| CENTEX CORP ITEM 1A RISK FACTORS The foregoing discussion of our business and operations should be read together with the risk factors set forth below |
| They describe various risks and uncertainties to which we are or may become subject, many of which are outside of 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 |
| HOME BUILDING Deterioration in economic conditions generally or in the market regions where we operate could decrease demand and pricing for new homes and adversely affect our results of operations |
| The residential homebuilding industry is sensitive to changes in regional and national economic conditions such as job growth, housing demand, availability of financing for homebuyers, interest rates and consumer confidence |
| Adverse changes in any of these conditions on a national level, or in the markets where we operate, could decrease demand and pricing for our homes or cause customers who have entered into purchase contracts for our homes to fail to perform their obligations, which could adversely affect the number of home deliveries we make or reduce the prices we can charge for homes |
| Adverse changes in these conditions could also result in a decreased value for the land, housing inventory and housing work-in-progress that we own |
| Depending on the nature and magnitude of these economic factors, they could have a material adverse effect on our business, revenues or earnings |
| In the last few months, a number of homebuilders have reported declines or slower growth rates in the volume of homes sold as a result of higher interest rates and other factors that could signal a downturn in the homebuilding industry |
| For example, during the second half of fiscal year 2006, we experienced an increase in customer cancellations, which has resulted in either declines in sales orders or less rapid growth in sales of our homes in a number of markets |
| A significant deterioration of these and other homebuilding economic factors could result in continued and prolonged decreases in demand for new homes |
| A decline in prices of new homes or in the volume of homes sold by us for any reason could have a material adverse effect on our revenues, earnings and margins |
| Increases in interest rates or other adverse developments affecting mortgage credit markets could make it more difficult or costly for customers to purchase our homes |
| Most of our homebuilding customers finance their home purchases through our Financial Services operations or, in some cases, third-party lenders |
| In general, housing demand is adversely affected by increases in interest rates or by decreases in the availability of mortgage financing as a result of deteriorating customer credit quality or other factors |
| Interest rates have been at historical lows for several years |
| Furthermore, many homebuyers have chosen adjustable rate or interest only mortgages or other mortgages that involve initial lower monthly payments |
| However, interest rates are currently on a modest upward trend, and may continue to increase in future periods |
| Any future increases in interest rates could cause potential homebuyers to be less willing to purchase our homes or to cancel sales contracts in backlog |
| In addition, if lenders perceive deterioration in credit quality among home buyers, lenders may increase the qualifications needed for mortgages or adjust their terms to address any increased credit risk |
| In general, if mortgage rates increase or lenders make it more difficult for prospective buyers to finance home purchases, it could become more difficult or costly for customers to purchase our homes, which would have an adverse affect on our results of operations |
| Competition for homebuyers could reduce our deliveries or decrease our profitability |
| The homebuilding industry is highly competitive |
| We compete in each of our markets with many national, regional and local homebuilders |
| In recent years, national homebuilders have been able to compete more effectively and increase their share of the national homebuilding market |
| Increasing levels of competition from other national homebuilders or from regional and local homebuilders in the markets in which we operate could reduce the number of homes we deliver, or cause us to accept reduced margins in order to maintain sales volume |
| We also compete with resales of existing used or foreclosed homes, homes offered by investors and housing speculators and available rental housing |
| Increased competitive conditions in the residential resale or rental market in the regions where we operate could decrease demand for new homes, cause us to increase our sales incentives or price 13 _________________________________________________________________ [70]Table of Contents discounts in order to maintain sales volumes, increase the volatility of the market for new homes or lead to cancellations of sales contracts in backlog, any of which could adversely affect our operating results |
| We may not be able to acquire land suitable for residential homebuilding at reasonable prices, which could limit our ability to expand our homebuilding operations and increase our costs |
| Our ability to expand our homebuilding operations depends upon our ability to acquire land suitable for residential building at reasonable prices and in locations where we want to build |
| Over the past decade, we have experienced an increase in competition for suitable land as a result of land constraints in certain of our markets |
| As competition for suitable land increases, and as available land is developed, the availability of suitable land at acceptable prices may decline |
| Any land shortages or any decrease in the supply of suitable land at reasonable prices in certain specific markets could limit our ability to develop new neighborhoods or result in increased land acquisition costs |
| There can be no assurance that, if we experience increased land acquisition costs, we will be able to pass these costs through to our customers, which could adversely impact our revenues, earnings and margins |
| The lag between when we acquire land and when we sell homes in our communities can make our operations susceptible to the effects of rapid changes in market conditions |
| There is often a significant lag time between when we acquire land for development and when we sell homes in neighborhoods we have planned, developed and constructed |
| The market value of home inventories, undeveloped land and developed home sites can fluctuate significantly during this time period because of changing market conditions |
| If the market value of home inventories or other property decline during this period, we may need to sell homes or other property at prices that generate lower margins than we anticipated when we acquired the land |
| In certain situations to the extent sales prices do not exceed the carrying value of the related assets, we may be required to record a write-down of our land or home inventories |
| In addition, inventory carrying costs for land can be significant and can result in reduced margins or losses in a poorly performing project or market |
| Government entities have adopted or may adopt slow or no growth initiatives, which could adversely affect our operations |
| Some municipalities in regions where we operate have approved, and others may approve, slow growth or no growth homebuilding regulations or laws that could negatively impact the availability of land and building opportunities within those localities |
| Approval of these initiatives could adversely affect our ability to build and sell homes in the affected markets or could require that we satisfy additional administrative and regulatory requirements, which could slow the progress or increase the costs of our homebuilding operations in these markets |
| Any such delays or costs could have an adverse effect on our revenues and earnings |
| Natural disasters and adverse weather conditions could delay deliveries or increase costs to build new homes in affected areas |
| The occurrence of natural disasters or adverse weather conditions in the areas in which we operate can delay new home deliveries, increase costs by damaging inventories of homes and construction materials, reduce the availability of raw materials and skilled labor, and negatively impact the demand for new homes in affected areas |
| In addition, when natural disasters such as hurricanes, tornadoes, earthquakes, floods and fires affect an area in which we build, or one nearby, there can be a diversion of labor and materials in the area from new home construction to the rebuilding of the existing homes damaged or destroyed in the natural disaster |
| This can cause delays in construction and delivery of new homes and/or increase our construction costs |
| Furthermore, if our insurance does not fully cover business interruptions or losses resulting from these events, our earnings, liquidity or capital resources could be adversely affected |
| Supply or labor shortages and other risks related to the demand for building materials and skilled labor could delay deliveries and affect our results of operations |
| Our ability to conduct and expand our homebuilding operations is dependent on continued access to building materials and skilled labor |
| Shortages of building materials or skilled labor could delay deliveries of our homes, which could adversely affect our revenues and earnings |
| In addition, increased costs or shortages of building materials such as concrete, wood, roofing materials, gypsum, insulation and plumbing and electrical components could cause increases in construction costs and construction delays |
| Labor disputes or increased costs or shortages of skilled labor, such as carpenters, plumbers and electricians, could also cause increases in costs and delays |
| We estimate and forecast construction costs as part of our business, and attempt to plan for possible cost increases due to changes in the cost or 14 _________________________________________________________________ [71]Table of Contents availability of materials and labor |
| However, generally we are unable to pass on unanticipated increases in construction costs to those customers who have already entered into sales contracts, as those sales contracts generally fix the price of the home at the time the contract is signed, which may be well in advance of the construction of the home |
| In general, significant unexpected increases in costs of materials or labor may adversely affect our results of operations |
| Compliance with regulatory requirements affecting our business could have substantial costs both in time and money, and some regulations could prohibit or restrict some homebuilding activity |
| We are subject to extensive and complex laws and regulations that affect the land development and homebuilding process, including laws and regulations related to zoning, permitted land uses, levels of density, building design, warranties, storm water and use of open spaces |
| In addition, we are subject to a variety of laws and regulations concerning safety and the protection of health and the environment |
| The particular environmental laws that apply to any given neighborhood vary greatly according to the neighborhood site, the site’s environmental conditions and the present and former uses of the site |
| In some of the markets where we operate, we are required to pay environmental impact fees, use energy-saving construction materials and make commitments to municipalities to provide certain infrastructure such as roads and sewage systems |
| We and the contractors that we engage to work on our jobsites are also subject to laws and regulations related to workers’ health and safety, wages and hour practices and immigration |
| We generally are required to obtain permits and approvals from local authorities to commence and complete residential development or home construction |
| Such permits and approvals may, from time-to-time, be opposed or challenged by local governments, neighboring property owners or other interested parties, adding delays, costs and risks of non-approval to the process |
| Our obligation to comply with the laws and regulations under which we operate, or the obligation of our subcontractors and other agents to comply with these and other laws and regulations, could result in delays in land development and homebuilding activity, cause us to incur substantial costs and prohibit or restrict land development and construction |
| It is possible that increasingly stringent requirements will be imposed on developers and homebuilders in the future |
| Although we cannot predict with any certainty either the nature of the requirements or the effect on our business, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations |
| FINANCIAL SERVICES General business, economic and market conditions may significantly affect the earnings of our Financial Services operations |
| Our Financial Services operations are sensitive to general business and economic conditions in the United States |
| These conditions include short-term and long-term interest rates, inflation, fluctuations in both debt and equity capital markets, and the strength of the US economy, as well as the local economies in which we conduct business |
| If any of these conditions worsen, our Financial Services business could be adversely affected |
| Also, because Financial Services focuses on providing services to customers who are considering the purchase of a home from Home Building or third parties, reduced home sales will likely also impact Financial Services’ business in the form of reduced home loans, title services and insurance services |
| In addition, our Financial Services business is significantly affected by the fiscal and monetary policies of the federal government and its agencies |
| We are particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the United States |
| The Federal Reserve Board’s policies influence the size of the mortgage origination market |
| The Federal Reserve Board’s policies also influence the yield on our interest-earning assets and the cost of our interest-bearing liabilities |
| Changes in those policies are beyond our control and difficult to predict and can have a material effect on the results of operations of our Financial Services segment |
| The mortgage financing industry is highly competitive |
| Our Financial Services business operates in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory and technological changes |
| Competition for mortgage loans comes primarily from large commercial banks, mortgage companies and savings and other financial institutions |
| We face competition in such areas as mortgage product offerings, rates and fees, and customer service |
| In addition, technological advances such as developments in e-commerce activities have increased consumers’ accessibility to products and services generally |
| This has intensified competition among banking as well as nonbanking companies in offering mortgage loans and similar financial products and services |
| 15 _________________________________________________________________ [72]Table of Contents Changes in lending laws could hurt our Financial Services operations |
| Our Financial Services operations are subject to extensive and complex laws and regulations that affect loan origination |
| These include eligibility requirements for participation in federal loan programs and compliance with consumer lending and similar requirements such as disclosure requirements, prohibitions against discrimination and real estate settlement procedures |
| They may also subject our operations to examination by applicable agencies |
| These may limit our ability to provide mortgage financing or title services to potential purchasers of our homes |
| The volatility of our Financial Services operations due to refinancing activity could negatively impact operations |
| A decline in mortgage rates generally increases the demand for home loans as borrowers refinance |
| An increase in mortgage rates generally results in a decrease in the demand for home loans and a corresponding decrease in the level of refinancing activity |
| Mortgage rates are currently on a modest upward trend, which could negatively affect our volume of refinanced home loans and our results of operations |
| CONSTRUCTION SERVICES Supply and labor shortages and other risks could increase costs and delay completion |
| Our Construction Services operations could be adversely affected by fluctuating prices and limited supplies of building materials, as well as the cost and availability of labor, particularly trades personnel |
| These prices and supplies may be further adversely affected by natural disasters and adverse weather conditions |
| These factors, which are similar to those discussed above in connection with our Home Building operations, could cause increased costs and delays in construction that could have an adverse effect upon our Construction Services operations |
| We are subject to regional changes in the demand for commercial construction projects |
| Although national demand for commercial construction is currently relatively stable, individual markets experience greater cyclicality and can be sensitive to overall capital spending trends in the economy, changes in federal and state appropriations for construction projects, financing and capital availability for commercial real estate and competitive pressures on the availability and pricing of construction projects |
| These factors can result in a reduction in the supply of suitable projects, increased competition and reduced margins on construction contracts |
| The timing and funding of awards and other factors could lead to unpredictable operating results |
| Our Construction Services operations are also subject to other risks and uncertainties, including the timing of new awards and the funding of such awards; the length of time over which construction contracts are to be performed; cancellations of, or changes in the scope of, existing contracts; and the ability to meet performance or schedule guarantees and cost overruns |
| FACTORS AFFECTING MULTIPLE BUSINESS SEGMENTS New federal laws that adversely affect liquidity in the secondary mortgage market could hurt our business |
| The Government-sponsored enterprises, principally FNMA and FHLMC, play a significant role in buying home mortgages and packaging them into investment securities that they either sell to investors or hold in their portfolios |
| Recent federal laws and proposed legislation could have the effect of curtailing the activities of FNMA and FHLMC These organizations provide liquidity to the secondary mortgage market |
| Any restriction or curtailment of their activities could affect the ability of our customers to obtain mortgage loans or increase mortgage interest rates, which could reduce demand for our homes and/or the loans that we originate and adversely affect our results of operations |
| We could be adversely affected by a change in our credit rating or a disruption in the capital markets |
| Our ability to continue to grow our business and operations in a profitable manner depends to a significant extent upon our ability to access capital on favorable terms |
| If we were to lose our investment-grade credit rating for any reason, it would become more difficult and costly for us to access the capital that is required in order to implement our business plans and achieve our growth objectives |
| 16 _________________________________________________________________ [73]Table of Contents In addition, a long-term or serious disruption in the capital markets could make it more difficult or more expensive for us to raise capital for use in our business, for our customers to obtain home loans or for us to sell loans originated by our Financial Services segment or to sell or securitize loans originated by our discontinued Home Equity operations |
| Further, a reduction of the positive spread between the rate at which we can borrow and the rate at which we can lend could hurt our ability to profit from our loan origination businesses |
| Reductions in tax benefits could make home ownership more expensive or less attractive |
| Significant expenses of owning a home, including mortgage interest expense 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 income tax laws to eliminate or substantially modify these income tax deductions, the after-tax costs of owning a new home would increase for the typical homeowner |
| If such tax law changes were enacted without other offsetting provisions or effects, they could adversely impact the demand for, and/or sales prices of, new homes, mortgage loans and home equity loans, and our operations might be negatively affected |
| We may incur increased costs related to repairing construction defects in the homes we sell or the buildings we construct |
| Our Home Building and Construction Services operations are subject to warranty and other claims related to construction defects and other construction-related issues, including compliance with building codes |
| The costs we incur to resolve those warranties and other claims reduce our profitability, and if we were to experience an unusually high level of claims, or unusually severe claims, our profitability could be adversely affected |
| An inability to obtain bonding could limit the number of projects we are able to pursue |
| As is customary in the construction and home building industries, we often are required to provide surety bonds to secure our performance under construction contracts, development agreements and other arrangements |
| Our ability to obtain surety bonds primarily depends upon our capitalization, working capital, past performance, management expertise and certain external factors, including the overall capacity of the surety market |
| Surety companies consider such factors in relationship to the amount of our backlog and their underwriting standards, which may change from time to time |
| Since 2001, the surety industry has undergone significant changes with several companies withdrawing completely from the industry or significantly reducing their bonding commitment |
| In addition, certain reinsurers of surety risk have limited their participation in this market |
| Therefore, we could be unable to obtain surety bonds, when required, which could adversely affect our future results of operations and revenues |
| DISCONTINUED OPERATIONS There are uncertainties associated with our planned disposition of Home Equity |
| On March 30, 2006, we announced that we signed a definitive agreement to sell Home Equity to an unrelated third party |
| As a result, Home Equity is now reflected as a discontinued operation in our financial statements |
| However, the sale of Home Equity is subject to certain conditions, including obtaining a substantial number of regulatory approvals from state financial services or other regulatory authorities |
| There can be no assurance that all of these regulatory approvals will be obtained, or that the purchaser will agree to close the purchase of Home Equity in the absence of one or more of these approvals |
| The purchase price to be received in connection with the sale of Home Equity will consist of payments based on the book value of Home Equity, plus a premium to be calculated in accordance with an agreed upon formula |
| With one exception, the amount of the premium will be determined shortly after closing by agreement of the parties or through determinations by independent third parties |
| However, one significant component of the purchase price will not be determined until after the second anniversary of the closing of the sale |
| Accordingly, the amount of the premium to be received in connection with the sale of Home Equity cannot be determined at the present time, and may be less than the estimated amounts we currently expect to receive, as reflected in our public announcements regarding this transaction |
| In addition, any amount received by us in connection with this transaction could be effectively reduced by any indemnification payments that we may be required to make to the purchaser under the purchase and sale agreement entered into by the parties |
| For additional information regarding the planned sale of Home Equity, please see the Current Reports on Form 8-K filed by us with the SEC on April 4 and May 2, 2006 |
| 17 _________________________________________________________________ [74]Table of Contents Loan losses could reduce the profitability of our Home Equity operations |
| Our Home Equity operations include holding residential mortgage loans for investment and establishing an allowance for credit losses on these loans |
| To a lesser extent, our operations also involve holding properties obtained through foreclosure pending resale and establishing an allowance for losses on these properties |
| Although the amount of these allowances reflects our judgment as to our present loss exposure on these loans and properties, there can be no assurance that it will be sufficient to cover any losses that may ultimately be incurred |
| Judgments as to loss exposure are subject to significant uncertainties, and the amount of the loss ultimately incurred may be determined by various factors outside our control |
| Changes in lending laws could hurt our Home Equity operations |
| Our discontinued Home Equity operations are particularly affected by laws and regulations related to the extension of credit to individuals whose credit ratings do not qualify them for conventional mortgage financing |
| Changes in these laws or the way that they are enforced may adversely affect the way that we operate or our ability to profitably originate loans |
| FORWARD-LOOKING STATEMENTS This report includes various forward-looking statements, which are not facts or guarantees of future performance and which are subject to significant risks and uncertainties |
| Certain information included in this Report or in other materials we have filed or will file with the SEC, as well as information included in oral statements or other written statements made or to be made by us, contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, as amended |
| You can identify these statements by the fact that they do not relate to matters of a strictly factual or historical nature and generally discuss or relate to forecasts, estimates or other expectations regarding future events |
| Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “may,” “can,” “could,” “might,” “will” and similar expressions identify forward-looking statements, including statements related to expected operating and performing results, planned transactions, planned objectives of management, future development in the industries in which we participate and other trends, developments and uncertainties that may affect our business in the future |
| Such statements include information related to anticipated operating results, financial resources, changes in interest rates, changes in revenues, changes in profitability, interest expense, growth and expansion, anticipated income to be realized by our investment in unconsolidated entities, the ability to acquire land, the ability to gain approvals and to open new communities, the ability to sell homes and properties, the ability to deliver homes from backlog, the ability to secure materials and subcontractors, the ability to produce the liquidity and capital necessary to expand and take advantage of opportunities in the future, the completion of and effects from planned transactions and stock market valuations |
| From time to time, forward-looking statements also are included in our other periodic reports on Forms 10-K, 10-Q and 8-K, press releases and presentations, on our web site and in other material released to the public |
| Forward-looking statements are not historical facts or guarantees of future performance but instead represent only our beliefs at the time the statements were made regarding future events, which are subject to significant risks, uncertainties, and other factors many of which are outside of the Company’s control and certain of which are listed above |
| Any or all of the forward-looking statements included in this Report and in any other reports or public statements made by us may turn out to be materially inaccurate |
| This can occur as a result of incorrect assumptions or as a consequence of known or unknown risks and uncertainties |
| Many of the risks and uncertainties mentioned in this Report or another report or public statement made by us, such as those discussed in these risk factors, will be important in determining whether these forward-looking statements prove to be accurate |
| Consequently, neither our stockholders nor any other person should place undue reliance on our forward-looking statements and should recognize that actual results may differ materially from those that may be anticipated by us |
| All forward-looking statements made in this Report are made as of the date hereof, and the risk that actual results will differ materially from expectations expressed in this Report will increase with the passage of time |
| We undertake no obligation, and disclaim any duty, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in our expectations or otherwise |
| However, we may make further disclosures regarding future events, trends and uncertainties in our subsequent reports on Forms 10-K, 10-Q and 8-K The above cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business include factors we believe could cause our actual results to differ materially from expected and historical results |
| Other factors beyond those listed above, including factors unknown to us and factors known to us which we have not determined to be material, could also adversely affect us |
| This discussion is provided as permitted by the 18 _________________________________________________________________ [75]Table of Contents Private Securities Litigation Reform Act of 1995 and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section |