchase price of approximately $ 7.2 billion .

At September 30, 2020, the Company’s homebuilding segment had total deposits of $ 653.4 million, consisting of cash deposits of $ 584.5 million and promissory notes and surety bonds of $ 68.9 million, related to contracts to purchase land and lots with a total remaining purchase price of approximately $ 9.9 billion.

The majority of land and lots under contract are currently expected to be purchased within three years.

Of these amounts, $ 88.7 million of the deposits related to contracts with Forestar to purchase land and lots with a remaining purchase price of $ 953.8 million .

Of these amounts, $ 98.2 million of the deposits related to contracts with Forestar to purchase land and lots with a remaining purchase price of $ 1.0 billion.

A limited number of the homebuilding land and lot purchase contracts at September 30, 2020, representing $ 32.6 million of remaining purchase price, were subject to specific performance provisions that may require the Company to purchase the land or lots upon the land sellers meeting their respective contractual obligations.

3 unchanged sentences

At September 30, 2020, the Company had outstanding surety bonds of $ 1.8 billion and letters of credit of $ 178.9 million to secure performance under various contracts.

Of the total letters of credit, $ 141.2 million were issued under the homebuilding revolving credit facility, $ 29.7 million were issued under Forestar’s revolving credit facility and $ 0.8 million were issued under secured letter of credit agreements.

Of the total letters of credit, $ 142.9 million were issued under the homebuilding revolving credit facility and $ 36.0 million were issued under Forestar’s revolving credit facility.

The Company leases office space and equipment under non-cancelable operating leases.

At September 30, 2020, the future minimum annual lease payments under these agreements are as follows (in millions):

Fiscal 2021 $ 17.4

Fiscal 2022 10.8

Fiscal 2023 6.0

Fiscal 2024 3.8

Fiscal 2025 1.4

Thereafter 0.1

Rent expense was $ 31.5 million, $ 30.5 million and $ 27.8 million for fiscal 2020, 2019 and 2018, respectively.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE L – OTHER ASSETS, ACCRUED EXPENSES AND OTHER LIABILITIES

NOTE M – OTHER ASSETS, ACCRUED EXPENSES AND OTHER LIABILITIES

The Company’s other assets at September 30, 2020 and 2019 were as follows:

5 unchanged sentences

Prepaid assets 46.0 49.6

Rental properties

Interest rate lock commitments 31.3 19.2

Margin deposits 16.2 19.6

Multi-family rental property held for sale — 28.9

Contract assets - insurance agency commissions 47.1 39.3

Lease right of use assets 34.7 —

Mortgage servicing rights 17.1 —

Other 39.9 37.5

$ 1,113.7 $ 912.8

The Company’s accrued expenses and other liabilities at September 30, 2020 and 2019 were as follows:

4 unchanged sentences

Warranty liability 310.2 247.3

Mortgage hedging instruments and loan commitments 16.5 —

Accrued interest 35.3 26.3

3 unchanged sentences

Accrued property taxes 44.1 40.1

Lease liabilities 37.0 —

Other 118.6 95.0

$ 1,607.0 $ 1,278.1

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE M – FAIR VALUE MEASUREMENTS

Fair value measurements are used for the Company’s mortgage loans held for sale, debt securities collateralized by residential real estate, IRLCs and other derivative instruments on a recurring basis and are used for inventories, other mortgage loans, rental properties and real estate owned on a nonrecurring basis, when events and circumstances indicate that the carrying value is not recoverable.

NOTE N – FAIR VALUE MEASUREMENTS

Fair value measurements are used for the Company’s mortgage loans held for sale, debt securities collateralized by residential real estate, mortgage servicing rights, IRLCs and other derivative instruments on a recurring basis and are used for inventories, other mortgage loans, rental properties and real estate owned on a nonrecurring basis, when events and circumstances indicate that the carrying value is not recoverable.

The fair value hierarchy and its application to the Company’s assets and liabilities is as follows:

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◦ Loan sale commitments and hedging instruments - The fair values of best-efforts and mandatory loan sale commitments and derivative instruments such as forward sales of MBS that are utilized as hedging instruments are calculated by reference to quoted prices for similar assets.

The Company mitigates exposure to nonperformance risk associated with derivative instruments by limiting the number of counterparties and actively monitoring their financial strength and creditworthiness while requiring them to be well-known institutions with credit ratings equal to or better than AA- or equivalent.

Further, the Company’s derivative contracts typically have short-term durations with maturities from one to four months.

6 unchanged sentences

• Level 3 – Valuation is typically derived from model-based techniques in which at least one significant input is unobservable and based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.

The Company’s assets measured at fair value using Level 3 inputs on a recurring basis are its debt securities collateralized by residential real estate and a limited number of mortgage loans held for sale with some degree of impairment affecting their marketability and for which reference to quoted prices in the secondary markets is not available.

The Company’s assets measured at fair value using Level 3 inputs on a recurring basis are its debt securities collateralized by residential real estate, mortgage servicing rights and a limited number of mortgage loans held for sale with some degree of impairment affecting their marketability and for which reference to quoted prices in the secondary markets is not available.

The Company’s assets measured at fair value using Level 3 inputs that are typically reported at the lower of carrying value or fair value on a nonrecurring basis are as follows:

1 unchanged sentence

The most significant factors used to estimate undiscounted future cash flows include pricing and incentive levels actually realized by the community, the rate at which the homes are sold and the costs incurred to develop the lots and construct the homes.

Inventory held and used measured at fair value represents those communities for which the estimated undiscounted cash flows are less than their carrying amounts and therefore, the Company has recorded impairments during the current period to record the inventory at fair value calculated based on its discounted estimated future cash flows.

Inventory held and used measured at fair value represents those communities for which the estimated undiscounted cash flows are less than their carrying amounts and therefore, the Company recorded impairments during the period to record the inventory at fair value calculated based on its discounted estimated future cash flows.

◦ Inventory available for sale - The factors considered in determining fair values of the Company’s land held for sale primarily include actual sale contracts and recent offers received from outside third parties, and may also include prices for land in recent comparable sales transactions and other market analysis.

9 unchanged sentences

Fair Value at September 30, 2020

Balance Sheet Location

Balance Sheet Location Level 1 Level 2 Level 3 Total

(In millions)

Debt securities collateralized by residential real estate

Mortgage loans held for sale (1)

Mortgage loans held for sale

Debt securities collateralized by residential real estate Other assets $ — $ — $ 3.9 $ 3.9

Mortgage loans held for sale (1) Mortgage loans held for sale — 1,503.2 15.1 1,518.3

Mortgage servicing rights (2) Other assets — — 17.1 17.1

Derivatives not designated as hedging instruments (3):

Interest rate lock commitments

Forward sales of mortgage-backed securities

Other liabilities

Best-efforts and mandatory commitments

Other liabilities

Interest rate lock commitments Other assets — 31.3 — 31.3

Forward sales of mortgage-backed securities Other liabilities — ( 16.2 ) — ( 16.2 )

Fair Value at September 30, 2019

Balance Sheet Location

Balance Sheet Location Level 1 Level 2 Level 3 Total

(In millions)

Debt securities collateralized by residential real estate

Mortgage loans held for sale (1)

Mortgage loans held for sale

Debt securities collateralized by residential real estate Other assets $ — $ — $ 3.9 $ 3.9

Mortgage loans held for sale (1) Mortgage loans held for sale — 1,055.3 9.8 1,065.1

Derivatives not designated as hedging instruments (3):

Interest rate lock commitments

Forward sales of mortgage-backed securities

Best-efforts and mandatory commitments

Interest rate lock commitments Other assets — 19.2 — 19.2

Forward sales of mortgage-backed securities Other liabilities — ( 4.1 ) — ( 4.1 )

Best-efforts and mandatory commitments Other liabilities — ( 1.0 ) — ( 1.0 )

Level 3 Assets at Fair Value for the Year Ended September 30, 2020

September 30, 2018

Net realized and unrealized gains (losses)

Sales and Settlements

Principal Reductions

Net transfers to (out of) Level 3

September 30, 2019 Net realized and unrealized gains (losses) Purchases / Originations Sales and Settlements Principal Reductions Net transfers to (out of) Level 3 Balance at

September 30, 2020

1 unchanged sentence

Debt securities collateralized by residential real estate

$ 3.9 $ — $ — $ — $ — $ — $ 3.9

Mortgage loans held for sale (1)

9.8 0.2 — ( 2.6 ) — 7.7 15.1

Mortgage servicing rights (2) — 1.9 15.2 — — — 17.1

Level 3 Assets at Fair Value for the Year Ended September 30, 2019

September 30, 2017

Net realized and unrealized gains (losses)

Sales and Settlements

Principal Reductions

Net transfers to (out of) Level 3

September 30, 2018 Net realized and unrealized gains (losses) Purchases / Originations Sales and Settlements Principal Reductions Net transfers to (out of) Level 3 Balance at

September 30, 2019

1 unchanged sentence

Debt securities collateralized by residential real estate

$ 3.9 $ — $ — $ — $ — $ — $ 3.9

Mortgage loans held for sale (1)

7.8 0.9 — ( 5.4 ) — 6.5 9.8

___________________________________________

(1) The Company typically elects the fair value option upon origination for mortgage loans held for sale.

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The Company plans to sell these loans as market conditions permit.

(2) Although the majority of the Company’s mortgage loans are sold on a servicing-released basis, when the servicing rights are retained, the Company records them at fair value using third-party valuations.

The valuation at the time the servicing asset is retained is reflected in the purchases/originations column with subsequent changes in value classified as realized and unrealized gains (losses).

The key assumptions used in the valuation, which are generally unobservable inputs, are mortgage prepayment rates, discount rates and delinquency rates, which were 13 %, 11 % and 5 %, respectively, at September 30, 2020.

(3) Fair value measurements of these derivatives represent changes in fair value, as calculated by reference to quoted prices for similar assets, and are reflected in the balance sheet as other assets or accrued expenses and other liabilities.

Changes in the fair value of these derivatives are included in revenues in the consolidated statements of operations.

In August 2018 , the Company sold $ 4.9 million of its debt securities to a third party for $ 7.3 million .

The resulting gain of $ 2.4 million on the sale is included in other income in the consolidated statement of operations for fiscal 2018.

The net fair value change in fiscal 2020 and 2019 was not significant.

AND SUBSIDIARIES

3 unchanged sentences

Balance Sheet Location 2020 2019

Level 2 Level 3 Level 2 Level 3

(In millions)

Inventory held and used (a) (b)

Inventory available for sale (a) (c)

Mortgage loans held for sale (a) (d)

Inventory held and used (1) (2)

Inventories $ — $ — $ — $ 4.5

Mortgage loans held for sale (1) (3)

Other mortgage loans (a) (e)

Mortgage loans held for sale 1.5 2.2 — 2.7

Other mortgage loans (1) (4)

Other assets 0.6 2.0 — 1.8

______________

1 unchanged sentence

(2) In performing its impairment analysis of communities, discount rates ranging from 16 % to 18 % were used in the periods presented.

The fair value of inventory available for sale was determined based on recent offers received from outside third parties, comparable sales or actual contracts.

(3) These mortgage loans have some degree of impairment affecting their marketability and are valued at the lower of carrying value or fair value.

3 unchanged sentences

For the financial assets and liabilities that the Company does not reflect at fair value, the following tables present both their respective carrying value and fair value at September 30, 2020 and 2019.

Carrying Value

Fair Value at September 30, 2019

Carrying Value Fair Value at September 30, 2020

Level 1 Level 2 Level 3 Total

(In millions)

Cash and cash equivalents (a)

Restricted cash (a)

Notes payable (b) (c)

Carrying Value

Fair Value at September 30, 2018

Cash and cash equivalents (1)

$ 3,018.5 $ 3,018.5 $ — $ — $ 3,018.5

Restricted cash (1)

21.6 21.6 — — 21.6

Notes payable (2) (3)

4,283.3 — 3,285.5 1,203.7 4,489.2

Carrying Value Fair Value at September 30, 2019

Level 1 Level 2 Level 3 Total

(In millions)

Cash and cash equivalents (a)

Restricted cash (a)

Notes payable (b) (c)

Cash and cash equivalents (1)

$ 1,494.3 $ 1,494.3 $ — $ — $ 1,494.3

Restricted cash (1)

19.7 19.7 — — 19.7

Notes payable (2) (3)

3,399.4 — 2,533.9 991.9 3,525.8

______________

(1) The fair values of cash, cash equivalents and restricted cash approximate their carrying values due to their short-term nature and are classified as Level 1 within the fair value hierarchy.

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE N – RELATED PARTY TRANSACTIONS

NOTE O – RELATED PARTY TRANSACTIONS

In March 2019, the Company assigned its rights under a land purchase contract it entered into in December 2017 to R&R Riverview LLC (R&R), an entity owned by Ryan Horton and Reagan Horton, the adult sons of Donald R.

5 unchanged sentences

In accordance with the Company’s policy on related party transactions, this transaction was reviewed and approved by a committee of the Board of Directors composed of independent directors.

The Company determined that R&R is a variable interest entity, and the Company has the power through its rights in its land purchase contract with R&R to control the activities that most significantly impact the entity’s economic performance, and the Company is the primary beneficiary.

The Company determined that R&R was a variable interest entity, and the Company had the power through its rights in its land purchase contract with R&R to control the activities that most significantly impact the entity’s economic performance, and the Company is the primary beneficiary.

Accordingly, the Company consolidated the variable interest entity in its consolidated financial statements by increasing inventory and notes payable by $ 77.5 million, and this amount was included in those balances at September 30, 2019.

In October 2019, the Company paid R&R $ 84.2 million for all 119 acres of land.

In October 2019, the Company paid R&R $ 84.2 million for all 119 acres of land and deconsolidated the variable interest entity from the financial statements.

The purchase transaction was also reviewed and approved by a committee of the Board of Directors composed of independent directors.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE O – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

NOTE P – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Consolidated quarterly results of operations for fiscal 2020 and 2019 were (in millions, except per share amounts):

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Revenues $ 4,020.7 $ 4,500.0 $ 5,390.0 $ 6,400.4

Income before income taxes 523.3 621.3 782.4 1,056.1

Income tax expense (1)

Net income (loss) attributable to noncontrolling interests

90.8 137.3 149.5 224.9

Net income 432.5 484.0 632.9 831.2

Net income attributable to noncontrolling interests 1.2 1.3 2.2 2.2

Net income attributable to D.R.

431.3 482.7 630.7 829.0

Basic net income per common share attributable to D.R.

1.17 1.32 1.73 2.28

Diluted net income per common share attributable to D.R.

1.16 1.30 1.72 2.24

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Revenues $ 3,519.0 $ 4,128.7 $ 4,906.3 $ 5,038.9

Income before income taxes 375.7 462.8 626.7 660.1

Income tax expense 89.0 108.4 153.1 156.2

Net income (loss) attributable to noncontrolling interests

Net income 286.7 354.4 473.6 503.9

Net (loss) income attributable to noncontrolling interests ( 0.5 ) 3.1 ( 1.2 ) ( 1.4 )

Net income attributable to D.R.

287.2 351.3 474.8 505.3

Basic net income per common share attributable to D.R.

0.77 0.94 1.28 1.37

Diluted net income per common share attributable to D.R.

0.76 0.93 1.26 1.35

Income tax expense in the first quarter of fiscal 2018 includes additional expense of $ 108.7 million due to remeasurement of the Company’s net deferred tax assets as a result of the Tax Act.

___________________

(1) Income tax expense in the first, second, third and fourth quarters of fiscal 2020 include a tax benefit of $ 32.9 million, $ 6.6 million, $ 38.1 million and $ 15.8 million, respectively, related to federal energy efficient homes tax credits that were retroactively reinstated during the first quarter.

The Company experiences variability in its results of operations from quarter to quarter due to the seasonal nature of its homebuilding business.

The Company generally closes more homes and has greater revenues and income before income taxes in the third and fourth quarters (June and September) than in the first and second quarters (December and March) of its fiscal year.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION

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

(Guarantor Subsidiaries).

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

The Company’s subsidiaries associated with the Forestar land development operation, the financial services operations and certain other subsidiaries do not guarantee the Company’s homebuilding senior notes or the homebuilding revolving credit facility (collectively, Non-Guarantor Subsidiaries).

In lieu of providing separate financial statements for the Guarantor Subsidiaries, consolidating condensed financial statements are presented below.

Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that they are not material to investors.

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 the Company;

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

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

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

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)

Consolidating Balance Sheet

September 30, 2019

Non-Guarantor

(In millions)

Cash and cash equivalents

Restricted cash

Investment in subsidiaries

Investment in unconsolidated entities

Mortgage loans held for sale

Deferred income taxes, net

Property and equipment, net

Intercompany receivables

LIABILITIES & EQUITY

Accounts payable and other liabilities

Intercompany payables

Notes payable

Total Liabilities

Stockholders’ equity

Noncontrolling interests

Total Liabilities & Equity

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)

Consolidating Balance Sheet

September 30, 2018

Non-Guarantor

(In millions)

Cash and cash equivalents

Restricted cash

Investment in subsidiaries

Investment in unconsolidated entities

Mortgage loans held for sale

Deferred income taxes, net

Property and equipment, net

Intercompany receivables

LIABILITIES & EQUITY

Accounts payable and other liabilities

Intercompany payables

Notes payable

Total Liabilities

Stockholders’ equity

Noncontrolling interests

Total Liabilities & Equity

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)

Consolidating Statement of Operations

Year Ended September 30, 2019

Non-Guarantor

(In millions)

Cost of sales

Selling, general and administrative expense

Equity in earnings of unconsolidated entities

Gain on sale of assets

Other (income) expense

Income before income taxes

Income tax expense

Equity in net income of subsidiaries, net of tax

Net loss attributable to noncontrolling interests

Net income attributable to D.R.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)

Consolidating Statement of Operations

Year Ended September 30, 2018

Non-Guarantor

(In millions)

Cost of sales

Selling, general and administrative expense

Equity in earnings of unconsolidated entities

Gain on sale of assets

Other (income) expense

Income before income taxes

Income tax expense

Equity in net income of subsidiaries, net of tax

Net income attributable to noncontrolling interests

Net income attributable to D.R.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)

Consolidating Statement of Operations

Year Ended September 30, 2017

Non-Guarantor

(In millions)

Cost of sales

Selling, general and administrative expense

Other (income) expense

Income before income taxes

Income tax expense

Equity in net income of subsidiaries, net of tax

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)

Consolidating Statement of Cash Flows

Year Ended September 30, 2019

Non-Guarantor

(In millions)

OPERATING ACTIVITIES

Net cash provided by (used in) operating activities

INVESTING ACTIVITIES

Expenditures for property and equipment

Proceeds from sale of assets

Expenditures related to rental properties

Return of investment in unconsolidated entities

Net principal increase of other mortgage loans and real estate owned

Intercompany advances

Payments related to business acquisitions

Net cash used in investing activities

FINANCING ACTIVITIES

Proceeds from notes payable

Repayment of notes payable

Advances on mortgage repurchase facility, net

Intercompany advances

Proceeds from stock associated with certain employee benefit plans

Cash paid for shares withheld for taxes

Cash dividends paid

Repurchases of common stock

Distributions to noncontrolling interests, net

Net proceeds from issuance of Forestar common stock

Net cash (used in) provided by financing activities

(Decrease) increase in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of year

Cash, cash equivalents and restricted cash at end of year

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)

Consolidating Statement of Cash Flows

Year Ended September 30, 2018

Non-Guarantor

(In millions)

OPERATING ACTIVITIES

Net cash provided by (used in) operating activities

INVESTING ACTIVITIES

Expenditures for property and equipment

Proceeds from sale of assets

Expenditures related to rental properties

Return of investment in unconsolidated entities

Net principal increase of other mortgage loans and real estate owned

Proceeds from debt securities collateralized by residential real estate

Intercompany advances

Payments related to business acquisitions, net of cash acquired

Net cash provided by (used in) investing activities

FINANCING ACTIVITIES

Proceeds from notes payable

Repayment of notes payable

Advances on mortgage repurchase facility, net

Intercompany advances

Proceeds from stock associated with certain employee benefit plans

Cash paid for shares withheld for taxes

Cash dividends paid

Repurchases of common stock

Distributions to noncontrolling interests, net

Net cash (used in) provided by financing activities

Increase in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of year

Cash, cash equivalents and restricted cash at end of year

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION - (Continued)

Consolidating Statement of Cash Flows

Year Ended September 30, 2017

Non-Guarantor

(In millions)

OPERATING ACTIVITIES

Net cash (used in) provided by operating activities

INVESTING ACTIVITIES

Expenditures for property and equipment

Expenditures related to rental properties

Net principal decrease of other mortgage loans and real estate owned

Purchases of debt securities collateralized by residential real estate

Intercompany advances

Payments related to business acquisitions

Net cash provided by (used in) investing activities

FINANCING ACTIVITIES

Proceeds from notes payable

Repayment of notes payable

Payments on mortgage repurchase facility, net

Intercompany advances

Proceeds from stock associated with certain employee benefit plans

Excess income tax benefit from employee stock awards

Cash paid for shares withheld for taxes

Cash dividends paid

Repurchases of common stock

Net cash used in financing activities

(Decrease) increase in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of year

Cash, cash equivalents and restricted cash at end of year

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data