Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended February 28, 2010.
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934. |
For the transition period from [ ] to [ ].
Commission File No. 001-09195
KB HOME
(Exact name of registrant as specified in its charter)
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Delaware
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95-3666267 |
(State of incorporation)
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(IRS employer identification number) |
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
(Address and telephone number of principal executive offices)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock as of
February 28, 2010.
Common stock, par value $1.00 per share: 88,025,838 shares outstanding, including 11,195,833 shares
held by the registrants Grantor Stock Ownership Trust and excluding 27,095,467 shares held in
treasury.
KB HOME
FORM 10-Q
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KB HOME
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts Unaudited)
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Three Months Ended February 28, |
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2010 |
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2009 |
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Total revenues |
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$ |
263,978 |
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$ |
307,361 |
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Homebuilding: |
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Revenues |
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$ |
262,511 |
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$ |
305,741 |
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Construction and land costs |
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(226,540 |
) |
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(290,958 |
) |
Selling, general and administrative expenses |
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(72,203 |
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(61,175 |
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Operating loss |
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(36,232 |
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(46,392 |
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Interest income |
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424 |
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3,513 |
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Interest expense, net of amounts capitalized |
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(19,407 |
) |
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(8,652 |
) |
Equity in loss of unconsolidated joint ventures |
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(1,184 |
) |
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(9,742 |
) |
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Homebuilding pretax loss |
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(56,399 |
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(61,273 |
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Financial services: |
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Revenues |
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1,467 |
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1,620 |
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Expenses |
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(893 |
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(860 |
) |
Equity in income of unconsolidated joint venture |
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1,321 |
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941 |
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Financial services pretax income |
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1,895 |
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1,701 |
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Total pretax loss |
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(54,504 |
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(59,572 |
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Income tax benefit (expense) |
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(200 |
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1,500 |
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Net loss |
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$ |
(54,704 |
) |
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$ |
(58,072 |
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Basic and diluted loss per share |
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$ |
(.71 |
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$ |
(.75 |
) |
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Basic and diluted average shares outstanding |
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76,834 |
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77,375 |
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Cash dividends declared per common share |
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$ |
.0625 |
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$ |
.0625 |
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See accompanying notes.
3
KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands Unaudited)
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February 28, |
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November 30, |
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2010 |
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2009 |
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Assets |
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Homebuilding: |
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Cash and cash equivalents |
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$ |
1,198,635 |
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$ |
1,174,715 |
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Restricted cash |
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90,222 |
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114,292 |
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Receivables |
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126,304 |
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337,930 |
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Inventories |
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1,580,130 |
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1,501,394 |
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Investments in unconsolidated joint ventures |
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105,737 |
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119,668 |
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Other assets |
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155,760 |
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154,566 |
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3,256,788 |
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3,402,565 |
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Financial services |
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28,670 |
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33,424 |
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Total assets |
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$ |
3,285,458 |
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$ |
3,435,989 |
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Liabilities and stockholders equity |
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Homebuilding: |
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Accounts payable |
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$ |
312,672 |
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$ |
340,977 |
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Accrued expenses and other liabilities |
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503,462 |
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560,368 |
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Mortgages and notes payable |
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1,815,261 |
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1,820,370 |
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2,631,395 |
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2,721,715 |
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Financial services |
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6,449 |
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7,050 |
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Common stock |
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115,121 |
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115,120 |
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Paid-in capital |
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861,001 |
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860,772 |
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Retained earnings |
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746,936 |
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806,443 |
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Accumulated other comprehensive loss |
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(22,244 |
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(22,244 |
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Grantor stock ownership trust, at cost |
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(121,657 |
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(122,017 |
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Treasury stock, at cost |
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(931,543 |
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(930,850 |
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Total stockholders equity |
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647,614 |
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707,224 |
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Total liabilities and stockholders equity |
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$ |
3,285,458 |
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$ |
3,435,989 |
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See accompanying notes.
4
KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands Unaudited)
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Three Months Ended February 28, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(54,704 |
) |
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$ |
(58,072 |
) |
Adjustments to reconcile net loss to net cash provided by
operating activities: |
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Equity in (income) loss of unconsolidated joint ventures |
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(137 |
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8,801 |
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Distributions of earnings from unconsolidated joint ventures |
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5,000 |
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662 |
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Amortization of discounts and issuance costs |
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530 |
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340 |
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Depreciation and amortization |
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892 |
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1,486 |
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Loss on voluntary reduction of revolving credit facility |
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1,366 |
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Tax benefits from stock-based compensation |
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2,050 |
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1,152 |
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Stock-based compensation expense |
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2,065 |
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468 |
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Inventory impairments and land option contract abandonments |
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13,362 |
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24,670 |
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Change in assets and liabilities: |
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Receivables |
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194,227 |
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197,449 |
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Inventories |
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(48,487 |
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57,448 |
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Accounts payable, accrued expenses and other liabilities |
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(92,321 |
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(133,016 |
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Other, net |
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(5,579 |
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2,131 |
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Net cash provided by operating activities |
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18,264 |
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103,519 |
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Cash flows from investing activities: |
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Investments in unconsolidated joint ventures |
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(2,340 |
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(7,748 |
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Purchases of property and equipment, net |
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(191 |
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(821 |
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Net cash used by investing activities |
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(2,531 |
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(8,569 |
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Cash flows from financing activities: |
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Change in restricted cash |
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24,070 |
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4,196 |
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Repayment of senior subordinated notes |
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(200,000 |
) |
Payments on mortgages, land contracts and other loans |
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(11,082 |
) |
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(8,843 |
) |
Issuance of common stock under employee stock plans |
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232 |
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795 |
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Payments of cash dividends |
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(4,803 |
) |
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(4,756 |
) |
Repurchases of common stock |
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(350 |
) |
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(616 |
) |
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Net cash provided (used) by financing activities |
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8,067 |
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(209,224 |
) |
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Net increase (decrease) in cash and cash equivalents |
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23,800 |
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(114,274 |
) |
Cash and cash equivalents at beginning of period |
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1,177,961 |
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1,141,518 |
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Cash and cash equivalents at end of period |
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$ |
1,201,761 |
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$ |
1,027,244 |
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See accompanying notes.
5
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. |
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Basis of Presentation and Significant Accounting Policies |
The accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial
information and the rules and regulations of the Securities and Exchange Commission (SEC).
Accordingly, certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with U.S. generally accepted accounting principles
(GAAP) have been condensed or omitted.
In the opinion of KB Home (the Company), the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring accruals) necessary to
present fairly the Companys consolidated financial position as of February 28, 2010, the results
of its consolidated operations for the three months ended February 28, 2010 and 2009, and its
consolidated cash flows for the three months ended February 28, 2010 and 2009. The results of
operations for the three months ended February 28, 2010 are not necessarily indicative of the
results to be expected for the full year, due to seasonal variations in operating results and
other factors. The consolidated balance sheet at November 30, 2009 has been taken from the
audited consolidated financial statements as of that date. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial statements for
the year ended November 30, 2009, which are contained in the Companys Annual Report on Form 10-K
for that period.
Use of Estimates
The accompanying unaudited consolidated financial statements have been prepared in conformity
with GAAP and, therefore, include amounts based on informed estimates and judgments of
management. Actual results could differ from these estimates.
Loss per share
Basic loss per share is calculated by dividing the net loss by the average number of common
shares outstanding for the period. Diluted loss per share is calculated by dividing the net loss
by the average number of common shares outstanding including all potentially dilutive shares
issuable under outstanding stock options. All outstanding stock options were excluded from the
diluted loss per share calculation for the three months ended February 28, 2010 and 2009 because
the effect of their inclusion would be antidilutive, or would decrease the reported loss per
share.
Comprehensive loss
The Companys comprehensive loss was $54.7 million for the three months ended February 28, 2010
and $58.1 million for the three months ended February 28, 2009. The accumulated balances of
other comprehensive loss in the consolidated balance sheets as of February 28, 2010 and November
30, 2009 are comprised solely of adjustments recorded directly to accumulated other comprehensive
loss in accordance with Accounting Standards Codification Topic No. 715, Compensation
Retirement Benefits (ASC 715). ASC 715 requires an employer to recognize the funded status of
defined postretirement benefit plans as an asset or liability on the balance sheet and requires
any unrecognized prior service costs and actuarial gains/losses to be recognized in accumulated
other comprehensive income (loss).
Reclassifications
Certain amounts in the consolidated financial statements of prior periods have been reclassified
to conform to the 2010 presentation.
2. |
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Stock-Based Compensation |
The Company
adopted the fair value recognition provisions of Accounting Standards Codification
Topic No. 718, Compensation Stock Compensation (ASC 718), using
the modified prospective transition method
6
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. |
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Stock-Based Compensation (continued) |
effective December 1, 2005. ASC 718 requires a public entity to measure compensation cost
associated with awards of equity instruments based on the grant-date fair value of the awards
over the requisite service period. ASC 718 requires public entities to initially measure
compensation cost associated with awards of liability instruments based on their current fair
value. The fair value of that award is to be remeasured subsequently at each reporting date
through the settlement date. Changes in fair value during the requisite service period will be
recognized as compensation cost over that period.
Stock Options
In accordance with ASC 718, the Company estimates the grant-date fair value of its stock options
using the Black-Scholes option-pricing model, which takes into account assumptions regarding the
dividend yield, the risk-free interest rate, the expected stock-price volatility and the expected
term of the stock options. The following table summarizes the stock options outstanding and stock
options exercisable as of February 28, 2010, as well as stock options activity during the three
months then ended:
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Weighted |
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Average Exercise |
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Options |
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Price |
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Options outstanding at beginning of period |
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5,711,701 |
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$ |
27.39 |
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Granted |
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122,956 |
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|
14.96 |
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Exercised |
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(1,000 |
) |
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|
13.95 |
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Cancelled |
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(128,432 |
) |
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15.44 |
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Options outstanding at end of period |
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5,705,225 |
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27.39 |
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Options exercisable at end of period |
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4,153,377 |
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|
31.19 |
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|
As of February 28, 2010, the weighted average remaining contractual life of stock options
outstanding and stock options exercisable was 8.3 years and 7.8 years, respectively. There was
$6.7 million of total unrecognized compensation cost related to unvested stock option awards as
of February 28, 2010. For the three months ended February 28, 2010 and 2009, stock-based
compensation expense associated with stock options totaled $1.5 million and $.5 million,
respectively. The aggregate intrinsic value of stock options outstanding and stock options
exercisable was $2.9 million and $1.7 million, respectively, as of February 28, 2010. (The
intrinsic value of a stock option is the amount by which the market value of a share of the
underlying stock exceeds the exercise price of the stock option.)
Other Stock-Based Awards
From time to time, the Company grants restricted stock, phantom shares and stock appreciation
rights to various employees. The Company recognized total compensation expense of $6.0 million
in the three months ended February 28, 2010 and total compensation income of $.6 million in the
three months ended February 28, 2009 related to these stock-based awards.
As of February 28, 2010, the Company has identified five reporting segments, comprised of four
homebuilding reporting segments and one financial services reporting segment, within its
consolidated operations in accordance with Accounting Standards Codification Topic No. 280,
Segment Reporting.
7
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. |
|
Segment Information (continued) |
As of February 28, 2010, the Companys homebuilding reporting segments conducted ongoing
operations in the following states:
West Coast: California
Southwest: Arizona and Nevada
Central: Colorado and Texas
Southeast: Florida, Maryland, North Carolina, South Carolina and Virginia
The Companys homebuilding reporting segments are engaged in the acquisition and development of
land primarily for residential purposes and offer a wide variety of homes that are designed to
appeal to first-time, move-up and active adult homebuyers.
The Companys homebuilding reporting segments were identified based primarily on similarities in
economic and geographic characteristics, product types, regulatory environments, methods used to
sell and construct homes and land acquisition characteristics. The Company evaluates segment
performance primarily based on segment pretax results.
The Companys financial services reporting segment provides title and insurance services to the
Companys homebuyers. This segment also provides mortgage banking services to the Companys
homebuyers indirectly through KBA Mortgage, LLC (KBA Mortgage) (formerly known as KB Home
Mortgage, LLC), a joint venture with a subsidiary of Bank of America, N.A. The Companys
financial services reporting segment conducts operations in the same markets as the Companys
homebuilding reporting segments.
The Companys reporting segments follow the same accounting policies used for the Companys
consolidated financial statements. Operational results of each segment are not necessarily
indicative of the results that would have occurred had the segment been an independent,
stand-alone entity during the periods presented, nor are they indicative of the results to be
expected in future periods.
The following tables present financial information relating to the Companys reporting segments
(in thousands):
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Three Months Ended February 28, |
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2010 |
|
|
2009 |
|
Revenues: |
|
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|
|
|
|
|
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West Coast |
|
$ |
108,434 |
|
|
$ |
108,520 |
|
Southwest |
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33,848 |
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|
52,273 |
|
Central |
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82,925 |
|
|
|
77,645 |
|
Southeast |
|
|
37,304 |
|
|
|
67,303 |
|
|
|
|
|
|
|
|
Total homebuilding revenues |
|
|
262,511 |
|
|
|
305,741 |
|
Financial services |
|
|
1,467 |
|
|
|
1,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
263,978 |
|
|
$ |
307,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss): |
|
|
|
|
|
|
|
|
West Coast |
|
$ |
3,357 |
|
|
$ |
(12,322 |
) |
Southwest |
|
|
(4,463 |
) |
|
|
(20,738 |
) |
Central |
|
|
(7,304 |
) |
|
|
(6,156 |
) |
Southeast |
|
|
(20,186 |
) |
|
|
(13,825 |
) |
Corporate and other (a) |
|
|
(27,803 |
) |
|
|
(8,232 |
) |
|
|
|
|
|
|
|
Total homebuilding pretax loss |
|
|
(56,399 |
) |
|
|
(61,273 |
) |
Financial services |
|
|
1,895 |
|
|
|
1,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pretax loss |
|
$ |
(54,504 |
) |
|
$ |
(59,572 |
) |
|
|
|
|
|
|
|
|
|
|
(a) |
|
Corporate and other includes corporate general and administrative expenses. |
8
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. |
|
Segment Information (continued) |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, |
|
|
|
2010 |
|
|
2009 |
|
Equity in income (loss) of unconsolidated joint ventures: |
|
|
|
|
|
|
|
|
West Coast |
|
$ |
100 |
|
|
$ |
195 |
|
Southwest |
|
|
(2,175 |
) |
|
|
(7,687 |
) |
Central |
|
|
|
|
|
|
21 |
|
Southeast |
|
|
891 |
|
|
|
(2,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(1,184 |
) |
|
$ |
(9,742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory impairments: |
|
|
|
|
|
|
|
|
West Coast |
|
$ |
1,196 |
|
|
$ |
6,991 |
|
Southwest |
|
|
962 |
|
|
|
11,927 |
|
Central |
|
|
|
|
|
|
|
|
Southeast |
|
|
4,677 |
|
|
|
5,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,835 |
|
|
$ |
24,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land option contract abandonments: |
|
|
|
|
|
|
|
|
West Coast |
|
$ |
|
|
|
$ |
283 |
|
Southwest |
|
|
|
|
|
|
|
|
Central |
|
|
6,340 |
|
|
|
|
|
Southeast |
|
|
187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,527 |
|
|
$ |
283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint venture impairments: |
|
|
|
|
|
|
|
|
West Coast |
|
$ |
|
|
|
$ |
|
|
Southwest |
|
|
|
|
|
|
5,426 |
|
Central |
|
|
|
|
|
|
|
|
Southeast |
|
|
|
|
|
|
2,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
7,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2010 |
|
|
2009 |
|
Assets: |
|
|
|
|
|
|
|
|
West Coast |
|
$ |
844,125 |
|
|
$ |
838,510 |
|
Southwest |
|
|
356,319 |
|
|
|
346,035 |
|
Central |
|
|
327,757 |
|
|
|
357,688 |
|
Southeast |
|
|
388,482 |
|
|
|
361,551 |
|
Corporate and other |
|
|
1,340,105 |
|
|
|
1,498,781 |
|
|
|
|
|
|
|
|
Total homebuilding assets |
|
|
3,256,788 |
|
|
|
3,402,565 |
|
Financial services |
|
|
28,670 |
|
|
|
33,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,285,458 |
|
|
$ |
3,435,989 |
|
|
|
|
|
|
|
|
9
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. |
|
Segment Information (continued) |
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2010 |
|
|
2009 |
|
Investments in unconsolidated joint ventures: |
|
|
|
|
|
|
|
|
West Coast |
|
$ |
42,176 |
|
|
$ |
54,795 |
|
Southwest |
|
|
55,394 |
|
|
|
56,779 |
|
Central |
|
|
|
|
|
|
|
|
Southeast |
|
|
8,167 |
|
|
|
8,094 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
105,737 |
|
|
$ |
119,668 |
|
|
|
|
|
|
|
|
The following tables present financial information relating to the Companys financial services
reporting segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, |
|
|
|
2010 |
|
|
2009 |
|
Revenues |
|
|
|
|
|
|
|
|
Interest income |
|
$ |
1 |
|
|
$ |
17 |
|
Title services |
|
|
156 |
|
|
|
187 |
|
Insurance commissions |
|
|
1,310 |
|
|
|
1,416 |
|
|
|
|
|
|
|
|
Total |
|
|
1,467 |
|
|
|
1,620 |
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
General and administrative |
|
|
(893 |
) |
|
|
(860 |
) |
|
|
|
|
|
|
|
Operating income |
|
|
574 |
|
|
|
760 |
|
Equity in income of unconsolidated joint venture |
|
|
1,321 |
|
|
|
941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income |
|
$ |
1,895 |
|
|
$ |
1,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,126 |
|
|
$ |
3,246 |
|
Receivables |
|
|
442 |
|
|
|
1,395 |
|
Investment in unconsolidated joint venture |
|
|
25,069 |
|
|
|
28,748 |
|
Other assets |
|
|
33 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
28,670 |
|
|
$ |
33,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
6,449 |
|
|
$ |
7,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
6,449 |
|
|
$ |
7,050 |
|
|
|
|
|
|
|
|
10
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Homes, lots and improvements in production |
|
$ |
1,142,113 |
|
|
$ |
1,091,851 |
|
|
|
|
|
|
|
|
|
|
Land under development |
|
|
438,017 |
|
|
|
409,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,580,130 |
|
|
$ |
1,501,394 |
|
|
|
|
|
|
|
|
The Companys interest costs are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Capitalized interest at beginning of period |
|
$ |
291,279 |
|
|
$ |
361,619 |
|
|
|
|
|
|
|
|
|
|
Capitalized interest related to
consolidation of previously unconsolidated
joint ventures |
|
|
9,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest incurred (a) |
|
|
32,051 |
|
|
|
29,258 |
|
|
|
|
|
|
|
|
|
|
Interest expensed (a) |
|
|
(19,407 |
) |
|
|
(8,652 |
) |
|
|
|
|
|
|
|
|
|
Interest amortized |
|
|
(23,386 |
) |
|
|
(16,892 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest at end of period (b) |
|
$ |
290,451 |
|
|
$ |
365,333 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts for the three months ended February 28, 2010 include $1.4 million of debt
issuance costs written off in connection with the Companys voluntary reduction of the
aggregate commitment under its unsecured revolving credit facility (the Credit Facility)
from $650.0 million to $200.0 million. |
|
(b) |
|
Inventory impairment charges are recognized against all inventory costs of a community,
such as land, land improvements, costs of home construction and capitalized interest.
Capitalized interest amounts presented in the table reflect the gross amount of capitalized
interest as impairment charges recognized are not generally allocated to specific
components of inventory. |
6. |
|
Inventory Impairments and Land Option Contract Abandonments |
Each land parcel or community in the Companys owned inventory is assessed to determine if
indicators of potential impairment exist. Impairment indicators are assessed separately for each
land parcel or community on a quarterly basis and include, but are not limited to: significant
decreases in sales rates, average selling prices, volume of homes delivered, gross margins on
homes delivered or projected margins on homes in backlog or future housing sales; significant
increases in budgeted land development and construction costs or cancellation rates; or projected
losses on expected future land sales. If indicators of potential impairment exist for a land
parcel or community, the identified inventory is evaluated for recoverability in accordance with
Accounting Standards Codification Topic No. 360, Property, Plant, and Equipment (ASC 360).
When an indicator of potential impairment is identified, the Company tests the asset for
recoverability by comparing the carrying amount of the asset to the undiscounted future net cash
flows expected to be generated by the asset. The undiscounted future net cash flows are impacted
by trends and factors known to the Company at the time they are calculated and the Companys
expectations related to: market supply and demand, including estimates concerning average selling
prices; sales and cancellation rates; and anticipated land development, construction and overhead
costs to be incurred. These estimates, trends and expectations are specific to each land parcel
or community and may vary among land parcels or communities.
11
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. |
|
Inventory Impairments and Abandonments (continued) |
A real estate asset is considered impaired when its carrying amount is greater than the
undiscounted future net cash flows the asset is expected to generate. Impaired real estate
assets are written down to fair value, which is primarily based on the estimated future cash
flows discounted for inherent risk associated with each asset. These discounted cash flows are
impacted by: the risk-free rate of return; expected risk premium based on estimated land
development, construction and delivery timelines; market risk from potential future price
erosion; cost uncertainty due to development or construction cost increases; and other risks
specific to the asset or conditions in the market in which the asset is located at the time the
assessment is made. These factors are specific to each land parcel or community and may vary
among land parcels or communities.
Based on the results of its evaluations, the Company recognized pretax, noncash inventory
impairment charges of $6.8 million in the first quarter of 2010 and $24.4 million in the first
quarter of 2009. As of February 28, 2010, the aggregate carrying value of inventory impacted by
pretax, noncash inventory impairment charges was $558.8 million, representing 107 communities and
various other land parcels. As of November 30, 2009, the aggregate carrying value of inventory
impacted by pretax, noncash inventory impairment charges was $603.9 million, representing 128
communities and various other land parcels.
The Companys optioned inventory is assessed to determine whether it continues to meet the
Companys internal investment standards and marketing strategy. Assessments are made separately
for each optioned parcel on a quarterly basis and are affected by, among other factors: current
and/or anticipated sales rates, average selling prices and home delivery volume; estimated land
development and construction costs; and projected profitability on expected future housing or
land sales. When a decision is made not to exercise certain land option contracts due to market
conditions and/or changes in market strategy, the Company writes off the costs, including
non-refundable deposits and pre-acquisition costs, related to the abandoned projects. Based on
the results of its assessments, the Company recognized land option contract abandonment charges
of $6.5 million in the first quarter of 2010 and $.3 million in the first quarter of 2009.
The inventory impairment and land option contract abandonment charges are included in
construction and land costs in the Companys consolidated statements of operations.
Due to the judgment and assumptions applied in the estimation process with respect to inventory
impairments and land option contract abandonments, it is possible that actual results could
differ substantially from those estimated.
7. |
|
Fair Value Disclosures |
Accounting Standards Codification Topic No. 820, Fair Value Measurements and Disclosures,
provides a framework for measuring the fair value of assets and liabilities under GAAP and
establishes a fair value hierarchy that requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The fair value
hierarchy can be summarized as follows:
|
|
|
Level 1
|
|
Fair value determined based on quoted prices in active markets for identical assets
or liabilities. |
|
|
|
Level 2
|
|
Fair value determined using significant observable inputs, such as quoted prices for
similar assets or liabilities or quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability, or inputs that are derived principally from or
corroborated by observable market data, by correlation or other means. |
|
|
|
Level 3
|
|
Fair value determined using significant unobservable inputs, such as pricing models,
discounted cash flows, or similar techniques. |
12
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. |
|
Fair Value Disclosures (continued) |
The following table presents the Companys assets measured at fair value on a nonrecurring basis
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Ended |
|
|
Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
February 28, |
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
Description |
|
2010 (a) |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held and used |
|
$ |
3,907 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,907 |
|
|
$ |
(6,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amount represents the aggregate fair values for communities where the Company recognized noncash
inventory impairment charges during the period, as of the date that the fair value measurements were
made. The carrying value for these communities may have subsequently increased or decreased from the
fair value reflected due to activity that has occurred since the measurement date. |
In accordance with the provisions of ASC 360, long-lived assets held and used with a carrying
amount of $10.7 million were written down to their fair value of $3.9 million during the three
months ended February 28, 2010, resulting in noncash inventory impairment charges of $6.8
million.
The fair values for long-lived assets held and used, determined using Level 3 inputs, were
primarily based on the estimated future cash flows discounted for inherent risk associated with
each asset. These discounted cash flows are impacted by: the risk-free rate of return; expected
risk premium based on estimated land development, construction and delivery timelines; market
risk from potential future price erosion; cost uncertainty due to development or construction
cost increases; and other risks specific to the asset or conditions in the market in which the
asset is located at the time the assessment is made. These factors are specific to each land
parcel or community and may vary among land parcels or communities.
The following table presents the carrying values and estimated fair values of the Companys
financial instruments, except for those for which the carrying values approximate fair values (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2010 |
|
|
November 30, 2009 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
|
|
Value |
|
|
Fair Value |
|
|
Value |
|
|
Fair Value |
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes due 2011 at 6 3/8% |
|
$ |
99,828 |
|
|
$ |
102,000 |
|
|
$ |
99,800 |
|
|
$ |
100,250 |
|
Senior notes due 2014 at 5 3/4% |
|
|
249,393 |
|
|
|
238,750 |
|
|
|
249,358 |
|
|
|
234,375 |
|
Senior notes due 2015 at 5 7/8% |
|
|
298,922 |
|
|
|
278,640 |
|
|
|
298,875 |
|
|
|
276,000 |
|
Senior notes due 2015 at 6 1/4% |
|
|
449,709 |
|
|
|
420,750 |
|
|
|
449,698 |
|
|
|
419,063 |
|
Senior notes due 2017 at 9.1% |
|
|
259,997 |
|
|
|
276,263 |
|
|
|
259,884 |
|
|
|
276,263 |
|
Senior notes due 2018 at 7 1/4% |
|
|
298,813 |
|
|
|
282,000 |
|
|
|
298,787 |
|
|
|
281,250 |
|
The fair values of the Companys senior notes are estimated based on quoted market prices.
The carrying amounts reported for cash and cash equivalents, restricted cash, and mortgages and
land contracts due to land sellers and other loans approximate fair values.
13
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. |
|
Variable Interest Entities |
In June 2009, the Financial Accounting Standards Board (FASB) revised the authoritative
guidance for determining the primary beneficiary of a variable interest entity (VIE). In
December 2009, the FASB issued Accounting Standards Update No. 2009-17, Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17),
which provides amendments to Accounting Standards Codification Topic No. 810, Consolidation
(ASC 810) to reflect the revised guidance. The amendments to ASC 810 replace the
quantitative-based risk and rewards calculation for determining which reporting entity, if any,
has a controlling interest in a VIE with an approach focused on identifying which reporting
entity has the power to direct the activities of a VIE that most significantly impact the
entitys economic performance and (1) the obligation to absorb losses of the entity or (2) the
right to receive benefits from the entity. The amendments also require additional disclosures
about a reporting entitys involvement with VIEs. The Company adopted the amended provisions of
ASC 810 effective December 1, 2009. The adoption of the amended provisions of ASC 810 did not
have a material effect on the Companys consolidated financial position or results of operations.
The Company participates in joint ventures from time to time for the purpose of conducting land
acquisition, development and/or other homebuilding activities. Its investments in these joint
ventures may create a variable interest in a VIE, depending on the contractual terms of the
arrangement. The Company analyzes its joint ventures in accordance with ASC 810 to determine
whether they are VIEs and, if so, whether the Company is the primary beneficiary. All of the
Companys joint ventures at February 28, 2010 and November 30, 2009 were determined under the
provisions of ASC 810 applicable at each such date to be unconsolidated joint ventures either
because they were not VIEs or, if they were VIEs, the Company was not the primary beneficiary of
the VIEs.
In the ordinary course of its business, the Company enters into land option contracts (or similar
agreements) in order to procure land for the construction of homes. The use of such land option
and other contracts generally allows the Company to reduce the risks associated with direct land
ownership and development, reduces the Companys capital and financial commitments, including
interest and other carrying costs, and minimizes the amount of the Companys land inventories on
its consolidated balance sheets. Under such land option contracts, the Company will pay a
specified option deposit or earnest money deposit in consideration for the right to purchase land
in the future, usually at a predetermined price. Under the requirements of ASC 810, certain of
the Companys land option contracts may create a variable interest for the Company, with the land
seller being identified as a VIE.
In compliance with ASC 810, the Company analyzes its land option contracts and other contractual
arrangements to determine whether the corresponding land sellers are VIEs and, if so, whether the
Company is the primary beneficiary. Although the Company does not have legal title to the
optioned land, ASC 810 requires the Company to consolidate a VIE if the Company is determined to
be the primary beneficiary. As a result of its analyses, the Company determined that as of
February 28, 2010 it was not the primary beneficiary of any VIEs from which it is purchasing land
under land option contracts. Since adopting the amended provisions of ASC 810, in determining
whether it is the primary beneficiary, the Company considers, among other things, whether it has
the power to direct the activities of the VIE that most significantly impact the entitys
economic performance. Such activities would include, among other things, determining or limiting
the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE,
or arranging financing for the VIE. The Company also considers whether it has the obligation to
absorb losses of the VIE or the right to receive benefits from the VIE.
Based on its analyses as of November 30, 2009, which were performed before the Company adopted the
amended provisions of ASC 810, the Company determined that it was the primary beneficiary of
certain VIEs from which it was purchasing land under land option contracts and, therefore,
consolidated such VIEs. Prior to its adoption of the amended provisions of ASC 810, in determining
whether it was the primary beneficiary, the Company considered, among other things, the size of its
deposit relative to the contract price, the risk of obtaining land entitlement approval, the risk
associated with land development required under the land option contract, and the risk of changes
in the market value of the optioned land during the contract period. The consolidation of VIEs in
which the Company determined it was the primary beneficiary increased inventories,
14
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. |
|
Variable Interest Entities (continued) |
with a corresponding increase to accrued expenses and other liabilities, on the Companys
consolidated balance sheets by $21.0 million at November 30, 2009. The liabilities related to
the Companys consolidation of VIEs from which it has arranged to purchase land under option and
other contracts represent the difference between the purchase price of land not yet purchased and
the Companys cash deposits. The Companys cash deposits related to these land option and other
contracts totaled $4.1 million at November 30, 2009. Creditors, if any, of these VIEs had no
recourse against the Company.
As of February 28, 2010, the Company had cash deposits totaling $1.2 million associated with land
option and other contracts that the Company determined to be unconsolidated VIEs, having an
aggregate purchase price of $26.7 million, and had cash deposits totaling $7.3 million associated
with land option and other contracts that the Company determined were not VIEs, having an
aggregate purchase price of $189.5 million.
The Companys exposure to loss related to its land option and other contracts with third parties
and unconsolidated entities consisted of its non-refundable deposits, which totaled $8.5 million
at February 28, 2010 and $9.6 million at November 30, 2009. In addition, the Company had
outstanding letters of credit of $4.2 million at February 28, 2010 and $8.7 million at November
30, 2009 in lieu of cash deposits under certain land option contracts.
The Company also evaluates land option contracts in accordance with Accounting Standards
Codification Topic No. 470, Debt (ASC 470), and, as a result of its evaluations, increased
inventories, with a corresponding increase to accrued expenses and other liabilities, on its
consolidated balance sheets by $22.8 million at February 28, 2010 and $36.1 million at November
30, 2009.
9. |
|
Investments in Unconsolidated Joint Ventures |
The Company participates in unconsolidated joint ventures that conduct land acquisition,
development and/or other homebuilding activities in various markets, typically where the
Companys homebuilding operations are located. The Companys partners in these unconsolidated
joint ventures are unrelated homebuilders, land developers and other real estate entities, or
commercial enterprises. Through these unconsolidated joint ventures, the Company seeks to reduce
and share market and development risks and to reduce its investment in land inventory, while
potentially increasing the number of homesites it controls or will own. In some instances,
participating in unconsolidated joint ventures enables the Company to acquire and develop land
that it might not otherwise have access to due to a projects size, financing needs, duration of
development or other circumstances. While the Company views its participation in unconsolidated
joint ventures as beneficial to its homebuilding activities, it does not view such participation
as essential.
The Company and/or its unconsolidated joint venture partners typically obtain options or enter
into other arrangements to have the right to purchase portions of the land held by the
unconsolidated joint ventures. The prices for these land options or other arrangements are
generally negotiated prices that approximate fair value. When an unconsolidated joint venture
sells land to the Companys homebuilding operations, the Company defers recognition of its share
of such unconsolidated joint venture earnings until a home sale is closed and title passes to a
homebuyer, at which time the Company accounts for those earnings as a reduction of the cost of
purchasing the land from the unconsolidated joint venture.
The Company and its unconsolidated joint venture partners make initial or ongoing capital
contributions to these unconsolidated joint ventures, typically on a pro rata basis. The
obligations to make capital contributions are governed by each unconsolidated joint ventures
respective operating agreement and related documents.
Each unconsolidated joint venture is obligated to maintain financial statements in accordance
with GAAP. The Company shares in profits and losses of these unconsolidated joint ventures
generally in accordance with its respective equity interests.
15
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. |
|
Investments in Unconsolidated Joint Ventures (continued) |
The following table presents combined condensed statement of operations information for the
Companys unconsolidated joint ventures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
85,802 |
|
|
$ |
11,476 |
|
Construction and land costs |
|
|
(88,520 |
) |
|
|
(18,501 |
) |
Other expenses, net |
|
|
(322 |
) |
|
|
(6,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss |
|
$ |
(3,040 |
) |
|
$ |
(13,160 |
) |
|
|
|
|
|
|
|
With respect to the Companys investment in unconsolidated joint ventures, its equity in loss of
unconsolidated joint ventures included pretax, noncash impairment charges of $7.6 million for the
three months ended February 28, 2009. There were no such charges for the three months ended
February 28, 2010.
The following table presents combined condensed balance sheet information for the Companys
unconsolidated joint ventures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Cash |
|
$ |
16,414 |
|
|
$ |
12,816 |
|
Receivables |
|
|
142,418 |
|
|
|
142,639 |
|
Inventories |
|
|
586,069 |
|
|
|
709,130 |
|
Other assets |
|
|
56,746 |
|
|
|
56,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
801,647 |
|
|
$ |
921,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity |
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
57,536 |
|
|
$ |
94,533 |
|
Mortgages and notes payable |
|
|
384,427 |
|
|
|
514,172 |
|
Equity |
|
|
359,684 |
|
|
|
312,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
801,647 |
|
|
$ |
921,524 |
|
|
|
|
|
|
|
|
The following table presents information relating to the Companys investments in unconsolidated
joint ventures and the outstanding debt of unconsolidated joint ventures as of the dates
specified, categorized by the nature of the Companys potential responsibility under a guaranty,
if any, for such debt (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Number of investments in unconsolidated joint ventures: |
|
|
|
|
|
|
|
|
With limited recourse debt (a) |
|
|
2 |
|
|
|
2 |
|
With non-recourse debt (b) |
|
|
|
|
|
|
2 |
|
Other (c) |
|
|
9 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11 |
|
|
|
13 |
|
|
|
|
|
|
|
|
16
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. |
|
Investments in Unconsolidated Joint Ventures (continued) |
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated joint ventures: |
|
|
|
|
|
|
|
|
With limited recourse debt |
|
$ |
1,386 |
|
|
$ |
1,277 |
|
With non-recourse debt |
|
|
|
|
|
|
9,983 |
|
Other |
|
|
104,351 |
|
|
|
108,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
105,737 |
|
|
$ |
119,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding debt of unconsolidated joint ventures: |
|
|
|
|
|
|
|
|
With limited recourse debt |
|
$ |
12,045 |
|
|
$ |
11,198 |
|
With non-recourse debt |
|
|
|
|
|
|
130,025 |
|
Other |
|
|
372,382 |
|
|
|
372,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (d) |
|
$ |
384,427 |
|
|
$ |
514,172 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
This category consists of unconsolidated joint ventures as to which the Company has
entered into a loan-to-value maintenance guaranty with respect to a portion of each such
unconsolidated joint ventures outstanding secured debt. |
|
(b) |
|
This category consists of unconsolidated joint ventures as to which the Company does not
have a guaranty or any other obligation to repay or to support the value of the collateral
(which collateral includes any letters of credit) underlying such unconsolidated joint
ventures respective outstanding secured debt. |
|
(c) |
|
This category consists of unconsolidated joint ventures with no outstanding debt and an
unconsolidated joint venture as to which the Company has entered into a several guaranty.
This guaranty, by its terms, purports to require the Company to guarantee the repayment of a
portion of the unconsolidated joint ventures outstanding debt in the event an involuntary
bankruptcy proceeding is filed against the unconsolidated joint venture that is not
dismissed within 60 days or for which an order approving relief under bankruptcy law is
entered, even if the unconsolidated joint venture or its partners do not collude in the
filing and the unconsolidated joint venture contests the filing, as further described below. |
|
|
|
In most cases, the Company may have also entered into a completion guaranty and/or a
carve-out guaranty with the lenders for the unconsolidated joint ventures identified in
categories (a) through (c) as further described below. |
|
(d) |
|
The Total amounts represent the aggregate outstanding debt of the unconsolidated
joint ventures in which the Company participates. The amounts do not represent the Companys
potential responsibility for such debt, if any. In most cases, the Companys maximum
potential responsibility for any portion of such debt, if any, is limited to either a
specified maximum amount or an amount equal to its pro rata interest in the relevant
unconsolidated joint venture, as further described below. |
The unconsolidated joint ventures finance land and inventory investments through a variety of
arrangements. To finance their respective land acquisition and development activities, certain of
the Companys unconsolidated joint ventures have obtained loans from third-party lenders that are
secured by the underlying property and related project assets. The Companys unconsolidated
joint ventures had aggregate outstanding debt, substantially all of which was secured, of
approximately $384.4 million at February 28, 2010 and $514.2 million at November 30, 2009.
Various financial and non-financial covenants apply to the outstanding debt of the unconsolidated
joint ventures, and a failure to comply with any applicable debt covenants could result in a
default and cause lenders to seek to enforce guarantees, if applicable, as described below.
17
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. |
|
Investments in Unconsolidated Joint Ventures (continued) |
In certain instances, the Company and/or its partner(s) in an unconsolidated joint venture
provide guarantees and indemnities to the unconsolidated joint ventures lenders that may include
one or more of the following: (a) a completion guaranty; (b) a loan-to-value maintenance
guaranty; and/or (c) a carve-out guaranty. A completion guaranty refers to the actual physical
completion of improvements for a project and/or the obligation to contribute equity to an
unconsolidated joint venture to enable it to fund its completion obligations. A loan-to-value
maintenance guaranty refers to the payment of funds to maintain the applicable loan balance at or
below a specific percentage of the value of an unconsolidated joint ventures secured collateral
(generally land and improvements). A carve-out guaranty refers to the payment of (i) losses a
lender suffers due to certain bad acts or omissions by an unconsolidated joint venture or its
partners, such as fraud or misappropriation, or due to environmental liabilities arising with
respect to the relevant project, or (ii) outstanding principal and interest and certain other
amounts owed to lenders upon the filing by an unconsolidated joint venture of a voluntary
bankruptcy petition or the filing of an involuntary bankruptcy petition by creditors of the
unconsolidated joint venture in which an unconsolidated joint venture or its partners collude or
which the unconsolidated joint venture fails to contest.
In most cases, the Companys maximum potential responsibility under these guarantees and
indemnities is limited to either a specified maximum dollar amount or an amount equal to its pro
rata interest in the relevant unconsolidated joint venture. In a few cases, the Company has
entered into agreements with its unconsolidated joint venture partners to be reimbursed or
indemnified with respect to the guarantees the Company has provided to an unconsolidated joint
ventures lenders for any amounts the Company may pay pursuant to such guarantees above its pro
rata interest in the unconsolidated joint venture. If the Companys unconsolidated joint venture
partners are unable to fulfill their reimbursement or indemnity obligations, or otherwise fail to
do so, the Company could incur more than its allocable share under the relevant guaranty. Should
there be indications that advances (if made) will not be voluntarily repaid by an unconsolidated
joint venture partner under any such reimbursement arrangements, the Company vigorously pursues
all rights and remedies available to it under the applicable agreements, at law or in equity to
enforce its rights.
The Companys potential responsibility under its completion guarantees, if triggered, is highly
dependent on the facts of a particular case. In any event, the Company believes its actual
responsibility under these guarantees is limited to the amount, if any, by which an
unconsolidated joint ventures outstanding borrowings exceed the value of its assets, but may be
substantially less than this amount.
At February 28, 2010, the Companys potential responsibility under its loan-to-value maintenance
guarantees relating to approximately $12.0 million of outstanding debt held by two unconsolidated
joint ventures totaled approximately $3.8 million, if any liability were determined to be due
thereunder. This amount represents the Companys maximum responsibility under such loan-to-value
maintenance guarantees assuming the underlying collateral has no value and without regard to
defenses that could be available to the Company against any attempted enforcement of such
guarantees.
Notwithstanding the Companys potential unconsolidated joint venture guaranty and indemnity
responsibilities and the resolutions it has reached in certain instances with unconsolidated
joint venture lenders with respect to those potential responsibilities, at this time the Company
does not believe, except as described below, that its existing exposure under its outstanding
completion, loan-to-value and carve-out guarantees and indemnities related to unconsolidated
joint venture debt is material to the Companys consolidated financial position or results of
operations.
The lenders for two of the Companys unconsolidated joint ventures have filed lawsuits against
some of the unconsolidated joint ventures members, and certain of those members parent
companies, seeking to recover damages under completion guarantees, among other claims. The
Company and the other parent companies, together with the members, are defending the lawsuits
in which they have been named and are currently exploring resolutions with the lenders, but
there is no assurance that the parties involved will reach satisfactory resolutions. In a
separate proceeding, the members (including the Company) of one of these unconsolidated joint
ventures are currently in arbitration regarding their respective performance obligations in
order to address one members claims for specific performance and, in the alternative,
damages. A decision in this arbitration
18
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. |
|
Investments in Unconsolidated Joint Ventures (continued) |
proceeding is pending. In the interim, the parties to the arbitration and the lenders to this
unconsolidated joint venture have agreed to engage in a mediation process in order to reach
negotiated settlements of the outstanding disputes and a restructuring of the unconsolidated
joint ventures outstanding debt. There is no assurance that the mediation process will be
successful, and a broad range of outcomes is possible, both for the mediation process or, if the
mediation is not successful, for the arbitration. Given the present uncertainty, it is possible
that the ultimate outcome could be material to the Companys consolidated financial position or
results of operations.
In addition to the above-described guarantees and indemnities, the Company has also provided a
several guaranty to the lenders of the Companys unconsolidated joint venture that is the subject
of the above-described arbitration/mediation proceedings. By its terms, the guaranty purports to
guarantee the repayment of principal and interest and certain other amounts owed to the
unconsolidated joint ventures lenders when an involuntary bankruptcy proceeding is filed against
the unconsolidated joint venture that is not dismissed within 60 days or for which an order
approving relief under bankruptcy law is entered, even if the unconsolidated joint venture or its
partners do not collude in the filing and the unconsolidated joint venture contests the filing.
The Companys potential responsibility under this several guaranty fluctuates with the
unconsolidated joint ventures debt and with the Companys and its partners respective land
purchases from the unconsolidated joint venture. At February 28, 2010, this unconsolidated joint
venture had total outstanding indebtedness of approximately $372.4 million and, if this guaranty
were then enforced, the Companys maximum potential responsibility under the guaranty would have
been approximately $182.7 million, which amount does not account for any offsets or defenses that
could be available to the Company. This unconsolidated joint venture has received notices from
its lenders administrative agent alleging a number of defaults under its loan agreement. As
noted above, the Company is currently exploring resolutions with the parties involved, but there
is no assurance that a satisfactory outcome will be reached.
10. |
|
Mortgages and Notes Payable |
Mortgages and notes payable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Mortgages and land contracts due to land
sellers and other loans |
|
$ |
158,599 |
|
|
$ |
163,968 |
|
Senior notes due 2011 at 6 3/8% |
|
|
99,828 |
|
|
|
99,800 |
|
Senior notes due 2014 at 5 3/4% |
|
|
249,393 |
|
|
|
249,358 |
|
Senior notes due 2015 at 5 7/8% |
|
|
298,922 |
|
|
|
298,875 |
|
Senior notes due 2015 at 6 1/4% |
|
|
449,709 |
|
|
|
449,698 |
|
Senior notes due 2017 at 9.1% |
|
|
259,997 |
|
|
|
259,884 |
|
Senior notes due 2018 at 7 1/4% |
|
|
298,813 |
|
|
|
298,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,815,261 |
|
|
$ |
1,820,370 |
|
|
|
|
|
|
|
|
At February 28, 2010, the Company had a Credit Facility with a syndicate of lenders that was
scheduled to mature in November 2010. Interest on the Credit Facility was payable monthly at the
London Interbank Offered Rate plus an applicable spread on amounts borrowed. In order to reduce
costs associated with maintaining the Credit Facility, the Company voluntarily reduced the
aggregate commitment under the Credit Facility from $650.0 million to $200.0 million, effective
December 28, 2009. At February 28, 2010, the Company had no borrowings outstanding and $148.2
million in letters of credit outstanding under the Credit Facility. On March 24, 2010, the
Company exercised its right to permanently terminate the entire commitment under the Credit
Facility and, as a result, requested to terminate the terms of the Credit Facility. These
terminations became effective on March 31, 2010.
19
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. |
|
Mortgages and Notes Payable (continued) |
The indenture governing the Companys senior notes does not contain any financial maintenance
covenants. Subject to specified exceptions, the senior notes indenture contains certain
restrictive covenants that, among other things, limit the Companys ability to incur secured
indebtedness; engage in sale-leaseback transactions involving property or assets above a certain
specified value; or engage in mergers, consolidations, or sales of assets.
As of February 28, 2010, the Company was in compliance with the applicable terms of all of its
covenants under the Credit Facility, senior notes indenture, and mortgages and land contracts due
to land sellers and other loans. The Companys ability to continue to borrow funds depends in
part on its ability to remain in such compliance. As noted above, the Company voluntarily
terminated the Credit Facility effective March 31, 2010.
11. |
|
Commitments and Contingencies |
The Company provides a limited warranty on all of its homes. The specific terms and conditions
of warranties vary depending upon the market in which the Company does business. The Company
generally provides a structural warranty of 10 years, a warranty on electrical, heating, cooling,
plumbing and other building systems each varying from two to five years based on geographic
market and state law, and a warranty of one year for other components of the home. The Company
estimates the costs that may be incurred under each limited warranty and records a liability in
the amount of such costs at the time the revenue associated with the sale of each home is
recognized. Factors that affect the Companys warranty liability include the number of homes
delivered, historical and anticipated rates of warranty claims, and cost per claim. The
Companys primary assumption in estimating the amounts it accrues for warranty costs is that
historical claims experience is a strong indicator of future claims experience. The Company
periodically assesses the adequacy of its recorded warranty liabilities, which are included in
accrued expenses and other liabilities in the consolidated balance sheets, and adjusts the
amounts as necessary based on its assessment.
The changes in the Companys warranty liability are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
135,749 |
|
|
$ |
145,369 |
|
|
|
|
|
|
|
|
|
|
Warranties issued |
|
|
1,192 |
|
|
|
1,993 |
|
|
|
|
|
|
|
|
|
|
Payments and adjustments |
|
|
(6,392 |
) |
|
|
(5,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
130,549 |
|
|
$ |
142,224 |
|
|
|
|
|
|
|
|
The Companys warranty liability of $130.5 million at February 28, 2010 includes $18.6 million
associated with the repair of approximately 323 homes primarily delivered in 2006 and 2007 and
located in Florida and Louisiana that were identified as containing or suspected of containing
allegedly defective drywall manufactured in China. The Company believes that its overall warranty
liability at February 28, 2010 is sufficient with respect to its general limited warranty
obligations and the estimated costs remaining to repair the identified homes impacted by the
allegedly defective drywall. The Company is continuing to review whether there are any
additional homes delivered in Florida, Louisiana or other locations that contain or may contain
this drywall material and depending on the outcome of its review and its actual claims
experience, the Company may need to increase its warranty liability in future periods. Because
the actual costs paid to date to repair the identified homes have been minimal, the amount
accrued to repair these homes is based largely on the Companys estimates of future costs. If the
actual costs to repair these homes differ from the estimated costs, the Company may revise its
warranty estimate for this issue.
The Company has been named as a defendant in one lawsuit relating to this drywall material, and
it may in the future be subject to other similar litigation or claims that could cause the
Company to incur significant costs.
20
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. |
|
Commitments and Contingencies (continued) |
Given the preliminary stages of the proceedings, the Company has not concluded whether the
outcome, if unfavorable, is likely to be material to its consolidated financial position or
results of operations.
The Company will seek reimbursement from various sources for the costs it expects to incur to
investigate and complete repairs and to defend itself in litigation associated with this drywall
material. At this early stage of its efforts to investigate and complete repairs and to respond
to litigation, however, the Company has not recorded any amounts for potential recoveries as of
February 28, 2010.
In the normal course of its business, the Company issues certain representations, warranties and
guarantees related to its home sales and land sales that may be affected by Accounting Standards
Codification Topic No. 460, Guarantees. Based on historical evidence, the Company does not
believe any of these representations, warranties or guarantees would result in a material effect
on its consolidated financial position or results of operations.
The Company has, and requires the majority of its subcontractors to have, general liability
insurance (including construction defect coverage) and workers compensation insurance. These
insurance policies protect the Company against a portion of its risk of loss from claims related
to its homebuilding activities, subject to certain self-insured retentions, deductibles and other
coverage limits. In Arizona, California, Colorado and Nevada, the Companys general liability
insurance takes the form of a wrap-up policy, where eligible subcontractors are enrolled as
insureds on each project. The Company self-insures a portion of its overall risk through the use
of a captive insurance subsidiary. The Company records expenses and liabilities based on the
costs required to cover its self-insured retention and deductible amounts under its insurance
policies, and on the estimated costs of potential claims and claim adjustment expenses above its
coverage limits or that are not covered by its policies. These estimated costs are based on an
analysis of the Companys historical claims and include an estimate of construction defect claims
incurred but not yet reported. The Companys estimated liabilities for such items were $105.7
million at February 28, 2010 and $107.0 million at November 30, 2009. These amounts are included
in accrued expenses and other liabilities in the consolidated balance sheets. The Companys
expenses associated with self-insurance totaled $1.8 million for the three months ended February
28, 2010 and $2.1 million for the three months ended February 28, 2009.
The Company is often required to obtain performance bonds and letters of credit in support of its
obligations to various municipalities and other government agencies in connection with community
improvements such as roads, sewers and water, and to certain unconsolidated joint ventures. At
February 28, 2010, the Company had $533.0 million of performance bonds and $148.2 million of
letters of credit outstanding. In the event any such performance bonds or letters of credit were
called, the Company would be obligated to reimburse the issuer of the performance bond or letter
of credit. The Company does not believe that a material amount of any currently outstanding
performance bonds or letters of credit will be called. Performance bonds do not have stated
expiration dates. Rather, the Company is released from the performance bonds as the underlying
performance is completed. The expiration dates of letters of credit issued in connection with
community improvements and certain unconsolidated joint ventures coincide with the expected
completion dates of the related projects or obligations. If the obligations related to a project
are ongoing, the relevant letters of credit are typically extended on a year-to-year basis.
The borrowings outstanding, if any, and letters of credit that were issued under the Credit
Facility were guaranteed by certain of the Companys subsidiaries (the Guarantor Subsidiaries).
In the ordinary course of its business, the Company enters into land option contracts to procure
land for the construction of homes. At February 28, 2010, the Company had total deposits of $12.7
million, comprised of cash deposits of $8.5 million and letters of credit of $4.2 million, to
purchase land having an aggregate purchase price of $216.2 million. The Companys land option
contracts generally do not contain provisions requiring the Companys specific performance.
21
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ERISA Litigation
On March 16, 2007, plaintiffs Reba Bagley and Scott Silver filed an action brought under Section
502 of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1132, Bagley et al., v.
KB Home, et al., in the United States District Court for the Central District of California. The
action was brought against the Company, its directors, certain of its current and former
officers, and the board of directors committee that oversees the KB Home 401(k) Savings Plan
(401(k) Plan). After the court allowed leave to file an amended complaint, plaintiffs filed an
amended complaint adding Tolan Beck and Rod Hughes as additional plaintiffs and dismissing
certain individuals as defendants. All four plaintiffs claim to be former employees of KB Home
who participated in the 401(k) Plan. Plaintiffs allege on behalf of themselves and on behalf of
all others similarly situated that all defendants breached fiduciary duties owed to plaintiffs
and purported class members under ERISA by failing to disclose information to and providing
misleading information to participants in the 401(k) Plan about the Companys alleged prior stock
option backdating practices and by failing to remove the Companys stock as an investment option
under the 401(k) Plan. Plaintiffs allege that this breach of fiduciary duties caused plaintiffs
to earn less on their 401(k) Plan accounts than they would have earned but for defendants
alleged breach of duties.
The parties to the litigation executed a settlement agreement on February 26, 2010. On March 1,
2010, plaintiffs filed a Motion for Preliminary Approval of the Settlement, Certification of a
Settlement Class, Approval of Notice Plan and To Set a Time for Fairness Hearing. On March 15,
2010, the court held a hearing on the motion at which it granted preliminary approval of the
settlement and requested that the parties make certain revisions to the settlement papers. A
hearing to decide the fairness of the settlement has not yet been scheduled.
Other Matters
On October 2, 2009, the staff of the SEC notified the Company that a formal order of
investigation had been issued regarding possible accounting and disclosure issues. The staff has
stated that its investigation should not be construed as an indication by the SEC that there has
been any violation of the federal securities laws. The Company is cooperating with the staff of
the SEC in connection with the investigation. The Company cannot predict the outcome of, or the
timeframe for, the conclusion of this matter.
In addition to those described in this report, the Company is involved in litigation and
government proceedings incidental to its business. These proceedings are in various procedural
stages and, based on reports of counsel, the Company believes as of the date of this report that
provisions or accruals made for any potential losses (to the extent estimable) are adequate and
that any liabilities or costs arising out of these proceedings are not likely to have a
materially adverse effect on its consolidated financial position or results of operations. The
outcome of any of these proceedings, however, is inherently uncertain, and if unfavorable
outcomes were to occur, there is a possibility that they would, individually or in the aggregate,
have a materially adverse effect on the Companys consolidated financial position or results of
operations.
At February 28, 2010, the Company was authorized to repurchase four million shares of its common
stock under a board-approved share repurchase program. The Company did not repurchase any of its
common stock under this program in the first quarter of 2010. The Company acquired $.4 million
of common stock in the first quarter of 2010, which were previously issued shares delivered to
the Company by employees to satisfy withholding taxes on the vesting of restricted stock awards.
These transactions are not considered repurchases under the share repurchase program.
During the quarter ended February 28, 2010, the Companys board of directors declared a cash
dividend of $.0625 per share of common stock, which was paid on February 18, 2010 to stockholders
of record on February 4, 2010.
22
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. |
|
Recent Accounting Pronouncements |
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures
About Fair Value Measurements (ASU 2010-06), which provides amendments to Accounting Standards
Codification Subtopic No. 820-10, Fair Value Measurements and Disclosures Overall. ASU
2010-06 requires additional disclosures and clarifications of existing disclosures for recurring
and nonrecurring fair value measurements. The revised guidance is effective for interim and
annual reporting periods beginning after December 15, 2009. ASU 2010-06 concerns disclosure only
and will not have an impact on the Companys financial position or results of operations.
The Companys income tax expense totaled $.2 million for the three months ended February 28,
2010, compared to an income tax benefit of $1.5 million for the three months ended February 28,
2009. The Companys effective income tax expense rate was .4% in the first quarter of 2010
compared to an effective income tax benefit rate of 2.5% for the first quarter of 2009. The
year-over-year difference in the Companys 2010 first quarter effective tax rate was primarily
due to the reversal of a $1.8 million liability for unrecognized tax benefits in the first
quarter of 2009.
In accordance with Accounting Standards Codification Topic No. 740, Income Taxes (ASC 740),
the Company evaluates its deferred tax assets quarterly to determine if valuation allowances are
required. ASC 740 requires that companies assess whether valuation allowances should be
established based on the consideration of all available evidence using a more likely than not
standard. During the three months ended February 28, 2010, the Company recorded a valuation
allowance of $21.2 million against the net deferred tax assets generated from the net loss for
the period. During the three months ended February 28, 2009, the Company recorded a similar
valuation allowance of $22.7 million against net deferred tax assets. The Companys net deferred
tax assets totaled $1.1 million at both February 28, 2010 and November 30, 2009. The deferred
tax asset valuation allowance increased to $771.2 million at February 28, 2010 from $750.0
million at November 30, 2009. This increase reflected the net impact of the $21.2 million
valuation allowance recorded during the first quarter of 2010.
During the quarter ended February 28, 2010, the Company had $.2 million of additions and $.3
million of reductions to its total gross unrecognized tax benefits as a result of the current
status of federal and state audits. The total amount of unrecognized tax benefits, including
interest and penalties, was $9.3 million as of February 28, 2010. The Company anticipates that
total unrecognized tax benefits will decrease by an amount ranging from $3.0 million to $4.0
million during the twelve months from this reporting date due to various state filings associated
with the resolution of the federal audit.
The benefits of the Companys net operating losses, built-in losses and tax credits would be
reduced or potentially eliminated if the Company experienced an ownership change under Internal
Revenue Code Section 382 (Section 382). Based on the Companys analysis performed as of
February 28, 2010, the Company does not believe it has experienced an ownership change as defined
by Section 382, and, therefore, the net operating losses, built-in losses and tax credits the
Company has generated should not be subject to a Section 382 limitation as of this reporting
date.
16. |
|
Supplemental Disclosure to Consolidated Statements of Cash Flows |
The following are supplemental disclosures to the consolidated statements of cash flows (in
thousands):
23
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16. |
|
Supplemental Disclosure to Consolidated Statements of Cash Flows (continued) |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, |
|
|
|
2010 |
|
|
2009 |
|
Summary of cash and cash equivalents at end of period: |
|
|
|
|
|
|
|
|
Homebuilding |
|
$ |
1,198,635 |
|
|
$ |
1,020,911 |
|
Financial services |
|
|
3,126 |
|
|
|
6,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,201,761 |
|
|
$ |
1,027,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid, net of amounts capitalized |
|
$ |
36,841 |
|
|
$ |
42,263 |
|
Income taxes paid |
|
|
115 |
|
|
|
77 |
|
Income taxes refunded |
|
|
190,906 |
|
|
|
231,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash activities: |
|
|
|
|
|
|
|
|
Increase in inventories in connection with
consolidation of joint ventures |
|
$ |
72,300 |
|
|
$ |
|
|
Increase in accounts payable, accrued expenses and
other liabilities in connection with
consolidation of joint ventures |
|
|
38,861 |
|
|
|
|
|
Cost of inventories acquired through seller financing |
|
|
5,713 |
|
|
|
5,069 |
|
Decrease in consolidated inventories not owned |
|
|
(34,402 |
) |
|
|
(7,902 |
) |
|
|
|
|
|
|
|
17. |
|
Supplemental Guarantor Information |
The Companys obligation to pay principal, premium, if any, and interest under its senior notes
are guaranteed on a joint and several basis by the Guarantor Subsidiaries. The guarantees are
full and unconditional and the Guarantor Subsidiaries are 100% owned by the Company. The
Guarantor Subsidiaries also provided a guaranty under the Credit Facility until it was terminated
on March 31, 2010, as discussed below under Note 18. Subsequent Event. The Company has
determined that separate, full financial statements of the Guarantor Subsidiaries would not be
material to investors and, accordingly, supplemental financial information for the Guarantor
Subsidiaries is presented.
24
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. |
|
Supplemental Guarantor Information (continued) |
Condensed Consolidated Statements of Operations
Three Months Ended February 28, 2010 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
238,791 |
|
|
$ |
25,187 |
|
|
$ |
|
|
|
$ |
263,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
238,791 |
|
|
$ |
23,720 |
|
|
$ |
|
|
|
$ |
262,511 |
|
Construction and land costs |
|
|
|
|
|
|
(200,504 |
) |
|
|
(26,036 |
) |
|
|
|
|
|
|
(226,540 |
) |
Selling, general and administrative expenses |
|
|
(23,138 |
) |
|
|
(40,460 |
) |
|
|
(8,605 |
) |
|
|
|
|
|
|
(72,203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(23,138 |
) |
|
|
(2,173 |
) |
|
|
(10,921 |
) |
|
|
|
|
|
|
(36,232 |
) |
Interest income |
|
|
359 |
|
|
|
31 |
|
|
|
34 |
|
|
|
|
|
|
|
424 |
|
Interest expense, net of amounts capitalized |
|
|
(1,839 |
) |
|
|
(15,952 |
) |
|
|
(1,616 |
) |
|
|
|
|
|
|
(19,407 |
) |
Equity in income (loss) of unconsolidated
joint ventures |
|
|
|
|
|
|
(2,075 |
) |
|
|
891 |
|
|
|
|
|
|
|
(1,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax loss |
|
|
(24,618 |
) |
|
|
(20,169 |
) |
|
|
(11,612 |
) |
|
|
|
|
|
|
(56,399 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services pretax income |
|
|
|
|
|
|
|
|
|
|
1,895 |
|
|
|
|
|
|
|
1,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pretax loss |
|
|
(24,618 |
) |
|
|
(20,169 |
) |
|
|
(9,717 |
) |
|
|
|
|
|
|
(54,504 |
) |
Income tax expense |
|
|
(100 |
) |
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
(200 |
) |
Equity in net loss of subsidiaries |
|
|
(29,986 |
) |
|
|
|
|
|
|
|
|
|
|
29,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(54,704 |
) |
|
$ |
(20,269 |
) |
|
$ |
(9,717 |
) |
|
$ |
29,986 |
|
|
$ |
(54,704 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations
Three Months Ended February 28, 2009 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
253,831 |
|
|
$ |
53,530 |
|
|
$ |
|
|
|
$ |
307,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
253,831 |
|
|
$ |
51,910 |
|
|
$ |
|
|
|
$ |
305,741 |
|
Construction and land costs |
|
|
|
|
|
|
(239,783 |
) |
|
|
(51,175 |
) |
|
|
|
|
|
|
(290,958 |
) |
Selling, general and administrative expenses |
|
|
(9,324 |
) |
|
|
(39,400 |
) |
|
|
(12,451 |
) |
|
|
|
|
|
|
(61,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(9,324 |
) |
|
|
(25,352 |
) |
|
|
(11,716 |
) |
|
|
|
|
|
|
(46,392 |
) |
Interest income |
|
|
2,993 |
|
|
|
176 |
|
|
|
344 |
|
|
|
|
|
|
|
3,513 |
|
Interest expense, net of amounts capitalized |
|
|
9,127 |
|
|
|
(17,647 |
) |
|
|
(132 |
) |
|
|
|
|
|
|
(8,652 |
) |
Equity in loss of unconsolidated joint ventures |
|
|
|
|
|
|
(7,470 |
) |
|
|
(2,272 |
) |
|
|
|
|
|
|
(9,742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax income (loss) |
|
|
2,796 |
|
|
|
(50,293 |
) |
|
|
(13,776 |
) |
|
|
|
|
|
|
(61,273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services pretax income |
|
|
|
|
|
|
|
|
|
|
1,701 |
|
|
|
|
|
|
|
1,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pretax income (loss) |
|
|
2,796 |
|
|
|
(50,293 |
) |
|
|
(12,075 |
) |
|
|
|
|
|
|
(59,572 |
) |
Income tax benefit (expense) |
|
|
(100 |
) |
|
|
1,200 |
|
|
|
400 |
|
|
|
|
|
|
|
1,500 |
|
Equity in net loss of subsidiaries |
|
|
(60,768 |
) |
|
|
|
|
|
|
|
|
|
|
60,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(58,072 |
) |
|
$ |
(49,093 |
) |
|
$ |
(11,675 |
) |
|
$ |
60,768 |
|
|
$ |
(58,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. |
|
Supplemental Guarantor Information (continued) |
Condensed Consolidated Balance Sheets
February 28, 2010 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,062,390 |
|
|
$ |
18,736 |
|
|
$ |
117,509 |
|
|
$ |
|
|
|
$ |
1,198,635 |
|
Restricted cash |
|
|
90,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,222 |
|
Receivables |
|
|
864 |
|
|
|
105,557 |
|
|
|
19,883 |
|
|
|
|
|
|
|
126,304 |
|
Inventories |
|
|
|
|
|
|
1,432,866 |
|
|
|
147,264 |
|
|
|
|
|
|
|
1,580,130 |
|
Investments in unconsolidated joint ventures |
|
|
|
|
|
|
96,184 |
|
|
|
9,553 |
|
|
|
|
|
|
|
105,737 |
|
Other assets |
|
|
69,636 |
|
|
|
85,880 |
|
|
|
244 |
|
|
|
|
|
|
|
155,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,223,112 |
|
|
|
1,739,223 |
|
|
|
294,453 |
|
|
|
|
|
|
|
3,256,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
|
|
|
|
|
|
|
|
28,670 |
|
|
|
|
|
|
|
28,670 |
|
Investments in subsidiaries |
|
|
1,454 |
|
|
|
|
|
|
|
|
|
|
|
(1,454 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,224,566 |
|
|
$ |
1,739,223 |
|
|
$ |
323,123 |
|
|
$ |
(1,454 |
) |
|
$ |
3,285,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities |
|
$ |
123,160 |
|
|
$ |
544,188 |
|
|
$ |
148,786 |
|
|
$ |
|
|
|
$ |
816,134 |
|
Mortgages and notes payable |
|
|
1,656,662 |
|
|
|
158,599 |
|
|
|
|
|
|
|
|
|
|
|
1,815,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,779,822 |
|
|
|
702,787 |
|
|
|
148,786 |
|
|
|
|
|
|
|
2,631,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
|
|
|
|
|
|
|
|
6,449 |
|
|
|
|
|
|
|
6,449 |
|
Intercompany |
|
|
(1,202,870 |
) |
|
|
1,057,544 |
|
|
|
145,326 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
647,614 |
|
|
|
(21,108 |
) |
|
|
22,562 |
|
|
|
(1,454 |
) |
|
|
647,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,224,566 |
|
|
$ |
1,739,223 |
|
|
$ |
323,123 |
|
|
$ |
(1,454 |
) |
|
$ |
3,285,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2009 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
995,122 |
|
|
$ |
56,969 |
|
|
$ |
122,624 |
|
|
$ |
|
|
|
$ |
1,174,715 |
|
Restricted cash |
|
|
114,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,292 |
|
Receivables |
|
|
191,747 |
|
|
|
109,536 |
|
|
|
36,647 |
|
|
|
|
|
|
|
337,930 |
|
Inventories |
|
|
|
|
|
|
1,374,617 |
|
|
|
126,777 |
|
|
|
|
|
|
|
1,501,394 |
|
Investments in unconsolidated joint ventures |
|
|
|
|
|
|
115,402 |
|
|
|
4,266 |
|
|
|
|
|
|
|
119,668 |
|
Other assets |
|
|
68,895 |
|
|
|
85,856 |
|
|
|
(185 |
) |
|
|
|
|
|
|
154,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,370,056 |
|
|
|
1,742,380 |
|
|
|
290,129 |
|
|
|
|
|
|
|
3,402,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
|
|
|
|
|
|
|
|
33,424 |
|
|
|
|
|
|
|
33,424 |
|
Investments in subsidiaries |
|
|
35,955 |
|
|
|
|
|
|
|
|
|
|
|
(35,955 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,406,011 |
|
|
$ |
1,742,380 |
|
|
$ |
323,553 |
|
|
$ |
(35,955 |
) |
|
$ |
3,435,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities |
|
$ |
147,264 |
|
|
$ |
588,203 |
|
|
$ |
165,878 |
|
|
$ |
|
|
|
$ |
901,345 |
|
Mortgages and notes payable |
|
|
1,656,402 |
|
|
|
163,967 |
|
|
|
1 |
|
|
|
|
|
|
|
1,820,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,803,666 |
|
|
|
752,170 |
|
|
|
165,879 |
|
|
|
|
|
|
|
2,721,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
|
|
|
|
|
|
|
|
7,050 |
|
|
|
|
|
|
|
7,050 |
|
Intercompany |
|
|
(1,104,879 |
) |
|
|
990,210 |
|
|
|
114,669 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
707,224 |
|
|
|
|
|
|
|
35,955 |
|
|
|
(35,955 |
) |
|
|
707,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,406,011 |
|
|
$ |
1,742,380 |
|
|
$ |
323,553 |
|
|
$ |
(35,955 |
) |
|
$ |
3,435,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. |
|
Supplemental Guarantor Information (continued) |
Condensed Consolidated Statements of Cash Flows
Three Months Ended February 28, 2010 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(54,704 |
) |
|
$ |
(20,269 |
) |
|
$ |
(9,717 |
) |
|
$ |
29,986 |
|
|
$ |
(54,704 |
) |
Adjustments to reconcile net loss to net cash provided
(used) by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory impairments and land option contract
abandonments |
|
|
|
|
|
|
8,498 |
|
|
|
4,864 |
|
|
|
|
|
|
|
13,362 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
190,883 |
|
|
|
(14,373 |
) |
|
|
17,717 |
|
|
|
|
|
|
|
194,227 |
|
Inventories |
|
|
|
|
|
|
(23,136 |
) |
|
|
(25,351 |
) |
|
|
|
|
|
|
(48,487 |
) |
Accounts payable, accrued expenses and other liabilities |
|
|
(24,098 |
) |
|
|
(48,474 |
) |
|
|
(19,749 |
) |
|
|
|
|
|
|
(92,321 |
) |
Other, net |
|
|
(5,408 |
) |
|
|
2,313 |
|
|
|
9,282 |
|
|
|
|
|
|
|
6,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities |
|
|
106,673 |
|
|
|
(95,441 |
) |
|
|
(22,954 |
) |
|
|
29,986 |
|
|
|
18,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated joint ventures |
|
|
|
|
|
|
1,950 |
|
|
|
(4,290 |
) |
|
|
|
|
|
|
(2,340 |
) |
Purchases of property and equipment, net |
|
|
|
|
|
|
(171 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
(191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
|
|
|
|
1,779 |
|
|
|
(4,310 |
) |
|
|
|
|
|
|
(2,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in restricted cash |
|
|
24,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,070 |
|
Payments on mortgages, land contracts and other loans |
|
|
|
|
|
|
3,452 |
|
|
|
(14,534 |
) |
|
|
|
|
|
|
(11,082 |
) |
Issuance of common stock under employee stock plans |
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232 |
|
Payments of cash dividends |
|
|
(4,803 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,803 |
) |
Repurchases of common stock |
|
|
(350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(350 |
) |
Intercompany |
|
|
(58,554 |
) |
|
|
51,977 |
|
|
|
36,563 |
|
|
|
(29,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(39,405 |
) |
|
|
55,429 |
|
|
|
22,029 |
|
|
|
(29,986 |
) |
|
|
8,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
67,268 |
|
|
|
(38,233 |
) |
|
|
(5,235 |
) |
|
|
|
|
|
|
23,800 |
|
Cash and cash equivalents at beginning of period |
|
|
995,122 |
|
|
|
56,969 |
|
|
|
125,870 |
|
|
|
|
|
|
|
1,177,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
1,062,390 |
|
|
$ |
18,736 |
|
|
$ |
120,635 |
|
|
$ |
|
|
|
$ |
1,201,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. |
|
Supplemental Guarantor Information (continued) |
Condensed Consolidated Statements of Cash Flows
Three Months Ended February 28, 2009 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(58,072 |
) |
|
$ |
(49,093 |
) |
|
$ |
(11,675 |
) |
|
$ |
60,768 |
|
|
$ |
(58,072 |
) |
Adjustments to reconcile net loss to net cash provided
(used) by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory impairments and land option contract
abandonments |
|
|
|
|
|
|
20,885 |
|
|
|
3,785 |
|
|
|
|
|
|
|
24,670 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
202,449 |
|
|
|
(405 |
) |
|
|
(4,595 |
) |
|
|
|
|
|
|
197,449 |
|
Inventories |
|
|
|
|
|
|
(36,367 |
) |
|
|
93,815 |
|
|
|
|
|
|
|
57,448 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
(42,783 |
) |
|
|
515 |
|
|
|
(90,748 |
) |
|
|
|
|
|
|
(133,016 |
) |
Other, net |
|
|
4,619 |
|
|
|
8,913 |
|
|
|
1,508 |
|
|
|
|
|
|
|
15,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities |
|
|
106,213 |
|
|
|
(55,552 |
) |
|
|
(7,910 |
) |
|
|
60,768 |
|
|
|
103,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated joint ventures |
|
|
|
|
|
|
(6,838 |
) |
|
|
(910 |
) |
|
|
|
|
|
|
(7,748 |
) |
Sales (purchases) of property and equipment, net |
|
|
|
|
|
|
(885 |
) |
|
|
64 |
|
|
|
|
|
|
|
(821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
|
|
|
|
(7,723 |
) |
|
|
(846 |
) |
|
|
|
|
|
|
(8,569 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in restricted cash |
|
|
4,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,196 |
|
Repayment of senior subordinated notes |
|
|
(200,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200,000 |
) |
Payments on mortgages, land contracts and other loans |
|
|
|
|
|
|
(8,843 |
) |
|
|
|
|
|
|
|
|
|
|
(8,843 |
) |
Issuance of common stock under employee stock plans |
|
|
795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
795 |
|
Payments of cash dividends |
|
|
(4,756 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,756 |
) |
Repurchases of common stock |
|
|
(616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(616 |
) |
Intercompany |
|
|
18,777 |
|
|
|
66,431 |
|
|
|
(24,440 |
) |
|
|
(60,768 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(181,604 |
) |
|
|
57,588 |
|
|
|
(24,440 |
) |
|
|
(60,768 |
) |
|
|
(209,224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(75,391 |
) |
|
|
(5,687 |
) |
|
|
(33,196 |
) |
|
|
|
|
|
|
(114,274 |
) |
Cash and cash equivalents at beginning of period |
|
|
987,057 |
|
|
|
25,067 |
|
|
|
129,394 |
|
|
|
|
|
|
|
1,141,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
911,666 |
|
|
$ |
19,380 |
|
|
$ |
96,198 |
|
|
$ |
|
|
|
$ |
1,027,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 24, 2010, pursuant to the terms of the Credit Facility, the Company notified Bank of
America, N.A., the Administrative Agent for the Credit Facility, of the Companys decision to
exercise its right to permanently terminate the entire commitment under the Credit Facility and,
as a result, to terminate the terms of the Credit Facility. These terminations became effective
on March 31, 2010. Upon the termination of the Credit Facility, the then outstanding letters of
credit under the Credit Facility were transferred to an $85.0 million cash-collateralized letter
of credit facility that the Company established with Bank of America, N.A. The Company
terminated the Credit Facility and entered into the cash-collateralized letter of credit facility
as a cost-savings measure. The Company may enter into similar letter of credit agreements with
other financial institutions.
The information presented in Note 17. Supplemental Guarantor Information above does not reflect
the termination of the Credit Facility. As a result of the termination, six of the Companys
subsidiaries have been released and discharged from guaranteeing the Credit Facility and no
longer have any obligations with respect to the Companys senior notes (the Released
Subsidiaries). Each of the Released Subsidiaries is not a
28
significant subsidiary, as defined
under Rule 1-02(w) of Regulation S-X, and does not guarantee any other indebtedness of the
Company. Each Released Subsidiary may be required to again provide a guarantee with respect to
the Companys senior notes if it becomes a significant subsidiary. Three of the Companys
subsidiaries continue to provide a guarantee with respect to the Companys senior notes.
29
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
OVERVIEW
Revenues are generated from our homebuilding operations and our financial services operations.
The following table presents a summary of our consolidated results of operations for the three
months ended February 28, 2010 and 2009 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, |
|
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
Homebuilding |
|
$ |
262,511 |
|
|
$ |
305,741 |
|
Financial services |
|
|
1,467 |
|
|
|
1,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
263,978 |
|
|
$ |
307,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss): |
|
|
|
|
|
|
|
|
Homebuilding |
|
$ |
(56,399 |
) |
|
$ |
(61,273 |
) |
Financial services |
|
|
1,895 |
|
|
|
1,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pretax loss |
|
|
(54,504 |
) |
|
|
(59,572 |
) |
Income tax benefit (expense) |
|
|
(200 |
) |
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(54,704 |
) |
|
$ |
(58,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
$ |
(.71 |
) |
|
$ |
(.75 |
) |
|
|
|
|
|
|
|
Operating conditions remained challenging during the first quarter of 2010, reflecting the
ongoing effect of the housing markets prolonged and severe downturn, which began in 2006, and
the weak U.S. economy. In several housing markets, including a number of our served markets, a
persistent oversupply of homes available for sale (including lender-owned homes acquired through
foreclosures and short sales), continued to exert downward pressure on home selling prices and
heighten competition for sales. At the same time, demand for housing was constrained by a
combination of relatively high unemployment, tight mortgage lending standards and weak consumer
confidence. These negative factors were offset to some extent by improved housing affordability
stemming from lower selling prices, relatively low mortgage interest rates, tax credit incentives
for homebuyers, and other government programs supportive of homeownership and home purchases.
Though recent data suggest that some housing markets may be stabilizing or starting to rebound
compared to prior periods, it is difficult to predict when or if a widespread and sustained
recovery may occur.
During the housing market downturn of the past few years, we have focused on three primary goals:
generating cash and maintaining a strong balance sheet; restoring the profitability of our
homebuilding operations; and positioning our business to capitalize on a housing market recovery
when it occurs. To advance these goals, we have pursued various initiatives to enhance our
operational productivity and have rolled out redesigned and value-engineered new product,
including The Open Series line of homes, across our markets. We have tailored The Open Series
and our other new product offerings to meet the affordability needs of our core customers
first-time, move-up and active adult homebuyers. Largely through these initiatives, we improved
our housing gross margin in each quarter of 2009 and in the first quarter of 2010, as measured
against the corresponding prior-year periods, even though our average selling prices decreased in
each period.
In 2010, restoring the profitability of our homebuilding operations is our highest priority.
During the first quarter of 2010, we continued to build on the substantial progress we made last
year toward achieving this goal, narrowing our net loss on a year-over-year basis for the seventh
consecutive quarter, despite generating lower revenues compared to the first quarter of 2009.
This performance primarily reflected lower asset impairment and land option contract abandonment
charges and improvements in our housing gross margin, partly offset by an increase in our
selling, general and administrative expenses.
30
Our total revenues of $264.0 million for the three months ended February 28, 2010 decreased 14%
from $307.4 million for the year-earlier period, mainly due to a decline in our housing revenues.
Housing revenues totaled $262.2 million in the first quarter of 2010, down 14% from $304.5
million in the first quarter of 2009, reflecting
an 8% year-over-year decrease in homes delivered and a 6% year-over-year decline in the average
selling price. We use the term home in this discussion and analysis to refer to a
single-family residence, whether it is a single-family home or other type of residential
property. We delivered 1,326 homes in the first quarter of 2010 at an average selling price of
$197,700, compared with 1,445 homes delivered at an average selling price of $210,700 in the
year-earlier quarter.
The decrease in the number of homes delivered in the first quarter of 2010 was largely due to a
9% year-over-year reduction in the number of active communities we operated. Active
communities are those that deliver five or more homes in a particular period. We have
strategically reduced our overall community count in previous quarters, primarily by exiting
underperforming markets, operating fewer communities in weaker markets and curtailing land
acquisition and development activities, to align our operations with reduced housing market
activity and to support our profitability and strong balance sheet goals. The year-over-year
decline in total homes delivered in the first quarter of 2010 reflected decreases of 3%, 19% and
37% in our West Coast, Southwest and Southeast segments, respectively, partly offset by an 18%
increase in our Central segment. With emerging signs of potentially improved operating
conditions going forward in 2010 and into 2011, we currently anticipate gradually increasing our
land acquisition activity and the number of active communities we operate, as further discussed
below under Outlook.
The decline in our average selling price in the first quarter of 2010 relative to the
year-earlier quarter was primarily due to targeted price reductions we implemented in some
markets in response to competitive conditions, as well as our ongoing rollout of new product,
including The Open Series, at lower price points compared to our previous products. The
year-over-year decrease in our overall average selling price reflected declines of 20%, 10% and
11% in our Southwest, Central and Southeast segments, respectively, partly offset by a 3%
increase in the West Coast segment.
Included in our total revenues were financial services revenues of $1.5 million in the three
months ended February 28, 2010, compared to $1.6 million in the three months ended February 28,
2009. Financial services revenues decreased slightly in the first quarter of 2010 compared to a
year ago, primarily due to our delivering fewer homes, which reduced title and insurance services
revenues.
We incurred a net loss of $54.7 million, or $.71 per diluted share, in the three months ended
February 28, 2010, compared to a net loss of $58.1 million, or $.75 per diluted share, in the
three months ended February 28, 2009. Our net loss narrowed in the first quarter of 2010 on a
year-over-year basis, largely due to a reduction in pretax, noncash charges for asset impairments
and land option contract abandonments and an increase in our housing gross margin, partly offset
by higher selling, general and administrative expenses. Our net loss for the quarter ended
February 28, 2010 included pretax, noncash charges of $13.4 million for inventory impairments and
land option contract abandonments, a decrease of 59% from the $32.3 million of pretax, noncash
charges for inventory and joint venture impairments and land option contract abandonments in the
year-earlier quarter. Our housing gross margin increased by 8.8 percentage points to 13.7% in
the first quarter of 2010 from 4.9% in the first quarter of 2009. Our housing gross margin,
excluding inventory impairment and land option contract abandonment charges, improved by 5.8
percentage points to 18.8% in the first quarter of 2010 from 13.0% in the year-earlier quarter.
Our selling, general and administrative expenses in the first quarter of 2010 rose 18% to $72.2
million, up from $61.2 million in the year-earlier quarter, reflecting, among other things,
increased compensation expense associated with cash-settled, stock-based awards as a result of an
increase in our stock price, and higher legal expenses.
Consistent with our goal of maintaining a strong financial position, we ended the first quarter
of 2010 with $1.29 billion of cash and cash equivalents and restricted cash, and no borrowings
outstanding under the Credit Facility. Our debt balance totaled $1.82 billion at February 28,
2010, essentially unchanged from the balance at November 30, 2009. Our ratio of debt to total
capital was 73.7% at February 28, 2010, compared to 72.0% at November 30, 2009. Our ratio of net
debt to total capital, which reflects our cash position, was 44.8% at February 28, 2010, compared
to 42.9% at November 30, 2009.
31
Our total backlog at February 28, 2010 was comprised of 2,713 homes, representing projected
future housing revenues of approximately $523.8 million, compared to a backlog at February 28,
2009 of 2,651 homes, representing projected future housing revenues of approximately $559.8
million. The number of homes in backlog rose 2% year over year mainly due to the increase in our
net orders in the first quarter of 2010. This marked the first year-over-year increase in the
number of homes in our quarter-end backlog in more than four years. Net orders from our
homebuilding operations rose 5% to 1,913 in the first quarter of 2010 from 1,827 in the first
quarter of 2009, largely due to a decrease in our cancellation rate. As a percentage of gross
orders, our cancellation rate improved to 22% in the first quarter of 2010 from 28% in the
year-earlier quarter. As a percentage of beginning backlog, the cancellation rate was 26% in the
first quarter of 2010 and 31% in the year-earlier quarter.
HOMEBUILDING
We have grouped our homebuilding activities into four reportable segments, which we refer to as
West Coast, Southwest, Central and Southeast. As of February 28, 2010, our reportable
homebuilding segments consisted of ongoing operations located in the following states: West Coast
California; Southwest Arizona and Nevada; Central Colorado and Texas; and Southeast
Florida, Maryland, North Carolina, South Carolina and Virginia.
The following table presents a summary of certain financial and operational data for our
homebuilding operations (dollars in thousands, except average selling price):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, |
|
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
Housing |
|
$ |
262,158 |
|
|
$ |
304,454 |
|
Land |
|
|
353 |
|
|
|
1,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
262,511 |
|
|
|
305,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Construction and land costs |
|
|
|
|
|
|
|
|
Housing |
|
|
226,194 |
|
|
|
289,423 |
|
Land |
|
|
346 |
|
|
|
1,535 |
|
|
|
|
|
|
|
|
Total |
|
|
226,540 |
|
|
|
290,958 |
|
Selling, general and administrative expenses |
|
|
72,203 |
|
|
|
61,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
298,743 |
|
|
|
352,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(36,232 |
) |
|
$ |
(46,392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes delivered |
|
|
1,326 |
|
|
|
1,445 |
|
Average selling price |
|
$ |
197,700 |
|
|
$ |
210,700 |
|
Housing gross margin |
|
|
13.7 |
% |
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses as a
percentage of housing revenues |
|
|
27.5 |
% |
|
|
20.1 |
% |
|
|
|
|
|
|
|
|
|
Operating loss as a percentage of homebuilding revenues |
|
|
-13.8 |
% |
|
|
-15.2 |
% |
The following tables present homes delivered, net orders and cancellation rates (based on gross
orders) by reporting segment and with respect to our unconsolidated joint ventures for the
three-month periods ended February 28, 2010 and 2009, and our ending backlog at February 28, 2010
and 2009:
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, |
|
|
|
Homes Delivered |
|
|
Net Orders |
|
|
Cancellation Rates |
|
Segment |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast |
|
|
340 |
|
|
|
351 |
|
|
|
429 |
|
|
|
459 |
|
|
|
17 |
% |
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southwest |
|
|
216 |
|
|
|
267 |
|
|
|
313 |
|
|
|
222 |
|
|
|
14 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central |
|
|
529 |
|
|
|
447 |
|
|
|
715 |
|
|
|
622 |
|
|
|
29 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast |
|
|
241 |
|
|
|
380 |
|
|
|
456 |
|
|
|
524 |
|
|
|
21 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,326 |
|
|
|
1,445 |
|
|
|
1,913 |
|
|
|
1,827 |
|
|
|
22 |
% |
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
joint ventures |
|
|
21 |
|
|
|
23 |
|
|
|
19 |
|
|
|
28 |
|
|
|
21 |
% |
|
|
48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
|
|
|
|
|
|
|
|
|
Backlog - Value |
|
|
|
Backlog - Homes |
|
|
(In Thousands) |
|
Segment |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast |
|
|
612 |
|
|
|
689 |
|
|
$ |
193,938 |
|
|
$ |
214,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southwest |
|
|
379 |
|
|
|
303 |
|
|
|
59,439 |
|
|
|
57,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central |
|
|
1,105 |
|
|
|
892 |
|
|
|
172,068 |
|
|
|
153,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast |
|
|
617 |
|
|
|
767 |
|
|
|
98,305 |
|
|
|
134,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,713 |
|
|
|
2,651 |
|
|
$ |
523,750 |
|
|
$ |
559,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated joint ventures |
|
|
35 |
|
|
|
76 |
|
|
$ |
13,825 |
|
|
$ |
30,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Homebuilding revenues totaled $262.5 million in the three months ended February 28,
2010, decreasing 14% from $305.7 million in the corresponding period of 2009, mainly due to a
decline in housing revenues. Housing revenues of $262.2 million for the three months ended
February 28, 2010 fell by $42.3 million, or 14%, from $304.5 million in the year-earlier period,
due to an 8% year-over-year decrease in homes delivered and a 6% year-over-year decline in the
average selling price. We delivered 1,326 homes in the first quarter of 2010, down from 1,445
homes delivered in the year-earlier quarter, primarily due to a 9% year-over-year reduction in
the number of active communities we operated.
Our overall average selling price of $197,700 for the quarter ended February 28, 2010 declined
from $210,700 in the year-earlier quarter, reflecting decreases of 20%, 10% and 11% in our
Southwest, Central and Southeast segments, respectively. Selling price declines, which varied
depending on local market conditions, reflected difficult economic and job market conditions,
intense competition from homebuilders and sellers of existing homes (including lender-owned homes
acquired through foreclosures and short sales), and our ongoing rollout of new, value-engineered
product at price points lower than those of our previous products to meet consumer demand for
affordable homes. Our average selling price increased 3% in the West Coast segment, primarily due
to changes in product mix.
Land sale revenues totaled $.4 million in the three months ended February 28, 2010 and $1.3
million in the year-earlier period. Generally, land sale revenues fluctuate with our decisions to
maintain or decrease our land ownership position in certain markets based upon the volume of our
holdings, our marketing strategy, the strength and number of competing developers entering
particular markets at given points in time, the availability of land in markets we serve and
prevailing market conditions.
Operating Loss. Our homebuilding operations generated operating losses of $36.2 million for the
three months ended February 28, 2010 and $46.4 million for the three months ended February 28,
2009, due to losses from housing operations. Our homebuilding operating losses represented
negative 13.8% of homebuilding revenues in the first quarter of 2010 and negative 15.2% of
homebuilding revenues in the year-earlier quarter. The
33
homebuilding operating loss decreased on a percentage basis in the three months ended February
28, 2010 compared to the year-earlier quarter due to an improvement in our housing gross margin,
partly offset by an increase in our selling, general and administrative expenses as a percentage
of revenues.
Within our homebuilding operations, our 2010 first quarter operating loss decreased by $10.2
million or 22% from the year-earlier quarter, reflecting lower pretax, noncash charges for
inventory impairments and land option contract abandonments and an improved housing gross margin.
Inventory impairment and land option contract abandonment charges totaled $13.4 million in the
first quarter of 2010, down 46% from $24.7 million in the first quarter of 2009.
We recorded pretax, noncash inventory impairment charges of $6.8 million in the first quarter of
2010, corresponding to four communities or land parcels with a post-impairment fair value of $3.9
million. In the first quarter of 2009, such charges totaled $24.4 million and corresponded to 18
communities or land parcels with a post-impairment fair value of $25.6 million. In the first
quarter of 2010, land option contract abandonment charges totaled $6.5 million and corresponded
to 401 lots. In the first quarter of 2009, land option contract abandonment charges totaled $.3
million and corresponded to 14 lots.
The inventory impairments we recorded in the first quarters of 2010 and 2009 reflected declining
asset values in certain markets due to the difficult economic and housing market conditions in
both periods. The charges for land option contract abandonments reflected our termination of
land option contracts on projects that no longer met our investment standards or marketing
strategy. Our housing gross margin improved 8.8 percentage points to 13.7% in the first quarter
of 2010 from 4.9% in the year-earlier quarter. Our housing gross margin, excluding inventory
impairment and land option contract abandonment charges, was 18.8% in the first quarter of 2010
and 13.0% in the first quarter of 2009. The year-over-year improvement in our housing gross
margin reflects the impact of our delivering more of our new, value-engineered product, such as
The Open Series, which is designed to reduce direct construction costs and increase operating
efficiencies compared to our previous products, consistent with our KBnxt operational business
model. Our margins were also favorably impacted by the inventory-related charges incurred in
prior periods, which lowered our land cost basis.
Our land sales generated break-even results in the first quarter of 2010, compared to a loss of
$.2 million in the first quarter of 2009.
As of February 28, 2010, the aggregate carrying value of inventory that had been impacted by
pretax, noncash inventory impairment charges was $558.8 million, representing 107 communities and
various other land parcels. As of November 30, 2009, the aggregate carrying value of inventory
that had been impacted by pretax, noncash inventory impairment charges was $603.9 million,
representing 128 communities and various other land parcels.
Selling, general and administrative expenses totaled $72.2 million in the first quarter of 2010,
increasing by $11.0 million, or 18%, from $61.2 million in the year-earlier quarter. The
year-over-year increase was mainly due to increased compensation expense associated with
cash-settled stock appreciation rights and phantom shares as a result of an increase in our
stock price, and higher legal expenses, primarily related to legal defense costs incurred with
respect to our former chairman and chief executive officer in connection with federal government
claims brought against him. As a percentage of housing revenues, selling, general and
administrative expenses rose to 27.5% in the first quarter of 2010 from 20.1% in the first
quarter of 2009, reflecting the year-over-year increase in our expenses and decline in our
housing revenues. Overall, it is difficult to predict both the compensation expense associated
with the cash-settled, stock-based awards that are tied to our stock price, and the legal defense
costs to be incurred in the future. However, at this time, we believe our 2010 second quarter
selling, general and administrative expenses and related ratio may again be negatively affected
by these two expense items. Nevertheless, we are hopeful that these items will have less of an
impact on our ratio for the remainder of the year as our revenues grow. Based on our current
outlook, we anticipate selling, general and administrative expenses as a percentage of housing
revenues for the full 2010 year to be approximately 18.5%, though significant changes in our
stock price could impact this ratio.
Interest Income. Interest income, which is generated from short-term investments and mortgages
receivable, totaled $.4 million in the first quarter of 2010 and $3.5 million in the first
quarter of 2009. Generally, increases and decreases in interest income are attributable to
changes in the interest-bearing average balances of short-term investments and mortgages
receivable, as well as fluctuations in interest rates. Interest income decreased in the first
quarter of 2010 compared to the year-earlier quarter due to lower interest rates.
34
Interest Expense, Net of Amounts Capitalized. Interest expense results principally from
borrowings to finance land purchases, housing inventory and other operating and capital needs.
Our interest expense, net of amounts capitalized, totaled $19.4 million in the three months ended
February 28, 2010 and $8.7 million in the three months ended February 28, 2009. Interest expense
for the three months ended February 28, 2010 included $1.4 million of debt issuance costs written
off in connection with our voluntary reduction of the aggregate commitment under the Credit
Facility from $650.0 million to $200.0 million. The percentage of interest capitalized declined
to 41% in the first quarter of 2010 from 70% in the year-earlier quarter due to a decrease in the
amount of inventory qualifying for interest capitalization, reflecting the inventory reduction
strategies we implemented in previous quarters, and our suspension of land development in certain
communities. Gross interest incurred increased to $32.1 million in the first quarter of 2010
from $29.3 million in the corresponding quarter of 2009, primarily as a result of the write
off of $1.4 million of debt issuance costs and a higher overall average interest rate in 2010.
Equity in Loss of Unconsolidated Joint Ventures. Our equity in loss of unconsolidated joint
ventures decreased to $1.2 million in the three months ended February 28, 2010 compared to $9.7
million in the three months ended February 28, 2009. Our equity in loss of unconsolidated joint
ventures in the first quarter of 2009 included noncash charges of $7.6 million to recognize the
impairment of certain unconsolidated joint venture investments. There were no such impairment
charges in the first quarter of 2010. Activities performed by our unconsolidated joint ventures
generally include buying, developing and selling land, and, in some cases, constructing and
delivering homes. Our unconsolidated joint ventures delivered 21 homes in the first three months
of 2010 and 23 homes in the first three months of 2009. Our unconsolidated joint ventures posted
combined revenues of $85.8 million in the first quarter of 2010 compared to $11.5 million in the
year-earlier quarter. The increased revenue primarily related to the sale of land by an
unconsolidated joint venture in our Southeast segment. Unconsolidated joint ventures generated
combined losses of $3.0 million in the first quarter of 2010 and $13.2 million in the
corresponding quarter of 2009.
NON-GAAP FINANCIAL MEASURES
This report contains information about our housing gross margin, excluding inventory impairment
and land option contract abandonment charges, and our ratio of net debt to total capital, both of
which are not calculated in accordance with GAAP. We believe these non-GAAP financial measures
are relevant and useful to investors in understanding our operations and the leverage employed in
our operations, and may be helpful in comparing us with other companies in the homebuilding
industry to the extent they provide similar information. However, because the housing gross
margin, excluding inventory impairment and land option contract abandonment charges, and the
ratio of net debt to total capital are not calculated in accordance with GAAP, these financial
measures may not be completely comparable to other companies in the homebuilding industry and,
thus, should not be considered in isolation or as an alternative to operating performance
measures prescribed by GAAP. Rather, these non-GAAP financial measures should be used to
supplement their respective most directly comparable GAAP financial measures in order to provide
a greater understanding of the factors and trends affecting our operations.
Housing Gross Margin, Excluding Inventory Impairment and Land Option Contract Abandonment
Charges. The following table reconciles our housing gross margin calculated in accordance with
GAAP to the non-GAAP financial measure of our housing gross margin, excluding inventory
impairment and land option contract abandonment charges (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Housing revenues |
|
$ |
262,158 |
|
|
$ |
304,454 |
|
Housing construction and land costs |
|
|
(226,194 |
) |
|
|
(289,423 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing gross margin |
|
|
35,964 |
|
|
|
15,031 |
|
Add: Inventory impairment and land
option contract abandonment
charges |
|
|
13,362 |
|
|
|
24,670 |
|
|
|
|
|
|
|
|
Housing gross margin, excluding
inventory impairment
and land option contract
abandonment charges |
|
$ |
49,326 |
|
|
$ |
39,701 |
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
Housing gross margin as a percentage of housing revenues |
|
|
13.7 |
% |
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing gross margin, excluding inventory impairment
and land option contract abandonment charges, as a
percentage of housing revenues |
|
|
18.8 |
% |
|
|
13.0 |
% |
|
|
|
|
|
|
|
Housing gross margin, excluding inventory impairment and land option contract abandonment
charges, is a non-GAAP financial measure, which we calculate by dividing housing revenues less
housing construction and land costs before pretax, noncash inventory impairment and land option
contract abandonment charges associated with housing operations recorded during a given period,
by housing revenues. The most directly comparable GAAP financial measure is housing gross
margin. We believe housing gross margin, excluding inventory impairment and land option contract
abandonment charges, is a relevant and useful financial measure to investors in evaluating our
performance as it measures the gross profit we generated specifically on the homes delivered
during a given period and enhances the comparability of housing gross margins between periods.
This financial measure assists us in making strategic decisions regarding product mix, product
pricing and construction pace. We also believe investors will find housing gross margin,
excluding inventory impairment and land option contract abandonment charges, relevant and useful
because it represents a profitability measure that may be compared to a prior period without
regard to variability of charges for inventory impairments or land option contract abandonments.
Ratio of Net Debt to Total Capital. The following table reconciles our ratio of debt to total
capital calculated in accordance with GAAP to the non-GAAP financial measure of our ratio of net
debt to total capital (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Mortgages and notes payable |
|
$ |
1,815,261 |
|
|
$ |
1,820,370 |
|
Stockholders equity |
|
|
647,614 |
|
|
|
707,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital |
|
$ |
2,462,875 |
|
|
$ |
2,527,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of debt to total capital |
|
|
73.7 |
% |
|
|
72.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages and notes payable |
|
$ |
1,815,261 |
|
|
$ |
1,820,370 |
|
Less: Cash and cash equivalents and restricted cash |
|
|
(1,288,857 |
) |
|
|
(1,289,007 |
) |
|
|
|
|
|
|
|
Net debt |
|
|
526,404 |
|
|
|
531,363 |
|
Stockholders equity |
|
|
647,614 |
|
|
|
707,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital |
|
$ |
1,174,018 |
|
|
$ |
1,238,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net debt to total capital |
|
|
44.8 |
% |
|
|
42.9 |
% |
|
|
|
|
|
|
|
The ratio of net debt to total capital is a non-GAAP financial measure, which we calculate by
dividing mortgages and notes payable, net of homebuilding cash and cash equivalents and
restricted cash, by total capital (mortgages and notes payable, net of homebuilding cash and cash
equivalents and restricted cash, plus stockholders equity). The most directly comparable GAAP
financial measure is the ratio of debt to total capital. We believe the ratio of net debt to
total capital is a relevant and useful financial measure to investors in understanding the
leverage employed in our operations and as an indicator of our ability to obtain external
financing.
36
HOMEBUILDING SEGMENTS
The following table presents financial information related to our homebuilding reporting segments
for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, |
|
|
|
2010 |
|
|
2009 |
|
West Coast: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
108,434 |
|
|
$ |
108,520 |
|
Construction and land costs |
|
|
(80,029 |
) |
|
|
(99,625 |
) |
Selling, general and administrative expenses |
|
|
(16,338 |
) |
|
|
(16,162 |
) |
|
|
|
|
|
|
|
Operating income (loss) |
|
|
12,067 |
|
|
|
(7,267 |
) |
Other, net |
|
|
(8,710 |
) |
|
|
(5,055 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss) |
|
$ |
3,357 |
|
|
$ |
(12,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southwest: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
33,848 |
|
|
$ |
52,273 |
|
Construction and land costs |
|
|
(27,023 |
) |
|
|
(57,026 |
) |
Selling, general and administrative expenses |
|
|
(6,589 |
) |
|
|
(7,146 |
) |
|
|
|
|
|
|
|
Operating income (loss) |
|
|
236 |
|
|
|
(11,899 |
) |
Other, net |
|
|
(4,699 |
) |
|
|
(8,839 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss |
|
$ |
(4,463 |
) |
|
$ |
(20,738 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
82,925 |
|
|
$ |
77,645 |
|
Construction and land costs |
|
|
(73,668 |
) |
|
|
(67,672 |
) |
Selling, general and administrative expenses |
|
|
(13,180 |
) |
|
|
(12,855 |
) |
|
|
|
|
|
|
|
Operating loss |
|
|
(3,923 |
) |
|
|
(2,882 |
) |
Other, net |
|
|
(3,381 |
) |
|
|
(3,274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss |
|
$ |
(7,304 |
) |
|
$ |
(6,156 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
37,304 |
|
|
$ |
67,303 |
|
Construction and land costs |
|
|
(43,612 |
) |
|
|
(64,368 |
) |
Selling, general and administrative expenses |
|
|
(9,454 |
) |
|
|
(11,949 |
) |
|
|
|
|
|
|
|
Operating loss |
|
|
(15,762 |
) |
|
|
(9,014 |
) |
Other, net |
|
|
(4,424 |
) |
|
|
(4,811 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss |
|
$ |
(20,186 |
) |
|
$ |
(13,825 |
) |
|
|
|
|
|
|
|
West Coast Our West Coast segment generated total revenues of $108.4 million in the first
quarter of 2010 and $108.5 million in the year-earlier quarter, with all revenues in each period
generated from housing operations. Housing revenues for the first quarter of 2010 were
essentially flat with the first quarter of 2009, reflecting a 3% year-over-year decrease in homes
delivered that was offset by a 3% year-over-year increase in the average selling price. We
delivered 340 homes in the first quarter of 2010, down from 351 homes delivered in the
year-earlier quarter, partly due to a 16% year-over-year decrease in the average number of active
communities we operated in this segment. The average selling price increased to $318,900 in the
quarter ended February 28, 2010 from $309,200 in the year-earlier quarter, mainly due to a change
in product mix and somewhat improved operating conditions in certain markets within this segment.
This segment posted pretax income of $3.4 million for the three months ended February 28, 2010
and a pretax loss of $12.3 million for the three months ended February 28, 2009. Pretax results
improved in the first quarter of 2010 compared to the year-earlier quarter mainly due to an
improved gross margin. The gross margin increased to 26.2% in the first quarter of 2010 from
8.2% in the year-earlier quarter, partly due to a decrease in pretax, noncash charges for
inventory impairments and land option contract abandonments. These charges totaled $1.2 million
in the first quarter of 2010 and $7.3 million in the year-earlier quarter. As a percentage of
revenues, such
37
inventory valuation charges were 1% in the first quarter of 2010 compared to 7% in the first
quarter of 2009. The increase in the gross margin also reflected reduced direct construction
costs and improved operating efficiencies. Selling, general and administrative expenses totaled
$16.3 million in the first quarter of 2010 and $16.2 million in the first quarter of 2009.
Southwest Total revenues from our Southwest segment decreased 35% to $33.8 million in the
first quarter of 2010 from $52.3 million in the year-earlier quarter due to a decrease in housing
revenues, with all revenues in each period produced from housing operations. Housing revenues
fell year over year due to a 19% year-over-year decrease in homes delivered and a 20%
year-over-year decline in the average selling price. We delivered 216 homes at an average selling
price of $156,600 in the first quarter of 2010 compared to 267 homes delivered at an average
selling price of $195,800 in the year-earlier period. The year-over-year decrease in homes
delivered was primarily due to a 16% year-over-year decrease in the number of active communities
we operated in this segment. The decline in the average selling price reflected competitive
conditions, as well as our rollout of new product at lower price points compared to those of our
previous product.
This segment posted pretax losses of $4.5 million in the three months ended February 28, 2010 and
$20.7 million in the year-earlier period. The pretax loss narrowed in the first quarter of 2010
compared to the first quarter of 2009, largely due to a decrease in noncash inventory and
joint venture impairment charges. The gross margin was positive 20.2% in the first quarter of
2010 compared to a negative 9.1% in the first quarter of 2009. There were $1.0 million of
inventory impairment charges in the first quarter of 2010, while the year-earlier quarter
included $11.9 million of such charges. As a percentage of revenues, inventory impairment
charges were 3% in the first quarter of 2010 and 23% in the first quarter of 2009. Selling,
general and administrative expenses decreased by $.5 million, or 8%, to $6.6 million in the
quarter ended February 28, 2010 from $7.1 million in the year-earlier quarter, primarily due to
overhead reductions and other cost-saving initiatives. Other, net expenses included no
unconsolidated joint venture impairment charges in the first quarter of 2010, and $5.4 million of
such charges in the first quarter of 2009.
Central Our Central segment generated total revenues of $82.9 million for the three months
ended February 28, 2010, up 7% from $77.6 million for the three months ended February 28, 2009,
mainly due to an increase in housing revenues. Housing revenues increased 6% to $82.5 million in
the first quarter of 2010 from $77.5 million in the year-earlier quarter, as a result of an 18%
year-over-year increase in homes delivered, partly offset by a 10% year-over-year decline in the
average selling price. In the first quarter of 2010, we delivered 529 homes at an average selling
price of $156,100, compared to 447 homes delivered at an average selling price of $173,500 in the
first quarter of 2009. The increase in homes delivered reflected a 15% year-over-year increase
in the number of active communities we operated in this segment. The lower average selling price
reflected competitive conditions and our rollout of new product at lower price points compared to
those of our previous product. Land sale revenues totaled $.4 million in the three months ended
February 28, 2010 and $.1 million in the year-earlier period.
Pretax losses from this segment totaled $7.3 million in the first quarter of 2010 and $6.2
million in the year-earlier quarter. In the first quarter of 2010, the pretax loss increased by
$1.1 million from the year-earlier quarter, mainly due to an increase in noncash land
option contract abandonment charges. The gross margin decreased to 11.2% in the first quarter of
2010 from 12.8% in the first quarter of 2009. In the first quarter of 2010, there were $6.3
million of land option contract abandonment charges, compared to no such charges in the
year-earlier quarter. As a percentage of revenues, land option contract abandonment charges were
8% in the first quarter of 2010. Selling, general and administrative expenses totaled $13.2
million in the first quarter of 2010 and $12.9 million in the first quarter of 2009.
Southeast Total revenues from our Southeast segment decreased 45% to $37.3 million in the three
months ended February 28, 2010 from $67.3 million in the three months ended February 28, 2009,
primarily due to a decrease in housing revenues. Housing revenues declined 44% to $37.3 million
in the first quarter of 2010 from $66.1 million in the year-earlier quarter due to a 37%
year-over-year decrease in homes delivered and an 11% year-over-year decrease in the average
selling price. We delivered 241 homes in the first quarter of 2010, down from 380 homes
delivered in the year-earlier quarter, largely due to a 30% year-over-year decrease in the number
of active communities we operated in this segment. The average selling price declined to
$154,800 in the first quarter of 2010 from $174,000 in the year-earlier quarter, reflecting
competitive conditions and our rollout of new product at lower price points compared to those of
our previous product. There were no land sale revenues from this segment during the first
quarter of 2010. Land sale revenues from this segment totaled $1.2 million in the first quarter
of 2009.
38
Pretax losses from this segment totaled $20.2 million in the three months ended February 28, 2010
and $13.8 million for the year-earlier period. The loss from this segment increased in the first
three months of 2010 from the year-earlier period, reflecting a lower gross margin, partly offset
by lower selling, general and administrative expenses. The gross margin fell to a negative 16.9%
in the first quarter of 2010 from a positive 4.4% in the first quarter of 2009, largely due to
the decline in the average selling price. There was $4.9 million of pretax, noncash inventory
impairment and land option contract abandonment charges in the first quarter of 2010, compared to
$5.5 million of inventory impairment charges in the first quarter of 2009. As a percentage of
revenues, these inventory-related charges were 13% in the first quarter of 2010 and 8% in the
first quarter of 2009. Selling, general and administrative expenses decreased by $2.4 million,
or 21%, to $9.5 million in the first quarter of 2010 from $11.9 million in the year-earlier
quarter as a result of our actions to reduce overhead costs. Other, net expenses included no
unconsolidated joint venture impairments in the first quarter of 2010 and $2.2 million of such
charges in the year-earlier quarter.
FINANCIAL SERVICES
Our financial services segment provides title and insurance services to our homebuyers. This
segment also provides mortgage banking services to our homebuyers indirectly through KBA
Mortgage. We and a subsidiary of Bank of America, N.A., each have a 50% ownership interest in
KBA Mortgage. KBA Mortgage is operated by our joint venture partner and is accounted for as an
unconsolidated joint venture in the financial services reporting segment of our consolidated
financial statements.
The following table presents a summary of selected financial and operational data for our
financial services segment (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,467 |
|
|
$ |
1,620 |
|
Expenses |
|
|
(893 |
) |
|
|
(860 |
) |
Equity in income of unconsolidated joint venture |
|
|
1,321 |
|
|
|
941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income |
|
$ |
1,895 |
|
|
$ |
1,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations (a): |
|
|
|
|
|
|
|
|
Loans |
|
|
1,042 |
|
|
|
1,099 |
|
Principal |
|
$ |
186,318 |
|
|
$ |
205,011 |
|
Percentage of homebuyers using KBA Mortgage |
|
|
81 |
% |
|
|
78 |
% |
|
|
|
|
|
|
|
|
|
Loans sold to third parties (a): |
|
|
|
|
|
|
|
|
Loans |
|
|
1,108 |
|
|
|
1,112 |
|
Principal |
|
$ |
198,760 |
|
|
$ |
210,267 |
|
|
|
|
(a) |
|
Loan originations and sales occur within KBA Mortgage. |
Revenues. Financial services revenues totaled $1.5 million for the three months ended February
28, 2010 and $1.6 million for the three months ended February 28, 2009, and included revenues
from interest income, title services and insurance commissions. The year-over-year decrease in
financial services revenues in the first quarter of 2010 resulted mainly from lower revenues from
title and insurance services, reflecting fewer homes delivered from our homebuilding operations.
Expenses. General and administrative expenses totaled $.9 million in both the first quarter of
2010 and first quarter of 2009.
Equity in Income of Unconsolidated Joint Venture. The equity in income of unconsolidated joint
venture of $1.3 million in the first three months of 2010 and $.9 million in the first three
months of 2009 related to our 50% interest in KBA Mortgage. The increase in unconsolidated joint
venture income in the first quarter of 2010 compared to the year-earlier quarter was mainly due
to increased margins on loan sales and reduced expenses.
39
KBA Mortgage originated 1,042 loans in the first quarter of 2010 compared to 1,099 loans in the
year-earlier quarter. The percentage of our homebuyers using KBA Mortgage as a loan originator
increased to 81% for the three months ended February 28, 2010 from 78% for the three months ended
February 28, 2009.
INCOME TAXES
Our income tax expense totaled $.2 million for the three months ended February 28, 2010, compared
to an income tax benefit of $1.5 million for the three months ended February 28, 2009. Our
effective income tax expense rate was .4% in the first quarter of 2010 compared to an effective
income tax benefit rate of 2.5% for the first quarter of 2009. The year-over-year difference in
our 2010 first quarter effective tax rate was primarily due to the reversal of a $1.8 million
liability for unrecognized tax benefits in the first quarter of 2009.
In accordance with ASC 740, we evaluate our deferred tax assets quarterly to determine if
valuation allowances are required. During the three months ended February 28, 2010, we recorded
a valuation allowance of $21.2 million against the net deferred tax assets generated from the net
loss for the period. During the three months ended February 28, 2009, we recorded a similar
valuation allowance of $22.7 million against net deferred tax assets. Our net deferred tax
assets totaled $1.1 million at both February 28, 2010 and November 30, 2009. The deferred tax
asset valuation allowance increased to $771.2 million at February 28, 2010 from $750.0 million at
November 30, 2009. This increase reflected the net impact of the $21.2 million valuation
allowance recorded during the first quarter of 2010.
The benefits of our net operating losses, built-in losses and tax credits would be reduced or
potentially eliminated if we experienced an ownership change under Section 382. Based on our
analysis performed as of February 28, 2010, we do not believe that we have experienced an
ownership change as defined by Section 382, and, therefore, the net operating losses, built-in
losses and tax credits we have generated should not be subject to a Section 382 limitation as of
this reporting date.
Liquidity and Capital Resources
Overview. Historically, we have funded our homebuilding and financial services operations with
internally generated cash flows and external sources of debt and equity financing.
In light of the prolonged downturn in the housing market and in order to be well-positioned for
future growth opportunities, we remain focused on maintaining a strong financial position. We
ended the first quarter of 2010 with $1.29 billion of cash and cash equivalents and restricted
cash, and no borrowings under the Credit Facility.
Capital Resources. At February 28, 2010, we had $1.82 billion of mortgages and notes payable
outstanding, essentially unchanged from the balance at November 30, 2009.
Our financial leverage, as measured by the ratio of debt to total capital, was 73.7% at February
28, 2010 compared to 72.0% at November 30, 2009. Our ratio of net debt to total capital at
February 28, 2010 was 44.8%, compared to 42.9% at November 30, 2009.
At February 28, 2010, we had no borrowings outstanding and $148.2 million in letters of credit
outstanding under the Credit Facility. At the $200.0 million aggregate commitment level, we had
$51.8 million available for future borrowings at February 28, 2010. Effective December 28, 2009,
we voluntarily reduced the aggregate Credit Facility to $200.0 million from $650.0 million as a
cost-savings measure.
On March 24, 2010, pursuant to the terms of the Credit Facility, we notified Bank of America,
N.A., the Administrative Agent for the Credit Facility, of our decision to exercise our right to
permanently terminate the entire commitment under the Credit Facility and, as a result, to
terminate the terms of the Credit Facility. These terminations became effective on March 31,
2010. Upon the termination of the Credit Facility, the then outstanding letters of credit under
the Credit Facility were transferred to an $85.0 million cash-collateralized letter of credit
facility that we established with Bank of America, N.A. We terminated the Credit Facility and
entered into the cash-collateralized letter of credit facility as a cost-savings measure. We may
enter into similar letter of credit agreements with other financial institutions.
Under the terms of the Credit Facility, we were required, among other things, to maintain a
minimum consolidated tangible net worth and certain financial statement ratios, and were subject
to limitations on
40
acquisitions, inventories and indebtedness. Specifically, the Credit Facility required us to
maintain a minimum consolidated tangible net worth of $1.00 billion, reduced by the cumulative
deferred tax valuation allowances not to exceed $721.8 million (Permissible Deferred Tax
Valuation Allowances). The minimum consolidated tangible net worth requirement was increased by
the amount of the proceeds from any issuance of capital stock and 50% of our cumulative
consolidated net income, before the effect of deferred tax valuation allowances, for each quarter
after May 31, 2008 where we had cumulative consolidated net income. There was no decrease when we
had cumulative consolidated net losses. At February 28, 2010, our applicable minimum consolidated
tangible net worth requirement was $278.2 million.
Other financial statement ratios required under the Credit Facility consisted of maintaining at
the end of each fiscal quarter a Coverage Ratio greater than 1.00 to 1.00 and a Leverage Ratio
less than 2.00 to 1.00, 1.25 to 1.00, or 1.00 to 1.00, depending on our Coverage Ratio. The
Coverage Ratio was the ratio of our consolidated adjusted EBITDA to consolidated interest expense
(as defined under the Credit Facility) over the previous 12 months. The Leverage Ratio was the
ratio of our consolidated total indebtedness (as defined under the Credit Facility) to the sum of
consolidated tangible net worth and Permissible Deferred Tax Valuation Allowances (Adjusted
Consolidated Tangible Net Worth).
If our Coverage Ratio was less than 1.00 to 1.00, we would not be in default under the Credit
Facility provided that our Leverage Ratio was less than 1.00 to 1.00 and we established with the
Credit Facilitys administrative agent an interest reserve account (Interest Reserve Account)
equal to the amount of interest incurred on a consolidated basis during the most recent completed
quarter, multiplied by the number of quarters that remained until the Credit Facilitys scheduled
maturity date of November 2010, not to exceed a maximum of four. We could withdraw all amounts
deposited in the Interest Reserve Account when our Coverage Ratio at the end of a fiscal quarter
was greater than or equal to 1.00 to 1.00, provided that there was no default under the Credit
Facility at the time the amounts were withdrawn. An Interest Reserve Account was not required
when our actual Coverage Ratio was greater than or equal to 1.00 to 1.00.
The covenants under the Credit Facility represented the most restrictive covenants we had as of
February 28, 2010 and November 30, 2009 with respect to our mortgages and notes payable. The
following table presents certain key financial metrics we were required to maintain under our
Credit Facility at February 28, 2010 and our actual ratios:
|
|
|
|
|
|
|
February 28, 2010 |
|
|
Covenant |
|
|
Financial Covenant |
|
Requirement |
|
Actual |
|
|
|
|
|
Minimum consolidated tangible net worth |
|
$278.2 million |
|
$641.6 million |
Coverage Ratio |
|
(a) |
|
(a) |
Leverage Ratio (b) |
|
<1.00 |
|
.40 |
Investment in subsidiaries and joint ventures
as a percentage of Adjusted Consolidated
Tangible Net Worth |
|
<35% |
|
10% |
Borrowing base in excess of senior indebtedness
(as defined) |
|
Greater than zero |
|
$598.9 million |
|
|
|
(a) |
|
Our Coverage Ratio of .79 was less than 1.00 to 1.00 as of February 28, 2010. With our
Leverage Ratio as of November 30, 2009 below 1.00 to 1.00, we maintained an Interest Reserve
Account to remain in compliance with the terms of the Credit Facility. The Interest Reserve
Account had a balance of $90.2 million at February 28, 2010. As discussed above, we
voluntarily terminated the Credit Facility effective March 31, 2010. |
|
(b) |
|
The Leverage Ratio requirement varied based on our Coverage Ratio. If our Coverage Ratio
was greater than or equal to 1.50 to 1.00, the Leverage Ratio requirement was less than 2.00
to 1.00. If our Coverage Ratio was between 1.00 and 1.50 to 1.00, the Leverage Ratio
requirement was less than 1.25 to 1.00. If our Coverage Ratio was less than 1.00 to 1.00,
the Leverage Ratio requirement was less than or equal to 1.00 to 1.00. |
41
The following table presents the same financial metrics and actual ratios at November 30, 2009:
|
|
|
|
|
|
|
November 30, 2009 |
|
|
Covenant |
|
|
Financial Covenant |
|
Requirement |
|
Actual |
|
|
|
|
|
Minimum consolidated tangible net worth |
|
$278.2 million |
|
$700.9 million |
Coverage Ratio |
|
(a) |
|
(a) |
Leverage Ratio |
|
<1.00 |
|
.39 |
Investment in subsidiaries and joint ventures
as a percentage of Adjusted Consolidated
Tangible Net Worth |
|
<35% |
|
11% |
Borrowing base in excess of senior indebtedness
(as defined) |
|
Greater than zero |
|
$474.7 million |
|
|
|
(a) |
|
Our Coverage Ratio of .77 was less than 1.00 to 1.00 as of November 30, 2009. With our
Leverage Ratio as of August 31, 2009 below 1.00 to 1.00, we maintained an Interest Reserve
Account of $114.3 million in the fourth quarter of 2009 to remain in compliance with the
terms of the Credit Facility. The Interest Reserve Account had a balance of $114.3 million
at November 30, 2009. |
If our Coverage Ratio was less than 2.00 to 1.00, we were restricted from optional payment or
prepayment of principal, interest or any other amount for subordinated obligations before their
maturity; payments to retire, redeem, purchase or acquire for value shares of capital stock from
or with non-employees; and investments in a holder of 5% or more of our capital stock if the
purpose of the investment was to avoid default. These restrictions did not apply if (a) our
unrestricted cash equaled or exceeded the aggregate commitment; (b) there were no outstanding
borrowings under the Credit Facility; and (c) there was no default under the Credit Facility.
Other covenants contained in the Credit Facility provided that (a) transactions with employees
for exchanges of capital stock, such as payments for incentive and employee benefit plans or
cashless exercises of stock options, cannot exceed $5.0 million in any fiscal year; (b) our
unimproved land book value cannot exceed consolidated tangible net worth; (c) investments in
subsidiaries and joint ventures (as defined in the Credit Facility) cannot exceed 35% of Adjusted
Consolidated Tangible Net Worth; (d) speculative home deliveries within a given quarter cannot
exceed 40% of the previous 12 months total deliveries; and (e) the borrowing base (as defined in
the Credit Facility) cannot be lower than total senior indebtedness (as defined in the Credit
Facility).
The indenture governing our senior notes does not contain any financial maintenance covenants.
Subject to specified exceptions, the senior notes indenture contains certain restrictive
covenants that, among other things, limit our ability to incur secured indebtedness; engage in
sale-leaseback transactions involving property or assets above a certain specified value; or
engage in mergers, consolidations, or sales of assets.
As of February 28, 2010, we were in compliance with the applicable terms of all of our covenants
under the Credit Facility, senior notes indenture, and mortgages and land contracts due to land
sellers and other loans. Our ability to continue to borrow funds depends in part on our ability
to remain in such compliance. As discussed above, we voluntarily terminated the Credit Facility
effective March 31, 2010.
As further discussed below under Off-Balance Sheet Arrangements, Contractual Obligations and
Commercial Commitments, various financial and non-financial covenants apply to the outstanding
debt of our unconsolidated joint ventures, and a failure to comply with any applicable debt
covenants could result in a default and cause lenders to seek to enforce guarantees, if
applicable, provided by us and/or our corresponding unconsolidated joint venture partner(s).
During the quarter ended February 28, 2010, our board of directors declared a cash dividend of
$.0625 per share of common stock, which was paid on February 18, 2010 to stockholders of record
on February 4, 2010.
Depending on available terms, we also finance certain land acquisitions with purchase-money
financing from land sellers or with other forms of financing from third parties. At February 28,
2010, we had outstanding mortgages and land contracts due to land sellers and other loans payable
in connection with such financing of $158.6 million.
42
Consolidated Cash Flows. Operating, investing and financing activities provided net cash of
$23.8 million in the three months ended February 28, 2010 and used net cash of $114.3 million in
the three months ended February 28, 2009.
Operating Activities. Operating activities provided net cash flows of $18.3 million in the three
months ended February 28, 2010 and $103.5 million in the corresponding period of 2009. The
year-over-year change in net operating cash flows was largely due to an increase in inventories
in the first quarter of 2010, reflecting land acquisition activity in the current period to
support future growth in our community count, homes delivered and revenues as part of our
strategy to restore our homebuilding operations to profitability, as further discussed below
under Outlook. In contrast, in the first quarter of 2009, we strategically reduced our
inventories and curtailed land purchases to align our operations with reduced housing market
activity and our outlook at that time with respect to future operating conditions, and to support
our profitability and strong balance sheet goals.
In the first three months of 2010, sources of operating cash included a decrease in receivables
of $194.2 million, mainly due to a $190.7 million federal income tax refund we received during
the quarter as a result of the carryback of our 2009 net operating loss to offset earnings
generated in 2004 and 2005. The cash provided was partly offset by a net decrease in accounts
payable, accrued expenses and other liabilities of $92.3 million, a net loss of $54.7 million, a
net increase in inventories of $48.5 million (excluding inventory impairments and land option
contract abandonments, $5.7 million of inventories acquired through seller financing and a
decrease of $34.4 million in consolidated inventories not owned) and other operating uses of $5.6
million.
In the first three months of 2009, sources of operating cash included a net decrease in
receivables of $197.4 million, due to a $221.0 million federal income tax refund we received
during the quarter, a decrease in inventories of $57.4 million (excluding inventory impairments
and land option contract abandonments, $5.1 million of inventories acquired through seller
financing and a decrease of $7.9 million in consolidated inventories not owned), other operating
sources of $2.1 million and various noncash items added to the net loss. Partially offsetting
the cash provided was a net loss of $58.1 million and a decrease in accounts payable, accrued
expenses and other liabilities of $133.0 million.
Investing Activities. Investing activities used net cash of $2.5 million in the three months
ended February 28, 2010 and $8.6 million in the year-earlier period. In the first three months
of 2010, cash of $2.3 million was used for investments in unconsolidated joint ventures and $.2
million was used for net purchases of property and equipment. In the first three months of 2009,
we used cash of $7.8 million for investments in unconsolidated joint ventures and $.8 million for
net purchases of property and equipment.
Financing Activities. Financing activities provided net cash of $8.0 million in the three months
ended February 28, 2010 and used net cash of $209.2 million in the three months ended February
28, 2009. In the first three months of 2010, $24.1 million of cash was provided from a reduction
in the balance of the Interest Reserve Account (which is restricted cash) and $.2 million of cash
was provided from the issuance of common stock under employee stock plans. The cash provided was
partially offset by net payments on short-term borrowings of $11.1 million, dividend payments of
$4.8 million and repurchases of common stock of $.4 million in connection with the satisfaction
of employee withholding taxes on vested restricted stock.
In the first three months of 2009, cash was used for the repayment of $200.0 million of 8 5/8%
senior subordinated notes, which matured on December 15, 2008, net payments on short-term
borrowings of $8.8 million, dividend payments of $4.8 million and repurchases of common stock of
$.6 million in connection with the satisfaction of employee withholding taxes on vested
restricted stock. These uses of cash were partly offset by $4.2 million of cash provided from a
reduction in the balance of the Interest Reserve Account and $.8 million of cash provided from
the issuance of common stock under employee stock plans.
Shelf Registration Statement. We have an automatically effective universal shelf registration
statement on file with the SEC. The registration statement registers the offering of debt and
equity securities that we may issue from time to time in amounts to be determined.
Share Repurchase Program. At February 28, 2010, we were authorized to repurchase four million
shares of our common stock under a board-approved share repurchase program. We did not
repurchase any of our common stock under this program in the first quarter of 2010.
In the present environment, we are carefully managing our use of cash for investments internal to
our business, investments to grow our business and potential additional debt reductions or
potential modifications to our
43
overall debt maturity schedule. Based on our current capital position, we believe we have
adequate resources and sufficient access to external financing sources to satisfy our current and
reasonably anticipated future requirements for funds to acquire capital assets and land,
consistent with our marketing strategies and investment standards, to construct homes, to finance
our financial services operations, and to meet any other needs in the ordinary course of our
business, both on a short- and long-term basis. Although we anticipate that our asset acquisition
and development activities will remain limited in the near term as markets stabilize, we are
analyzing potential asset acquisitions and will use our present financial strength to acquire
assets in desirable, long-term markets when the prices, timing and strategic fit are compelling.
Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments
We participate in unconsolidated joint ventures that conduct land acquisition, development and/or
other homebuilding activities in various markets, typically where our homebuilding operations are
located. Our partners in these unconsolidated joint ventures are unrelated homebuilders, land
developers and other real estate entities, or commercial enterprises. Through these
unconsolidated joint ventures, we seek to reduce and share market and development risks and to
reduce our investment in land inventory, while potentially increasing the number of homesites we
control or will own. In some instances, participating in unconsolidated joint ventures enables us
to acquire and develop land that we might not otherwise have access to due to a projects size,
financing needs, duration of development or other circumstances. While we view our participation
in unconsolidated joint ventures as beneficial to our homebuilding activities, we do not view
such participation as essential.
We and/or our unconsolidated joint venture partners typically obtain options or enter into other
arrangements to have the right to purchase portions of the land held by the unconsolidated joint
ventures. The prices for these land options or other arrangements are generally negotiated prices
that approximate fair value. When an unconsolidated joint venture sells land to our homebuilding
operations, we defer recognition of our share of such unconsolidated joint venture earnings until
a home sale is closed and title passes to a homebuyer, at which time we account for those
earnings as a reduction of the cost of purchasing the land from the unconsolidated joint venture.
We and our unconsolidated joint venture partners make initial or ongoing capital contributions to
these unconsolidated joint ventures, typically on a pro rata basis. The obligations to make
capital contributions are governed by each unconsolidated joint ventures respective operating
agreement and related documents. We also share in the profits and losses of these unconsolidated
joint ventures generally in accordance with our respective equity interests. These unconsolidated
joint ventures had total assets of $801.6 million at February 28, 2010 and $921.5 million at
November 30, 2009. Our investment in these unconsolidated joint ventures totaled $105.7 million
at February 28, 2010 and $119.7 million at November 30, 2009. We expect our investments in
unconsolidated joint ventures to continue to decrease over time and are reviewing each investment
to ensure it fits into our current overall strategic plans and business objectives.
The unconsolidated joint ventures finance land and inventory investments through a variety of
arrangements. To finance their respective land acquisition and development activities, certain of
our unconsolidated joint ventures have obtained loans from third-party lenders that are secured
by the underlying property and related project assets. Our unconsolidated joint ventures had
aggregate outstanding debt, substantially all of which was secured, of approximately $384.4
million at February 28, 2010 and $514.2 million at November 30, 2009. Various financial and
non-financial covenants apply to the outstanding debt of the unconsolidated joint ventures, and a
failure to comply with any applicable debt covenants could result in a default and cause lenders
to seek to enforce guarantees, if applicable, as described below.
In certain instances, we and/or our partner(s) in an unconsolidated joint venture provide
guarantees and indemnities to the unconsolidated joint ventures lenders that may include one or
more of the following: (a) a completion guaranty; (b) a loan-to-value maintenance guaranty;
and/or (c) a carve-out guaranty. A completion guaranty refers to the actual physical completion
of improvements for a project and/or the obligation to contribute equity to an unconsolidated
joint venture to enable it to fund its completion obligations. A loan-to-value maintenance
guaranty refers to the payment of funds to maintain the applicable loan balance at or below a
specific percentage of the value of an unconsolidated joint ventures secured collateral
(generally land and improvements). A carve-out guaranty refers to the payment of (i) losses a
lender suffers due to certain bad acts or omissions by an unconsolidated joint venture or its
partners, such as fraud or misappropriation, or due to environmental liabilities arising with
respect to the relevant project, or (ii) outstanding principal and interest and
44
certain other amounts owed to lenders upon the filing by an unconsolidated joint venture of a
voluntary bankruptcy petition or the filing of an involuntary bankruptcy petition by creditors of
the unconsolidated joint venture in which an unconsolidated joint venture or its partners collude
or which the unconsolidated joint venture fails to contest.
In most cases, our maximum potential responsibility under these guarantees and indemnities is
limited to either a specified maximum dollar amount or an amount equal to our pro rata interest
in the relevant unconsolidated joint venture. In a few cases, we have entered into agreements
with our unconsolidated joint venture partners to be reimbursed or indemnified with respect to
the guarantees we have provided to an unconsolidated joint ventures lenders for any amounts we
may pay pursuant to such guarantees above our pro rata interest in the unconsolidated joint
venture. If our unconsolidated joint venture partners are unable to fulfill their reimbursement
or indemnity obligations, or otherwise fail to do so, we could incur more than our allocable
share under the relevant guaranty. Should there be indications that advances (if made) will not
be voluntarily repaid by an unconsolidated joint venture partner under any such reimbursement
arrangements, we vigorously pursue all rights and remedies available to us under the applicable
agreements, at law or in equity to enforce our rights.
Our potential responsibility under our completion guarantees, if triggered, is highly dependent
on the facts of a particular case. In any event, we believe our actual responsibility under these
guarantees is limited to the amount, if any, by which an unconsolidated joint ventures
outstanding borrowings exceed the value of its assets, but may be substantially less than this
amount.
At February 28, 2010, our potential responsibility under our loan-to-value maintenance guarantees
relating to approximately $12.0 million of outstanding debt held by two unconsolidated joint
ventures totaled approximately $3.8 million, if any liability were determined to be due
thereunder. This amount represents our maximum responsibility under such loan-to-value
maintenance guarantees assuming the underlying collateral has no value and without regard to
defenses that could be available to us against any attempted enforcement of such guarantees.
Notwithstanding our potential unconsolidated joint venture guaranty and indemnity
responsibilities and the resolutions we have reached in certain instances with unconsolidated
joint venture lenders with respect to those potential responsibilities, at this time we do not
believe, except as described below, that our existing exposure under our outstanding completion,
loan-to-value and carve-out guarantees and indemnities related to unconsolidated joint venture
debt is material to our consolidated financial position or results of operations.
The lenders for two of our unconsolidated joint ventures have filed lawsuits against some of the
unconsolidated joint ventures members, and certain of those members parent companies, seeking
to recover damages under completion guarantees, among other claims. We and the other parent
companies, together with the members, are defending the lawsuits in which they have been named
and are currently exploring resolutions with the lenders, but there is no assurance that the
parties involved will reach satisfactory resolutions. In a separate proceeding, the members
(including us) of one of these unconsolidated joint ventures are currently in arbitration
regarding their respective performance obligations in order to address one members claims for
specific performance and, in the alternative, damages. A decision in this arbitration proceeding
is pending. In the interim, the parties to the arbitration and the lenders to this
unconsolidated joint venture have agreed to engage in a mediation process in order to reach
negotiated settlements of the outstanding disputes and a restructuring of the unconsolidated
joint ventures outstanding debt. There is no assurance that the mediation process will be
successful, and a broad range of outcomes is possible, both for the mediation process or, if the
mediation is not successful, for the arbitration. Given the present uncertainty, it is possible
that the ultimate outcome could be material to our consolidated financial position or results of
operations.
In addition to the above-described guarantees and indemnities, we have also provided a several
guaranty to the lenders of our unconsolidated joint venture that is the subject of the
above-described arbitration/mediation proceedings. By its terms, the guaranty purports to
guarantee the repayment of principal and interest and certain other amounts owed to the
unconsolidated joint ventures lenders when an involuntary bankruptcy proceeding is filed against
the unconsolidated joint venture that is not dismissed within 60 days or for which an order
approving relief under bankruptcy law is entered, even if the unconsolidated joint venture or its
partners do not collude in the filing and the unconsolidated joint venture contests the filing.
Our potential responsibility under this several guaranty fluctuates with the unconsolidated joint
ventures debt and with our and our partners respective land purchases from the unconsolidated
joint venture. At February 28, 2010, this unconsolidated joint venture had total outstanding
indebtedness of approximately $372.4 million and, if this guaranty were then enforced, our
maximum potential responsibility under the guaranty would have been approximately $182.7
45
million, which amount does not account for any offsets or defenses that could be available to us.
This unconsolidated joint venture has received notices from its lenders administrative agent
alleging a number of defaults under its loan agreement. As noted above, we are currently
exploring resolutions with the parties involved, but there is no assurance that a satisfactory
outcome will be reached.
In June 2009, the FASB revised the authoritative guidance for determining the primary beneficiary
of a VIE. In December 2009, the FASB issued ASU 2009-17, which provides amendments to ASC 810 to
reflect revised guidance. The amendments to ASC 810 replace the quantitative-based risk and
rewards calculation for determining which reporting entity, if any, has a controlling interest in
a VIE with an approach focused on identifying which reporting entity has the power to direct the
activities of a VIE that most significantly impact the entitys economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive benefits from the entity.
The amendments also require additional disclosures about a reporting entitys involvement with
VIEs. We adopted the amended provisions of ASC 810 effective December 1, 2009. The adoption of
the amended provisions of ASC 810 did not have a material effect on our consolidated financial
position or results of operations.
We participate in joint ventures from time to time for the purpose of conducting land
acquisition, development and/or other homebuilding activities. Our investments in these joint
ventures may create a variable interest in a VIE, depending on the contractual terms of the
arrangement. We analyze our joint ventures in accordance with ASC 810 to determine whether they
are VIEs and, if so, whether we are the primary beneficiary. All of our joint ventures at
February 28, 2010 and November 30, 2009 were determined under the provisions of ASC 810
applicable at each such date to be unconsolidated joint ventures either because they were not
VIEs or, if they were VIEs, we were not the primary beneficiary of the VIEs.
In the ordinary course of our business, we enter into land option contracts (or similar
agreements) in order to procure land for the construction of homes. The use of such land option
and other contracts generally allows us to reduce the risks associated with direct land ownership
and development, reduces our capital and financial commitments, including interest and other
carrying costs, and minimizes the amount of our land inventories on our consolidated balance
sheets. Under such land option contracts, we will pay a specified option deposit or earnest money
deposit in consideration for the right to purchase land in the future, usually at a predetermined
price. Under the requirements of ASC 810, certain of our land option contracts may create a
variable interest for us, with the land seller being identified as a VIE.
In compliance with ASC 810, we analyze our land option contracts and other contractual
arrangements to determine whether the corresponding land sellers are VIEs and, if so, whether we
are the primary beneficiary. Although we do not have legal title to the optioned land, ASC 810
requires us to consolidate a VIE if we are determined to be the primary beneficiary. As a result
of our analyses, we determined that as of February 28, 2010 we were not the primary beneficiary
of any VIEs from which we are purchasing land under land option contracts. Since adopting the
amended provisions of ASC 810, in determining whether we are the primary beneficiary, we
consider, among other things, whether we have the power to direct the activities of the VIE that
most significantly impact the entitys economic performance. Such activities would include,
among other things, determining or limiting the scope or purpose of the VIE, selling or
transferring property owned or controlled by the VIE, or arranging financing for the VIE. We
also consider whether we have the obligation to absorb losses of the VIE or the right to receive
benefits from the VIE.
Based on our analyses as of November 30, 2009, which were performed before we adopted the amended
provisions of ASC 810, we determined that we were the primary beneficiary of certain VIEs from
which we were purchasing land under land option contracts and, therefore, consolidated such VIEs.
Prior to our adoption of the amended provisions of ASC 810, in determining whether we were the
primary beneficiary, we considered, among other things, the size of our deposit relative to the
contract price, the risk of obtaining land entitlement approval, the risk associated with land
development required under the land option contract, and the risk of changes in the market value
of the optioned land during the contract period. The consolidation of VIEs in which we determined
we were the primary beneficiary increased inventories, with a corresponding increase to accrued
expenses and other liabilities, on our consolidated balance sheets by $21.0 million at November
30, 2009. The liabilities related to our consolidation of VIEs from which we have arranged to
purchase land under option and other contracts represent the difference between the purchase
price of land not yet purchased and our cash deposits. Our cash deposits related to these land
option and other contracts totaled $4.1 million at November 30, 2009. Creditors, if any, of these
VIEs have no recourse against us.
46
As of February 28, 2010, we had cash deposits totaling $1.2 million associated with land option
and other contracts that we determined to be unconsolidated VIEs, having an aggregate purchase
price of $26.7 million, and had cash deposits totaling $7.3 million associated with land option
and other contracts that we determined were not VIEs, having an aggregate purchase price of
$189.5 million.
We also evaluate land option contracts in accordance with ASC 470, and, as a result of our
evaluations, increased inventories, with a corresponding increase to accrued expenses and other
liabilities, on our consolidated balance sheets by $22.8 million at February 28, 2010 and $36.1
million at November 30, 2009.
Critical Accounting Policies
The preparation of our consolidated financial statements requires the use of judgment in the
application of accounting policies and estimates of uncertain matters. There have been no
significant changes to our critical accounting policies and estimates during the three months
ended February 28, 2010 from those disclosed in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the
year ended November 30, 2009.
Recent Accounting Pronouncements
In January 2010, the FASB issued ASU 2010-06, which provides amendments to Accounting Standards
Codification Subtopic No. 820-10, Fair Value Measurements and Disclosures Overall. ASU
2010-06 requires additional disclosures and clarifications of existing disclosures for recurring
and nonrecurring fair value measurements. The revised guidance is effective for interim and
annual reporting periods beginning after December 15, 2009. ASU 2010-06 concerns disclosure only
and will not have an impact on our financial position or results of operations.
Outlook
Our backlog at February 28, 2010 totaled 2,713 net orders, representing projected future housing
revenues of approximately $523.8 million. By comparison, at February 28, 2009, our backlog
totaled 2,651 net orders, representing projected future housing revenues of approximately $559.8
million. The 2% year-over-year increase in the number of net orders in our quarter-end backlog
was primarily due to the increase in our first quarter net orders in 2010 compared to 2009. The
6% year-over-year decline in the projected future housing revenues in our backlog reflects our
lower average selling prices in the first quarter of 2010 compared with the year-earlier quarter,
which stem from intense price competition in certain of our served markets and our rollout of new
product at lower price points than those of our previous product. Compared to our year-end 2009
levels, our net orders in backlog and their projected future revenues increased 28% and 24%,
respectively.
Net orders generated by our homebuilding operations increased 5% to 1,913 in the first quarter of
2010 from the 1,827 net orders generated in the corresponding quarter of 2009, even though we
operated from 9% fewer active communities in the first quarter of 2010 compared to the
year-earlier period. The increase in our net orders reflected improvement in our cancellation
rate. As a percentage of gross orders, our first quarter cancellation rate improved to 22% in
2010, from 28% in 2009. As a percentage of beginning backlog, the cancellation rate was 26% in
the first quarter of 2010 and 31% in the year-earlier quarter.
Throughout 2009, we and the homebuilding industry in general faced persistently challenging
operating conditions in most housing markets due to an increased supply of homes available for
sale and restrained demand. The primary factors behind these conditions included mounting sales
of lender-owned homes acquired through mortgage foreclosures and short sales, exacerbated by
increasing mortgage delinquencies; a generally poor economic and employment environment;
tightened mortgage credit standards and reduced credit availability; and relatively weak consumer
confidence. Though recent data suggest that some housing markets may be stabilizing or starting
to rebound relative to this time last year, it remains highly uncertain when and to what extent
housing markets or the broader economy may experience a meaningful and sustained recovery.
Moreover, several obstacles to a recovery could arise or intensify in 2010, which alone or in
combination may further increase the supply of homes available for sale and/or constrain demand.
On the supply side, these obstacles include increased foreclosure activity and additional
lender-owned inventory entering the market due to
47
the lifting of voluntary lender foreclosure moratoriums, greater voluntary or involuntary
mortgage defaults or short sales, and increases in mortgage interest rates. On the demand side,
potential obstacles include persistent weakness or further deterioration in economic conditions,
employment levels and/or consumer confidence; continued or further tightening in mortgage credit
lending standards; and reduced government support for housing. For instance, the Federal Reserve
completed a $1.25 trillion mortgage-backed securities purchase program on March 31, 2010, which
could cause mortgage interest rates to increase and/or reduce the availability of mortgage
financing, and federal home purchase tax credits are scheduled to expire in April 2010.
Though market conditions may remain volatile, our highest priority for 2010 is restoring the
profitability of our homebuilding operations. We continue to make progress toward this goal,
having narrowed our first quarter net loss on a year-over-year basis for the seventh consecutive
quarterly period. In addition, during the first quarter of 2010, we generated year-over-year
improvement in our housing gross margin and experienced fewer and lower magnitude charges for
asset impairments and land option contract abandonments, trends that we currently believe will
continue throughout 2010.
Within a context of disciplined spending and careful operational cost control, we believe that
restoring the profitability of our homebuilding operations will require stronger revenue growth,
and that such growth can be achieved through the continued rollout of our new, value-engineered
product, an increase in the number of our active communities, and a larger inventory base. This
tactical shift is reflected in the operations of our Central segment, which, as reported above,
produced year-over-year increases in segment revenues and homes delivered during the first
quarter, as a result of operating from 15% more active communities than in the first quarter of 2009. To
enable this kind of growth across our enterprise as 2010 proceeds, we are pursuing a land
acquisition strategy guided by the principles of our KBnxt operational business model,
emphasizing ownership or control of well-priced land parcels within our existing served markets
or in nearby submarkets that in the aggregate represent a three-to-four year supply of
developable land.
We believe we have the financial and operational resources to seize land acquisition
opportunities as they arise, and we are confident that the number of attractive opportunities
will increase as housing markets improve over time. As a result, we currently anticipate that
the number of our active communities will increase on a year-over-year basis in the latter half
of 2010 resulting in an overall active community count for the year that is roughly flat with
2009. Based on this assumption, we expect to deliver between 8,300 and 9,000 homes in 2010.
Further, we expect some increase in revenues to come from diminishing downward pricing pressures
in certain of our served markets compared to prior periods.
We believe the transformations that we have made in our business in recent yearsthe redesign of
our product line, the reduction in our overhead, the improvement in our operating efficiencies,
and the strategic redeployment of capital into housing markets that we believe have high future
growth prospects from those that do nothave put us in a position to achieve profitability in
the latter part of 2010, depending on the extent to which housing markets continue to stabilize
and eventually recover.
Despite our progress, our overall outlook remains cautious given the significant potential
obstacles noted above and the uncertainty as to when each of our served markets may begin a
sustained recovery. Our ability to generate positive results from our strategic initiatives and
planned land acquisition activities, including achieving profitability, remains limited by current
negative supply and demand dynamics in many housing markets, which are unlikely to abate soon, and
by the expected curtailment in government programs and incentives designed to support homeownership
and/or home purchases. We continue to believe a meaningful improvement in housing market conditions
will require a sustained decrease in unsold homes, price stabilization, reduced mortgage
delinquency and foreclosure rates, and the restoration of both consumer and credit market
confidence that support a decision to buy a home. We cannot predict when these events may occur.
Moreover, if conditions in our served markets decline further, we may need to take
additional noncash charges for inventory and joint venture impairments and land option contract
abandonments, and we may decide that we need to reduce, slow or even abandon our land acquisition
plans for those markets. Our 2010 results could also be adversely affected if general economic
conditions do not meaningfully improve or actually decline, if job losses accelerate or weak
employment levels persist, if mortgage delinquencies, short sales and foreclosures increase, if
consumer mortgage lending becomes less available or more expensive, or if consumer confidence
weakens, any or all of which could further delay a recovery in housing markets or result in further
deterioration in operating conditions. Despite these difficulties and risks, we believe we are
well-positioned, financially and operationally, to advance our primary goals and expand our
business when the general housing market stabilizes and longer term demographic, economic and
population growth trends once again drive demand for homeownership.
48
Forward-Looking Statements
Investors are cautioned that certain statements contained in this document, as well as some
statements by us in periodic press releases and other public disclosures and some oral statements
by us to securities analysts and stockholders during presentations, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the
Act). Statements that are predictive in nature, that depend upon or refer to future events or
conditions, or that include words such as expects, anticipates, intends, plans,
believes, estimates, hopes, and similar expressions constitute forward-looking statements.
In addition, any statements concerning future financial or operating performance (including
future revenues, homes delivered, net orders, selling prices, expenses, expense ratios, margins,
earnings or earnings per share, or growth or growth rates), future market conditions, future
interest rates, and other economic conditions, ongoing business strategies or prospects, future
dividends and changes in dividend levels, the value of backlog (including amounts that we expect
to realize upon delivery of homes included in backlog and the timing of those deliveries),
potential future acquisitions and the impact of completed acquisitions, future share repurchases
and possible future actions, which may be provided by us, are also forward-looking statements as
defined by the Act. Forward-looking statements are based on current expectations and projections
about future events and are subject to risks, uncertainties, and assumptions about our
operations, economic and market factors, and the homebuilding industry, among other things. These
statements are not guarantees of future performance, and we have no specific policy or intention
to update these statements.
Actual events and results may differ materially from those expressed or forecasted in
forward-looking statements due to a number of factors. The most important risk factors that could
cause our actual performance and future events and actions to differ materially from such
forward-looking statements include, but are not limited to: general economic, employment and
business conditions; adverse market conditions that could result in additional impairments or
abandonment charges and operating losses, including an oversupply of unsold homes, declining home
prices and increased foreclosure and short sale activity, among other things; conditions in the
capital and credit markets (including consumer mortgage lending standards, the availability of
consumer mortgage financing and mortgage foreclosure rates); material prices and availability;
labor costs and availability; changes in interest rates; inflation; our debt level; weak or
declining consumer confidence, either generally or specifically with respect to purchasing homes;
competition for home sales from other sellers of new and existing homes, including sellers of
homes obtained through foreclosures or short sales; weather conditions, significant natural
disasters and other environmental factors; government actions, policies, programs and regulations
directed at or affecting the housing market (including, but not limited to, tax credits, tax
incentives and/or subsidies for home purchases, and programs intended to modify existing mortgage
loans and to prevent mortgage foreclosures), the homebuilding industry, or construction
activities; the availability and cost of land in desirable areas; legal or regulatory proceedings
or claims; the ability and/or willingness of participants in our unconsolidated joint ventures to
fulfill their obligations; our ability to access capital, including our capacity under our
unsecured revolving credit facility; our ability to use the net deferred tax assets we have
generated; our ability to successfully implement our current and planned product, geographic and
market positioning (including, but not limited to, our efforts to expand our inventory base with
desirable land positions or interests at reasonable cost), revenue growth and cost reduction
strategies; consumer interest in our new product designs, including The Open Series; and other
events outside of our control. Please see our periodic reports and other filings with the SEC for
a further discussion of these and other risks and uncertainties applicable to our business.
49
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We primarily enter into debt obligations to support general corporate purposes, including the
operations of our subsidiaries. We are subject to interest rate risk on our senior notes. For
fixed rate debt, changes in interest rates generally affect the fair value of the debt
instrument, but not our earnings or cash flows. Under our current policies, we do not use
interest rate derivative instruments to manage our exposure to changes in interest rates.
The following table presents principal cash flows by scheduled maturity, weighted average
interest rates and the estimated fair value of our long-term debt obligations as of February 28,
2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
Fiscal Year of Expected Maturity |
|
Fixed Rate Debt |
|
|
Interest Rate |
|
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
|
|
|
|
|
% |
2011 |
|
|
99,828 |
|
|
|
6.4 |
|
2012 |
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
2014 |
|
|
249,393 |
|
|
|
5.8 |
|
Thereafter |
|
|
1,307,441 |
|
|
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,656,662 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at February 28, 2010 |
|
$ |
1,598,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
For additional information regarding our market risk, refer to Item 7A, Quantitative and
Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended
November 30, 2009.
Item 4. Controls and Procedures
We have established disclosure controls and procedures to ensure that information we are required
to disclose in the reports we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified in the SECs rules
and forms, and accumulated and communicated to management, including the President and Chief
Executive Officer (the Principal Executive Officer) and Senior Vice President and Chief
Accounting Officer (the Principal Financial Officer), as appropriate, to allow timely decisions
regarding required disclosure. Under the supervision and with the participation of senior
management, including our Principal Executive Officer and our Principal Financial Officer, we
evaluated our disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934. Based on this evaluation, our Principal
Executive Officer and Principal Financial Officer concluded that our disclosure controls and
procedures were effective as of February 28, 2010.
50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
ERISA Litigation
On March 16, 2007, plaintiffs Reba Bagley and Scott Silver filed an action brought under Section
502 of ERISA, 29 U.S.C. § 1132, Bagley et al., v. KB Home, et al. , in the United States District
Court for the Central District of California. The action was brought against us, our directors,
certain of our current and former officers, and the board of directors committee that oversees
the 401(k) Plan. After the court allowed leave to file an amended complaint, plaintiffs filed an
amended complaint adding Tolan Beck and Rod Hughes as additional plaintiffs and dismissing
certain individuals as defendants. All four plaintiffs claim to be former employees of KB Home
who participated in the 401(k) Plan. Plaintiffs allege on behalf of themselves and on behalf of
all others similarly situated that all defendants breached fiduciary duties owed to plaintiffs
and purported class members under ERISA by failing to disclose information to and providing
misleading information to participants in the 401(k) Plan about our alleged prior stock option
backdating practices and by failing to remove our stock as an investment option under the 401(k)
Plan. Plaintiffs allege that this breach of fiduciary duties caused plaintiffs to earn less on
their 401(k) Plan accounts than they would have earned but for defendants alleged breach of
duties.
The parties to the litigation executed a settlement agreement on February 26, 2010. On March 1,
2010, plaintiffs filed a Motion for Preliminary Approval of the Settlement, Certification of a
Settlement Class, Approval of Notice Plan and To Set a Time for Fairness Hearing. On March 15,
2010, the court held a hearing on the motion at which it granted preliminary approval of the
settlement and requested that the parties make certain revisions to the settlement papers. A
hearing to decide the fairness of the settlement has not yet been scheduled.
Other Matters
On October 2, 2009, the staff of the SEC notified us that a formal order of investigation had
been issued regarding possible accounting and disclosure issues. The staff has stated that its
investigation should not be construed as an indication by the SEC that there has been any
violation of the federal securities laws. We are cooperating with the staff of the SEC in
connection with the investigation. We cannot predict the outcome of, or the timeframe for, the
conclusion of this matter.
In addition to those described in this report, we are involved in litigation and government
proceedings incidental to our business. These proceedings are in various procedural stages and,
based on reports of counsel, we believe as of the date of this report that provisions or accruals
made for any potential losses (to the extent estimable) are adequate and that any liabilities or
costs arising out of these proceedings are not likely to have a materially adverse effect on our
consolidated financial position or results of operations. The outcome of any of these
proceedings, however, is inherently uncertain, and if unfavorable outcomes were to occur, there
is a possibility that they would, individually or in the aggregate, have a materially adverse
effect on our consolidated financial position or results of operations.
51
Item 1A. Risk Factors
There have been no material changes to the risk factors we previously disclosed in our Annual
Report on Form 10-K for the year ended November 30, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes our purchases of our own equity securities during the three months
ended February 28, 2010:
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Maximum |
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Total Number of |
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Number of Shares |
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Shares Purchased |
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That May Yet be |
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Total Number |
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as Part of Publicly |
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Purchased Under |
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of Shares |
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Average Price |
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Announced Plans |
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the Plans |
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Period |
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Purchased |
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Paid per Share |
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or Programs |
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or Programs |
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December 1 31 |
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$ |
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4,000,000 |
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January 1 31 |
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23,393 |
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14.96 |
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4,000,000 |
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February 1 28 |
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4,000,000 |
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Total |
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23,393 |
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$ |
14.96 |
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On December 8, 2005, our board of directors authorized a share repurchase program under which we
may repurchase up to 10 million shares of our common stock. Acquisitions under the share
repurchase program may be made in open market or private transactions and will be made
strategically from time to time at managements discretion based on its assessment of market
conditions and buying opportunities. At February 28, 2010, we were authorized to repurchase four
million shares of our common stock under this share repurchase program. During the three months
ended February 28, 2010, no shares were repurchased pursuant to this share repurchase program.
The 23,393 shares purchased during the three months ended February 28, 2010 were previously
issued shares delivered to us by employees to satisfy withholding taxes on the vesting of
restricted stock awards. These transactions are not considered repurchases under the share
repurchase program.
Item 6. Exhibits
Exhibits
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10.56 |
* |
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KB Home 2010 Equity Incentive Plan. |
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10.57 |
* |
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Form of Indemnification Agreement, filed as an exhibit to the Companys Current Report on
Form 8-K dated April 2, 2010, is incorporated by reference herein. |
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31.1 |
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Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of William R. Hollinger, Senior Vice President and Chief Accounting Officer
of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
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32.2 |
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Certification of William R. Hollinger, Senior Vice President and Chief Accounting Officer
of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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* |
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Management contract or compensatory plan or arrangement in which executive officers are
eligible to participate. |
52
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.
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KB HOME
Registrant
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Dated April 8, 2010 |
/s/ JEFFREY T. MEZGER
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Jeffrey T. Mezger |
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President and Chief Executive Officer
(Principal Executive Officer) |
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Dated April 8, 2010 |
/s/ WILLIAM R. HOLLINGER
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William R. Hollinger |
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Senior Vice President and Chief Accounting Officer
(Principal Financial Officer) |
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53
INDEX OF EXHIBITS
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10.56 |
* |
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KB Home 2010 Equity Incentive Plan. |
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10.57 |
* |
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Form of Indemnification Agreement, filed as an exhibit to the Companys Current Report on
Form 8-K dated April 2, 2010, is incorporated by reference herein. |
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31.1 |
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Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of William R. Hollinger, Senior Vice President and Chief Accounting Officer of
KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
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32.2 |
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Certification of William R. Hollinger, Senior Vice President and Chief Accounting Officer of
KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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* |
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Management contract or compensatory plan or arrangement in which executive officers are
eligible to participate. |
54