IMPAIRMENTS
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D. R. HORTON, INC.,* AND SUBSIDIARIES |
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September 30, |
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2008 |
2007 |
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(In millions) |
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ASSETS |
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Homebuilding: |
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Cash and cash equivalents |
$1,355.60 |
$228.30 |
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Inventories: |
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Construction in progress and finished homes |
1,681.60 |
3,346.80 |
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Residential land and lots developed and under development |
2,409.60 |
5,334.70 |
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Land held for development |
531.7 |
540.1 |
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Land inventory not owned |
60.3 |
121.9 |
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4,683.20 |
9,343.50 |
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Property and equipment, net |
65.9 |
110.2 |
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Income taxes receivable |
676.2 |
— |
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Deferred income taxes, net of valuation allowance of $961.3 million and $4.7 million at September 30, 2008 and 2007, respectively |
213.5 |
863.8 |
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Earnest money deposits and other assets |
247.5 |
291.2 |
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Goodwill |
15.9 |
95.3 |
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7,257.80 |
10,932.30 |
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Financial Services: |
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Cash and cash equivalents |
31.7 |
41.3 |
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Mortgage loans held for sale |
352.1 |
523.5 |
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Other assets |
68 |
59.2 |
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451.8 |
624 |
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Total assets |
$7,709.60 |
$11,556.30 |
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LIABILITIES |
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Homebuilding: |
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Accounts payable |
$254.00 |
$566.20 |
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Accrued expenses and other liabilities |
814.9 |
933.3 |
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Notes payable |
3,544.90 |
3,989.00 |
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4,613.80 |
5,488.50 |
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Financial Services: |
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Accounts payable and other liabilities |
27.5 |
24.7 |
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Repurchase agreement and notes payable to financial institutions |
203.5 |
387.8 |
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231 |
412.5 |
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4,844.80 |
5,901.00 |
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Commitments and contingencies (Note L) |
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Minority interests |
30.5 |
68.4 |
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Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued |
— |
— |
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Common stock, $.01 par value, 1,000,000,000 shares authorized, 320,315,508 shares issued and 316,660,275 shares outstanding 314,914,440 shares outstanding at September 30, 2007 |
3.2 |
3.2 |
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Additional capital |
1,716.30 |
1,693.30 |
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Retained earnings |
1,210.50 |
3,986.10 |
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Treasury stock, 3,655,233 shares at September 30, 2008 and 2007, at cost |
95.7 |
95.7 |
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2,834.30 |
5,586.90 |
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Total liabilities and stockholders’ equity |
$7,709.60 |
$11,556.30 |
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D. R. HORTON, INC., AND SUBSIDIARIES |
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Year Ended September 30, |
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2008 |
2007 |
2006 |
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(In millions, except per share data) |
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Homebuilding: |
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Revenues: |
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Home sales |
$6,164.30 |
$10,721.20 |
$14,545.40 |
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Land/lot sales |
354.3 |
367.6 |
215.1 |
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6,518.60 |
11,088.80 |
14,760.50 |
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Cost of sales: |
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Home sales |
5,473.10 |
8,872.30 |
11,047.80 |
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Land/lot sales |
324.2 |
283.3 |
99.6 |
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Inventory impairments and land option cost writeoffs |
2,484.50 |
1,329.50 |
270.9 |
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8,281.80 |
10,485.10 |
11,418.30 |
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Gross profit (loss): |
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Home sales |
691.2 |
1,848.90 |
3,497.60 |
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Land/lot sales |
30.1 |
84.3 |
115.5 |
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Inventory impairments and land option cost writeoffs |
2,484.50 |
1,329.50 |
270.9 |
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1,763.20 |
603.7 |
3,342.20 |
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Selling, general, and administrative expense |
791.8 |
1,141.50 |
1,456.60 |
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Goodwill impairment |
79.4 |
474.1 |
— |
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Interest expense |
39 |
— |
— |
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Loss on early retirement of debt |
2.6 |
12.1 |
17.9 |
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Other (income) |
9.1 |
4 |
11 |
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2,666.90 |
1,202.00 |
1,878.70 |
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Financial Services: |
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Revenues |
127.5 |
207.7 |
290.8 |
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General and administrative expense |
100.1 |
153.8 |
202.2 |
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Interest expense |
3.7 |
23.6 |
37.1 |
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Interest and other (income) |
11.4 |
38.5 |
56.9 |
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35.1 |
68.8 |
108.4 |
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Income (loss) before income taxes |
2,631.80 |
951.2 |
1,987.10 |
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Provision for (benefit from) income taxes |
1.8 |
238.7 |
753.8 |
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Net income (loss) |
($2,633.60) |
($712.50) |
$1,233.30 |
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Basic net income (loss) per common share |
($8.34) |
($2.27) |
$3.94 |
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Net income (loss) per common share assuming dilution |
($8.34) |
($2.27) |
$3.90 |
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Cash dividends declared per common share |
$0.45 |
$0.60 |
$0.44 |
Land and development costs are typically allocated to individual residential lots on a prorata basis, and the costs of residential lots are transferred to construction in progress when home construction begins. The specific identification method is used for the purpose of accumulating home construction costs. Cost of sales for homes closed includes the specific construction costs of each home and all applicable land acquisition, land development, and related costs (both incurred and estimated to be incurred) based on the total number of homes expected to be closed in each community. Any changes to the estimated total development costs subsequent to the initial home closings in a community are generally allocated on a prorata basis to the remaining homes in the community. When a home is closed, the Company generally has not yet paid and recorded all incurred costs necessary to complete the home. Each month a liability and a charge to cost of sales is recorded for the amount that is determined will ultimately be paid related to completed homes that have been closed as of the end of that month. The home construction budgets are compared to actual recorded costs to determine the additional costs remaining to be paid on each closed home. The accuracy of each month’s accrual is monitored by comparing actual costs incurred on closed homes in subsequent months to the amount previously accrued. Although actual costs to be paid in the future on previously closed homes could differ from the Company’s current accruals, historically, differences in amounts have not been significant.
Each quarter, all components of inventory are reviewed for the purpose of determining whether recorded costs and costs required to complete each home or project are recoverable. If the review indicates that an impairment loss is required under the guidelines of SFAS No. 144, ‘‘Accounting for the Impairment or Disposal of LongLived Assets,’’ an estimate of the loss is made and recorded to cost of sales in that quarter.
Required
a. 1. Are inventories classified as a current asset? Comment.
2. Does it appear that inventories are a highly liquid asset?
b. 1. Goodwill impairment—what does this imply?
2. Comment on the review of inventory for impairments. Why is this done under the guidelines of SFAS No. 144, ‘‘Accounting for the impairment or disposal of longlived assets.’’?
c. 1. Why restricted cash? Can this cash be used in operations?
2. Comment on the impairments and the use of cash.
3. Do you think that cash dividends will be eliminated? Comment.