Edgar Filing: HORTON D R INC /DE/

2013.9.30 - 10K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________________________________________________________________________

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2013

Commission file number 1-14122

___________________________________________________________________________________________________________________

D.R. Horton, Inc.

(Exact name of registrant as specified in its charter)



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

(817) 390-8200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share		New York Stock Exchange
2.00% Convertible Senior Notes due 2014		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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



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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of March 31, 2013, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $7,155,332,000 based on the closing price as reported on the New York Stock Exchange.

As of November 20, 2013, there were 330,142,756 shares of the registrant’s common stock, par value $.01 per share, issued and 322,942,685 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2014 Annual Meeting of Stockholders are incorporated herein by reference (to the extent indicated) in Part III.

D.R. HORTON, INC. AND SUBSIDIARIES

2013 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



		Page
PART I
ITEM 1.	Business	1
ITEM 1A.	Risk Factors	11
ITEM 1B.	Unresolved Staff Comments	20
ITEM 2.	Properties	20
ITEM 3.	Legal Proceedings	20
ITEM 4.	Mine Safety Disclosures	20

PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
ITEM 6.	Selected Financial Data	23
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	60
ITEM 8.	Financial Statements and Supplementary Data	62
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	106
ITEM 9A.	Controls and Procedures	106
ITEM 9B.	Other Information	106

PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	107
ITEM 11.	Executive Compensation	107
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	107
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	107
ITEM 14.	Principal Accountant Fees and Services	107

PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	108
SIGNATURES		115

PART I


ITEM 1.	BUSINESS

D.R. Horton, Inc. is one of the largest homebuilding companies in the United States. We construct and sell homes through our operating divisions in 27 states and 78 metropolitan markets of the United States, under the names of D.R. Horton, America’s Builder, Emerald Homes and Breland Homes. Our common stock is included in the S&P 500 Index and listed on the New York Stock Exchange under the ticker symbol “DHI.” Unless the context otherwise requires, the terms “D.R. Horton,” the “Company,” “we” and “our” used herein refer to D.R. Horton, Inc., a Delaware corporation, and its predecessors and subsidiaries.

Donald R. Horton began our homebuilding business in 1978 in Fort Worth, Texas. In 1991, we were incorporated in Delaware to acquire the assets and businesses of our predecessor companies, which were residential home construction and development companies owned or controlled by Mr. Horton. In 1992, we completed the initial public offering of our common stock. Our company expanded and diversified its operations geographically over the years by investing available capital into our existing homebuilding markets and into start-up operations in new markets, as well as by acquiring other homebuilding companies. Our product offerings across our operating markets are broad and diverse. Our homes range in size from 1,000 to more than 4,000 square feet and in price from $100,000 to more than $1,000,000. For the year ended September 30, 2013, we closed 24,155 homes with an average sales price of approximately $249,400.

Through our financial services operations, we provide mortgage financing and title agency services to homebuyers in many of our homebuilding markets. DHI Mortgage, our 100% owned subsidiary, provides mortgage financing services primarily to our homebuilding customers and generally sells the mortgages it originates and the related servicing rights to third-party purchasers. DHI Mortgage originates loans in accordance with purchaser guidelines and sells substantially all of its mortgage production shortly after origination. Our subsidiary title companies serve as title insurance agents by providing title insurance policies, examination and closing services, primarily to our homebuilding customers.

Our financial reporting segments consist of six homebuilding segments and a financial services segment. Our homebuilding operations are the most substantial part of our business, comprising approximately 97% of consolidated revenues, which totaled $6.3 billion in fiscal 2013. Our homebuilding operations generate most of their revenues from the sale of completed homes, with a lesser amount from the sale of land and lots. In addition to building traditional single-family detached homes, we also build attached homes, such as town homes, duplexes, triplexes and condominiums. The sale of detached homes generated approximately 91% of home sales revenues in fiscal 2013. Our financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services.

In addition to our homebuilding and financial services operations, we have ancillary activities that are related to our homebuilding business and real estate holdings, but are not components of our core homebuilding operations. These include the activities of our captive insurance subsidiary and other insurance-related subsidiaries, subsidiaries that own rental properties and collect rental income, and subsidiaries that own income-producing assets such as non-residential real estate, mineral rights and other rights or assets. These ancillary activities and the related income or loss are not significant, either individually or in the aggregate.

Available Information

We make available, as soon as reasonably practicable, on our website, www.drhorton.com, all of our reports required to be filed with the Securities and Exchange Commission (SEC). These reports can be found on the “Investors” page of our website under “SEC Filings” and include our annual and quarterly reports on Form 10-K and 10-Q (including related filings in XBRL format), current reports on Form 8-K, beneficial ownership reports on Forms 3, 4, and 5, proxy statements and amendments to such reports. Our SEC filings are also available to the public on the SEC’s website at www.sec.gov, and the public may read and copy any document we file at the SEC’s public reference room located at 100 F Street NE, Washington, D.C. 20549. Further information on the operation of the public reference room can be obtained by calling the SEC at 1-800-SEC-0330. In addition to our SEC filings, our corporate governance documents, including our Code of Ethical Conduct for the Chief Executive Officer, Chief Financial Officer and senior financial officers, are available on the “Investors” page of our website under “Corporate Governance.” Our stockholders may also obtain these documents in paper format free of charge upon request made to our Investor Relations department.

Our principal executive offices are located at 301 Commerce Street, Suite 500, Fort Worth, Texas 76102 and our telephone number is (817) 390-8200. Information on or linked to our website is not incorporated by reference into this annual report on Form 10-K unless expressly noted.

OPERATING STRUCTURE AND PROCESSES

Following is an overview of our company's operating structure and the significant processes that support our business controls, strategies and performance.

Homebuilding Markets

Our homebuilding business began in the Dallas/Fort Worth area, which is still one of our largest local homebuilding operations and home to our corporate headquarters. We currently operate in 27 states and 78 markets, which provides us with geographic diversification in our homebuilding inventory investments and our sources of revenues and earnings. We believe our geographic diversification lowers our operational risks by mitigating the effects of local and regional economic cycles, and it also enhances our earnings potential by providing more diverse opportunities to invest in our business.

We conduct our homebuilding operations in the geographic regions, states and markets listed below, and we conduct our mortgage and title operations in many of these markets. Our homebuilding operating divisions are aggregated into six reporting segments, also referred to as reporting regions, which comprise the markets below. Our financial statements contain additional information regarding segment performance.



State	Reporting Region/Market	State	Reporting Region/Market

	East Region		South Central Region
Delaware	Central Delaware	Louisiana	Baton Rouge
Georgia	Savannah		Lafayette
Maryland	Baltimore	New Mexico	Las Cruces
	Suburban Washington, D.C.	Oklahoma	Oklahoma City
New Jersey	North New Jersey	Texas	Austin
	South New Jersey		Dallas
North Carolina	Charlotte		El Paso
	Fayetteville		Fort Worth
	Greensboro/Winston-Salem		Houston
	Jacksonville		Killeen/Temple/Waco
	Raleigh/Durham		Midland/Odessa
	Wilmington		Rio Grande Valley
Pennsylvania	Lancaster		San Antonio
	Philadelphia
South Carolina	Charleston		Southwest Region
	Columbia	Arizona	Phoenix
	Greenville		Tucson
	Hilton Head	New Mexico	Albuquerque
	Myrtle Beach
Virginia	Northern Virginia		West Region
		California	Bay Area
	Midwest Region		Central Valley
Colorado	Colorado Springs		Imperial Valley
	Denver		Los Angeles County
	Fort Collins		Riverside County
Illinois	Chicago		Sacramento
Indiana	Northern Indiana		San Bernardino County
Minnesota	Minneapolis/St. Paul		San Diego County
			Ventura County
	Southeast Region	Hawaii	Hawaii
Alabama	Birmingham		Maui
	Huntsville		Oahu
	Mobile	Nevada	Las Vegas
	Montgomery		Reno
	Tuscaloosa	Oregon	Portland
Florida	Fort Myers/Naples	Utah	Salt Lake City
	Jacksonville	Washington	Seattle/Tacoma
	Lakeland		Vancouver
	Melbourne/Vero Beach
	Miami/West Palm Beach
	Orlando
	Pensacola/Panama City
	Tampa/Sarasota
	Volusia County
Georgia	Atlanta
	Middle Georgia
Mississippi	Gulf Coast
Tennessee	Nashville

When evaluating new or existing homebuilding markets for purposes of capital allocation, we consider local, market-specific factors, including among others:


•	Economic conditions;


•	Employment levels and job growth;


•	Income level of potential homebuyers;


•	Local housing affordability and typical mortgage products utilized;


•	Market for homes at our targeted price points;


•	Availability of land and lots on acceptable terms;


•	Land entitlement and development processes;


•	Availability of qualified subcontractors;


•	New and secondary home sales activity;


•	Competition; and


•	Prevailing housing products, features, cost and pricing.

Economies of Scale

We are the largest homebuilding company in the United States in fiscal 2013 as measured by number of homes closed, revenues and pre-tax income, and we are also one of the largest builders in many of the markets in which we operate. We believe that our national, regional and local scale of operations provides us with benefits that may not be available to the same degree to some other smaller homebuilders, such as:


•	Greater access to and lower cost of capital, due to our balance sheet strength and our lending and capital markets relationships;


•	Negotiation of volume discounts and rebates from national, regional and local materials suppliers and lower labor rates from certain subcontractors; and


•	Enhanced leverage of our general and administrative activities and higher profit margins, which allow us flexibility to adjust to changes in market conditions and compete effectively in each of our markets.

Decentralized Homebuilding Operations

We view homebuilding as a local business; therefore, most of our direct homebuilding activities are decentralized, which provides flexibility to our local managers on operational decisions. At September 30, 2013, we had 34 separate homebuilding operating divisions, many of which operate in more than one market area. Generally, each operating division consists of a division president; a controller; land entitlement, acquisition and development personnel; a sales manager and sales and marketing personnel; a construction manager and construction superintendents; customer service personnel; a purchasing manager and office staff. We believe that our division presidents and their management teams, who are familiar with local conditions, generally have the best information on which to base many decisions regarding their operations. Our division presidents receive performance based compensation if they achieve targeted financial and operating metrics related to their operating divisions. Following is a summary of our homebuilding activities that are decentralized in our local operating divisions, and the control and oversight functions that are centralized in our regional and corporate offices:

Operating Division Responsibilities

Each operating division is responsible for:


•	Site selection, which involves

— A feasibility study;

— Soil and environmental reviews;

— Review of existing zoning and other governmental requirements;

— Review of the need for and extent of offsite work required to meet local building codes; and

— Financial analysis of the potential project;


•	Negotiating lot option, land acquisition and related contracts;


•	Obtaining all necessary land development and home construction approvals;


•	Selecting land development subcontractors and ensuring their work meets our contracted scopes;


•	Selecting building plans and architectural schemes;


•	Selecting construction subcontractors and ensuring their work meets our contracted scopes;


•	Planning and managing homebuilding schedules;


•	Developing and implementing local marketing and sales plans;


•	Determining the pricing for each house plan in a given community; and


•	Coordinating post-closing customer service and warranty repairs.

Centralized Controls

We centralize many important risk elements of our homebuilding business through our regional and corporate offices. We have four separate homebuilding regional offices. Generally, each regional office consists of a region president, legal counsel, a chief financial officer and limited office support staff. Each of our region presidents and their management teams are responsible for oversight of the operations of a number of homebuilding operating divisions, including:


•	Review and approval of division business plans and budgets;


•	Review of all land and lot acquisition contracts;


•	Review of all business and financial analysis for potential land and lot inventory investments;


•	Oversight of land and home inventory levels;


•	Monitoring division financial and operating performance; and


•	Review of major personnel decisions and division incentive compensation plans.

Our corporate executives and corporate office departments are responsible for establishing our operational policies and internal control standards and for monitoring compliance with established policies and controls throughout our operations. The corporate office also has primary responsibility for direct management of certain key risk elements and initiatives through the following centralized functions:


•	Financing;


•	Cash management;


•	Allocation of capital;


•	Issuance and monitoring of inventory investment guidelines to our operating divisions;


•	Approval and funding of land and lot acquisitions;


•	Monitoring and analysis of margins, costs, profitability and inventory levels;


•	Risk and litigation management;


•	Environmental assessments of land and lot acquisitions;


•	Information technology systems;


•	Accounting and management reporting;


•	Income taxes;


•	Internal audit;


•	Public reporting and investor and media relations;


•	Administration of payroll and employee benefits;


•	Negotiation of national purchasing contracts;


•	Administration of customer satisfaction surveys and reporting of results; and


•	Approval of major personnel decisions and management incentive compensation plans.

Cost Controls

We control construction costs by designing our homes efficiently and by obtaining competitive bids for construction materials and labor. We also competitively bid and negotiate pricing from our subcontractors and suppliers based on the volume of services and products we purchase on a local, regional and national basis. We monitor our land development expenditures and construction costs versus budgets for each house and community, and we review our inventory levels, margins, expenses, profitability and returns for each operating market compared to both its business plan and our performance expectations.

We control overhead costs by centralizing certain accounting and administrative functions and by monitoring staffing and compensation levels. We review other general and administrative costs to identify efficiencies and savings opportunities in our operating divisions and our regional and corporate offices. We also direct many of our promotional activities toward local real estate brokers, which we believe is an efficient use of our advertising expenditures.

Land/Lot Acquisition and Inventory Management

We acquire land after we have completed due diligence and generally after we have obtained the rights (known as entitlements) to begin development or construction work resulting in an acceptable number of residential lots. Before we acquire lots or tracts of land, we complete a feasibility study, which includes soil tests, independent environmental studies, other engineering work and financial analysis. We also evaluate the status of necessary zoning and other governmental entitlements required to develop and use the property for home construction. Although we purchase and develop land primarily to support our homebuilding activities, we may sell land and lots to other developers and homebuilders where we have excess land and lot positions.

We also enter into land/lot option contracts, in which we obtain the right, but generally not the obligation, to buy land or lots at predetermined prices on a defined schedule commensurate with anticipated home closings or planned development. Our option contracts generally are non-recourse, which limits our financial exposure to our earnest money deposited with land and lot sellers and any pre-acquisition due diligence costs we incur. This enables us to control land and lot positions with limited capital investment, which substantially reduces the risks associated with land ownership and development.

We directly acquire almost all of our land and lot positions. We are a party to a small number of joint ventures, all of which are consolidated in our financial statements.

We attempt to mitigate our exposure to real estate inventory risks by:


•	Managing our supply of land/lots controlled (owned and optioned) in each market based on anticipated future home closing levels;


•	Monitoring local market and demographic trends, housing preferences and related economic developments, including the identification of desirable housing submarkets based on the quality of local schools, new job opportunities, local growth initiatives and personal income trends;


•	Utilizing land/lot option contracts, where possible;


•	Seeking to acquire developed lots which are substantially ready for home construction, where possible;


•	Limiting the size of acquired land parcels to smaller tracts, where possible, and controlling our investments in land acquisition, land development and housing inventory to match the expected housing demand in each of our operating markets;


•	Generally commencing construction of custom features or optional upgrades on homes under contract only after the buyer’s receipt of mortgage approval and receipt of satisfactory deposits from the buyer; and


•	Monitoring and managing the number of speculative homes (homes under construction without an executed sales contract) built in each subdivision.

Land Development and Home Construction

Substantially all of our land development and home construction work is performed by subcontractors. Subcontractors typically are selected after a competitive bidding process, and are retained for a specific subdivision or series of house plans pursuant to a contract that obligates the subcontractor to complete the scope of work at an agreed-upon price. We employ land development managers and construction superintendents to monitor land development and home construction activities, participate in major design and building decisions, coordinate the activities of subcontractors and suppliers, review the work of subcontractors for quality and cost controls and monitor compliance with zoning and building codes. In addition, our construction superintendents play a significant role in working with our homebuyers by assisting with option selection and home modification decisions, educating buyers on the construction process and instructing buyers on post-closing home maintenance.

Our home designs are selected or prepared in each of our markets to appeal to the tastes and preferences of local homebuyers in each community. We offer optional interior and exterior features to allow homebuyers to enhance the basic home design and to allow us to generate additional revenues from each home sold. We continually adjust our product offerings to address our customers’ expectations for affordability, home size and features. Construction time for our homes depends on the availability of labor, materials and supplies, the weather, the size of the home and other factors. We complete the construction of most homes within three to six months.

We typically do not maintain significant inventories of land development or construction materials, except for work in progress materials for active development projects and homes under construction. Generally, the construction materials used in our operations are readily available from numerous sources. We have contracts exceeding one year with certain suppliers of building materials that are cancelable at our option. As housing demand and land development and home construction activity increased in fiscal 2012 and 2013, we experienced some temporary shortages and delays of materials and labor in some of our operating markets, none of which had a material effect on our consolidated operating results.

Marketing and Sales

We market and sell our homes primarily through commissioned employees, and the majority of our home closings also involve an independent real estate broker. We typically conduct home sales from sales offices located in furnished model homes in each subdivision, and we generally do not offer our model homes for sale until the completion of a subdivision. Our sales personnel assist prospective homebuyers by providing floor plans and price information, demonstrating the features and layouts of model homes and assisting with the selection of options and other custom features. We train and inform our sales personnel as to the availability of financing, construction schedules, and marketing and advertising plans. As market conditions warrant, we may provide potential homebuyers with one or more of a variety of incentives, including discounts and free upgrades, to be competitive in a particular market.

We market our homes and communities to prospective homebuyers and real estate brokers through electronic media, including email, social networking sites and our company website, as well as brochures, flyers, newsletters and promotional events. We also use billboards, radio, television, magazine and newspaper advertising as necessary in each local market. We attempt to position our subdivisions in locations that are desirable to potential homebuyers and convenient to or visible from local traffic patterns, which helps to reduce advertising costs. Model homes play a substantial role in our marketing efforts, and we expend significant effort and resources to create an attractive atmosphere in our model homes.

We also build speculative homes in most of our subdivisions. These homes enhance our marketing and sales efforts to prospective homebuyers who are relocating to these markets, as well as to independent brokers, who often represent homebuyers requiring a home within a short time frame. We determine our speculative homes strategy in each market based on local market factors, such as new job growth, the number of job relocations, housing demand and supply, seasonality, current sales contract cancellation trends and our past experience in the market. We maintain a level of speculative home inventory in each subdivision based on our current and planned sales pace, and we monitor and adjust speculative home inventory on an ongoing basis as conditions warrant. Speculative homes help to provide us with opportunities to compete effectively with existing homes available in the market and improve our profits and returns on our inventory of owned lots.

Sales Contracts and Backlog

Our sales contracts require an earnest money deposit which varies in amount across our markets and subdivisions. Additionally, customers are generally required to pay additional deposits when they select options or upgrade features for their homes. Our sales contracts include a financing contingency which permits customers to cancel and receive a refund of their deposit if they cannot obtain mortgage financing at prevailing or specified interest rates within a specified period. Our contracts may include other contingencies, such as the sale of an existing home. Most of our sales contracts stipulate that when customers cancel their contracts with us, we have the right to retain their earnest money and option deposits; however, our operating divisions often choose to refund the deposit.

Sales order backlog represents homes under contract but not yet closed at the end of the period. At September 30, 2013, the value of our backlog of sales orders was $2,210.1 million (8,205 homes), an increase of 33% from $1,667.9 million (7,240 homes) at September 30, 2012. The average sales price of homes in backlog was $269,400 at September 30, 2013, up 17% from the $230,400 average at September 30, 2012. Many of the contracts in our sales order backlog are subject to contingencies, such as those described above, which can result in cancellations. A portion of the contracts in backlog will not result in closings due to cancellations. As a percentage of gross sales orders, cancellations of sales contracts were 24% in both fiscal 2013 and 2012.

The length of time between the signing of a sales contract for a home and delivery of the home to the buyer (closing) is generally from two to six months; therefore, substantially all of the homes in our sales backlog at September 30, 2013 are scheduled to close in fiscal year 2014. Further discussion of our backlog is provided in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of this annual report on Form 10-K.

Customer Service and Quality Control

Our operating divisions are responsible for pre-closing quality control inspections and responding to customers’ post-closing needs. We believe that a prompt and courteous response to homebuyers’ needs during and after construction reduces post-closing repair costs, enhances our reputation for quality and service and ultimately leads to repeat and referral business from the real estate community and homebuyers. We typically provide our homebuyers with a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems, a two-year limited warranty on major mechanical systems, and a one-year limited warranty on other construction components. The subcontractors who perform the actual construction also provide us with warranties on workmanship and are generally prepared to respond to us and the homeowner promptly upon request. In addition, some of our suppliers provide manufacturer’s warranties on specified products installed in the home.

Customer Mortgage Financing

We provide mortgage financing services principally to purchasers of our homes in the majority of our homebuilding markets through our 100% owned subsidiary, DHI Mortgage. DHI Mortgage assists in the sales transaction by coordinating the mortgage application, mortgage commitment and home closing processes to facilitate a timely and efficient home-buying experience for our buyers. DHI Mortgage originates mortgage loans for a substantial portion of our homebuyers. During the year ended September 30, 2013, DHI Mortgage provided mortgage financing services for approximately 56% of our total homes closed, and approximately 86% of DHI Mortgage’s loan volume related to homes closed by our homebuilding operations. Most of our homebuilding divisions also work with a number of additional mortgage lenders that offer a range of mortgage financing programs to our homebuyers.

To limit the risks associated with our mortgage operations, DHI Mortgage originates loan products that we believe can be sold to third-party purchasers. DHI Mortgage sells substantially all of the loans and their servicing rights to third-party purchasers shortly after origination with limited recourse provisions. DHI Mortgage centralizes most of its control and oversight functions, including those related to loan underwriting, quality control, compliance with investor standards and regulatory requirements, secondary marketing of loans, hedging activities, accounting and financial and operational reporting.

Title Services

Through our subsidiary title companies, we serve as a title insurance agent in selected markets by providing title insurance policies, examination and closing services primarily to the purchasers of homes we build and sell. We currently assume little or no underwriting risk associated with these title policies.

Employees

At September 30, 2013, we employed 4,609 persons, of whom 1,104 were sales and marketing personnel, 1,079 were involved in construction, 1,418 were office personnel and 1,008 worked in mortgage and title operations. We believe that we have good relations with our employees.

Acquisitions

We routinely evaluate opportunities to profitably expand our operations, including potential acquisitions of other homebuilding or related businesses. In fiscal 2012, we acquired the homebuilding operations of Breland Homes, and in October 2013, we acquired the homebuilding operations of Regent Homes, Inc. for an estimated $35 million in cash. Regent Homes operates in Charlotte, Greensboro and Winston-Salem, North Carolina. The assets acquired from Regent included approximately 240 homes in inventory, 300 lots and control of approximately 600 additional lots through option contracts, as well as a sales order backlog of 213 homes valued at $31.1 million.

Acquisitions of homebuilding businesses can provide us with immediate land and home inventories, as well as control of additional land and lot positions through option contracts. In addition, employees may have specialized knowledge of local market conditions, including existing relationships with municipalities, land owners, developers, subcontractors and suppliers. These inventory positions and local market knowledge and relationships could take us several years to develop through our own start-up efforts. We seek to limit the risks associated with acquiring other companies by conducting extensive operational, financial and legal due diligence on each acquisition and by performing financial analysis to determine that each acquisition will have a positive impact on our earnings within an acceptable period of time.

Competition

The homebuilding industry is highly competitive. We compete with numerous other national, regional and local homebuilders for homebuyers, desirable properties, raw materials, skilled labor, employees, management talent and financing. We also compete with resales of existing and foreclosed homes and with the rental housing market. Our homes compete on the basis of quality, price, design, mortgage financing terms and location. Our financial services businesses compete with other title companies and mortgage lenders, including national, regional and local mortgage bankers and other financial institutions, some of which are subject to fewer government regulations or have greater access to capital, different lending criteria and broader product offerings.

Governmental Regulation and Environmental Matters

The homebuilding industry is subject to extensive and complex regulations. We and the subcontractors we use must comply with many federal, state and local laws and regulations, including zoning, density and development requirements, building, environmental, advertising, labor and real estate sales rules and regulations. These regulations and requirements affect substantially all aspects of our land development and home design, construction and sales processes in varying degrees across our markets. Our homes are inspected by local authorities where required, and homes eligible for insurance or guarantees provided by the Federal Housing Administration (FHA) and the Department of Veteran Affairs (VA) are subject to inspection by them. These regulations often provide broad discretion to the administering governmental authorities. In addition, our new housing developments may be subject to various assessments for schools, parks, streets, utilities and other public improvements.

Our homebuilding operations are also subject to an extensive variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health, safety and the environment. The particular environmental laws for each site vary greatly according to location, environmental condition and the present and former uses of the site and adjoining properties.

Our mortgage company and title insurance agencies must comply with extensive federal and state laws and regulations as administered by numerous federal and state government agencies. These include eligibility and other requirements for participation in the programs offered by the FHA, VA, Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and the United States Department of Agriculture (USDA). These laws and regulations also require compliance with consumer lending laws and other regulations governing disclosure requirements, prohibitions against discrimination and real estate settlement procedures. These laws and regulations subject our operations to regular, extensive examinations by the applicable agencies.

Seasonality

Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again in the future, we generally have more homes under construction, close more homes and have greater revenues and operating income in the third and fourth quarters of our fiscal year. The seasonal activity increases our working capital requirements for our homebuilding operations during our third and fourth fiscal quarters and increases our funding requirements for the mortgages we originate in our financial services segment at the end of these quarters. As a result of seasonal activity, our quarterly results of operations and financial position at the end of a particular fiscal quarter are not necessarily representative of the balance of our fiscal year.


ITEM 1A.	RISK FACTORS

Discussion of our business and operations included in this annual report on Form 10-K should be read together with the risk factors set forth below. They describe various risks and uncertainties we are or may become subject to, many of which are difficult to predict or beyond our control. These risks and uncertainties, together with other factors described elsewhere in this report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.

The homebuilding industry experienced a significant downturn in recent years. Although industry conditions improved during fiscal 2012 and 2013, the general U.S. economy remains weak. A subsequent deterioration in industry conditions could adversely affect our business or financial results.

We experienced one of the most severe housing downturns in U.S. history from 2006 through 2011. During this downturn, we experienced significant reductions in our home sales and homebuilding revenues, and we incurred substantial asset impairments and write-offs. Our recent results and other national data indicate that the overall demand for new homes improved during fiscal 2012 and 2013. However, both national new home sales and our company's home sales remain below historical levels due to the current weak U.S. economic conditions, the restrictive mortgage lending environment and variations in local housing market conditions. A subsequent deterioration in industry conditions could adversely affect our business and financial results.

The homebuilding industry is cyclical and affected by changes in economic, real estate or other conditions that could adversely affect our business or financial results.

The homebuilding industry is cyclical and is significantly affected by changes in general and local economic and real estate conditions, such as:


•	employment levels;


•	availability of financing for homebuyers;


•	interest rates;


•	consumer confidence;


•	levels and prices of new homes for sale and alternatives to new homes, including foreclosed homes, homes held for sale by investors and speculators, other existing homes and rental properties;


•	demographic trends; and


•	housing demand.

Adverse changes in these general and local economic conditions or deterioration in the broader economy could have a negative impact on our business and financial results. Also, changes in these economic conditions may affect some of our regions or markets more than others. If adverse conditions affect any of our larger markets, they could have a proportionately greater impact on us than on some other homebuilding companies.

In recent years, concerns regarding the U.S. government’s fiscal policies and economic stimulus actions have created uncertainty in the financial markets and caused volatility in interest rates, which has impacted business and consumer confidence. Federal government actions related to economic stimulus, taxation and spending levels, borrowing limits, potential government shutdowns, the implementation of federal healthcare legislation and the related political debates, conflicts and compromises associated with such actions may negatively impact the financial markets and consumer confidence and spending, which could hurt the U.S. economy and the housing market. Such events could adversely affect our homebuilding and financial services businesses and operating results.

Weather conditions and natural disasters, such as hurricanes, tornadoes, earthquakes, wildfires, volcanic activity, droughts and floods, can harm our homebuilding business. These can delay our development work, home construction and home closings, adversely affect the cost or availability of materials or labor or damage homes under construction. The climates and geology of many of the states in which we operate, including California, Florida, Texas and other coastal areas, where we have some of our larger operations, present increased risks of adverse weather or natural disasters.

Deployments of U.S. military personnel to foreign regions, terrorist attacks, other acts of violence or threats to national security and any corresponding response by the United States or others, or related domestic or international instability, may cause an economic slowdown in the markets where we operate, which could adversely affect our homebuilding business.

If we experience any of the foregoing, potential customers may be less willing or able to buy our homes. In the future, our pricing and product strategies may also be limited by market conditions. We may be unable to change the mix of our home offerings, reduce the costs of the homes we build, offer more affordable homes or satisfactorily address changing market conditions in other ways without adversely affecting our profit margins. In addition, cancellations of home sales contracts in backlog may increase if homebuyers do not honor their contracts due to any of the factors discussed above.

Our financial services business is closely related to our homebuilding business, as it originates mortgage loans principally to purchasers of the homes we build. A decrease in the demand for our homes because of the foregoing matters will also adversely affect the financial results of this segment of our business. An increase in the default rate on the mortgages we originate may adversely affect our ability to sell the mortgages or the pricing we receive upon the sale of mortgages or may increase our recourse obligations for previous originations. We establish reserves related to mortgages we have sold; however, actual future obligations related to these mortgages could differ significantly from our currently estimated amounts.

Constriction of the credit markets could limit our ability to access capital and increase our costs of capital.

During much of the recent housing downturn, the credit markets constricted and reduced some sources of liquidity that were previously available to us. Consequently, we focused on generating substantial operating cash flow, and we relied principally on our cash on hand to meet our working capital needs and repay outstanding indebtedness during those years. There likely will be periods in the future when financial market upheaval will increase our cost of capital or limit our ability to access the public debt markets or obtain bank financing.

We have a revolving credit facility, which currently provides committed loan financing through September 7, 2018 in an amount totaling $725 million. Also, our mortgage subsidiary uses a $300 million mortgage repurchase facility to finance many of the loans it originates. The mortgage repurchase facility must be renewed annually and currently expires on February 28, 2014. We expect to renew and extend the term of the mortgage repurchase facility on similar terms prior to its maturity. Adverse changes in market conditions could make the renewal of this facility more difficult or could result in an increase in the cost of the facility or a decrease in its committed availability. Such changes affecting our mortgage repurchase facility may also make it more difficult or costly to sell the mortgages that we originate.

We believe that our existing cash resources, our revolving credit facility and our mortgage repurchase facility provide sufficient liquidity to fund our near-term working capital needs and debt obligations. We regularly assess our projected capital requirements to fund future growth in our business, repay our longer-term debt obligations, and support our other general corporate and operational needs, and we regularly evaluate our opportunities to raise additional capital. As market conditions permit, we may issue new debt or equity securities through the public capital markets or obtain additional bank financing to fund our projected capital requirements or provide additional liquidity. Adverse changes in economic, homebuilding or capital market conditions could negatively affect our business, liquidity and financial results.

Reductions in the availability of mortgage financing and the liquidity provided by government-sponsored enterprises, the effects of government programs, a decrease in our ability to sell mortgage loans on attractive terms or an increase in mortgage interest rates could adversely affect our business or financial results.

During the last seven years, the mortgage lending industry has experienced significant change and contraction. Credit requirements have tightened and investor demand for mortgage loans and mortgage-backed securities has been predominantly limited to securities backed by Fannie Mae, Freddie Mac or Ginnie Mae. As a result, it is difficult for some potential buyers to finance the purchase of our homes. Further tightening of credit requirements could adversely affect our business or financial results.

We believe that the liquidity provided by Fannie Mae, Freddie Mac and Ginnie Mae to the mortgage industry has been very important to the housing market. Fannie Mae and Freddie Mac have required substantial injections of capital from the federal government and may require additional government support in the future. There has been ongoing discussion by the government with regard to the long term structure and viability of Fannie Mae and Freddie Mac. These discussions include the downsizing of their portfolios as well as the tightening of guidelines for their loan products. In addition, increased lending volume and losses insured by the FHA have resulted in a reduction of its insurance fund. Any reduction in the availability of the financing or insuring provided by these institutions could adversely affect interest rates, mortgage availability and sales of new homes and mortgage loans. The FHA insures mortgage loans that generally have lower credit requirements and is an important source for financing the sale of our homes. In recent years, more restrictive guidelines have been placed on FHA insured loans, affecting minimum down payment and availability for condominium financing. Also in recent years, the FHA has raised the premium charged to borrowers for insuring loans, which has increased the cost of FHA financing. Additional future restrictions or premium increases may negatively affect the availability or affordability of FHA financing, which could adversely affect our ability to sell homes.

While the use of down payment assistance programs by our homebuyers has decreased significantly, some of our customers still utilize 100% financing through programs offered by the VA and United States Department of Agriculture (USDA). These government-sponsored loan programs are subject to changes in regulations, lending standards and government funding levels. There can be no assurances that these programs or other programs will continue to be available in our homebuilding markets or that they will be as attractive to our customers as the programs currently offered, which could negatively affect our sales.

The mortgage loans originated by our financial services operations are generally sold to third-party purchasers. During fiscal 2013, approximately 44% of our mortgage loans were sold to one major financial institution. On an ongoing basis, we seek to establish additional loan purchase arrangements with multiple institutions. If we are unable to sell mortgage loans to additional purchasers on attractive terms, our ability to originate and sell mortgage loans at competitive prices could be limited, which would negatively affect our profitability.

Even if potential customers do not need financing, changes in the availability of mortgage products may make it more difficult for them to sell their current homes to potential buyers who need financing.

Mortgage rates are currently low as compared to most historical periods. If interest rates increase, the costs of owning a home will be affected, which could result in a decline in the demand for our homes.

The risks associated with our land and lot inventory could adversely affect our business or financial results.

Inventory risks are substantial for our homebuilding business. During fiscal 2012 and 2013, we increased our investments in land and lot inventories in response to increased demand for our homes. There are risks inherent in controlling, owning and developing land. If housing demand declines, we may not be able to build and sell homes profitably in some of our communities, and we may not be able to fully recover the costs of some of the land and lots we own. Also, the values of our owned undeveloped land, building lots and housing inventories may fluctuate significantly due to changes in market conditions. As a result, our deposits for building lots controlled under option or similar contracts may be put at risk, we may have to sell homes or land for a lower profit margin or we may have to record inventory impairment charges on our developed and undeveloped land and lots. A significant deterioration in economic or homebuilding industry conditions may result in substantial inventory impairment charges.

Homebuilding is subject to home warranty and construction defect claims in the ordinary course of business that can be significant.

We are subject to home warranty and construction defect claims arising in the ordinary course of our homebuilding business. We rely on subcontractors to perform the actual construction of our homes, and in many cases, to select and obtain construction materials. Despite our detailed specifications and monitoring of the construction process, our subcontractors occasionally use improper construction processes or defective materials in the construction of our homes. When we find these issues, we repair them in accordance with our warranty obligations. We spend significant resources to repair items in homes we have sold to fulfill the warranties we issued to our homebuyers. Additionally, we are subject to construction defect claims which can be costly to defend and resolve in the legal system. Warranty and construction defect matters can also result in negative publicity in the media and on the internet which can damage our reputation and adversely affect our ability to sell homes.

Based on the large number of homes we have sold over the years, our potential liabilities related to warranty and construction defect claims are significant. As a consequence, we maintain product liability insurance, and we obtain indemnities and certificates of insurance from subcontractors covering claims related to their workmanship and materials. We establish warranty and other reserves for the homes we sell based on historical experience in our markets and our judgment of the qualitative risks associated with the types of homes built. Because of the uncertainties inherent to these matters, we cannot provide assurance that our insurance coverage, our subcontractor arrangements and our reserves will be adequate to address all of our future warranty and construction defect claims. Contractual indemnities can be difficult to enforce, we may be responsible for applicable self-insured retentions and some types of claims may not be covered by insurance or may exceed applicable coverage limits. Additionally, the coverage offered by and the availability of product liability insurance for construction defects is limited and costly. We have responded to increases in insurance costs and coverage limitations by increasing our self-insured retentions and claim reserves. There can be no assurance that coverage will not be further restricted or become more costly. If costs to resolve our future warranty and construction defect claims exceed our estimates, our financial results and liquidity could be adversely affected.

Supply shortages and other risks related to acquiring land, building materials and skilled labor could increase our costs and delay deliveries.

The homebuilding industry has from time to time experienced significant difficulties that can affect the cost or timing of

construction, including:


•	difficulty in acquiring land suitable for residential building at affordable prices in locations where our potential customers want to live;


•	shortages of qualified subcontractors;


•	reliance on local subcontractors, manufacturers and distributors who may be inadequately capitalized;


•	shortages of materials; and


•	volatile increases in the cost of materials, particularly increases in the price of lumber, drywall and cement, which are significant components of home construction costs.

These factors may cause us to take longer or incur more costs to build our homes and adversely affect our revenues and margins. If the level of new home demand increases significantly in future periods, the risk of shortages in residential lots, labor and materials available to the homebuilding industry could increase in some markets where we operate.

We are required to obtain performance bonds, the unavailability of which could adversely affect our results of operations and cash flows.

We often are required to provide surety bonds to secure our performance or obligations under construction contracts, development agreements and other arrangements. Our ability to obtain surety bonds primarily depends upon our credit rating, financial condition, past performance and other factors, including the capacity of the surety market and the underwriting practices of surety bond issuers. The ability to obtain surety bonds also can be impacted by the willingness of insurance companies to issue performance bonds for construction and development activities. If we are unable to obtain surety bonds when required, our results of operations and cash flows could be adversely affected.

Increases in the costs of owning a home could prevent potential customers from buying our homes and adversely affect our business or financial results.

Significant expenses of owning a home, including mortgage interest and real estate taxes, generally are deductible expenses for an individual’s federal, and in some cases state, income taxes, subject to various limitations under current tax law and policy. If the federal government or a state government changes its income tax laws, as has been discussed from time to time, to eliminate or substantially modify these income tax deductions, the after-tax cost of owning a new home would increase for many of our potential customers. The loss or reduction of homeowner tax deductions, if such tax law changes were enacted without offsetting provisions, could adversely affect demand for and sales prices of new homes.

In addition, increases in property tax rates by local governmental authorities, as experienced in some areas in response to reduced federal and state funding, could adversely affect the amount of financing our potential customers could obtain or their desire to purchase new homes.

Governmental regulations and environmental matters could increase the cost and limit the availability of our development and homebuilding projects and adversely affect our business or financial results.

We are subject to extensive and complex regulations that affect land development and home construction, including zoning, density restrictions, building design and building standards. These regulations often provide broad discretion to the administering governmental authorities as to the conditions we must meet prior to development or construction being approved, if approved at all. We are subject to determinations by these authorities as to the adequacy of water or sewage facilities, roads or other local services. New housing developments may also be subject to various assessments for schools, parks, streets and other public improvements. In addition, in many markets government authorities have implemented no growth or growth control initiatives. Any of these can limit, delay or increase the costs of development or home construction.

We are also subject to a significant number and variety of local, state and federal laws and regulations concerning protection of health, safety, labor standards and the environment. The impact of environmental laws varies depending upon the prior uses of the building site or adjoining properties and may be greater in areas with less supply where undeveloped land or desirable alternatives are less available. These matters may result in delays, may cause us to incur substantial compliance, remediation, mitigation and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or areas. Government agencies also routinely initiate audits, reviews or investigations of our business practices to ensure compliance with these laws and regulations, which can cause us to incur costs or create other disruptions in our business that can be significant.

The subcontractors we rely on to perform the actual construction of our homes are also subject to a significant number of local, state and federal laws and regulations, including laws involving matters that are not within our control. If the subcontractors who construct our homes fail to comply with all applicable laws, we can suffer reputational damage, and may be exposed to possible liability.

We are also subject to an extensive number of laws and regulations because our common stock and debt securities are publicly traded in the capital markets. These regulations govern our communications with our shareholders and the capital markets, our financial statement disclosures and our legal processes, and they also impact the work required to be performed by our independent registered public accounting firm and our legal counsel. Changes in these laws and regulations, including the subsequent implementation of rules by the administering government authorities, can require us to incur additional compliance costs, and such costs can be significant.

Governmental regulation of our financial services operations could adversely affect our business or financial results.

Our financial services operations are subject to a significant number of federal, state and local laws and regulations, any of which may limit our ability to provide mortgage financing or title services to potential purchasers of our homes. These include eligibility requirements for participation in federal loan programs, compliance with consumer lending laws and other regulations governing disclosure requirements, prohibitions against discrimination, real estate settlement procedures and foreclosure and servicing policies. Additionally, the turmoil caused by the significant number of defaults and resulting foreclosures during the housing downturn has encouraged consumer lawsuits and the investigation of financial services industry practices by various governmental authorities. These governmental inquiries could result in changes in regulations and in the practices of the financial services and homebuilding industries, and they could adversely affect the costs and financial results of financial services and homebuilding companies.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was enacted to provide for a number of new requirements related to residential mortgage lending practices. In 2011, the Consumer Financial Protection Bureau (CFPB) was created to regulate consumer protection with regard to financial products and services. In January 2013, the CFPB proposed a number of new rules to become effective in January 2014, including but not limited to rules regarding the creation and definition of a “Qualified Mortgage” (QM), rules for lender practices regarding assessing borrowers’ ability to repay, and limitations on certain fees and incentive arrangements. The effects of these rules upon their adoption could affect the availability and cost of mortgage credit. Other requirements provided for by the Dodd-Frank Act have not yet been finalized or implemented. The effect of such provisions on our financial services business will depend on the rules that are ultimately enacted.

We have substantial amounts of consolidated debt and may incur additional debt, and our debt obligations and ability to comply with related covenants, restrictions or limitations could adversely affect our financial condition.

As of September 30, 2013, our consolidated debt was $3,509.0 million. We have $1,030.8 million principal amount of our debt maturing before the end of fiscal 2014, of which $500 million is in the form of convertible senior notes that will mature on May 15, 2014 and are convertible into approximately 38.6 million shares of our common stock at a conversion price of $12.96 per share. The indentures governing our senior and convertible senior notes impose restrictions on our and our guarantor subsidiaries' ability to incur debt secured by certain assets. However, the indentures do not restrict the incurrence of future unsecured debt by us or our guarantor subsidiaries or the incurrence of debt, whether secured or unsecured, by our financial services or other non-guarantor subsidiaries. Additionally, the agreement governing our revolving credit facility allows us to incur a substantial amount of future secured and unsecured debt.

Possible consequences. The amount and the maturities of our debt could have important consequences. For example, they could:


•	require us to dedicate a substantial portion of our cash flow from operations to payment of our debt and reduce our ability to use our cash flow for other operating or investing purposes;


•	limit our flexibility in planning for, or reacting to, the changes in our business;


•	limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service requirements or other requirements;


•	place us at a competitive disadvantage if we have more debt than some of our competitors; and


•	make us more vulnerable to downturns in our business or general economic conditions.

In addition, the magnitude of our debt and the restrictions imposed by the instruments governing these obligations expose us to additional risks, including:

Dependence on future performance. Our ability to meet our debt service and other obligations and the financial covenants under our revolving credit facility will depend, in part, upon our future financial performance. Our future results are subject to the risks and uncertainties described in this report. Our revenues and earnings vary with the level of general economic activity in the markets we serve. Our businesses are also affected by financial, political, business and other factors, many of which are beyond our control. The factors that affect our ability to generate cash can also affect our ability to raise additional funds for these purposes through the sale of debt or equity, the refinancing of debt or the sale of assets. Changes in prevailing interest rates may affect our ability to meet our debt service obligations, because borrowings under our revolving credit facility and mortgage repurchase facility bear interest at floating rates.

Revolving credit facility. Our revolving credit facility contains financial covenants requiring the maintenance of a minimum level of tangible net worth, a maximum allowable ratio of debt to tangible net worth and a borrowing base restriction if our ratio of debt to tangible net worth exceeds a certain level. A failure to comply with these requirements could allow the lending banks to terminate the availability of funds under our revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity.

Mortgage repurchase facility and other restrictions. The mortgage repurchase facility for our mortgage subsidiary requires the maintenance of a minimum level of tangible net worth, a maximum allowable ratio of debt to tangible net worth and a minimum level of liquidity by our mortgage subsidiary. A failure to comply with these requirements could allow the lending banks to terminate the availability of funds to the mortgage subsidiary or cause their debt to become due and payable prior to maturity. Any difficulty experienced in complying with these covenants could make the renewal of the facility more difficult or costly.

In addition, although our financial services business is conducted through subsidiaries that are not restricted by our indentures, the ability of our financial services subsidiaries to provide funds to our homebuilding operations would be restricted in the event such distribution of funds would cause an event of default under the mortgage repurchase facility or if an event of default had occurred under this facility. Moreover, our right to receive assets from these subsidiaries upon their liquidation or recapitalization would be subject to the prior claims of the creditors of these subsidiaries. Any claims we may have to the funds of our financial services subsidiaries would be subordinate to subsidiary indebtedness to the extent of any security for such indebtedness and to any indebtedness otherwise recognized as senior to our claims.

Changes in debt ratings. Our senior unsecured debt is currently rated at below investment grade. Any lowering of our debt ratings could make accessing the public capital markets or obtaining additional credit from banks more difficult and/or more expensive.

Change of control purchase options and change of control default. If a change of control occurs as defined in the indentures governing $283.8 million principal amount of our senior notes as of September 30, 2013, we would be required to offer to purchase such notes at 101% of their principal amount, together with all accrued and unpaid interest, if any. In addition, upon the occurrence of both a change of control and a ratings downgrade event, each as defined in the indenture governing $1.8 billion principal amount of our senior notes as of September 30, 2013, we will be required in certain circumstances to offer to repurchase such notes at 101% of their principal amount, together with all accrued and unpaid interest, if any. If a fundamental change, including a change of control, occurs as defined in the indenture governing our convertible senior notes, which constituted $500 million principal amount as of September 30, 2013, we would be required to offer to purchase such notes at par, together with all accrued and unpaid interest, if any. Moreover, a change of control (as defined in our revolving credit facility) would constitute an event of default under our revolving credit facility, which could result in the acceleration of any borrowings outstanding under our revolving credit facility, a requirement to cash collateralize all letters of credit outstanding thereunder and the termination of the commitments thereunder. If more than $50 million outstanding under our revolving credit facility were accelerated and such acceleration were not rescinded within 30 days, an event of default would result under the indentures governing our senior notes, entitling holders of at least 25 percent in principal amount of the relevant series of notes then outstanding by notice to us and the trustee, to declare all such notes to be due and payable immediately. If purchase offers were required under the indentures for such notes or the borrowings under our revolving credit facility or senior notes were accelerated, we can give no assurance that we would have sufficient funds to pay the amounts that we would be required to purchase.

Homebuilding and financial services are very competitive industries, and competitive conditions could adversely affect our business or financial results.

The homebuilding industry is highly competitive. Homebuilders compete not only for homebuyers, but also for desirable properties, financing, raw materials and skilled labor. We compete with local, regional and national homebuilders, often within larger subdivisions designed, planned and developed by such homebuilders. We also compete with existing home sales, foreclosures and rental properties. The competitive conditions in the homebuilding industry can negatively affect our sales volumes, selling prices and incentive levels, reduce our profit margins, and cause impairments in the value of our inventory or other assets. Competition can also affect our ability to acquire suitable land, raw materials and skilled labor at acceptable prices or terms, or cause delays in the construction of our homes.

Our financial services business competes with other title companies and mortgage lenders, including national, regional and local mortgage banks and other financial institutions, some of which are subject to fewer government regulations. Mortgage lenders who are subject to fewer regulations or have greater access to capital or different lending criteria may be able to offer more attractive financing to potential customers.

Our homebuilding and financial services businesses compete with other companies across all industries to attract and retain highly skilled and experienced employees, managers and executives. Competition for the services of these individuals will likely increase as business conditions improve in the homebuilding and financial services industries or in the general economy. If we are unable to attract and retain key employees, managers or executives, our business could be adversely affected.

We cannot make any assurances that our growth strategies or acquisitions will be successful or not expose us to additional risks.

We have primarily focused on internal growth in recent years by increasing our investments in land, lot and home inventories in our existing homebuilding markets. We have also expanded our business through selected investments in new geographic markets. Investments in land, lots and home inventories can expose us to risks of economic loss and inventory impairments if housing conditions weaken or if we are unsuccessful in implementing our growth strategies.

Additionally, we acquired the homebuilding operations of one company in fiscal 2012 and another company in October 2013, and we may make strategic acquisitions of other homebuilding companies or their assets in the future. Such acquisitions have similar risks as our other investments in land, lots and home inventories, but they also require the integration of the acquired operations and management. We can give no assurance that we will be able to successfully identify, acquire and integrate strategic acquisitions in the future. Acquisitions can result in dilution to existing stockholders if we issue our common stock as consideration, or reduce our liquidity or increase our debt if we fund them with cash. In addition, acquisitions can expose us to valuation risks, including the risk of writing off goodwill or impairing inventory and other assets related to such acquisitions. The risk of goodwill and asset impairments increases during a cyclical housing downturn when our profitability may decline, as evidenced by the goodwill and asset impairment charges we recognized during the recent downturn.

Our business could be adversely affected by the loss of key personnel.

We rely on our key personnel to effectively operate and manage our homebuilding and financial services businesses. Specifically, our success depends heavily on the performance of our homebuilding division and region presidents and their management teams, our financial services management team, our corporate office management teams and our executive officers. These key personnel have significant experience and skills in the homebuilding and financial services industries, as well as leadership and management abilities that are important to our success. We seek to have succession plans in the event we lose the services of our key personnel. However, if we lose the services of key personnel and our succession planning and implementation efforts are unsuccessful, our business could be adversely affected.

Our business and financial results could be adversely affected by significant inflation or deflation.

Inflation can adversely affect us by increasing costs of land, materials and labor. In addition, significant inflation is often accompanied by higher interest rates, which have a negative impact on housing demand. In a highly inflationary environment, depending on industry and other economic conditions, we may be precluded from raising home prices enough to keep up with the rate of inflation, which could reduce our profit margins. Moreover, with inflation, the costs of capital increase and the purchasing power of our cash resources can decline. Current or future efforts by the government to stimulate the economy may increase the risk of significant inflation and its adverse impact on our business or financial results.

Alternatively, a significant period of deflation could cause a decrease in overall spending and borrowing levels. This could lead to a further deterioration in economic conditions, including an increase in the rate of unemployment. Deflation could also cause the value of our inventories to decline or reduce the value of existing homes below the related mortgage loan balance, which could potentially increase the supply of existing homes and have a negative impact on our results of operations.

Our deferred income tax assets may not be fully realizable.

As of September 30, 2013, we had deferred income tax assets, net of deferred tax liabilities, of $617.6 million, against which we provided a valuation allowance of $31.0 million. The realization of all or a portion of our deferred income tax assets is dependent upon the generation of future taxable income during the statutory carryforward periods and in the jurisdictions in which the related temporary differences become deductible. We have provided the valuation allowance against our net deferred income tax assets because it is more likely than not that a portion of our state net operating loss carryforwards will not be realized due to the more limited carryforward periods that exist in certain states. The accounting for deferred income taxes is based upon estimates of future results. A housing industry downturn or other adverse situations that negatively affect our future taxable income could result in the need for us to record a larger valuation allowance against our net deferred income tax assets. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated results of operations or financial position. Changes in tax laws also affect actual tax results and the valuation of deferred income tax assets. Specifically, a decrease in income tax rates would result in a decrease in our deferred tax assets and a corresponding charge to income tax expense.

Information technology failures and data security breaches could harm our business.

We use information technology and other computer resources to carry out important operational and marketing activities and to maintain our business records. These information technology systems are dependent upon global communications providers, web browsers, telephone systems and other aspects of the Internet infrastructure that have experienced security breaches, cyber-attacks, significant systems failures and electrical outages in the past. A material breach in the security of our information technology systems or other data security controls could include the theft or release of customer, employee or company data. In February 2012, we experienced a software security breach by unknown external sources in our Internet Loan Prequalification System. We investigated the breach with the assistance of information technology security experts and with local and federal law enforcement. Our investigations produced no evidence that any of our customers’ data was actually accessed or exported from our systems. A security breach such as the one we experienced, a significant and extended disruption in the functioning of our information technology systems or a breach of any of our data security controls could damage our reputation and cause us to lose customers, adversely impact our sales and revenue and require us to incur significant expense to address and remediate or otherwise resolve these kinds of issues. The release of confidential information as a result of a security breach may also lead to litigation or other proceedings against us by affected individuals or business partners, or by regulators, and the outcome of such proceedings, which could include penalties or fines, could have a significant negative impact on our business. We may also be required to incur significant costs to protect against damages caused by these information technology failures or security breaches in the future. We routinely utilize information technology security experts to assist us in our evaluations of the effectiveness of the security of our information technology systems, and we regularly enhance our security measures to protect our systems and data. However, we cannot provide assurances that a security breach, cyber-attack, data theft or other significant systems or security failures will not occur in the future, and such occurrences could have a material and adverse effect on our consolidated results of operations or financial position.


ITEM 1B.	UNRESOLVED STAFF COMMENTS

None.


ITEM 2.	PROPERTIES

In addition to our inventories of land, lots and homes, we own office buildings totaling approximately 520,000 square feet, and we lease approximately 515,000 square feet of office space under leases expiring through December 2019. These properties are located in our various operating markets to house our homebuilding and financial services operating divisions and our regional and corporate offices.


ITEM 3.	LEGAL PROCEEDINGS

We are involved in lawsuits and other contingencies in the ordinary course of business. While the outcome of such contingencies cannot be predicted with certainty, we believe that the liabilities arising from these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds our estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.

In August 2011, the Wage and Hour Division (WHD) of the U.S. Department of Labor notified the Company that it was initiating an investigation to determine the Company's compliance with the Fair Labor Standards Act (FLSA) and, to the extent applicable, other laws enforced by WHD. Subsequently, the WHD reviewed various aspects of our employment processes and practices in our corporate office and some of our operating divisions. To date, the WHD has not communicated any violations of labor laws to the Company, and the Company has had no contact from the WHD related to this investigation since December 2012. The Company believes that its business practices are in compliance with the FLSA and other applicable laws enforced by WHD. At this time, the Company cannot predict the outcome or timing of the conclusion of this investigation, nor can it reasonably estimate the potential costs that may be associated with its eventual resolution. Consequently, the Company has not recorded any associated liabilities in the accompanying balance sheet.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.

PART II


ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol “DHI.” The following table sets forth, for the periods indicated, the range of high and low sales prices for our common stock, as reported by the NYSE, and the quarterly cash dividends declared per common share.



	Year Ended September 30, 2013						Year Ended September 30, 2012
	High		Low		Declared Dividends		High		Low		Declared Dividends
1st Quarter	$	22.32	$	17.71	$	0.1875	$	12.89	$	8.03	$	0.0375
2nd Quarter	25.56		20.02		—		16.45		12.74		0.0375
3rd Quarter	27.75		19.94		—		18.45		13.80		0.0375
4th Quarter	23.20		17.52		—		22.46		16.93		0.0375

As of November 20, 2013, the closing price of our common stock on the NYSE was $19.06, and there were approximately 462 holders of record.

Cash dividends of $0.1875 per common share declared during the first quarter of fiscal 2013 included a quarterly cash dividend of $0.0375 per share and an additional cash dividend of $0.15 per share. The cash dividend of $0.15 per share was in lieu of and accelerated the payment of all quarterly dividends that would have otherwise paid in calendar year 2013. The declaration of future cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, our future earnings, cash flows, capital requirements, financial condition and general business conditions.

The information required by this item with respect to equity compensation plans is set forth under Item 12 of this annual report on Form 10-K and is incorporated herein by reference.

During fiscal years 2013, 2012 and 2011, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

Effective August 1, 2013, our Board of Directors authorized the repurchase of up to $100 million of our common stock effective through July 31, 2014. All of the $100 million authorization was remaining at September 30, 2013, and no common stock has been repurchased subsequent to September 30, 2013.

Stock Performance Graph

The following graph illustrates the cumulative total stockholder return on D.R. Horton common stock for the last five fiscal years through September 30, 2013, compared to the S&P 500 Index and the S&P 500 Homebuilding Index. The comparison assumes a hypothetical investment in D.R. Horton common stock and in each of the foregoing indices of $100 at September 30, 2008, and assumes that all dividends were reinvested. Shareholder returns over the indicated period are based on historical data and should not be considered indicative of future shareholder returns. The graph and related disclosure in no way reflect our forecast of future financial performance.

Comparison of Five-Year Cumulative Total Return

Among D.R. Horton, Inc., S&P 500 Index and S&P 500 Homebuilding Index



	Year Ended September 30,
	2008		2009		2010		2011		2012		2013
D.R. Horton, Inc.	$	100.00	$	89.10	$	87.99	$	72.50	$	167.08	$	158.90
S&P 500 Index	$	100.00	$	93.09	$	102.55	$	103.73	$	135.05	$	161.18
S&P 500 Homebuilding Index	$	100.00	$	83.77	$	77.71	$	55.39	$	153.19	$	155.13

This performance graph shall not be deemed to be incorporated by reference into our SEC filings and should not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.


ITEM 6.	SELECTED FINANCIAL DATA

The following selected consolidated financial data are derived from our Consolidated Financial Statements. The data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Item 1A, “Risk Factors,” Item 8, “Financial Statements and Supplementary Data,” and all other financial data contained in this annual report on Form 10-K. These historical results are not necessarily indicative of the results to be expected in the future.



	Year Ended September 30,
	2013		2012			2011			2010			2009
			(In millions, except per share data)
Operating Data:
Revenues:
Homebuilding	$	6,085.9	$	4,236.2		$	3,549.6		$	4,309.7		$	3,603.9
Financial Services	173.4		117.8			87.2			90.5			53.7
Gross profit — Homebuilding (1)	1,232.4		743.8			526.3			682.1			65.2
Income (loss) before income taxes:
Homebuilding	592.3		203.7			(7.0		)	78.1			(541.3		)
Financial Services	65.5		39.2			19.1			21.4			(15.5		)
Income tax expense (benefit) (2) (3)	195.1		(713.4		)	(59.7		)	(145.6		)	(7.0		)
Net income (loss)	462.7		956.3			71.8			245.1			(549.8		)
Net income (loss) per share:
Basic	1.44		3.01			0.23			0.77			(1.73		)
Diluted	1.33		2.77			0.23			0.77			(1.73		)
Cash dividends declared per common share	0.1875		0.15			0.15			0.15			0.15



	September 30,
	2013		2012		2011		2010		2009
	(In millions)
Balance Sheet Data:
Cash and cash equivalents and marketable securities	$	936.5	$	1,345.7	$	1,030.2	$	1,607.0	$	1,957.3
Inventories	6,197.4		4,165.2		3,449.7		3,449.0		3,666.7
Total assets	8,856.4		7,248.2		5,358.4		5,938.6		6,756.8
Notes payable (4)	3,509.0		2,493.1		1,704.6		2,171.8		3,145.3
Total equity	4,061.4		3,594.7		2,623.5		2,622.9		2,400.6

___________


(1)	Homebuilding gross profit in fiscal 2009 was adversely affected by inventory and land option charges of $407.7 million recorded during the year.

(2)

The income tax benefit in fiscal 2012 reflects a $753.2 million reduction of our deferred tax asset valuation allowance during the year. The income tax benefit in fiscal 2011 was due to receiving a favorable result from the Internal Revenue Service on a ruling request concerning capitalization of inventory costs, and the income tax benefit in fiscal 2010 resulted from a tax law change regarding net operating loss carrybacks.

(3)

At September 30, 2013 we recorded an out-of-period adjustment which increased both our deferred income taxes and the valuation allowance on our deferred income taxes by $23.9 million. The out-of-period adjustment had no impact on our statement of operations during fiscal 2013. Had deferred income taxes related to the state NOL carryforwards of each of our legal entities been reflected at state specific tax rates as of September 30, 2012, our deferred income taxes would have increased by $31.6 million and the corresponding valuation allowance on our deferred income taxes would have increased by $37.6 million. This would have resulted in a decrease in our income tax benefit of $6.0 million in fiscal 2012, which would have reversed and decreased our income tax expense by $6.0 million in fiscal 2013. The unadjusted amounts from fiscal 2012 are not material to our financial statements for fiscal 2012, and the out-of-period adjustment recorded in fiscal 2013 is not material to the current fiscal year’s financial statements.


(4)	Notes payable includes both homebuilding notes payable and the amount outstanding on our mortgage repurchase facility.


ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations — Fiscal Year 2013 Overview

In fiscal 2013, demand for new homes increased in most of our markets as compared to fiscal 2012, while the supply of homes for sale became more limited relative to the increased demand. This favorable supply and demand environment resulted in increased sales volume, higher average sales and closing prices and improved gross margins in our homebuilding segments compared to the prior year. Comparing fiscal 2013 to fiscal 2012, the number and value of our net sales orders increased 19% and 37%, respectively, and the number of homes closed and home sales revenues increased 28% and 43%, respectively. The average selling price of our homes closed increased 12% and our gross margins on homes closed increased by 310 basis points in fiscal 2013 as compared to the prior year, primarily because favorable market conditions allowed us to increase sales prices or reduce sales incentives in many of our communities. Pre-tax income was $657.8 million in fiscal 2013 compared to $242.9 million in fiscal 2012. These results reflect the significant improvement in housing market conditions over the past two years, strong operating results from our land, lot and housing investments and tight controls of our selling, general and administrative (SG&A) expenses and interest costs.

After generating strong increases in net sales volume and home prices in fiscal 2012 and in the first half of fiscal 2013, our net sales volume growth moderated in the second half of fiscal 2013. We believe several factors contributed to this moderation, including increased mortgage interest rates, higher home prices and our efforts to align our sales pace with our construction activities in many of our communities. We believe that increases in mortgage interest rates have a short-term impact on the timing of new home demand, while long-term demand in our individual operating markets is tied more closely to improvement in each market's economy, as measured by job growth, household incomes, household formations and consumer confidence. Until there is a more robust U.S. economic recovery, we expect the level of national new home sales to remain below most historical periods, with uneven improvement across our operating markets. However, the U.S. economy appears to be slowly improving, which we expect will allow slow to moderate growth in housing demand in markets where job growth is occurring.

We believe our business is well-positioned to continue to profitably grow during the housing recovery due to our strong balance sheet and liquidity, our finished lot and land position, our inventory of available homes and our broad geographic operating base. We increased our investments in land, lot and home inventories by $2.1 billion during fiscal 2013 in response to the increased demand for our homes and improved market conditions, and we will continue to adjust our strategies and investments based on housing demand and our performance in each of our markets. Nevertheless, the pace of the housing recovery and our future results could be negatively affected by weakening economic conditions, decreases in the level of employment and housing demand, decreased home affordability, significant increases in mortgage interest rates or tightening of mortgage lending standards.

Strategy

While new home demand improved in most of our markets in fiscal 2012 and 2013, we expect that further improvement in individual markets will be uneven and largely dependent on local economic conditions. Our operating strategy has positioned us to capitalize on opportunities across our markets. We have used our liquidity and balance sheet flexibility to provide the capital to increase our investments in housing and land inventory, expand our product offerings, geographically expand our operations, opportunistically pursue business acquisitions and increase our profitability. Our operating strategy includes the following initiatives:


•	Maintaining a strong cash balance and overall liquidity position.


•	Managing the sales prices and level of sales incentives on our homes to optimize the balance of sales volumes, profits, returns on inventory investments and cash flows.


•	Entering into lot option contracts to purchase finished lots, where possible, which mitigates many of the risks of land ownership.


•	Investing in land acquisition, land development and housing inventory opportunities in markets where housing demand is improving and expanding our operations in desirable markets, while controlling the level of land and lots we own in each of our markets relative to the local new home demand.


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


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


•	Modifying product offerings, sales pace and home prices to meet consumer demand, align with construction activity and enhance profit margins in each of our markets.


•	Controlling our SG&A infrastructure to match production levels.

Our operating strategy has continued to produce positive results in fiscal 2013. However, we cannot provide any assurances that the initiatives listed above will continue to be successful, and we may need to adjust components of our strategy to meet future market conditions. We expect that our operating strategy will allow us to increase our profitability while maintaining a strong balance sheet and liquidity position in fiscal 2014.

Key Results

Key financial results as of and for our fiscal year ended September 30, 2013, as compared to fiscal 2012, were as follows:

Homebuilding Operations:


•	Homebuilding revenues increased 44% to $6.1 billion.


•	Homes closed increased 28% to 24,155 homes, and the average closing price of those homes increased 12% to $249,400.


•	Net sales orders increased 19% to 25,120 homes, and the value of net sales orders increased 37% to $6.6 billion.


•	Sales order backlog increased 13% to 8,205 homes, and the value of sales order backlog increased 33% to $2.2 billion.


•	Home sales gross margins increased 310 basis points to 20.8%.


•	Homebuilding SG&A expenses decreased as a percentage of homebuilding revenues by 180 basis points to 10.7%.


•	Homebuilding pre-tax income was $592.3 million, compared to $203.7 million.


•	Homebuilding cash and marketable securities totaled $913.3 million, compared to $1.3 billion.


•	Homebuilding inventories totaled $6.2 billion, compared to $4.2 billion.


•	Homes in inventory totaled 17,000, compared to 13,000.


•	Owned and controlled lots totaled 180,900, compared to 152,700.


•	Homebuilding debt was $3.3 billion, compared to $2.3 billion.


•	Gross homebuilding debt to total capital was 44.6%, increasing from 39.1%. Net homebuilding debt to total capital was 36.7%, increasing from 21.4%.

Financial Services Operations:


•	Total financial services revenues, net of recourse and reinsurance expenses, increased 47% to $173.4 million.


•	Financial services pre-tax income increased 67% to $65.5 million.

Consolidated Results:


•	Consolidated pre-tax income was $657.8 million, compared to $242.9 million.


•	Income tax expense was $195.1 million, compared to a tax benefit of $713.4 million resulting from a significant reduction in the valuation allowance on our deferred tax assets in the prior year.


•	Net income was $462.7 million, compared to $956.3 million.


•	Diluted earnings per share was $1.33, compared to $2.77.


•	Total equity was $4.1 billion, compared to $3.6 billion.

Results of Operations — Homebuilding

Our operating segments are our 34 homebuilding operating divisions, which we aggregate into six reporting segments. These reporting segments, which we also refer to as reporting regions, have homebuilding operations located in the following states:



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

Fiscal Year Ended September 30, 2013 Compared to Fiscal Year Ended September 30, 2012

The following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the fiscal years ended 2013 and 2012.



	Net Sales Orders (1)
	Fiscal Year Ended September 30,
	Net Homes Sold				Value (In millions)						Average Selling Price
	2013	2012	% Change		2013		2012		% Change		2013		2012		% Change
East	2,624	2,244	17	%	$	723.6	$	565.3	28	%	$	275,800	$	251,900	9	%
Midwest	1,480	1,301	14	%	503.2		386.2		30	%	340,000		296,800		15	%
Southeast	7,408	5,378	38	%	1,759.2		1,101.9		60	%	237,500		204,900		16	%
South Central	8,074	6,822	18	%	1,683.1		1,282.3		31	%	208,500		188,000		11	%
Southwest	1,381	1,715	(19	)%	288.9		327.7		(12	)%	209,200		191,100		9	%
West	4,153	3,588	16	%	1,609.0		1,139.9		41	%	387,400		317,700		22	%
	25,120	21,048	19	%	$	6,567.0	$	4,803.3	37	%	$	261,400	$	228,200	15	%



	Sales Order Cancellations
	Fiscal Year Ended September 30,
	Cancelled Sales Orders		Value (In millions)				Cancellation Rate (2)
	2013	2012	2013		2012		2013		2012
East	807	655	$	207.6	$	147.7	24	%	23	%
Midwest	248	192	79.1		53.9		14	%	13	%
Southeast	2,369	1,851	513.1		351.6		24	%	26	%
South Central	2,794	2,426	547.7		436.4		26	%	26	%
Southwest	738	705	141.6		120.0		35	%	29	%
West	795	828	290.1		256.3		16	%	19	%
	7,751	6,657	$	1,779.2	$	1,365.9	24	%	24	%

______________


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


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

Net Sales Orders

The value of net sales orders increased 37%, to $6,567.0 million (25,120 homes) in 2013 from $4,803.3 million (21,048 homes) in 2012, with significant increases in five of our six market regions. Average selling prices increased in all regions and the volume of net sales orders increased in most regions, indicating broad improvement in market conditions across our business.

The number of net sales orders increased 19% during 2013 compared to 2012, reflecting the improvement in new home demand and market conditions, as well as the effects of investments we have made to expand our operations. The largest percentage increase occurred in our Southeast region as a result of improved market conditions and our increased inventory investments in our Atlanta, Jacksonville and Orlando markets. Sales orders in our Southeast region were also positively impacted by our acquisition of the homebuilding operations of Breland Homes during the fourth quarter of fiscal 2012, which contributed 674 net sales orders in 2013, compared to 118 net sales orders in 2012. The decrease in net sales orders in our Southwest region was primarily due to sales decreases in our Phoenix market as compared to 2012 when significant sales increases occurred in this market. Our overall net sales volume growth moderated in the second half of the year which we believe is due in part to the impact of recent increases in mortgage interest rates and higher home prices, as well as our efforts to align our sales pace with our construction activities in many of our communities. Our future sales volumes will depend on the strength of the overall economy, employment levels and our ability to successfully implement our operating strategies in each of our markets.

The average price of our net sales orders increased 15% to $261,400 in 2013, from $228,200 in 2012, resulting from our ability to raise sales prices in many of our communities as demand for new homes improved and the relative supply of homes for sale declined in many of our markets. A small increase in the average size of our homes sold was also a contributing factor. Home prices have rebounded sharply in many of our markets, and as supply and demand become more balanced, we expect our average sales prices to increase at a lower rate in fiscal 2014.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 24% in both fiscal 2013 and 2012. Our cancellation rates in the third and fourth quarters of fiscal 2013 were 24% and 31%, respectively, which were higher than the same periods of 2012, as potential buyers adjusted to the impact of higher mortgage interest rates and home prices.



	Sales Order Backlog
	As of September 30,
	Homes in Backlog				Value (In millions)						Average Selling Price
	2013	2012	% Change		2013		2012		% Change		2013		2012		% Change
East	782	663	18	%	$	226.3	$	170.5	33	%	$	289,400	$	257,200	13	%
Midwest	456	425	7	%	159.4		127.4		25	%	349,600		299,800		17	%
Southeast	2,810	2,209	27	%	703.7		465.0		51	%	250,400		210,500		19	%
South Central	2,697	2,232	21	%	595.8		433.5		37	%	220,900		194,200		14	%
Southwest	475	699	(32	)%	96.1		134.9		(29	)%	202,300		193,000		5	%
West	985	1,012	(3	)%	428.8		336.6		27	%	435,300		332,600		31	%
	8,205	7,240	13	%	$	2,210.1	$	1,667.9	33	%	$	269,400	$	230,400	17	%

Sales Order Backlog

Sales order backlog represents homes under contract but not yet closed at the end of the period. Many of the contracts in our sales order backlog are subject to contingencies, including mortgage loan approval and buyers selling their existing homes, which can result in cancellations. A portion of the contracts in backlog will not result in closings due to cancellations. Our homes in backlog at September 30, 2013 increased 13% from the prior year, with more homes in backlog in most regions due to increases in net sales orders as compared with the prior year.



	Homes Closed and Home Sales Revenue
	Fiscal Year Ended September 30,
	Homes Closed				Value (In millions)						Average Selling Price
	2013	2012	% Change		2013		2012		% Change		2013		2012		% Change
East	2,505	2,187	15	%	$	667.8	$	542.4	23	%	$	266,600	$	248,000	8	%
Midwest	1,449	1,164	24	%	471.3		339.3		39	%	325,300		291,500		12	%
Southeast	6,807	4,682	45	%	1,520.4		930.7		63	%	223,400		198,800		12	%
South Central	7,609	6,300	21	%	1,520.8		1,158.4		31	%	199,900		183,900		9	%
Southwest	1,605	1,442	11	%	327.7		269.4		22	%	204,200		186,800		9	%
West	4,180	3,115	34	%	1,516.8		978.2		55	%	362,900		314,000		16	%
	24,155	18,890	28	%	$	6,024.8	$	4,218.4	43	%	$	249,400	$	223,300	12	%

Home Sales Revenue

Revenues from home sales increased 43%, to $6,024.8 million (24,155 homes closed) in 2013 from $4,218.4 million (18,890 homes closed) in 2012. During the current year, home sales revenues increased in all of our market regions, resulting from increases in the number of homes closed and increases in average selling prices due to favorable housing market conditions and our increased inventory investments.

The number of homes closed in fiscal 2013 increased 28% from 2012 due to increases in all of our market regions. The most significant percentage increase in the current year occurred in our Southeast region, where the highest percentage increases occurred in the Jacksonville, Orlando, Southwest Florida and Atlanta markets and where Huntsville was a new market in fiscal 2013. In our West region, the highest percentage increases occurred in the Southern California, Portland and Las Vegas markets.

The average selling price of homes closed during 2013 was $249,400, up 12% from the $223,300 average in 2012, resulting from our ability to raise sales prices in many of our communities as demand for new homes improved from the prior year and the supply of homes for sale declined in many of our markets. Also, a small increase in the average size of our homes closed was a contributing factor. Home prices have rebounded sharply in many of our markets, and as supply and demand become more balanced, we expect our average sales prices to increase at a lower rate in fiscal 2014.

Homebuilding Operating Margin Analysis



	Percentages of Related Revenues
	Fiscal Year Ended September 30,
	2013		2012
Gross profit — Home sales	20.8	%	17.7	%
Gross profit — Land/lot sales and other	16.7	%	25.3	%
Effect of inventory and land option charges on total homebuilding gross profit	(0.5	)%	(0.1	)%
Gross profit — Total homebuilding	20.3	%	17.6	%
Selling, general and administrative expense	10.7	%	12.5	%
Interest expense	0.1	%	0.6	%
Other (income)	(0.2	)%	(0.3	)%
Income before income taxes	9.7	%	4.8	%

Home Sales Gross Profit

Gross profit from home sales increased by 68%, to $1.3 billion in 2013, from $745.5 million in 2012, and increased 310 basis points, to 20.8% as a percentage of home sales revenues. Approximately 210 basis points of the increase in the home sales gross profit percentage resulted from reduced sales incentives and increases in the average selling price of our homes closed, partially offset by smaller increases in the average cost of our homes closed, reflecting improved market conditions from the prior year. Approximately 60 basis points of the increase was due to lower costs for warranty and construction defect claims as a percentage of home sales revenue. The remaining 40 basis points of the increase was due to a decrease in the amortization of capitalized interest and property taxes as a percentage of home sales revenues, resulting from the decrease in interest capitalized as a percentage of our active inventory from the prior year due to a decrease in the average interest rate on our outstanding debt and the growth in our active inventory.

Our gross profit margins in fiscal 2013 benefited significantly from favorable market conditions that allowed us to increase sales prices and reduce incentives across most of our markets, while we limited increases in construction costs. Our gross profit margins also benefited from reduced interest amortized to cost of sales, as our average borrowing costs benefited from the maturity of some higher interest rate debt combined with the issuance of new debt securities in a period of historically low interest rates. As housing supply and demand becomes more balanced, we expect our average sales prices to increase at a slower rate, while our construction costs could increase. Also, our borrowing costs could increase if the economy improves. These factors could cause our gross profit margins in fiscal 2014 to decline from recent levels.

Land Sales and Other Revenues

Land sales and other revenues increased to $61.1 million in 2013, from $17.8 million in 2012. Fluctuations in revenues from land sales are a function of how we manage our inventory levels in various markets. We generally purchase land and lots with the intent to build and sell homes on them. However, we occasionally purchase land that includes commercially zoned parcels which we typically sell to commercial developers, and we may also sell residential lots or land parcels to manage our land and lot supply. Land and lot sales occur at unpredictable intervals and varying degrees of profitability. Therefore, the revenues and gross profit from land sales fluctuate from period to period. As of September 30, 2013, we had $34.0 million of land held for sale that we expect to sell in the next twelve months.

Revenue from a single long-term construction project for which we served as the general contractor was included in land sales and other revenues. Revenue from this project was recognized on a percentage-of-completion basis as the construction was completed. During fiscal 2013 and 2012, the revenue related to this project was $20.0 million and $6.5 million, respectively, and the gross profit was $4.4 million and $1.2 million, respectively.

Inventory and Land Option Charges

During fiscal 2013, we reviewed the performance and outlook for all of our land inventories and communities each quarter for indicators of potential impairment and performed impairment evaluations and analyses when necessary. As of September 30, 2013, we performed impairment evaluations of communities with a combined carrying value of $165.9 million and determined that communities with carrying values totaling $32.6 million were impaired. Accordingly, during the three months ended September 30, 2013, we recorded impairment charges of $21.3 million to reduce the carrying values of the impaired communities to their estimated fair values. During fiscal 2013 and 2012, impairment charges totaled $21.3 million and $3.2 million, respectively.

The overall improvement of housing industry conditions and our increased profitability have significantly reduced the number of our communities and carrying value of inventories that had indicators of potential impairment during the past few years. However, if we modify our pricing and incentives, construction and development plans or land sale strategies in individual communities, or if conditions worsen in the broader economy, homebuilding industry or specific markets in which we operate, we may be required to evaluate additional communities for potential impairment. These evaluations could result in additional impairment charges.

During fiscal 2013 and 2012, we wrote off $9.8 million and $3.0 million, respectively, of earnest money deposits and land option costs related to land option contracts which are expected to be terminated. At September 30, 2013, outstanding earnest money deposits associated with our portfolio of land and lot option purchase contracts totaled $42.4 million.

Selling, General and Administrative (SG&A) Expense

SG&A expense from homebuilding activities increased 23% to $649.9 million in 2013 from $528.7 million in 2012. As a percentage of homebuilding revenues, SG&A expense decreased 180 basis points, to 10.7% in 2013 from 12.5% in 2012. The improvement in SG&A expenses as a percentage of revenues is due to an increase in both the volume and the average selling prices of our homes closed, combined with our efforts to keep the growth in overhead expenses at a lower level than the growth in home closings volume and revenues.

The largest component of our homebuilding SG&A expense is employee compensation and related costs, which represented 65% and 63% of SG&A costs in 2013 and 2012, respectively. These costs increased by 27%, to $425.2 million in 2013 from $335.6 million in 2012, mainly due to an increase in our number of employees and an increase in the level of incentive compensation related to the significant increases in profitability in the current year as compared to the prior year. Our homebuilding operations employed approximately 3,600 and 2,740 employees at September 30, 2013 and 2012, respectively.

Our homebuilding SG&A expense as a percentage of revenues can vary significantly between periods, depending largely on the fluctuations in revenue, profit levels and our stock price. Our awards of performance based units to executive management are accounted for as liability awards and are measured quarterly with changes in value recorded in compensation expense within SG&A. Changes in our stock price and our performance compared to our peer group can cause significant changes in the value of these awards and in our compensation expense. During fiscal 2013 and 2012, the compensation expense related to these liability awards was $8.8 million and $9.8 million, respectively. We attempt to control our SG&A costs while ensuring that our infrastructure adequately supports our expected volume of closings; however, we cannot make assurances that we will be able to maintain or improve upon the current SG&A expense as a percentage of revenues.

Interest Incurred

Comparing fiscal 2013 with fiscal 2012, interest incurred increased 39% to $172.8 million, due to a 59% increase in our average debt. Interest incurred in the current year increased by a lower percentage than the increase in our average debt due to new debt issued at lower interest rates and the maturity of higher interest rate debt, both of which reduced our average interest rate as compared to the prior year.

We capitalize interest costs incurred to inventory during active development and construction (active inventory). Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. In recent years, our active inventory has been lower than our debt level and therefore, a portion of the interest incurred was reflected as interest expense. However, during the third and fourth quarters of fiscal 2013, our active inventory exceeded our debt level and therefore, all interest incurred during those periods was capitalized to inventory. As a result, $7.1 million of interest was expensed during fiscal 2013, compared to $26.9 million during 2012. Interest amortized to cost of sales declined to 2.3% of total home and land/lot and other cost of sales in fiscal 2013 from 2.7% in fiscal 2012 as a result of a decrease in interest capitalized as a percentage of our active inventory from the prior year due to the decrease in the average interest rate on our outstanding debt and the growth in our active inventory.

Other Income

Other income, net of other expenses, included in our homebuilding operations was $14.9 million in 2013, compared to $12.1 million in 2012. Other income consists of interest income, rental income, income from insurance related activities, income associated with other income-producing assets, and various other types of ancillary income and losses not directly associated with our core homebuilding operations. The activities that result in this ancillary income or loss are not significant, either individually or in the aggregate.

Acquisitions

In August 2012, we acquired the homebuilding operations of Breland Homes for $105.9 million in cash, of which $9.4 million was paid in fiscal 2013. Breland Homes operates in Huntsville and Mobile in Alabama and along the coast of Mississippi. The assets acquired primarily included approximately 300 homes in inventory, 1,000 finished lots and control of approximately 3,700 additional lots through option contracts. We also acquired a sales order backlog of 228 homes valued at $46.9 million. The acquisition of the homebuilding operations of Breland Homes was not material to our results of operations or financial condition.

In October 2013, we acquired the homebuilding operations of Regent Homes, Inc. for an estimated $35 million in cash. Regent Homes operates in Charlotte, Greensboro and Winston-Salem, North Carolina. The assets acquired included approximately 240 homes in inventory, 300 lots and control of approximately 600 additional lots through option contracts. We also acquired a sales order backlog of 213 homes valued at $31.1 million.

Homebuilding Results by Reporting Region



	Fiscal Year Ended September 30,
	2013						2012
	Homebuilding Revenues		Homebuilding Pre-tax Income (1)		% of Revenues		Homebuilding Revenues		Homebuilding Pre-tax Income (1)		% of Revenues
	(In millions)
East	$	686.3	$	48.3	7.0	%	$	542.4	$	16.0	2.9	%
Midwest	471.5		38.9		8.3	%	339.3		1.1		0.3	%
Southeast	1,520.7		148.4		9.8	%	934.6		38.0		4.1	%
South Central	1,526.2		149.0		9.8	%	1,158.4		80.6		7.0	%
Southwest	327.7		26.3		8.0	%	270.7		16.8		6.2	%
West	1,553.5		181.4		11.7	%	990.8		51.2		5.2	%
	$	6,085.9	$	592.3	9.7	%	$	4,236.2	$	203.7	4.8	%

______________

(1)

Expenses maintained at the corporate level consist primarily of interest and property taxes, which are capitalized and amortized to cost of sales or expensed directly, and the expenses related to operating our corporate office. The amortization of capitalized interest and property taxes is allocated to each segment based on the segment’s revenue, while interest expense and those expenses associated with the corporate office are allocated to each segment based on the segment’s inventory balances.

East Region — Homebuilding revenues increased 27% in 2013 compared to 2012, due to an increase in the average selling price and the number of homes closed in the majority of the region's markets. The increase in home closings in our South Carolina markets contributed most to the overall increase in the region. The region reported pre-tax income of $48.3 million in 2013, compared to $16.0 million in 2012, primarily as a result of increases in revenues and gross profit. Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased 270 basis points in fiscal 2013, compared to fiscal 2012. As a percentage of homebuilding revenues, SG&A expenses decreased by 70 basis points in 2013 due to the increase in revenues.

Midwest Region — Homebuilding revenues increased 39% in 2013 compared to 2012, due to an increase in the number of homes closed as well as an increase in the average selling price in the majority of the region’s markets. The increase in home closings in our Denver market contributed most to the overall increase in the region. The region reported pre-tax income of $38.9 million in 2013, compared to $1.1 million in 2012, primarily as a result of increases in revenues and gross profit. Home sales gross profit percentage increased 500 basis points in fiscal 2013, compared to fiscal 2012. The fiscal 2013 results benefited from reimbursements received from subcontractors of $8.2 million related to legal claim settlements in our Denver market. As a percentage of homebuilding revenues, SG&A expenses decreased by 250 basis points in fiscal 2013 due to the increase in revenues.

Southeast Region — Homebuilding revenues increased 63% in 2013 compared to 2012, due to an increase in the number of homes closed as well as an increase in the average selling price in the majority of the region’s markets. The increase in home closings in our Huntsville, Jacksonville, Orlando, Southwest Florida and Atlanta markets contributed most to the overall increase in the region. The acquisition of Breland Homes in August 2012 contributed 695 homes closed and $145.8 million in homebuilding revenues to the region's operating results in fiscal 2013, compared to 114 homes closed and $22.4 million in homebuilding revenues in fiscal 2012. The region reported pre-tax income of $148.4 million in 2013, compared to $38.0 million in 2012, primarily as a result of increases in revenues and gross profit. Home sales gross profit percentage increased 400 basis points in fiscal 2013, compared to fiscal 2012. As a percentage of homebuilding revenues, SG&A expenses decreased by 120 basis points in fiscal 2013 due to the increase in revenues.

South Central Region — Homebuilding revenues increased 32% in 2013 compared to 2012, due to an increase in the number of homes closed, as well as an increase in the average selling price in the majority of the region’s markets. The increase in home closings in our Houston and Dallas markets contributed most to the overall increase in the region. The region reported pre-tax income of $149.0 million in 2013, compared to $80.6 million in 2012, primarily as a result of increases in revenues and gross profit. Home sales gross profit percentage increased 150 basis points in fiscal 2013, compared to fiscal 2012. As a percentage of homebuilding revenues, SG&A expenses decreased by 120 basis points in fiscal 2013 due to the increase in revenues.

Southwest Region — Homebuilding revenues increased 21% in 2013 compared to 2012, primarily due to an increase in the number of homes closed in our Tucson market. The region reported pre-tax income of $26.3 million in 2013, compared to $16.8 million in 2012, primarily as a result of increases in revenues and gross profit. Home sales gross profit percentage increased 30 basis points in fiscal 2013, compared to fiscal 2012. The fiscal 2013 results included $5.7 million of expenses related to construction defect settlements in the Phoenix market which limited the region's improvement in gross profit percentage. As a percentage of homebuilding revenues, SG&A expenses decreased by 130 basis points in fiscal 2013 due to the increase in revenues.

West Region — Homebuilding revenues increased 57% in 2013 compared to 2012, primarily due to an increase in the number of homes closed in the majority of the region's markets. The increase in home closings in our Southern California, Portland and Las Vegas markets contributed most to the overall increase in the region. The region reported pre-tax income of $181.4 million in 2013, compared to $51.2 million in 2012, primarily as a result of increases in revenues and gross profit. Fiscal 2013 pre-tax income was reduced by inventory impairment charges of $20.2 million in California. Home sales gross profit percentage increased 420 basis points in fiscal 2013, compared to fiscal 2012. As a percentage of homebuilding revenues, SG&A expenses decreased by 340 basis points in fiscal 2013 due to the increase in revenues.

Inventories, Land and Lot Position and Homes in Inventory

We routinely enter into land/lot option contracts to purchase land or finished lots at predetermined prices on a defined schedule commensurate with planned development or anticipated new home demand. We also purchase undeveloped land that generally is vested with all rights necessary to begin development or construction work, and we plan and coordinate the development of our land into residential lots for use in our homebuilding business. We significantly increased our investments in land and lot acquisition, land development and housing inventory across all of our market regions during fiscal 2013 to meet housing demand as market conditions improved and to expand our operations in desirable markets. We manage our inventory of owned land and lots and homes under construction relative to demand in each of our markets, including starting construction on unsold homes to capture new home demand, monitoring the number and aging of unsold homes and aggressively marketing our unsold, completed homes in inventory.

Our inventories, land and lot position and homes in inventory at September 30, 2013 and 2012 are summarized as follows:



	As of September 30,
	2013								2012
	Construction in Progress and Finished Homes		Residential Land/Lots Developed and Under Development		Land Held for Development		Total Inventory		Construction in Progress and Finished Homes		Residential Land/Lots Developed and Under Development		Land Held for Development		Total Inventory
	(In millions)
East	$	293.5	$	363.6	$	85.8	$	742.9	$	220.6	$	260.2	$	91.9	$	572.7
Midwest	182.3		208.6		21.3		412.2		133.2		161.6		23.3		318.1
Southeast	677.2		679.1		152.2		1,508.5		382.8		321.1		201.1		905.0
South Central	610.3		785.0		48.3		1,443.6		416.9		406.6		111.7		935.2
Southwest	124.6		108.4		29.4		262.4		91.0		81.9		15.7		188.6
West	545.8		997.9		124.5		1,668.2		400.5		564.9		185.9		1,151.3
Corporate and unallocated (1)	64.3		84.7		10.6		159.6		37.7		42.1		14.5		94.3
	$	2,498.0	$	3,227.3	$	472.1	$	6,197.4	$	1,682.7	$	1,838.4	$	644.1	$	4,165.2



	As of September 30,
	2013							2012
	Land/Lots Owned (2)		Lots Controlled Under Land and Lot Option Purchase Contracts (3)		Total Land/Lots Owned and Controlled		Homes in Inventory (4)	Land/Lots Owned (2)		Lots Controlled Under Land and Lot Option Purchase Contracts (3)		Total Land/Lots Owned and Controlled		Homes in Inventory (4)
East	14,700		5,600		20,300		1,900	11,600		7,100		18,700		1,500
Midwest	5,600		1,900		7,500		1,000	5,000		1,100		6,100		800
Southeast	34,200		22,600		56,800		5,400	24,900		20,500		45,400		3,400
South Central	41,000		16,700		57,700		5,300	25,700		22,300		48,000		4,200
Southwest	6,600		1,400		8,000		1,100	5,200		4,200		9,400		1,000
West	24,500		6,100		30,600		2,300	22,200		2,900		25,100		2,100
	126,600		54,300		180,900		17,000	94,600		58,100		152,700		13,000
	70	%	30	%	100	%		62	%	38	%	100	%

______________


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


(2)	Land/lots owned include approximately 32,500 and 24,700 owned lots that are fully developed and ready for home construction at September 30, 2013 and 2012, respectively. Land/lots owned also include land held for development representing 21,700 and 41,100 lots at September 30, 2013 and 2012, respectively.

(3)

The total remaining purchase price of lots controlled through land and lot option purchase contracts at September 30, 2013 and 2012 was $1.9 billion and $1.7 billion, respectively, secured with $42.4 million and $35.0 million in earnest money deposits. Our lots controlled under land and lot option purchase contracts exclude approximately 2,800 and 5,200 lots at September 30, 2013 and 2012, respectively, representing lots controlled under lot option contracts for which we do not expect to exercise our option to purchase the land or lots, but the underlying contracts have yet to be terminated. We have reserved the deposits related to these contracts.

(4)

Homes in inventory include approximately 1,300 and 1,100 model homes at September 30, 2013 and 2012, respectively. Approximately 9,000 and 6,400 of our homes in inventory were unsold at September 30, 2013 and 2012, respectively. At September 30, 2013, approximately 3,000 of our unsold homes were completed, of which approximately 600 homes had been completed for more than six months. At September 30, 2012, approximately 2,100 of our unsold homes were completed, of which approximately 400 homes had been completed for more than six months.

Results of Operations — Financial Services

Fiscal Year Ended September 30, 2013 Compared to Fiscal Year Ended September 30, 2012

The following tables set forth key operating and financial data for our financial services operations, comprising DHI Mortgage and our subsidiary title companies, for the fiscal years ended September 30, 2013 and 2012:



	Fiscal Year Ended September 30,
	2013		2012		% Change
Number of first-lien loans originated or brokered by DHI Mortgage for D.R. Horton homebuyers	13,514		11,228		20	%
Number of homes closed by D.R. Horton	24,155		18,890		28	%
DHI Mortgage capture rate	56	%	59	%
Number of total loans originated or brokered by DHI Mortgage for D.R. Horton homebuyers	13,566		11,283		20	%
Total number of loans originated or brokered by DHI Mortgage	15,806		13,499		17	%
Captive business percentage	86	%	84	%
Loans sold by DHI Mortgage to third parties	15,601		13,397		16	%



	Fiscal Year Ended September 30,
	2013			2012			% Change
				(In millions)
Loan origination fees	$	21.4		$	18.9		13	%
Sale of servicing rights and gains from sale of mortgage loans	112.5			73.9			52	%
Recourse expense	(0.5		)	(4.7		)	(89	)%
Sale of servicing rights and gains from sale of mortgage loans, net	112.0			69.2			62	%
Other revenues	10.1			7.5			35	%
Reinsurance expense	(0.1		)	(1.5		)	(93	)%
Other revenues, net	10.0			6.0			67	%
Total mortgage operations revenues	143.4			94.1			52	%
Title policy premiums, net	30.0			23.7			27	%
Total revenues	173.4			117.8			47	%
General and administrative expense	116.4			85.5			36	%
Interest and other (income)	(8.5		)	(6.9		)	23	%
Income before income taxes	$	65.5		$	39.2		67	%

Financial Services Operating Margin Analysis



	Percentages of Financial Services Revenues (1)
	Fiscal Year Ended September 30,
	2013		2012
Recourse and reinsurance expense	0.3	%	5.0	%
General and administrative expense	66.9	%	69.0	%
Interest and other (income)	(4.9	)%	(5.6	)%
Income before income taxes	37.6	%	31.6	%

______________


(1)	Excludes the effects of recourse and reinsurance charges on financial services revenues.

Mortgage Loan Activity

The volume of loans originated and brokered by our mortgage operations is directly related to the number of homes closed by our homebuilding operations. In fiscal 2013, total first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased by 20%, due to an increase of 28% in the number of homes closed by our homebuilding operations. The percentage increase in loans originated was lower than the percentage increase in the number of homes closed due to a slight decrease in our mortgage capture rate (the percentage of total home closings by our homebuilding operations for which DHI Mortgage handled the homebuyers’ financing) to 56% in fiscal 2013, from 59% in fiscal 2012.

Home closings from our homebuilding operations constituted 86% of DHI Mortgage loan originations in 2013, compared to 84% in 2012. These rates reflect DHI Mortgage’s consistent focus on the captive business provided by our homebuilding operations.

The number of loans sold increased by 16% in 2013 compared to 2012, corresponding to the 17% increase in the number of loans originated. Virtually all of the mortgage loans originated during fiscal 2013 and mortgage loans held for sale on September 30, 2013 were eligible for sale to the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) or Government National Mortgage Association (Ginnie Mae). Approximately 44% of the mortgage loans sold by DHI Mortgage during fiscal 2013 were sold to one major financial institution. On an ongoing basis, we seek to broaden our loan sale alternatives and capacity by establishing additional loan sale arrangements with multiple institutions. If we are unable to maintain a sufficient number of loan sale arrangements on attractive terms, our ability or capacity to originate and sell mortgage loans at competitive prices could be limited, which would negatively affect profitability.

Financial Services Revenues and Expenses

Revenues from the financial services segment increased 47%, to $173.4 million in fiscal 2013 from $117.8 million in fiscal 2012. The volume of loans sold increased 16% while revenues from the sale of servicing rights and gains from sale of mortgages increased 52%. Loan sale revenue increased at a higher rate than loan sale volume primarily due to a more competitive marketplace among loan purchasers, resulting in an improved execution in the secondary market, as well as an increase in the average loan amount due to an increase in the sales prices of homes closed by our homebuilding operations. Loan origination fees increased 13%, corresponding to increases in the number of loans originated of 17%.

Charges related to recourse obligations were $0.5 million in fiscal 2013, compared to $4.7 million in fiscal 2012. Our loss reserve for loan recourse obligations is estimated based upon an analysis of loan repurchase requests received, our actual repurchases and losses through the disposition of such loans or requests, discussions with our mortgage purchasers and analysis of the mortgages we originated. While we believe that we have adequately reserved for losses on known and projected repurchase requests, if actual repurchase volume or actual losses incurred resolving those repurchases exceed our expectations, additional recourse expense may be incurred.

Financial services general and administrative (G&A) expense increased 36%, to $116.4 million in 2013 from $85.5 million in 2012. As a percentage of financial services revenues (excluding the effects of recourse and reinsurance expense), G&A expense was 66.9% in 2013, compared to 69.0% in 2012. Fluctuations in financial services G&A expense as a percentage of revenues can be expected to occur as some expenses are not directly related to mortgage loan volume or to changes in the amount of revenue earned.

Results of Operations — Consolidated

Fiscal Year Ended September 30, 2013 Compared to Fiscal Year Ended September 30, 2012

Income before Income Taxes

Income before income taxes for fiscal 2013 was $657.8 million, compared to $242.9 million for fiscal 2012. The difference in our operating results for the current year compared to a year ago is due to higher revenues from increased home closings and sales of mortgage loans and higher profit margins in both our homebuilding and financial services businesses.

Income Taxes

Our income tax expense in fiscal 2013 was $195.1 million, compared to a benefit of $713.4 million in 2012. The effective tax rate in fiscal 2013 was 29.7%. We did not have a meaningful effective tax rate in fiscal 2012 because our net deferred tax assets were fully offset by a valuation allowance until the third quarter of fiscal 2012 when we significantly reduced the valuation allowance on our deferred tax assets.

At September 30, 2013 and 2012, we had deferred tax assets, net of deferred tax liabilities, of $617.6 million and $751.4 million, respectively, offset by valuation allowances of $31.0 million and $41.9 million, respectively. At September 30, 2013, we had tax benefits of $99.3 million for state net operating loss (NOL) carryforwards that expire (beginning at various times depending on the tax jurisdiction) from fiscal 2014 to fiscal 2032. We also had state tax credit carryforwards of $4.0 million that will expire from fiscal 2018 to fiscal 2023 and $1.9 million of state tax credit carryforwards have no expiration date.

When assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of our deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of sufficient taxable income in future periods. We record a valuation allowance when we determine it is more likely than not that a portion of the deferred tax assets will not be realized. At June 30, 2012, we determined it was more likely than not that the substantial majority of our deferred tax assets would be realized, which resulted in a $753.2 million reversal of all of the valuation allowance related to our federal deferred tax assets and a portion of the valuation allowance related to our state deferred tax assets during the third and fourth quarters of fiscal 2012.

Further changes in the valuation allowance were recorded during fiscal 2013 based on our quarterly evaluations to determine the need for a valuation allowance related to our state deferred tax assets. At March 31, 2013, after considering the impact of significantly improving profits from operations, we concluded it was more likely than not that we would realize more of our deferred tax assets related to state NOL carryforwards than previously anticipated. We based this conclusion on additional positive evidence related to the actual pre-tax profits achieved during the six months ended March 31, 2013 and higher levels of forecasted profitability for the remainder of fiscal 2013 and in future years. We expected these increased profits to result in a greater realization of our NOL carryforwards in certain states before they expire than previously estimated. Accordingly, at March 31, 2013, we reduced the valuation allowance on our state deferred tax assets by $18.7 million to a balance of $23.2 million. Because this reduction of the valuation allowance was recognized in an interim period, a portion of the valuation allowance to be reversed was allocated to the remaining interim periods. Therefore, we reversed an additional $2.9 million of the valuation allowance in the third and fourth quarters of fiscal 2013. Additionally, approximately $13.2 million of our valuation allowance was attributable to state NOL carryforwards that expired at the end of fiscal 2013, at which time the related unrealized deferred tax assets and valuation allowances were written off. The amount of our valuation allowance at September 30, 2013 as a result of the activity described above would have been $7.1 million.

At September 30, 2013 we recorded an out-of-period adjustment which increased both our deferred income taxes and the valuation allowance on our deferred income taxes by $23.9 million. The out-of-period adjustment had no impact on our statement of operations during fiscal 2013. The increase in our deferred income taxes of $23.9 million corrected an error in recording the future benefits for state NOL carryforwards based on each of our legal entities’ NOLs in each state and the current tax rate of each state. The valuation allowance was also increased by $23.9 million because we determined it is more likely than not that these state NOL carryforwards will not be realized because we estimate we will not have sufficient taxable income within these states' carryforward periods. As a result of this adjustment, the remaining amount of the valuation allowance related to state deferred tax assets was $31.0 million at September 30, 2013. Our valuation allowance is based on an analysis of the amount of NOL carryforwards associated with each of our legal entities in the states in which we conduct business, as

compared to our expected level of taxable income under existing apportionment or recognition rules in each state and the carryforward periods allowed in each state's tax code. Had deferred income taxes related to the state NOL carryforwards of each of our legal entities been reflected at state specific tax rates as of September 30, 2012, our deferred income taxes would have increased by $31.6 million and the corresponding valuation allowance on our deferred income taxes would have increased by $37.6 million. This would have resulted in a decrease in our income tax benefit of $6.0 million in fiscal 2012, which would have reversed and decreased our income tax expense by $6.0 million in fiscal 2013. The unadjusted amounts from fiscal 2012 are not material to our financial statements for fiscal 2012, and the out-of-period adjustment recorded in fiscal 2013 is not material to the current fiscal year’s financial statements.

The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could result in changes in our estimates of the valuation of our deferred tax assets and related valuation allowances, and could also have a material impact on our consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of our deferred tax assets.

Unrecognized tax benefits are the differences between tax positions taken or expected to be taken in a tax return and the benefits recognized for accounting purposes. The total amount of unrecognized tax benefits was $4.2 million and $14.1 million at September 30, 2013 and 2012, respectively. Included in the balance of unrecognized tax benefits at September 30, 2013 and 2012 are tax benefits of $2.7 million and $11.8 million, respectively, that, if recognized, would reduce our income tax expense. Also included in the balance of unrecognized tax benefits at September 30, 2013 and 2012 are tax benefits of $1.5 million and $2.3 million, respectively, that, if recognized, would result in an adjustment to deferred income taxes.

We classify interest expense and penalties on income taxes as income tax expense. During fiscal 2013 and 2012, we recognized interest benefits related to unrecognized tax benefits of $2.8 million and $0.1 million, respectively, in our consolidated statements of operations. At September 30, 2013 and 2012, our total accrued interest expense relating to unrecognized tax benefits was $2.2 million and $5.1 million, respectively, and there were no accrued penalties.

A reduction of $4.2 million in the amount of unrecognized tax benefits and $2.2 million of accrued interest is reasonably possible within the next 12 months, of which $4.1 million would be reflected as an income tax benefit in the consolidated statement of operations and $2.3 million would result in an adjustment to deferred income taxes.

We are subject to federal income tax and to income tax in multiple states. The statute of limitations for our major tax jurisdictions remains open for examination for fiscal years 2010 through 2013. We are currently being audited by various states.

The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013, and did not have a material effect on our consolidated financial position, results of operations or cash flows.

Results of Operations — Homebuilding

Fiscal Year Ended September 30, 2012 Compared to Fiscal Year Ended September 30, 2011

The following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the fiscal years ended September 30, 2012 and 2011.



	Net Sales Orders (1)
	Fiscal Year Ended September 30,
	Net Homes Sold				Value (In millions)				Average Selling Price
	2012	2011	% Change		2012		2011	% Change	2012	2011	% Change
East	2,244	2,066	9	%	$	565.3	$