What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-11-18 compared with 2021-11-18 · 250 added, 177 removed, 1146 unchanged (27% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Total Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of D.R.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of D.R.

and subsidiaries (the Company) as of September 30, 2022 and 2021, the related consolidated statements of operations, total equity and cash flows for each of the three years in the period ended September 30, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2022, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2022 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 18, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

Estimation of reserves for construction defect matters

Description of the Matter At September 30, 2022, the Company’s reserve for legal claims related to construction defect matters was $724.8 million.

As explained in Note L to the consolidated financial statements, the Company has established reserves for construction defect matters based on the estimated costs of pending legal claims and the estimated costs of anticipated future legal claims related to previously closed homes, and this liability is included within the accrued expenses and other liabilities account in the consolidated balance sheet.

This reserve estimate is subject to a high degree of variability and ongoing revision as the circumstances of individual pending claims and historical data and trends change.

Management applies judgment in determining the key assumptions used in calculating the reserve for construction defect matters.

Auditing the reserve for construction defect matters is complex and especially challenging due to the judgmental nature of the key assumptions related to projections of the frequency of future claims and the costs to resolve claims in consideration of historical claims information.

These assumptions are developed by management, are subjective in nature and have a significant effect on the determined amount of the reserve for construction defect matters.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process for estimating the reserve for construction defect matters.

We tested the Company’s controls that address the risk of material misstatement related to the measurement and valuation of the reserve for construction defect matters, including the key assumptions related to the projections of the frequency and costs of future claims, and the completeness and accuracy of data used in the model developed by management.

To test the reserve for construction defect matters, our audit procedures included, among others, evaluating the methodology used, the key assumptions and the underlying data used by the Company in developing the reserve estimate.

As management utilizes historical trends of frequency of claims incurred and the average cost to resolve claims relative to the types of products and markets where the Company operates in measuring the reserve estimate, we evaluated management’s methodology for determining the frequency and cost of future claims assumptions by comparing these key assumptions to trends observed in historical Company claims data and other available information.

In addition, we involved an actuarial specialist to assist with our procedures.

Our specialist developed a range of values for the reserve estimate based on independently selected assumptions, which we compared to management’s recorded amount to evaluate management’s estimate.

We also performed sensitivity analyses to determine the effect of changes in assumptions, where appropriate.

We also tested completeness and accuracy of underlying claims data used in management’s estimation calculations and performed recalculations to evaluate the accuracy of the model used by management to determine the estimate.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2018.

Dallas, Texas

November 18, 2022

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of D.R.

Opinion on Internal Control Over Financial Reporting

We have audited D.R.

and subsidiaries’ internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).

In our opinion, D.R.

and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2022, based on the COSO criteria .

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2022 and 2021, the related consolidated statements of operations, total equity, and cash flows for each of the three years in the period ended September 30, 2022, and the related notes and our report dated November 18, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Dallas, Texas

November 18, 2022

AND SUBSIDIARIES

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

Cumulative effect of adoption of ASC 606 — — 27.1 — — 27.1

Net income — — 2,373.7 — 6.8 2,380.5

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— — — ( 1,105.9 ) — ( 1,105.9 )

Distributions to noncontrolling interests — — — — ( 0.1 ) ( 0.1 )

Change of ownership interest in Forestar — ( 1.6 ) — — 3.5 1.9

Noncontrolling interest acquired — — — — 18.0 18.0

Balances at September 30, 2022 ( 343,953,023 shares)

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Depreciation and amortization 81.4 82.1 90.6

Amortization of discounts and fees 8.2 10.2 10.9

Stock-based compensation expense 105.1 91.4 77.8

Equity in earnings of unconsolidated entities ( 1.0 ) ( 0.7 ) —

Deferred income taxes 29.1 ( 10.0 ) 14.1

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Changes in operating assets and liabilities:

(Increase) decrease in construction in progress and finished homes ( 1,734.9 ) ( 739.1 ) 84.6

Increase in construction in progress and finished homes ( 2,059.0 ) ( 1,734.9 ) ( 739.1 )

Increase in residential land and lots —

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Repurchases of common stock ( 1,131.5 ) ( 848.4 ) ( 360.4 )

Distributions to noncontrolling interests, net ( 0.1 ) ( 0.7 ) ( 3.9 )

Net proceeds from issuance of Forestar common stock 1.7 33.5 —

Other financing activities ( 2.3 ) ( 4.4 ) —

Net other financing activities 91.4 ( 2.4 ) ( 5.1 )

Net cash (used in) provided by financing activities ( 811.2 ) ( 85.1 ) 270.6

Net increase in cash, cash equivalents and restricted cash 197.1 1,526.1 8.0

Net (decrease) increase in cash, cash equivalents and restricted cash ( 664.3 ) 197.1 1,526.1

Cash, cash equivalents and restricted cash at beginning of year 3,237.2 3,040.1 1,514.0

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Stock issued under employee incentive plans $ 130.9 $ 124.7 $ 84.4

Accrual for holdback payment related to acquisition $ 1.1 $ 0.7 $ 10.1

Repurchase of common stock not settled $ — $ 25.6 $ —

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generally accepted accounting principles (GAAP) and include the accounts of D.R.

and all of its 100% owned, majority-owned and controlled subsidiaries, which are collectively referred to as the Company, unless the context otherwise requires.

and all of its wholly-owned, majority-owned and controlled subsidiaries, which are collectively referred to as the Company, unless the context otherwise requires.

Noncontrolling interests represent the proportionate equity interests in consolidated entities that are not 100% owned by the Company.

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All intercompany accounts, transactions and balances have been eliminated in consolidation.

Reclassifications

During the third quarter of fiscal 2021, the Company changed the presentation of its single and multi-family rental operations in its consolidated financial statements.

Bulk sales of rental properties are now presented as revenues and cost of sales, rental assets previously recorded as property and equipment have been reclassified to inventory, and related cash flows for the single and multi-family rental operations are now included in operating activities.

Prior to the third quarter of fiscal 2021, bulk sales of rental properties were presented on a net basis as a gain on sale of assets, and the majority of the cash flow activities were included in investing activities.

This change in presentation was implemented as a result of the Company’s change in strategic focus during the third quarter of fiscal 2021, which included increased levels of rental property activity during that quarter and plans for future investment in the Company’s single and multi-family rental operations.

This presentation was effected on a prospective basis in the Company’s consolidated financial statements beginning in the third quarter of fiscal 2021.

Additionally, during the fourth quarter of fiscal 2021, the Company changed its internal organization and reporting of its operating segments and reportable segments to combine its single-family rental operations and its multi-family rental operations into a new reporting segment to reflect the method by which the chief operating decision makers manage the business, evaluate internal results and allocate financial resources.

The Company’s single-family rental operations had previously been reported in its homebuilding segment and its multi-family operations had previously been reported in its other segment.

Additionally, the Company realigned the aggregation of its homebuilding operating segments into six new reportable segments to better allocate its homebuilding operating segments across geographic reporting regions.

In the Company’s segment information in Note B and in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the prior presentation has been conformed to the current presentation for all periods presented to be consistent with how management evaluates segment performance.

Use of Estimates

6 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.

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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

Horton are eliminated in the consolidated financial statements.

The Company rarely purchases unimproved land for resale, but periodically may elect to sell parcels of land that no longer fit into its strategic operating plans.

The Company rarely purchases unimproved land for resale, but periodically may elect to sell parcels of land that do not fit into its strategic operating plans.

Revenue from land sales is typically recognized on the closing date, which is generally when performance obligations are satisfied.

The Company’s rental operations develop, construct, lease, own and ultimately sell multi-family and single-family rental properties.

The Company’s rental operations develop, construct, lease and sell residential multi-family and single-family rental properties.

Revenue is recognized from the sale of these properties on the closing date, which is when performance obligations are satisfied.

3 unchanged sentences

The Company typically elects the fair value option for its mortgage loan originations whereby mortgage loans held for sale are recorded at fair value based on either sale commitments or current market quotes and loan values are adjusted through revenues for subsequent changes in fair value until the loans are sold.

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.

Expected gains and losses from the sale of servicing rights are included in the measurement of all written loan commitments that are

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Inventories and Cost of Sales

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

If so, impairment charges are recorded to cost of sales if the fair value of such assets is less than their carrying amounts.

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

The Company’s estimate of undiscounted cash flows from communities analyzed may change and could result in a future need to record impairment charges to adjust the carrying value of these assets to their estimated fair value.

There are several factors which could lead to changes in the estimates of undiscounted future cash flows for a given community.

The most significant of these includes 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.

Pricing and incentive levels are often interrelated with sales pace in a community, such that a price reduction is typically expected to increase the sales pace.

Further, both of these factors are heavily influenced by the competitive pressures facing a given community from both new and existing homes.

If conditions in the broader economy, homebuilding industry or specific markets in which the Company operates worsen, and as the Company evaluates specific community pricing and incentives, construction and development plans, and its overall land sale strategies, it may be required to evaluate additional communities for potential impairment.

This may result in impairment charges which could be significant.

When events or circumstances indicate that the carrying values on finished homes in substantially completed communities and completed rental properties are greater than the fair values less estimated costs to sell these homes, impairment charges are also recorded.

The key assumptions relating to inventory valuations are impacted by local market and economic conditions and are inherently uncertain.

5 unchanged sentences

During fiscal 2022, 2021 and 2020, the Company’s active inventory exceeded its debt level, and all interest incurred was capitalized to inventory.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Land Purchase Contract Deposits and Pre-Acquisition Costs

Land and Lot Purchase Contracts

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

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

There were no variable interest entities reported in the consolidated balance sheets at September 30, 2021 or 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.

There was one variable interest entity consolidated for $ 64.3 million in the Company’s balance sheet at September 30, 2022 because the Company determined it controlled the activities that most significantly impacted the variable interest entity’s economic performance.

There were no variable interest entities consolidated in the Company’s balance sheet at September 30, 2021.

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.

At September 30, 2021 and 2020, the deposits related to these contracts totaled $ 870.2 million and $ 519.6 million, respectively, and are included in other assets in the consolidated balance sheets.

At September 30, 2022 and 2021, the deposits related to these contracts totaled $ 1.5 billion and $ 870.2 million, respectively, and are included in other assets in the consolidated balance sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property and Equipment

10 unchanged sentences

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

In October 2020, the Company acquired the homebuilding operations of Braselton Homes in Corpus Christi, Texas for approximately $ 23.0 million in cash.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In April 2022, the Company and Vidler Water Resources, Inc.

(Vidler) entered into a definitive merger agreement pursuant to which the Company would acquire all of the outstanding shares of Vidler for $ 15.75 per share in an all-cash transaction.

Under the terms of the merger agreement, in May 2022, the Company completed a tender offer and acquired all of the outstanding shares for a total purchase price of $ 290.5 million.

There was no goodwill recorded as a result of this transaction.

The Company’s allocation of the purchase price to the assets, liabilities and noncontrolling interest acquired is as follows (in millions):

Cash and cash equivalents $ 19.0

Deferred income taxes, net of valuation allowance of $ 15.8 million

Water rights and other water-related assets (1)

Total assets 313.9

Other liabilities 5.4

Total liabilities 5.4

Noncontrolling interest 18.0

Net assets acquired $ 290.5

_____________________________________

(1) Water rights and other water-related assets were measured at fair value using Level 3 inputs and are included in other assets in the Company’s consolidated financial statements.

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.

2 unchanged sentences

The estimated fair value is determined by discounting the future cash flows of the operating segment to present value.

If the carrying value of the operating segment exceeds its fair value, the Company records a goodwill impairment by the amount that an operating segment’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

If the carrying value

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of the operating segment exceeds its fair value, the Company records a goodwill impairment by the amount that an operating segment’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

As a result of the qualitative assessments performed in fiscal 2022, 2021 and 2020, no impairment charges were indicated or recorded.

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Warranty liabilities have been established by charging cost of sales for each home delivered.

The amounts charged are based on management’s estimate of expected warranty-related costs under all unexpired warranty obligation periods.

The amounts charged are based on management’s estimate of the warranty-related costs expected to be incurred in the future.

The Company’s warranty liability is based upon historical warranty cost experience in each market in which it operates and is adjusted to reflect qualitative risks associated with the types of homes built and the geographic areas in which they are built.

5 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Advertising Costs

1 unchanged sentence

Advertising expense was approximately $ 41.7 million, $ 36.1 million and $ 41.7 million in fiscal 2022, 2021 and 2020, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

losses and tax credit carryforwards.

When assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized.

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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 totaled $ 2.9 million and $ 8.9 million at September 30, 2021 and 2020, respectively.

The Company’s unrecognized tax benefits totaled $ 2.9 million at both September 30, 2022 and 2021.

Earnings Per Share

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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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fair Value Measurements

3 unchanged sentences

Fair value measurements are used for the Company’s mortgage loans held for sale, mortgage servicing rights, interest rate lock commitments 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pending Accounting Standards

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 and 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.

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ASU 2021-08 creates an exception to the general recognition and measurement principle in ASC 805 and will result in recognition of contract assets and contract liabilities consistent with those recorded by the acquiree immediately before the acquisition date.

The guidance is effective for the Company beginning October 1, 2023 and interim periods therein, with early adoption permitted.

The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations and cash flows.

The guidance is effective for the Company beginning October 1, 2023, with early adoption 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.

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

During the fourth quarter of fiscal 2021, the Company changed its internal organization and reporting of its operating segments and reportable segments to combine its single-family rental operations and its multi-family rental operations into a new reporting segment to reflect the method by which the chief operating decision makers manage the business, evaluate internal results and allocate financial resources.

The Company’s single-family rental operations had previously been reported in its homebuilding segment and its multi-family rental operations had previously been reported in its other segment.

Segment information reported in prior year periods has been reclassified to conform to the 2021 presentation.

Based on the new aggregation described above, the six reporting segments and the states in which the Company has homebuilding operations are as follows:

The homebuilding operating segments are aggregated into six reporting segments.

The reporting segments and the states in which the Company has homebuilding operations are as follows:

Colorado, Oregon, Utah and Washington

1 unchanged sentence

South Central:

Oklahoma and Texas

Arkansas, Oklahoma and Texas

Alabama, Florida, Louisiana and Mississippi

1 unchanged sentence

Delaware, Illinois, Indiana, Iowa, Kentucky, Maryland, Minnesota, Nebraska,

New Jersey, Ohio, Pennsylvania and Virginia

Homebuilding is the Company’s core business, generating 96 % of consolidated revenues in fiscal 2021 and 97 % of consolidated revenues in fiscal 2020 and 2019.

New Jersey, Ohio, Pennsylvania, Virginia and West Virginia

Homebuilding is the Company’s core business, generating 95 %, 96 % and 97 % of consolidated revenues in fiscal 2022, 2021 and 2020, respectively.

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 106 markets across 33 states.

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The Forestar segment is a residential lot development company with operations in 53 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.

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

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

3 unchanged sentences

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s rental segment consists of multi-family and single-family rental operations.

The multi-family rental operations develop, construct, lease, own and ultimately sell the residential properties.

The single-family rental operations construct single-family rental homes with the intent to later market the community for a bulk sale of homes.

The multi-family rental operations develop, construct, lease and sell residential rental properties.

The single-family rental operations primarily construct and lease single-family homes within a community and then market each community for a bulk sale of rental homes.

In addition to its homebuilding, Forestar, financial services and rental operations, the Company engages in other business activities through its subsidiaries.

The Company conducts insurance-related operations, owns non-residential real estate including ranch land and improvements and owns and operates energy related assets.

The results of these operations are immaterial for separate reporting and therefore are grouped together and presented as other within the Eliminations and Other column in the tables that follow.

The Company conducts insurance-related operations, owns water rights and other water-related assets, owns non-residential real estate including ranch land and improvements and owns and operates energy-related assets.

The results of these operations are immaterial for separate reporting and therefore are grouped together and presented in the Eliminations and Other column in the tables that follow.

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Construction in progress and finished homes 9,951.5 — — — ( 153.3 ) 9,798.2

7,848.0 — — — ( 108.8 ) 7,739.2

Residential land and lots — developed and under development

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

(2) Amounts include the balances of the Company’s other businesses, reconciling amounts between segment and consolidated balances, the elimination of intercompany transactions and, to a lesser extent, purchase accounting adjustments related to the Forestar acquisition.

(2) Amounts include the balances of the Company’s other businesses, the elimination of intercompany transactions and, to a lesser extent, purchase accounting adjustments.

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6 unchanged sentences

Construction in progress and finished homes 7,848.0 — — — ( 108.8 ) 7,739.2

6,037.5 — — — ( 53.4 ) 5,984.1

Residential land and lots — developed and under development

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

(2) Amounts include the balances of the Company’s other businesses, the elimination of intercompany transactions and, to a lesser extent, purchase accounting adjustments related to the Forestar acquisition.

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20 unchanged sentences

Selling, general and administrative expense 2,186.7 93.6 547.6 91.1 14.7 2,933.7

Gain on sale of assets

— ( 2.5 ) — — ( 11.5 ) ( 14.0 )

Loss on extinguishment of debt — 18.1 — — — 18.1

Other (income) expense ( 16.4 ) ( 5.4 ) ( 43.2 ) ( 27.1 ) 32.8 ( 59.3 )

5 unchanged sentences

_____________

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

(2) Amounts include the results of the Company’s other businesses, reconciling amounts between segment and consolidated balances, the elimination of intercompany transactions and, to a lesser extent, purchase accounting adjustments related to the Forestar acquisition.

(2) Amounts include the results of the Company’s other businesses and the elimination of intercompany transactions.

(3) Amount in the Eliminations and Other column represents the recognition of profit on lots sold from Forestar to the homebuilding segment.

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Gain on sale of assets — ( 2.5 ) — — ( 11.5 ) ( 14.0 )

Loss on extinguishment of debt — 18.1 — — — 18.1

Other (income) expense ( 10.3 ) ( 1.4 ) ( 29.3 ) ( 24.8 ) 24.2 ( 41.6 )

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_____________

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

(2) Amounts include the results of the Company’s other businesses, reconciling amounts between segment and consolidated balances and the elimination of intercompany transactions.

(3) Amount in the Eliminations and Other column represents the recognition of profit on lots sold from Forestar to the homebuilding segment.

30 unchanged sentences

_____________

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

17 unchanged sentences

(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.

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

Homebuilding Results by Reporting Segment Year Ended September 30,

32 unchanged sentences

As of September 30, 2022, the Company determined that no communities were impaired, and no impairment charges were recorded during the three months ended September 30, 2022.

There were $ 5.6 million of impairment charges recorded during fiscal 2021 compared to $ 1.7 million and $ 25.7 million of impairment charges recorded in fiscal 2020 and 2019, respectively.

There were $ 3.8 million of impairment charges recorded during fiscal 2022 that related to a Forestar land development project, compared to $ 5.6 million and $ 1.7 million of impairment charges recorded in fiscal 2021 and 2020, respectively.

During fiscal 2022, 2021 and 2020, earnest money and pre-acquisition cost write-offs related to land purchase contracts that the Company has terminated or expects to terminate were $ 66.6 million, $ 23.0 million and $ 22.1 million, respectively.

4 unchanged sentences

(In millions)

Homebuilding:

Revolving credit facility $ — $ —

364-day revolving credit facility (1)

4.375 % senior notes due 2022 (1)

5 unchanged sentences

1.4 % senior notes due 2027 (1)

1.4 % senior notes due 2027 (2)

Other secured notes (2)

3 unchanged sentences

5.0 % senior notes due 2028 (3)

5.0 % senior notes due 2028 (5)

Other secured notes 12.5 12.5

1 unchanged sentence

Mortgage repurchase facility 1,618.3 1,494.6

$ 5,412.4 $ 4,283.3

_____________

Revolving credit facility 800.0 —

Total $ 6,066.9 $ 5,412.4

See footnotes on following page.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(1) The Company’s $375 million 364-day senior unsecured homebuilding revolving credit facility was not renewed upon its maturity in May 2021.

(1) Debt issuance costs that were deducted from the carrying amounts of the homebuilding senior notes totaled $ 12.2 million and $ 16.5 million at September 30, 2022 and 2021, respectively.

(3) Homebuilding other secured notes excludes $ 0.7 million and $ 4.8 million of earnest money notes payable to Forestar at September 30, 2021 and 2020, respectively.

(2) Homebuilding other secured notes excludes $ 0.7 million of earnest money notes payable to Forestar at September 30, 2021.

These intercompany notes are eliminated in consolidation.

(4) Forestar’s 8.0 % senior notes due April 2024 were redeemed in May 2021.

(3) Debt issuance costs that were deducted from the carrying amount of Forestar’s senior notes totaled $ 6.5 million and $ 8.0 million at September 30, 2022 and 2021, respectively.

As of September 30, 2021, maturities of consolidated notes payable, assuming the mortgage repurchase facility is not extended or renewed, are $ 1.9 billion in fiscal 2022, $ 700.3 million in fiscal 2023, $ 13.7 million in fiscal 2024, $ 500.4 million in fiscal 2025, $ 900.4 million in fiscal 2026 and $ 1.4 billion thereafter.

Homebuilding:

In April 2021, the Company’s senior unsecured homebuilding revolving credit facility was amended to increase its capacity to $ 2.19 billion with an uncommitted accordion feature that could increase the size of the facility to $ 3.0 billion, subject to certain conditions and availability of additional bank commitments.

The maturity date of the facility was extended to April 20, 2026.

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

As of September 30, 2022, maturities of consolidated notes payable, assuming the mortgage repurchase facility is not extended or renewed, are $ 2.5 billion in fiscal 2023, $ 12.9 million in fiscal 2024, $ 500.4 million in fiscal 2025, $ 1.7 billion in fiscal 2026, $ 600.4 million in fiscal 2027 and $ 800.0 million thereafter.

The Company has a $ 2.19 billion senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $ 3.0 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 total revolving credit commitments.

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

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

Borrowings and repayments under the facility totaled $ 3.45 billion each during fiscal 2022.

At September 30, 2022, there were no borrowings outstanding and $ 220 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $ 1.97 billion.

In October 2022, the Company’s senior unsecured homebuilding revolving credit facility was amended to extend its maturity date to October 28, 2027.

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.

4 unchanged sentences

Horton has an automatically effective universal shelf registration statement filed with the SEC in July 2021, registering debt and equity securities that the Company may issue from time to time in amounts to be determined.

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 %.

In December 2020, the Company repaid $ 400 million principal amount of its 2.55 % senior notes at maturity.

In August 2021, the Company issued $ 600 million principal amount of 1.3 % senior notes due October 15, 2026 , 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 1.5 %.

In September 2022, the Company repaid $ 350 million principal amount of its 4.375 % senior notes at maturity.

AND SUBSIDIARIES

5 unchanged sentences

(In millions)

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 %

6 unchanged sentences

(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.

In addition, the 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.

The 2.5 % senior notes, the 2.6 % senior notes and the 1.3 % 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.

3 unchanged sentences

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 facilities are guaranteed by entities that hold approximately 80 % of the Company’s assets.

The homebuilding senior notes and borrowings under the homebuilding revolving credit facility are guaranteed by entities that hold approximately 76 % 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.

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 Company’s homebuilding revolving credit facility and the homebuilding senior notes are guaranteed by D.R.

Horton, Inc.’s significant wholly-owned homebuilding subsidiaries.

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

The authorization has no expiration date.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In April 2021, Forestar’s senior unsecured revolving credit facility was amended to increase its capacity to $ 410 million with an uncommitted accordion feature that could increase the size of the facility to $ 600 million, subject to certain conditions and availability of additional bank commitments.

The maturity date of the facility was extended to April 16, 2025.

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.

Forestar has a $ 410 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $ 600 million, subject to certain conditions and availability of additional bank commitments.

The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of $ 100 million and 50 % of the total revolving credit commitments.

Borrowings under the revolving credit facility are subject to a borrowing base calculation based on the book value of Forestar’s real estate assets and unrestricted cash.

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

Borrowings and repayments under the facility totaled $ 58.0 million each during fiscal 2021.

At September 30, 2022, there were no borrowings outstanding and $ 53.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $ 356.7 million.

In October 2022, Forestar’s senior unsecured revolving credit facility was amended to extend its maturity date to October 28, 2026.

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

2 unchanged sentences

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.

In April 2021, Forestar issued $ 400 million principal amount of 3.85 % senior notes that mature May 15, 2026 with interest payable semi-annually.

The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 4.1 %.

The net proceeds from this issuance were primarily used to redeem Forestar’s $ 350 million principal amount of 8.0 % senior notes due 2024 in May 2021.

The redemption price of $ 365.6 million included a call premium of $ 14.0 million and accrued and unpaid interest of $ 1.6 million.

Forestar recognized an $ 18.1 million loss on extinguishment of debt upon redemption of the notes.

Forestar also has $ 300 million principal amount of 5.0 % senior notes that mature March 1, 2028.

The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 5.2 %.

As of September 30, 2022, Forestar had $ 700 million principal amount of senior notes issued pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, which represent unsecured obligations of Forestar.

These notes include $ 400 million principal amount of 3.85 % senior notes that mature May 15, 2026 and $ 300 million principal amount of 5.0 % senior notes that mature March 1, 2028.

The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 4.1 % and 5.2 %, respectively.

Forestar’s senior notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreements.

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.

Forestar’s revolving credit facility and its senior notes are guaranteed by Forestar’s wholly-owned subsidiaries that are not immaterial subsidiaries or have not been designated as unrestricted subsidiaries.

They are not guaranteed by D.R.

or any of the subsidiaries that guarantee the debt of the Company’s homebuilding, financial services or rental operations.

At September 30, 2022, 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.

In April 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.

11 unchanged sentences

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

or any of the subsidiaries that guarantee the Company’s homebuilding debt.

or any of the subsidiaries that guarantee the debt of the Company’s homebuilding, Forestar or rental operations.

The facility contains financial covenants as to the mortgage subsidiary’s minimum required tangible net worth, its maximum allowable leverage ratio and its minimum required liquidity.

1 unchanged sentence

At September 30, 2022, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

In March 2022, the Company’s rental subsidiary, DRH Rental, entered into a $ 625 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $ 1.25 billion, subject to certain conditions and availability of additional bank commitments.

On subsequent occasions, DRH Rental utilized the accordion feature to obtain additional commitments, thereby increasing the size of the facility to $ 975 million at September 30, 2022.

Availability under the rental revolving credit facility is subject to a borrowing base calculation based on the book value of DRH Rental’s real estate assets and unrestricted cash.

At September 30, 2022, the borrowing base limited the available capacity under the facility to $ 811.9 million.

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 total revolving credit commitments.

The maturity date of the facility is March 4, 2026.

At September 30, 2022, there were $ 800 million of borrowings outstanding at a 4.8 % annual interest rate and no letters of credit issued under the facility, resulting in available capacity of $ 11.9 million.

In November 2022, DRH Rental utilized the accordion feature and increased the size of the revolving credit facility to $ 1.025 billion through an additional commitment.

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

The financial covenants require DRH Rental to maintain a minimum level of tangible net worth, a minimum level of liquidity and a maximum allowable leverage ratio.

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

At September 30, 2022, DRH Rental was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility.

DRH Rental’s revolving credit facility is guaranteed by DRH Rental’s wholly-owned subsidiaries that are not immaterial subsidiaries or have not been designated as unrestricted subsidiaries.

The rental revolving credit facility is not guaranteed by D.R.

or any of the subsidiaries that guarantee the debt of the Company’s homebuilding, Forestar or financial services operations.

NOTE E – CAPITALIZED INTEREST

21 unchanged sentences

Land 35.5 32.6

Single-family rental properties (1)

Single-family rental properties — 68.1

Total single-family rental properties — 87.2

Accumulated depreciation ( 289.2 ) ( 276.6 )

1 unchanged sentence

Other Businesses

Multi-family rental properties (1)

Multi-family rental properties — 173.8

Total multi-family rental properties — 232.1

Energy-related assets 106.2 79.0

6 unchanged sentences

Rental, net 2.0 0.6

Eliminations — ( 3.0 )

Property and equipment, net $ 471.6 $ 392.9

__________________

(1) Single-family and multi-family rental property assets totaling $ 415.8 million and $ 425.1 million, respectively, are recorded as rental property inventory at September 30, 2021.

Depreciation expense was $ 72.0 million, $ 73.3 million and $ 69.4 million in fiscal 2022, 2021 and 2020, respectively.

6 unchanged sentences

Servicing rights retained are typically sold within six months of loan origination.

At September 30, 2021, mortgage loans held for sale had an aggregate carrying value of $ 2.03 billion and an aggregate outstanding principal balance of $ 1.97 billion.

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, 2022, mortgage loans held for sale of $ 2.39 billion had an aggregate outstanding principal balance of $ 2.51 billion.

At September 30, 2021, mortgage loans held for sale of $ 2.03 billion had an aggregate outstanding principal balance of $ 1.97 billion.

During the years ended September 30, 2022, 2021 and 2020, mortgage loans originated totaled $ 19.5 billion, $ 16.0 billion and $ 12.2 billion, respectively, and mortgage loans sold totaled $ 18.9 billion, $ 15.5 billion and $ 11.8 billion, respectively.

1 unchanged sentence

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

During fiscal 2021, approximately 52 % of the Company’s mortgage loans were sold directly to Fannie Mae or into securities backed by Ginnie Mae, and 41 % were sold to two other major financial entities.

During fiscal 2022, approximately 62 % of the Company’s mortgage loans were sold directly to Fannie Mae, Freddie Mac or into securities backed by Ginnie Mae, and 30 % were sold to one other major financial entity.

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.

7 unchanged sentences

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

At September 30, 2021 and 2020, the Company had MBS totaling $ 834.6 million and $ 1.1 billion, respectively, that did not yet have interest rate lock commitments (IRLCs) or closed loans created or assigned and recorded an asset of $ 1.1 million at September 30, 2021 and a liability of $ 5.3 million at September 30, 2020 for the fair value of such MBS position.

At September 30, 2022 and 2021, the Company had MBS totaling $ 532.4 million and $ 834.6 million, respectively, that did not yet have interest rate lock commitments (IRLCs) or closed loans created or assigned and recorded an asset of $ 4.8 million and $ 1.1 million, respectively, for the fair value of such MBS position.

Loan Commitments and Related Derivatives

3 unchanged sentences

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, 2021 and 2020, the notional amount of best-efforts whole loan delivery commitments totaled $ 88.8 million and $ 84.6 million, respectively, and the notional amount of hedging instruments related to IRLCs not yet committed to purchasers totaled $ 1.4 billion and $ 1.6 billion, respectively.

At September 30, 2022 and 2021, the notional amount of best-efforts whole loan delivery commitments totaled $ 23.5 million and $ 88.8 million, respectively, and the notional amount of hedging instruments related to the remaining IRLCs totaled $ 3.8 billion and $ 1.4 billion, respectively.

AND SUBSIDIARIES

29 unchanged sentences

The Company’s effective tax rate was 22.7 %, 21.8 % and 20.2 % in fiscal 2022, 2021 and 2020, respectively.

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

The effective tax rates for fiscal 2021 and 2020 include a reduction of 2.2 % and 3.1 %, respectively, for tax benefits related to the federal energy efficient homes tax credit.

The effective tax rate for fiscal 2020 also includes a reduction of 0.4 % for a tax benefit 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 and tax benefits related to stock-based compensation and federal energy efficient homes tax credits.

The effective tax rate for fiscal 2020 also includes a reduction for a tax benefit related to the release of a valuation allowance against the Company’s state deferred tax assets.

The federal energy efficient homes tax credit was retroactively extended to qualifying homes closed from January 1, 2022 through December 31, 2032 as a result of the enactment of the Inflation Reduction Act (IRA) that was signed into law on August 16, 2022.

Other tax related provisions of the IRA had no material impact on the Company’s financial statements.

Reconciliation of Expected Income Tax Expense

33 unchanged sentences

Depreciation of fixed assets 30.5 14.4

Deferral of income 18.5 2.0

Undistributed earnings of subsidiary 27.3 10.2

Other 26.2 20.3

1 unchanged sentence

Deferred income taxes, net $ 141.1 $ 155.3

Horton has $ 10.3 million of tax benefits for state net operating loss (NOL) carryforwards that expire at various times depending on the tax jurisdiction.

The Company has $ 30.9 million of tax benefits for a federal net operating loss (NOL) carryforward acquired in the Vidler acquisition.

The utilization of the federal NOL is subject to IRC Section 382 limitations;

however, it is expected that all of the federal NOL will be utilized within the carryforward period.

Horton has $ 12.0 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction.

Of the total amount, $ 4.3 million of the tax benefits expire over the next ten years and the remaining $ 7.7 million expire from fiscal years 2033 to 2042.

3 unchanged sentences

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.

Valuation Allowance

The Company has a valuation allowance of $ 4.2 million and $ 7.5 million at September 30, 2021 and 2020, respectively, related to state deferred tax assets for NOL carryforwards that are more likely than not to expire before being realized.

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

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

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Valuation Allowance

The Company has a valuation allowance of $ 17.9 million and $ 4.2 million at September 30, 2022 and 2021, respectively, related to deferred tax assets for state NOL, state capital loss and tax credit carryforwards that are expected to expire before being realized.

Of the $ 17.9 million valuation allowance, $ 15.8 million relates to state NOL, state capital loss and tax credit carryforwards acquired in the Vidler acquisition.

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, state capital loss and tax credit carryforwards.

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

Unrecognized Tax Benefits

15 unchanged sentences

Horton’s major tax jurisdictions remains open for examination for fiscal years 2018 through 2022.

A federal refund claim related to the retroactive extension of energy efficient homes tax credits for fiscal 2018 is currently under audit by the Internal Revenue Service.

Horton is under audit by various states, however, the Company is not aware of any significant findings by the state taxing authorities.

An audit by the Internal Revenue Service of a federal refund claim related to the retroactive extension of energy efficient homes tax credits for fiscal 2018 and additional energy efficient tax credits for fiscal 2017 was completed during the current fiscal year with no material adjustments.

Horton is under audit by various states;

however, 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 statute of limitations for Forestar’s major tax jurisdictions remains open for examination for tax years 2016 through 2021.

The statute of limitations for Forestar’s federal income tax remains open for examination for tax years 2019 through 2022.

The statute of limitations for Forestar’s major state tax jurisdictions generally remain open for examination for tax years 2017 through 2022.

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

20 unchanged sentences

No shares of preferred stock were issued or outstanding.

At September 30, 2021, Forestar had an effective shelf registration statement filed with the SEC in September 2018, registering $ 500 million of equity securities, of which $ 100 million was reserved for sales under its at-the-market equity offering program.

During fiscal 2021, Forestar issued 1.4 million shares of common stock under its at-the-market equity offering program for proceeds of $ 33.4 million, net of commissions and other issuance costs.

At September 30, 2021, $ 359.9 million remained available for issuance under Forestar’s shelf registration statement, of which $ 65.6 million was reserved for sales under its at-the-market equity offering program.

In October 2021, after the expiration of Forestar’s existing registration statement and at-the-market equity offering program, a new shelf registration statement became effective, registering $ 750 million of equity securities.

In April 2021, the Board of Directors authorized the repurchase of up to $ 1.0 billion of the Company’s common stock, replacing the prior authorization.

In April 2022, the Board of Directors authorized the repurchase of up to $ 1.0 billion of the Company’s common stock, replacing the previous authorization.

The authorization has no expiration date.

During fiscal 2021, the Company repurchased 10.4 million shares of its common stock for $ 874.0 million.

During fiscal 2022, the Company repurchased 14.0 million shares of its common stock for $ 1.1 billion.

At September 30, 2022, there was $ 438.3 million remaining on the repurchase authorization.

1 unchanged sentence

In October 2022, the Board of Directors approved a quarterly cash dividend of $ 0.25 per common share, payable on December 12, 2022, to stockholders of record on December 2, 2022.

Forestar has an effective shelf registration statement, filed with the SEC in October 2021, registering $ 750 million of equity securities, of which $ 300 million was reserved for sales under its at-the-market equity offering program that became effective in November 2021.

During fiscal 2022, Forestar issued 84,547 shares of common stock under its at-the-market equity offering program for proceeds of $ 1.7 million, net of commissions and other issuance costs totaling $ 0.1 million.

At September 30, 2022, $ 748.2 million remained available for issuance under Forestar’s shelf registration statement, of which $ 298.2 million was reserved for sales under its at-the-market equity offering program.

AND SUBSIDIARIES

16 unchanged sentences

The Company records as expense the amount that the employee contributions would have earned had the funds been invested in the designated investments.

Related to this plan, the Company recorded expense of $ 21.7 million, $ 5.3 million and $ 2.9 million in fiscal 2021, 2020 and 2019, respectively.

Related to this plan, the Company recorded a credit to expense of $ 24.0 million in fiscal 2022 and recorded charges to expense of $ 21.7 million and $ 5.3 million in fiscal 2021 and 2020, respectively.

Employee Stock Purchase Plan

12 unchanged sentences

The Company’s Stock Incentive Plan provides for the granting of stock options and restricted stock units to executive officers, other key employees and non-management directors.

Restricted stock unit awards may be based on performance (performance-based) or on service over a requisite time period (time-based).

Restricted stock unit (RSU) awards may be based on service over a requisite time period (time-based) or on performance (performance-based).

RSU equity awards represent the contingent right to receive one share of the Company’s common stock per RSU if the vesting conditions and/or performance criteria are satisfied.

The RSUs have no dividend or voting rights until vested.

At September 30, 2022, the Company had 8.5 million shares of common stock reserved for issuance and 4.2 million shares available for future grants under the Stock Incentive Plan.

Time-Based Restricted Stock Unit (RSU) Equity Awards

Time-based RSUs represent the contingent right to receive one share of the Company’s common stock if the vesting conditions are satisfied.

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

Time-Based Restricted Stock Unit Equity Awards

During fiscal 2022, 2021 and 2020, time-based RSUs were granted to the Company’s executive officers, other key employees and non-management directors (collectively, approximately 1,200 , 1,030 and 960 recipients, respectively).

1 unchanged sentence

The following table provides additional information related to time-based RSU activity during fiscal 2022, 2021 and 2020.

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

The number of RSUs vested includes shares of common stock withheld by the Company on behalf of employees to satisfy the tax withholding requirements.

Year Ended September 30,

15 unchanged sentences

This expense is expected to be recognized over a weighted average period of 2.6 years.

Performance-Based Restricted Stock Unit (RSU) Equity Awards

Performance-Based Restricted Stock Unit Equity Awards

During fiscal 2022, 2021 and 2020, performance-based RSU equity awards that vest at the end of three-year performance periods were granted to the Company’s executive officers.

1 unchanged sentence

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.

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.

8 unchanged sentences

November 2020 September 2023 360,000 70.60 12.5 12.5 —

November 2020 September 2023 360,000 70.60 12.5 — —

October 2021 (1) September 2024 430,000 80.58 14.3 — —

$ 35.4 $ 22.6 $ 9.3

_________________________

(1) The performance RSUs granted in October 2021 totaled 390,000 ;

however, in March 2022, the Compensation Committee of the Company’s Board of Directors approved an amendment and restatement of this award to increase the RSUs granted from 390,000 to 430,000 .

Concurrent with this change, the Compensation Committee amended the executive officer short-term performance bonus plan to reduce the amount of the award that could be earned.

In October 2022, the Compensation Committee approved the issuance of the performance-based RSUs that vested in September 2022 in the form of 585,000 shares of common stock to satisfy the awards.

71 unchanged sentences

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.

In these states, the Company purchases insurance policies from either third-party carriers or its 100% owned captive insurance subsidiary and names certain subcontractors as additional insureds.

In these states, the Company purchases insurance policies from either third-party carriers or its wholly-owned captive insurance subsidiary and names certain subcontractors as additional insureds.

The policies issued by the captive insurance subsidiary and the policies issued on or after June 1, 2020 by third-party carriers essentially represent self-insurance of these risks by the Company.

8 unchanged sentences

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

At September 30, 2021, the Company had total deposits of $ 1.1 billion, consisting of cash deposits of $ 989.3 million and promissory notes and surety bonds of $ 79.8 million, related to contracts to purchase land and lots with a total remaining purchase price of approximately $ 15.5 billion.

At September 30, 2022, the Company had total deposits of $ 1.6 billion, consisting of cash deposits of $ 1.5 billion and promissory notes and surety bonds of $ 90.5 million, related to contracts to purchase land and lots with a total remaining purchase price of approximately $ 19.7 billion.

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

21 unchanged sentences

Earnest money and refundable deposits $ 1,685.7 $ 1,079.8

Insurance receivables 109.5 81.2

Mortgage hedging instruments and commitments 330.2 8.7

Water rights and other water-related assets related to Vidler acquisition 286.6 —

Other receivables 210.9 153.6

Insurance receivables 137.9 109.5

Prepaid assets 77.4 51.6

Contract assets - insurance agency commissions 74.3 58.6

Lease right of use assets 35.6 34.7

Interest rate lock commitments 47.7 17.9

Margin deposits 0.9 16.2

Lease right of use assets 46.6 35.6

Mortgage servicing rights 10.6 4.1

Mortgage hedging instruments and commitments 8.7 5.3

Other 52.4 41.2

6 unchanged sentences

Warranty liability 454.3 376.3

Customer deposits 193.4 93.1

Inventory related accruals 403.6 261.2

Broker deposits related to hedging instruments 240.9 —

Customer deposits 224.2 193.4

Interest rate lock commitments 183.5 0.7

Federal and state income tax liabilities 110.9 88.2

34 unchanged sentences

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:

◦ Inventory held and used - In assessing impairment indicators of of its inventory held and used, the Company performs an analysis of the undiscounted cash flows estimated to be generated by those assets.

◦ Inventory held and used - In assessing impairment indicators of its inventory held and used, the Company performs an analysis of the undiscounted cash flows estimated to be generated by those assets.

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.

16 unchanged sentences

Derivatives not designated as hedging instruments (3):

Interest rate lock commitments (4) Other assets — 17.2 — 17.2

Forward sales of mortgage-backed securities Other assets — 8.5 — 8.5

Interest rate lock commitments (4) Other assets and other liabilities — ( 135.8 ) — ( 135.8 )

Mortgage hedging instruments and commitments (5) Other assets and other liabilities — 317.8 — 317.8

Fair Value at September 30, 2021

1 unchanged sentence

(In millions)

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

Mortgage loans held for sale (1) Mortgage loans held for sale $ — $ 2,009.4 $ 11.7 $ 2,021.1

1 unchanged sentence

Derivatives not designated as hedging instruments (3):

Interest rate lock commitments Other assets — 31.3 — 31.3

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

Interest rate lock commitments (4) Other assets and other liabilities — 17.2 — 17.2

Mortgage hedging instruments and commitments Other assets — 8.5 — 8.5

Level 3 Assets at Fair Value for the Year Ended September 30, 2022

2 unchanged sentences

(In millions)

Debt securities collateralized by residential real estate

$ 3.9 $ — $ — $ ( 3.9 ) $ — $ — $ —

Mortgage loans held for sale (1)

27 unchanged sentences

(4) The fair value of interest rate lock commitments at September 30, 2022 reflects $ 47.7 million of servicing release premiums in other assets and a change in fair value of $ 183.5 million in other liabilities.

The fair value of interest rate lock commitments at September 30, 2021 reflects $ 17.9 million of servicing release premiums in other assets and a change in fair value of $ 0.7 million in other liabilities.

(5) The fair value of mortgage hedging instruments and commitments at September 30, 2022 reflects a $ 330.2 million change in fair value in other assets and a $ 12.4 million change in fair value in other liabilities.

The following table summarizes the Company’s assets measured at fair value on a nonrecurring basis at September 30, 2022 and 2021.

38 unchanged sentences

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