##### 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 June 30, 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 July 29, 2004: Centex Corporation
    
    Common Stock
    
    123,579,085 shares




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Centex Corporation and Subsidiaries Form 10-Q Table of Contents June 30, 2004 PagePart I.
    
    Financial InformationItem 1.
    
    Financial StatementsStatements of Consolidated Earnings
    
    
    2Consolidated Balance Sheets with Consolidating Details
    
    
    3Statements of Consolidated Cash Flows with Consolidating Details
    
    
    5Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    25Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    47Item 4.
    
    Controls and Procedures
    
    
    47Part II.
    
    Other InformationItem 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
    
    
    48Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    48Signatures
    
    
    
    
    
    
    50Credit AgreementLetter of Credit and Reimbursement AgreementCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer
  1




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##### Table of Contents



Part I. Financial Information 
 Item 1. Financial Statements 
 Centex Corporation and Subsidiaries
Statements of Consolidated Earnings
(Dollars in thousands, except per share data)
(unaudited) For the Three Months Ended June 30,2004
    
    
    2003RevenuesHome Building
    
    $
    1,998,114
    
    
    $
    1,504,493Financial Services
    
    
    274,321
    
    
    
    266,860Construction Services
    
    
    434,217
    
    
    
    375,755Other
    
    
    59,421
    
    
    
    25,5212,766,073
    
    
    
    2,172,629Costs and ExpensesHome Building
    
    
    1,774,773
    
    
    
    1,349,041Financial Services
    
    
    216,747
    
    
    
    201,261Construction Services
    
    
    429,751
    
    
    
    371,196Other
    
    
    52,079
    
    
    
    26,339Corporate General and Administrative
    
    
    19,585
    
    
    
    19,103Interest Expense
    
    
    5,025
    
    
    
    15,4702,497,960
    
    
    
    1,982,410Earnings from Unconsolidated Entities
    
    
    7,779
    
    
    
    5,080Earnings from Continuing Operations Before Income Taxes
    
    
    275,892
    
    
    
    195,299Income Taxes
    
    
    98,659
    
    
    
    62,081Earnings from Continuing Operations
    
    
    177,233
    
    
    
    133,218Earnings from Discontinued Operations, net of Taxes of $0 and $4,901
    
    
    
    
    
    
    9,572Net Earnings
    
    $
    177,233
    
    
    $
    142,790Basic Earnings Per ShareContinuing Operations
    
    $
    1.43
    
    
    $
    1.09Discontinued Operations
    
    
    
    
    
    
    0.08$
    1.43
    
    
    $
    1.17Diluted Earnings Per ShareContinuing Operations
    
    $
    1.35
    
    
    $
    1.04Discontinued Operations
    
    
    
    
    
    
    0.08$
    1.35
    
    
    $
    1.12Average Shares OutstandingBasic
    
    
    123,573,221
    
    
    
    122,490,530Dilutive Securities:Options
    
    
    7,110,684
    
    
    
    5,044,926Other
    
    
    242,913
    
    
    
    330,236Diluted
    
    
    130,926,818
    
    
    
    127,865,692Cash 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
Consolidated Balance Sheets with Consolidating Details
(Dollars in thousands)
(unaudited) Centex Corporation and SubsidiariesJune 30, 2004
    
    
    March 31, 2004AssetsCash and Cash Equivalents
    
    $
    182,177
    
    
    $
    193,147Restricted Cash
    
    
    330,106
    
    
    
    296,016Receivables -Residential Mortgage Loans Held for Investment, net
    
    
    6,921,049
    
    
    
    6,498,155Residential Mortgage Loans Held for Sale
    
    
    1,845,990
    
    
    
    1,819,605Construction Contracts
    
    
    316,916
    
    
    
    312,552Trade, including Notes of $46,095 and $51,321
    
    
    362,789
    
    
    
    356,570Inventories -Housing Projects
    
    
    5,429,636
    
    
    
    4,897,036Land Held for Development and Sale
    
    
    233,836
    
    
    
    208,140Land Held Under Option Agreements Not Owned
    
    
    449,449
    
    
    
    362,405Other
    
    
    54,095
    
    
    
    94,224Investments -Joint Ventures and Other
    
    
    186,497
    
    
    
    140,118Unconsolidated Subsidiaries
    
    
    
    
    
    
    Property and Equipment, net
    
    
    166,062
    
    
    
    155,891Other Assets -Deferred Income Taxes
    
    
    159,702
    
    
    
    157,678Goodwill
    
    
    249,212
    
    
    
    254,258Mortgage Securitization Residual Interest
    
    
    81,233
    
    
    
    89,374Deferred Charges and Other, net
    
    
    217,593
    
    
    
    233,399$
    17,186,342
    
    
    $
    16,068,568Liabilities and Stockholders EquityAccounts Payable
    
    $
    709,863
    
    
    $
    760,563Accrued Liabilities
    
    
    1,160,337
    
    
    
    1,201,349Debt -Centex
    
    
    2,808,173
    
    
    
    2,418,190Financial Services
    
    
    8,820,858
    
    
    
    8,302,190Payables to Affiliates
    
    
    
    
    
    
    Commitments and ContingenciesMinority Interests
    
    
    420,801
    
    
    
    336,051Stockholders Equity -Preferred Stock: Authorized 5,000,000 Shares, None Issued
    
    
    
    
    
    
    Common Stock: $.25 Par Value; Authorized 300,000,000
Shares; Outstanding 123,514,178 and 122,660,357 Shares
    
    
    32,280
    
    
    
    32,068Capital in Excess of Par Value
    
    
    234,124
    
    
    
    202,958Unamortized Value of Deferred Compensation
    
    
    (350
    )
    
    
    (411
    )Retained Earnings
    
    
    3,163,193
    
    
    
    2,990,889Treasury Stock, at Cost; 5,607,489 and 5,610,772 Shares
    
    
    (212,773
    )
    
    
    (212,822
    )Accumulated Other Comprehensive Income (Loss)
    
    
    49,836
    
    
    
    37,543Total Stockholders Equity
    
    
    3,266,310
    
    
    
    3,050,225$
    17,186,342
    
    
    $
    16,068,568
 See Notes to Consolidated Financial Statements. 3




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##### Table of Contents



Centex Corporation and Subsidiaries
Consolidated Balance Sheets with Consolidating Details
(Dollars in thousands)
(unaudited) Centex*
    
    Financial ServicesJune 30, 2004
    
    
    March 31, 2004
    
    
    June 30, 2004
    
    
    March 31, 2004$
    154,850
    
    
    $
    174,878
    
    
    $
    27,327
    
    
    $
    18,26934,410
    
    
    
    36,152
    
    
    
    295,696
    
    
    
    259,864
    
    
    
    
    
    
    
    6,921,049
    
    
    
    6,498,155
    
    
    
    
    
    
    
    1,845,990
    
    
    
    1,819,605316,916
    
    
    
    312,552
    
    
    
    
    
    
    
    177,558
    
    
    
    178,829
    
    
    
    185,231
    
    
    
    177,7415,429,636
    
    
    
    4,897,036
    
    
    
    
    
    
    
    233,836
    
    
    
    208,140
    
    
    
    
    
    
    
    449,449
    
    
    
    362,405
    
    
    
    
    
    
    
    45,899
    
    
    
    85,284
    
    
    
    8,196
    
    
    
    8,940186,497
    
    
    
    140,118
    
    
    
    
    
    
    
    550,441
    
    
    
    531,941
    
    
    
    
    
    
    
    119,150
    
    
    
    114,524
    
    
    
    46,912
    
    
    
    41,36766,703
    
    
    
    66,985
    
    
    
    92,999
    
    
    
    90,693237,475
    
    
    
    237,656
    
    
    
    11,737
    
    
    
    16,602
    
    
    
    
    
    
    
    81,233
    
    
    
    89,374151,231
    
    
    
    171,534
    
    
    
    66,362
    
    
    
    61,865$
    8,154,051
    
    
    $
    7,518,034
    
    
    $
    9,582,732
    
    
    $
    9,082,475$
    688,630
    
    
    $
    743,062
    
    
    $
    21,233
    
    
    $
    17,501971,718
    
    
    
    972,041
    
    
    
    188,619
    
    
    
    229,3082,808,173
    
    
    
    2,418,190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,820,858
    
    
    
    8,302,190
    
    
    
    
    
    
    
    (16,148
    )
    
    
    15,661419,220
    
    
    
    334,516
    
    
    
    1,581
    
    
    
    1,535
    
    
    
    
    
    
 
    
    
    32,280
    
    
    
    32,068
    
    
    
    1
    
    
    
    1234,124
    
    
    
    202,958
    
    
    
    275,467
    
    
    
    275,521(350
    )
    
    
    (411
    )
    
    
    
    
    
    
    3,163,193
    
    
    
    2,990,889
    
    
    
    292,531
    
    
    
    256,490(212,773
    )
    
    
    (212,822
    )
    
    
    
    
    
    
    49,836
    
    
    
    37,543
    
    
    
    (1,410
    )
    
    
    (15,732
    )3,266,310
    
    
    
    3,050,225
    
    
    
    566,589
    
    
    
    516,280$
    8,154,051
    
    
    $
    7,518,034
    
    
    $
    9,582,732
    
    
    $
    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. 4




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##### Table of Contents



Centex Corporation and Subsidiaries
Statements of Consolidated Cash Flows with Consolidating Details
(Dollars in thousands)
(unaudited) Centex Corporation and SubsidiariesFor the Three Months Ended June 30,2004
    
    
    2003Cash Flows  Operating ActivitiesNet Earnings
    
    $
    177,233
    
    
    $
    142,790Adjustments-Depreciation and Amortization
    
    
    23,910
    
    
    
    29,961Provision for Losses on Residential Mortgage Loans Held for Investment
    
    
    26,813
    
    
    
    15,762Deferred Income Tax Benefit
    
    
    (10,199
    )
    
    
    (6,255
    )Equity in Earnings of Centex Development Company, L.P. and Joint Ventures
    
    
    (5,088
    )
    
    
    (4,352
    )Undistributed Earnings of Unconsolidated Subsidiaries
    
    
    
    
    
    
    Minority Interest, net of Taxes
    
    
    946
    
    
    
    8,472Changes in Assets and Liabilities, Excluding Effect of Acquisitions(Increase) Decrease in Restricted Cash
    
    
    (34,090
    )
    
    
    (42,121
    )Increase in Receivables
    
    
    (15,765
    )
    
    
    (34,383
    )Increase in Residential Mortgage Loans Held for Sale
    
    
    (26,385
    )
    
    
    (43,684
    )Increase in Housing Projects and Land Held for Development and Sale
    
    
    (567,889
    )
    
    
    (294,622
    )Decrease (Increase) in Other Inventories
    
    
    39,826
    
    
    
    2,562Decrease in Accounts Payable and Accrued Liabilities
    
    
    (73,147
    )
    
    
    (89,934
    )Decrease (Increase) in Other Assets, net
    
    
    31,154
    
    
    
    (3,080
    )(Decrease) Increase in Payables to Affiliates
    
    
    
    
    
    
    Other
    
    
    (3,231
    )
    
    
    (435,912
    )
    
    
    (318,884
    )Cash Flows  Investing ActivitiesPayment (Issuance) on Notes Receivable, net
    
    
    5,226
    
    
    
    (819
    )Increase in Residential Mortgage Loans Held for Investment
    
    
    (449,707
    )
    
    
    (478,631
    )Increase in Investment and Advances to Centex Development Company, L.P.
and Joint Ventures
    
    
    (39,990
    )
    
    
    (16,098
    )Decrease (Increase) in Investment and Advances to Unconsolidated Subsidiaries
    
    
    
    
    
    
    Purchases of Property and Equipment, net
    
    
    (13,707
    )
    
    
    (10,109
    )Other
    
    
    8,742
    
    
    
    (12,538
    )(489,436
    )
    
    
    (518,195
    )Cash Flows  Financing ActivitiesIncrease (Decrease) in Short-Term Debt, net
    
    
    219,736
    
    
    
    76,833CentexIssuance of Long-Term Debt
    
    
    391,654
    
    
    
    6,626Repayment of Long-Term Debt
    
    
    (769
    )
    
    
    (3,289
    )Financial ServicesIssuance of Long-Term Debt
    
    
    907,799
    
    
    
    1,309,791Repayment of Long-Term Debt
    
    
    (608,867
    )
    
    
    (926,854
    )Proceeds from Stock Option Exercises
    
    
    9,164
    
    
    
    19,722Treasury Stock Transactions, net
    
    
    49
    
    
    
    26Dividends Paid
    
    
    (4,929
    )
    
    
    (2,472
    )913,837
    
    
    
    480,383Effect of Exchange Rate on Cash
    
    
    541
    
    
    
    Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (10,970
    )
    
    
    (356,696
    )Cash and Cash Equivalents at Beginning of Period
    
    
    193,147
    
    
    
    456,179Cash and Cash Equivalents at End of Period
    
    $
    182,177
    
    
    $
    99,483
 See Notes to Consolidated Financial Statements. 5




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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 Three Months Ended June 30,
    
    For the Three Months Ended June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003$
    177,233
    
    
    $
    142,790
    
    
    $
    36,041
    
    
    $
    41,18719,521
    
    
    
    25,422
    
    
    
    4,389
    
    
    
    4,539
    
    
    
    
    
    
    
    26,813
    
    
    
    15,762(72
    )
    
    
    (4,460
    )
    
    
    (10,127
    )
    
    
    (1,795
    )(5,088
    )
    
    
    (4,352
    )
    
    
    
    
    
    
    (36,041
    )
    
    
    (41,187
    )
    
    
    
    
    
    
    900
    
    
    
    8,279
    
    
    
    46
    
    
    
    1931,742
    
    
    
    (27,869
    )
    
    
    (35,832
    )
    
    
    (14,252
    )(8,268
    )
    
    
    (22,014
    )
    
    
    (7,497
    )
    
    
    (12,369
    )
    
    
    
    
    
    
    
    (26,385
    )
    
    
    (43,684
    )(567,889
    )
    
    
    (294,622
    )
    
    
    
    
    
    
    39,082
    
    
    
    4,221
    
    
    
    744
    
    
    
    (1,659
    )(36,190
    )
    
    
    (91,431
    )
    
    
    (22,689
    )
    
    
    (60
    )19,689
    
    
    
    701
    
    
    
    11,465
    
    
    
    (3,781
    )
    
    
    
    
    
    
    
    (31,809
    )
    
    
    10,146
    
    
    
    
    
    
    
    (3,231
    )
    
    
    (395,381
    )
    
    
    (304,522
    )
    
    
    (58,072
    )
    
    
    (5,773
    )5,219
    
    
    
    (1,100
    )
    
    
    7
    
    
    
    281
    
    
    
    
    
    
    
    (449,707
    )
    
    
    (478,631
    )(39,990
    )
    
    
    (16,098
    )
    
    
    
    
    
    
    17,541
    
    
    
    (8,589
    )
    
    
    
    
    
    
    (2,602
    )
    
    
    (5,607
    )
    
    
    (11,105
    )
    
    
    (4,502
    )(525
    )
    
    
    (12,538
    )
    
    
    9,267
    
    
    
    (20,357
    )
    
    
    (43,932
    )
    
    
    (451,538
    )
    
    
    (482,852
    )
    
    
    
    (25,257
    )
    
    
    219,736
    
    
    
    102,090391,654
    
    
    
    6,626
    
    
    
    
    
    
    
    (769
    )
    
    
    (3,289
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    907,799
    
    
    
    1,309,791
    
    
    
    
    
    
    
    (608,867
    )
    
    
    (926,854
    )9,164
    
    
    
    19,722
    
    
    
    
    
    
    
    49
    
    
    
    26
    
    
    
    
    
    
    
    (4,929
    )
    
    
    (2,472
    )
    
    
    
    
    
    
    395,169
    
    
    
    (4,644
    )
    
    
    518,668
    
    
    
    485,027541
    
    
    
    
    
    
    
    
    
    
    
    (20,028
    )
    
    
    (353,098
    )
    
    
    9,058
    
    
    
    (3,598
    )174,878
    
    
    
    441,097
    
    
    
    18,269
    
    
    
    15,082$
    154,850
    
    
    $
    87,999
    
    
    $
    27,327
    
    
    $
    11,484
  *
    
    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. 6




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##### Table of Contents



Centex Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 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 subsidiaries (the Company) after elimination of all
significant intercompany balances and transactions. 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 MonthsEnded June 30,2004
    
    
    2003Cash Paid for Interest
    
    $
    91,193
    
    
    $
    71,192Net Cash Paid for Taxes
    
    $
    8,617
    
    
    $
    46,162
 Interest expense relating to the Financial Services segment is included in
Financial Services costs and expenses. The Company capitalizes a portion of
interest incurred as a component of housing projects inventory cost. The
relief of capitalized interest is included in Home Buildings costs and
expenses as 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. 7




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##### Table of Contents



For the Three MonthsEnded June 30,2004
    
    
    2003Total Interest Incurred
    
    $
    107,755
    
    
    $
    86,813Less  Interest Capitalized
    
    
    (41,082
    )
    
    
    (20,315
    )Financial Services Interest Expense
    
    
    (61,648
    )
    
    
    (51,028
    )Interest Expense, net
    
    $
    5,025
    
    
    $
    15,470Capitalized Interest Relieved to Home
Buildings Costs and Expenses
    
    $
    27,569
    
    
    $
    13,174
 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 explained in Note (J), Land Held Under Option Agreements not Owned and
Other Land Deposits pursuant to the provisions of FIN 46, as of June 30, 2004,
the Company consolidated $416.5 million of lot option agreements and recorded
$33.0 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), whereas 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. 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 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, which will be recognized as
compensation expense over the vesting period. Compensation expense of $2.6
million related to these stock options was recognized during the three month
period ended June 30, 2004. 8




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##### Table of Contents



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 month
periods ended June 30, 2004 and 2003, consistent with the provisions of SFAS
No. 123. For the Three MonthsEnded June 30,2004
    
    
    2003Net Earnings  as Reported
    
    $
    177,233
    
    
    $
    142,790Stock-Based Employee Compensation Included in Reported Net Income,
net of Related Tax Effects
    
    
    7,777
    
    
    
    3,585Total Stock-Based Employee Compensation Expense Determined Under
Fair Value Based Method, net of Related Tax Effects
    
    
    (7,777
    )
    
    
    (8,205
    )Pro Forma Net Earnings
    
    $
    177,233
    
    
    $
    138,170Earnings Per Share:Basic  as Reported
    
    $
    1.43
    
    
    $
    1.17Basic  Pro Forma
    
    $
    1.43
    
    
    $
    1.13Diluted  as Reported
    
    $
    1.35
    
    
    $
    1.12Diluted  Pro Forma
    
    $
    1.35
    
    
    $
    1.08
 (D) STOCKHOLDERS EQUITY A summary of changes in stockholders equity is presented below: Unamortized
    
    
    
    
    
    
    
    
    
    AccumulatedCommon Stock
    
    Capital inExcess of
    
    
    Value ofDeferred
    
    
    Retained
    
    
    TreasuryStock
    
    
    OtherComprehensiveShares
    
    
    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
    
    
    68
    
    
    
    17
    
    
    
    4,742
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,820Stock Compensation
    
    
    
    
    
    
    
    
    
    
    7,117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,117Exercise of Stock
Options, Including
Tax Benefits
    
    
    783
    
    
    
    195
    
    
    
    19,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,575Cash Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,929
    )
    
    
    
    
    
    
    
    
    
    
    (4,929
    )Other Stock
Transactions
    
    
    3
    
    
    
    
    
    
    
    (73
    )
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    (24
    )Net Earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177,233
    
    
    
    
    
    
    
    
    
    
    
    177,233Unrealized Gain
on Hedging
Instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,043
    
    
    
    15,043Foreign Currency
Translation
Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,750
    )
    
    
    (2,750
    )Balance, June 30, 2004
    
    
    123,514
    
    
    $
    32,280
    
    
    $
    234,124
    
    
    $
    (350
    )
    
    $
    3,163,193
    
    
    $
    (212,773
    )
    
    $
    49,836
    
    
    $
    3,266,310
 9




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##### Table of Contents



(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: June 30, 2004
    
    
    March 31, 2004Residential Mortgage Loans Held for Investment
    
    $
    6,985,978
    
    
    $
    6,554,513Allowance for Losses on Residential Mortgage Loans
Held for Investment
    
    
    (64,929
    )
    
    
    (56,358
    )Residential Mortgage Loans Held for Investment,
net of Allowance for Losses
    
    $
    6,921,049
    
    
    $
    6,498,155
 Changes in the allowance for losses on residential mortgage loans held for
investment were as follows for the three months ended June 30, 2004 and the
year ended March 31, 2004: June 30, 2004
    
    
    March 31, 2004Balance at Beginning of Period
    
    $
    56,358
    
    
    $
    28,384Provision for Losses
    
    
    26,813
    
    
    
    79,503Losses Sustained, net of Recoveries of $54 and $204
    
    
    (18,242
    )
    
    
    (51,529
    )Balance at End of Period
    
    $
    64,929
    
    
    $
    56,358
 June 30, 2004
    
    
    March 31, 2004Allowance as a Percentage of Gross Loans Held for Investment
    
    
    0.9
    %
    
    
    0.9
    %Allowance as a Percentage of 90+ Days Contractual Delinquency
    
    
    43.8
    %
    
    
    36.4
    %90+ Days Contractual DelinquencyTotal Dollars Delinquent
    
    $
    148,301
    
    
    $
    154,868% Delinquent
    
    
    2.1
    %
    
    
    2.4
    %
 (F) GOODWILL A summary of changes in goodwill by segment for the three months ended
June 30, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    337
    
    
    
    337Goodwill Disposed
    
    
    
    
    
    
    (4,865
    )
    
    
    
    
    
    
    
    
    
    
    (4,865
    )Other, net
    
    
    (366
    )
    
    
    
    
    
    
    
    
    
    
    (152
    )
    
    
    (518
    )Balance as of June 30, 2004
    
    $
    158,241
    
    
    $
    11,737
    
    
    $
    1,007
    
    
    $
    78,227
    
    
    $
    249,212
 Goodwill for the Other segment at June 30, 2004 relates to the Companys
home services operations. 10




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##### Table of Contents



(G) INDEBTEDNESS Balances of short-term and long-term debt (debt instruments with original
maturities greater than one year) and weighted-average interest rates at June
30, 2004 and March 31, 2004 were (due dates are presented in fiscal years): June 30,
    
    March 31,2004
    
    2004Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageInterest
    
    
    
    
    
    
    InterestRate
    
    
    
    
    
    
    RateShort-term Debt:Financial Institutions
    
    $
    548,336
    
    
    
    1.92
    %
    
    $
    601,718
    
    
    
    1.42
    %Secured Liquidity Notes:Harwood Street Funding I, LLC
    
    
    1,053,841
    
    
    
    1.50
    %
    
    
    936,000
    
    
    
    1.15
    %Harwood Street Funding II, LLC
    
    
    722,075
    
    
    
    1.65
    %
    
    
    566,798
    
    
    
    1.15
    %Consolidated Short-term Debt
    
    
    2,324,252
    
    
    
    
    
    
    
    2,104,516Long-term Debt:CentexMedium-term Note Programs, due through 2007
    
    
    258,000
    
    
    
    4.72
    %
    
    
    258,000
    
    
    
    4.67
    %Long-term Notes, due through 2015
    
    
    2,158,386
    
    
    
    6.56
    %
    
    
    1,808,332
    
    
    
    6.73
    %Other Indebtedness, due through 2010
    
    
    192,051
    
    
    
    5.67
    %
    
    
    152,152
    
    
    
    5.31
    %Subordinated Debt:Subordinated Debentures, due in 2007
    
    
    99,781
    
    
    
    8.75
    %
    
    
    99,763
    
    
    
    8.75
    %Subordinated Debentures, due in 2006
    
    
    99,955
    
    
    
    7.38
    %
    
    
    99,943
    
    
    
    7.38
    %2,808,173
    
    
    
    
    
    
    
    2,418,190Financial ServicesHome Equity Asset-Backed Certificates,
due through 2035
    
    
    6,263,856
    
    
    
    3.19
    %
    
    
    5,964,924
    
    
    
    3.59
    %Harwood Street Funding I, LLC Variable Rate
Subordinated Extendable Certificates,
due through 2007
    
    
    139,000
    
    
    
    3.33
    %
    
    
    139,000
    
    
    
    3.06
    %Harwood Street Funding II, LLC Variable
Rate Subordinated Notes, due through 2009
    
    
    93,750
    
    
    
    3.52
    %
    
    
    93,750
    
    
    
    3.24
    %6,496,606
    
    
    
    
    
    
    
    6,197,674Consolidated Long-term Debt
    
    
    9,304,779
    
    
    
    
    
    
    
    8,615,864Total Debt
    
    $
    11,629,031
    
    
    
    
    
    
    $
    10,720,380
 11




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##### Table of Contents



The weighted-average interest rates for short-term and long-term debt
during the three months ended June 30, 2004 and 2003 were: For the Three Months Ended June 30,2004
    
    
    2003Short-term Debt:Financial Services
    
    
    1.64
    %
    
    
    1.61
    %Long-term Debt:CentexMedium-term Note Programs (1)
    
    
    5.30
    %
    
    
    5.31
    %Long-term Notes
    
    
    6.64
    %
    
    
    7.08
    %Other Indebtedness
    
    
    5.52
    %
    
    
    4.32
    %Subordinated Debentures
    
    
    8.07
    %
    
    
    8.07
    %Financial ServicesCentex Home Equity Company, LLC Long-term Debt (2)
    
    
    3.21
    %
    
    
    3.90
    %CTX Mortgage Company, LLC Long-term Debt (3)
    
    
    3.12
    %
    
    
    
  (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
    
    $
    38,039
    
    
    $
    1,598,266
    
    
    $
    1,636,3052006
    
    
    341,244
    
    
    
    2,077,188
    
    
    
    2,418,4322007
    
    
    432,569
    
    
    
    1,499,912
    
    
    
    1,932,4812008
    
    
    359,535
    
    
    
    668,183
    
    
    
    1,027,7182009
    
    
    1,187
    
    
    
    352,076
    
    
    
    353,263Thereafter
    
    
    1,635,599
    
    
    
    300,981
    
    
    
    1,936,580$
    2,808,173
    
    
    $
    6,496,606
    
    
    $
    9,304,779
 Financial Services long-term debt associated with Home Equity includes
Asset-Backed Certificates of $6.26 billion at June 30, 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. 12




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##### Table of Contents



Under Centex Corporations bank credit facilities, Centex is required to
maintain certain leverage and interest coverage ratios and a minimum tangible
net worth. At June 30, 2004, Centex was in compliance with all of these
covenants. Credit Facilities The Companys existing credit facilities and available capacity as of June
30, 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
    
    
    250,000
    
    
    
    59,553
    (2)1,050,000
    
    
    
    859,553
    (3)International HomebuildingMulti-Bank Secured Revolving Credit Facility
    
    
    180,740
    
    
    
    39,763Secured Bonding Facility
    
    
    18,074
    
    
    
    15,976Unsecured Credit Facility
    
    
    36,148
    
    
    
    36,148234,962
    
    
    
    91,887
    (4)Financial ServicesSecured Credit Facilities
    
    
    720,000
    
    
    
    171,664
    (5)Harwood Street Funding I, LLC Facility
    
    
    3,000,000
    
    
    
    1,807,318Harwood Street Funding II, LLC Facility
    
    
    2,500,000
    
    
    
    1,684,1756,220,000
    
    
    
    3,663,157$
    7,504,962
    
    
    $
    4,614,597
    (6)
  (1)
    
    This is an unsecured, committed, multi-bank revolving credit facility,
maturing in August 2006, which serves as backup for commercial paper
borrowings. As of June 30, 2004, there were no borrowings under this
backup facility, and the Companys $700 million commercial paper program
had no amounts outstanding. There have been no borrowings under this
revolving credit facility since inception. In July 2004, the maturity
date of this revolving credit facility was extended to July 2007.(2)
    
    This is an unsecured, committed, multi-bank revolving letter of credit
facility, maturing in August 2004. Letters of credit issued under this
facility may expire no later than August 2005. In July 2004, this facility
was increased to $300 million and the maturity date was extended to July
2005. In addition, the expiration period for letters of credit issued
under this facility was extended to 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 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 credit
facility guaranteed by Centex Corporation.(5)
    
    CTX Mortgage Company, LLC and its related companies and Home Equity share
in a $500 million secured, committed credit facility to finance mortgage
inventory. CTX Mortgage Company, LLC and its related companies also
maintain $210 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. 13




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##### Table of Contents



(6)
    
    The amount of available capacity includes $4.58 billion of committed
capacity and $36.1 million of uncommitted capacity as of June 30, 2004.
Although the Company believes 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 sales of conforming and Jumbo A loans to Harwood
Street Funding I, LLC (HSF-I), pursuant to a mortgage loan purchase agreement
(the HSF-I Purchase Agreement). Since 1999, CTX Mortgage Company, LLC has
sold substantially all of the 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. When HSF-I acquires these 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 June 30, 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 and (2) subordinated certificates
maturing in September 2004, November 2005 and June 2006, extendable for up to
five years, rated BBB by S&P and Baa2 by Moodys. 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. At June
30, 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. 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 of approximately $1.19 billion at
June 30, 2004. 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 are
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 14




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##### Table of Contents



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, 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 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 does not have recourse to the Company, and the consolidation
of this debt does not change the Companys debt ratings. The Company does not
guarantee the payment of any debt or subordinated extendable 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
$2.57 billion of mortgage loans to investors and recognized net gains from
mortgage banking operations of $33.9 million during the three months ended June
30, 2004. CTX Mortgage Company, LLC sold $4.05 billion of mortgage loans to
HSF-I and other investors and recognized net gains from mortgage banking
operations of $77.0 million during the three months ended June 30, 2003. 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 June 30, 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 15




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terms, and any delay in obtaining such financing could adversely affect
the results of operations of Financial Services. (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. We held an ownership interest in the Partnership, which we
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 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 $186.5 million and $140.1 million at June
30, 2004 and March 31, 2004, respectively. These joint ventures had total
outstanding secured construction debt of approximately $274.6 million and
$202.2 million at June 30, 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 $70.3 million and $73.2 million at June 30, 2004 and
March 31, 2004, respectively. For certain of the recourse joint ventures,
which represents approximately $66.9 million and $69.9 million of the Companys
maximum potential liability for the debt of all the recourse joint ventures at
June 30, 2004 and March 31, 2004, respectively, the Company becomes liable up
to the maximum amount for the recourse joint venture only to the extent that
the 16




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##### Table of Contents



construction debt exceeds a certain percentage of the value of the
project. At June 30, 2004 and March 31, 2004, the Company was not liable for
any of this debt based on the values of the related projects as of such dates.
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 accordance with the provisions of FIN 46, the Company determines
if it is the primary beneficiary of joint ventures based upon analysis of the
variability of the expected gains and losses of the joint venture. Based on
this evaluation, if the Company is the primary beneficiary, the joint venture
is consolidated. 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 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 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 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 three months ended June 30, 2004 and the year ended March 31, 2004: June 30, 2004
    
    
    March 31, 2004Balance at Beginning of Period
    
    $
    20,146
    
    
    $
    16,125Warranties Issued
    
    
    10,419
    
    
    
    29,806Settlements Made
    
    
    (8,345
    )
    
    
    (25,597
    )Changes in Liability of Pre-Existing
Warranties, Including Expirations
    
    
    
    
    
    
    (188
    )Foreign Currency Translation
    
    
    18
    
    
    
    Balance at End of Period
    
    $
    22,238
    
    
    $
    20,146
 In January 2003, Centex 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 has defenses to the allegations made by the EPA and
is exploring methods of settling this matter. While the amount of civil
penalties, if any, 17




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##### Table of Contents



and the cost of injunctive relief, if any, are undetermined, the Company is
confident that such amounts will not be material to its consolidated financial
condition or operations. 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 three months
ended June 30, 2004 and the year ended March 31, 2004: June 30, 2004
    
    
    March 31, 2004Balance at Beginning of Period
    
    $
    25,045
    
    
    $
    28,594Provision for Losses
    
    
    
    
    
    
    1,837Settlements
    
    
    (2,008
    )
    
    
    (5,386
    )Balance at End of Period
    
    $
    23,037
    
    
    $
    25,045
 (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 June 30,
2004. As a result, the Company recorded $416.5 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 June 30, 2004,
the Company recorded $33.0 million of deposits related to these options as land
held under option agreements not owned. At June 30, 2004, the Company had deposited or invested with third parties
$109.0 million (excluding the $33.0 million of deposits discussed above)
included in land held for development and sale related to lot option
agreements. The lot option agreements related to these deposits had a total
remaining purchase price of approximately $3.76 billion. 18




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##### Table of Contents



(K) COMPREHENSIVE INCOME A summary of comprehensive income for the three months ended June 30, 2004
and 2003 is presented below: For the Three MonthsEnded June 30,2004
    
    
    2003Net Earnings
    
    $
    177,233
    
    
    $
    142,790Other Comprehensive Income (Loss), net of Tax:Unrealized Gain (Loss) on Hedging Instruments
    
    
    15,043
    
    
    
    (1,252
    )Foreign Currency Translation Adjustments
    
    
    (2,750
    )
    
    
    10,720Other
    
    
    
    
    
    
    2Comprehensive Income
    
    $
    189,526
    
    
    $
    152,260
 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 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 operations involve the purchase and development of land or
lots and the construction and sale of detached and attached single-family homes
domestically and 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 throughout the United Kingdom. Financial Services Financial Services mortgage 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 $159.2 million and $106.7 million for the three months ended
June 30, 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. 19




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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 $1.3 million and $1.4 million for the three months
ended June 30, 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 June 30, 2004(Dollars in millions)Home
    
    
    Financial
    
    
    ConstructionBuilding
    
    
    Services
    
    
    Services
    
    
    Other
    
    
    TotalRevenues
    
    $
    1,998.1
    
    
    $
    274.3
    
    
    $
    434.2
    
    
    $
    59.5
    
    
    $
    2,766.1Cost of Sales
    
    
    (1,473.0
    )
    
    
    (61.6
    )
    
    
    (413.9
    )
    
    
    (36.5
    )
    
    
    (1,985.0
    )Selling, General and Administrative
Expenses
    
    
    (301.8
    )
    
    
    (155.1
    )
    
    
    (15.8
    )
    
    
    (40.3
    )
    
    
    (513.0
    )Earnings from Unconsolidated
Entities
    
    
    7.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.8Earnings (Loss) from Continuing
Operations Before Income Tax
    
    $
    231.1
    
    
    $
    57.6
    
    
    $
    4.5
    
    
    $
    (17.3
    )
    
    $
    275.9
 20




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##### Table of Contents



For the Three Months Ended June 30, 2003(Dollars in millions)Home
    
    
    Financial
    
    
    ConstructionBuilding
    
    
    Services
    
    
    Services
    
    
    Other
    
    
    TotalRevenues
    
    $
    1,504.5
    
    
    $
    266.9
    
    
    $
    375.8
    
    
    $
    25.4
    
    
    $
    2,172.6Cost of Sales
    
    
    (1,127.4
    )
    
    
    (51.0
    )
    
    
    (356.8
    )
    
    
    (10.3
    )
    
    
    (1,545.5
    )Selling, General and Administrative
Expenses
    
    
    (221.7
    )
    
    
    (150.3
    )
    
    
    (14.4
    )
    
    
    (50.5
    )
    
    
    (436.9
    )Earnings (Loss) from Unconsolidated
Entities
    
    
    6.0
    
    
    
    
    
    
    
    
    
    
    
    (0.9
    )
    
    
    5.1Earnings (Loss) from Continuing
Operations Before Income Tax
    
    $
    161.4
    
    
    $
    65.6
    
    
    $
    4.6
    
    
    $
    (36.3
    )
    
    $
    195.3
 The following summarizes the components of the Other segments loss from
continuing operations before income tax (dollars in millions): For the Three MonthsEnded June 30,2004
    
    
    2003Operating Loss from Home Services Operations
    
    $
    (2.6
    )
    
    $
    (1.3
    )Operating Earnings (Loss) from Investment Real Estate Operations
    
    
    9.9
    
    
    
    (0.1
    )Corporate General and Administrative Expense
    
    
    (19.6
    )
    
    
    (19.1
    )Interest Expense
    
    
    (5.0
    )
    
    
    (15.5
    )Other
    
    
    
    
    
    
    (0.3
    )$
    (17.3
    )
    
    $
    (36.3
    )
 (M) INCOME TAXES Income tax expense for the Company increased from $62.1 million to $98.7
million and the effective tax rate increased from approximately 32% to 36% for
the three months ended June 30, 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. 21




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At June 30, 2004, Centex Corporation has interest rate swap agreements
that, in effect, fix the variable interest rates on (i) $25 million of its
outstanding debt at 6.7% and expires in October 2005 and (ii) £50 million of
its outstanding debt at 4.0% and expires in March 2006. During the three
months ended June 30, 2004, the hedges related to these derivatives were
effective. 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 June 30, 2004
related to these derivatives, the Company estimates decreases in interest
incurred over the next 12 months to be approximately $204.8 thousand. As of
June 30, 2004, the balance in accumulated other comprehensive income related to
these derivatives was $278.7 thousand ($277.0 thousand net of tax). 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 June 30, 2004,
Home Equity had $165 million of these interest rate swap agreements in place at
a weighted-average interest rate of 4.5%. 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 June 30, 2004, Home Equity was hedging $2.25 billion of its outstanding debt
with these interest rate swaps at a weighted-average interest rate of 2.1%.
These swaps expire at varying times through June 2007. Based on the balance in
accumulated other comprehensive income at June 30, 2004 related to interest
rate hedging activities, the Company estimates decreases in interest incurred
over the next 12 months to be approximately $7.1 million. During the three
months ended June 30, 2004, the hedges related to substantially all of Home
Equitys interest rate swaps were effective and the ineffective portion was
insignificant. As of June 30, 2004, the balance in accumulated other
comprehensive income related to Home Equitys derivatives was $10.3 million
($6.7 million net of tax). 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, (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 22




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##### Table of Contents



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 approximately $2 million for the three months ended June
30, 2004. 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 loss of approximately $72 thousand for the
three months ended June 30, 2004. (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. Home Building purchased land from the Partnership during the three months
ended June 30, 2003 totaling $12.0 million. In addition, at June 30, 2003,
Home Building had $7.8 million deposited with the Partnership as option
deposits for the purchase of land. Home Building also 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 months ended June 30, 2003, Home Building paid $0.4 million to the
Partnership in fees and reimbursements pursuant to these agreements. Construction Services executed a $10.6 million contract with the
Partnership for the construction of an office building. At June 30, 2003, this
contract was outstanding. (P) RECENT ACCOUNTING PRONOUNCEMENTS During March 2004, the FASB issued an exposure draft entitled Share-Based
Payment, which would amend SFAS No. 123 and SFAS No. 95, Statements of Cash
Flows. 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.
Among other items, the exposure draft may require the Company to change its
method of valuing share-based payments and its method of accruing compensation
costs for awards with graded vesting schedules (that is, awards for which
different parts vest at different times). The exposure draft is not final and
is subject to a comment period that ended June 30, 2004. Although the exposure
draft and its eventual effective date are subject to revision, the proposed
effective date of the exposure draft is for fiscal years beginning after
December 15, 2004. If the exposure draft is implemented in its current form,
it is not expected to have a material impact on the Companys results of
operations or financial position. (Q) OFF-BALANCE SHEET OBLIGATIONS The Company enters into various off-balance sheet transactions in the
normal course of business in order to reduce financing costs and improve access
to liquidity, facilitate homebuilding activities and manage exposure to
changing interest rates. Further discussion regarding these transactions can
be found above in Note (I), Commitments and Contingencies. 23




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##### Table of Contents



(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, the 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 months ended June 30, 2003, discontinued operations had
revenues of $183.6 million and operating earnings of $23.6 million. (S) SUBSEQUENT EVENTS On July 19, 2004, Centex Corporation filed with the U.S. Securities and
Exchange Commission (the SEC) a Form S-3 Registration Statement which will allow Centex to sell from time to time up to $2.5
billion of common and preferred stock, debt securities, warrants and other
securities. Centex plans to use proceeds from any sales of these securities
for general corporate purposes, which may include debt repayment, working
capital, capital expenditures, acquisitions and securities
repurchases. On August 3, 2004, the SEC declared this Registration
Statement effective. (T) RECLASSIFICATIONS Certain prior year balances have been reclassified to be consistent with
the June 30, 2004 presentation. 24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations 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 (for our company as a whole
and by principal business segment) for the first quarter fiscal 2005 and 2004: (PERFORMANCE GRAPH) (PERFORMANCE GRAPH)  *
    
    Other consists of the financial results of investment real estate operations,
home services operations, corporate general and administrative expense and
interest expense. As outlined in the charts above, for the quarter ended June 30, 2004, as
compared to the quarter ended June 30, 2003, revenues increased 27% to $2.8
billion and earnings from continuing operations increased 42% 25




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##### Table of Contents



to $276 million. The increase in revenues and operating earnings is
primarily the result of the operating results of our Home Building segment.
The growth in operating earnings from the Home Building segment was offset, to
a much lesser extent, by a decline in operating earnings of our Financial
Services segment. Home Buildings organic growth strategy is driven primarily by growth in
neighborhoods open for sale, increases in closings per neighborhood, increases
in average selling prices, and continued improvements in operating margins.
For the first quarter 2005, as compared to first quarter 2004, Home Buildings
domestic operations have increased average neighborhood count from 558 to 570
and closings per average neighborhood from 11.4 to 13.0. Over that same period
of time, domestic operating margins have also improved from 10.4% to 11.8%. As of March 31, 2004, we had homebuilding operations in 45 of the 50
largest housing markets in the United States, which includes six markets with
our Wayne Homes operations. We have largely completed our geographic
diversification plan and are now 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. The overall demand for housing in the United States remains favorable, and
is driven by population growth, demographics, immigration, household formations
and increasing 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 a consolidation phase. 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 growth factor over the next decade or more as large homebuilders
realize the benefits of size, such as capital strength, more efficient
operations and technological advantages. Financial Services operating results for the quarter ended June 30, 2004
have been negatively impacted by decreased loan refinancing activity reflective
of an increasing mortgage interest rate environment. Thirty-year conventional
mortgage fixed interest rates were approximately 6.29% and 5.23% as of June 30,
2004 and 2003, respectively. Refinancing activity accounted for 24% and 51% of
originations in first quarter 2005 and 2004, respectively. Our Financial
Services segment will continue to focus on serving the customers of our Home
Building segment and increasing the percentage of conforming mortgage loans
provided to them. For the three months ended June 30, 2004, our conforming
mortgage business financed approximately 73% of our Home Building non-cash unit
closings. In addition, the Financial Services growth model includes plans to
increase the number of loan officers originating conforming retail loans and
improve their productivity. Our conforming 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 a portfolio-based model that produces more predictable earnings. 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 the ability or
willingness of prospective homebuyers to finance home purchases and/or further
curtail mortgage refinance activity. Although we expect that we would be able
to make adjustments in our operations to mitigate the effects of any increase
in interest rates, there can be no assurances that these efforts would be
successful. 26




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##### Table of Contents



Our Construction Services segment operating earnings for the first quarter
2005 remained relatively stable as compared to the first quarter 2004.
Industry conditions have created increased pricing pressure on construction
companies, which in turn has reduced our Construction Services operating
margins. However, revenues for the first quarter 2005 increased compared to
first quarter 2004 due to our focus on increasing market share. The commercial
construction environment remains challenged but is showing signs of improvement
as evidenced by the increase in backlog. At June 30, 2004, the backlog was
$1.65 billion, an increase of 17.5% over the prior year. Strategically, we
will continue to focus on our core geographic and selected industry segments to
achieve growth in revenues and operating earnings. In fiscal year 2004, we consummated the 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. HOME BUILDING The following summarizes the results of our Home Building operations for
the three months ended June 30, 2004 and 2003 (dollars in millions except per
unit data): For the Three Months Ended June 30,2004
    
    2003% Change
    
    
    
    
    
    
    % ChangeRevenues  Housing
    
    $
    1,967.0
    
    
    
    33.1
    %
    
    $
    1,477.4
    
    
    
    38.3
    %Revenues  Land Sales and Other
    
    
    31.1
    
    
    
    14.8
    %
    
    
    27.1
    
    
    
    (27.5
    %)Cost of Sales  Housing
    
    
    (1,433.8
    )
    
    
    30.0
    %
    
    
    (1,102.6
    )
    
    
    38.1
    %Cost of Sales  Land Sales and Other
    
    
    (39.2
    )
    
    
    58.1
    %
    
    
    (24.8
    )
    
    
    (1.2
    %)Selling, General and Administrative
Expenses
    
    
    (301.8
    )
    
    
    36.1
    %
    
    
    (221.7
    )
    
    
    21.9
    %Earnings from Unconsolidated Entities
    
    
    7.8
    
    
    
    30.0
    %
    
    
    6.0
    
    
    NMOperating Earnings
    
    $
    231.1
    
    
    
    43.2
    %
    
    $
    161.4
    
    
    
    61.6
    %Operating
Earnings as a Percentage of Revenues
    
    
    11.6
    %
    
    NM
    
    
    10.7
    %
    
    NM
 Home Buildings results are derived from its domestic and international
operations as described below. 27




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##### Table of Contents



Domestic 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. The following summarizes the results of our Home Building
domestic operations for the three months ended June 30, 2004 and 2003: For the Three Months Ended June 30,2004
    
    2003% Change
    
    
    
    
    
    
    % ChangeUnits Closed
    
    
    7,383
    
    
    
    16.3
    %
    
    
    6,349
    
    
    
    27.1
    %Average Unit Sales Price
    
    $
    253,592
    
    
    
    9.0
    %
    
    $
    232,699
    
    
    
    8.8
    %Operating Earnings Per Unit
    
    $
    30,284
    
    
    
    22.8
    %
    
    $
    24,667
    
    
    
    22.9
    %Backlog Units
    
    
    17,062
    
    
    
    20.9
    %
    
    
    14,111
    
    
    
    26.6
    %Average Operating Neighborhoods
    
    
    570
    
    
    
    2.2
    %
    
    
    558
    
    
    
    15.8
    %Closings Per Average Neighborhood
    
    
    13.0
    
    
    
    14.0
    %
    
    
    11.4
    
    
    
    9.6
    %Lots Owned
    
    
    82,853
    
    
    
    27.9
    %
    
    
    64,757
    
    
    
    23.5
    %Lots Controlled
    
    
    129,315
    
    
    
    53.1
    %
    
    
    84,454
    
    
    
    52.6
    %Total Lots Owned and Controlled
    
    
    212,168
    
    
    
    42.2
    %
    
    
    149,211
    
    
    
    38.4
    %
 Home
Buildings domestic operations financial performance 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 The following summarizes changes in performance indicators for the three
months ended June 30, 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 quarter ended June 30, 2004, average
operating neighborhoods increased 2.2% to 570 as compared to the quarter ended
June 30, 2003. The 14.0% increase in closings per average neighborhood in first quarter
2005 was largely the result of higher sales rates realized over the last twelve
months. These sale rate increases can be attributed to our continued focus on
market research, enhanced sales and marketing activities and activity-based
sales management. Sales orders for the quarter were particularly strong in the
southeast and west coast regions and, for all regions, totaled 9,031 units, an
increase of 7.4% versus the prior year. Home closing volume also increased
16.3%, to 7,383 homes. Strong housing market conditions, combined with our geographic, product
and segment diversification strategies, continued to drive higher average
selling prices. For first quarter 2005, average selling prices were up 9.0% to
$253,592. Average selling prices, excluding California, were up 6.9% to
$218,154 and Californias average selling price was up 17.3% to $471,192. 28




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##### Table of Contents



Operating margins for our domestic homebuilding operations improved to
11.8% for the first quarter from 10.4% in the prior year. Increased unit
volume, average selling price increases and continued focus on lowering direct
construction costs 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 believe that we can deal effectively with the challenges
we may experience 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 expanding margins. During the first quarter, 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 June 30, 2004 would produce approximately 100% of
our projected closings for fiscal year 2005, 90% of our projected closings for
fiscal year 2006, and 60% of our projected closings for fiscal year 2007. International In February 2004, we acquired through merger transactions the Partnership,
an investment previously accounted for 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. 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 throughout the United Kingdom. Included in
Home Buildings operating results were 314 closings and revenues and operating
earnings of $99.0 million and $7.5 million, respectively, for the three-month
period ended June 30, 2004. Earnings from unconsolidated entities related to
the international homebuilding operations of the Partnership were $4.8 million
for the three months ended June 30, 2003. 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. 29




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##### Table of Contents



The following summarizes the results of our Financial Services operations
for the three months ended June 30, 2004 and 2003 (dollars in millions): For the Three Months Ended June 30,2004
    
    2003% Change
    
    
    
    
    
    
    % ChangeRevenues
    
    $
    274.3
    
    
    
    2.8
    %
    
    $
    266.9
    
    
    
    47.9
    %Cost of Sales
    
    
    (61.6
    )
    
    
    20.8
    %
    
    
    (51.0
    )
    
    
    14.3
    %Selling, General and Administrative
Expenses
    
    
    (155.1
    )
    
    
    3.2
    %
    
    
    (150.3
    )
    
    
    34.7
    %Operating Earnings
    
    $
    57.6
    
    
    
    (12.2
    %)
    
    $
    65.6
    
    
    
    170.0
    %Interest Margin
    
    $
    97.6
    
    
    
    75.2
    %
    
    $
    55.7
    
    
    
    54.3
    %Origination Volume
    
    $
    4,942.8
    
    
    
    (9.0
    %)
    
    $
    5,432.1
    
    
    
    82.3
    %Number of Loans Originated
    
    
    30,693
    
    
    
    (15.3
    %)
    
    
    36,222
    
    
    
    63.6
    %Number of Loan Applications
    
    
    114,978
    
    
    
    2.7
    %
    
    
    111,956
    
    
    
    69.7
    %
 Financial Services results are primarily derived from conforming mortgage
lending and sub-prime home equity lending operations as described below. Conforming Mortgage Lending The following summarizes the results of our conforming mortgage lending
operations, which are conducted by CTX Mortgage Company, LLC and its related
companies, for the three months ended June 30, 2004 and 2003 (dollars in
millions): For the Three Months Ended June 30,2004
    
    2003% Change
    
    
    
    
    
    
    % ChangeRevenues
    
    $
    109.1
    
    
    
    (25.8
    %)
    
    $
    147.0
    
    
    
    63.5
    %Cost of Sales
    
    
    (7.0
    )
    
    
    250.0
    %
    
    
    (2.0
    )
    
    
    
    %Selling, General and Administrative
Expenses
    
    
    (70.1
    )
    
    
    (25.1
    %)
    
    
    (93.6
    )
    
    
    26.0
    %Operating Earnings
    
    $
    32.0
    
    
    
    (37.7
    %)
    
    $
    51.4
    
    
    
    277.9
    %Interest Margin
    
    $
    15.7
    
    
    
    528.0
    %
    
    $
    2.5
    
    
    
    8.7
    %Average Interest Earning Assets
    
    $
    1,661.6
    
    
    
    424.2
    %
    
    $
    317.0
    
    
    
    73.5
    %Average Yield
    
    
    5.47
    %
    
    NM
    
    
    5.81
    %
    
    NMAverage Interest Bearing Liabilities
    
    $
    1,601.3
    
    
    
    546.5
    %
    
    $
    247.7
    
    
    
    86.9
    %Average Rate Paid
    
    
    1.72
    %
    
    NM
    
    
    2.87
    %
    
    NM
 The revenues and operating earnings of CTX Mortgage Company, LLC and its
related companies are derived primarily from the sale of mortgage loans,
inclusive of all 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 30




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##### Table of Contents



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 conforming loans reduces our capital
investment and related risks, provides substantial liquidity and is an
efficient process given the size and maturity of the conforming mortgage loan
secondary capital markets. CTX Mortgage Company, LLC originates mortgage
loans, holds them for a short period 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, 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 of approximately
$1.19 billion at June 30, 2004. In addition, interest income and interest
expense of HSF-I subsequent to June 30, 2003 are reflected in our financial
statements. As a result of the consolidation, interest income reflected as
revenues and interest expense reflected as cost of sales in the table above
increased approximately $15.5 million and $4.5 million, respectively. HSF-I
purchases mortgage loans, at closing, from CTX Mortgage Company, LLC with the
proceeds from the issuance of medium term notes, secured liquidity notes and
subordinated certificates that are extendable for up to five years. CTX
Mortgage Company, LLC and its related companies sold $2.57 billion of mortgage
loans to investors and recognized net gains from mortgage banking operations of
$33.9 million during the three months ended June 30, 2004. CTX Mortgage
Company, LLC sold $4.05 billion of mortgage loans to HSF-I and other investors
and recognized net gains from mortgage banking operations of $77.0 million
during the three months ended June 30, 2003. In the normal course of its activities, CTX Mortgage Company, LLC (and its
related companies subsequent to the consolidation of HSF-I) carries inventories
of loans pending sale to third-party investors and earns an interest margin,
that 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. CTX Mortgage Company, LLC and its related companies use
short-term mortgage warehouse facilities to finance these inventories of loans.
The significant increase in interest margin is due to the consolidation of
HSF-I interest income and expense in our financial statements subsequent to
June 30, 2003. 31




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##### Table of Contents



The decrease in revenues for the three months ended June 30, 2004 is the
result of a decrease in the volume of loans originated and sold to the
secondary market and less favorable secondary market conditions. The following
table provides a comparative analysis of mortgage loan originations and
applications for the three months ended June 30, 2004 and 2003: For the Three Months Ended June 30,2004
    
    2003% Change
    
    
    
    
    
    
    % ChangeOrigination Volume
    
    $
    3,501.6
    
    
    
    (23.1
    %)
    
    $
    4,554.6
    
    
    
    83.6
    %Number of Loans OriginatedBuilder
    
    
    5,019
    
    
    
    13.2
    %
    
    
    4,435
    
    
    
    31.3
    %Retail
    
    
    14,154
    
    
    
    (37.9
    %)
    
    
    22,792
    
    
    
    83.7
    %19,173
    
    
    
    (29.6
    %)
    
    
    27,227
    
    
    
    72.5
    %Number of Loan ApplicationsBuilder
    
    
    6,146
    
    
    
    1.4
    %
    
    
    6,064
    
    
    
    34.1
    %Retail
    
    
    10,867
    
    
    
    (57.0
    %)
    
    
    25,255
    
    
    
    121.6
    %17,013
    
    
    
    (45.7
    %)
    
    
    31,319
    
    
    
    96.7
    %Average Loan Size
    
    $
    182,600
    
    
    
    9.1
    %
    
    $
    167,300
    
    
    
    6.4
    %Profit Per Loan
    
    $
    1,670
    
    
    
    (11.6
    %)
    
    $
    1,889
    
    
    
    100.3
    %
 The decrease in loan originations is primarily reflective of a decrease in
retail loan originations due to a decrease in refinancing activity partially
offset by an increase in loans originated for Centex Homes buyers. For the
three months ended June 30, 2004, CTX Mortgage Company, LLC originated 73% of
the non-cash closings of Centex Homes buyers, consistent with the prior year.
Profit per loan decreased due to a decrease in the volume of originations. CTX Mortgage Company, LLCs operations are influenced by borrowers
perceptions of and reactions to interest rates. Refinancing activity accounted
for 24% and 51% of originations in first quarter 2005 and 2004, respectively.
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. 32




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##### Table of Contents



Sub-Prime Home Equity Lending The following summarizes the results of our Sub-Prime Home Equity Lending
operations for the three months ended June 30, 2004 and 2003 (dollars in
millions): For the Three Months Ended June 30,2004
    
    2003% Change
    
    
    
    
    
    
    % ChangeRevenues
    
    $
    165.2
    
    
    
    37.8
    %
    
    $
    119.9
    
    
    
    32.3
    %Cost of Sales
    
    
    (54.6
    )
    
    
    11.4
    %
    
    
    (49.0
    )
    
    
    15.0
    %Selling, General and Administrative
Expenses:Operating Expenses
    
    
    (58.2
    )
    
    
    42.3
    %
    
    
    (40.9
    )
    
    
    30.3
    %Loan Loss Provision
    
    
    (26.8
    )
    
    
    69.6
    %
    
    
    (15.8
    )
    
    
    167.8
    %Operating Earnings
    
    $
    25.6
    
    
    
    80.3
    %
    
    $
    14.2
    
    
    
    32.7
    %Interest Margin
    
    $
    81.9
    
    
    
    53.9
    %
    
    $
    53.2
    
    
    
    57.4
    %Average Interest Earning Assets
    
    $
    6,746.5
    
    
    
    38.4
    %
    
    $
    4,876.1
    
    
    
    43.3
    %Average Yield
    
    
    8.09
    %
    
    NM
    
    
    8.39
    %
    
    NMAverage Interest Bearing Liabilities
    
    $
    6,979.3
    
    
    
    37.8
    %
    
    $
    5,065.0
    
    
    
    43.3
    %Average Rate Paid
    
    
    3.13
    %
    
    NM
    
    
    3.88
    %
    
    NM
 The revenues of Centex Home Equity Company, LLC, or Home Equity, increased
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. The factors that contributed to this
portfolio growth include:  
    
    Increased consumer demand
    
    Increased overall sales force
    
    Continued focus in key markets Revenues also increased due to a whole loan sale transaction in the
quarter ended June 30, 2004 whereby Home Equity sold loans to a third party;
however, servicing rights were retained. As a result of Home Equity retaining
the servicing rights, the whole loan sale transaction will generate two revenue
streams: (1) gain on sale of the mortgages and (2) the servicing income after
the sale. Home Equity recognized approximately $14.4 million in revenue this
quarter due to the whole loan sale. Operating expenses 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 its employees are directly related to
a corresponding increase in salaries and related costs, rent expense, group
insurance costs and advertising expenditures. The increase in the loss provision 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 loss ratios to continue to increase.
For a more detailed discussion of our accounting policy and methodology for
establishing the provision for losses, see Critical Accounting 33




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##### Table of Contents



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 is primarily derived from 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 increased primarily as a result of
an increase in the portfolio of mortgage loans held for investment and a
decrease in interest rates on debt used to fund mortgage loans. Average interest earning assets and liabilities increased primarily due to
an increase in the volume of loan originations and an increase in average loan
size (see table below). The fact that the average rate paid on interest
bearing liabilities decreased significantly more than the decrease of the yield
earned on interest earning assets, coupled with the increase in originations,
resulted in the increase in net interest margin. The following table provides a comparative analysis of mortgage loan
originations and applications for the three months ended June 30, 2004 and
2003: For the Three Months Ended June 30,2004
    
    2003% Change
    
    
    
    
    
    
    % ChangeOrigination Volume
    
    $
    1,441.2
    
    
    
    64.2
    %
    
    $
    877.5
    
    
    
    76.2
    %Number of Loans Originated
    
    
    11,520
    
    
    
    28.1
    %
    
    
    8,995
    
    
    
    41.5
    %Number of Loan Applications
    
    
    97,965
    
    
    
    21.5
    %
    
    
    80,637
    
    
    
    61.1
    %Average Loan Size
    
    $
    125,100
    
    
    
    28.2
    %
    
    $
    97,600
    
    
    
    24.6
    %
 The increase in origination volume 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 Home Equitys portfolio of mortgage loans as of
June 30, 2004 and 2003: For the Three Months Ended June 30,2004
    
    2003% Change
    
    
    
    
    
    
    % ChangeServicing Portfolio:Number of LoansPortfolio Accounting Method
    
    
    78,331
    
    
    
    19.7
    %
    
    
    65,456
    
    
    
    34.5
    %Serviced for Others
    
    
    13,253
    
    
    
    3.5
    %
    
    
    12,801
    
    
    
    (22.1
    %)Total
    
    
    91,584
    
    
    
    17.0
    %
    
    
    78,257
    
    
    
    20.2
    %Dollars in billionsPortfolio Accounting Method
    
    $
    6.92
    
    
    
    35.4
    %
    
    $
    5.11
    
    
    
    46.4
    %Serviced for Others
    
    
    0.94
    
    
    
    25.3
    %
    
    
    0.75
    
    
    
    (25.0
    %)Total
    
    $
    7.86
    
    
    
    34.1
    %
    
    $
    5.86
    
    
    
    30.5
    %
 34




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##### Table of Contents



Home Equity periodically securitizes its inventory of mortgage loan
originations in order to provide long-term funding for its mortgage operations
and to reduce its interest rate exposure on fixed rate loans. 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 nor the
offsetting debt resulting from these securitizations. However, the gain on
sale method does reflect Home Equitys retained residual interest in, as well
as the servicing rights to, the securitized loans 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 other category of Home Equitys servicing portfolio
also includes loans sold on a whole loan basis that Home Equity continues to
service. The structure of the securitization 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. 35




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##### Table of Contents



CONSTRUCTION SERVICES The following summarizes Construction Services results for the three
months ended June 30, 2004 and 2003 (dollars in millions): For the Three Months Ended June 30,2004
    
    2003% Change
    
    
    
    
    
    
    % ChangeRevenues
    
    $
    434.2
    
    
    
    15.5
    %
    
    $
    375.8
    
    
    
    4.2
    %Operating Earnings
    
    $
    4.5
    
    
    
    (2.2
    %)
    
    $
    4.6
    
    
    
    (43.2
    %)New Contracts Executed
    
    $
    338.0
    
    
    
    29.4
    %
    
    $
    261.3
    
    
    
    (4.0
    %)Backlog of Uncompleted Contracts
    
    $
    1,650.2
    
    
    
    17.5
    %
    
    $
    1,404.8
    
    
    
    (32.8
    %)
 Operating earnings for Construction Services remained relatively stable.
Industry conditions have created increased pricing pressure, which in turn has
reduced Construction Services operating margins. The increases in new
contracts executed and backlog of uncompleted contracts were the result of our
strategy to increase market share by focusing on key geographic markets and
certain industry markets. 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 June 30, 2004 and 2003, such work, which is not
included in backlog, was approximately $2.46 billion and $2.02 billion,
respectively. There is no assurance that this awarded work will result in
future revenues. 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 segment
information below. As previously 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. 36




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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 Ended June 30,2004
    
    2003% Change
    
    
    
    
    
    
    % ChangeOperating Loss from Home Services
Operations
    
    $
    (2.6
    )
    
    
    100.0
    %
    
    $
    (1.3
    )
    
    
    (18.8
    %)Operating Earnings (Loss) from
Investment Real Estate Operations
    
    
    9.9
    
    
    NM
    
    
    (0.1
    )
    
    
    (102.6
    %)Corporate General and Administrative
Expense
    
    
    (19.6
    )
    
    
    2.6
    %
    
    
    (19.1
    )
    
    
    51.6
    %Interest Expense
    
    
    (5.0
    )
    
    
    (67.7
    %)
    
    
    (15.5
    )
    
    
    21.1
    %Other
    
    
    
    
    
    
    (100.0
    %)
    
    
    (0.3
    )
    
    
    (57.1
    %)Operating Loss
    
    $
    (17.3
    )
    
    
    (52.3
    %)
    
    $
    (36.3
    )
    
    
    51.9
    %
 The increase in our home services divisions operating loss in first
quarter 2005 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 on new sales growth. The
increase in our investment real estate divisions operating earnings was
primarily related to the timing of property sales. Interest costs include interest expense of $5.0 million and $15.5 million
and interest expensed and relieved to Home Buildings costs and expenses of
$27.6 million and $13.2 million for the three months ended June 30, 2004 and
2003, respectively. Total interest costs, excluding Financial Services
interest expense, were $32.6 million and $28.6 million for the three months
ended June 30, 2004 and 2003, respectively. The increase in total interest
costs is primarily related to an increase in average debt outstanding for the
first quarter in fiscal 2005, as compared to June 30, 2003. Our effective tax rate related to continuing operations increased to
approximately 36% from 32% in the three month period ended June 30, 2004 and
2003, respectively, primarily 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 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 June 30, 2004
presentation. For the three months ended June 30, 2003, discontinued operations had
revenues of $183.6 million and operating earnings of $23.6 million. 37




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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 three months ended June 30, 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 Three Months Ended June 30,2004
    
    
    2003Net Cash (Used in) Provided byCentex*Operating Activities
    
    $
    (395,381
    )
    
    $
    (304,522
    )Investing Activities
    
    
    (20,357
    )
    
    
    (43,932
    )Financing Activities
    
    
    395,169
    
    
    
    (4,644
    )Effect of Exchange Rate on Cash
    
    
    541
    
    
    
    (20,028
    )
    
    
    (353,098
    )Financial ServicesOperating Activities
    
    
    (58,072
    )
    
    
    (5,773
    )Investing Activities
    
    
    (451,538
    )
    
    
    (482,852
    )Financing Activities
    
    
    518,668
    
    
    
    485,0279,058
    
    
    
    (3,598
    )Centex Corporation and SubsidiariesOperating Activities
    
    
    (435,912
    )
    
    
    (318,884
    )Investing Activities
    
    
    (489,436
    )
    
    
    (518,195
    )Financing Activities
    
    
    913,837
    
    
    
    480,383Effect of Exchange Rate on Cash
    
    
    541
    
    
    
    Net Decrease in Cash
    
    $
    (10,970
    )
    
    $
    (356,696
    )
  *
    
    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 medium-term notes and other debt securities. 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 three months ended June 30, 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. During the three months ended June 30, 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 38




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##### Table of Contents



Services financing activities were primarily from new debt used to fund
the increased residential mortgage loan activity. During the three months ended June 30, 2004, the Companys principal
amount of outstanding debt increased $688.9 million resulting
from: (1) Centex issuance of $350.0 million long-term note due 2015,
(2) an increase in Centex other
indebtedness of $40.0 million primarily relating to our international homebuilding operations
and (3) and a $298.9 million increase in Financial Services Home Equity asset-based
certificates. Our existing credit facilities and available capacity as of June 30, 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
    
    
    250,000
    
    
    
    59,553
    (2)1,050,000
    
    
    
    859,553
    (3)International HomebuildingMulti-Bank Secured Revolving Credit Facility
    
    
    180,740
    
    
    
    39,763Secured Bonding Facility
    
    
    18,074
    
    
    
    15,976Unsecured Credit Facility
    
    
    36,148
    
    
    
    36,148234,962
    
    
    
    91,887
    (4)Financial ServicesSecured Credit Facilities
    
    
    720,000
    
    
    
    171,664
    (5)Harwood Street Funding I, LLC Facility
    
    
    3,000,000
    
    
    
    1,807,318Harwood Street Funding II, LLC Facility
    
    
    2,500,000
    
    
    
    1,684,1756,220,000
    
    
    
    3,663,157$
    7,504,962
    
    
    $
    4,614,597
    (6)
  (1)
    
    This is an unsecured, committed, multi-bank revolving credit facility,
maturing in August 2006, which serves as backup for commercial paper
borrowings. As of June 30, 2004, there were no borrowings under this
backup facility, and our $700 million commercial paper program had no
amounts outstanding. We have not borrowed under this revolving credit
facility since its inception. In July 2004, the maturity date of this
revolving credit facility was extended to July 2007.(2)
    
    This is an unsecured, committed, multi-bank revolving letter of credit
facility, maturing in August 2004. Letters of credit under this facility
may expire no later than August 2005. In July 2004, this facility was
increased to $300 million and the maturity date was extended to July 2005.
In addition, the expiration period for letters of credit issued under
this facility was extended to 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, committed 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
credit facility guaranteed by Centex Corporation. 39




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##### Table of Contents



(5)
    
    CTX Mortgage Company, LLC and its related companies and Home Equity share in
a $500 million secured, committed credit facility to finance mortgage
inventory. CTX Mortgage Company, LLC and its related companies also maintain
$210 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 $4.58 billion of committed
capacity and $36.1 million of uncommitted capacity as of June 30, 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 finances its inventory of mortgage loans held
for sale principally through sales of conforming and Jumbo A 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 June 30, 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 and (2)
subordinated certificates maturing in September 2004, November 2005 and June
2006, 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 June 30, 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 June 30, 2004,
we were in compliance with all of these covenants. As of June 30, 2004, our short-term debt was $2.32 billion, all of which
was applicable to Financial Services. Certain of our short-term borrowings
vary on a seasonal basis and are generally financed at prevailing market
interest rates under our commercial paper program. 40




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##### Table of Contents



Our outstanding debt (in thousands) as of June 30, 2004 was as follows
(due dates are presented in fiscal years): CentexSenior Debt:Medium-term Note Programs, weighted-average 4.72%, due through 2007
    
    $
    258,000Long-term Notes, weighted-average 6.56%, due through 2015
    
    
    2,158,386Other Indebtedness, weighted-average 5.67%, due through 2010
    
    
    192,051Subordinated Debt:Subordinated Debentures, 8.75%, due in 2007
    
    
    99,781Subordinated Debentures, 7.38%, due in 2006
    
    
    99,9552,808,173Financial ServicesShort-term Debt:Short-term Notes Payable
    
    
    548,336Harwood Street Funding I and II, LLC Secured Liquidity Notes
    
    
    1,775,916Home Equity Asset-Backed Certificates, weighted-average 3.19%, due
through 2035
    
    
    6,263,856Harwood Street Funding I, LLC Variable Rate Subordinated Extendable
Certificates, weighted-average 3.33%, due through 2007
    
    
    139,000Harwood Street Funding II, LLC Variable Rate Subordinated Notes,
weighted-average 3.52%, due through 2009
    
    
    93,7508,820,858Total
    
    $
    11,629,031
 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 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
$186.5 million and $140.1 million at June 30, 2004 and March 31, 2004,
respectively. These joint ventures had total outstanding secured construction
debt of approximately $274.6 million and $202.2 million at June 30, 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 $70.3 million and $73.2 million at
June 30, 2004 and March 31, 2004, respectively. For certain of the recourse
joint ventures, which represents approximately $66.9 million and $69.9 million
of our maximum potential liability for the debt of all the recourse joint
ventures at June 30, 2004 and March 31, 2004, respectively, we become liable up
to the maximum amount for the recourse joint venture only to the extent that
the construction debt exceeds a certain percentage of the value of the project.
At June 30, 2004 and March 31, 2004, we were not liable for any of this debt
based on the values of the related projects as of such dates. For certain of
the joint ventures, we have also guaranteed the completion of 41




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the project by
the joint ventures and agreed to indemnify the construction lender for certain
environmental liabilities with respect to the project. In accordance with the
provisions of FIN 46, we determine if we are the primary beneficiary of joint
ventures based upon analysis of the variability of the expected gains and
losses of the joint venture. Based on this evaluation, if we are the primary
beneficiary, the joint venture is consolidated. 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. 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 these 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 three months ended June 30, 2004. 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 three months ended June 30, 2004. 42




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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 reclassified to land held under option agreements
not owned. 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. 43




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We believe that the allowance for losses is sufficient to provide for
credit losses in the existing residential mortgage loans held for investment,
which include real estate owned. 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. Although we consider the loan origination reserve reflected in our
consolidated balance sheet at June 30, 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 44




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of Senate Bill 800, which in part provides 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 During March 2004, the FASB issued an exposure draft entitled Share-Based
Payment, which would amend SFAS No. 123 and SFAS No. 95, Statements of Cash
Flows. 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.
Among other items, the exposure draft may require the Company to change its
method of valuing share-based payments and its method of accruing compensation
costs for awards with graded vesting schedules (that is, awards for which
different parts vest at different times). The exposure draft is not final and
is subject to a comment period that ended June 30, 2004. Although the exposure
draft and its eventual effective date are subject to revision, the proposed
effective date of the exposure draft is for fiscal years beginning after
December 15, 2004. If the exposure draft is implemented in its current form,
it is not expected to have a material impact on the Companys results of
operations or financial position.   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 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. 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. 45




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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, consumer confidence and income,
availability of financing, interest rate levels and changes in the economic
condition of 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,
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.
    
    Our international homebuilding operations are affected by fluctuations in the
value of the United States dollar as compared to the British pound sterling and
changes in the British economy to the extent those changes affect the homebuilding
market in the United Kingdom. We do not currently use any hedging instruments or
other strategies to manage currency risks related to fluctuations in the value of
the United States dollar or the British pound sterling.
    
    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 do experience moderate 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.
    
    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 affect 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 due to further curtailment of refinancing activity. 46




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
    
    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,
protecting the environment and health. 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. 
 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 debt outstanding 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 June 30, 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 June 30, 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 subsequent to the date of the foregoing evaluation that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting. 47




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Part II. Other Information 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities The following table details our common stock repurchases for the three
months ended June 30, 2004: Issuer Purchases of Equity SecuritiesTotal Number of
    
    
    Maximum Number ofShares Purchased as
    
    
    Shares that May YetTotal Number of
    
    
    Average Price Paid
    
    
    Part of Publicly
    
    
    Be Purchased UnderShares Purchased
    
    
    Per Share
    
    
    Announced Plan
    
    
    the PlanPeriodApril 1-30
    
    No shares repurchasedMay 1-31
    
    No shares repurchasedJune 1-30
    
    No shares repurchasedAt June 30, 2004
    
    
    
    
    
    
    
    
    
    
    5,625,600
    
    
    
    2,724,000
 On February 17, 2004, the Board of Directors increased our share
repurchase authorization of common stock to 4,000,000 shares adjusted for the
stock split. The total number of shares purchased in 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. 
 Item 6. Exhibits and Reports on Form 8-K  1)
    
    Exhibits  10.1
    
    Credit Agreement, dated as of July 16, 2004
among Centex Corporation, Bank of America, N.A., as
Administrative Agent, and the lenders named therein.10.2
    
    Letter of Credit and Reimbursement Agreement,
dated as of July 16, 2004 among Centex Corporation, Bank of
America, N.A., as Administrative Agent, and the lenders named
therein.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.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. 48




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2)
    
    Reports on Form 8-K Current Report on Form 8-K of Centex Corporation dated April 20,
2004 announcing the Companys results of operations for the
quarter and fiscal year ended March 31, 2004. Current Report on Form 8-K of Centex Corporation dated May 5, 2004
filing an underwriting agreement and an indenture supplement
relating to the Companys public offering of $350,000,000
aggregate principal amount of its Senior Notes due 2014. Current Report on Form 8-K of Centex Corporation dated May 18,
2004 announcing changes in the Companys senior management team. 49




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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 CORPORATIONRegistrantAugust
5,
    , 2004/s/ Leldon E. EcholsLeldon E. EcholsExecutive Vice President andChief Financial Officer(principal financial officer)August
5,
    , 2004/s/ Mark D. KempMark D. KempSenior Vice President-Controller(principal accounting officer)
 50




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EXHIBIT INDEX

EXHIBIT NUMBER
    
    DESCRIPTION10.1
    
    
    Credit Agreement, dated as of July 16, 2004
among Centex Corporation, Bank of America, N.A., as
Administrative Agent, and the lenders named therein.10.2
    
    
    Letter of Credit and Reimbursement Agreement,
dated as of July 16, 2004 among Centex Corporation, Bank of
America, N.A., as Administrative Agent, and the lenders named
therein.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.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.