##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 2004 Commission File No. 1-6776 Centex Corporation A Nevada Corporation IRS Employer Identification No. 75-0778259
2728 N. Harwood
Dallas, Texas 75201
(214) 981-5000 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 o. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes x No o Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the close of business on January 27, 2005: Centex Corporation
    
    Common Stock
    
    126,553,614 shares




---



Centex Corporation and Subsidiaries Form 10-Q Table of Contents December 31, 2004 PagePart I.
    
    Financial InformationItem 1.
    
    Financial StatementsStatements of Consolidated Earnings
    
    
    2Consolidated Balance Sheets with Consolidating Details
    
    
    4Statements of Consolidated Cash Flows with Consolidating Details
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    28Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    56Item 4.
    
    Controls and Procedures
    
    
    56Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    56Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    57Item 6.
    
    Exhibits
    
    
    57Signatures
    
    
    
    
    
    
    59Certification of CEO Pursuant to Rule 13a-14/15d-14Certification of CFO Pursuant to Rule 13a-14/15d-14Certification of CEO Pursuant to 18 U.S.C. Section 1350Certification of CFO Pursuant to 18 U.S.C. Section 1350
  1




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##### Table of Contents



Part I. Financial Information 
 Item 1. Financial Statements
 
 Statements of Consolidated Earnings Centex Corporation and Subsidiaries
Statements of Consolidated Earnings
(Dollars in thousands, except per share data)
(unaudited) For the Three Months Ended December 31,2004
    
    
    2003RevenuesHome Building
    
    $
    2,368,379
    
    
    $
    1,906,305Financial Services
    
    
    266,701
    
    
    
    238,231Construction Services
    
    
    445,468
    
    
    
    404,227Other
    
    
    38,075
    
    
    
    21,0943,118,623
    
    
    
    2,569,857Costs and ExpensesHome Building
    
    
    2,047,821
    
    
    
    1,676,941Financial Services
    
    
    220,698
    
    
    
    194,580Construction Services
    
    
    439,070
    
    
    
    400,634Other
    
    
    31,737
    
    
    
    17,277Corporate General and Administrative
    
    
    23,137
    
    
    
    29,891Interest Expense
    
    
    5,718
    
    
    
    3,4562,768,181
    
    
    
    2,322,779Earnings from Unconsolidated Entities
    
    
    43,444
    
    
    
    31,831Earnings from Continuing Operations
Before Income Taxes
    
    
    393,886
    
    
    
    278,909Income Taxes
    
    
    140,115
    
    
    
    91,039Earnings from Continuing Operations
    
    
    253,771
    
    
    
    187,870Earnings from Discontinued Operations,
net of Taxes of $0 and $5,896
    
    
    
    
    
    
    10,800Net Earnings
    
    $
    253,771
    
    
    $
    198,670Basic Earnings Per ShareContinuing Operations
    
    $
    2.02
    
    
    $
    1.51Discontinued Operations
    
    
    
    
    
    
    0.09$
    2.02
    
    
    $
    1.60Diluted Earnings Per ShareContinuing Operations
    
    $
    1.91
    
    
    $
    1.43Discontinued Operations
    
    
    
    
    
    
    0.09$
    1.91
    
    
    $
    1.52Average Shares OutstandingBasic
    
    
    125,593,379
    
    
    
    124,076,292Dilutive Securities:Options
    
    
    6,747,733
    
    
    
    6,113,626Other
    
    
    206,078
    
    
    
    470,040Diluted
    
    
    132,547,190
    
    
    
    130,659,958Cash Dividends Per Share
    
    $
    0.04
    
    
    $
    0.02
 See Notes to Consolidated Financial Statements. 2




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##### Table of Contents



Centex Corporation and Subsidiaries
Statements of Consolidated Earnings
(Dollars in thousands, except per share data)
(unaudited) For the Nine Months Ended December 31,2004
    
    
    2003RevenuesHome Building
    
    $
    6,597,952
    
    
    $
    5,119,937Financial Services
    
    
    817,945
    
    
    
    795,642Construction Services
    
    
    1,331,913
    
    
    
    1,166,611Other
    
    
    121,792
    
    
    
    88,6228,869,602
    
    
    
    7,170,812Costs and ExpensesHome Building
    
    
    5,761,009
    
    
    
    4,530,723Financial Services
    
    
    661,116
    
    
    
    609,890Construction Services
    
    
    1,315,535
    
    
    
    1,153,899Other
    
    
    110,414
    
    
    
    67,718Corporate General and Administrative
    
    
    61,741
    
    
    
    70,982Interest Expense
    
    
    16,024
    
    
    
    35,3707,925,839
    
    
    
    6,468,582Earnings from Unconsolidated Entities
    
    
    54,531
    
    
    
    51,991Earnings from Continuing Operations Before
Income Taxes and Cumulative
Effect of a Change in Accounting Principle
    
    
    998,294
    
    
    
    754,221Income Taxes
    
    
    356,678
    
    
    
    245,079Earnings from Continuing Operations Before
Cumulative Effect of a Change in
Accounting Principle
    
    
    641,616
    
    
    
    509,142Earnings from Discontinued Operations, net
of Taxes of $0 and $17,229
    
    
    
    
    
    
    31,707Earnings Before Cumulative Effect of a
Change in Accounting Principle
    
    
    641,616
    
    
    
    540,849Cumulative Effect of a Change in Accounting
Principle, Net of Tax
Benefit of $0 and $8,303
    
    
    
    
    
    
    (13,260
    )Net Earnings
    
    $
    641,616
    
    
    $
    527,589Basic Earnings Per ShareContinuing Operations
    
    $
    5.16
    
    
    $
    4.13Discontinued Operations
    
    
    
    
    
    
    0.26Cumulative Effect of a Change in
Accounting Principle
    
    
    
    
    
    
    (0.11
    )$
    5.16
    
    
    $
    4.28Diluted Earnings Per ShareContinuing Operations
    
    $
    4.87
    
    
    $
    3.95Discontinued Operations
    
    
    
    
    
    
    0.25Cumulative Effect of a Change in
Accounting Principle
    
    
    
    
    
    
    (0.11
    )$
    4.87
    
    
    $
    4.09Average Shares OutstandingBasic
    
    
    124,404,141
    
    
    
    123,334,548Dilutive Securities:Options
    
    
    6,863,476
    
    
    
    5,458,904Other
    
    
    435,136
    
    
    
    227,014Diluted
    
    
    131,702,753
    
    
    
    129,020,466Cash Dividends Per Share
    
    $
    0.12
    
    
    $
    0.06
 See Notes to Consolidated Financial Statements. 3




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##### Table of Contents



Consolidated Balance Sheets with Consolidating Details Centex Corporation and Subsidiaries
Consolidated Balance Sheets with Consolidating Details
(Dollars in thousands)
(unaudited) Centex Corporation and SubsidiariesDecember 31, 2004
    
    
    March 31, 2004AssetsCash and Cash Equivalents
    
    $
    50,323
    
    
    $
    178,859Restricted Cash
    
    
    445,902
    
    
    
    310,304Receivables -Residential Mortgage Loans Held for Investment, net
    
    
    7,722,829
    
    
    
    6,498,155Residential Mortgage Loans Held for Sale
    
    
    1,585,642
    
    
    
    1,819,605Construction Contracts
    
    
    325,156
    
    
    
    312,552Trade, including Notes of $51,144 and $51,321
    
    
    388,141
    
    
    
    356,570Inventories -Housing Projects
    
    
    6,670,879
    
    
    
    4,897,036Land Held for Development and Sale
    
    
    304,544
    
    
    
    208,140Land Held Under Option Agreements Not Owned
    
    
    471,227
    
    
    
    362,405Other
    
    
    34,238
    
    
    
    94,224Investments -Joint Ventures and Other
    
    
    169,344
    
    
    
    140,118Unconsolidated Subsidiaries
    
    
    
    
    
    
    Property and Equipment, net
    
    
    159,306
    
    
    
    155,891Other Assets -Deferred Income Taxes
    
    
    123,147
    
    
    
    157,678Goodwill
    
    
    251,793
    
    
    
    254,258Mortgage Securitization Residual Interest
    
    
    74,414
    
    
    
    89,374Deferred Charges and Other, net
    
    
    225,647
    
    
    
    233,399$
    19,002,532
    
    
    $
    16,068,568Liabilities and Stockholders EquityAccounts Payable
    
    $
    666,709
    
    
    $
    686,308Accrued Liabilities
    
    
    1,352,471
    
    
    
    1,275,604Debt -Centex
    
    
    3,227,633
    
    
    
    2,418,190Financial Services
    
    
    9,442,772
    
    
    
    8,302,190Payables to (Receivables from) Affiliates
    
    
    
    
    
    
    Commitments and ContingenciesMinority Interests
    
    
    473,878
    
    
    
    336,051Stockholders Equity -Preferred Stock: Authorized 5,000,000 Shares, None Issued
    
    
    
    
    
    
    Common Stock: $.25 Par Value; Authorized 300,000,000
Shares; Outstanding 126,139,846 and 122,660,357 Shares
    
    
    32,938
    
    
    
    32,068Capital in Excess of Par Value
    
    
    335,491
    
    
    
    202,958Unamortized Value of Deferred Compensation
    
    
    (246
    )
    
    
    (411
    )Retained Earnings
    
    
    3,617,657
    
    
    
    2,990,889Treasury Stock, at Cost; 5,613,808 and 5,610,772 Shares
    
    
    (213,394
    )
    
    
    (212,822
    )Accumulated Other Comprehensive Income (Loss)
    
    
    66,623
    
    
    
    37,543Total Stockholders Equity
    
    
    3,839,069
    
    
    
    3,050,225$
    19,002,532
    
    
    $
    16,068,568
 See Notes to Consolidated Financial Statements. 4




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##### Table of Contents



Centex Corporation and Subsidiaries
Consolidated Balance Sheets with Consolidating Details
(Dollars in thousands)
(unaudited) Centex*
    
    Financial ServicesDecember 31, 2004
    
    
    March 31, 2004
    
    
    December 31, 2004
    
    
    March 31, 2004$
    37,137
    
    
    $
    160,590
    
    
    $
    13,186
    
    
    $
    18,26945,197
    
    
    
    50,440
    
    
    
    400,705
    
    
    
    259,864
    
    
    
    
    
    
    
    7,722,829
    
    
    
    6,498,155
    
    
    
    
    
    
    
    1,585,642
    
    
    
    1,819,605325,156
    
    
    
    312,552
    
    
    
    
    
    
    
    186,873
    
    
    
    178,829
    
    
    
    201,268
    
    
    
    177,7416,670,879
    
    
    
    4,897,036
    
    
    
    
    
    
    
    304,544
    
    
    
    208,140
    
    
    
    
    
    
    
    471,227
    
    
    
    362,405
    
    
    
    
    
    
    
    28,065
    
    
    
    85,284
    
    
    
    6,173
    
    
    
    8,940169,344
    
    
    
    140,118
    
    
    
    
    
    
    
    572,978
    
    
    
    531,941
    
    
    
    
    
    
    
    114,781
    
    
    
    114,524
    
    
    
    44,525
    
    
    
    41,36751,897
    
    
    
    66,985
    
    
    
    71,250
    
    
    
    90,693240,056
    
    
    
    237,656
    
    
    
    11,737
    
    
    
    16,602
    
    
    
    
    
    
    
    74,414
    
    
    
    89,374163,409
    
    
    
    171,534
    
    
    
    62,238
    
    
    
    61,865$
    9,381,543
    
    
    $
    7,518,034
    
    
    $
    10,193,967
    
    
    $
    9,082,475$
    654,209
    
    
    $
    668,807
    
    
    $
    12,500
    
    
    $
    17,5011,188,364
    
    
    
    1,046,296
    
    
    
    164,107
    
    
    
    229,3083,227,633
    
    
    
    2,418,190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,442,772
    
    
    
    8,302,190
    
    
    
    
    
    
    
    (13,638
    )
    
    
    15,661472,268
    
    
    
    334,516
    
    
    
    1,610
    
    
    
    1,535
    
    
    
    
    
    
    
    
    
    
    
    32,938
    
    
    
    32,068
    
    
    
    1
    
    
    
    1335,491
    
    
    
    202,958
    
    
    
    275,467
    
    
    
    275,521(246
    )
    
    
    (411
    )
    
    
    
    
    
    
    3,617,657
    
    
    
    2,990,889
    
    
    
    315,529
    
    
    
    256,490(213,394
    )
    
    
    (212,822
    )
    
    
    
    
    
    
    66,623
    
    
    
    37,543
    
    
    
    (4,381
    )
    
    
    (15,732
    )3,839,069
    
    
    
    3,050,225
    
    
    
    586,616
    
    
    
    516,280$
    9,381,543
    
    
    $
    7,518,034
    
    
    $
    10,193,967
    
    
    $
    9,082,475
  *
    
    In the supplemental data presented above, Centex represents the consolidation of all
subsidiaries other than those included in Financial Services. Transactions between Centex and
Financial Services have been eliminated from the Centex Corporation and Subsidiaries balance
sheets. 5




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##### Table of Contents



Statements of Consolidated Cash Flows with Consolidating Details Centex Corporation and Subsidiaries
Statements of Consolidated Cash Flows with Consolidating Details
(Dollars in thousands)
(unaudited) Centex Corporation and SubsidiariesFor the Nine Months Ended December 31,2004
    
    
    2003Cash Flows  Operating ActivitiesNet Earnings
    
    $
    641,616
    
    
    $
    527,589Adjustments-Cumulative Effect of a Change in Accounting Principle
    
    
    
    
    
    
    13,260Depreciation and Amortization
    
    
    79,708
    
    
    
    78,105Provision for Losses on Residential Mortgage Loans Held for Investment
    
    
    71,941
    
    
    
    56,643Deferred Income Tax Provision (Benefit)
    
    
    22,833
    
    
    
    (23,371
    )Equity in Earnings of Joint Ventures and Centex Development Company, L.P.
    
    
    (43,728
    )
    
    
    (64,650
    )Undistributed Earnings of Unconsolidated Subsidiaries
    
    
    
    
    
    
    Minority Interest, net of Taxes
    
    
    825
    
    
    
    31,128Changes in Assets and Liabilities, Excluding Effect of Acquisitions(Increase) Decrease in Restricted Cash
    
    
    (135,598
    )
    
    
    (108,660
    )Increase in Receivables
    
    
    (44,219
    )
    
    
    (33,635
    )Decrease in Residential Mortgage Loans Held for Sale
    
    
    233,963
    
    
    
    1,113,052Increase in Housing Projects and Land Held for Development and Sale
    
    
    (1,823,266
    )
    
    
    (1,277,001
    )Decrease (Increase) in Other Inventories
    
    
    47,167
    
    
    
    5,013Increase (Decrease) in Accounts Payable and Accrued Liabilities
    
    
    91,186
    
    
    
    147,968Decrease (Increase) in Other Assets, net
    
    
    26,929
    
    
    
    9,806(Decrease) Increase in Payables to Affiliates
    
    
    
    
    
    
    Other
    
    
    (3,231
    )
    
    
    1,926(833,874
    )
    
    
    477,173Cash Flows  Investing ActivitiesPayment on Notes Receivable, net
    
    
    177
    
    
    
    10,053Increase in Residential Mortgage Loans Held for Investment
    
    
    (1,296,615
    )
    
    
    (1,493,783
    )Decrease in Investment and Advances to Joint Ventures

and Centex Development Company, L.P.
    
    
    35,838
    
    
    
    71,307Decrease in Investment and Advances to Unconsolidated Subsidiaries
    
    
    
    
    
    
    Purchases of Property and Equipment, net
    
    
    (30,183
    )
    
    
    (41,133
    )Other
    
    
    8,371
    
    
    
    (15,203
    )(1,282,412
    )
    
    
    (1,468,759
    )Cash Flows  Financing ActivitiesIncrease (Decrease) in Short-Term Debt, net
    
    
    1,501,002
    
    
    
    13,983CentexIssuance of Long-Term Debt
    
    
    722,759
    
    
    
    307,277Repayment of Long-Term Debt
    
    
    (41,121
    )
    
    
    (90,429
    )Financial ServicesIssuance of Long-Term Debt
    
    
    1,867,799
    
    
    
    3,405,616Repayment of Long-Term Debt
    
    
    (2,106,145
    )
    
    
    (2,996,992
    )Proceeds from Stock Option Exercises
    
    
    57,899
    
    
    
    54,737Treasury Stock Transactions, net
    
    
    (572
    )
    
    
    (99,151
    )Dividends Paid
    
    
    (14,848
    )
    
    
    (7,431
    )1,986,773
    
    
    
    587,610Effect of Exchange Rate on Cash
    
    
    977
    
    
    
    Net Decrease in Cash and Cash Equivalents
    
    
    (128,536
    )
    
    
    (403,976
    )Cash and Cash Equivalents at Beginning of Period
    
    
    178,859
    
    
    
    456,179Cash and Cash Equivalents at End of Period
    
    $
    50,323
    
    
    $
    52,203
 See Notes to Consolidated Financial Statements. 6




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##### Table of Contents



Centex Corporation and Subsidiaries
Statements of Consolidated Cash Flows with Consolidating Details
(Dollars in thousands)
(unaudited) Centex *
    
    Financial ServicesFor the Nine Months Ended December 31,
    
    For the Nine Months Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003$
    641,616
    
    
    $
    527,589
    
    
    $
    98,039
    
    
    $
    103,073
    
    
    
    
    
    
    
    
    
    
    
    13,26066,339
    
    
    
    65,400
    
    
    
    13,369
    
    
    
    12,705
    
    
    
    
    
    
    
    71,941
    
    
    
    56,64314,689
    
    
    
    (13,109
    )
    
    
    8,144
    
    
    
    (10,262
    )(43,728
    )
    
    
    (64,650
    )
    
    
    
    
    
    
    (59,039
    )
    
    
    (38,073
    )
    
    
    
    
    
    
    750
    
    
    
    31,061
    
    
    
    75
    
    
    
    675,243
    
    
    
    (24,903
    )
    
    
    (140,841
    )
    
    
    (83,757
    )(20,673
    )
    
    
    (19,910
    )
    
    
    (23,546
    )
    
    
    (13,725
    )
    
    
    
    
    
    
    
    233,963
    
    
    
    1,113,052(1,823,266
    )
    
    
    (1,277,001
    )
    
    
    
    
    
    
    44,400
    
    
    
    5,964
    
    
    
    2,767
    
    
    
    (951
    )162,223
    
    
    
    153,724
    
    
    
    (59,740
    )
    
    
    (24,409
    )1,043
    
    
    
    (19,845
    )
    
    
    25,886
    
    
    
    29,651
    
    
    
    
    
    
    
    (29,299
    )
    
    
    16,212
    
    
    
    1,926
    
    
    
    (3,231
    )
    
    
    (1,010,403
    )
    
    
    (671,827
    )
    
    
    197,527
    
    
    
    1,211,559158
    
    
    
    9,785
    
    
    
    19
    
    
    
    268
    
    
    
    
    
    
    
    (1,296,615
    )
    
    
    (1,493,783
    )35,838
    
    
    
    71,307
    
    
    
    
    
    
    
    18,002
    
    
    
    2,441
    
    
    
    
    
    
    
    (13,320
    )
    
    
    (29,429
    )
    
    
    (16,863
    )
    
    
    (11,704
    )(896
    )
    
    
    (33,203
    )
    
    
    9,267
    
    
    
    18,00039,782
    
    
    
    20,901
    
    
    
    (1,304,192
    )
    
    
    (1,487,219
    )122,074
    
    
    
    84,749
    
    
    
    1,378,928
    
    
    
    (70,766
    )722,759
    
    
    
    307,277
    
    
    
    
    
    
    
    (41,121
    )
    
    
    (90,429
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,867,799
    
    
    
    3,405,616
    
    
    
    
    
    
    
    (2,106,145
    )
    
    
    (2,996,992
    )57,899
    
    
    
    54,737
    
    
    
    
    
    
    
    (572
    )
    
    
    (99,151
    )
    
    
    
    
    
    
    (14,848
    )
    
    
    (7,431
    )
    
    
    (39,000
    )
    
    
    (65,000
    )846,191
    
    
    
    249,752
    
    
    
    1,101,582
    
    
    
    272,858977
    
    
    
    
    
    
    
    
    
    
    
    (123,453
    )
    
    
    (401,174
    )
    
    
    (5,083
    )
    
    
    (2,802
    )160,590
    
    
    
    441,097
    
    
    
    18,269
    
    
    
    15,082$
    37,137
    
    
    $
    39,923
    
    
    $
    13,186
    
    
    $
    12,280
  *
    
    In the supplemental data presented above, Centex represents the consolidation of all
subsidiaries other than those included in Financial Services. Transactions between Centex
and Financial Services have been eliminated from the Centex Corporation and Subsidiaries
statements of consolidated cash flows. 7




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##### Table of Contents



Notes to Consolidated Financial Statements Centex Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2004
(Dollars and shares in thousands, except per share data)
(unaudited) (A) BASIS OF PRESENTATION The consolidated interim financial statements include the accounts of Centex Corporation and
all subsidiaries, partnerships and other entities in which Centex Corporation has a controlling
interest (the Company). Also included are variable interest entities, as discussed in Note (J),
Land Held Under Option Agreements Not Owned and Other Land Deposits. All significant
intercompany balances and transactions have been eliminated. The unaudited statements have been
prepared in accordance with accounting principles generally accepted in the United States for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United
States have been condensed or omitted. In the opinion of the Company, all adjustments (consisting of normal, recurring adjustments)
necessary to present fairly the information in the consolidated financial statements of the Company
have been included. The results of operations for such interim periods are not necessarily
indicative of results for the full year. The Company suggests that these consolidated financial
statements be read in conjunction with the consolidated financial statements and the notes to
consolidated financial statements included in the Companys latest Annual Report on Form 10-K. (B) STATEMENTS OF CONSOLIDATED CASH FLOWS  SUPPLEMENTAL DISCLOSURES The following table provides supplemental disclosures related to the Statements of
Consolidated Cash Flows: For the Three Months
    
    For the Nine MonthsEnded December 31,
    
    Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Cash Paid for Interest
    
    $
    113,105
    
    
    $
    78,737
    
    
    $
    323,607
    
    
    $
    249,900Net Cash Paid for Taxes
    
    $
    90,445
    
    
    $
    84,863
    
    
    $
    265,339
    
    
    $
    256,731
 Interest expense relating to the Financial Services segment is included in Financial
Services costs and expenses. Home Building capitalizes a portion of interest incurred as a
component of housing projects inventory cost. Capitalized interest is included in Home Buildings
costs and expenses as related housing inventories are sold. Interest expense related to segments
other than Financial Services and Home Building is included as a separate line item in the
Statements of Consolidated Earnings. 8




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##### Table of Contents



For the Three Months
    
    For the Nine MonthsEnded December 31,
    
    Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Total Interest Incurred
    
    $
    124,118
    
    
    $
    98,513
    
    
    $
    349,376
    
    
    $
    279,918Less 
    
    Interest Capitalized
    
    
    (46,141
    )
    
    
    (37,337
    )
    
    
    (130,929
    )
    
    
    (77,856
    )Financial Services Interest Expense
    
    
    (72,259
    )
    
    
    (57,720
    )
    
    
    (202,423
    )
    
    
    (166,692
    )Interest Expense, net
    
    $
    5,718
    
    
    $
    3,456
    
    
    $
    16,024
    
    
    $
    35,370Capitalized Interest Relieved to Home
Buildings Costs and Expenses
    
    $
    31,998
    
    
    $
    28,453
    
    
    $
    92,465
    
    
    $
    56,397
 Effective July 1, 2003, the Company consolidated Harwood Street Funding I, LLC (HSF-I)
pursuant to the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities, as revised, (FIN 46), as discussed in Note (G),
Indebtedness. As of July 1, 2003, the cumulative effect of a change in accounting principle
recorded was $13.3 million, net of tax. As of July 1, 2003, assets and liabilities consolidated
were as follows: Cash and Cash Equivalents
    
    $
    18,000Residential Mortgage Loans Held for Sale
    
    
    2,443,428Other Assets
    
    
    (36,100
    )Accounts Payable
    
    
    20,910Financial Services Debt
    
    
    (2,459,498
    )Cumulative Effect of a Change in Accounting Principle
    
    $
    (13,260
    )
 As explained in Note (J), Land Held Under Option Agreements Not Owned and Other Land
Deposits pursuant to the provisions of FIN 46, as of December 31, 2004, the Company consolidated
$430.2 million of lot option agreements and recorded $41.0 million of deposits related to these
options as land held under option agreements not owned. (C) STOCK-BASED EMPLOYEE COMPENSATION ARRANGEMENTS On April 1, 2003, the Company adopted the fair value measurement provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123),
under which the Company recognizes compensation expense of a stock option award to an employee over
the vesting period based on the fair value of the award on the grant date. The fair value method
has been applied to awards granted or modified on or after April 1, 2003 (the prospective method).
Awards granted prior to such date continued to be accounted for in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and
related interpretations, until the modification of those awards described in the following
paragraph. On January 30, 2004, the Company modified all of its outstanding stock options and long-term
incentive plan rights in order to keep the holders in the same economic position as before the
spin-off of our construction products operations. This adjustment is a modification, which
resulted in a reduction of the option exercise price and an increase in the number of shares
covered by the options or long-term incentive plan rights, under the provisions of SFAS No. 123.
Subsequent to January 30, 2004, the Company has no outstanding options or other stock rights accounted for under the provisions of APB No. 25.
In December 9




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##### Table of Contents



2004, the FASB issued a revision to SFAS No. 123. See Note (P), Recent Accounting
Pronouncements for further discussion. In May 2004, the Company granted approximately 1.8 million options to employees. The fair
value of these options is $31.3 million, as calculated under the Black-Scholes option-pricing
model, and is recognized as compensation expense over the vesting period. Compensation expense of
$2.6 million and $7.8 million related to these stock options was recognized during the three and
nine month periods ended December 31, 2004, respectively. The following pro forma information reflects the Companys net earnings and earnings per share
as if compensation cost for all stock option plans and other equity-based compensation programs had
been determined based upon the fair value at the date of grant for awards outstanding during the
three and nine month periods ended December 31, 2004 and 2003, consistent with the provisions of
SFAS No. 123: For the Three Months
    
    For the Nine MonthsEnded December 31,
    
    Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net Earnings  as Reported
    
    $
    253,771
    
    
    $
    198,670
    
    
    $
    641,616
    
    
    $
    527,589Stock-Based Employee Compensation
Included in Reported Net Income,
net of Related Tax Effects
    
    
    8,202
    
    
    
    3,590
    
    
    
    23,765
    
    
    
    10,747Total Stock-Based Employee Compensation
Expense Determined Under
Fair Value Based Method, net of Related
Tax Effects
    
    
    (8,202
    )
    
    
    (8,035
    )
    
    
    (23,765
    )
    
    
    (24,335
    )Pro Forma Net Earnings
    
    $
    253,771
    
    
    $
    194,225
    
    
    $
    641,616
    
    
    $
    514,001Earnings Per Share:Basic  as Reported
    
    $
    2.02
    
    
    $
    1.60
    
    
    $
    5.16
    
    
    $
    4.28Basic  Pro Forma
    
    $
    2.02
    
    
    $
    1.57
    
    
    $
    5.16
    
    
    $
    4.17Diluted  as Reported
    
    $
    1.91
    
    
    $
    1.52
    
    
    $
    4.87
    
    
    $
    4.09Diluted  Pro Forma
    
    $
    1.91
    
    
    $
    1.49
    
    
    $
    4.87
    
    
    $
    3.98
 10




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##### Table of Contents



(D) STOCKHOLDERS EQUITY A summary of changes in stockholders equity is presented below: Unamortized
    
    
    
    
    
    
    
    
    AccumulatedCommon Stock
    
    
    Capital in
    
    
    Value of
    
    
    
    
    
    Treasury
    
    
    OtherExcess of
    
    
    Deferred
    
    
    Retained
    
    
    Stock
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Par Value
    
    
    Compensation
    
    
    Earnings
    
    
    at Cost
    
    
    Income (Loss)
    
    
    TotalBalance, March 31, 2004
    
    
    122,660
    
    
    $
    32,068
    
    
    $
    202,958
    
    
    $
    (411
    )
    
    $
    2,990,889
    
    
    $
    (212,822
    )
    
    $
    37,543
    
    
    $
    3,050,225Issuance and Amortization of Restricted
Stock
    
    
    82
    
    
    
    20
    
    
    
    14,485
    
    
    
    165
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,670Stock Compensation
    
    
    
    
    
    
    
    
    
    
    21,912
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,912Exercise of Stock
Options, Including
Tax Benefits
    
    
    3,400
    
    
    
    850
    
    
    
    96,701
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,551Cash Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,848
    )
    
    
    
    
    
    
    
    
    
    
    (14,848
    )Other Stock
Transactions
    
    
    (2
    )
    
    
    
    
    
    
    (565
    )
    
    
    
    
    
    
    
    
    
    
    (572
    )
    
    
    
    
    
    
    (1,137
    )Net Earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    641,616
    
    
    
    
    
    
    
    
    
    
    
    641,616Unrealized Gain
on Hedging
Instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,816
    
    
    
    11,816Foreign Currency
Translation
Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,264
    
    
    
    17,264Balance, December 31,
2004
    
    
    126,140
    
    
    $
    32,938
    
    
    $
    335,491
    
    
    $
    (246
    )
    
    $
    3,617,657
    
    
    $
    (213,394
    )
    
    $
    66,623
    
    
    $
    3,839,069
 (E) RESIDENTIAL MORTGAGE LOANS HELD FOR INVESTMENT Residential mortgage loans held for investment by Centex Home Equity Company, LLC and its
related companies (Home Equity), including real estate owned, consisted of the following: December 31, 2004
    
    
    March 31, 2004Residential Mortgage Loans Held for Investment
    
    $
    7,800,557
    
    
    $
    6,554,513Allowance for Losses on Residential Mortgage Loans
Held for Investment
    
    
    (77,728
    )
    
    
    (56,358
    )Residential Mortgage Loans Held for Investment,
net of Allowance for Losses
    
    $
    7,722,829
    
    
    $
    6,498,155
 Changes in the allowance for losses on residential mortgage loans held for investment
were as follows for the nine months ended December 31, 2004 and the year ended March 31, 2004: For the Nine
    
    
    For theMonths Ended
    
    
    Year EndedDecember 31, 2004
    
    
    March 31, 2004Balance at Beginning of Period
    
    $
    56,358
    
    
    $
    28,384Provision for Losses
    
    
    71,941
    
    
    
    79,503Losses Sustained, net
of Recoveries of $292
and $204
    
    
    (50,571
    )
    
    
    (51,529
    )Balance at End of Period
    
    $
    77,728
    
    
    $
    56,358
 11




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##### Table of Contents



For the Nine
    
    
    For theMonths Ended
    
    
    Year EndedDecember 31, 2004
    
    
    March 31, 2004Allowance as a Percentage of Gross Loans
Held for Investment
    
    
    1.0
    %
    
    
    0.9
    %Allowance as a Percentage of 90+ Days
Contractual Delinquency
    
    
    37.9
    %
    
    
    36.4
    %90+ Days Contractual Delinquency (based
on months)Total Dollars Delinquent
    
    $
    204,955
    
    
    $
    154,868% Delinquent
    
    
    2.6
    %
    
    
    2.4
    %
 (F) GOODWILL A summary of changes in goodwill by segment for the nine months ended December 31, 2004 is
presented below: Home
    
    
    Financial
    
    
    ConstructionBuilding
    
    
    Services
    
    
    Services
    
    
    Other
    
    
    TotalBalance as of March 31, 2004
    
    $
    158,607
    
    
    $
    16,602
    
    
    $
    1,007
    
    
    $
    78,042
    
    
    $
    254,258Goodwill Acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    595
    
    
    
    595Goodwill Disposed
    
    
    
    
    
    
    (4,865
    )
    
    
    
    
    
    
    
    
    
    
    (4,865
    )Other, net
    
    
    1,957
    
    
    
    
    
    
    
    
    
    
    
    (152
    )
    
    
    1,805Balance as of December 31,
2004
    
    $
    160,564
    
    
    $
    11,737
    
    
    $
    1,007
    
    
    $
    78,485
    
    
    $
    251,793
 Goodwill for the Other segment at December 31, 2004 relates to the Companys home services
operations. 12




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##### Table of Contents



(G) INDEBTEDNESS A summary of the balances of short-term and long-term debt (debt instruments with original
maturities greater than one year) and weighted average interest rates at December 31, 2004 and
March 31, 2004 is presented below. Due dates are presented in fiscal years. Centex, in this note,
refers to the consolidation of all subsidiaries other than those included in Financial Services. December 31,
    
    March 31,2004
    
    2004Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageInterest
    
    
    
    
    
    
    InterestRate
    
    
    
    
    
    
    RateShort-term Debt:Centex
    
    $
    122,074
    
    
    
    2.30
    %
    
    $
    
    
    
    
    
    %Financial ServicesFinancial Institutions
    
    
    179,274
    
    
    
    2.68
    %
    
    
    601,718
    
    
    
    1.42
    %Harwood Street Funding I, LLC Term Notes
    
    
    250,000
    
    
    
    2.20
    %
    
    
    
    
    
    
    
    %Secured Liquidity Notes:Harwood Street Funding I, LLC
    
    
    1,063,550
    
    
    
    2.44
    %
    
    
    936,000
    
    
    
    1.15
    %Harwood Street Funding II, LLC
    
    
    1,990,620
    
    
    
    2.42
    %
    
    
    566,798
    
    
    
    1.15
    %Consolidated Short-term Debt
    
    
    3,605,518
    
    
    
    
    
    
    
    2,104,516Long-term Debt:CentexMedium-term Note Programs, due through 2007
    
    
    228,000
    
    
    
    5.48
    %
    
    
    258,000
    
    
    
    4.67
    %Senior Notes, due through 2015
    
    
    2,458,493
    
    
    
    6.32
    %
    
    
    1,808,332
    
    
    
    6.73
    %Other Indebtedness, due through 2015
    
    
    219,268
    
    
    
    5.77
    %
    
    
    152,152
    
    
    
    5.31
    %Subordinated Debt:Subordinated Debentures, due in 2007
    
    
    99,818
    
    
    
    8.75
    %
    
    
    99,763
    
    
    
    8.75
    %Subordinated Debentures, due in 2006
    
    
    99,980
    
    
    
    7.38
    %
    
    
    99,943
    
    
    
    7.38
    %3,105,559
    
    
    
    
    
    
    
    2,418,190Financial ServicesHome Equity Asset-Backed Certificates,
due through 2035
    
    
    5,805,578
    
    
    
    3.85
    %
    
    
    5,964,924
    
    
    
    3.59
    %Harwood Street Funding I, LLC Variable Rate
Subordinated Extendable Certificates,
due through 2010
    
    
    60,000
    
    
    
    4.40
    %
    
    
    139,000
    
    
    
    3.06
    %Harwood Street Funding II, LLC Variable
Rate Subordinated Notes, due through 2009
    
    
    93,750
    
    
    
    4.55
    %
    
    
    93,750
    
    
    
    3.24
    %5,959,328
    
    
    
    
    
    
    
    6,197,674Consolidated Long-term Debt
    
    
    9,064,887
    
    
    
    
    
    
    
    8,615,864Total Debt
    
    $
    12,670,405
    
    
    
    
    
    
    $
    10,720,380
 As
of December 31, 2004, Centexs short-term debt consists of
$110.0 million outstanding under its commercial paper program and
$12.1 million in land related notes. 13




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##### Table of Contents



The weighted-average interest rates for short-term and long-term debt during the nine
months ended December 31, 2004 and 2003 were: For the Nine Months Ended December 31,2004
    
    
    2003Short-term Debt:Centex
    
    
    2.30
    %
    
    
    1.71
    %Financial Services
    
    
    2.42
    %
    
    
    1.24
    %Long-term Debt:CentexMedium-term Note Programs (1)
    
    
    5.52
    %
    
    
    5.31
    %Senior Notes
    
    
    6.49
    %
    
    
    6.91
    %Other Indebtedness
    
    
    5.66
    %
    
    
    3.57
    %Subordinated Debentures
    
    
    8.06
    %
    
    
    8.06
    %Financial ServicesCentex Home Equity Company, LLC Long-term Debt
(2)
    
    
    3.30
    %
    
    
    3.66
    %CTX Mortgage Company, LLC Long-term Debt (3)
    
    
    3.58
    %
    
    
    2.69
    %
  (1)

Interest rates include the effects of an interest rate swap agreement.(2)

Consists of Centex Home Equity Company, LLC Asset-Backed Certificates and Harwood Street
Funding II, LLC Variable Rate Subordinated Notes.(3)

Consists of Harwood Street Funding I, LLC Variable Rate Subordinated Extendable Certificates. Maturities of Centex and Financial Services long-term debt during the next five years
ending March 31 are: FinancialCentex
    
    
    Services
    
    
    Total2005
    
    $
    654
    
    
    $
    660,679
    
    
    $
    661,3332006
    
    
    341,353
    
    
    
    2,115,724
    
    
    
    2,457,0772007
    
    
    467,038
    
    
    
    1,665,416
    
    
    
    2,132,4542008
    
    
    359,094
    
    
    
    876,402
    
    
    
    1,235,4962009
    
    
    1,252
    
    
    
    230,456
    
    
    
    231,708Thereafter
    
    
    1,936,168
    
    
    
    410,651
    
    
    
    2,346,819$
    3,105,559
    
    
    $
    5,959,328
    
    
    $
    9,064,887
 Financial Services long-term debt associated with Home Equity includes Asset-Backed
Certificates of $5.81 billion at December 31, 2004. These Asset-Backed Certificates relate to
securitized residential mortgage loans and are structured as collateralized borrowings. The
holders of such debt have no recourse for non-payment to Centex Home Equity Company, LLC or Centex
Corporation; however, as is common in these structures, Centex Home Equity Company, LLC remains
liable for customary loan representations. The principal and interest on these certificates are
paid from the liquidation of the underlying residential mortgage loans, which serve as collateral
for the debt. Accordingly, the timing of the principal payments on these certificates is dependent
upon the payments received on the underlying residential mortgage loans. The expected maturities
of this component of long-term debt are based on contractual maturities adjusted for projected
prepayments. 14




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##### Table of Contents



Under
Centex Corporations bank credit facilities, the Company is required to maintain certain
leverage and interest coverage ratios and a minimum tangible net worth. At December 31, 2004,
Centex was in compliance with all of these covenants. Credit Facilities The Companys existing credit facilities and available capacity as of December 31, 2004 are
summarized below: Existing Credit
    
    
    AvailableFacilities
    
    
    CapacityCentexCentex CorporationMulti-Bank Revolving Credit Facility
    
    $
    800,000
    
    
    $
    800,000
    (1)Multi-Bank Revolving Letter of Credit Facility
    
    
    300,000
    
    
    
    84,765
    (2)1,100,000
    
    
    
    884,765
    (3)International HomebuildingMulti-Bank Secured Revolving Credit Facility
    
    
    192,660
    
    
    
    17,339Secured Bonding Facility
    
    
    19,266
    
    
    
    17,339Unsecured Line of Credit
    
    
    38,532
    
    
    
    38,532250,458
    
    
    
    73,210
    (4)Financial ServicesSecured Credit Facilities
    
    
    525,000
    
    
    
    345,726
    (5)Harwood Street Funding I, LLC Facility
    
    
    3,000,000
    
    
    
    1,625,920Harwood Street Funding II, LLC Facility
    
    
    2,500,000
    
    
    
    415,6306,025,000
    
    
    
    2,387,276$
    7,375,458
    
    
    $
    3,345,251
    (6)
  (1)

This is an unsecured, committed, multi-bank revolving credit facility, maturing in July
2007, which serves as backup for commercial paper borrowings. As of December 31, 2004, there
were no borrowings under this backup facility, and our $700 million commercial paper program
had $110 million outstanding. We have not borrowed under this revolving credit facility since
its inception.(2)

This is an unsecured, committed, multi-bank revolving letter of credit facility, maturing in
July 2005. Letters of credit under this facility may expire no later than July 2006.(3)

In conjunction with the issuance of surety bonds in support of our Construction Services
activity, Centex Corporation will provide letters of credit of up to $100 million if Centex
Corporations public debt ratings fall below investment grade. In support of this ratings
trigger, we maintain a minimum of $100 million in unused committed credit at all times.(4)

The international homebuilding operations maintain a £100 million secured, committed,
multi-bank revolving credit facility and a £10 million secured, uncommitted bonding facility.
These facilities are not guaranteed by, nor is there recourse to, Centex Corporation. The
international homebuilding operations also maintain a £20 million unsecured, uncommitted line
of credit guaranteed by Centex Corporation.(5)

CTX Mortgage Company, LLC and its related companies and Home Equity share in a $250 million
secured, committed credit facility to finance mortgage inventory. CTX Mortgage Company, LLC
and its related companies also maintain $265 million of secured, committed mortgage warehouse
facilities to finance mortgages. Home Equity also maintains a $10 million secured, committed
mortgage warehouse facility to finance mortgages. 15




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##### Table of Contents



(6)

The amount of available capacity consists of
$3,289.4 million of committed capacity and $55.9
million of uncommitted capacity as of December 31, 2004. Although we believe that the
uncommitted capacity is currently available, there can be no assurance that the lenders under
these facilities would elect to make advances if and when requested to do so. CTX Mortgage Company, LLC and Harwood Street Funding I, LLC CTX Mortgage Company, LLC finances its inventory of mortgage loans held for sale principally
through the sale of loans to HSF-I, pursuant to a mortgage loan purchase agreement, as amended (the
HSF-I Purchase Agreement). Under the terms of the HSF-I Purchase Agreement, CTX Mortgage
Company, LLC may elect to sell to HSF-I, and HSF-I is obligated to purchase from CTX Mortgage
Company, LLC, mortgage loans that satisfy certain eligibility criteria and portfolio requirements.
Since 1999, CTX Mortgage Company, LLC has sold substantially all conforming and Jumbo A mortgage
loans that it originates to HSF-I in accordance with the HSF-I Purchase Agreement. HSF-Is
commitment to purchase eligible mortgage loans continues in effect until the occurrence of certain
termination events described in the HSF-I Purchase Agreement. At December 31, 2004, the maximum
amount of mortgage loans that HSF-I is allowed to carry in its inventory under the HSF-I Purchase
Agreement is $3.0 billion. When HSF-I acquires mortgage loans, it typically holds them for a
period of 45 to 60 days and then resells them into the secondary market. In accordance with the
HSF-I Purchase Agreement, CTX Mortgage Company, LLC acts as servicer of the loans owned by HSF-I
and arranges for the sale of the eligible mortgage loans into the secondary market. HSF-I obtains
the funds needed to purchase eligible mortgage loans from CTX Mortgage Company, LLC by issuing (1)
short-term secured liquidity notes, (2) medium-term debt and (3) subordinated certificates. As of
December 31, 2004, HSF-I had outstanding (1) short-term secured liquidity notes rated A1+ by
Standard & Poors, or S&P, and P-1 by Moodys Investors Service, or Moodys, (2) term notes rated
A1+ by S&P and P-1 by Moodys and (3) subordinated certificates maturing in September 2009,
extendable for up to five years, rated BBB by S&P and Baa2 by Moodys. The purposes of this
arrangement are to allow CTX Mortgage Company, LLC to reduce the cost of financing the mortgage
loans originated by it and to improve its liquidity. In January 2003, the FASB issued FIN 46, which modified the accounting for certain entities in
which (1) equity investors do not have a controlling financial interest and/or (2) the entity is
unable to finance its activities without additional subordinated financial support from other
parties. Pursuant to FIN 46, HSF-I is a variable interest entity for which the Company is the
primary beneficiary. Accordingly, HSF-I was consolidated in the Companys financial statements
beginning July 1, 2003. Prior to the implementation of FIN 46, HSF-I was not consolidated in the
Companys financial statements. As a result of the consolidation of HSF-I, the Company recorded a
cumulative effect of a change in accounting principle of $13.3 million, net of tax, in the quarter
ended September 30, 2003. The consolidation of HSF-I resulted in an increase in the Companys
residential mortgage loans held for sale with a corresponding increase in the Companys debt. In
addition, interest income and interest expense of HSF-I subsequent to June 30, 2003, are reflected
in the Companys financial statements. Because HSF-I is a consolidated entity as of July 1, 2003,
all transactions between the Company and HSF-I subsequent to June 30, 2003 have been eliminated in
consolidation. HSF-I has entered into a swap arrangement with a bank (the Harwood Swap) under which the
bank has agreed to make certain payments to HSF-I, and HSF-I has agreed to make certain payments to
the bank, the net effect of which is that the bank has agreed to bear certain interest rate risks,
non-credit related market risks and prepayment risks related to the mortgage loans held by HSF-I.
The purpose of this arrangement is to provide credit enhancement to HSF-I by permitting it to hedge
these risks with a counterparty having a short-term credit rating of A1+ from S&P and P-1 from
Moodys. However, the Company effectively bears all interest rate risks, non-credit related market
risks and prepayment risks that are the subject of the Harwood Swap because Centex has entered into
a separate swap arrangement with the bank pursuant to which Centex has agreed to pay to the bank
all amounts that the bank is required to pay to HSF-I pursuant to the Harwood Swap plus a monthly
fee equal to a percentage of the notional amount of the Harwood Swap. Additionally, 16




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##### Table of Contents



the bank is required to pay to Centex all amounts that the bank receives from HSF-I pursuant to the
Harwood Swap. Financial Services executes the forward sales of CTX
Mortgage Company, LLCs mortgage loans
to hedge the risk of reductions in value of mortgages sold to HSF-I or maintained under secured
financing agreements. This offsets the majority of the Companys risk as the counterparty to the
swap supporting the payment requirements of HSF-I. See additional discussion of interest rate
risks in Note (N), Derivatives and Hedging. The Company is also required to reimburse the bank
for certain expenses, costs and damages that it may incur. HSF-Is debt and subordinated certificates do not have recourse to the Company, and the
consolidation of this debt and subordinated certificates has not changed the Companys debt
ratings. The Company does not guarantee the payment of any debt or subordinated certificates of
HSF-I and is not liable for credit losses relating to securitized residential mortgage loans sold
to HSF-I. However, the Company retains certain risks related to the portfolio of mortgage loans
held by HSF-I. In particular, CTX Mortgage Company, LLC makes representations and warranties to
HSF-I to the effect that each mortgage loan sold to HSF-I satisfies the eligibility criteria and
portfolio requirements discussed above. CTX Mortgage Company, LLC may be required to repurchase
mortgage loans sold to HSF-I if such mortgage loans are determined to be ineligible loans or there
occur certain other breaches of representations and warranties of CTX Mortgage Company, LLC, as
seller or servicer. CTX Mortgage Company, LLCs obligations as servicer, including its obligation
as servicer to repurchase such loans, are guaranteed by Centex Corporation. CTX Mortgage Company,
LLC records a liability for its estimated losses for these obligations and such amount is included
in its loan origination reserve. CTX Mortgage Company, LLC and its related companies sold $2.10
billion and $7.17 billion of mortgage loans to investors during the three and nine months ended
December 31, 2004, respectively, and $3.55 billion and $13.13 billion during the three and nine
months ended December 31, 2003, respectively. CTX Mortgage Company, LLC and its related companies
recognized gains on sales of mortgage loans and related derivative activity of $35.8 million and
$107.1 million during the three and nine months ended December 31, 2004, respectively, and $43.4
million and $199.9 million during the three and nine months ended December 31, 2003, respectively. Centex Home Equity Company, LLC and Harwood Street Funding II, LLC Home Equity finances its inventory of mortgage loans held for investment through Harwood
Street Funding II, LLC (HSF-II), a wholly-owned, consolidated entity, under a revolving sales
agreement that expires upon final payment of the senior and subordinated debt issued by HSF-II.
This arrangement, where HSF-II has committed to finance all eligible loans, gives Home Equity daily
access to HSF-IIs borrowing capacity of $2.5 billion. HSF-II obtains funds for the purchase of
eligible loans by issuing (1) short-term secured liquidity notes, (2) medium-term debt and (3)
subordinated notes. As of December 31, 2004, HSF-II had outstanding (1) short-term secured
liquidity notes rated A1+ by S&P, P-1 by Moodys and F1+ by Fitch Ratings, or Fitch and (2)
subordinated notes rated BBB by S&P, Baa2 by Moodys and BBB by Fitch. Because HSF-II is a
consolidated entity, the debt, interest income and interest expense of HSF-II are reflected in the
financial statements of Financial Services. HSF-IIs debt does not have recourse to the Company
and the consolidation of this debt does not change the Companys debt ratings. In the event Financial Services is unable to finance its inventory of loans through HSF-I and
HSF-II, it would draw on other existing credit facilities. In addition, Financial Services would
need to make other customary financing arrangements to fund its mortgage loan origination
activities. Although the Company believes that Financial Services could arrange for alternative
financing that is common for non-investment grade mortgage companies, there can be no assurance
that such financing would be available on satisfactory terms, and any delay in obtaining such
financing could adversely affect the results of operations of Financial Services. 17




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##### Table of Contents



(H) MERGER OF 3333
HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY,
L.P. AND       SUBSIDIARIES Prior to February 2004, the common stock of 3333 Holding Corporation (Holding) and warrants
to purchase limited partnership interests in Centex Development Company, L.P. (the Partnership)
were traded in tandem with our common stock. The Company held an ownership interest in the
Partnership, which was reported on the equity method of accounting as a part of our investment real
estate operations. Neither Holding nor the Partnership was consolidated in our financial
statements. On February 29, 2004, the Company completed the acquisition of Holding and the Partnership
through a series of transactions, which included mergers with the Companys subsidiaries. The
transactions were approved by the Companys stockholders and holders of beneficial interests in
Holding at a special joint meeting of stockholders held on February 25, 2004. These transactions
terminated the tandem trading relationship between the Companys common stock and the common stock
of Holding, as well as the stockholder warrants of the Partnership. For their interests in the
securities of Holding and the Partnership, the Companys stockholders of record on February 29,
2004 received an amount equal to $0.02 per share of the Companys common stock, totaling
approximately $1.2 million, which was paid on March 10, 2004. The mergers resulted in the consolidation of Holding and the Partnership. As a result of the
mergers, effective March 1, 2004, the Company eliminated its investment in the Partnership of
$370.6 million, recorded net assets of $370.6 million including goodwill of $36.4 million, and
recorded a dividend to stockholders of $1.2 million. Operations of Holding and the Partnership
have been consolidated in the Companys results of operations subsequent to March 1, 2004. The operations of the Partnership included homebuilding operations in the United Kingdom. As
a result of the merger, the international homebuilding operations of the Partnership are now
included in our Home Building business segment, and the Partnerships domestic real estate
operations continue to be reported within our investment real estate operations included in the
Other segment. (I) COMMITMENTS AND CONTINGENCIES The Company conducts a portion of its land acquisition, development and other activities
through its participation in joint ventures in which the Company holds less than a majority equity
interest. These land related activities typically require substantial capital, and partnering with
other developers allows Home Building to share the risks and rewards of ownership while providing
for efficient asset utilization. The Companys investment in these non-consolidated joint ventures
was $169.3 million and $140.1 million at December 31, 2004 and March 31, 2004, respectively. These
joint ventures had total outstanding secured construction debt of approximately $423.5 million and
$202.2 million at December 31, 2004 and March 31, 2004, respectively. The Company is liable, on a
contingent basis, through guarantees, letters of credit or other arrangements, with respect to a
portion of the construction debt of certain of the joint ventures, which we refer to as the
recourse joint ventures. The Companys maximum potential liability with respect to the debt of the
recourse joint ventures, based on its ownership percentage of the recourse joint ventures, is
approximately $150.7 million and $73.2 million at December 31, 2004 and March 31, 2004,
respectively. For certain of the joint ventures, the Company has also guaranteed the completion of
the project by the joint ventures and agreed to indemnify the construction lender for certain
environmental liabilities with respect to the project. In the normal course of its business, the Company issues certain representations, warranties
and guarantees related to its home sales, land sales, building sales, commercial construction and
mortgage loan 18




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##### Table of Contents



originations. The Company believes that it has established the necessary accruals for these
representations, warranties and guarantees. See further discussion of our warranty liability
below. Home Building offers a ten-year limited warranty for most homes constructed and sold in the
United States and in the United Kingdom. The warranty covers defects in materials or workmanship
in the first two years of the customers ownership of the home and certain designated components or
structural elements of the home in the third through tenth years. Prior to April 1, 2004, Home
Buildings United States warranties for non-structural defects in materials or workmanship covered the first year.
In California, effective January 1, 2003, Home Building began following the statutory provisions
of Senate Bill 800, which, in part, provide a statutory warranty to customers and a statutory
dispute resolution process. Home Building estimates the costs that may be incurred under its
warranty program for which it will be responsible and records a liability at the time each home is
closed. Factors that affect Home Buildings warranty liability include the number of homes closed,
historical and anticipated rates of warranty claims, and cost per claim. Home Building
periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as
necessary. Changes in Home Buildings contractual warranty liability are as follows for the nine months
ended December 31, 2004 and the year ended March 31, 2004: For the Nine
    
    
    For theMonths Ended
    
    
    Year EndedDecember 31, 2004
    
    
    March 31, 2004Balance at Beginning of Period
    
    $
    20,146
    
    
    $
    16,125Warranties Issued
    
    
    33,850
    
    
    
    29,806Settlements Made
    
    
    (26,926
    )
    
    
    (25,597
    )Changes in Liability of Pre-Existing
Warranties, Including Expirations
    
    
    
    
    
    
    (188
    )Balance at End of Period
    
    $
    27,070
    
    
    $
    20,146
 In January 2003, we received a request for information from the United States Environmental
Protection Agency (EPA) pursuant to Section 308 of the Clean Water Act seeking information about
storm water discharge practices at projects that Centex subsidiaries had completed or were
building. Subsequently, the EPA limited its request to Home Building and 30 communities. Home
Building has provided the requested information and the United States Department of Justice (the
Justice Department), acting on behalf of the EPA, has asserted that some of these and certain
other communities (including one of Construction Services projects) have violated regulatory
requirements applicable to storm water discharges, and that injunctive relief and civil penalties
may be warranted. Home Building and Construction Services believe they have defenses to the
allegations made by the EPA and are exploring methods of settling this matter. While the amount of
civil penalties, if any, and the cost of injunctive relief, if any, are undetermined, the Company
is confident that such amounts will not be material to its consolidated results of
operations or financial condition. 19




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##### Table of Contents



CTX Mortgage Company, LLC has established a liability for anticipated losses associated with
loans originated. Changes in CTX Mortgage Company, LLCs mortgage loan origination reserve are as
follows for the nine months ended December 31, 2004 and the year ended March 31, 2004: For the Nine
    
    
    For theMonths Ended
    
    
    Year EndedDecember 31, 2004
    
    
    March 31, 2004Balance at Beginning of Period
    
    $
    25,045
    
    
    $
    28,594Provision for Losses
    
    
    159
    
    
    
    1,837Settlements
    
    
    (5,637
    )
    
    
    (5,386
    )Balance at End of Period
    
    $
    19,567
    
    
    $
    25,045
 On
November 23, 2004, Miami-Dade County, Florida filed suit against
Centex-Rooney Construction Co., a wholly-owned subsidiary of Centex
Corporation; John J. Kirlin, Inc.; and M.C. Harry and Associates,
Inc., in the Countys Circuit Court of the Eleventh Judicial
Circuit. Miami-Dade County alleges that, in the course of performing
or managing construction work on Concourse F at the Miami
International Airport, the defendants caused a jet fuel line rupture
on or about July 30, 1987, which resulted in the contamination
of soil, groundwater and surface water in and around airport
Concourse F. Miami-Dade County seeks damages of approximately
$8.0 million for its costs incurred to date and for expected
future costs, civil penalties and an order requiring the defendants
to address remaining contamination. Centex believes it has
substantial defenses to Miami-Dade Countys claims, including
waiver and release and statute of limitations defenses. Centex also
believes insurance coverage may be available to cover defense costs
and any potential damages. Centex does not believe that this lawsuit
will have a material impact on the Companys consolidated
results of operations or financial position. (J) LAND HELD UNDER OPTION AGREEMENTS NOT OWNED AND OTHER LAND DEPOSITS In order to ensure the future availability of land for homebuilding, the Company enters into
lot option purchase agreements with unaffiliated third parties. Under the option agreements, the
Company pays a stated deposit in consideration for the right to purchase land at a future time,
usually at predetermined prices. These options generally do not contain performance requirements
from the Company nor obligate the Company to purchase the land, and expire at various dates through
the year 2010. The Company has determined that in accordance with the provisions of FIN 46, it is the primary
beneficiary of certain lot option agreements at December 31, 2004. As a result, the Company
recorded $430.2 million of land as inventory under the caption land held under option agreements
not owned, with a corresponding increase to minority interests. In addition, at December 31, 2004,
the Company recorded $41.0 million of deposits related to these options as land held under option
agreements not owned. At December 31, 2004, the Company had deposited, invested or secured with a letter of credit
with third parties $155.7 million to ensure future availability
of land for homebuilding. Deposits of $129.3 million (excluding
the $41.0 million of deposits discussed above) are included in
land held for development and sale. As of December 31, 2004,
these lot option
agreements had a total remaining purchase price of approximately $5.74
billion. 20




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##### Table of Contents



(K) COMPREHENSIVE INCOME A summary of comprehensive income for the three and nine months ended December 31, 2004 and
2003 is presented below: For the Three Months
    
    For the Nine MonthsEnded December 31,
    
    Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net Earnings
    
    $
    253,771
    
    
    $
    198,670
    
    
    $
    641,616
    
    
    $
    527,589Other Comprehensive Income (Loss), net of Tax:Unrealized Gain (Loss) on Hedging
Instruments
    
    
    6,028
    
    
    
    4,742
    
    
    
    11,816
    
    
    
    7,913Foreign Currency Translation Adjustments
    
    
    21,381
    
    
    
    16,426
    
    
    
    17,264
    
    
    
    29,705Other
    
    
    
    
    
    
    (127
    )
    
    
    
    
    
    
    (121
    )Comprehensive Income
    
    $
    281,180
    
    
    $
    219,711
    
    
    $
    670,696
    
    
    $
    565,086
 The foreign currency translation adjustments are primarily the result of international
homebuildings translated assets, liabilities and income statement accounts. The unrealized gain
or loss on hedging instruments represents the deferral in other comprehensive income (loss) of the
unrealized gain or loss on interest rate swap agreements designated as cash flow hedges. The
accounting for interest rate swaps and other derivative financial instruments is discussed in
detail in Note (N), Derivatives and Hedging. (L) BUSINESS SEGMENTS The Company operates in three principal business segments: Home Building, Financial Services
and Construction Services. These segments operate primarily in the United States, and their
markets are nationwide. Revenues from any one customer are not significant to the Company.
Intersegment revenues and investments in joint ventures are not material and are not shown in the
following tables. Home Building Home Buildings domestic operations involve the purchase and development of land or lots and
the construction and sale of detached and attached single-family homes (including resort and second
home properties and lots). Our international homebuilding operations involve the purchase and
development of land or lots and the construction and sale of a range of products from small
single-family units to executive houses and apartments in the United Kingdom. Financial Services Financial Services operations consist primarily of home financing, sub-prime home equity
lending and the sale of title insurance and other various insurance coverages. These activities
include mortgage origination, servicing and other related services for homes sold by the Companys
subsidiaries and others. Financial Services revenues include interest income of $160.3 million
and $135.8 million for the three months and $479.8 million and $382.3 million for the nine months
ended December 31, 2004 and 2003, respectively. Substantially all of the Companys interest income
in each year is earned by the Financial Services segment. Financial Services cost of sales is
comprised of interest expense related to debt issued to fund its home financing and sub-prime home
equity lending activities. 21




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##### Table of Contents



Construction Services Construction Services operations involve the construction of buildings for both private and
government interests including educational institutions, hospitals, military housing, correctional
institutions, airport facilities, office buildings, hotels and resorts and sports facilities. As
this segment generates positive cash flow, intercompany interest income (credited at the prime rate
in effect) of $2.0 million and $1.1 million for the three months and $4.7 million and $3.5 million
for the nine months ended December 31, 2004 and 2003, respectively, is included in managements
evaluation of this segment. However, the intercompany interest income is eliminated in
consolidation and excluded from the tables presented below. Other The Companys Other segment includes the Companys home services and investment real estate
operations, which are not material for purposes of segment reporting, and corporate general and
administrative expenses and interest expense. As previously described in Note (H), Merger of 3333 Holding Corporation and Subsidiary and
Centex Development Company, L.P. and Subsidiaries, in February 2004, the Company acquired Holding
and the Partnership. Subsequent to the merger, the Company has consolidated the financial results
of the Partnership; and as a result, the Company realigned its reporting for the Partnership,
whereby the Partnerships international homebuilding operations are included in the Home Building
business segment. The Partnerships domestic operations continue to be reported within our
investment real estate operations. The Company has determined that no significant capital will be
allocated to our investment real estate operations for new business development. Beginning April
1, 2004, the financial results of our investment real estate operations are included in the Other
business segment. Prior period amounts have been reclassified to conform to the current year
presentation. For the Three Months Ended December 31, 2004(Dollars in millions)Home
    
    
    Financial
    
    
    ConstructionBuilding
    
    
    Services
    
    
    Services
    
    
    Other
    
    
    TotalRevenues
    
    $
    2,368.4
    
    
    $
    266.7
    
    
    $
    445.5
    
    
    $
    38.0
    
    
    $
    3,118.6Cost of Sales
    
    
    (1,703.0
    )
    
    
    (72.3
    )
    
    
    (422.1
    )
    
    
    (18.7
    )
    
    
    (2,216.1
    )Selling, General and Administrative
Expenses
    
    
    (344.8
    )
    
    
    (148.4
    )
    
    
    (17.0
    )
    
    
    (41.8
    )
    
    
    (552.0
    )Earnings from Unconsolidated
Entities
    
    
    43.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43.4Earnings (Loss) from Continuing
Operations Before Income Tax
    
    $
    364.0
    
    
    $
    46.0
    
    
    $
    6.4
    
    
    $
    (22.5
    )
    
    $
    393.9
 22




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##### Table of Contents



For the Three Months Ended December 31, 2003(Dollars in millions)Home
    
    
    Financial
    
    
    ConstructionBuilding
    
    
    Services
    
    
    Services
    
    
    Other
    
    
    TotalRevenues
    
    $
    1,906.3
    
    
    $
    238.2
    
    
    $
    404.2
    
    
    $
    21.2
    
    
    $
    2,569.9Cost of Sales
    
    
    (1,410.9
    )
    
    
    (57.7
    )
    
    
    (385.9
    )
    
    
    (6.7
    )
    
    
    (1,861.2
    )Selling, General and Administrative
Expenses
    
    
    (266.1
    )
    
    
    (136.8
    )
    
    
    (14.7
    )
    
    
    (44.0
    )
    
    
    (461.6
    )Earnings from Unconsolidated
Entities
    
    
    31.3
    
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    31.8Earnings (Loss) from Continuing
Operations Before Income Tax
    
    $
    260.6
    
    
    $
    43.7
    
    
    $
    3.6
    
    
    $
    (29.0
    )
    
    $
    278.9
 For the Nine Months Ended December 31, 2004(Dollars in millions)Home
    
    
    Financial
    
    
    ConstructionBuilding
    
    
    Services
    
    
    Services
    
    
    Other
    
    
    TotalRevenues
    
    $
    6,598.0
    
    
    $
    817.9
    
    
    $
    1,331.9
    
    
    $
    121.8
    
    
    $
    8,869.6Cost of Sales
    
    
    (4,801.9
    )
    
    
    (202.4
    )
    
    
    (1,267.7
    )
    
    
    (67.2
    )
    
    
    (6,339.2
    )Selling, General and Administrative
Expenses
    
    
    (959.1
    )
    
    
    (458.7
    )
    
    
    (47.8
    )
    
    
    (121.0
    )
    
    
    (1,586.6
    )Earnings from Unconsolidated
Entities
    
    
    54.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54.5Earnings (Loss) from Continuing
Operations Before Income Tax
    
    $
    891.5
    
    
    $
    156.8
    
    
    $
    16.4
    
    
    $
    (66.4
    )
    
    $
    998.3
 For the Nine Months Ended December 31, 2003(Dollars in millions)Home
    
    
    Financial
    
    
    ConstructionBuilding
    
    
    Services
    
    
    Services
    
    
    Other
    
    
    TotalRevenues
    
    $
    5,119.9
    
    
    $
    795.6
    
    
    $
    1,166.6
    
    
    $
    88.7
    
    
    $
    7,170.8Cost of Sales
    
    
    (3,798.0
    )
    
    
    (166.7
    )
    
    
    (1,109.4
    )
    
    
    (26.6
    )
    
    
    (5,100.7
    )Selling, General and Administrative
Expenses
    
    
    (732.6
    )
    
    
    (443.1
    )
    
    
    (44.5
    )
    
    
    (147.7
    )
    
    
    (1,367.9
    )Earnings from Unconsolidated
Entities
    
    
    45.0
    
    
    
    
    
    
    
    
    
    
    
    7.0
    
    
    
    52.0Earnings (Loss) from Continuing
Operations Before Income Tax
    
    $
    634.3
    
    
    $
    185.8
    
    
    $
    12.7
    
    
    $
    (78.6
    )
    
    $
    754.2
 23




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##### Table of Contents



The following summarizes the components of the Other segments loss from continuing
operations before income tax (dollars in millions): For the Three Months
    
    For the Nine MonthsEnded December 31,
    
    Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Operating Loss from Home Services
Operations
    
    $
    (0.4
    )
    
    $
    
    
    
    $
    (5.1
    )
    
    $
    (2.4
    )Operating Earnings from Investment
Real Estate Operations
    
    
    6.7
    
    
    
    4.4
    
    
    
    16.4
    
    
    
    30.3Corporate General and
Administrative
Expense
    
    
    (23.1
    )
    
    
    (29.9
    )
    
    
    (61.7
    )
    
    
    (71.0
    )Interest Expense
    
    
    (5.7
    )
    
    
    (3.5
    )
    
    
    (16.0
    )
    
    
    (35.4
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )$
    (22.5
    )
    
    $
    (29.0
    )
    
    $
    (66.4
    )
    
    $
    (78.6
    )
 (M) INCOME TAXES Income
tax expense, excluding taxes related to discontinued operations, for the Company increased from $91.0 million to $140.1 million and the effective tax
rate increased from approximately 33% to 36% for the three months ended December 31, 2003 and 2004,
respectively. Income tax expense, excluding taxes related to cumulative effect of a change in
accounting principle and discontinued operations, also increased from $245.1 million to $356.7 million and the effective tax
rate increased from approximately 33% to 36% for the nine months ended December 31, 2003 and 2004,
respectively. The increase in the effective tax rate is primarily the result of a reduction in the
availability of tax benefits related to the Companys net operating loss carryforwards in fiscal
2005 as compared to the prior year. (N) DERIVATIVES AND HEDGING The Company is exposed to the risk of interest rate fluctuations on its debt and other
obligations. As part of its strategy to manage the obligations that are subject to changes in
interest rates, the Company has entered into various interest rate swap agreements, designated as
cash flow hedges as described below. The swap agreements are recorded at their fair value in other
assets or accrued liabilities in the Consolidated Balance Sheets. To the extent the hedging
relationship is effective, gains or losses in the fair value of the derivative are deferred as a
component of Stockholders Equity through other comprehensive income (loss). Fluctuations in the
fair value of the ineffective portion of the derivative are reflected in the current period
earnings, although such amounts are insignificant. At December 31, 2004, the Company has interest rate swap agreements that, in effect, fix the
variable interest rates on (i) $25.0 million of its outstanding debt at 6.7% and expires in October
2005 and (ii) $96.3 (£50.0) million of its outstanding debt at 4.0% and expires in March 2006. During the
three and nine months ended December 31, 2004, the hedges related to these derivatives were
primarily effective and the ineffective portion was insignificant. Amounts to be received or paid
under the swap agreements are recognized as changes in interest incurred on the related debt
instruments. Based on the balance in accumulated other comprehensive income at December 31, 2004
related to these derivatives, the Company estimates increases in interest incurred over the next 12
months to be approximately $229.5 thousand. As of December 31, 2004, the balance in accumulated
other comprehensive income related to these derivatives was $22.7 thousand. 24




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##### Table of Contents



Financial Services, through Home Equity, uses interest rate swaps to hedge the market risk
associated with the anticipated issuance of fixed rate securitization debt used to finance
sub-prime mortgages. At December 31, 2004, Home Equity had $180.0 million of these interest rate
swap agreements in place at a weighted-average interest rate of 3.9%. Changes in fair value of
these derivatives are deferred in accumulated other comprehensive income (loss) and recorded
through current earnings as an adjustment of the interest incurred over the life of the
securitization debt. Home Equity also uses interest rate swaps that, in effect, fix the interest
rate on its variable interest rate debt. Amounts to be received or paid as a result of these swap
agreements are recognized as adjustments to interest incurred on the related debt instrument. At
December 31, 2004, Home Equity was hedging $2.44 billion of its outstanding debt with these
interest rate swaps at a weighted-average interest rate of 2.4%. These swaps expire at varying
times through January 2008. Based on the balance in accumulated other comprehensive income at
December 31, 2004 related to interest rate hedging activities, the Company estimates decreases in
interest incurred over the next 12 months to be approximately $10.7 million. During the three and
nine months ended December 31, 2004, the hedges related to substantially all of Home Equitys
interest rate swaps were effective and the ineffective portion was insignificant. As of December
31, 2004, the balance in accumulated other comprehensive income related to Home Equitys
derivatives was $8.9 million. Financial Services, through CTX Mortgage Company, LLC and its related companies, enters into
interest rate lock commitments (IRLCs) with its customers under which CTX Mortgage Company, LLC
and its related companies agree to make mortgage loans at agreed upon rates within a period of
time, generally from 1 to 30 days, if certain conditions are met. Initially, the IRLCs are treated
as derivative instruments and their fair value is recorded on the balance sheet in other assets or
accrued liabilities. The fair value of these loan commitment derivatives does not include future
cash flows related to the associated servicing of the loan or the value of any internally-developed
intangible assets. Subsequent changes in the fair value of the IRLCs are recorded as an adjustment
to earnings. To hedge the interest rate risk related to its IRLCs, CTX Mortgage Company, LLC and
its related companies execute mandatory forward trade commitments (i.e., forward trade
commitments). CTX Mortgage Company, LLC and its related companies also execute forward trade
commitments to hedge the interest rate risk related to its portfolio of mortgage loans held for
sale, including mortgage loans held by HSF-I. As discussed in Note (G), Indebtedness, HSF-I is a
variable interest entity that has been consolidated with Financial Services and the Company
effective July 1, 2003, pursuant to FIN 46. In connection with the consolidation of HSF-I, CTX
Mortgage Company, LLC and its related companies elected as of July 1, 2003 to utilize hedge
accounting treatment under Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, (SFAS No. 133) for these forward
trade commitments. These forward trade commitments have been designated as fair value hedges.
Accordingly, changes in the fair value of the forward trade commitments and the mortgage loans, for
which the hedge relationship is deemed effective, are recorded as an adjustment to earnings. To
the extent the hedge is effective, gains or losses in the value of the hedged loans due to interest
rate movement will be offset by an equal and opposite gain or loss in the value of the forward
trade commitment. This will result in net zero impact to earnings. To the extent the hedge
contains some ineffectiveness, the ineffectiveness is recognized immediately in earnings. The
amount of hedge ineffectiveness included in earnings was a loss of $5.7 million and $13.0 million
for the three and nine months ended December 31, 2004, respectively. Forward trade commitments not
designated as hedges are treated as derivative instruments, and their fair value is recorded on the
balance sheet in other assets or accrued liabilities. Subsequent changes in the fair value of
these forward trade commitments are recorded as an adjustment to earnings. The net change in the
estimated fair value of derivative positions not subject to hedge accounting resulted in a gain of
approximately $772 thousand and $438 thousand for the three and nine months ended December 31,
2004. 25




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##### Table of Contents



(O) RELATED PARTY TRANSACTIONS As previously described in Note (H), Merger of 3333 Holding Corporation and Subsidiary and
Centex Development Company, L.P. and Subsidiaries, in February 2004, the Company acquired Holding
and the Partnership. Transactions and amounts occurring after the Partnerships consolidation are
not included in the related party disclosures below, as the transactions between the Company and
the Partnership have been eliminated in consolidation. Prior to the merger, the Partnership
executed transactions with Home Building and Construction Services. At December 31, 2003, Home Building had $4.9 million deposited with the Partnership as option
deposits for the purchase of land. Home Building entered into agreements to reimburse the
Partnership for certain costs and fees incurred by the Partnership in the purchase and ownership of
these tracts of land. During the three and nine months ended December 31, 2003, Home Building paid
$0.5 million and $1.6 million, respectively, to the Partnership in fees and reimbursements pursuant
to these agreements. During the three and nine months ended December 31, 2003, Home Building paid
$5.4 million and $19.0 million, respectively, for the purchase of residential lots. Construction Services executed a $9.7 million contract with the Partnership for the
construction of an office building. This contract was outstanding as
of December 31, 2003 and completed prior to March 31, 2004. During
the three and nine months ended December 31, 2003, the Partnership paid $3.1 million and $3.6
million, respectively, to Construction Services pursuant to this contract. (P) RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued a revision to SFAS No. 123 entitled Share-Based Payment,
(SFAS 123R). Share-based payments are transactions in which an enterprise receives employee
services in exchange for (1) equity instruments of the enterprise or (2) liabilities that are based
on the fair value of the enterprises equity instruments or that may be settled by the issuance of
such equity instruments. SFAS 123R requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation issued to employees, but
expresses no preference for a type of valuation model. SFAS 123R supersedes APB No. 25 and is
effective for interim or annual periods beginning after June 15, 2005. SFAS 123R is not expected
to have a material impact on the Companys results of operations or financial position. In December 2004, the FASB issued Staff Position 109-1 (FSP 109-1), Application of FASB
Statement No. 109 (FASB No. 109), Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of 2004. FSP 109-1
clarifies guidance that applies to the new deduction for qualified domestic production activities.
When fully phased-in, the deduction will be up to 9% of the lesser of qualified production
activities income or taxable income. FSP 109-1 clarifies that the deduction should be accounted for as
a special deduction under FASB No. 109 and will reduce tax
expense in the period or periods that the
amounts are deductible on the tax return. Any tax benefits resulting from the new deduction will
be effective for the Companys fiscal year ending March 31, 2006. The Company is in the process of
assessing the impact, if any, the new deduction will have on its financial statements. 26




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##### Table of Contents



(Q) OFF-BALANCE SHEET OBLIGATIONS The Company enters into various off-balance sheet transactions in the normal course of
business in order to facilitate certain homebuilding activities. Further discussion regarding
these transactions can be found above in Note (I), Commitments and Contingencies. (R) SPIN-OFF OF SUBSIDIARIES In June 2003, the Company spun off substantially all of its manufactured housing operations,
which had previously been included in the Other segment. As a result of the spin-off, the
manufactured housing operations earnings for all periods prior to the spin-off have been
reclassified to discontinued operations in the Statements of Consolidated Earnings. In January 2004, the Company spun off its entire equity interest in Eagle Materials Inc.,
formerly known as Centex Construction Products, Inc., which had previously been reported as a
separate business segment. As a result of the spin-off, Construction Products earnings for all
periods prior to the spin-off have been reclassified to discontinued operations in the Statements
of Consolidated Earnings. For the three and nine months ended December 31, 2003, discontinued operations had revenues of
$81.5 million and $422.9 million, respectively, and operating earnings of $8.8 million and $61.6
million, respectively. (S) SUBSEQUENT EVENTS On
February 1, 2005, Centex Corporation issued at par $170.0 million of unsecured medium-term notes
maturing in fiscal year 2008. The notes bear interest at a floating
rate, which was initially set at 3.0%. On
January 27, 2005, Home Equity issued $925.0 million of
Asset-Backed Certificates with scheduled maturities through fiscal year 2035. (T) RECLASSIFICATIONS Certain prior year balances have been reclassified to be consistent with the December 31, 2004
presentation. 27




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to help the reader gain a better understanding of our
financial condition and our results of operations. It is provided as a supplement to, and should
be read in conjunction with, our financial statements and accompanying notes. Executive Summary We currently operate in three principal business segments: Home Building, Financial Services
and Construction Services. The following charts summarize certain key line items of our results of
operations by business segment for the three months ended December 31, 2004 and 2003 (dollars in
millions): Revenues (REVENUES BAR CHART) Earnings (Loss) from Continuing Operations Before
Income Taxes and Cumulative Effect of a
Change in Accounting Principle (EARNINGS BAR CHART)  *
    
    Other consists of the financial results of our investment real estate operations, home
services operations, corporate general and administrative expense and interest expense. Revenues for the three months ended December 31, 2004 increased 21.4% to $3.12
billion as compared to the three months ended December 31, 2003. In addition,
earnings from continuing operations before income taxes for the three months
ended December 31, 2004 increased 41.2% to $394 million as compared to the same
period in the prior year. The growth in revenues and operating earnings is primarily attributable to the growth and
improvement in operating margin of our Home Building segment. The growth in Home Buildings
operating earnings was complemented by improvements in operating earnings from our other segments. 28




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##### Table of Contents



The following charts summarize certain key line items of our results of operations by
business segment for the nine months ended December 31, 2004 and 2003 (dollars in millions): Revenues (REVENUES BAR CHART) Earnings (Loss) from Continuing Operations
Before Income Taxes and Cumulative Effect of a
Change in Accounting Principle (EARNINGS BAR CHART)  *
    
    Other consists of the financial results of our investment real estate operations, home services
operations, corporate general and administrative expense and interest expense. Revenues for the nine months ended December 31, 2004 increased 23.7% to $8.87 billion as compared
to the nine months ended December 31, 2003. In addition, earnings from continuing operations
before income taxes and cumulative effect of a change in accounting principle for the nine months
ended December 31, 2004 increased 32.4% to $998 million as compared to the same period in the prior
year. The growth in revenues and operating earnings is primarily attributable to the growth and
improvement in operating margin of our Home Building segment. Home Buildings operating earnings
growth was partially offset by a decline in operating earnings of our Financial Services segment. Home Buildings growth strategy is focused primarily on growth in neighborhoods open for sale,
increases in closings per neighborhood, increases in average unit selling prices, and continued
improvements in operating margins. Home Buildings domestic operations have increased average
neighborhood count, closings per average neighborhood, average unit selling prices and operating
margins as compared to the same period in the prior year. For more specific information on the
operating results of our Home Building segment, refer to the Home Building segment information
below. As of September 30, 2004, we had homebuilding operations in 43 of the 50 largest housing
markets in the United States (including markets where we conduct our Wayne Homes operations and our
resort and second home operation, Centex Destination Properties, which differ in certain respects
from our general homebuilding operations). We are focused primarily on further penetration in our
existing markets; however, we will continue to be opportunistic with respect to specific geographic
or market segment expansion. 29




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##### Table of Contents



The overall demand for housing in the United States remains favorable, and is driven in the
long-term by population growth, demographics, immigration, household formations and changes in home
ownership rates. Short-term growth drivers such as mortgage rates, consumer confidence and
employment levels can also impact housing demand. The highly fragmented homebuilding industry in
the United States is in the early stages of consolidation. In 1995, based upon single-family
permits issued in the United States, the 10 largest homebuilders represented approximately 7.2% of
the housing market. As of 2003, the 10 largest homebuilders were producing approximately 15.1% of
the nations new housing stock. We believe industry consolidation will continue to be an important
trend over the next decade or more as large homebuilders seek to capitalize on the benefits of
size, such as capital strength, more efficient operations and technological advantages. Financial Services operating results for the three and nine months ended December 31, 2004 have
been negatively impacted by decreased loan refinancing activity,
increases in interest rates and, for our prime mortgage lending
operations, an increase in the origination of less profitable
adjustable rate mortgages. CTX Mortgage Company, LLCs
refinancing activity accounted for 21% of its originations for both the three and nine months ended
December 31, 2004 as compared to 23% and 42% for the same periods last year. Refinancing activity
has declined due to an extended period of relatively low mortgage loan rates, which has reduced the
supply of loans likely to be refinanced. Our Financial Services segment will continue to focus on
serving the customers of our Home Building segment. For the three and nine months ended December
31, 2004, our prime mortgage business financed approximately 73% and 72% of our Home Building
non-cash unit closings versus 74% for the same periods last year. In addition, the Financial
Services growth model includes plans to increase the number of loan officers originating prime
retail loans and to improve their productivity. Our prime mortgage lending business is primarily a
fee-based business with low capital requirements. Our Financial Services segment also includes our
sub-prime home equity lending operations, which is primarily a
portfolio-based model that has produced
more predictable earnings than our prime mortgage lending operations. Our sub-prime home equity
loans are obtained through our organically grown origination channels using centrally controlled
product, pricing and underwriting. The results of operations of certain of our segments, including our Home Building and
Financial Services operations, may be adversely affected by increases in interest rates. Any
significant increase in mortgage interest rates above currently prevailing low levels could affect
demand for housing, at least in the short term, and could reduce the ability or willingness of
prospective homebuyers to finance home purchases and/or it could further curtail mortgage refinance
activity. Although we expect that we would make adjustments in our operations in an effort to
mitigate the effects of any increase in interest rates, there can be no assurances that these
efforts would be successful. Our Construction Services segment revenues and operating earnings for the three and nine
months ended December 31, 2004 has improved as compared to the same periods last year due to our
focus on increasing market share and improving project margins. Strategically, we will continue to
focus on our core geographic and selected industry segments to continue growth in revenues and
operating earnings. In fiscal year 2004, we consummated the tax-free spin-offs to our stockholders of
substantially all of our manufactured housing operations on June 30, 2003 and our entire ownership
interest in Eagle Materials Inc., formerly known as Centex Construction Products, Inc., a former
majority-owned subsidiary, on January 30, 2004. Manufactured housing and Centex Construction
Products, Inc. are reported as discontinued operations in our consolidated financial statements. 30




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##### Table of Contents



HOME BUILDING Home Buildings operations consist of our domestic and international operations. Home
Buildings domestic operations involve the purchase and development of land or lots and the
construction and sale of detached and attached single-family homes (including resort and second
home properties and lots). Our international homebuilding operations involve the purchase and
development of land or lots and the construction and sale of a range of products from small
single-family units to executive houses and apartments in the United Kingdom. The following summarizes the results of our Home Building operations for the three and nine
months ended December 31, 2004 and 2003 (dollars in millions): For the Three Months Ended December 31,2004
    
    2003% Change
    
    
    
    
    
    % ChangeRevenues  Housing
    
    $
    2,300.8
    
    
    
    25.6
    %
    
    $
    1,832.4
    
    
    
    28.0
    %Revenues  Land Sales and Other
    
    
    67.6
    
    
    
    (8.5
    %)
    
    
    73.9
    
    
    
    190.9
    %Cost of Sales  Housing
    
    
    (1,646.7
    )
    
    
    22.8
    %
    
    
    (1,340.9
    )
    
    
    24.7
    %Cost of Sales  Land Sales and Other
    
    
    (56.3
    )
    
    
    (19.6
    %)
    
    
    (70.0
    )
    
    
    183.4
    %Selling, General and Administrative
Expenses
    
    
    (344.8
    )
    
    
    29.6
    %
    
    
    (266.1
    )
    
    
    26.9
    %Earnings from Unconsolidated
Entities
    
    
    43.4
    
    
    
    38.7
    %
    
    
    31.3
    
    
    
    80.9
    %Operating Earnings
    
    $
    364.0
    
    
    
    39.7
    %
    
    $
    260.6
    
    
    
    58.2
    %Operating
Earnings as a Percentage of Revenues
    
    
    15.4
    %
    
    NM
    
    
    13.7
    %
    
    NM
 For the Nine Months Ended December 31,2004
    
    2003% Change
    
    
    
    
    
    % ChangeRevenues  Housing
    
    $
    6,419.9
    
    
    
    28.5
    %
    
    $
    4,997.6
    
    
    
    32.8
    %Revenues  Land Sales and Other
    
    
    178.1
    
    
    
    45.6
    %
    
    
    122.3
    
    
    
    48.4
    %Cost of Sales  Housing
    
    
    (4,640.4
    )
    
    
    26.3
    %
    
    
    (3,672.8
    )
    
    
    30.5
    %Cost of Sales  Land Sales and Other
    
    
    (161.5
    )
    
    
    29.0
    %
    
    
    (125.2
    )
    
    
    81.7
    %Selling, General and Administrative
Expenses
    
    
    (959.1
    )
    
    
    30.9
    %
    
    
    (732.6
    )
    
    
    25.1
    %Earnings from Unconsolidated
Entities
    
    
    54.5
    
    
    
    21.1
    %
    
    
    45.0
    
    
    
    119.5
    %Operating Earnings
    
    $
    891.5
    
    
    
    40.5
    %
    
    $
    634.3
    
    
    
    60.4
    %Operating
Earnings as a Percentage of Revenues
    
    
    13.5
    %
    
    NM
    
    
    12.4
    %
    
    NM
 31




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##### Table of Contents



Home Buildings results are derived from its domestic and international operations as
described below. Domestic The following summarizes the results of our Home Building domestic operations for the three
and nine months ended December 31, 2004 and 2003: For the Three Months Ended December 31,2004
    
    2003% Change
    
    
    
    
    
    % ChangeUnits Closed
    
    
    8,047
    
    
    
    7.8
    %
    
    
    7,468
    
    
    
    14.7
    %Average Unit Sales Price
    
    $
    269,972
    
    
    
    10.0
    %
    
    $
    245,370
    
    
    
    11.6
    %Operating Earnings Per Unit
    
    $
    43,143
    
    
    
    28.8
    %
    
    $
    33,505
    
    
    
    37.1
    %Average Operating Neighborhoods
    
    
    598
    
    
    
    6.8
    %
    
    
    560
    
    
    
    6.1
    %Closings Per Average Neighborhood
    
    
    13.5
    
    
    
    1.5
    %
    
    
    13.3
    
    
    
    8.1
    %
 For the Nine Months Ended December 31,2004
    
    2003% Change
    
    
    
    
    
    % ChangeUnits Closed
    
    
    23,261
    
    
    
    12.2
    %
    
    
    20,723
    
    
    
    19.8
    %Average Unit Sales Price
    
    $
    262,150
    
    
    
    8.7
    %
    
    $
    241,162
    
    
    
    10.8
    %Operating Earnings Per Unit
    
    $
    36,711
    
    
    
    24.2
    %
    
    $
    29,564
    
    
    
    32.5
    %Average Operating Neighborhoods
    
    
    581
    
    
    
    4.1
    %
    
    
    558
    
    
    
    10.1
    %Closings Per Average Neighborhood
    
    
    40.0
    
    
    
    7.8
    %
    
    
    37.1
    
    
    
    8.8
    %
 As of December 31,2004
    
    2003% Change
    
    
    
    
    
    % ChangeBacklog Units
    
    
    17,501
    
    
    
    18.5
    %
    
    
    14,775
    
    
    
    17.9
    %Lots Owned
    
    
    93,919
    
    
    
    30.8
    %
    
    
    71,793
    
    
    
    31.2
    %Lots Controlled
    
    
    164,002
    
    
    
    62.6
    %
    
    
    100,872
    
    
    
    52.6
    %Total Lots Owned and Controlled
    
    
    257,921
    
    
    
    49.4
    %
    
    
    172,665
    
    
    
    42.9
    %
 The financial performance of Home Buildings domestic operations is reflective of changes in
the following performance indicators:  
    
    Growth in average neighborhoods
    
    Growth in closings per average neighborhood
    
    Increases in average unit sales price
    
    Operating margin improvement 32




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##### Table of Contents



The following summarizes changes in performance indicators for the three and nine months ended
December 31, 2004 as compared to the prior year. We define a neighborhood as an individual active selling location targeted to a specific buyer
segment. For the three months ended December 31, 2004, we opened 95 new neighborhoods and closed
out of 75 neighborhoods, driving our average operating neighborhoods to 598, a 6.8% increase over
the prior year. For the nine months ended December 31, 2004, we opened 247 neighborhoods and
closed out of 198 neighborhoods, driving our average operating neighborhoods to 581, a 4.1%
increase over the prior year. Higher
sales rates continue to fuel our growth in closings per average neighborhood. Sales per
average neighborhood were 13.1 and 43.6 for the three and nine months ended December 31, 2004, a
4.8% and 3.8% increase, respectively, over the same periods last year. These sales rate increases
can be attributed to our continued focus on market research, enhanced sales and marketing
activities and activity-based sales management. Sales orders were particularly strong in the
midwest and southeast regions, which achieved increases of 22% and 17%, respectively, for the three
months ended December 31, 2004 as compared to the prior year. For all regions, sales orders
totaled 7,821 units and 25,348 units for the three and nine months ended December 31, 2004,
respectively, an increase of 11.7% and 8.1% versus the same periods in the prior year. Home
closing volume also increased 7.8% to 8,047 homes and 12.2% to 23,261 homes for the three and nine
months ended December 31, 2004, respectively, as compared to the same periods in the prior year. Current housing market conditions, combined with our geographic, product and segment
diversification strategies, continued to drive higher average selling prices. For the three months
ended December 31, 2004, average selling prices were up 10.0% to $269,972 as compared to the same
period last year. The increase is primarily due to strong performances in the southeast and west
coast regions, and a greater mix of homes closed in the west coast region where average selling
prices were $477,103. For the nine months ended December 31, 2004, average selling prices were
$262,150, up 8.7% over the prior year. The west coast region continues to experience the largest
increase as average prices rose to $459,256, a $60,631 increase over the prior year. Operating margins (consisting of operating earnings as a percentage of revenues), as compared
to the prior year, for Home Buildings domestic operations improved to 15.5% from 13.1% and to
13.6% from 12.0% for the three and nine months ended December 31, 2004, respectively. Increased
unit volume, increases in average unit selling price, continued focus on lowering direct
construction costs, improved margin on land sales, and earnings from joint ventures resulted in
margin improvement throughout the Home Building segment. National and regional purchasing programs
and local cost reduction and efficiency efforts have helped offset increasing raw material costs
experienced throughout the year. We purchase materials, services and land from numerous sources,
and during the past twelve months have been able to deal effectively with the challenges we have
experienced relating to the supply or availability of materials, services and land. The above factors contributed to the improvement in our operating earnings, which is
reflective of our continued focus on our Quality Growth strategy, consisting of growing revenue
and earnings while improving margins. During the three and nine months ended December 31, 2004, we continued to increase our land
position to facilitate our short and longer term growth initiatives. Based on our current closing
projections, our land position that is currently owned or controlled under option agreements at
December 31, 2004 would produce approximately 100% of our projected closings for fiscal year 2005,
96% of our projected closings for fiscal year 2006, and 73% of our projected closings for fiscal
year 2007. 33




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##### Table of Contents



International In February 2004, we acquired the Partnership through merger transactions. Prior to the
merger, we accounted for our investment in the Partnership on the equity method of accounting.
Subsequent to the merger, international homebuilding operations of the Partnership have been
consolidated with the Home Building segment. Prior period earnings related to the international
homebuilding operations of the Partnership, previously reflected in our investment real estate
operations, have been reclassified to the Home Building segment to conform to the presentation
subsequent to the merger. The following summarizes the results of Home Buildings international
operations for the three and nine months ended December 31, 2004
(dollars in millions): For the Period Ended December 31, 2004Three Months
    
    
    Nine MonthsRevenues
    
    $
    129.0
    
    
    $
    327.9Operating Earnings
    
    $
    16.9
    
    
    $
    37.6Units Closed
    
    
    410
    
    
    
    1,067
 Earnings from unconsolidated entities related to the international homebuilding operations of
the Partnership were $10.4 million and $21.6 million for the three and nine months ended December
31, 2003, respectively. Earnings from unconsolidated entities are not comparative to operating
earnings as operating earnings exclude interest expense and taxes. FINANCIAL SERVICES The Financial Services segment is primarily engaged in the residential mortgage lending
business, as well as other financial services that are in large part related to the residential
mortgage market. Its operations include mortgage origination, servicing and other related services
for purchasers of homes sold by our Home Building operations and other homebuilders, sub-prime home
equity lending and the sale of title insurance and various other insurance coverages. The following summarizes the results of our Financial Services operations for the three and
nine months ended December 31, 2004 and 2003 (dollars in millions): For the Three Months Ended December 31,2004
    
    
    2003% Change
    
    
    
    
    
    % ChangeRevenues
    
    $
    266.7
    
    
    
    12.0
    %
    
    $
    238.2
    
    
    
    6.8
    %Cost of Sales
    
    
    (72.3
    )
    
    
    25.3
    %
    
    
    (57.7
    )
    
    
    25.4
    %Selling, General and Administrative
Expenses
    
    
    (148.4
    )
    
    
    8.5
    %
    
    
    (136.8
    )
    
    
    7.8
    %Operating Earnings
    
    $
    46.0
    
    
    
    5.3
    %
    
    $
    43.7
    
    
    
    (12.9
    %)Interest Margin
    
    $
    88.0
    
    
    
    12.7
    %
    
    $
    78.1
    
    
    
    74.7
    %Origination Volume
    
    $
    4,432.2
    
    
    
    13.9
    %
    
    $
    3,891.1
    
    
    
    (19.8
    %)Number of Loans Originated
    
    
    26,653
    
    
    
    2.6
    %
    
    
    25,980
    
    
    
    (21.4
    %)Number of Loan Applications
    
    
    114,575
    
    
    
    17.9
    %
    
    
    97,199
    
    
    
    9.4
    %
 34




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##### Table of Contents



For the Nine Months Ended December 31,2004
    
    
    2003% Change
    
    
    
    
    
    
    % ChangeRevenues
    
    $
    817.9
    
    
    
    2.8
    %
    
    $
    795.6
    
    
    
    30.8
    %Cost of Sales
    
    
    (202.4
    )
    
    
    21.4
    %
    
    
    (166.7
    )
    
    
    22.3
    %Selling, General and Administrative
Expenses
    
    
    (458.7
    )
    
    
    3.5
    %
    
    
    (443.1
    )
    
    
    22.7
    %Operating Earnings
    
    $
    156.8
    
    
    
    (15.6
    %)
    
    $
    185.8
    
    
    
    67.2
    %Interest Margin
    
    $
    277.4
    
    
    
    28.7
    %
    
    $
    215.6
    
    
    
    78.6
    %Origination Volume
    
    $
    13,723.5
    
    
    
    (7.2
    %)
    
    $
    14,786.1
    
    
    
    25.6
    %Number of Loans Originated
    
    
    84,720
    
    
    
    (13.6
    %)
    
    
    98,091
    
    
    
    18.8
    %Number of Loan Applications
    
    
    344,564
    
    
    
    8.6
    %
    
    
    317,213
    
    
    
    34.1
    %
 Financial Services results are primarily derived from prime mortgage lending and sub-prime
home equity lending operations as described below. Prime Mortgage Lending The following summarizes the results of our prime mortgage lending operations, which are
conducted by CTX Mortgage Company, LLC and its related companies, for the three and nine months
ended December 31, 2004 and 2003 (dollars in millions): For the Three Months Ended December 31,2004
    
    
    2003% Change
    
    
    
    
    
    
    % ChangeRevenues
    
    $
    101.3
    
    
    
    (2.8
    %)
    
    $
    104.2
    
    
    
    (13.5
    %)Cost of Sales
    
    
    (8.3
    )
    
    
    36.1
    %
    
    
    (6.1
    )
    
    
    281.3
    %Selling, General and Administrative
Expenses
    
    
    (72.1
    )
    
    
    1.3
    %
    
    
    (71.2
    )
    
    
    (11.8
    %)Operating Earnings
    
    $
    20.9
    
    
    
    (22.3
    %)
    
    $
    26.9
    
    
    
    (29.6
    %)Interest Margin
    
    $
    11.1
    
    
    
    (8.3
    %)
    
    $
    12.1
    
    
    
    764.3
    %Average
Interest Earning Assets
    
    $
    1,302.8
    
    
    
    (10.4
    %)
    
    $
    1,453.9
    
    
    
    673.8
    %Average Yield
    
    
    5.94
    %
    
    NM
    
    
    5.70
    %
    
    NMAverage Interest Bearing Liabilities
    
    $
    1,287.3
    
    
    
    (4.2
    %)
    
    $
    1,343.9
    
    
    
    994.4
    %Average Rate Paid
    
    
    2.56
    %
    
    NM
    
    
    1.90
    %
    
    NM
 35




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##### Table of Contents



For the Nine Months Ended December 31,2004
    
    
    2003% Change
    
    
    
    
    
    
    % ChangeRevenues
    
    $
    315.5
    
    
    
    (23.6
    %)
    
    $
    412.9
    
    
    
    29.8
    %Cost of Sales
    
    
    (23.2
    )
    
    
    34.1
    %
    
    
    (17.3
    )
    
    
    220.4
    %Selling, General and Administrative
Expenses
    
    
    (217.6
    )
    
    
    (15.2
    %)
    
    
    (256.7
    )
    
    
    8.8
    %Operating Earnings
    
    $
    74.7
    
    
    
    (46.2
    %)
    
    $
    138.9
    
    
    
    81.1
    %Interest Margin
    
    $
    40.3
    
    
    
    12.9
    %
    
    $
    35.7
    
    
    
    561.1
    %Average
Interest Earning Assets
    
    $
    1,462.3
    
    
    
    8.5
    %
    
    $
    1,348.3
    
    
    
    636.4
    %Average Yield
    
    
    5.79
    %
    
    NM
    
    
    5.65
    %
    
    NMAverage Interest Bearing Liabilities
    
    $
    1,421.0
    
    
    
    12.9
    %
    
    $
    1,258.9
    
    
    
    921.8
    %Average Rate Paid
    
    
    2.15
    %
    
    NM
    
    
    1.84
    %
    
    NM
 The revenues and operating earnings of CTX Mortgage Company, LLC and its related companies are
derived primarily from the sale of mortgage loans, together with all related servicing rights,
interest income and other fees. Net origination fees, mortgage servicing rights, and other
revenues derived from the origination of mortgage loans are deferred and recognized when the
related loan is sold to a third-party purchaser. Interest revenues on residential mortgage loans
receivable are recognized using the interest (actuarial) method. Other revenues, including fees
for title insurance and other services performed in connection with mortgage lending activities,
are recognized as earned. Our business strategy of selling prime loans a short time after origination reduces our
capital investment and related risks, provides substantial liquidity and is an efficient process
given the size and maturity of the prime mortgage loan secondary capital markets. CTX Mortgage
Company, LLC originates mortgage loans and sells them to HSF-I and investors. HSF-I is a variable
interest entity for which we are the primary beneficiary and, as of
July 1, 2003, it was consolidated
with our Financial Services segment. The consolidation of HSF-I resulted in an increase in our
residential mortgage loans held for sale with a corresponding increase in our debt. In addition,
interest income and interest expense of HSF-I subsequent to June 30, 2003 are reflected in our
financial statements. The increase in interest margin for the nine months ended December 31, 2004 is the result of
the inclusion of HSF-I interest margin for the full nine month period ended December 31, 2004,
offset by the impact of decreased loan refinance activity. The nine months ended December 31, 2003
includes only six months of HSF-I interest margin. 36




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##### Table of Contents



The following summarizes HSF-Is interest margin for the three and nine months ended December
31, 2004 and 2003 (dollars in millions): For the Three Months Ended December 31,2004
    
    
    2003% ChangeRevenues  Interest Income
    
    $
    14.7
    
    
    
    8.1
    %
    
    $
    13.6Cost of Sales  Interest Expense
    
    
    (6.2
    )
    
    
    100.0
    %
    
    
    (3.1
    )Interest Margin
    
    $
    8.5
    
    
    
    (19.0
    %)
    
    $
    10.5
 For the Nine Months Ended December 31,2004
    
    
    2003% ChangeRevenues  Interest Income
    
    $
    43.4
    
    
    
    11.6
    %
    
    $
    38.9Cost of Sales  Interest Expense
    
    
    (15.3
    )
    
    
    70.0
    %
    
    
    (9.0
    )Interest Margin
    
    $
    28.1
    
    
    
    (6.0
    %)
    
    $
    29.9
 The
following table quantifies: (1) the volume of loan sales to investors
(third parties), and
(2) the gains recorded on those sales and related derivative activity, collectively, gain on sale
of mortgage loans for the three and nine months ended
December 31, 2004 and 2003 (dollars in millions): For the Three Months Ended December 31,2004
    
    
    2003% ChangeLoan Sales to Investors
    
    $
    2,104.4
    
    
    
    (40.7
    %)
    
    $
    3,546.5Gain on Sale of Mortgage Loans
    
    $
    35.8
    
    
    
    (17.5
    %)
    
    $
    43.4
 For the Nine Months Ended December 31,2004
    
    2003% ChangeLoan Sales to Investors
    
    $
    7,165.4
    
    
    
    (45.4
    %)
    
    $
    13,133.8Gain on Sale of Mortgage Loans
    
    $
    107.1
    
    
    
    (46.4
    %)
    
    $
    199.9
 The decreases in loan sales and gain on sale of mortgage loans are the result of a decrease in
the volume of loans originated and sold to investors and an increase in the origination of less
profitable adjustable rate mortgages (ARMs). ARMs as a percentage of total originations were 51%
and 47% for the three and nine months ended December 31, 2004, as compared to 30% and 20% for the
three and nine months ended December 31, 2003. In the normal course of its activities, CTX Mortgage Company, LLC and its related companies
carry inventories of loans pending sale to third-party investors and earn an interest margin, which
we define as the difference between interest revenue on mortgage loans held for sale and interest
expense on debt used to fund the mortgage loans. 37




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##### Table of Contents



The decrease in revenues for the three and nine months ended December 31, 2004 is the result
of a decrease in the volume of loans originated and sold to investors and an increase in the
origination of less profitable ARMs. The following table provides a comparative analysis of
mortgage loan originations and applications for the three and nine months ended December 31, 2004
and 2003: For the Three Months Ended December 31,2004
    
    2003% Change
    
    
    
    
    
    
    % ChangeOrigination
Volume (in millions)
    
    $
    3,064.1
    
    
    
    6.2
    %
    
    $
    2,886.4
    
    
    
    (30.4
    %)Number of Loans OriginatedBuilder
    
    
    5,463
    
    
    
    6.3
    %
    
    
    5,138
    
    
    
    17.3
    %Retail
    
    
    9,897
    
    
    
    (15.1
    %)
    
    
    11,657
    
    
    
    (43.4
    %)15,360
    
    
    
    (8.5
    %)
    
    
    16,795
    
    
    
    (32.8
    %)Number of Loan ApplicationsBuilder
    
    
    5,463
    
    
    
    15.6
    %
    
    
    4,727
    
    
    
    (2.0
    %)Retail
    
    
    8,603
    
    
    
    (3.9
    %)
    
    
    8,954
    
    
    
    (51.5
    %)14,066
    
    
    
    2.8
    %
    
    
    13,681
    
    
    
    (41.3
    %)Average Loan Size
    
    $
    199,500
    
    
    
    16.1
    %
    
    $
    171,900
    
    
    
    3.6
    %Profit Per Loan
    
    $
    1,365
    
    
    
    (14.5
    %)
    
    $
    1,597
    
    
    
    4.4
    %
 For the Nine Months Ended December 31,2004
    
    2003% Change
    
    
    
    
    
    
    % ChangeOrigination
Volume (in millions)
    
    $
    9,656.1
    
    
    
    (18.7
    %)
    
    $
    11,879.7
    
    
    
    19.1
    %Number of Loans OriginatedBuilder
    
    
    15,688
    
    
    
    9.7
    %
    
    
    14,307
    
    
    
    22.1
    %Retail
    
    
    35,400
    
    
    
    (36.8
    %)
    
    
    56,016
    
    
    
    14.1
    %51,088
    
    
    
    (27.4
    %)
    
    
    70,323
    
    
    
    15.7
    %Number of Loan ApplicationsBuilder
    
    
    17,330
    
    
    
    2.3
    %
    
    
    16,939
    
    
    
    19.3
    %Retail
    
    
    29,427
    
    
    
    (41.7
    %)
    
    
    50,457
    
    
    
    3.1
    %46,757
    
    
    
    (30.6
    %)
    
    
    67,396
    
    
    
    6.7
    %Average Loan Size
    
    $
    189,000
    
    
    
    11.9
    %
    
    $
    168,900
    
    
    
    3.0
    %Profit Per Loan
    
    $
    1,463
    
    
    
    (25.9
    %)
    
    $
    1,974
    
    
    
    56.4
    %
 The decrease in loan originations is primarily reflective of a significant decrease in
refinancing activity, partially offset by an increase in the number of loans originated for Home
Buildings customers reflective of an increase in Home Buildings closings. For the three and nine
months ended December 31, 2004, CTX Mortgage Company, LLC originated 73% and 72%, respectively, of
the non-cash unit closings of Home Buildings customers, versus 74% for the same periods last year.
Profit per loan decreased due to an increase in the origination of less profitable ARMs, as well
as a reduction in operating leverage resulting from a decrease in the volume of loan originations. CTX Mortgage Company, LLCs operations are influenced by borrowers perceptions of and
reactions to interest rates. For the three months ended December 31, 2004 and 2003, refinancing
activity accounted for 38




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##### Table of Contents



21% and 23% of originations, respectively. Refinancing activity accounted
for 21% and 42% of originations in the nine months ended December 31, 2004 and 2003, respectively.
Refinancing activity has declined due to an extended period of relatively low mortgage loan rates,
which has reduced the supply of loans likely to be refinanced. Any significant increase in
mortgage interest rates above currently prevailing low levels could affect the ability or
willingness of prospective homebuyers to finance home purchases and/or further curtail mortgage
refinance activity. Although there can be no assurance that these efforts will be successful, we
will seek to mitigate the effects of any increase in mortgage interest rates by adding loan
officers, improving their productivity and reducing costs. Sub-Prime Home Equity Lending The following summarizes the results of our Sub-Prime Home Equity Lending operations for the
three and nine months ended December 31, 2004 and 2003 (dollars in millions): For the Three Months Ended December 31,2004
    
    2003% Change
    
    
    
    
    
    % ChangeRevenues
    
    $
    165.4
    
    
    
    23.4
    %
    
    $
    134.0
    
    
    
    30.6
    %Cost of Sales
    
    
    (64.0
    )
    
    
    24.0
    %
    
    
    (51.6
    )
    
    
    16.2
    %Selling, General and Administrative
Expenses:Operating Expenses
    
    
    (55.5
    )
    
    
    26.4
    %
    
    
    (43.9
    )
    
    
    21.9
    %Loan Loss Provision
    
    
    (20.8
    )
    
    
    (4.1
    %)
    
    
    (21.7
    )
    
    
    112.7
    %Operating Earnings
    
    $
    25.1
    
    
    
    49.4
    %
    
    $
    16.8
    
    
    
    40.0
    %Interest
Margin
    
    $
    76.9
    
    
    
    16.5
    %
    
    $
    66.0
    
    
    
    52.4
    %Average Interest Earning Assets
    
    $
    7,468.3
    
    
    
    27.5
    %
    
    $
    5,855.8
    
    
    
    44.9
    %Average Yield
    
    
    7.55
    %
    
    NM
    
    
    8.02
    %
    
    NMAverage Interest Bearing Liabilities
    
    $
    7,703.8
    
    
    
    26.1
    %
    
    $
    6,109.6
    
    
    
    45.2
    %Average Rate Paid
    
    
    3.32
    %
    
    NM
    
    
    3.37
    %
    
    NM
 39




---



##### Table of Contents



For the Nine Months Ended December 31,2004
    
    2003% Change
    
    
    
    
    
    % ChangeRevenues
    
    $
    502.4
    
    
    
    31.3
    %
    
    $
    382.7
    
    
    
    31.8
    %Cost of Sales
    
    
    (179.2
    )
    
    
    19.9
    %
    
    
    (149.4
    )
    
    
    14.1
    %Selling, General and Administrative
Expenses:Operating Expenses
    
    
    (169.2
    )
    
    
    30.4
    %
    
    
    (129.8
    )
    
    
    28.1
    %Loan Loss Provision
    
    
    (71.9
    )
    
    
    27.0
    %
    
    
    (56.6
    )
    
    
    138.8
    %Operating Earnings
    
    $
    82.1
    
    
    
    75.1
    %
    
    $
    46.9
    
    
    
    36.3
    %Interest
Margin
    
    $
    237.1
    
    
    
    31.8
    %
    
    $
    179.9
    
    
    
    56.0
    %Average Interest Earning Assets
    
    $
    7,111.8
    
    
    
    32.5
    %
    
    $
    5,367.4
    
    
    
    44.6
    %Average Yield
    
    
    7.81
    %
    
    NM
    
    
    8.18
    %
    
    NMAverage Interest Bearing Liabilities
    
    $
    7,347.0
    
    
    
    31.3
    %
    
    $
    5,596.9
    
    
    
    44.8
    %Average Rate Paid
    
    
    3.25
    %
    
    NM
    
    
    3.56
    %
    
    NM
 The revenues of Centex Home Equity Company, LLC, or Home Equity, increased primarily as a
result of continued growth in our portfolio of residential mortgage loans held for investment.
This portfolio growth translated into more interest income, our largest component of revenue. Revenues also increased in the three and nine months ended December 31, 2004 as a result of
whole loan sales by Home Equity to third parties. Home Equity recorded approximately $4.0 million
and $31.4 million in net revenue and operating earnings related to the whole loan sales for the three
and nine months ended December 31, 2004, respectively. Operating expenses, for the three and nine months ended December 31, 2004, increased as a
result of Home Equitys continued growth. The increase in loan production volume, the expansion of
branch offices and the increase in the number of employees led to a corresponding increase in
salaries and related costs, rent expense, group insurance costs and advertising expenditures. The increase in the loan loss provision for the nine months ended December 31, 2004, occurred
primarily because of the increase in residential mortgage loans held for investment. Also, as the
portfolio continues to mature and grow, we expect the provision for losses, the loans charged off
and the allowance for losses to continue to increase. For a more detailed discussion of our
accounting policy and methodology for establishing the provision for losses, see Critical
Accounting Estimates-Valuation of Residential Mortgage Loans Held for Investment. Changes in the
allowance for losses are included in Note (E), Residential Mortgage Loans Held for Investment, of
the Notes to Consolidated Financial Statements. The increase in operating earnings for the three and nine months ended December 31, 2004, is
primarily attributable to the increase in interest margin, which we define as the difference
between interest revenue on mortgage loans held for sale or investment and interest expense on debt
used to fund the mortgage loans. Interest margin, for the three and nine months ended December 31,
2004, increased primarily as a result of an increase in the portfolio of mortgage loans held for
investment. In the current year, interest margin as a percentage of
revenues has decreased primarily as a result of an increasing
interest rate environment, as well as increased competitive industry
conditions. Whole loan sale transactions also 40




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##### Table of Contents



contributed to the increase in operating earnings
for the three and nine months ended December 31, 2004. Whole loan sales have the effect of
increasing current revenue, but decreasing future interest margin. Average interest earning assets and liabilities for the three and nine months ended December
31, 2004, increased primarily due to an increase in the volume of loan originations and an increase
in average loan size (see table below). The following table provides a comparative analysis of mortgage loan originations and
applications for the three and nine months ended December 31, 2004 and 2003: For the Three Months Ended December 31,2004
    
    2003% Change
    
    
    
    
    
    % ChangeOrigination
Volume (in millions)
    
    $
    1,368.1
    
    
    
    36.2
    %
    
    $
    1,004.7
    
    
    
    42.7
    %Number of Loans Originated
    
    
    11,293
    
    
    
    23.0
    %
    
    
    9,185
    
    
    
    14.1
    %Number of Loan Applications
    
    
    100,509
    
    
    
    20.3
    %
    
    
    83,518
    
    
    
    27.4
    %Average Loan Size
    
    $
    121,100
    
    
    
    10.7
    %
    
    $
    109,400
    
    
    
    25.0
    %
 For the Nine Months Ended December 31,2004
    
    
    2003% Change
    
    
    
    
    
    % ChangeOrigination
Volume (in millions)
    
    $
    4,067.4
    
    
    
    39.9
    %
    
    $
    2,906.4
    
    
    
    61.2
    %Number of Loans Originated
    
    
    33,632
    
    
    
    21.1
    %
    
    
    27,768
    
    
    
    27.5
    %Number of Loan Applications
    
    
    297,807
    
    
    
    19.2
    %
    
    
    249,817
    
    
    
    44.1
    %Average
Loan Size
    
    $
    120,900
    
    
    
    15.5
    %
    
    $
    104,700
    
    
    
    26.4
    %
 The increase in origination volume for the three and nine months ended December 31, 2004, as
compared to the prior year, was due to an increase in the average loan size and an increase in the
overall sales force, which resulted in an increase in the number of loan applications received. The following summarizes the portfolio of mortgage loans serviced by Home Equity as of
December 31, 2004 and 2003: For the Nine Months Ended December 31,2004
    
    
    2003% Change
    
    
    
    
    
    % ChangeServicing Portfolio:Number of LoansPortfolio Accounting Method
    
    
    82,628
    
    
    
    12.8
    %
    
    
    73,232
    
    
    
    29.4
    %Serviced for Others
    
    
    14,794
    
    
    
    30.0
    %
    
    
    11,376
    
    
    
    (20.3
    %)Total
    
    
    97,422
    
    
    
    15.1
    %
    
    
    84,608
    
    
    
    19.4
    %Dollars in billionsPortfolio Accounting Method
    
    $
    7.72
    
    
    
    27.0
    %
    
    $
    6.08
    
    
    
    44.1
    %Serviced for Others
    
    
    1.16
    
    
    
    73.1
    %
    
    
    0.67
    
    
    
    (21.2
    %)Total
    
    $
    8.88
    
    
    
    31.6
    %
    
    $
    6.75
    
    
    
    33.1
    %
 41




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##### Table of Contents



Home Equity periodically securitizes its inventory of mortgage loan originations or engages in
whole loan sales in order to provide funding for its mortgage operations. The majority of Home Equitys servicing portfolio is accounted for using the portfolio
accounting method in accordance with FASB SFAS No. 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, where (1) loan
originations are securitized and accounted for as borrowings; (2) interest income is recorded over
the life of the loans using the interest (actuarial) method; (3) the mortgage loans receivable and
the securitization debt (asset-backed certificates) remain on Home Equitys balance sheet; and (4)
the related interest margin is reflected in the income statement. This structure of securitizations
has been utilized since April 1, 2000. Another component of Home Equitys servicing portfolio includes securitizations accounted for
as gain on sale in accordance with FASB SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, where from October 1997 through March 2000,
an estimate of the entire gain resulting from the sale was included in earnings during the period
in which the securitization transaction occurred. This is referred to as the gain on sale method
and is included in the Serviced for Others category in the above table. Unlike the portfolio
accounting method, our balance sheet does not reflect the mortgage loans receivable or the
offsetting debt resulting from these securitizations. However, under the gain on sale
method, Home Equitys retained residual interest in, as well as the
servicing rights to, the securitized loans are reflected on the balance sheet. We refer to the retained residual
interest as the mortgage securitization residual interest, or MSRI. Home Equity carries MSRI at
fair value on the balance sheet. The Serviced for Others category of Home Equitys servicing portfolio also includes loans
sold on a whole loan servicing-retained basis. Home Equity continues to service these loans, which
resulted in a $2.1 million servicing asset recorded on a present value basis as of December 31,
2004. For the three and nine months ended December 31, 2004, Home Equitys loan sales on a
servicing-retained basis were nil and $620.3 million, respectively. The structure of Home Equitys securitizations has no effect on the ultimate amount of profit
and cash flow recognized over the life of the mortgages. However, the structure does affect the
timing of profit recognition. Under both structures, recourse on the securitized debt is limited
to the payments received on the underlying mortgage collateral with no recourse to Home Equity or
Centex Corporation. As is common in these structures, Home Equity remains liable for customary
loan representations. The primary risks in Home Equitys operations are consistent with those of the financial
services industry and include credit risk associated with its loans, liquidity risk related to
funding its loans and interest rate risk prior to securitization of the loans. In addition, it is
also subject to prepayment risks (principal reductions in excess of contractually scheduled
reductions) associated with loans securitized prior to April 2000. 42




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##### Table of Contents



CONSTRUCTION SERVICES The following summarizes Construction Services results for the three and nine months ended
December 31, 2004 and 2003 (dollars in millions): For the Three Months Ended December 31,2004
    
    
    2003% Change
    
    
    
    
    
    % ChangeRevenues
    
    $
    445.5
    
    
    
    10.2
    %
    
    $
    404.2
    
    
    
    (1.7
    %)Operating Earnings
    
    $
    6.4
    
    
    
    77.8
    %
    
    $
    3.6
    
    
    
    (61.7
    %)New Contracts Executed
    
    $
    895.2
    
    
    
    59.6
    %
    
    $
    560.8
    
    
    
    347.9
    %
 For the Nine Months Ended December 31,2004
    
    
    2003% Change
    
    
    
    
    
    % ChangeRevenues
    
    $
    1,331.9
    
    
    
    14.2
    %
    
    $
    1,166.6
    
    
    
    0.3
    %Operating Earnings
    
    $
    16.4
    
    
    
    29.1
    %
    
    $
    12.7
    
    
    
    (52.3
    %)New Contracts Executed
    
    $
    1,597.9
    
    
    
    13.2
    %
    
    $
    1,411.8
    
    
    
    154.8
    %
 As of December 31,2004
    
    
    2003% Change
    
    
    
    
    
    % ChangeBacklog of Uncompleted Contracts
    
    $
    2,012.4
    
    
    
    14.1
    %
    
    $
    1,764.4
    
    
    
    12.3
    % Revenues and operating earnings for the three and nine months ended December 31, 2004
increased as compared to the same periods in the prior year. Revenue increases are due to an
increase in the number of active projects and an increase in average contract size. As of December
31, 2004, we had 239 active projects, which represents an 11.7% increase over the prior year.
Construction Services operating earnings have increased as compared to the same periods in the
prior year. The construction services industry continues to
experience pricing pressure; however, industry conditions are
improving. The increase in new contracts executed and backlog of uncompleted contracts was primarily due to
the execution of contracts for military housing projects. Construction Services defines backlog as
the uncompleted portion of all signed contracts. Construction Services has also been awarded work that is pending execution of a signed
contract. At December 31, 2004 and 2003, such work, which is not included in backlog, was
approximately $2.25 billion and $1.58 billion, respectively. There is no assurance that this
awarded work will result in future revenues. 43




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##### Table of Contents



OTHER Our Other segment includes our home services operations, investment real estate operations,
corporate general and administrative expense and interest expense. In June 2003, we spun off
substantially all of our investment in manufactured housing operations, which had previously been
included in the Other segment. As a result of the spin-off, manufactured housing operations are
reflected as a discontinued operation and not included in the information presented below for the
Other segment. As described in Note (H), Merger of 3333 Holding Corporation and Subsidiary and Centex
Development Company, L.P. and Subsidiaries, of the Notes to Consolidated Financial Statements, the
Company acquired Holding and the Partnership in February 2004. Subsequent to the merger, the
Company has consolidated the financial results of the Partnership; and as a result, the Company has
realigned its reporting for the Partnership, whereby the Partnerships international homebuilding
operations are included in the Home Building business segment. The Partnerships domestic
operations continue to be reported within our investment real estate operations. The Company has
determined that no significant capital will be allocated to our investment real estate operations
for new business development. Beginning April 1, 2004, the financial results of our investment
real estate operations are included in the Other business segment. Prior period amounts have been
reclassified to conform to the current year presentation. The following summarizes the components of the Other segments loss from continuing operations
before income tax (dollars in millions): For the Three Months Ended December 31,2004
    
    
    2003% Change
    
    
    
    
    
    % ChangeOperating Loss from Home Services
Operations
    
    $
    (0.4
    )
    
    
    
    %
    
    $
    
    
    
    
    (100.0
    %)Operating Earnings from Investment
Real Estate Operations
    
    
    6.7
    
    
    
    52.3
    %
    
    
    4.4
    
    
    
    (69.7
    %)Corporate General and Administrative
Expense
    
    
    (23.1
    )
    
    
    (22.7
    %)
    
    
    (29.9
    )
    
    
    116.7
    %Interest Expense
    
    
    (5.7
    )
    
    
    62.9
    %
    
    
    (3.5
    )
    
    
    (80.9
    %)Operating Loss
    
    $
    (22.5
    )
    
    
    (22.4
    %)
    
    $
    (29.0
    )
    
    
    63.8
    %
 For the Nine Months Ended December 31,2004
    
    
    2003% Change
    
    
    
    
    
    % ChangeOperating Loss from Home Services
Operations
    
    $
    (5.1
    )
    
    
    112.5
    %
    
    $
    (2.4
    )
    
    
    (4.0
    %)Operating Earnings from Investment
Real Estate Operations
    
    
    16.4
    
    
    
    (45.9
    %)
    
    
    30.3
    
    
    
    51.5
    %Corporate General and Administrative
Expense
    
    
    (61.7
    )
    
    
    (13.1
    %)
    
    
    (71.0
    )
    
    
    74.0
    %Interest Expense
    
    
    (16.0
    )
    
    
    (54.8
    %)
    
    
    (35.4
    )
    
    
    (21.5
    %)Other
    
    
    
    
    
    
    (100.0
    %)
    
    
    (0.1
    )
    
    
    (90.0
    %)Operating Loss
    
    $
    (66.4
    )
    
    
    (15.5
    %)
    
    $
    (78.6
    )
    
    
    13.3
    %
 44




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##### Table of Contents



The increase in our home services divisions operating loss in the three and nine months ended
December 31, 2004 is primarily due to an increase in marketing expenses resulting from expansion
and growth of our home services operations in the homebuilder customer market coupled with
incremental commissions paid on new sales growth. The fluctuations in our investment real estate
divisions operating earnings were primarily related to the timing of property sales. Interest
costs for the three months ended December 31, 2004 and 2003,
respectively, include interest expense of $5.7 million and $3.5 million and previously
capitalized interest included in Home Buildings costs and
expenses of $32.0 million and $28.5 million. For the nine months
ended December 31, 2004 and 2003, interest costs include interest expense of $16.0 million and
$35.4 million, respectively, and previously capitalized interest included in Home Buildings costs
and expenses of $92.5 million and $56.4 million, respectively. Total interest costs, excluding
Financial Services interest expense, were $37.7 million and $31.9 million for the three months
ended December 31, 2004 and 2003, respectively, and $108.5 million and $91.8 million for the nine
months ended December 31, 2004 and 2003, respectively. See Note (B), Statements of Consolidated
Cash Flows  Supplemental Disclosures, of the Notes to Consolidated Financial Statements for
further information on interest costs. The increase in total interest costs is primarily related
to an increase in average debt outstanding for the three and nine months ended December 31, 2004 as
compared to the prior year. Our effective tax rate related to continuing operations increased to approximately 36% from
33% and to approximately 36% from 33% in the three and nine month periods ended December 31, 2004
and 2003, respectively, due to the reduction in the availability of tax benefits related to the
Companys net operating loss carryforwards in fiscal 2005 as compared to the prior year. DISCONTINUED OPERATIONS In June 2003, we spun off tax-free to our stockholders substantially all of our manufactured
housing operations, and in January 2004, we spun off to our stockholders our entire equity interest
in Eagle Materials Inc., formerly known as Centex Construction Products, Inc. As a result of the
spin-offs, the earnings from these operations for all periods prior to the spin-offs have been
reclassified to discontinued operations in the Statements of Consolidated Earnings. All prior
period information related to these discontinued operations has been reclassified to be consistent
with the December 31, 2004 presentation. For the three and nine months ended December 31, 2003, discontinued operations had revenues of
$81.5 million and $422.9 million, respectively, and operating earnings of $8.8 million and $61.6
million, respectively. 45




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FINANCIAL CONDITION AND LIQUIDITY The consolidating net cash used in or provided by the operating, investing and financing
activities for the nine months ended December 31, 2004 and 2003 is summarized below (dollars in
thousands). See Statements of Consolidated Cash Flows with Consolidating Details for the detail
supporting this summary. For the Nine Months Ended December 31,2004
    
    
    2003Net Cash (Used in) Provided byCentex*Operating Activities
    
    $
    (1,010,403
    )
    
    $
    (671,827
    )Investing Activities
    
    
    39,782
    
    
    
    20,901Financing Activities
    
    
    846,191
    
    
    
    249,752Effect of Exchange Rate on Cash
    
    
    977
    
    
    
    (123,453
    )
    
    
    (401,174
    )Financial ServicesOperating Activities
    
    
    197,527
    
    
    
    1,211,559Investing Activities
    
    
    (1,304,192
    )
    
    
    (1,487,219
    )Financing Activities
    
    
    1,101,582
    
    
    
    272,858(5,083
    )
    
    
    (2,802
    )Centex Corporation and SubsidiariesOperating Activities
    
    
    (833,874
    )
    
    
    477,173Investing Activities
    
    
    (1,282,412
    )
    
    
    (1,468,759
    )Financing Activities
    
    
    1,986,773
    
    
    
    587,610Effect of Exchange Rate on Cash
    
    
    977
    
    
    
    Net Decrease in Cash
    
    $
    (128,536
    )
    
    $
    (403,976
    )
  *
    Centex represents a supplemental presentation that reflects the Financial Services segment
as if accounted for under the equity method. We believe that separate disclosure of the
consolidating information is useful because the Financial Services subsidiaries operate in a
distinctly different financial environment that generally requires significantly less equity
to support their higher debt levels compared to the operations of our other subsidiaries; the
Financial Services subsidiaries have structured their financing programs substantially on a
stand alone basis; and Centex has limited obligations with respect to
the indebtedness of our Financial Services subsidiaries. Management uses this information in its financial and
strategic planning. We also use this presentation to allow investors to compare us to
homebuilders that do not have financial services operations. We generally fund our Centex operating and other short-term liquidity needs through cash
provided by operations, borrowings from commercial paper and the issuance of senior debt. Centexs
operating cash is derived primarily through home and land sales from our Home Building segment and
general contracting fees obtained through our Construction Services segment. During the nine
months ended December 31, 2004, cash was primarily used in Centexs operating activities to finance
increases in Home Building inventories relating to the increased level of sales and resulting units
under construction during the year, and for the acquisition of land held for development. The
funds provided by Centexs financing activities were primarily from debt issued to fund the
increased homebuilding activity. We generally fund our Financial Services operating and other short-term liquidity needs
through securitizations, committed credit facilities, proceeds from the sale of mortgage loans to
investors and cash flows from operations. Financial Services operating cash is derived primarily
through sales of mortgage loans, interest income on mortgage loans held for investment and
origination and servicing fees. Effective July 1, 2003, Financial Services consolidated $2.48
billion of HSF-Is residential mortgage loans held for sale. The initial consolidation of HSF-I
was not reflected in the Statements of Consolidated Cash Flows, as it was a non-cash transaction.
As these mortgage loans were sold in the secondary market, an inflow of cash from 46




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##### Table of Contents



operating activities occurred. During the nine months ended December 31, 2004, cash was primarily used in
Financial Services investing activities to finance increases in residential mortgage loans held
for investment. The funds provided by Financial Services financing activities were primarily from
new debt used to fund the increased residential mortgage loan activity. Our existing credit facilities and available capacity as of December 31, 2004 are summarized
below (dollars in thousands): Existing Credit
    
    
    AvailableFacilities
    
    
    CapacityCentexCentex CorporationMulti-Bank Revolving Credit Facility
    
    $
    800,000
    
    
    $
    800,000
    (1)Multi-Bank Revolving Letter of Credit Facility
    
    
    300,000
    
    
    
    84,765
    (2)1,100,000
    
    
    
    884,765
    (3)International HomebuildingMulti-Bank Secured Revolving Credit Facility
    
    
    192,660
    
    
    
    17,339Secured Bonding Facility
    
    
    19,266
    
    
    
    17,339Unsecured Line of Credit
    
    
    38,532
    
    
    
    38,532250,458
    
    
    
    73,210
    (4)Financial ServicesSecured Credit Facilities
    
    
    525,000
    
    
    
    345,726
    (5)Harwood Street Funding I, LLC Facility
    
    
    3,000,000
    
    
    
    1,625,920Harwood Street Funding II, LLC Facility
    
    
    2,500,000
    
    
    
    415,6306,025,000
    
    
    
    2,387,276
    (6)$
    7,375,458
    
    
    $
    3,345,251
    (6)
  (1)
    This is an unsecured, committed, multi-bank revolving credit facility, maturing in July
2007, which serves as backup for commercial paper borrowings. As of December 31, 2004, there
were no borrowings under this backup facility, and our $700 million commercial paper program had $110 million outstanding. We have not borrowed under this
revolving credit facility since its inception.  (2)
    This is an unsecured, committed, multi-bank revolving letter of credit facility, maturing in
July 2005. Letters of credit under this facility may expire no later than July 2006.  (3)
    In conjunction with the issuance of surety bonds in support of our Construction Services
activity, Centex Corporation will provide letters of credit of up to $100 million if Centex
Corporations public debt ratings fall below investment grade. In support of this ratings
trigger, we maintain a minimum of $100 million in unused committed credit at all times.  (4)
    The international homebuilding operations maintain a £100 million secured, committed,
multi-bank revolving credit facility and a £10 million secured, uncommitted bonding facility.
These facilities are not guaranteed by, nor is there recourse to, Centex Corporation. The
international homebuilding operations also maintain a £20 million unsecured, uncommitted line
of credit guaranteed by Centex Corporation.  (5)
    CTX Mortgage Company, LLC and its related companies and Home Equity share in a $250 million
secured, committed credit facility to finance mortgage inventory. CTX Mortgage Company, LLC
and its related companies also maintain $265 million of secured, committed mortgage warehouse
facilities to finance mortgages. Home Equity also maintains a $10 million secured, committed
mortgage warehouse facility to finance mortgages.  (6)
    The amount of available capacity consists of
$3,289.4 million of committed capacity and $55.9
million of uncommitted capacity as of December 31, 2004. Although we believe that the
uncommitted capacity is currently available, there can be no assurance that the lenders under
these facilities would elect to make advances if and when requested to do so. 47




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CTX Mortgage Company, LLC finances its inventory of mortgage loans held for sale
principally through the sale of loans to HSF-I. HSF-I acquires mortgage loans from CTX Mortgage
Company, LLC, holds them for a period of 45 to 60 days and then resells them into the secondary
market. HSF-I obtains the funds needed to purchase eligible mortgage loans from CTX Mortgage
Company, LLC by issuing (1) short-term secured liquidity notes, (2) medium-term debt and (3)
subordinated certificates. As of December 31, 2004, HSF-I had outstanding (1) short-term secured
liquidity notes rated A1+ by Standard & Poors, or S&P, and P-1 by Moodys Investors Service, or
Moodys, (2) term notes rated A1+ by S&P and P-1 by Moodys and (3) subordinated certificates
maturing in September 2009, extendable for up to five years, rated BBB by S&P and Baa2 by Moodys.
The purpose of this arrangement is to allow CTX Mortgage Company, LLC to reduce the cost of
financing the mortgage loans originated by it and to improve its liquidity. Because HSF-I is a
consolidated entity, the debt, interest income and interest expense of HSF-I are reflected in the
financial statements of Financial Services. Home Equity finances its inventory of mortgage loans held for investment principally through
HSF-II, a wholly-owned, consolidated entity, under a revolving sales agreement that expires upon
final payment of the senior and subordinated debt issued by HSF-II. This arrangement, where HSF-II
has committed to finance all eligible loans, gives Home Equity daily access to HSF-IIs capacity of
$2.5 billion. HSF-II obtains funds by issuing (1) short-term secured liquidity notes, (2)
medium-term debt and (3) subordinated notes. As of December 31, 2004, HSF-II had outstanding (1)
short-term secured liquidity notes rated A1+ by S&P, P-1 by Moodys and F1+ by Fitch Ratings, or
Fitch and (2) subordinated notes rated BBB by S&P, Baa2 by Moodys and BBB by Fitch. Because
HSF-II is a consolidated entity, the debt, interest income and interest expense of HSF-II are
reflected in the financial statements of Financial Services. Under our debt covenants, we are required to maintain certain leverage and interest coverage
ratios and a minimum tangible net worth. At December 31, 2004, we were in compliance with all
covenants. As of December 31, 2004, our short-term debt was $3.61 billion, most of which was applicable
to Financial Services. Certain of Centexs short-term borrowings vary on a seasonal basis and are
generally financed at prevailing market interest rates under our commercial paper program. 48




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##### Table of Contents



Our outstanding debt (in thousands) as of December 31, 2004 was as follows (due dates are
presented in fiscal years): CentexShort-term Debt:Short-term Notes Payable
    
    $
    122,074Senior Debt:Medium-term Note Programs, weighted-average 5.48%, due through 2007
    
    
    228,000Senior Notes, weighted-average 6.32%, due through 2015
    
    
    2,458,493Other Indebtedness, weighted-average 5.77%, due through 2015
    
    
    219,268Subordinated Debt:Subordinated Debentures, 8.75%, due in 2007
    
    
    99,818Subordinated Debentures, 7.38%, due in 2006
    
    
    99,9803,227,633Financial ServicesShort-term Debt:Short-term Notes Payable
    
    
    179,274Harwood Street Funding I, LLC Term Notes
    
    
    250,000Harwood Street Funding I and II, LLC Secured Liquidity Notes
    
    
    3,054,170Home Equity Asset-Backed Certificates, weighted-average 3.85%, due
through 2035
    
    
    5,805,578Harwood Street Funding I, LLC Variable Rate Subordinated Extendable
Certificates, weighted-average 4.40%, due through 2010
    
    
    60,000Harwood Street Funding II, LLC Variable Rate Subordinated Notes,
weighted-average 4.55%, due through 2009
    
    
    93,7509,442,772Total
    
    $
    12,670,405
 During the nine months ended December 31, 2004, the principal amount of the Companys
outstanding long-term debt increased $449.0 million resulting from: (1) Centex issuance of $350.0 million of
unsecured senior notes due in fiscal year 2015, (2) Centex issuance of $300.0 million of unsecured
senior notes maturing in fiscal year 2011, (3) an increase in Centex other indebtedness of $67.1
million primarily relating to our international homebuilding operations, (4) Centex repayment of
$30.0 million of medium-term notes, (5) Home Equity issuance of $1,807.8 million and retirement of
$1,967.1 million of asset-backed certificates and (6) HSF-I issuance of $60.0 million of
subordinated certificates due through fiscal year 2010 and the payment in full of $139.0 million of
subordinated certificates. On
February 1, 2005, Centex Corporation issued at par $170.0 million of
unsecured medium-term notes maturing in fiscal year 2008. The notes
bear interest at a floating rate, which was initially set at 3.0% On
January 27, 2005, Home Equity issued $925.0 million of Assets-Backed
Certificates with schedule maturities through fiscal year 2035. 49




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##### Table of Contents



CERTAIN OFF-BALANCE SHEET OBLIGATIONS The following is a summary of certain off-balance sheet arrangements and other obligations and
their possible effects on our liquidity and capital resources. Joint Ventures We conduct a portion of our land acquisition, development and other activities through our
participation in joint ventures in which we hold less than a majority equity interest. These land
related activities typically require substantial capital, and partnering with other developers
allows Home Building to share the risks and rewards of ownership while providing for efficient
asset utilization. Our investment in these non-consolidated joint ventures was $169.3 million and
$140.1 million at December 31, 2004 and March 31, 2004, respectively. These joint ventures had
total outstanding secured construction debt of approximately $423.5 million and $202.2 million at
December 31, 2004 and March 31, 2004, respectively. We are liable, on a contingent basis, through guarantees, letters of credit or other arrangements, with respect
to a portion of the construction debt of certain of the joint ventures, which we refer to as the
recourse joint ventures. Our maximum potential liability with respect to the debt of the recourse
joint ventures, based on our ownership percentage of the recourse joint ventures, is approximately
$150.7 million and $73.2 million at December 31, 2004 and March 31, 2004, respectively. For
certain of the joint ventures, we have also guaranteed the completion of the project by the joint
ventures and agreed to indemnify the construction lender for certain environmental liabilities with
respect to the project. CRITICAL ACCOUNTING ESTIMATES Some of our critical accounting policies require the use of judgment in their application or
require estimates of inherently uncertain matters. Our accounting policies are in compliance with
generally accepted accounting principles; however, a change in the facts and circumstances of the
underlying transactions could significantly change the application of the accounting policies and
the resulting financial statement impact. Listed below are those policies that we believe are
critical and require the use of complex judgment in their application. Our critical accounting
estimates have been discussed with members of the Audit Committee and the Board of Directors. Impairment of Long-Lived Assets Housing projects and land held for development and sale are stated at the lower of cost
(including direct construction costs, capitalized interest and real estate taxes) or fair value
less cost to sell. Property and equipment is carried at cost less accumulated depreciation. We
assess these assets for recoverability in accordance with the provisions of Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or
SFAS No. 144. SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. These evaluations for
impairment are significantly impacted by estimates of revenues, costs and expenses and other
factors. If long-lived assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value of the
assets. No significant impairments of long-lived assets were recorded in the nine months ended
December 31, 2004. 50




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##### Table of Contents



Goodwill Goodwill represents the excess of purchase price over net assets of businesses acquired. See
Note (F), Goodwill, of the Notes to Consolidated Financial Statements for a summary of the
changes in goodwill by segment. We adopted the provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, or SFAS No. 142, effective April 1,
2001. Upon the adoption of SFAS No. 142, goodwill is no longer subject to amortization. Rather,
goodwill will be subject to at least an annual assessment for impairment (conducted as of January
1), at the reporting unit level, by applying a fair value-based test. If the carrying amount
exceeds the fair value, an impairment has occurred. We continually evaluate whether events and
circumstances have occurred that indicate the remaining balance of goodwill may not be recoverable.
Fair value is estimated using a discounted cash flow or market valuation approach. Such
evaluations for impairment are significantly impacted by estimates of future revenues, costs and
expenses and other factors. If the goodwill is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the goodwill exceeds the fair
value of the future cash flows. We had no impairment of goodwill in the nine months ended December
31, 2004. Land Held Under Option Agreements Not Owned In order to ensure the future availability of land for homebuilding, the Company enters into
lot option purchase agreements with unaffiliated third parties. Under the option agreements, the
Company pays a stated deposit in consideration for the right to purchase land at a future time,
usually at predetermined prices. These options generally do not contain performance requirements
from the Company nor obligate the Company to purchase the land. The Company has evaluated those entities with which we entered into lot option agreements in
accordance with the provisions of Financial Accounting Standards Board (FASB) Interpretation No.
46, Consolidation of Variable Interest Entities, as revised (FIN 46). The provisions of FIN 46
require the Company to consolidate the financial results of a variable interest entity if the
Company is the primary beneficiary of the variable interest entity. Variable interest entities are
entities in which (1) equity investors do not have a controlling financial interest and/or (2) the
entity is unable to finance its activities without additional subordinated financial support from
other parties. The primary beneficiary of a variable interest entity is the owner or investor that
absorbs a majority of the variable interest entitys expected losses and/or receives a majority of
the variable interest entitys expected residual returns. The Company determines if it is the primary beneficiary of variable interest entities based
upon analysis of the variability of the expected gains and losses of the variable interest entity.
Expected gains and losses of the variable interest entity are highly dependent upon managements
estimates of the variability and probabilities of future land prices, the probabilities of expected
cash flows and entitlement risks related to the underlying land, among other factors. Based on
this evaluation, if the Company is the primary beneficiary of those entities with which we have
entered into lot option agreements, the variable interest entity is consolidated. For purposes of
consolidation, to the extent financial statements are available, the Company consolidates the
assets and liabilities of the variable interest entity. If financial statements for the variable
interest entity are not available, the Company records the remaining purchase price of land in the
Consolidated Balance Sheets under the caption, land held under option agreements not owned, with a
corresponding increase in minority interests. Lot option deposits related to these options are
also reclassified to land held under option agreements not owned. 51




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See Note (J), Land Held Under Option Agreements Not Owned and Other Land Deposits, of the
Notes to Consolidated Financial Statements for further discussion on the results of our analysis of
lot option agreements. Valuation of Residential Mortgage Loans Held for Investment Home Equity originates and purchases loans in accordance with standard underwriting criteria.
The underwriting standards are primarily intended to assess the creditworthiness of the mortgagee,
the value of the mortgaged property and the adequacy of the property as collateral for the home
equity loan. Home Equity establishes an allowance for losses by recording a provision for losses in the
statement of consolidated earnings when it believes a loss has occurred. When Home Equity
determines that a residential mortgage loan held for investment is partially or fully
uncollectible, the estimated loss is charged against the allowance for losses. Recoveries on
losses previously charged to the allowance are credited to the allowance at the time the recovery
is collected. We evaluate the allowance on an aggregate basis considering, among other things, the
relationship of the allowance to residential mortgage loans held for investment and historical
credit losses. The allowance reflects our judgment of the present loss exposure at the end of the reporting period. A
range of expected credit losses is estimated using historical losses, static pool loss curves and
delinquency modeling. These tools take into consideration historical information regarding
delinquency and loss severity experience and apply that information to the portfolio at each
reporting date. Although we consider the allowance for losses on residential mortgage loans held for
investment reflected in our consolidated balance sheet to be adequate, there can be no assurance
that this allowance will prove to be sufficient over time to cover ultimate losses. This allowance
may prove to be insufficient due to unanticipated adverse changes in the economy or discrete events
adversely affecting specific customers or industries. See Note (E), Residential Mortgage Loans
Held for Investment, of the Notes to Consolidated Financial Statements for a discussion of the
changes in the allowance for losses. Mortgage Securitization Residual Interest Home Equity uses mortgage securitizations to finance its mortgage loan portfolio. For
securitizations prior to April 2000, which Home Equity accounted for as sales, Home Equity retained
a mortgage securitization residual interest, or MSRI. The MSRI represents the present value of
Home Equitys right to receive, over the life of the securitization, the excess of the
weighted-average coupon on the loans securitized over the interest rates on the securities sold, a
normal servicing fee, a trustee fee and an insurance fee, where applicable, net of the credit
losses relating to the loans securitized. Home Equity estimates the fair value of MSRI through the
application of discounted cash flow analysis. Such analysis requires the use of various
assumptions, the most significant of which are anticipated prepayments (principal reductions in
excess of contractually scheduled reductions), estimated future credit losses and the discount rate
applied to future cash flows. Loan Origination Reserve CTX Mortgage Company, LLC has established a liability for anticipated losses associated with
loans originated based upon, among other factors, historical loss rates and current trends in loan
originations. This liability includes losses associated with certain borrower payment defaults,
credit quality issues, or misrepresentation and reflects managements judgment of the loss exposure
at the end of the reporting period. 52




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Although we consider the loan origination reserve reflected in our consolidated balance sheet
at December 31, 2004 to be adequate, there can be no assurance that this reserve will prove to be
sufficient over time to cover ultimate losses in connection with our loan originations. This
reserve may prove to be inadequate due to unanticipated adverse changes in the economy or discrete
events adversely affecting specific customers or industries. Warranty Accruals Home Building offers a ten-year limited warranty for most homes constructed and sold in the
United States and in the United Kingdom. The warranty covers defects in materials or workmanship
in the first two years of the home and certain designated components or structural elements of the
home in the third through tenth years. In California, effective January 1, 2003, Home Building
began following the statutory provisions of Senate Bill 800, which in part provide a statutory
warranty to customers and a statutory dispute resolution process. Home Building estimates the
costs that may be incurred under its warranty program for which it will be responsible and records
a liability at the time each home is closed. Factors that affect Home Buildings warranty
liability include the number of homes closed, historical and anticipated rates of warranty claims
and cost per claim. Home Building periodically assesses the adequacy of its recorded warranty
liability and adjusts the amounts as necessary. Although we consider the warranty accruals reflected in our
consolidated balance sheet to be adequate, there can be no assurance that this accrual will prove
to be sufficient over time to cover ultimate losses. Insurance Accruals We have certain deductible limits under our workers compensation, automobile and general
liability insurance policies for which reserves are actuarially determined based on claims filed
and an estimate of claims incurred but not yet reported. Projection of losses concerning these
liabilities is subject to a high degree of variability due to factors such as claim settlement
patterns, litigation trends and legal interpretations, among others. Although we consider the
insurance accruals reflected in our consolidated balance sheet to be adequate, there can be no
assurance that this accrual will prove to be sufficient over time to cover ultimate losses. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued a revision to SFAS No. 123 entitled Share-Based Payment,
(SFAS 123R). Share-based payments are transactions in which an enterprise receives employee
services in exchange for (1) equity instruments of the enterprise or (2) liabilities that are based
on the fair value of the enterprises equity instruments or that may be settled by the issuance of
such equity instruments. SFAS 123R requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation issued to employees, but
expresses no preference for a type of valuation model. SFAS 123R supersedes APB No. 25 and is
effective for interim or annual periods beginning after June 15, 2005. SFAS 123R is not expected
to have a material impact on the Companys results of operations or financial position. In December 2004, the FASB issued Staff Position 109-1 (FSP 109-1), Application of FASB
Statement No. 109 (FASB No. 109), Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of 2004. FSP 109-1
clarifies guidance that applies to the new deduction for qualified domestic production activities.
When fully phased-in, the deduction will be up to 9% of the lesser of qualified production
activities income or taxable income. FSP 109-1 53




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clarifies the deduction should be accounted for as
a special deduction under FASB No. 109 and will reduce tax expense in the period or periods the
amounts are deductible on the tax return. Any tax benefits resulting from the new deduction will
be effective for the Companys fiscal year ending March 31, 2006. The Company is in the process of
assessing the impact, if any, the new deduction will have on its financial statements.   FORWARD-LOOKING STATEMENTS
 Various sections of this Report, including Managements Discussion and Analysis of Financial
Condition and Results of Operations, 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. Forward-looking statements may be identified
by the context of the statement and generally arise when we are discussing our beliefs, estimates
or expectations. Generally, the words believe, expect, intend, estimate, anticipate,
project, will and similar expressions identify forward-looking statements, including statements
relating to expected operating results, future developments in the industries in which we
participate and other trends, developments and uncertainties that may affect our business in the
future. These statements are not historical facts or guarantees of future performance but instead
represent only our belief 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. Actual results and outcomes may differ materially from what we express or
forecast in these forward-looking statements. 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 duty
to update any forward-looking statement to reflect future events or changes in our expectations. In addition to the specific risks and uncertainties discussed elsewhere in this Report, the
following risks and uncertainties may affect our business, operations, financial condition or
results of operations:  
    
    Our Home Building operations are sensitive to changes in general
economic conditions, including levels of employment and job
formation, consumer confidence and income, availability of
financing, interest rate levels and changes in economic conditions
in the local markets in which we operate.  
    
    Our Home Building operations depend to a significant extent upon
our being able to acquire land that is suitable for residential
development at acceptable prices and in locations that are
desirable to us. Any increases in the cost or reductions in the
supply of suitable land for development could affect the revenues
or operating earnings of our Home Building operations.  
    
    Our Home Building operations may be adversely affected by
increases in interest rates. The majority of our home buyers
finance their purchases of homes. In general, housing demand is
likely to be adversely affected by significant increases in
interest rates. If mortgage interest rates increase significantly
and the ability or willingness of prospective buyers to finance
home purchases is adversely affected, our operating results may be
adversely affected.  
    
    Our Home Building and Construction Services operations could be
adversely affected by fluctuating lumber prices and supply, as
well as shortages of other materials or trades personnel,
including insulation, drywall, concrete, carpenters, electricians
and plumbers. In addition, both our Home Building and
Construction Services operations are subject to risks and
uncertainties involving the cost and availability of labor and
labor disputes. These factors could cause delays in construction
that could have an adverse effect upon our Home Building and
Construction Services operations. 54




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
    
    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. Although these claims and issues have not materially
affected our results of operations in the period covered by this
Report, there can be no assurance that this will continue to be
the case in future periods.  
    
    The value of our investment in international homebuilding is
affected by fluctuations in the value of the United States dollar
as compared to the British pound sterling, and can also be
affected by economic factors concerning the homebuilding market in
the United Kingdom.  
    
    Our Home Building operations are also subject to other risks and
uncertainties, including seasonal variations, adverse weather
conditions, the general demand for housing in national and
regional markets and new construction and the resale market for
existing homes.  
    
    Although national demand for commercial construction is 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.  
    
    Our Construction Services operations are also subject to other risks and
uncertainties, including the timing of new awards and the funding of such awards;
adverse weather conditions; cancellations of, or changes in the scope to, existing
contracts; the ability to meet performance or schedule guarantees and cost
overruns.  
    
    An increase in interest rates could have an adverse effect on our Financial
Services operations. The operations of CTX Mortgage Company, LLC are influenced by
borrowers perceptions of and reactions to interest rates. Any significant
increase in mortgage rates above currently prevailing levels could adversely affect
the volume of loan originations.  
    
    Our Home Equity operations involve holding residential mortgage loans for
investment and establishing an allowance for credit losses on these loans.
Although the amount of this allowance reflects our judgment as to our present loss
exposure on these loans, there can be no assurance that it will be sufficient to
cover any losses that may ultimately be incurred.  
    
    All of our businesses operate in very competitive environments, which are
characterized by competition from a number of other homebuilders, mortgage lenders,
and contractors in each of the markets in which we operate. Any increase in
competition has the potential to reduce the number of homes we sell, or to compel
us to accept reduced profit margins in order to maintain sales volume.  
    
    We are subject to various federal, state and local statutes, rules and
regulations that could affect our businesses, including those concerning zoning,
construction, the sale of homes and real estate, protecting the environment and
health and employment practices. In addition, our businesses could be affected by
changes in federal income tax policy, federal mortgage loan financing programs and
other changes in regulation or policy. 55




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Item 3. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risks related to fluctuations in interest rates on our direct debt
obligations, on mortgage loans receivable, residual interest in mortgage securitizations and
securitizations classified as debt. We utilize derivative instruments, including interest rate
swaps, in conjunction with our overall strategy to manage the outstanding debt that is subject to
changes in interest rates. We utilize forward sale commitments to mitigate the risk associated
with the majority of our mortgage loan portfolio. Other than the forward commitments and interest
rate swaps discussed earlier, we do not utilize forward or option contracts on foreign currencies
or commodities, or other types of derivative financial instruments. There have been no material changes in our market risk since March 31, 2004. For further
information regarding our market risk, refer to our Annual Report on Form 10-K for the fiscal year
ended March 31, 2004. 
 Item 4. Controls and Procedures An evaluation has been performed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures as of December 31, 2004.
Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial
Officer, concluded that our disclosure controls and procedures were effective as of December 31,
2004 to provide reasonable assurance that information required to be disclosed in our reports filed
or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. There has been no change in
our internal controls over financial reporting during the quarter ended December 31, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal controls over
financial reporting. 
 Part II. Other Information 
 Item 1. Legal Proceedings On November 23, 2004, Miami-Dade County, Florida filed suit against Centex-Rooney Construction
Co., a wholly-owned subsidiary of Centex Corporation; John J. Kirlin, Inc.; and M. C. Harry and
Associates, Inc., in the Countys Circuit Court of the Eleventh Judicial Circuit. Miami-Dade
County alleges that, in the course of performing or managing construction work on Concourse F at
the Miami International Airport, the defendants caused a jet fuel line rupture on or about July 30,
1987, which resulted in the contamination of soil, groundwater and surface water in and around
airport Concourse F. Miami-Dade County seeks damages of approximately $8.0 million for its costs
incurred to date and for expected future costs, civil penalties and an order requiring the defendants
to address remaining contamination. Centex believes it has substantial defenses to Miami-Dade
Countys claims, including waiver and release and statute of
limitations defenses. Centex also believes insurance coverage may be available
to cover defense costs and any potential damages.
Centex does not believe that this lawsuit will have a material impact on the Companys consolidated
results of operations or financial position. 56




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table details our common stock repurchases for the three months ended December
31, 2004: Issuer Purchases of Equity SecuritiesTotal Number of
    
    
    Maximum Number ofTotal Number
    
    
    
    
    
    
    Shares Purchased as
    
    
    Shares that May Yetof Shares
    
    
    Average Price
    
    
    Part of Publicly
    
    
    Be Purchased UnderPurchased
    
    
    Paid Per Share
    
    
    Announced Plan
    
    
    the PlanPeriod
    
    
    
    
    
    5,625,600
    
    
    
    2,724,000October 1-31
    
    No shares repurchased
    
    
    
    
    
    
    
    November 1-30
    
    
    1,975
    
    
    
    55.06
    
    
    
    
    
    
    
    December 1-31
    
    
    11,019
    
    
    
    55.61
    
    
    
    
    
    
    
    At December 31, 2004
    
    
    12,994
    
    
    
    55.53
    
    
    
    5,625,600
    
    
    
    2,724,000
 On
February 17, 2004, the Board of Directors increased our open
market share repurchase authorization
of common stock to 4,000,000 shares adjusted for our March 2004 two-for-one stock split. The total
number of shares purchased in the third column of the above table represents shares of common stock repurchased
pursuant to Board of Directors authorizations including the February 17, 2004 authorization and all
prior authorizations. Purchases are made from time-to-time in the open market. The share
repurchase authorization has no stated expiration date, and the Board of Directors has authorized
all shares repurchased. The 12,994 shares repurchased for the quarter ended December 31, 2004, represent the delivery
by employees or directors of previously issued shares to the Company to satisfy the exercise price
of options and/or withholding taxes that arise on the exercise of options. These transactions
have been approved by the Board of Directors; however, these transactions are not considered
repurchases pursuant to the Companys open market stock repurchase program. 
 Item 6.
    Exhibits3.1
    
    
    Restated Articles of Incorporation of Centex Corporation
(Centex), as amended (incorporated by reference from Exhibit 3.1 to Centexs
Annual Report on Form 10-K for the fiscal year ended March 31, 2004).3.2
    
    
    Amended and Restated By-laws of Centex dated May 15, 2003
(incorporated by reference from Exhibit 3.2 to Centexs Quarterly Report on Form
10-Q for the quarter ended June 30, 2003).31.1
    
    
    Certification of the Chief Executive Officer of Centex Corporation
pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act
of 1934, as amended.31.2
    
    
    Certification of the Chief Financial Officer of Centex Corporation
pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act
of 1934, as amended.
 57




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32.1
    
    
    Certification of the Chief Executive Officer of Centex Corporation
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of the Chief Financial Officer of Centex Corporation
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 58




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Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CENTEX CORPORATIONRegistrantFebruary 2, 2005
    
    
    
    
    
    /s/ Leldon E. EcholsLeldon E. EcholsExecutive Vice President andChief Financial Officer(principal financial officer)February 2, 2005
    

    
    
    
    
    /s/ Mark D. KempMark D. KempSenior Vice President-Controller(principal accounting officer)
 59