KB Home 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 May 31, 2008.
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
(State of incorporation)
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95-3666267
(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 is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | 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 May
31, 2008.
Common stock, par value $1.00 per share: 89,605,999 shares outstanding, including 12,091,182 shares
held by the Registrants Grantor Stock Ownership Trust and excluding 25,483,921 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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Six Months Ended May 31, |
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Three Months Ended May 31, |
|
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|
2008 |
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|
2007 |
|
|
2008 |
|
|
2007 |
|
Total revenues |
|
$ |
1,433,289 |
|
|
$ |
2,802,046 |
|
|
$ |
639,065 |
|
|
$ |
1,413,208 |
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|
|
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|
|
|
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|
|
|
|
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Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,428,402 |
|
|
$ |
2,794,635 |
|
|
$ |
637,094 |
|
|
$ |
1,409,986 |
|
Construction and land costs |
|
|
(1,668,481 |
) |
|
|
(2,655,684 |
) |
|
|
(755,840 |
) |
|
|
(1,479,405 |
) |
Selling, general and administrative expenses |
|
|
(246,703 |
) |
|
|
(398,807 |
) |
|
|
(119,065 |
) |
|
|
(193,585 |
) |
Goodwill impairment |
|
|
(24,570 |
) |
|
|
|
|
|
|
(24,570 |
) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(511,352 |
) |
|
|
(259,856 |
) |
|
|
(262,381 |
) |
|
|
(263,004 |
) |
Interest income |
|
|
22,554 |
|
|
|
10,268 |
|
|
|
9,522 |
|
|
|
5,600 |
|
Equity in loss of unconsolidated joint ventures |
|
|
(45,361 |
) |
|
|
(41,700 |
) |
|
|
(5,483 |
) |
|
|
(39,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Homebuilding pretax loss |
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|
(534,159 |
) |
|
|
(291,288 |
) |
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|
(258,342 |
) |
|
|
(296,899 |
) |
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|
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Financial services: |
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|
|
|
|
|
|
|
|
|
|
|
|
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Revenues |
|
|
4,887 |
|
|
|
7,411 |
|
|
|
1,971 |
|
|
|
3,222 |
|
Expenses |
|
|
(2,232 |
) |
|
|
(2,411 |
) |
|
|
(1,113 |
) |
|
|
(1,071 |
) |
Equity in income of unconsolidated joint venture |
|
|
8,302 |
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|
|
10,191 |
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|
2,154 |
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|
3,396 |
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Financial services pretax income |
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10,957 |
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|
15,191 |
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|
3,012 |
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|
5,547 |
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Loss from continuing operations before
income taxes |
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|
(523,202 |
) |
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|
(276,097 |
) |
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|
(255,330 |
) |
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|
(291,352 |
) |
Income tax benefit (expense) |
|
|
(900 |
) |
|
|
112,600 |
|
|
|
(600 |
) |
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|
117,200 |
|
|
|
|
|
|
|
|
|
|
|
|
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Loss from continuing operations |
|
|
(524,102 |
) |
|
|
(163,497 |
) |
|
|
(255,930 |
) |
|
|
(174,152 |
) |
Income from discontinued operations, net of
income taxes |
|
|
|
|
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|
42,348 |
|
|
|
|
|
|
|
25,466 |
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|
|
|
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|
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|
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Net loss |
|
$ |
(524,102 |
) |
|
$ |
(121,149 |
) |
|
$ |
(255,930 |
) |
|
$ |
(148,686 |
) |
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Basic earnings (loss) per share: |
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Continuing operations |
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$ |
(6.77 |
) |
|
$ |
(2.12 |
) |
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$ |
(3.30 |
) |
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$ |
(2.26 |
) |
Discontinued operations |
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|
.55 |
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|
.33 |
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Basic loss per share |
|
$ |
(6.77 |
) |
|
$ |
(1.57 |
) |
|
$ |
(3.30 |
) |
|
$ |
(1.93 |
) |
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Diluted earnings (loss) per share: |
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Continuing operations |
|
$ |
(6.77 |
) |
|
$ |
(2.12 |
) |
|
$ |
(3.30 |
) |
|
$ |
(2.26 |
) |
Discontinued operations |
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|
|
|
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|
.55 |
|
|
|
|
|
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|
.33 |
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Diluted loss per share |
|
$ |
(6.77 |
) |
|
$ |
(1.57 |
) |
|
$ |
(3.30 |
) |
|
$ |
(1.93 |
) |
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|
|
|
|
|
|
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|
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|
Basic average shares outstanding |
|
|
77,413 |
|
|
|
77,046 |
|
|
|
77,462 |
|
|
|
77,102 |
|
|
|
|
|
|
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|
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|
Diluted average shares outstanding |
|
|
77,413 |
|
|
|
77,046 |
|
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|
77,462 |
|
|
|
77,102 |
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Cash dividends declared per common share |
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$ |
.75 |
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$ |
.50 |
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$ |
.50 |
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$ |
.25 |
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See accompanying notes.
3
KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands)
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May 31, |
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November 30, |
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2008 |
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2007 |
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(unaudited) |
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Assets |
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Homebuilding: |
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Cash and cash equivalents |
|
$ |
1,305,077 |
|
|
$ |
1,325,255 |
|
Receivables |
|
|
190,010 |
|
|
|
295,739 |
|
Inventories |
|
|
2,608,823 |
|
|
|
3,312,420 |
|
Investments in unconsolidated joint ventures |
|
|
294,504 |
|
|
|
297,010 |
|
Deferred income taxes |
|
|
222,458 |
|
|
|
222,458 |
|
Goodwill |
|
|
43,400 |
|
|
|
67,970 |
|
Other assets |
|
|
123,500 |
|
|
|
140,712 |
|
|
|
|
|
|
|
|
|
|
|
4,787,772 |
|
|
|
5,661,564 |
|
Financial services |
|
|
53,236 |
|
|
|
44,392 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,841,008 |
|
|
$ |
5,705,956 |
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Liabilities and stockholders equity |
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Homebuilding: |
|
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|
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|
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Accounts payable |
|
$ |
609,989 |
|
|
$ |
699,851 |
|
Accrued expenses and other liabilities |
|
|
778,261 |
|
|
|
975,828 |
|
Mortgages and notes payable |
|
|
2,161,220 |
|
|
|
2,161,794 |
|
|
|
|
|
|
|
|
|
|
|
3,549,470 |
|
|
|
3,837,473 |
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|
|
|
|
|
|
|
Financial services |
|
|
17,109 |
|
|
|
17,796 |
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
115,090 |
|
|
|
114,976 |
|
Paid-in capital |
|
|
859,258 |
|
|
|
851,628 |
|
Retained earnings |
|
|
1,384,218 |
|
|
|
1,968,881 |
|
Accumulated other comprehensive loss |
|
|
(22,923 |
) |
|
|
(22,923 |
) |
Grantor stock ownership trust, at cost |
|
|
(131,390 |
) |
|
|
(132,608 |
) |
Treasury stock, at cost |
|
|
(929,824 |
) |
|
|
(929,267 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,274,429 |
|
|
|
1,850,687 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
4,841,008 |
|
|
$ |
5,705,956 |
|
|
|
|
|
|
|
|
See accompanying notes.
4
KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands Unaudited)
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|
Six Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(524,102 |
) |
|
$ |
(121,149 |
) |
Income from discontinued operations, net of income taxes |
|
|
|
|
|
|
(42,348 |
) |
Adjustments to reconcile net loss to net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
|
Equity in loss of unconsolidated joint ventures |
|
|
37,059 |
|
|
|
41,804 |
|
Distributions of earnings from unconsolidated joint ventures |
|
|
8,975 |
|
|
|
12,427 |
|
Amortization of discounts and issuance costs |
|
|
1,180 |
|
|
|
1,274 |
|
Depreciation and amortization |
|
|
5,161 |
|
|
|
9,060 |
|
Provision for deferred income taxes |
|
|
|
|
|
|
(117,634 |
) |
Tax benefit associated with exercise of stock options |
|
|
2,046 |
|
|
|
(705 |
) |
Stock-based compensation expense |
|
|
2,631 |
|
|
|
3,561 |
|
Inventory and joint venture impairments and land option contract abandonments |
|
|
400,462 |
|
|
|
316,882 |
|
Goodwill impairment |
|
|
24,570 |
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables |
|
|
107,594 |
|
|
|
(9,104 |
) |
Inventories |
|
|
218,121 |
|
|
|
76,307 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
(188,471 |
) |
|
|
(267,463 |
) |
Other, net |
|
|
10,008 |
|
|
|
24,811 |
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities continuing operations |
|
|
105,234 |
|
|
|
(72,277 |
) |
Net cash provided by operating activities discontinued operations |
|
|
|
|
|
|
188,223 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
105,234 |
|
|
|
115,946 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Investments in unconsolidated joint ventures |
|
|
(97,704 |
) |
|
|
(86,730 |
) |
Sales (purchases) of property and equipment, net |
|
|
4,378 |
|
|
|
(3,891 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities continuing operations |
|
|
(93,326 |
) |
|
|
(90,621 |
) |
Net cash used by investing activities discontinued operations |
|
|
|
|
|
|
(14,720 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(93,326 |
) |
|
|
(105,341 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Payments on mortgages, land contracts and other loans |
|
|
(1,335 |
) |
|
|
(113,246 |
) |
Issuance of common stock under employee stock plans |
|
|
3,593 |
|
|
|
8,276 |
|
Excess tax benefit associated with exercise of stock options |
|
|
|
|
|
|
705 |
|
Payments of cash dividends |
|
|
(38,723 |
) |
|
|
(38,533 |
) |
Repurchases of common stock |
|
|
(557 |
) |
|
|
(4,238 |
) |
|
|
|
|
|
|
|
Net cash used by financing activities continuing operations |
|
|
(37,022 |
) |
|
|
(147,036 |
) |
Net cash used by financing activities discontinued operations |
|
|
|
|
|
|
(196,139 |
) |
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(37,022 |
) |
|
|
(343,175 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(25,114 |
) |
|
|
(332,570 |
) |
Cash and cash equivalents at beginning of period |
|
|
1,343,742 |
|
|
|
804,182 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
1,318,628 |
|
|
$ |
471,612 |
|
|
|
|
|
|
|
|
See accompanying notes.
5
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. |
|
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 generally accepted accounting principles 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 May 31, 2008, the results of
its consolidated operations for the six months and three months ended May 31, 2008 and 2007, and
its consolidated cash flows for the six months ended May 31, 2008 and 2007. The results of
consolidated operations for the six months and three months ended May 31, 2008 are not
necessarily indicative of the results to be expected for the full year. The consolidated
balance sheet at November 30, 2007 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,
2007, which are contained in the Companys Annual Report on Form 10-K for that period. |
|
|
|
Earnings (loss) per share |
|
|
|
Basic earnings (loss) per share is calculated by dividing net income (loss) by the average
number of common shares outstanding for the period. Diluted earnings (loss) per share is
calculated by dividing net income (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 six
months and three months ended May 31, 2008 and 2007 because the effect of their inclusion would
be antidilutive, or would decrease the reported loss per share. |
|
|
|
The following table presents a reconciliation of average shares outstanding (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
Three Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Basic average shares
outstanding |
|
|
77,413 |
|
|
|
77,046 |
|
|
|
77,462 |
|
|
|
77,102 |
|
Net effect of stock
options assumed to
be exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted average
shares outstanding |
|
|
77,413 |
|
|
|
77,046 |
|
|
|
77,462 |
|
|
|
77,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
The following table presents the components of comprehensive loss (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
Three Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net loss |
|
$ |
(524,102 |
) |
|
$ |
(121,149 |
) |
|
$ |
(255,930 |
) |
|
$ |
(148,686 |
) |
Foreign currency translation
adjustment |
|
|
|
|
|
|
4,956 |
|
|
|
|
|
|
|
5,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(524,102 |
) |
|
$ |
(116,193 |
) |
|
$ |
(255,930 |
) |
|
$ |
(143,333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
6
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. |
|
Basis of Presentation and Significant Accounting Policies (continued) |
|
|
|
The balances of accumulated other comprehensive loss reported in the consolidated balance sheets
as of May 31, 2008 and November 30, 2007 are comprised solely of an adjustment of $22.9 million
recorded directly to accumulated other comprehensive loss at the end of 2007 to initially apply
Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and
132(R), which requires an employer to recognize the funded status of a defined postretirement
benefit plan 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 2008 presentation. |
|
2. |
|
Stock-Based Compensation |
|
|
|
The Company adopted the fair value recognition provisions of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment (SFAS No. 123(R)), using the modified prospective
transition method effective December 1, 2005. SFAS No. 123(R) 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. SFAS No. 123(R) 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 SFAS No. 123(R), 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 as of May 31, 2008 as well as activity during the six months then ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Exercise |
|
|
|
Options |
|
|
Price |
|
Options outstanding at beginning of period |
|
|
8,173,464 |
|
|
$ |
30.17 |
|
Exercised |
|
|
(113,635 |
) |
|
|
20.39 |
|
Cancelled |
|
|
(112,598 |
) |
|
|
44.43 |
|
|
|
|
|
|
|
|
Options outstanding at end of period |
|
|
7,947,231 |
|
|
$ |
30.11 |
|
|
|
|
|
|
|
|
Options exercisable at end of period |
|
|
7,127,745 |
|
|
$ |
29.02 |
|
|
|
|
|
|
|
|
|
|
As of May 31, 2008, the weighted average remaining contractual life of stock options outstanding
and stock options exercisable was 9.6 years. There was $4.5 million of total unrecognized
compensation cost related to unvested stock option awards as of May 31, 2008. For the three
months ended May 31, 2008 and 2007, stock-based compensation expense associated with stock options totaled $1.3 million and $1.7 million,
respectively. For the six months ended May 31, 2008 and 2007, stock-based compensation expense
totaled $2.6 million and $3.5 million, respectively. The aggregate intrinsic value of both stock
options outstanding and stock options exercisable was $9.2 million as of May 31, 2008. (The
intrinsic value of a stock option is the amount by which |
7
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. |
|
Stock-Based Compensation (continued) |
|
|
|
the market value of a share of the Companys common stock exceeds the exercise price of the
stock option.) The intrinsic value of stock options exercised during the six months ended May
31, 2008 was $.7 million. |
|
|
|
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 $3.7 million
in the three months ended May 31, 2008 and $1.1 million in the three months ended May 31, 2007
related to these stock-based awards. The Company recognized total compensation expense of $6.6
million in the six months ended May 31, 2008 and $2.3 million in the six months ended May 31,
2007 related to restricted stock, phantom shares and stock appreciation rights. |
|
3. |
|
Segment Information |
|
|
|
As of May 31, 2008, 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 Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information. As of May 31, 2008, 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, Georgia, North Carolina and South Carolina |
|
|
|
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, first move-up and active adult buyers. |
|
|
|
The Companys homebuilding reporting segments were identified based primarily on similarities in
economic and geographic characteristics, as well as similar product type, regulatory
environments, methods used to sell and construct homes and land acquisition characteristics.
The Company evaluates segment performance primarily based on pretax income. |
|
|
|
The Companys financial services reporting segment provides title and insurance services to the
Companys homebuyers and provided escrow coordination services until the second quarter of 2007,
when the Company terminated the escrow coordination business. The financial services reporting
segment also provides mortgage banking services to the Companys homebuyers indirectly through
Countrywide KB Home Loans, a joint venture with Countrywide Financial Corporation
(Countrywide). On July 1, 2008, Bank of America Corporation completed its purchase of
Countrywide. At this time, the Company believes this transaction will not have a material effect
on the joint ventures activities. 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 operated as an independent,
stand-alone entity during the periods presented. |
8
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. |
|
Segment Information (continued) |
|
|
|
The following tables present financial information relating to the Companys reporting segments
(in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
Three Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast |
|
$ |
440,939 |
|
|
$ |
922,296 |
|
|
$ |
199,863 |
|
|
$ |
501,817 |
|
Southwest |
|
|
364,201 |
|
|
|
671,698 |
|
|
|
122,354 |
|
|
|
332,202 |
|
Central |
|
|
300,475 |
|
|
|
449,340 |
|
|
|
148,586 |
|
|
|
216,678 |
|
Southeast |
|
|
322,787 |
|
|
|
751,301 |
|
|
|
166,291 |
|
|
|
359,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homebuilding revenues |
|
|
1,428,402 |
|
|
|
2,794,635 |
|
|
|
637,094 |
|
|
|
1,409,986 |
|
Financial services |
|
|
4,887 |
|
|
|
7,411 |
|
|
|
1,971 |
|
|
|
3,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,433,289 |
|
|
$ |
2,802,046 |
|
|
$ |
639,065 |
|
|
$ |
1,413,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing operations
before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast |
|
$ |
(173,436 |
) |
|
$ |
(181,716 |
) |
|
$ |
(110,236 |
) |
|
$ |
(196,289 |
) |
Southwest |
|
|
(118,080 |
) |
|
|
29,574 |
|
|
|
(62,653 |
) |
|
|
(2,141 |
) |
Central |
|
|
(41,780 |
) |
|
|
(33,405 |
) |
|
|
(11,838 |
) |
|
|
(18,894 |
) |
Southeast |
|
|
(144,892 |
) |
|
|
(38,857 |
) |
|
|
(40,779 |
) |
|
|
(47,807 |
) |
Corporate and other (a) |
|
|
(55,971 |
) |
|
|
(66,884 |
) |
|
|
(32,836 |
) |
|
|
(31,768 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homebuilding
loss from continuing
operations before
income taxes |
|
|
(534,159 |
) |
|
|
(291,288 |
) |
|
|
(258,342 |
) |
|
|
(296,899 |
) |
Financial services |
|
|
10,957 |
|
|
|
15,191 |
|
|
|
3,012 |
|
|
|
5,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from
continuing operations
before income taxes |
|
$ |
(523,202 |
) |
|
$ |
(276,097 |
) |
|
$ |
(255,330 |
) |
|
$ |
(291,352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast |
|
$ |
16,317 |
|
|
$ |
14,047 |
|
|
$ |
8,354 |
|
|
$ |
11,121 |
|
Southwest |
|
|
14,939 |
|
|
|
17,265 |
|
|
|
8,097 |
|
|
|
8,230 |
|
Central |
|
|
9,425 |
|
|
|
11,107 |
|
|
|
4,751 |
|
|
|
6,178 |
|
Southeast |
|
|
13,595 |
|
|
|
9,727 |
|
|
|
7,923 |
|
|
|
4,705 |
|
Corporate and other |
|
|
622 |
|
|
|
1,452 |
|
|
|
(2,803 |
) |
|
|
(2,409 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (b) |
|
$ |
54,898 |
|
|
$ |
53,598 |
|
|
$ |
26,322 |
|
|
$ |
27,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Corporate and other includes corporate general and administrative expenses. |
|
(b) |
|
Interest cost for the three months ended May 31, 2008 and 2007 represents $26.3 million and $27.8 million, respectively, of interest
amortized in construction and land costs. Interest cost for the six months ended May 31, 2008 and 2007 represents $54.9 million and $53.6
million, respectively, of interest amortized in construction and land costs. |
9
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. |
|
Segment Information (continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
Three Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Equity in income (loss)
of unconsolidated joint
ventures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast |
|
$ |
(10,806 |
) |
|
$ |
(7,760 |
) |
|
$ |
(1,432 |
) |
|
$ |
(6,196 |
) |
Southwest |
|
|
(6,016 |
) |
|
|
5,269 |
|
|
|
(841 |
) |
|
|
5,207 |
|
Central |
|
|
(4,594 |
) |
|
|
(1,740 |
) |
|
|
(3,080 |
) |
|
|
(1,311 |
) |
Southeast |
|
|
(23,945 |
) |
|
|
(37,469 |
) |
|
|
(130 |
) |
|
|
(37,195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(45,361 |
) |
|
$ |
(41,700 |
) |
|
$ |
(5,483 |
) |
|
$ |
(39,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory impairments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast |
|
$ |
132,969 |
|
|
$ |
203,192 |
|
|
$ |
80,855 |
|
|
$ |
202,260 |
|
Southwest |
|
|
102,863 |
|
|
|
29,323 |
|
|
|
50,853 |
|
|
|
29,323 |
|
Central |
|
|
20,539 |
|
|
|
8,204 |
|
|
|
3,254 |
|
|
|
7,904 |
|
Southeast |
|
|
77,900 |
|
|
|
25,512 |
|
|
|
18,985 |
|
|
|
21,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
334,271 |
|
|
$ |
266,231 |
|
|
$ |
153,947 |
|
|
$ |
261,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory abandonments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast |
|
$ |
9,186 |
|
|
$ |
6,730 |
|
|
$ |
9,186 |
|
|
$ |
5,035 |
|
Southwest |
|
|
187 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
Central |
|
|
|
|
|
|
1,345 |
|
|
|
|
|
|
|
625 |
|
Southeast |
|
|
18,304 |
|
|
|
1,166 |
|
|
|
11,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,677 |
|
|
$ |
9,344 |
|
|
$ |
20,426 |
|
|
$ |
5,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint venture impairments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast |
|
$ |
8,106 |
|
|
$ |
3,650 |
|
|
$ |
|
|
|
$ |
3,650 |
|
Southwest |
|
|
4,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Central |
|
|
2,629 |
|
|
|
750 |
|
|
|
2,158 |
|
|
|
750 |
|
Southeast |
|
|
22,835 |
|
|
|
36,907 |
|
|
|
|
|
|
|
36,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
38,514 |
|
|
$ |
41,307 |
|
|
$ |
2,158 |
|
|
$ |
41,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. |
|
Segment Information (continued) |
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
November 30, |
|
|
|
2008 |
|
|
2007 |
|
Assets: |
|
|
|
|
|
|
|
|
West Coast |
|
$ |
1,267,931 |
|
|
$ |
1,542,948 |
|
Southwest |
|
|
653,434 |
|
|
|
887,361 |
|
Central |
|
|
542,885 |
|
|
|
643,599 |
|
Southeast |
|
|
677,718 |
|
|
|
845,679 |
|
Corporate and other |
|
|
1,645,804 |
|
|
|
1,741,977 |
|
|
|
|
|
|
|
|
Total homebuilding assets |
|
|
4,787,772 |
|
|
|
5,661,564 |
|
Financial services |
|
|
53,236 |
|
|
|
44,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,841,008 |
|
|
$ |
5,705,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated joint ventures: |
|
|
|
|
|
|
|
|
West Coast |
|
$ |
77,880 |
|
|
$ |
63,450 |
|
Southwest |
|
|
141,558 |
|
|
|
134,082 |
|
Central |
|
|
2,651 |
|
|
|
7,230 |
|
Southeast |
|
|
72,415 |
|
|
|
92,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
294,504 |
|
|
$ |
297,010 |
|
|
|
|
|
|
|
|
4. |
|
Financial Services |
|
|
|
The following table presents financial information related to the Companys financial services
reporting segment (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
Three Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
105 |
|
|
$ |
83 |
|
|
$ |
58 |
|
|
$ |
40 |
|
Title services |
|
|
983 |
|
|
|
2,639 |
|
|
|
545 |
|
|
|
1,222 |
|
Insurance commissions |
|
|
3,799 |
|
|
|
4,100 |
|
|
|
1,368 |
|
|
|
1,903 |
|
Escrow coordination fees |
|
|
|
|
|
|
589 |
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,887 |
|
|
|
7,411 |
|
|
|
1,971 |
|
|
|
3,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(2,232 |
) |
|
|
(2,411 |
) |
|
|
(1,113 |
) |
|
|
(1,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,655 |
|
|
|
5,000 |
|
|
|
858 |
|
|
|
2,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of unconsolidated
joint venture |
|
|
8,302 |
|
|
|
10,191 |
|
|
|
2,154 |
|
|
|
3,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income |
|
$ |
10,957 |
|
|
$ |
15,191 |
|
|
$ |
3,012 |
|
|
$ |
5,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. |
|
Financial Services (continued) |
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
November 30, |
|
|
|
2008 |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
13,551 |
|
|
$ |
18,487 |
|
Receivables |
|
|
789 |
|
|
|
2,655 |
|
Investment in unconsolidated joint venture |
|
|
38,801 |
|
|
|
23,140 |
|
Other assets |
|
|
95 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
53,236 |
|
|
$ |
44,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
17,109 |
|
|
$ |
17,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
17,109 |
|
|
$ |
17,796 |
|
|
|
|
|
|
|
|
5. |
|
Inventories |
|
|
|
Inventories consist of the following (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
November 30, |
|
|
|
2008 |
|
|
2007 |
|
Homes, lots and improvements in production |
|
$ |
2,156,256 |
|
|
$ |
2,473,980 |
|
Land under development |
|
|
452,567 |
|
|
|
838,440 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,608,823 |
|
|
$ |
3,312,420 |
|
|
|
|
|
|
|
|
|
|
The Companys interest costs are as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
Three Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Capitalized interest at beginning of period |
|
$ |
348,084 |
|
|
$ |
333,020 |
|
|
$ |
358,010 |
|
|
$ |
358,796 |
|
Interest incurred |
|
|
76,905 |
|
|
|
102,889 |
|
|
|
38,403 |
|
|
|
51,340 |
|
Interest amortized |
|
|
(54,898 |
) |
|
|
(53,598 |
) |
|
|
(26,322 |
) |
|
|
(27,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest at end of period |
|
$ |
370,091 |
|
|
$ |
382,311 |
|
|
$ |
370,091 |
|
|
$ |
382,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. |
|
Impairments and Abandonments |
|
|
|
Each parcel or community in the Companys owned inventory is assessed to determine if indicators of
potential impairment exist. If indicators of potential impairment exist for a parcel or community,
the identified inventory is evaluated for recoverability in accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144). Impairment indicators are assessed separately for each parcel or community on a
quarterly basis and include, but are not limited to: significant decreases in sales rates, average
selling prices, home delivery volume or gross margins; significant increases in budgeted land
development and construction costs or cancellation rates; or projected losses on expected future
housing or land sales. 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 the Companys expectations related to: market supply and demand, including
estimates concerning average selling prices; sales incentives; sales and cancellation rates; and
anticipated land development, construction and |
12
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. |
|
Impairments and Abandonments (continued) |
|
|
|
overhead costs to be incurred. These estimates are specific to each community and may vary
among communities. |
|
|
|
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 conditions in the market in which the asset is located at the time an assessment
is made. These factors are specific to each community and may vary among communities. |
|
|
|
Based on the results of its evaluations, the Company recognized pretax, non-cash inventory
impairment charges of $154.0 million in the three months ended May 31, 2008 and $261.2 million
in the three months ended May 31, 2007. In the six months ended May 31, 2008 and 2007, the
Company recognized pretax, non-cash inventory impairment charges of $334.3 million and $266.2
million, respectively. As of May 31, 2008, the aggregate carrying value of inventory impacted
by pretax, non-cash impairment charges was $1.38 billion, representing 156 communities and
various other land parcels. As of November 30, 2007, the aggregate carrying value of inventory
impacted by pretax, non-cash impairment charges was $1.35 billion, representing 144 communities
and various other land parcels. |
|
|
|
The Companys optioned inventory is assessed to determine whether it continues to meet the
Companys internal investment standards. 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, home delivery volume and gross margins; estimated land
development and construction costs; and projected profitability on expected future housing or
land sales. When a decision is made to not exercise a land option contract 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 project. The Company
recognized abandonment charges associated with land option contracts of $20.4 million in the
three months ended May 31, 2008 and $5.7 million in the three months ended May 31, 2007. In the
six months ended May 31, 2008 and 2007, the Company recognized abandonment charges of $27.7
million and $9.4 million, respectively. The inventory impairment charges 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
impairments and abandonments, it is possible that actual results could differ from those
estimated. |
|
|
|
The Companys equity in loss of unconsolidated joint ventures in the three months ended May 31,
2008 and 2007 reflected pretax, non-cash impairment charges of $2.1 million and $41.3 million,
respectively, including valuation adjustments related to the Companys investments in certain
unconsolidated joint ventures. In the six months ended May 31, 2008 and 2007, the Companys
equity in loss of unconsolidated joint ventures reflected pretax, non-cash impairment charges of
$38.5 million and $41.3 million, respectively, including valuation adjustments related to the
Companys investments in certain unconsolidated joint ventures. |
|
7. |
|
Consolidation of Variable Interest Entities |
|
|
|
In December 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 46(R), Consolidation of Variable Interest Entities (FASB Interpretation No. 46(R)), to
clarify the application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities, called variable
interest entities (VIEs), in which equity investors do not have the characteristics of a
controlling interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. Under FASB Interpretation No. 46(R),
an enterprise that absorbs a majority of the VIEs expected |
13
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. |
|
Consolidation of Variable Interest Entities (continued) |
|
|
|
losses, receives a majority of the VIEs expected residual returns, or both, is considered to be
the primary beneficiary of the VIE and must consolidate the entity in its financial statements. |
|
|
|
The Company enters into joint ventures from time to time for the purpose of conducting land
acquisition, development and 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 FASB Interpretation No.
46(R) when they are entered into or upon a reconsideration event. All of the Companys joint
ventures at May 31, 2008 and November 30, 2007 were determined to be unconsolidated joint
ventures because either 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 in order
to procure land for the construction of homes. The use of such option agreements 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
sheet. 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 FASB Interpretation No. 46(R), 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 FASB Interpretation No. 46(R), the Company analyzes its land option contracts
and other contractual arrangements when they are entered into or upon a reconsideration event,
and as a result has consolidated the fair value of certain VIEs from which the Company is
purchasing land under option contracts. Although the Company does not have legal title to the
optioned land, FASB Interpretation No. 46(R) requires the Company to consolidate the VIE if the
Company is determined to be the primary beneficiary. The consolidation of VIEs in which the
Company was determined to be the primary beneficiary increased inventories, with a corresponding
increase to accrued expenses and other liabilities, on the Companys consolidated balance sheets
by $15.5 million at May 31, 2008 and $19.0 million at November 30, 2007. The liabilities related
to the Companys consolidation of VIEs from which it is purchasing land under option contracts
represents the difference between the purchase price of optioned land not yet purchased and the
Companys cash deposits. The Companys cash deposits related to these land option contracts
totaled $3.4 million at May 31, 2008 and $4.7 million at November 30, 2007. Creditors, if any,
of these VIEs have no recourse against the Company. As of May 31, 2008, excluding consolidated
VIEs, the Company had cash deposits totaling $26.3 million, which were associated with land
option contracts having an aggregate purchase price of $680.6 million. |
|
|
|
The Company also evaluates land option contracts in accordance with Statement of Financial
Accounting Standards No. 49, Accounting for Product Financing Arrangements (SFAS No. 49)
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 $101.0 million at
May 31, 2008 and $221.1 million at November 30, 2007. |
|
8. |
|
Goodwill |
|
|
|
The Company has recorded goodwill in connection with various acquisitions in prior years.
Goodwill represents the excess of the purchase price over the fair value of net assets acquired.
In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142), the Company tests goodwill for potential impairment
annually as of November 30 and between annual
tests if an event occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. |
14
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. |
|
Goodwill (continued) |
|
|
|
During the quarter ended May 31, 2008, the Company determined that it was necessary to evaluate
goodwill for impairment due to deteriorating conditions in certain housing markets and the
significant inventory impairments the Company identified and recognized during the quarter in
accordance with SFAS No. 144. The Company evaluates goodwill for impairment using the two-step
process prescribed in SFAS No. 142. The first step is to identify potential impairment by
comparing the fair value of a reporting unit to the book value, including goodwill. If the fair
value of a reporting unit exceeds the book value, goodwill is not considered impaired. If the
book value exceeds the fair value, the second step of the process is performed to measure the
amount of impairment. In accordance with SFAS No. 142, the Company has determined that its
reporting units are the same as its reporting segments. |
|
|
|
The Companys goodwill balance at November 30, 2007 totaled $68.0 million. Of this total, $24.6
million related to the Companys Central reporting segment and $43.4 million related to its
Southeast reporting segment. Based on the results of its impairment evaluation performed as of
April 30, 2008, the Company recorded an impairment charge of $24.6 million in the quarter ended
May 31, 2008 related to its Central reporting segment, where all of the goodwill previously
recorded was determined to be impaired. The charge was recorded at the Companys corporate
level because all goodwill is carried at that level. The Companys goodwill balance of $43.4
million at May 31, 2008 related entirely to its Southeast reporting segment. |
|
|
|
The process of evaluating goodwill for impairment involves the determination of the fair value
of the Companys reporting units. Inherent in such fair value determinations are certain
judgments and estimates relating to future cash flows, including the Companys interpretation of
current economic indicators and market valuations, and assumptions about the Companys strategic
plans with regard to its operations. To the extent additional information arises, market
conditions change or the Companys strategies change, it is possible that its conclusion
regarding whether existing goodwill is impaired could change and result in a material effect on
the Companys consolidated financial position or results of operations. |
|
9. |
|
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
such as appliances. 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 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. |
15
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. |
|
Commitments and Contingencies (continued) |
|
|
|
The changes in the Companys warranty liability are as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
Three Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
151,525 |
|
|
$ |
141,060 |
|
|
$ |
150,917 |
|
|
$ |
139,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranties issued |
|
|
10,769 |
|
|
|
26,478 |
|
|
|
3,834 |
|
|
|
13,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and adjustments |
|
|
(16,244 |
) |
|
|
(26,863 |
) |
|
|
(8,701 |
) |
|
|
(12,749 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
146,050 |
|
|
$ |
140,675 |
|
|
$ |
146,050 |
|
|
$ |
140,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 FASB Interpretation
No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. 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. 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 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 $99.3
million at May 31, 2008 and $95.6 million at November 30, 2007, and are included in the
consolidated balance sheets as accrued expenses and other liabilities. |
|
|
|
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
subdivision improvements such as roads, sewers and water. At May 31, 2008, the Company had
approximately $868.7 million of performance bonds and $210.1 million of letters of credit
outstanding. In the event any such performance bonds or letters of credit are called, the
Company would be obligated to reimburse the issuer of the performance bond or letter of credit.
At this time, the Company does not believe that a material amount of any currently outstanding
performance bonds or letters of credit will be called. The expiration dates of letters of
credit coincide with the expected completion dates of the related projects. If the obligations
related to a project are ongoing, annual extensions of the letters of credit are typically
granted on a year-to-year basis. Performance bonds do not have stated expiration dates.
Rather, the Company is released from the performance bonds as the contractual performance is
completed. |
|
|
|
Borrowings outstanding and letters of credit issued under the Companys Credit Facility are
guaranteed by certain of the Companys subsidiaries (the Guarantor Subsidiaries). |
|
|
|
In the ordinary course of business, the Company enters into land option contracts to procure
land for the construction of homes. At May 31, 2008, the Company had total deposits of $74.5
million, comprised of cash deposits of $29.7 million and letters of credit of $44.8 million, to
purchase land with a total remaining purchase price of $696.1 million. The Companys land option
contracts generally do not contain provisions requiring the Companys specific performance. |
16
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. |
|
Commitments and Contingencies (continued) |
|
|
|
The Company conducts a portion of its land acquisition, development and other homebuilding
activities through participation in unconsolidated joint ventures in which it holds less than a
controlling interest. These unconsolidated joint ventures generally operate in certain markets
where the Companys consolidated homebuilding operations are located. Through these
unconsolidated joint ventures, the Company seeks to reduce and share market and development
risks and also reduce the amount of capital it invests in land inventory, while increasing the
number of homesites it may own or control. In some instances, participating in unconsolidated
joint ventures enables the Company to acquire and develop land that it might not otherwise
obtain or have access to due to the projects size, financing needs, duration of improvements or
other conditions or circumstances. These unconsolidated joint ventures are typically structured
through entities in which ownership is shared with the Companys partners. The Companys
partners in these unconsolidated joint ventures are usually unrelated homebuilders, land
developers and other real estate entities. 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 purchase portions of the land held by the unconsolidated joint
ventures. The prices for these land options are generally negotiated prices that approximate
fair market value. The Company does not include in its income from unconsolidated joint ventures
its pro rata share of unconsolidated joint venture earnings resulting from land sales to its
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 it accounts for those earnings as a reduction of the cost of purchasing the land from the
unconsolidated joint ventures. |
|
|
|
The Company and its unconsolidated joint venture partners make capital contributions to these
unconsolidated joint ventures, typically on a pro-rata basis. The obligation to make capital
contributions is governed by each unconsolidated joint ventures respective operating agreement.
The Companys equity investment in these unconsolidated joint ventures totaled $294.5 million at
May 31, 2008 and $297.0 million at November 30, 2007. These unconsolidated joint ventures had
total assets of $2.39 billion at May 31, 2008 and $2.51 billion at November 30, 2007. At May 31,
2008, the Companys five largest unconsolidated joint ventures collectively represented
approximately 78% of the Companys total investment in unconsolidated joint ventures. |
|
|
|
Given the varied nature of the Companys unconsolidated joint ventures projects and the market
environments in which they operate, each has distinct funding and liquidity needs. To finance
their respective land acquisition and development activities, many of the Companys
unconsolidated joint ventures have obtained loans from third-party lenders that are secured by
the underlying property and related project assets. Unconsolidated joint ventures had
outstanding debt, substantially all of which was secured, of approximately $1.50 billion at May
31, 2008 and $1.54 billion at November 30, 2007. |
|
|
|
In certain instances, the Company and the other partners in an unconsolidated joint venture provide
guarantees and indemnities to the unconsolidated joint ventures lenders that may include a pro
rata share of one or more of the following: (a) the physical completion of improvements for a
project and/or the obligation to contribute equity to the unconsolidated joint venture to enable it
to fund its completion obligations, which the Company refers to as a completion guaranty; (b) 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 project, or (ii) outstanding principal and interest and
certain other amounts owed to lenders upon the filing by the 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 the unconsolidated joint venture or its partners collude
or which the unconsolidated joint venture fails to contest, each of which the Company refers to as
a carve-out guaranty; and/or (c) the payment of funds to maintain the value of the unconsolidated
joint ventures secured collateral (generally land and improvements) at or above a specific
percentage of the outstanding loan balance, which the Company refers to as a loan-to-value
maintenance guaranty. In most cases, the extent of each of the Companys and its partners
maximum potential exposure to an unconsolidated joint ventures obligations under these guarantees
and indemnities is |
17
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. |
|
Commitments and Contingencies (continued) |
|
|
|
limited to either a specified maximum amount or an amount equal to their respective pro rata
interests in the relevant unconsolidated joint venture. In a few cases, the Company has
provided a loan-to-value maintenance guaranty to an unconsolidated joint ventures lenders up to
a specified maximum amount and has entered into an agreement with its unconsolidated joint
venture partners to be reimbursed for any amounts the Company may pay pursuant to such guaranty
above its pro rata interest in the relevant unconsolidated joint venture. If the Companys
unconsolidated joint venture partners do not have adequate resources to fulfill their
reimbursement obligations, or otherwise fail to do so, the Company may be responsible for more
than its pro rata share, up to its maximum exposure under the relevant loan-to-value maintenance
guaranty. However, the Company will vigorously pursue all rights and remedies available to it
under the applicable agreements, at law or in equity to enforce its reimbursement rights. |
|
|
|
The Companys potential exposure under its completion guarantees is limited to the amount, if
any, by which an unconsolidated joint ventures outstanding borrowings exceed the value of its
assets, though in the aggregate the Company believes its actual exposure under these guarantees
will be substantially less than this amount. At this time, the Company has no reason to believe
that its carve-out guarantees will be triggered in any material amount. At May 31, 2008, the
Companys pro rata share of loan-to-value maintenance guarantees to lenders of unconsolidated
joint venture debt totaled approximately $108.2 million. This amount represents the Companys
maximum exposure to loss from such loan-to-value maintenance guarantees without regard to the
underlying value of the collateral and any defenses that may be available to the Company against
any attempted enforcement of such guarantees. |
|
|
|
In addition to the above-described guarantees and indemnities, the Company has also provided a
several guaranty to the lenders of one of the Companys unconsolidated joint ventures. By its
terms, the guaranty purports to guarantee the payment of principal and interest and certain
other amounts owed to the unconsolidated joint ventures lenders in the event an involuntary
bankruptcy proceeding is commenced 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 exposure under this
guaranty fluctuates with the outstanding balance of the unconsolidated joint ventures debt and
with its and its partners respective land purchases from the unconsolidated joint venture. At
May 31, 2008, this unconsolidated joint venture had total outstanding indebtedness of
approximately $327.9 million and, if this guaranty was enforceable, the Companys potential
exposure under the guaranty was approximately $182.7 million. This unconsolidated joint venture
has received a series of notices from its lenders administrative agent alleging a number of
defaults under its loan agreement. The Company is currently exploring resolutions of the matter
with the lenders, the lenders administrative agent and its partners in this unconsolidated
joint venture, but there can be no assurance that the Company will reach a satisfactory
resolution with all of the parties involved. |
|
|
|
Certain of the Companys other unconsolidated joint ventures operating in difficult market
conditions are in default of their debt agreements with their lenders or are at risk of
defaulting. The Company is carefully managing its investments in these particular
unconsolidated joint ventures and is working with the relevant lenders and unconsolidated joint
venture partners to reach satisfactory resolutions. However, based on the terms and amounts of
the debt involved for these particular unconsolidated joint ventures and the terms of the
applicable joint venture operating agreements, the Company does not believe that its exposure
related to any defaults by these particular unconsolidated joint ventures is material to the
Companys consolidated financial position or results of operations. |
|
10. |
|
Legal Matters |
|
|
|
Derivative Litigation |
|
|
|
On July 10, 2006, a shareholder derivative action, Wildt v. Karatz, et al., was filed in Los
Angeles Superior Court. On August 8, 2006, a virtually identical shareholder derivative lawsuit,
Davidson v. Karatz, et al., was |
18
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. |
|
Legal Matters (continued) |
|
|
|
also filed in Los Angeles Superior Court. These actions, which ostensibly are brought on behalf
of the Company, allege, among other things, that defendants (various of the Companys current
and former directors and officers) breached their fiduciary duties to the Company by, among
other things, backdating grants of stock options to various current and former executives in
violation of the Companys shareholder-approved stock option plans, and seek unspecified money
damages and injunctive and other equitable relief. Defendants have not yet responded to the
complaints. On January 22, 2007, the court entered an order, pursuant to an agreement among the
parties and the Company, providing, among other things, that, to preserve the status quo without
prejudicing any partys substantive rights, the Companys former Chairman and Chief Executive
Officer shall not exercise any of his outstanding options, at any price, during the period in
which the order is in effect. Pursuant to further stipulated orders, these terms remain in
effect and are now scheduled to expire on September 3, 2008, unless otherwise agreed in writing.
The plaintiffs have agreed to stay their cases while the parallel federal court derivative
lawsuits discussed below are pursued. A stipulation and order effectuating the parties
agreement to stay the state court actions was entered by the court on February 7, 2007. The
parties may extend the agreement that options will not be exercised by the Companys former
Chairman and Chief Executive Officer beyond the current September 3, 2008 expiration date. |
|
|
|
On August 16, 2006, a shareholder derivative lawsuit, Redfield v. Karatz, et al., was filed in
the United States District Court for the Central District of California. On August 31, 2006, a
virtually identical shareholder derivative lawsuit, Staehr v. Karatz, et al., was also filed in
the United States District Court for the Central District of California. These actions, which
ostensibly are brought on behalf of the Company, allege, among other things, that defendants
(various of the Companys current and former directors and officers) breached their fiduciary
duties to the Company by, among other things, backdating grants of stock options to various
current and former executives in violation of the Companys shareholder-approved stock option
plans and seek unspecified money damages and injunctive and other equitable relief. Unlike
Wildt and Davidson, however, these lawsuits also include substantive claims under the federal
securities laws. On January 9, 2007, plaintiffs filed a consolidated complaint. All defendants
filed motions to dismiss the complaint on April 2, 2007. Subsequently, plaintiffs filed a
motion for partial summary judgment against certain of the defendants. Pursuant to stipulated
orders, the motions to dismiss and the motion for partial summary judgment remained suspended
for several months while the parties engaged in settlement discussions. Although settlement
discussions are ongoing, activity in the litigation has recently recommenced. On May 14, 2008,
the Court ordered that the partial summary judgment motion shall be taken off calendar, subject
to being reset at a future time, following resolution of the pending motions to dismiss.
Defendants various motions to dismiss are scheduled to be argued at a hearing on August 18,
2008. Discovery has not commenced. At this time, the Company has not concluded whether any
potential outcome of the derivative litigation is likely to be material to its consolidated
financial position or results of operations. |
|
|
|
Government Investigations |
|
|
|
In August 2006, the Company announced that it had received an informal inquiry from the SEC
relating to its stock option grant practices. In January 2007, the Company was informed of the
SECs decision to conduct a formal investigation of this matter. The Department of Justice
(DOJ) is also looking into these practices but has informed the Company that it is not a
target of this investigation. The Company has cooperated with these government agencies and
intends to continue to do so. At this time, the Company has not concluded whether an unfavorable
outcome of one or both of the government investigations is likely to be material to its
consolidated financial position or results of operations. |
|
|
|
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, and certain of its current and former
officers. After the Court allowed leave to file an amended complaint, on April 3, 2008, plaintiffs
filed an amended complaint adding Tolan Beck and Rod |
19
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. |
|
Legal Matters (continued) |
|
|
|
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 KB Home 401(k)
Savings Plan (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 Plan about alleged prior stock option backdating
practices of the Company and by failing to remove the Companys stock as an investment option
under the Plan. Plaintiffs allege that this breach of fiduciary duties caused plaintiffs to earn
less on their Plan accounts than they would have earned but for defendants alleged breach of
duties. Plaintiffs seek unspecified money damages and injunctive and other equitable relief. On
May 16, 2008, the Company filed a motion to dismiss on the ground that plaintiffs allegations
fail to state a claim against the Company. Plaintiffs filed an opposition to the motion on June
20, 2008. The Company filed its reply in support of the motion on July 7, 2008, and the hearing
on the motion is scheduled for August 4, 2008. Because of the pendency of the Companys motion
to dismiss (and a separate motion to dismiss filed by the individual defendants), no discovery
has been taken in the lawsuit. While the Company believes it has strong defenses to the ERISA
claims, it has not concluded whether an unfavorable outcome is likely to be material to its
consolidated financial position or results of operations. |
|
|
|
Storm Water Matter |
|
|
|
In January 2003, the Company received a request for information from the Environmental
Protection Agency (EPA) pursuant to Section 308 of the Clean Water Act. Several other public
homebuilders received similar requests. The request sought information about storm water
pollution control program implementation at certain of the Companys construction sites, and the
Company provided information pursuant to the request. In May 2004, on behalf of the EPA, the
DOJ asserted that certain regulatory requirements applicable to storm water discharges had been
violated on certain occasions at certain of the Companys construction sites, and unspecified
civil penalties and injunctive relief might be warranted. The Company explored with the EPA,
DOJ and other homebuilders methods of resolving the matter. In May 2008, the Company signed a
consent decree with the EPA, DOJ and various states affecting the Companys storm water
pollution practices at its construction sites. Other homebuilders also signed similar consent
decrees. In June 2008, the DOJ filed suit in the United States District Court for the Eastern
District of Virginia (Civil Action No. 1:08CV603) and simultaneously submitted the Companys
consent decree for approval by the court, which, if entered, will resolve the issues in the
suit. The DOJ also published a notice of lodging of the Companys consent decree in the Federal
Register (73 Fed. Reg. 35,711), which triggered the opening of a 30-day public comment period.
After the public comment period, the DOJ will ask the court to sign and enter the Companys
consent decree as final. The court may require a hearing before signing and entering the
consent decree. The Company anticipates that its consent decree will become final during the
third fiscal quarter. Under the consent decree, the Company has agreed to pay a civil penalty
of $1.2 million and undertake certain storm management practices, among other items. The
Company believes that the costs associated with implementing the consent decree are not likely
to be material to its consolidated financial position or results of operations. |
|
|
|
Other Matters |
|
|
|
The Company is also involved in litigation and governmental proceedings incidental to its
business. These cases are in various procedural stages and, based on reports of counsel, the
Company believes that provisions or reserves made for potential losses are adequate and any
liabilities or costs arising out of currently pending litigation should not have a materially
adverse effect on its consolidated financial position or results of operations. |
|
11. |
|
Stockholders Equity |
|
|
|
As of May 31, 2008, the Company was authorized to repurchase four million shares of its common
stock under a board-approved stock repurchase program. The Company did not repurchase any of its
common stock under this program in the first half of 2008. The Company acquired $.6 million of
common stock during the six |
20
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. |
|
Stockholders Equity (continued) |
|
|
|
months ended May 31, 2008, 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 29, 2008, the Companys board of directors declared a cash
dividend of $.25 per share of common stock, which was paid on February 21, 2008 to shareholders
of record on February 7, 2008. During the quarter ended May 31, 2008, the Companys board of
directors declared a cash dividend of $.25 per share of common stock, which was paid on May 22,
2008 to shareholders of record on May 8, 2008, and declared a cash dividend of $.25 per share of
common stock, which is payable on July 24, 2008 to shareholders of record on July 10, 2008. |
|
12. |
|
Recent Accounting Pronouncements |
|
|
|
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS No. 157), which provides guidance for using fair value to measure
assets and liabilities, defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and for interim
periods within those years. In February 2008, the FASB issued FASB Staff Position No. 157-2,
Effective Date of FASB Statement No. 157, which delayed for one year the applicability of SFAS
No. 157s fair-value measurements to certain nonfinancial assets and liabilities. The Company
adopted SFAS No. 157 in 2008, except as it applies to those nonfinancial assets and liabilities
affected by the one-year delay. The partial adoption of SFAS No. 157 did not have a material
impact on the Companys consolidated financial position or results of operations. The Company is
currently evaluating the potential impact of adopting the remaining provisions of SFAS No. 157
on its consolidated financial position and results of operations. |
|
13. |
|
Income Taxes |
|
|
|
The Companys income tax expense from continuing operations totaled $.6 million in the second
quarter of 2008, compared to an income tax benefit of $117.2 million in the second quarter of
2007. For the six months ended May 31, 2008, the Companys income tax expense from continuing
operations totaled $.9 million compared to an income tax benefit of $112.6 million for the six
months ended May 31, 2007. These amounts represented effective income tax rates from continuing
operations of .2% and 40.2% for the three months ended May 31, 2008 and 2007, respectively, and
..2% and 40.8% for the six months ended May 31, 2008 and 2007, respectively. |
|
|
|
The significant change in the Companys effective tax rate in 2008 resulted from no tax benefits
being recorded in the three-month or six-month periods as a result of a full valuation allowance
related to the Companys current year loss, and the recognition of a liability for unrecognized
tax benefits. For the three months ended May 31, 2008, the Company recorded a valuation
allowance of $98.9 million. For the six months ended May 31, 2008, the valuation allowance
recorded totaled $198.9 million. In accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes (SFAS No. 109), the Company was unable to record
deferred tax benefits that would have reduced its net losses in the three months and six months
ended May 31, 2008 due to the uncertainty of realizing such deferred tax assets. |
|
|
|
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109 (FASB Interpretation No. 48), which
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. FASB
Interpretation No. 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The Company implemented the
provisions of FASB Interpretation No. 48 effective December 1, 2007. The |
21
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. |
|
Income Taxes (continued) |
|
|
|
cumulative effect of the adoption of FASB Interpretation No. 48 was recorded in the first half
of 2008 as a $2.5 million reduction to beginning retained earnings. Gross unrecognized tax
benefits as of December 1, 2007 totaled $37.8 million. As of the date of its adoption of FASB
Interpretation No. 48, the Companys liability for unrecognized tax benefits was $29.0 million,
which, if recognized, would affect the Companys effective tax rate. |
|
|
|
The Company estimates that within 12 months from the date of its adoption of FASB Interpretation
No. 48, $6.0 million of unrecognized federal income tax liability will reverse due to the
anticipated expiration of time to assess tax. As of the date of the Companys adoption of FASB
Interpretation No. 48, fiscal years 2003 through 2007 remain subject to examination. |
|
|
|
Since the Companys adoption of FASB Interpretation No. 48 on December 1, 2007, there have been
no material changes to the components of the Companys total unrecognized tax benefit, including
the amounts which, if recognized, would affect the Companys effective tax rate. It is
reasonably possible that, within the next 12 months, total unrecognized tax benefits may
decrease as a result of the potential resolution with the Internal Revenue Service relating to
issues stemming from fiscal years 2004 and 2005. However, any such change cannot be estimated at
this time. |
|
|
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in
its consolidated financial statements as a component of the income tax provision consistent with
the Companys historical accounting policy. After the adoption of FASB Interpretation No. 48 on
December 1, 2007, the Companys total gross accrued interest and penalties was $16.5 million. At
May 31, 2008, its total gross accrued interest and penalties was $17.6 million. The Companys
liability for unrecognized tax benefits, combined with accrued interest and penalties, is
reflected as a component of accrued expenses and other liabilities in its consolidated balance
sheet. |
|
14. |
|
Supplemental Disclosure to Statements of Cash Flows |
|
|
|
The following are supplemental disclosures to the consolidated statements of cash flows (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Summary of cash and cash equivalents: |
|
|
|
|
|
|
|
|
Homebuilding |
|
$ |
1,305,077 |
|
|
$ |
390,573 |
|
Financial services |
|
|
13,551 |
|
|
|
14,951 |
|
Discontinued operations |
|
|
|
|
|
|
66,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,318,628 |
|
|
$ |
471,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid, net of amounts capitalized |
|
$ |
(263 |
) |
|
$ |
7,819 |
|
Income taxes paid (refunded) |
|
|
(105,737 |
) |
|
|
13,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash activities: |
|
|
|
|
|
|
|
|
Cost of inventories acquired through seller financing |
|
$ |
|
|
|
$ |
4,139 |
|
Decrease in consolidated inventories not owned |
|
|
(123,528 |
) |
|
|
(165,588 |
) |
|
|
|
|
|
|
|
22
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. |
|
Supplemental Guarantor Information |
|
|
|
The Companys obligations to pay principal, premium, if any, and interest under certain debt
instruments 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 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. |
|
|
|
Condensed Consolidating Statements of Operations
Six Months Ended May 31, 2008 (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
1,103,933 |
|
|
$ |
329,356 |
|
|
$ |
|
|
|
$ |
1,433,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
1,103,933 |
|
|
$ |
324,469 |
|
|
$ |
|
|
|
$ |
1,428,402 |
|
Construction and land costs |
|
|
|
|
|
|
(1,274,907 |
) |
|
|
(393,574 |
) |
|
|
|
|
|
|
(1,668,481 |
) |
Selling, general and administrative
expenses |
|
|
(37,430 |
) |
|
|
(141,373 |
) |
|
|
(67,900 |
) |
|
|
|
|
|
|
(246,703 |
) |
Goodwill impairment |
|
|
(24,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(62,000 |
) |
|
|
(312,347 |
) |
|
|
(137,005 |
) |
|
|
|
|
|
|
(511,352 |
) |
Interest income (expense), net of amounts
capitalized |
|
|
40,062 |
|
|
|
(22,454 |
) |
|
|
(17,608 |
) |
|
|
|
|
|
|
|
|
Other, net |
|
|
20,466 |
|
|
|
(2,221 |
) |
|
|
(41,052 |
) |
|
|
|
|
|
|
(22,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax loss |
|
|
(1,472 |
) |
|
|
(337,022 |
) |
|
|
(195,665 |
) |
|
|
|
|
|
|
(534,159 |
) |
Financial services pretax income |
|
|
|
|
|
|
|
|
|
|
10,957 |
|
|
|
|
|
|
|
10,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pretax loss |
|
|
(1,472 |
) |
|
|
(337,022 |
) |
|
|
(184,708 |
) |
|
|
|
|
|
|
(523,202 |
) |
Income tax expense |
|
|
|
|
|
|
(600 |
) |
|
|
(300 |
) |
|
|
|
|
|
|
(900 |
) |
Equity in net loss of subsidiaries |
|
|
(522,630 |
) |
|
|
|
|
|
|
|
|
|
|
522,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(524,102 |
) |
|
$ |
(337,622 |
) |
|
$ |
(185,008 |
) |
|
$ |
522,630 |
|
|
$ |
(524,102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. |
|
Supplemental Guarantor Information (continued) |
|
|
|
Condensed Consolidating Statements of Operations |
|
|
Six Months Ended May 31, 2007 (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
2,081,509 |
|
|
$ |
720,537 |
|
|
$ |
|
|
|
$ |
2,802,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
2,081,509 |
|
|
$ |
713,126 |
|
|
$ |
|
|
|
$ |
2,794,635 |
|
Construction and land costs |
|
|
|
|
|
|
(2,020,276 |
) |
|
|
(635,408 |
) |
|
|
|
|
|
|
(2,655,684 |
) |
Selling, general and administrative expenses |
|
|
(58,734 |
) |
|
|
(239,512 |
) |
|
|
(100,561 |
) |
|
|
|
|
|
|
(398,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(58,734 |
) |
|
|
(178,279 |
) |
|
|
(22,843 |
) |
|
|
|
|
|
|
(259,856 |
) |
Interest income (expense), net of amounts
capitalized |
|
|
96,731 |
|
|
|
(78,185 |
) |
|
|
(18,546 |
) |
|
|
|
|
|
|
|
|
Other, net |
|
|
7,006 |
|
|
|
4,430 |
|
|
|
(42,868 |
) |
|
|
|
|
|
|
(31,432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax income (loss) |
|
|
45,003 |
|
|
|
(252,034 |
) |
|
|
(84,257 |
) |
|
|
|
|
|
|
(291,288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services pretax income |
|
|
|
|
|
|
|
|
|
|
15,191 |
|
|
|
|
|
|
|
15,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before income taxes |
|
|
45,003 |
|
|
|
(252,034 |
) |
|
|
(69,066 |
) |
|
|
|
|
|
|
(276,097 |
) |
Income tax benefit (expense) |
|
|
(18,400 |
) |
|
|
102,800 |
|
|
|
28,200 |
|
|
|
|
|
|
|
112,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before equity in net income (loss) of
subsidiaries |
|
|
26,603 |
|
|
|
(149,234 |
) |
|
|
(40,866 |
) |
|
|
|
|
|
|
(163,497 |
) |
Income from discontinued operations,
net of income taxes |
|
|
|
|
|
|
|
|
|
|
42,348 |
|
|
|
|
|
|
|
42,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in net income (loss)
of subsidiaries |
|
|
26,603 |
|
|
|
(149,234 |
) |
|
|
1,482 |
|
|
|
|
|
|
|
(121,149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income (loss) of subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
(190,100 |
) |
|
|
|
|
|
|
|
|
|
|
190,100 |
|
|
|
|
|
Discontinued operations |
|
|
42,348 |
|
|
|
|
|
|
|
|
|
|
|
(42,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(121,149 |
) |
|
$ |
(149,234 |
) |
|
$ |
1,482 |
|
|
$ |
147,752 |
|
|
$ |
(121,149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. |
|
Supplemental Guarantor Information (continued) |
|
|
|
Condensed Consolidating Statements of Operations |
|
|
Three Months Ended May 31, 2008 (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
477,483 |
|
|
$ |
161,582 |
|
|
$ |
|
|
|
$ |
639,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
477,483 |
|
|
$ |
159,611 |
|
|
$ |
|
|
|
$ |
637,094 |
|
Construction and land costs |
|
|
|
|
|
|
(589,025 |
) |
|
|
(166,815 |
) |
|
|
|
|
|
|
(755,840 |
) |
Selling, general and administrative
expenses |
|
|
(22,737 |
) |
|
|
(67,142 |
) |
|
|
(29,186 |
) |
|
|
|
|
|
|
(119,065 |
) |
Goodwill impairment |
|
|
(24,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(47,307 |
) |
|
|
(178,684 |
) |
|
|
(36,390 |
) |
|
|
|
|
|
|
(262,381 |
) |
Interest income (expense), net of amounts
capitalized |
|
|
21,837 |
|
|
|
(13,776 |
) |
|
|
(8,061 |
) |
|
|
|
|
|
|
|
|
Other, net |
|
|
8,584 |
|
|
|
(728 |
) |
|
|
(3,817 |
) |
|
|
|
|
|
|
4,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax loss |
|
|
(16,886 |
) |
|
|
(193,188 |
) |
|
|
(48,268 |
) |
|
|
|
|
|
|
(258,342 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services pretax income |
|
|
|
|
|
|
|
|
|
|
3,012 |
|
|
|
|
|
|
|
3,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pretax loss |
|
|
(16,886 |
) |
|
|
(193,188 |
) |
|
|
(45,256 |
) |
|
|
|
|
|
|
(255,330 |
) |
Income tax expense |
|
|
|
|
|
|
(500 |
) |
|
|
(100 |
) |
|
|
|
|
|
|
(600 |
) |
Equity in net loss of subsidiaries |
|
|
(239,044 |
) |
|
|
|
|
|
|
|
|
|
|
239,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(255,930 |
) |
|
$ |
(193,688 |
) |
|
$ |
(45,356 |
) |
|
$ |
239,044 |
|
|
$ |
(255,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. |
|
Supplemental Guarantor Information (continued) |
|
|
|
Condensed Consolidating Statements of Operations |
|
|
Three Months Ended May 31, 2007 (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
1,063,545 |
|
|
$ |
349,663 |
|
|
$ |
|
|
|
$ |
1,413,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
1,063,545 |
|
|
$ |
346,441 |
|
|
$ |
|
|
|
$ |
1,409,986 |
|
Construction and land costs |
|
|
|
|
|
|
(1,166,530 |
) |
|
|
(312,875 |
) |
|
|
|
|
|
|
(1,479,405 |
) |
Selling, general and administrative
expenses |
|
|
(28,767 |
) |
|
|
(113,353 |
) |
|
|
(51,465 |
) |
|
|
|
|
|
|
(193,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(28,767 |
) |
|
|
(216,338 |
) |
|
|
(17,899 |
) |
|
|
|
|
|
|
(263,004 |
) |
Interest income (expense), net of amounts
capitalized |
|
|
50,856 |
|
|
|
(44,518 |
) |
|
|
(6,338 |
) |
|
|
|
|
|
|
|
|
Other, net |
|
|
3,805 |
|
|
|
4,307 |
|
|
|
(42,007 |
) |
|
|
|
|
|
|
(33,895 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax income (loss) |
|
|
25,894 |
|
|
|
(256,549 |
) |
|
|
(66,244 |
) |
|
|
|
|
|
|
(296,899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services pretax income |
|
|
|
|
|
|
|
|
|
|
5,547 |
|
|
|
|
|
|
|
5,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before income taxes |
|
|
25,894 |
|
|
|
(256,549 |
) |
|
|
(60,697 |
) |
|
|
|
|
|
|
(291,352 |
) |
Income tax benefit (expense) |
|
|
(10,400 |
) |
|
|
103,200 |
|
|
|
24,400 |
|
|
|
|
|
|
|
117,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before equity in net income (loss) of
subsidiaries |
|
|
15,494 |
|
|
|
(153,349 |
) |
|
|
(36,297 |
) |
|
|
|
|
|
|
(174,152 |
) |
Income from discontinued operations,
net of income taxes |
|
|
|
|
|
|
|
|
|
|
25,466 |
|
|
|
|
|
|
|
25,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in net income (loss)
of subsidiaries |
|
|
15,494 |
|
|
|
(153,349 |
) |
|
|
(10,831 |
) |
|
|
|
|
|
|
(148,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income (loss) of
subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
(189,646 |
) |
|
|
|
|
|
|
|
|
|
|
189,646 |
|
|
|
|
|
Discontinued operations |
|
|
25,466 |
|
|
|
|
|
|
|
|
|
|
|
(25,466 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(148,686 |
) |
|
$ |
(153,349 |
) |
|
$ |
(10,831 |
) |
|
$ |
164,180 |
|
|
$ |
(148,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. |
|
Supplemental Guarantor Information (continued) |
|
|
|
Condensed Consolidating Balance Sheets
May 31, 2008 (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,164,661 |
|
|
$ |
25,528 |
|
|
$ |
114,888 |
|
|
$ |
|
|
|
$ |
1,305,077 |
|
Receivables |
|
|
20,463 |
|
|
|
139,499 |
|
|
|
30,048 |
|
|
|
|
|
|
|
190,010 |
|
Inventories |
|
|
|
|
|
|
2,132,660 |
|
|
|
476,163 |
|
|
|
|
|
|
|
2,608,823 |
|
Other assets |
|
|
365,137 |
|
|
|
241,381 |
|
|
|
77,344 |
|
|
|
|
|
|
|
683,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,550,261 |
|
|
|
2,539,068 |
|
|
|
698,443 |
|
|
|
|
|
|
|
4,787,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
|
|
|
|
|
|
|
|
53,236 |
|
|
|
|
|
|
|
53,236 |
|
Investments in subsidiaries |
|
|
44,766 |
|
|
|
|
|
|
|
|
|
|
|
(44,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,595,027 |
|
|
$ |
2,539,068 |
|
|
$ |
751,679 |
|
|
$ |
(44,766 |
) |
|
$ |
4,841,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and
other liabilities |
|
$ |
215,832 |
|
|
$ |
870,890 |
|
|
$ |
301,528 |
|
|
$ |
|
|
|
$ |
1,388,250 |
|
Mortgages and notes payable |
|
|
2,143,415 |
|
|
|
17,805 |
|
|
|
|
|
|
|
|
|
|
|
2,161,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,359,247 |
|
|
|
888,695 |
|
|
|
301,528 |
|
|
|
|
|
|
|
3,549,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
|
|
|
|
|
|
|
|
17,109 |
|
|
|
|
|
|
|
17,109 |
|
Intercompany |
|
|
(2,038,649 |
) |
|
|
1,650,373 |
|
|
|
388,276 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
1,274,429 |
|
|
|
|
|
|
|
44,766 |
|
|
|
(44,766 |
) |
|
|
1,274,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,595,027 |
|
|
$ |
2,539,068 |
|
|
$ |
751,679 |
|
|
$ |
(44,766 |
) |
|
$ |
4,841,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2007 (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,104,429 |
|
|
$ |
71,519 |
|
|
$ |
149,307 |
|
|
$ |
|
|
|
$ |
1,325,255 |
|
Receivables |
|
|
126,531 |
|
|
|
151,089 |
|
|
|
18,119 |
|
|
|
|
|
|
|
295,739 |
|
Inventories |
|
|
|
|
|
|
2,670,155 |
|
|
|
642,265 |
|
|
|
|
|
|
|
3,312,420 |
|
Other assets |
|
|
405,306 |
|
|
|
219,146 |
|
|
|
103,698 |
|
|
|
|
|
|
|
728,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,636,266 |
|
|
|
3,111,909 |
|
|
|
913,389 |
|
|
|
|
|
|
|
5,661,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
|
|
|
|
|
|
|
|
44,392 |
|
|
|
|
|
|
|
44,392 |
|
Investments in subsidiaries |
|
|
64,148 |
|
|
|
|
|
|
|
|
|
|
|
(64,148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,700,414 |
|
|
$ |
3,111,909 |
|
|
$ |
957,781 |
|
|
$ |
(64,148 |
) |
|
$ |
5,705,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and
other liabilities |
|
$ |
210,697 |
|
|
$ |
1,130,047 |
|
|
$ |
334,935 |
|
|
$ |
|
|
|
$ |
1,675,679 |
|
Mortgages and notes payable |
|
|
2,142,654 |
|
|
|
19,140 |
|
|
|
|
|
|
|
|
|
|
|
2,161,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,353,351 |
|
|
|
1,149,187 |
|
|
|
334,935 |
|
|
|
|
|
|
|
3,837,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
|
|
|
|
|
|
|
|
17,796 |
|
|
|
|
|
|
|
17,796 |
|
Intercompany |
|
|
(2,503,624 |
) |
|
|
1,962,722 |
|
|
|
540,902 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
1,850,687 |
|
|
|
|
|
|
|
64,148 |
|
|
|
(64,148 |
) |
|
|
1,850,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,700,414 |
|
|
$ |
3,111,909 |
|
|
$ |
957,781 |
|
|
$ |
(64,148 |
) |
|
$ |
5,705,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. |
|
Supplemental Guarantor Information (continued) |
|
|
|
Condensed Consolidating Statements of Cash Flows
Six Months Ended May 31, 2008 (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(524,102 |
) |
|
$ |
(337,622 |
) |
|
$ |
(185,008 |
) |
|
$ |
522,630 |
|
|
$ |
(524,102 |
) |
Adjustments to reconcile net income to net cash provided
(used) by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory and joint venture impairments and land option
contract abandonments |
|
|
|
|
|
|
266,856 |
|
|
|
133,606 |
|
|
|
|
|
|
|
400,462 |
|
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
|
|
|
|
157,070 |
|
|
|
61,051 |
|
|
|
|
|
|
|
218,121 |
|
Other, net |
|
|
129,732 |
|
|
|
(124,104 |
) |
|
|
5,125 |
|
|
|
|
|
|
|
10,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities |
|
|
(394,370 |
) |
|
|
(37,800 |
) |
|
|
14,774 |
|
|
|
522,630 |
|
|
|
105,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated joint ventures |
|
|
|
|
|
|
(30,484 |
) |
|
|
(67,220 |
) |
|
|
|
|
|
|
(97,704 |
) |
Sales (purchases) of property and equipment, net |
|
|
5,933 |
|
|
|
(1,645 |
) |
|
|
90 |
|
|
|
|
|
|
|
4,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
5,933 |
|
|
|
(32,129 |
) |
|
|
(67,130 |
) |
|
|
|
|
|
|
(93,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of cash dividends |
|
|
(38,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,723 |
) |
Other, net |
|
|
3,036 |
|
|
|
(1,335 |
) |
|
|
|
|
|
|
|
|
|
|
1,701 |
|
Intercompany |
|
|
484,356 |
|
|
|
25,273 |
|
|
|
13,001 |
|
|
|
(522,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
448,669 |
|
|
|
23,938 |
|
|
|
13,001 |
|
|
|
(522,630 |
) |
|
|
(37,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
60,232 |
|
|
|
(45,991 |
) |
|
|
(39,355 |
) |
|
|
|
|
|
|
(25,114 |
) |
Cash and cash equivalents at beginning of period |
|
|
1,104,429 |
|
|
|
71,519 |
|
|
|
167,794 |
|
|
|
|
|
|
|
1,343,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
1,164,661 |
|
|
$ |
25,528 |
|
|
$ |
128,439 |
|
|
$ |
|
|
|
$ |
1,318,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. |
|
Supplemental Guarantor Information (continued) |
|
|
|
Condensed Consolidated Statements of Cash Flows
Six Months Ended May 31, 2007 (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KB Home |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
|
|
|
|
Corporate |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(121,149 |
) |
|
$ |
(149,234 |
) |
|
$ |
(40,866 |
) |
|
$ |
190,100 |
|
|
$ |
(121,149 |
) |
Income from discontinued operations, net of income taxes |
|
|
|
|
|
|
|
|
|
|
(42,348 |
) |
|
|
|
|
|
|
(42,348 |
) |
Inventory impairments and land option cost write-offs |
|
|
|
|
|
|
258,995 |
|
|
|
57,887 |
|
|
|
|
|
|
|
316,882 |
|
Other, net |
|
|
(103,934 |
) |
|
|
(168,156 |
) |
|
|
46,428 |
|
|
|
|
|
|
|
(225,662 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities continuing operations |
|
|
(225,083 |
) |
|
|
(58,395 |
) |
|
|
21,101 |
|
|
|
190,100 |
|
|
|
(72,277 |
) |
Net cash provided by operating activities discontinued
operations |
|
|
|
|
|
|
|
|
|
|
188,223 |
|
|
|
|
|
|
|
188,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities |
|
|
(225,083 |
) |
|
|
(58,395 |
) |
|
|
209,324 |
|
|
|
190,100 |
|
|
|
115,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated joint ventures |
|
|
|
|
|
|
(18,759 |
) |
|
|
(67,971 |
) |
|
|
|
|
|
|
(86,730 |
) |
Purchases of property and equipment, net |
|
|
(233 |
) |
|
|
(2,603 |
) |
|
|
(1,055 |
) |
|
|
|
|
|
|
(3,891 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities continuing operations |
|
|
(233 |
) |
|
|
(21,362 |
) |
|
|
(69,026 |
) |
|
|
|
|
|
|
(90,621 |
) |
Net cash used by investing activities discontinued operations |
|
|
|
|
|
|
|
|
|
|
(14,720 |
) |
|
|
|
|
|
|
(14,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(233 |
) |
|
|
(21,362 |
) |
|
|
(83,746 |
) |
|
|
|
|
|
|
(105,341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on mortgages, land contracts and other loans |
|
|
|
|
|
|
(91,730 |
) |
|
|
(21,516 |
) |
|
|
|
|
|
|
(113,246 |
) |
Payments of cash dividends |
|
|
(38,533 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,533 |
) |
Other, net |
|
|
4,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,743 |
|
Intercompany |
|
|
106,806 |
|
|
|
57,468 |
|
|
|
25,826 |
|
|
|
(190,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities continuing operations |
|
|
73,016 |
|
|
|
(34,262 |
) |
|
|
4,310 |
|
|
|
(190,100 |
) |
|
|
(147,036 |
) |
Net cash used by financing activities discontinued operations |
|
|
|
|
|
|
|
|
|
|
(196,139 |
) |
|
|
|
|
|
|
(196,139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
73,016 |
|
|
|
(34,262 |
) |
|
|
(191,829 |
) |
|
|
(190,100 |
) |
|
|
(343,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(152,300 |
) |
|
|
(114,019 |
) |
|
|
(66,251 |
) |
|
|
|
|
|
|
(332,570 |
) |
Cash and cash equivalents at beginning of period |
|
|
447,221 |
|
|
|
150,829 |
|
|
|
206,132 |
|
|
|
|
|
|
|
804,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
294,921 |
|
|
$ |
36,810 |
|
|
$ |
139,881 |
|
|
$ |
|
|
|
$ |
471,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. |
|
Subsequent Event |
|
|
|
On June 12, 2008, the Company announced that it would redeem all of its outstanding 7 3/4%
senior subordinated notes due 2010 in the aggregate principal amount of $300.0 million. The
redemption date is July 14, 2008 and the redemption price is 101.938% of the principal amount
plus all accrued interest to the date of
redemption. The Company expects to incur a loss on the redemption primarily due to the call
premium of $5.8 million. |
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.
Discontinued operations are comprised solely of our French construction operations, which we
sold on July 10, 2007. The following table presents a summary of our results for the six months
and three months ended May 31, 2008 and 2007 (in thousands, except per share amounts): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
Three Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding |
|
$ |
1,428,402 |
|
|
$ |
2,794,635 |
|
|
$ |
637,094 |
|
|
$ |
1,409,986 |
|
Financial services |
|
|
4,887 |
|
|
|
7,411 |
|
|
|
1,971 |
|
|
|
3,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,433,289 |
|
|
$ |
2,802,046 |
|
|
$ |
639,065 |
|
|
$ |
1,413,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding |
|
$ |
(534,159 |
) |
|
$ |
(291,288 |
) |
|
$ |
(258,342 |
) |
|
$ |
(296,899 |
) |
Financial services |
|
|
10,957 |
|
|
|
15,191 |
|
|
|
3,012 |
|
|
|
5,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes |
|
|
(523,202 |
) |
|
|
(276,097 |
) |
|
|
(255,330 |
) |
|
|
(291,352 |
) |
Income tax benefit (expense) |
|
|
(900 |
) |
|
|
112,600 |
|
|
|
(600 |
) |
|
|
117,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(524,102 |
) |
|
|
(163,497 |
) |
|
|
(255,930 |
) |
|
|
(174,152 |
) |
Income from discontinued
operations, net of income taxes |
|
|
|
|
|
|
42,348 |
|
|
|
|
|
|
|
25,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(524,102 |
) |
|
$ |
(121,149 |
) |
|
$ |
(255,930 |
) |
|
$ |
(148,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(6.77 |
) |
|
$ |
(2.12 |
) |
|
$ |
(3.30 |
) |
|
$ |
(2.26 |
) |
Discontinued operations |
|
|
|
|
|
|
.55 |
|
|
|
|
|
|
|
.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share |
|
$ |
(6.77 |
) |
|
$ |
(1.57 |
) |
|
$ |
(3.30 |
) |
|
$ |
(1.93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first half of 2008, housing market conditions continued to deteriorate as record high
foreclosures in the period exacerbated the oversupply of unsold homes in the marketplace and
consumer confidence declined significantly amid signs of weakness in the general economy. The
protracted housing supply-demand imbalance combined with ongoing turmoil in consumer mortgage
lending and other credit markets further intensified competition for sales and put downward
pressure on sales prices during the first half of 2008. These adverse conditions have persisted
in varying degrees for the housing industry since the second half of 2006 and their impact is
reflected in our results for the three months and six months ended May 31, 2008. Our results
for these periods were also substantially affected by strategic actions we have taken over the
past several quarters in each of our homebuilding reporting segments to reduce our inventory
investments and the number of active communities we operate. We have done so to better align
our business operations with todays significantly reduced home sales activity relative to the
peak levels of a few years ago and our diminished future sales expectations. In the three months
and six months ended May 31, 2008, we operated 37% and 38% fewer active communities,
respectively, than in the corresponding year-earlier periods. The reduced community counts were
a significant factor in the year-over-year declines in net orders, homes delivered and revenues
we experienced in each of our homebuilding reporting segments. We also experienced
year-over-year decreases in revenues in each homebuilding reporting segment in the second
quarter and first half of 2008 due to targeted sales price reductions and sales concessions we
implemented in certain markets or communities in response to competitive pressures, weak
consumer demand and heightened supply levels, and our ongoing efforts to enhance the
affordability of our homes, particularly in light of tighter consumer mortgage lending
standards. As a result of current market conditions and our current strategic initiatives, we
expect to report reduced year-over-year net orders, homes delivered and revenues throughout
2008. |
30
Our total revenues of $639.1 million for the three months ended May 31, 2008 decreased 55% from
$1.41 billion for the three months ended May 31, 2007 due to lower housing and land sale
revenues. Housing revenues of $636.7 million in the second quarter of 2008 declined 51% from
$1.30 billion in the year-earlier quarter, reflecting decreases in both the number of homes
delivered and the average selling price compared to the year-earlier quarter. We delivered
2,810 homes in the second quarter of 2008, down 41% from the 4,776 homes we delivered in the
year-earlier quarter. The overall average selling price of our homes decreased 17% to $226,600
in the second quarter of 2008 from $271,600 in the corresponding period of 2007. 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. Included in our total revenues were
financial services revenues of $2.0 million in the three months ended May 31, 2008 and $3.2
million in the three months ended May 31, 2007.
We incurred a net loss of $255.9 million, or $3.30 per diluted share, in the second quarter of
2008, including pretax, non-cash charges of $176.5 million for inventory and joint venture
impairments and the abandonment of land option contracts, and $24.6 million for goodwill
impairment. The inventory impairments resulted from the combination of increased housing supply
and persistently poor demand, which amplified pricing pressures and diminished asset values in
many of our markets. Inventory values were also affected by the uncertain time frame for a
housing market recovery. The abandonment charges reflect our decisions not to pursue certain
land option contracts where potential projects no longer met our internal investment standards.
Approximately 90% of the total impairments and abandonments in the second quarter of 2008 were
recorded against assets in California, Arizona, Nevada and Florida, states that have been
heavily impacted by rising foreclosures and falling housing prices. The goodwill impairment
charge related to acquisitions we made in prior years within our Central reporting segment. Our
net loss in the second quarter of 2008 also included a charge of $98.9 million to record a
valuation allowance against net deferred tax assets generated during the quarter in accordance
with SFAS No. 109. In the second quarter of 2007, we posted a net loss of $148.7 million, or
$1.93 per diluted share, including a pretax, non-cash charge of $308.2 million for inventory and
joint venture impairments and the abandonment of land option contracts, partly offset by
after-tax income of $25.5 million, or $.33 per diluted share from the French discontinued
operations that we sold in July 2007.
For the six months ended May 31, 2008, our Company-wide revenues totaled $1.43 billion, a
decrease of 49% from $2.80 billion for the six months ended May 31, 2007. Included in our total
revenues were financial services revenues of $4.9 million in the six months ended May 31, 2008
and $7.4 million in the six months ended May 31, 2007. Our net loss for the first half of 2008
totaled $524.1 million, or $6.77 per diluted share, including pretax, non-cash charges of $400.5
million for inventory and joint venture impairments and the abandonment of land option
contracts, and $24.6 million for goodwill impairment. The net loss also reflected a $198.9
million valuation allowance charge against deferred tax assets to fully reserve the tax benefits
generated from our pretax loss in the period. For the six months ended May 31, 2007, we
reported a net loss of $121.1 million, or $1.57 per diluted share, including pretax, non-cash
charges of $316.9 million for inventory and joint venture impairments and land option contract
abandonments, and after-tax income of $42.3 million, or $.55 per diluted share from the French
discontinued operations.
Given the strength of our cash position, on June 12, 2008, we announced that we would redeem all
of our outstanding 7 3/4% senior subordinated notes due 2010 in the aggregate principal amount
of $300.0 million. The redemption date is July 14, 2008 and the redemption price is 101.938% of
the principal amount plus all accrued interest to the date of redemption. We expect to incur a
loss on the redemption primarily due to the call premium of $5.8 million. However, in addition
to reducing our total debt, we expect the redemption to generate approximately $16.0 million in
annual interest cost savings.
Our backlog at May 31, 2008 consisted of 6,233 homes, representing projected future housing
revenues of approximately $1.47 billion. These backlog measures declined 54% and 61%,
respectively, from the 13,672 homes, representing approximately $3.74 billion in projected
future housing revenues, at May 31, 2007. These backlog level decreases reflected our reduced
active community count, the effects of several quarters of negative year-over-year net order
results and lower average selling prices. Net orders generated from our homebuilding operations
decreased 42% to 4,200 in the second quarter of 2008 from 7,265 net orders in the second quarter
of 2007, with year-over-year declines experienced in each of our operating segments largely due
to lower active community counts in 2008. However, our second quarter 2008 net orders were
nearly triple the 1,449 net orders reported in the first quarter of 2008, in part due to a
substantially improved cancellation rate. Our cancellation rate based on gross orders improved
to 27% in the second quarter of 2008 from 53% in the first quarter of 2008, 58% in the fourth
quarter of 2007 and 34% in the second quarter of 2007.
31
We continue to take steps to maintain our strong financial position and reposition our
operations to align with reduced market demand compared to the record levels of a few years ago.
Our cash balance of $1.31 billion and debt balance of $2.16 billion at May 31, 2008 were
largely unchanged from the balances at November 30, 2007. We generated positive cash flows from
our operations in the first two quarters of 2008, a trend we expect to continue for the
remainder of the year. As of May 31, 2008, our ratio of debt to total capital, net of cash,
remained at the low end of our targeted range of 40-50%. Our liquidity, including the available
capacity under our Credit Facility, was approximately $2.40 billion at May 31, 2008. We have
reduced our inventory levels by 50% to $2.61 billion at May 31, 2008 from $5.24 billion at May
31, 2007 and ended the second quarter of 2008 with an attractive, geographically diverse land
portfolio of approximately 56,600 lots owned or controlled. We believe our solid financial
position and present lot positions give us a distinct competitive advantage relative to other
homebuilding companies and should allow us to capitalize on opportunities when the housing
market stabilizes.
HOMEBUILDING
We have grouped our homebuilding activities into four reporting segments, which we refer to as
West Coast, Southwest, Central and Southeast. As of May 31, 2008, our 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,
Georgia, North Carolina and South Carolina.
The following table presents a summary of selected financial and operational data for our
homebuilding operations (dollars in thousands, except average selling price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
Three Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing |
|
$ |
1,363,433 |
|
|
$ |
2,670,624 |
|
|
$ |
636,719 |
|
|
$ |
1,297,366 |
|
Land |
|
|
64,969 |
|
|
|
124,011 |
|
|
|
375 |
|
|
|
112,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,428,402 |
|
|
|
2,794,635 |
|
|
|
637,094 |
|
|
|
1,409,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing |
|
|
1,520,091 |
|
|
|
2,508,766 |
|
|
|
748,098 |
|
|
|
1,348,306 |
|
Land |
|
|
148,390 |
|
|
|
146,918 |
|
|
|
7,742 |
|
|
|
131,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,668,481 |
|
|
|
2,655,684 |
|
|
|
755,840 |
|
|
|
1,479,405 |
|
Selling, general and administrative expenses |
|
|
246,703 |
|
|
|
398,807 |
|
|
|
119,065 |
|
|
|
193,585 |
|
Goodwill impairment |
|
|
24,570 |
|
|
|
|
|
|
|
24,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,939,754 |
|
|
|
3,054,491 |
|
|
|
899,475 |
|
|
|
1,672,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(511,352 |
) |
|
$ |
(259,856 |
) |
|
$ |
(262,381 |
) |
|
$ |
(263,004 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes delivered |
|
|
5,738 |
|
|
|
9,912 |
|
|
|
2,810 |
|
|
|
4,776 |
|
Average selling price |
|
$ |
237,600 |
|
|
$ |
269,400 |
|
|
$ |
226,600 |
|
|
$ |
271,600 |
|
Housing gross margin |
|
|
-11.5 |
% |
|
|
6.1 |
% |
|
|
-17.5 |
% |
|
|
-3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
as a percent of housing revenues |
|
|
18.1 |
% |
|
|
14.9 |
% |
|
|
18.7 |
% |
|
|
14.9 |
% |
Operating loss as a percent of homebuilding
revenues |
|
|
-35.8 |
% |
|
|
-9.3 |
% |
|
|
-41.2 |
% |
|
|
-18.7 |
% |
32
The following tables present information by reporting segment in terms of homes delivered to
buyers, net orders taken and cancellation rates based on gross orders for the three-month and
six-month periods ended May 31, 2008 and 2007, together with backlog data in terms of homes and
value by reporting segment as of May 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
Homes Delivered |
|
Net Orders |
|
Cancellation Rates |
Segment |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
West Coast |
|
|
603 |
|
|
|
950 |
|
|
|
977 |
|
|
|
1,673 |
|
|
|
29 |
% |
|
|
30 |
% |
Southwest |
|
|
534 |
|
|
|
1,061 |
|
|
|
760 |
|
|
|
1,437 |
|
|
|
21 |
|
|
|
30 |
|
Central |
|
|
863 |
|
|
|
1,236 |
|
|
|
964 |
|
|
|
1,903 |
|
|
|
31 |
|
|
|
39 |
|
Southeast |
|
|
810 |
|
|
|
1,529 |
|
|
|
1,499 |
|
|
|
2,252 |
|
|
|
26 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,810 |
|
|
|
4,776 |
|
|
|
4,200 |
|
|
|
7,265 |
|
|
|
27 |
% |
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated joint ventures |
|
|
74 |
|
|
|
11 |
|
|
|
131 |
|
|
|
109 |
|
|
|
24 |
% |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
Homes Delivered |
|
Net Orders |
|
Cancellation Rates |
Segment |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
West Coast |
|
|
1,217 |
|
|
|
1,845 |
|
|
|
1,516 |
|
|
|
3,140 |
|
|
|
34 |
% |
|
|
29 |
% |
Southwest |
|
|
1,274 |
|
|
|
2,246 |
|
|
|
946 |
|
|
|
2,545 |
|
|
|
32 |
|
|
|
32 |
|
Central |
|
|
1,762 |
|
|
|
2,663 |
|
|
|
1,195 |
|
|
|
3,236 |
|
|
|
45 |
|
|
|
40 |
|
Southeast |
|
|
1,485 |
|
|
|
3,158 |
|
|
|
1,992 |
|
|
|
4,088 |
|
|
|
34 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,738 |
|
|
|
9,912 |
|
|
|
5,649 |
|
|
|
13,009 |
|
|
|
36 |
% |
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated joint ventures |
|
|
149 |
|
|
|
19 |
|
|
|
179 |
|
|
|
194 |
|
|
|
31 |
% |
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
|
|
|
|
|
|
|
|
|
Backlog Value |
|
|
|
Backlog Homes |
|
|
(In Thousands) |
|
Segment |
|
2008 |
|
|
2007 |
|
|
2008 |
|
2007 |
|
West Coast |
|
|
1,489 |
|
|
|
2,910 |
|
|
$ |
516,073 |
|
|
$ |
1,357,973 |
|
Southwest |
|
|
978 |
|
|
|
2,829 |
|
|
|
222,279 |
|
|
|
733,211 |
|
Central |
|
|
1,444 |
|
|
|
3,628 |
|
|
|
260,404 |
|
|
|
633,775 |
|
Southeast |
|
|
2,322 |
|
|
|
4,305 |
|
|
|
467,141 |
|
|
|
1,012,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,233 |
|
|
|
13,672 |
|
|
$ |
1,465,897 |
|
|
$ |
3,737,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated joint ventures |
|
|
239 |
|
|
|
229 |
|
|
$ |
101,748 |
|
|
$ |
84,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Homebuilding revenues decreased by $772.9 million, or 55%, to $637.1 million in the
three months ended May 31, 2008, from $1.41 billion in the corresponding period of 2007, due to
a decline in housing and land sales revenues. Housing revenues for the quarter ended May 31,
2008 totaled $636.7 million, down $660.6 million, or 51%, from $1.30 billion in the year-earlier
period, reflecting fewer homes delivered and a lower average selling price. We delivered 2,810
homes in the second quarter of 2008, down 41% from 4,776 homes delivered in the second quarter
of 2007, with each of our homebuilding reporting segments posting a year-over-year decrease.
The overall decline in homes delivered was largely due to the 37% decrease in the number of
active communities we operated in the second quarter of 2008 compared to the year-earlier
quarter. Over the past several quarters we have decreased community counts to better align our
operations with reduced housing market activity. We anticipate our reduced active community
count to continue to negatively impact, on a year-over-year basis, the number of homes we
deliver and the amount of revenues we generate from our housing
33
operations for the remainder of 2008. Our average selling price of $226,600 for the three
months ended May 31, 2008 decreased 17% from $271,600 in the year-earlier period, as the
persistent housing supply-demand imbalance of the past few years, exacerbated recently by
growing foreclosures, heightened competition from homebuilders and other sellers and intensified
pricing pressures. In addition, we rolled out product at lower price points to address the
ongoing affordability concerns of potential homebuyers. The largest year-over-year decrease was
in our West Coast segment, where the average selling price was down 30%. In the second quarter
of 2008, our average selling price fell 13% in the Southwest segment and 12% in the Southeast
segment on a year-over-year basis. In our Central segment, the second quarter 2008 average
selling price was flat with the year-earlier quarter. We anticipate our average selling price
will continue to decrease due to the ongoing oversupply of unsold homes in the marketplace,
tightening consumer lending requirements, affordability concerns of potential homebuyers and our
continued introduction of product at lower price points.
Homebuilding revenues for the six months ended May 31, 2008 decreased by $1.37 billion, or 49%,
to $1.43 billion from $2.79 billion for the year-earlier period, due to lower housing and land
sale revenues. Housing revenues for the six months ended May 31, 2008 totaled $1.36 billion,
down 49% from $2.67 billion in the year-earlier period, reflecting a 42% decrease in the number
of homes delivered and a 12% decrease in our average selling price. Company-wide homes delivered
decreased to 5,738 in the first six months of 2008 from 9,912 in the first six months of 2007
primarily due to reduced active community counts. Our average selling price decreased to
$237,600 in the first six months of 2008 from $269,400 in the corresponding period of 2007 as a
result of downward pricing pressure and our efforts to redesign our product to enhance its
affordability.
Revenues from land sales totaled $.4 million for the three months ended May 31, 2008 and $112.6
million for the three months ended May 31, 2007. For the six months ended May 31, 2008,
revenues from land sales totaled $65.0 million compared to $124.0 million for the six months
ended May 31, 2007. 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 the markets we serve and prevailing
market conditions. Land sale revenues were more significant in the three-month and six-month
periods ended May 31, 2007 compared to the corresponding 2008 periods because we sold a greater
amount of land in 2007 as part of our strategic efforts to reposition our operations in light of
challenging market conditions and our future sales expectations.
Operating loss. Our homebuilding operations generated operating losses of $262.4 million in the
three months ended May 31, 2008 and $263.0 million in the three months ended May 31, 2007 due to
losses from both housing operations and land sales. The 2008 second quarter operating loss
represented 41.2% of homebuilding revenues; in the year-earlier quarter, the operating loss
represented 18.7% of homebuilding revenues. This change of 22.5 percentage points was primarily
due to a decrease in our housing gross margin, which fell to negative 17.5% in the second
quarter of 2008 from a negative 3.9% for the same period of 2007, and a goodwill impairment
charge of $24.6 million recorded in the second quarter of 2008. Our housing gross margin in the
second quarter of 2008 was adversely impacted by pretax, non-cash charges of $167.1 million for
inventory impairments and land option contract abandonments, and competitive pricing pressures.
The inventory impairment charges in the second quarter of 2008 reflected the combination of
increased housing supply and persistently poor demand, which increased pricing pressure and
decreased asset values in certain markets. The majority of these inventory impairments occurred
in California, Arizona, Nevada and Florida, states that have been hardest hit by rising
foreclosure activity and falling housing prices. The abandonment charges recorded in the second
quarter of 2008 reflected our decisions to terminate certain land option contracts that no
longer met our internal investment standards. The loss within housing operations in the second
quarter of 2007 was primarily due to pretax, non-cash inventory impairment and land option
contract abandonment charges of $244.5 million. Excluding the inventory-related non-cash
charges, our housing gross margin would have been 8.7% in the second quarter of 2008 and 14.9%
in the second quarter of 2007.
Company-wide land sales generated a loss of $7.4 million in the three months ended May 31, 2008,
including $7.3 million of impairment charges related to planned future land sales. In the three
months ended May 31, 2007, land sales produced a loss of $18.5 million, which included $22.4
million of similar impairment charges.
Selling, general and administrative expenses decreased by $74.5 million, or 38%, to $119.1
million in the three months ended May 31, 2008 from $193.6 million in the corresponding 2007
period. The decrease reflected our ongoing efforts to rescale the size of our operations to the
lower volume of homes we are delivering and our future sales expectations. As a percentage of
housing revenues, selling, general and administrative expenses increased to 18.7% in the second
quarter of 2008 from 14.9% in the year-earlier period, largely due to the
34
substantial year-over-year decrease in our homebuilding revenues which has outpaced our
significant overhead reductions. Although we intend to continue our efforts to reduce our
selling, general and administrative expenses, we expect the ratio of these expenses to housing
revenues to remain above 2007 levels for the remainder of the year.
Our homebuilding operations posted operating losses of $511.4 million for the first six months
of 2008 and $259.9 million for the first six months of 2007, reflecting losses from both housing
operations and land sales. As a percentage of homebuilding revenues, the operating loss was
35.8% in the first half of 2008 compared to 9.3% in the first half of 2007 due to a decrease in
our housing gross margin to negative 11.5% in the first half of 2008 from positive 6.1% for the
same period of 2007. Our housing gross margin decreased in 2008 largely due to pretax, non-cash
charges of $277.4 million for inventory impairments and land option contract abandonments, lower
average selling prices and the increased use of price concessions and sales incentives to meet
competitive conditions. In the six months ended May 31, 2007, the housing gross margin
reflected $250.0 million of inventory impairment and land option contract abandonment charges.
Company-wide land sales generated a loss of $83.4 million in the first six months of 2008,
including $84.5 million of impairment charges related to future land sales. In the first six
months of 2007, land sales produced losses of $22.9 million, including $25.6 million of
impairment charges related to future land sales.
Selling, general and administrative expenses decreased by $152.1 million, or 38%, to $246.7
million in the six months ended May 31, 2008 from $398.8 million in the corresponding period of
2007. As a percentage of housing revenues, selling, general and administrative expenses
increased to 18.1% in the first half of 2008 from 14.9% in the year-earlier period, primarily
due to our expense reductions being outpaced by the severe year-over-year decline in housing
revenues stemming from our strategic active community count reductions and the decrease in our
average selling price.
Goodwill impairment. We have recorded goodwill in connection with various acquisitions in prior
years. Goodwill represents the excess of the purchase price over the fair value of net assets
acquired. In accordance with SFAS No. 142, we test goodwill for potential impairment annually as
of November 30 and between annual tests if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its carrying amount. During
the quarter ended May 31, 2008, we determined that it was necessary to evaluate goodwill for
impairment due to deteriorating conditions in certain housing markets and the significant
inventory impairments we identified and recognized during the quarter in accordance with SFAS
No. 144. We evaluate goodwill for impairment using the two-step process prescribed in SFAS No.
142. The first step is to identify potential impairment by comparing the fair value of a
reporting unit to the book value, including goodwill. If the fair value of a reporting unit
exceeds the book value, goodwill is not considered impaired. If the book value exceeds the fair
value, the second step of the process is performed to measure the amount of impairment. In
accordance with SFAS No. 142, we have determined that our reporting units are the same as our
reporting segments. Based on the results of our evaluation as of April 30, 2008, we recorded an
impairment charge of $24.6 million in the quarter ended May 31, 2008 related to our Central
reporting segment, where the goodwill previously recorded was determined to be impaired. The
charge was recorded at our corporate level because all goodwill is carried at that level.
The process of evaluating goodwill for impairment involves the determination of the fair value
of our reporting units. Inherent in such fair value determinations are certain judgments and
estimates relating to future cash flows, including our interpretation of current economic
indicators and market valuations, and assumptions about our strategic plans with regard to our
operations. To the extent additional information arises, market conditions change or our
strategies change, it is possible that our conclusion regarding whether existing goodwill is
impaired could change and result in a material effect on our consolidated financial position or
results of operations.
Interest Income. Interest income totaled $9.5 million in the second quarter of 2008 and $5.6
million in the second quarter of 2007. For the first half of 2008, interest income totaled
$22.6 million compared to $10.3 million in the first half of 2007. 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. The increase in interest income for the three-month and six-month periods ended May 31,
2008 compared to the year-earlier periods reflected a substantial increase in short-term
investments due to the higher level of cash on our balance sheet stemming from the July 2007
sale of our French discontinued operations and other assets, the cash generated from our
operations, and our reduction in land purchases.
35
Equity in Loss of Unconsolidated Joint Ventures. Our equity in loss of unconsolidated joint
ventures totaled $5.5 million in the three months ended May 31, 2008 and $39.5 million in the
three months ended May 31, 2007. Our equity in loss of unconsolidated joint ventures included
pretax, non-cash charges of $2.1 million in the three months ended May 31, 2008 and $41.3
million in the three months ended May 31, 2007 to recognize the impairment of certain
unconsolidated joint ventures. Our unconsolidated joint ventures recorded combined revenues of
$27.9 million in the second quarter of 2008 compared to $41.8 million in the corresponding
period of 2007. For the six months ended May 31, 2008, our equity in loss of unconsolidated
joint ventures totaled $45.4 million compared to $41.7 million for the same period of 2007.
These amounts included pretax, non-cash charges of $38.5 million in the six months ended May 31,
2008 and $41.3 million in the six months ended May 31, 2007 to recognize the impairment of
certain unconsolidated joint venture investments. Combined revenues from these unconsolidated
joint ventures totaled $55.3 million in the first half of 2008 and $43.9 million in the first
half of 2007. Activities performed by our unconsolidated joint ventures generally include
buying, developing and selling land, and, in some cases building and delivering homes.
Unconsolidated joint ventures generated combined losses of $98.7 million in the second quarter
of 2008 and $31.2 million in the corresponding period of 2007. In the first six months of 2008
and 2007, unconsolidated joint ventures generated combined losses of $117.5 million and $36.7
million, respectively.
HOMEBUILDING SEGMENTS
The following table presents financial information related to our homebuilding reporting
segments for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
Three Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
West Coast: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
440,939 |
|
|
$ |
922,296 |
|
|
$ |
199,863 |
|
|
$ |
501,817 |
|
Construction and land costs |
|
|
(555,605 |
) |
|
|
(1,012,459 |
) |
|
|
(275,990 |
) |
|
|
(649,883 |
) |
Selling, general and
administrative expenses |
|
|
(56,141 |
) |
|
|
(97,026 |
) |
|
|
(27,361 |
) |
|
|
(47,634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(170,807 |
) |
|
|
(187,189 |
) |
|
|
(103,488 |
) |
|
|
(195,700 |
) |
Other, net |
|
|
(2,629 |
) |
|
|
5,473 |
|
|
|
(6,748 |
) |
|
|
(589 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss |
|
$ |
(173,436 |
) |
|
$ |
(181,716 |
) |
|
$ |
(110,236 |
) |
|
$ |
(196,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southwest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
364,201 |
|
|
$ |
671,698 |
|
|
$ |
122,354 |
|
|
$ |
332,202 |
|
Construction and land costs |
|
|
(439,692 |
) |
|
|
(582,276 |
) |
|
|
(167,401 |
) |
|
|
(309,187 |
) |
Selling, general and
administrative
expenses |
|
|
(37,416 |
) |
|
|
(63,036 |
) |
|
|
(15,763 |
) |
|
|
(29,650 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(112,907 |
) |
|
|
26,386 |
|
|
|
(60,810 |
) |
|
|
(6,635 |
) |
Other, net |
|
|
(5,173 |
) |
|
|
3,188 |
|
|
|
(1,843 |
) |
|
|
4,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss) |
|
$ |
(118,080 |
) |
|
$ |
29,574 |
|
|
$ |
(62,653 |
) |
|
$ |
(2,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
300,475 |
|
|
$ |
449,340 |
|
|
$ |
148,586 |
|
|
$ |
216,678 |
|
Construction and land costs |
|
|
(286,161 |
) |
|
|
(401,074 |
) |
|
|
(133,398 |
) |
|
|
(195,853 |
) |
Selling, general and
administrative
expenses |
|
|
(49,325 |
) |
|
|
(76,842 |
) |
|
|
(22,951 |
) |
|
|
(36,333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(35,011 |
) |
|
|
(28,576 |
) |
|
|
(7,763 |
) |
|
|
(15,508 |
) |
Other, net |
|
|
(6,769 |
) |
|
|
(4,829 |
) |
|
|
(4,075 |
) |
|
|
(3,386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss |
|
$ |
(41,780 |
) |
|
$ |
(33,405 |
) |
|
$ |
(11,838 |
) |
|
$ |
(18,894 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
Three Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Southeast: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
322,787 |
|
|
$ |
751,301 |
|
|
$ |
166,291 |
|
|
$ |
359,289 |
|
Construction and land costs |
|
|
(381,933 |
) |
|
|
(655,386 |
) |
|
|
(176,849 |
) |
|
|
(321,632 |
) |
Selling, general and administrative expenses |
|
|
(57,667 |
) |
|
|
(98,000 |
) |
|
|
(26,754 |
) |
|
|
(48,637 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(116,813 |
) |
|
|
(2,085 |
) |
|
|
(37,312 |
) |
|
|
(10,980 |
) |
Other, net |
|
|
(28,079 |
) |
|
|
(36,772 |
) |
|
|
(3,467 |
) |
|
|
(36,827 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss |
|
$ |
(144,892 |
) |
|
$ |
(38,857 |
) |
|
$ |
(40,779 |
) |
|
$ |
(47,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast Our West Coast segment generated total revenues of $199.9 million in the three
months ended May 31, 2008, down 60% from $501.8 million in the year-earlier period due to
decreases in housing and land sale revenues. Second quarter housing revenues declined 55% to
$199.9 million from $448.0 million in the second quarter of 2007, due to a 37% decrease in homes
delivered and a 30% decrease in the average selling price. We delivered 603 homes at an average
selling price of $331,400 in the quarter ended May 31, 2008 compared to 950 homes delivered at
an average selling price of $471,600 in the year-earlier quarter. We delivered fewer homes in
the second quarter of 2008 largely due to a 45% decrease in our active communities in this
segment. The lower average selling price in the second quarter of 2008 was due to pricing
pressure in this segment stemming from increased foreclosures and weakening demand as well as
our efforts to redesign our product to enhance its affordability to potential homebuyers. The
West Coast segment had no land sales in the second quarter of 2008. In the year-earlier quarter
the segment had land sale revenues of $53.8 million.
Our West Coast segment generated pretax losses of $110.2 million in the three months ended May
31, 2008 and $196.3 million in the year-earlier period. Pretax results improved in the second
quarter of 2008 compared to the year-earlier period due to decreased inventory impairment and
land option contract abandonment charges and lower selling, general and administrative expenses.
The segments inventory impairment and land option contract abandonment charges totaled $90.0
million in the second quarter of 2008, down from $207.3 million in the second quarter of 2007.
The gross margin in this segment worsened to negative 38.1% in the second quarter of 2008 from
negative 29.5% in the year-earlier quarter mainly due to an increase in inventory impairment and
land option contract abandonment charges as a percent of revenues and a decrease in the average
selling price. Selling, general and administrative expenses in our West Coast segment decreased
by $20.2 million, or 43%, to $27.4 million in the three months ended May 31, 2008 from $47.6
million in the year-earlier period, reflecting the steps we have taken to rescale the size of
our business to align with reduced housing market activity.
For the six months ended May 31, 2008, our West Coast segment generated total revenues of $440.9
million, a decrease of 52% from $922.3 million in the year-earlier period, reflecting lower
housing and land sale revenues. First half housing revenues from our West Coast segment totaled
$440.9 million, down from $868.5 million in the first half of 2007 due to a 34% decrease in
homes delivered and a 23% decrease in the average selling price. Homes delivered in this
segment decreased to 1,217 in the six months ended May 31, 2008 from 1,845 in the year-earlier
period mainly due to a 36% reduction in active communities in this segment. The average selling
price fell to $362,300 in the first half of 2008 from $470,800 in the year-earlier period due to
greater use of price concessions in response to highly competitive conditions and weak demand,
as well as our efforts to redesign our product to enhance its affordability to potential
homebuyers. The West Coast segment had no land sales in the six months ended May 31, 2008 and
$53.8 million of land sale revenues for the six months ended May 31, 2007.
Our West Coast segment posted pretax losses of $173.4 million for the six months ended May 31,
2008 and $181.7 million in the year-earlier period. The pretax results of our West Coast segment
improved in the first half of 2008 compared to the year-earlier period due to decreased
inventory impairment and land option contract abandonment charges and lower selling, general and
administrative expenses. Inventory impairment and land option contract abandonment charges in
this segment totaled $142.2 million in the first half of 2008 and $209.9 million in the first
half of 2007. The gross margin in our West Coast segment fell to negative 26.0% for the six
months ended May 31, 2008 from negative 9.8% in the year-earlier period, reflecting the impact
of increased impairment and land option contract abandonment charges as a percent of revenues,
lower average selling prices and more frequent use of sales incentives. Selling, general and
administrative expenses in the West Coast segment decreased by $40.9 million, or 42%, to $56.1
million in the first half of 2008 from $97.0
37
million in the year-earlier period due to our actions to align overhead with a reduced volume of
homes delivered and our future sales expectations.
Southwest Total revenues from our Southwest segment decreased 63% to $122.3 million in the
second quarter of 2008 from $332.2 million in the year-earlier period due to declines in housing
and land sale revenues. Housing revenues from our Southwest segment fell 56% to $122.4 million
in the three months ended May 31, 2008 from $280.2 million in the year-earlier period, due to a
50% decrease in homes delivered and a 13% decrease in the average selling price. Homes
delivered in this segment decreased to 534 in the second quarter of 2008 from 1,061 in the
year-earlier quarter largely due to a 32% decrease in the number of active communities we
operate, reflecting our strategic efforts to reduce community counts. The average selling price
declined to $229,100 in the three months ended May 31, 2008 from $264,100 in the three months
ended May 31, 2007 due to pricing pressures resulting from the excess supply of new and resale
homes in certain markets within this segment in light of increased foreclosures, and lower
levels of demand. The Southwest segment had no land sales in the second quarter of 2008. In
the year-earlier quarter, the segment had land sale revenues of $52.0 million.
Our Southwest segment generated pretax losses of $62.7 million in the quarter ended May 31, 2008
and $2.1 million in the year-earlier quarter. The increased pretax loss resulted from a
substantial decrease in the gross margin, partly offset by a decrease in selling, general and
administrative expenses. In our Southwest segment, the gross margin fell to negative 36.8% in
the second quarter of 2008 from positive 6.9% in the second quarter of 2007, largely due to
increased inventory impairment and land option contract abandonment charges, heightened
competition and the increased use of price concessions and sales incentives. Inventory
impairment and land option contract abandonment charges increased to $50.9 million in the second
quarter of 2008 from $29.3 million in the year-earlier quarter. Selling, general and
administrative expenses decreased by $13.9 million, or 47%, to $15.8 million in the quarter
ended May 31, 2008 from $29.7 million in the year-earlier quarter, reflecting the impact of our
initiatives to reduce the size of our business in line with reduced housing market activity in
this segment.
For the first half of 2008, our Southwest segment generated total revenues of $364.2 million,
down 46% from $671.7 million in the year-earlier period, mainly due to a decrease in housing
revenues. In the six months ended May 31, 2008, housing revenues from the segment declined 51%
to $301.5 million from $614.3 million in the six months ended May 31, 2007, reflecting a 43%
decrease in homes delivered and a 13% decrease in the average selling price. We delivered 1,274
homes at an average selling price of $236,700 in the six months ended May 31, 2008 compared to
2,246 homes at an average selling price of $273,500 in the year-earlier period. We delivered
fewer homes in the first half of 2008 mainly due to the 24% decrease in the number of active
communities we operate in this segment, reflecting our strategic efforts to reduce community
counts. The average selling price declined in light of the highly competitive conditions in
this segment stemming from the persistent imbalance in housing supply and demand. The Southwest
segments total revenues included land sale revenues of $62.7 million in the first half of 2008
and $57.4 million in first half of 2007.
For the six months ended May 31, 2008, our Southwest segment posted a pretax loss of $118.1
million compared to pretax income of $29.6 million in the year-earlier period. The loss
reflected a lower gross margin, partly offset by a decrease in selling, general and
administrative expenses. The gross margin from our Southwest segment declined to negative 20.7%
in the first half of 2008 from positive 13.3% in the first half of 2007, mainly due to increased
inventory impairment and land option contract abandonment charges in the 2008 period. These
charges totaled $103.1 million, up from $29.4 million in the first half of 2007. Selling,
general and administrative expenses of $37.4 million in the six months ended May 31, 2008
decreased by $25.6 million, or 41%, from $63.0 million in the year-earlier period, largely as a
result of our cost reduction efforts.
Central Our Central segment posted total revenues of $148.6 million in the three months ended
May 31, 2008, down 31% from $216.7 million in the year-earlier period, primarily due to a
decrease in housing revenues. Second quarter housing revenues from our Central segment declined
30% to $148.3 million from $212.3 million in the second quarter of 2007, due to a 30% decrease
in homes delivered. The average selling price of $171,800 in the second quarter of 2008 was
unchanged from the year-earlier quarter. We delivered 863 homes in the quarter ended May 31,
2008, down from 1,236 homes delivered in the year-earlier quarter principally due to a 24%
decrease in active communities. The Central segments total revenues included land sale
revenues of $.3 million in the second quarter of 2008 and $4.4 million in the second quarter of
2007.
Our Central segment posted pretax losses of $11.8 million in the second quarter of 2008 and
$18.9 million in the year-earlier quarter. The decrease was mainly due to reduced selling,
general and administrative expenses,
38
partly offset by lower gross profits that resulted primarily from a decrease in the number of
homes delivered. Our Central segments gross margin increased to 10.2% in the second quarter of
2008 from 9.6% in the second quarter of 2007. Inventory impairment and land option contract
abandonment charges decreased to $3.3 million from $8.5 million in the second quarter of 2007.
Selling, general and administrative expenses of $23.0 million in the second quarter of 2008
decreased by $13.3 million, or 37%, from $36.3 million in the second quarter of 2007 due to our
actions to align our overhead with the reduced market demand.
For the six months ended May 31, 2008, our Central segment generated total revenues of $300.5
million, a decrease of 33% from $449.3 million in the year-earlier period, mainly due to lower
housing revenues. In the first half of 2008, housing revenues from the segment totaled $299.6
million, down from $442.7 million in the first half of 2007, reflecting a 34% decrease in homes
delivered, partly offset by a 2% increase in the average selling price. Homes delivered in this
segment decreased to 1,762 in the six months ended May 31, 2008 from 2,663 in the year-earlier
period mainly due to a 31% reduction in active communities in this segment. The average selling
price increased to $170,000 in the first half of 2008 from $166,300 in the year-earlier period
due to a change in product mix. The Central segments total revenues included land sale
revenues of $.9 million in the first half of 2008 and $6.6 million in first half of 2007.
Our Central segment posted a pretax loss of $41.8 million for the six months ended May 31, 2008
compared to a pretax loss of $33.4 million in the year-earlier period. The increased loss
reflected a lower gross margin, partly offset by a decrease in selling, general and
administrative expenses. The segments gross margin fell to 4.8% in the first half of 2008 from
10.7% in the first half of 2007, mainly due to increased inventory impairment and land option
contract abandonment charges in the 2008 period. These charges totaled $20.5 million in the
first half of 2008, up from $9.5 million in the corresponding period of 2007. Selling, general
and administrative expenses of $49.3 million in the six months ended May 31, 2008 decreased by
$27.5 million, or 36%, from $76.8 million in the year-earlier period, reflecting our efforts to
recalibrate our operations in line with reduced housing market activity.
Southeast In the second quarter of 2008, our Southeast segment generated total revenues of
$166.3 million, a decline of 54% from $359.3 million in the second quarter of 2007, primarily
due to a decrease in housing revenues. Our Southeast segment housing revenues fell 53% to
$166.3 million in the second quarter of 2008 from $356.8 million in the corresponding quarter of
2007, reflecting a 47% decrease in homes delivered and a 12% decrease in the average selling
price. We delivered 810 homes at an average selling price of $205,300 in the quarter ended May
31, 2008 compared to 1,529 homes delivered at an average selling price of $233,300 in the
year-earlier quarter. The year-over-year decrease in the number of homes delivered in the
second quarter of 2008 was primarily due to a 45% reduction in active communities as a result of
our efforts to recalibrate our operations to the reduced level of housing market activity in
this segment. The lower average selling price in the second quarter of 2008 reflected increased
pricing pressure stemming from competitive market conditions and increased foreclosure activity.
The Southeast segments total revenues included no land sale revenues in the second quarter of
2008 and $2.5 million of land sales in second quarter of 2007.
Our Southeast segment generated pretax losses of $40.8 million in the three months ended May 31,
2008 and $47.8 million in the three months ended May 31, 2007. The pretax results improved in
the second quarter of 2008 compared to the year-earlier period, reflecting a decrease in
selling, general and administrative expenses, partially offset by a decline in the gross margin.
The gross margin decreased to negative 6.4% in the second quarter of 2008 from positive 10.5%
in the second quarter of 2007, primarily due to higher inventory impairment and land option
contract abandonment charges in the 2008 period. In the three months ended May 31, 2008,
inventory impairment and land option contract abandonment charges totaled $30.2 million, up from
$21.7 million in the corresponding period of 2007. Selling, general and administrative expenses
decreased by $21.9 million, or 45%, to $26.8 million in the second quarter of 2008 from $48.6
million in the second quarter of 2007 due to our actions to align our overhead with the lower
volume of home deliveries in the Southeast segment and our future sales expectations. Due
mainly to impairment charges of $36.9 million in the second quarter of 2007 related to this
segments unconsolidated joint venture investments, other, net expenses in this segment
decreased to $3.4 million in the second quarter of 2008 from $36.8 million in the year-earlier
quarter.
In the six months ended May 31, 2008, our Southeast segment generated total revenues of $322.8
million, down 57% from $751.3 million in the year-earlier period, mainly due to lower housing
revenues. The segments first half housing revenues totaled $321.4 million, a decrease of 57%
from $745.0 million in the first half of 2007, reflecting a 53% decrease in homes delivered and
an 8% decrease in the average selling price. Homes delivered in this segment decreased to 1,485
in the six months ended May 31, 2008 from 3,158 in the year-earlier period mainly due to a 50%
reduction in our active communities. The average selling price decreased to $216,400 in
39
the first half of 2008 from $235,900 in the year-earlier period due to highly competitive
selling conditions. The Southeast segments total revenues included land sale revenues of $1.4
million in the first half of 2008 and $6.3 million in first half of 2007.
Our Southeast segment generated pretax losses of $144.9 million in the six months ended May 31,
2008 and $38.9 million in the year-earlier period. The increased loss in the first half of 2008
compared to the year-earlier period reflected a substantial decline in the gross margin, partly
offset by a decrease in selling, general and administrative expenses. The segments gross margin
declined to negative 18.3% in the first half of 2008 from positive 12.8% in the first half of
2007, mainly due to higher inventory impairment and land option contract abandonment charges in
the 2008 period. These charges increased to $96.2 million in the six months ended May 31, 2008
from $26.7 million in the corresponding period of 2007. Selling, general and administrative
expenses decreased by $40.3 million, or 41%, to $57.7 million in the first half of 2008 from
$98.0 million in the first half of 2007 due to our efforts to reduce our operations in line with
lower housing market activity. Other, net expenses of $28.1 million in the six months ended May
31, 2008 included $22.8 million of impairment charges related to this segments unconsolidated
joint venture investments. In the six months ended May 31, 2007, other, net expenses of $36.8
million included impairment charges of $36.9 million associated with unconsolidated joint
venture investments in this segment.
FINANCIAL SERVICES
Our financial services segment provides title and insurance services to our homebuyers and
provided escrow coordination services until the second quarter of 2007, when we terminated the
escrow coordination business. The segment also provides mortgage banking services to our
homebuyers indirectly through Countrywide KB Home Loans. We and Countrywide each have a 50%
ownership interest in the Countrywide KB Home Loans joint venture, with Countrywide providing
management oversight of the joint ventures operations. On July 1, 2008, Bank of America
Corporation completed its purchase of Countrywide. At this time, we believe this transaction
will not have a material effect on the joint ventures activities. Countrywide KB Home Loans 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
Three Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
$ |
4,887 |
|
|
$ |
7,411 |
|
|
$ |
1,971 |
|
|
$ |
3,222 |
|
Expenses |
|
|
(2,232 |
) |
|
|
(2,411 |
) |
|
|
(1,113 |
) |
|
|
(1,071 |
) |
Equity in income of unconsolidated
joint venture |
|
|
8,302 |
|
|
|
10,191 |
|
|
|
2,154 |
|
|
|
3,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income |
|
$ |
10,957 |
|
|
$ |
15,191 |
|
|
$ |
3,012 |
|
|
$ |
5,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
4,795 |
|
|
|
6,495 |
|
|
|
2,284 |
|
|
|
3,269 |
|
Principal |
|
$ |
989,741 |
|
|
$ |
1,547,157 |
|
|
$ |
456,165 |
|
|
$ |
791,934 |
|
Retention rate |
|
|
79 |
% |
|
|
66 |
% |
|
|
80 |
% |
|
|
70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans sold to third parties (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
5,768 |
|
|
|
7,422 |
|
|
|
2,204 |
|
|
|
3,304 |
|
Principal |
|
$ |
1,208,028 |
|
|
$ |
1,782,142 |
|
|
$ |
441,854 |
|
|
$ |
795,125 |
|
|
|
|
(a) |
|
Loan originations and sales are within the Countrywide KB Home Loans joint venture. |
Revenues. In the three-month and six-month periods ended May 31, 2008 and 2007, our financial
services operations generated revenues primarily from the following sources: interest income;
title services; and insurance commissions. In the three months and six months ended May 31,
2007, financial services revenues also included escrow coordination fees. Financial services
revenues totaled $2.0 million in the second quarter of 2008 and $3.2 million in the second
quarter of 2007. In the first six months of 2008, financial services
40
revenues totaled $4.9 million compared to $7.4 million in the corresponding year-earlier period.
The decrease in financial services revenues in the three-month and six-month periods ended May
31, 2008 compared to the year-earlier periods resulted from lower revenues from title and
insurance services, reflecting fewer homes delivered from our homebuilding operations, and the
elimination of escrow coordination fees due to the termination of our escrow coordination
business in the second quarter of 2007.
Expenses. General and administrative expenses totaled $1.1 million in the second quarters of
2008 and 2007. In the first six months of 2008, general and administrative expenses totaled
$2.2 million compared to $2.4 million in the year-earlier period. The year-over-year decrease
in general and administrative expenses in the first six months of 2008 was primarily due to the
termination of the escrow coordination business in the second quarter of 2007.
Equity in Income of Unconsolidated Joint Venture. Equity in income of unconsolidated joint
venture relates to our 50% interest in the Countrywide KB Home Loans joint venture and totaled
$2.2 million for the three months ended May 31, 2008 and $3.4 million for the three months ended
May 31, 2007. For the six months ended May 31, 2008, equity in income of unconsolidated joint
venture totaled $8.3 million compared to $10.2 million for the six months ended May 31, 2007.
The Countrywide KB Home Loans joint venture originated 2,284 loans in the second quarter of 2008
compared to 3,269 loans in the year-earlier quarter. In the first half of 2008, the Countrywide
KB Home Loans joint venture originated 4,795 loans, down from 6,495 loans originated in the
year-earlier period. The year-over-year decrease in loan originations for the three-month and
six-month periods reflected the impact of fewer homes delivered from our homebuilding
operations, partly offset by an increase in Countrywide KB Home Loans retention rate (the
percentage of our homebuyers using Countrywide KB Home Loans as a loan originator). Countrywide
KB Home Loans retention rate for the three months ended May 31, 2008 increased by 10 percentage
points to 80%, compared to 70% for the year-earlier quarter, and the retention rate for the six
months ended May 31, 2008 increased by 13 percentage points to 79%, compared to 66% for the
year-earlier period. The higher retention rates in the three months and six months ended May
31, 2008 as compared to the year-earlier periods reflected the continued maturation of
Countrywide KB Home Loans operations and the diminished availability to homebuyers of
alternative consumer mortgage lenders in the marketplace.
INCOME TAXES
Our income tax expense from continuing operations totaled $.6 million in the second quarter of
2008, compared to an income tax benefit from continuing operations of $117.2 million in the
second quarter of 2007. These amounts represented effective income tax rates from continuing
operations of .2% in the second quarter of 2008 and 40.2% in the second quarter of 2007. For
the first six months of 2008, our income tax expense from continuing operations totaled $.9
million compared to an income tax benefit of $112.6 million for the six months ended May 31,
2007. These amounts represented effective income tax rates from continuing operations of .2%
for the six months ended May 31, 2008 and 40.8% for the six months ended May 31, 2007. The
significant change in our effective tax rate in 2008 compared to 2007 resulted from no tax
benefits being recorded in the three-month or six-month periods due to a full valuation
allowance related to our current year loss, and the corresponding recognition of a liability for
unrecognized tax benefits. In the three months and six months ended May 31, 2008, we recorded
valuation allowances of $98.9 million and $198.9 million, respectively. In accordance with SFAS
No. 109, we were unable to record deferred tax benefits that would have reduced our net losses
in the three months and six months ended May 31, 2008 due to the uncertainty of realizing such
deferred tax assets.
Liquidity and Capital Resources
Overview. Historically, we have funded our homebuilding and financial services activities with
internally generated cash flows and external sources of debt and equity financing. We may also
borrow funds from time to time under our Credit Facility.
In light of the prolonged downturn in the housing market, we remain focused on building and
maintaining a strong balance sheet by generating and preserving cash and reducing debt. We took
several decisive actions in 2007 that resulted in substantial cash flow generation and debt
reductions in that year, including selling our French operations and other assets, reducing
inventory and active community counts, trimming our workforce and consolidating or exiting
underperforming markets. During the first half of 2008, we remained committed to our balance
sheet initiatives and, as a result, we ended the second quarter with $1.31 billion of cash and
41
$2.16 billion of debt. Due to seasonal fluctuations in our home sales activity, we have in past years
experienced negative cash flows from operations in the first two quarters of our fiscal years.
As a result of our balance sheet focus, however, we substantially maintained our cash and debt
at year-end 2007 levels and generated positive cash flows from our operations in the first two
quarters of 2008, a trend we expect to continue for the remainder of the year.
Capital Resources. As of May 31, 2008, we had no outstanding borrowings under our unsecured
revolving credit facility (Credit Facility) and $210.1 million of outstanding letters of
credit, leaving us with $1.09 billion available for our future use.
Our financial leverage, as measured by the ratio of debt to total capital, was 62.9% at May 31,
2008 compared to 53.9% at November 30, 2007. The increase in this ratio reflected lower retained
earnings at May 31, 2008 primarily due to pretax, non-cash charges recorded during the first six
months of 2008 for the impairment of inventory and joint ventures and the abandonment of land
option contracts, and the impairment of goodwill, as well as a charge to record a valuation
allowance against the net deferred tax assets generated during the period. Our ratio of net
debt to net total capital at May 31, 2008 was 40.2%, compared to 31.1% at November 30, 2007 and
46.6% at May 31, 2007. Net debt to net total capital is calculated by dividing mortgages and
notes payable, net of homebuilding cash, by net total capital (mortgages and notes payable, net
of homebuilding cash, plus stockholders equity). We believe the ratio of net debt to net total
capital is useful in understanding the leverage employed in our operations and in comparing us
with other companies in the homebuilding industry.
During the quarter ended February 29, 2008, our board of directors declared a cash dividend of
$.25 per share of common stock, which was paid on February 21, 2008 to shareholders of record on
February 7, 2008. During the quarter ended May 31, 2008, our board of directors declared a cash
dividend of $.25 per share of common stock, which was paid on May 22, 2008 to shareholders of
record on May 8, 2008, and declared a cash dividend of $.25 per share of common stock, which is
payable on July 24, 2008 to shareholders of record on July 10, 2008.
On June 12, 2008, we announced that we would redeem all of our outstanding 7 3/4% senior
subordinated notes due 2010 in the aggregate principal amount of $300.0 million. The redemption
date is July 14, 2008 and the redemption price is 101.938% of the principal amount plus all
accrued interest to the date of redemption. We expect to incur a loss on the redemption
primarily due to the call premium of $5.8 million. However, in addition to reducing our total
debt, we expect the redemption to generate approximately $16.0 million in annual interest cost
savings.
Consolidated Cash Flows. Operating, investing and financing activities used net cash of $25.1
million in the six months ended May 31, 2008 and $332.6 million in the six months ended May 31,
2007. The decrease in cash used in the first half of 2008 compared to the year-earlier period
reflects our balance sheet-focused efforts to generate and preserve cash by delivering backlog,
reducing active communities and curtailing land investments, among other actions.
Operating Activities. Operating activities provided net cash flows of $105.2 million in the
first six months of 2008 and $115.9 million in the first six months of 2007. The year-over-year
change in operating cash flow primarily reflected a net decrease in inventories resulting from
our curtailment of inventory investments in light of challenging housing market conditions and
lower future sales expectations. Our sources of operating cash in the first six months of 2008
included a net decrease in inventories of $218.1 million (excluding inventory and joint venture
impairments and land option contract abandonments and a decrease of $123.5 million in
consolidated inventories not owned), a decrease in receivables of $107.6 million, other
operating sources of $10.0 million and various non-cash items added to the net loss. Partially
offsetting the cash provided was a net loss of $524.1 million and a decrease in accounts
payable, accrued expenses and other liabilities of $188.5 million.
Operating cash used by continuing operations in the six months ended May 31, 2007 included a
decrease in accounts payable, accrued expenses and other liabilities of $267.5 million, a net
loss of $121.2 million, and an increase in receivables of $9.1 million. The cash used was
partially offset by a net decrease in inventories of $76.3 million (excluding inventory and
joint venture impairments and land option contract abandonments, $4.1 million of inventories
acquired through seller financing and a decrease of $165.6 million in consolidated inventories
not owned), other operating sources of $24.8 million and various
non-cash items added to the loss from continuing operations. Our French discontinued operations
provided net cash from operating activities of $188.2 million in the first six months of 2007.
42
Investing Activities. Investing activities used net cash of $93.3 million in the six months
ended May 31, 2008 and $105.3 million in the year-earlier period. In the first six months of
2008, $97.7 million of cash was used for investments in unconsolidated joint ventures. The cash
used was partially offset by $4.4 million provided from net sales of property and equipment. In
the first six months of 2007, continuing operations used cash of $86.7 million for investments
in unconsolidated joint ventures and $3.9 million for net purchases of property and equipment.
Our French discontinued operations used net cash of $14.7 million for investing activities in
the first six months of 2007.
Financing Activities. Net cash used for financing activities totaled $37.0 million in the first
six months of 2008 and $343.2 million in the first six months of 2007. In the first six months
of 2008, cash was used for dividend payments of $38.7 million, net payments on short-term
borrowings of $1.3 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 $3.6 million provided from the issuance of common stock under our employee
stock plans.
In the first six months of 2007, financing activities used cash of $113.2 million for net
payments on short-term borrowings, $38.5 million for dividend payments, and $4.2 million for
repurchases of common stock in connection with the satisfaction of employee withholding taxes on
vested restricted stock. These uses of cash were partly offset by $8.2 million provided from the
issuance of common stock under our employee stock plans and $.7 million of excess tax benefit
associated with the exercise of stock options. Our French discontinued operations used net cash
of $196.1 million for financing activities in the first six months of 2007.
Shelf Registration Statement. At May 31, 2008, $450.0 million of capacity remained available
under our universal shelf registration statement filed with the SEC on November 12, 2004.
Share Repurchase Program. At May 31, 2008, we were authorized to repurchase four million shares
of our common stock under a board-approved share repurchase program. We did not repurchase any
shares of our common stock under this program in the first six months of 2008.
We continually consider various options for the use of our cash, including internal capital
investments, investments to grow our business and additional debt reductions. Based on our
current capital position, we believe we have adequate resources and sufficient credit facilities
to satisfy our current and reasonably anticipated future requirements for funds to acquire
capital assets and land, 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 land acquisition and development activities will remain
limited in the near term, we are analyzing potential lot acquisitions in the market and will use
our present financial strength to acquire lots in good, long-term markets when the prices and
timing are compelling.
Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments
We conduct a portion of our land acquisition, development and other homebuilding activities
through participation in unconsolidated joint ventures in which we hold less than a controlling
interest. These unconsolidated joint ventures generally operate in certain markets where our
consolidated homebuilding operations are located. Through these unconsolidated joint ventures,
we seek to reduce and share market and development risks and also reduce the amount of capital
we invest in land inventory, while increasing the number of homesites we may own or control. In
some instances, participating in unconsolidated joint ventures enables us to acquire and develop
land that we might not otherwise obtain or have access to due to the projects size, financing
needs, duration of improvements or other conditions or circumstances. These unconsolidated
joint ventures are typically structured through entities in which ownership is shared with our
partners. Our partners in these unconsolidated joint ventures are usually unrelated
homebuilders, land developers and other real estate entities. While we view our participation
in unconsolidated joint ventures as beneficial to our homebuilding activities, we do not view
such participation as essential. We anticipate decreasing our investments in unconsolidated
joint ventures in 2008 and are reviewing each investment to ensure it fits into our overall
strategic plans and business objectives.
We and/or our unconsolidated joint venture partners typically obtain options or enter into other
arrangements to purchase portions of the land held by the unconsolidated joint ventures. The
prices for these land options are generally negotiated prices that approximate fair market
value. We do not include in our income from
unconsolidated joint ventures our pro rata share of unconsolidated joint venture earnings
resulting from land
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sales 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 ventures.
We and our unconsolidated joint venture partners make capital contributions to these
unconsolidated joint ventures, typically on a pro-rata basis. The obligation to make capital
contributions is governed by each unconsolidated joint ventures respective operating agreement.
Our equity investment in these unconsolidated joint ventures totaled $294.5 million at May 31,
2008 and $297.0 million at November 30, 2007. These unconsolidated joint ventures had total
assets of $2.39 billion at May 31, 2008 and $2.51 billion at November 30, 2007. At May 31, 2008,
our five largest unconsolidated joint ventures collectively represented approximately 78% of our
total investment in unconsolidated joint ventures.
Given the varied nature of our unconsolidated joint ventures projects and the market
environments in which they operate, each has distinct funding and liquidity needs. To finance
their respective land acquisition and development activities, many of our unconsolidated joint
ventures have obtained loans from third-party lenders that are secured by the underlying
property and related project assets. Unconsolidated joint ventures had outstanding debt,
substantially all of which was secured, of approximately $1.50 billion at May 31, 2008 and $1.54
billion at November 30, 2007.
In certain instances, we and the other partners in an unconsolidated joint venture provide
guarantees and indemnities to the unconsolidated joint ventures lenders that may include a pro
rata share of one or more of the following: (a) the physical completion of improvements for a
project and/or the obligation to contribute equity to the unconsolidated joint venture to enable
it to fund its completion obligations, which we refer to as a completion guaranty; (b) 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 project, or (ii) outstanding principal and interest and
certain other amounts owed to lenders upon the filing by the 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 the unconsolidated joint venture or its partners
collude or which the unconsolidated joint venture fails to contest, each of which we refer to as
a carve-out guaranty; and/or (c) the payment of funds to maintain the value of the
unconsolidated joint ventures secured collateral (generally land and improvements) at or above
a specific percentage of the outstanding loan balance, which we refer to as a loan-to-value
maintenance guaranty. In most cases, the extent of each of our and our partners maximum
potential exposure to an unconsolidated joint ventures obligations under these guarantees and
indemnities is limited to either a specified maximum amount or an amount equal to our respective
pro rata interests in the relevant unconsolidated joint venture. In a few cases, we have
provided a loan-to-value maintenance guaranty to an unconsolidated joint ventures lenders up to
a specified maximum amount and have entered into an agreement with our unconsolidated joint
venture partners to be reimbursed for any amounts we may pay pursuant to such guaranty above our
pro rata interest in the relevant unconsolidated joint venture. If our unconsolidated joint
venture partners do not have adequate resources to fulfill their reimbursement obligations, or
otherwise fail to do so, we may be responsible for more than our pro rata share, up to our
maximum exposure under the relevant loan-to-value maintenance guaranty. However, we will
vigorously pursue all rights and remedies available to us under the applicable agreements, at
law or in equity to enforce our reimbursement rights.
Our potential exposure under our completion guarantees is limited to the amount, if any, by
which an unconsolidated joint ventures outstanding borrowings exceed the value of its assets,
though in the aggregate we believe our actual exposure under these guarantees will be
substantially less than this amount. At this time, we have no reason to believe that our
carve-out guarantees will be triggered in any material amount. At May 31, 2008, our pro rata
share of loan-to-value maintenance guarantees to lenders of unconsolidated joint venture debt
totaled approximately $108.2 million. This amount represents our maximum exposure to loss from
such loan-to-value maintenance guarantees without regard to the underlying value of the
collateral and any defenses that may be available to us against any attempted enforcement of
such guarantees.
In addition to the above-described guarantees and indemnities, we have also provided a several
guaranty to the lenders of one of our unconsolidated joint ventures. By its terms, the guaranty
purports to guarantee the payment of principal and interest and certain other amounts owed to
the unconsolidated joint ventures lenders in the event an involuntary bankruptcy proceeding is
commenced 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 exposure under this guaranty fluctuates with the outstanding
balance of the
44
unconsolidated joint ventures debt and with our and our partners respective
land purchases from the unconsolidated joint venture. At May 31, 2008, this unconsolidated joint
venture had total outstanding indebtedness of approximately $327.9 million and, if this guaranty
was enforceable, our potential exposure under the guaranty was approximately $182.7 million.
This unconsolidated joint venture has received a series of notices from its lenders
administrative agent alleging a number of defaults under its loan agreement. We are currently
exploring resolutions of the matter with the lenders, the lenders administrative agent and our
partners in this unconsolidated joint venture, but there can be no assurance that we will reach
a satisfactory resolution with all of the parties involved.
Certain of our other unconsolidated joint ventures operating in difficult market conditions are
in default of their debt agreements with their lenders or are at risk of defaulting. We are
carefully managing our investments in these particular unconsolidated joint ventures and are
working with the relevant lenders and unconsolidated joint venture partners to reach
satisfactory resolutions. However, based on the terms and amounts of the debt involved for
these particular unconsolidated joint ventures and the terms of the applicable joint venture
operating agreements, we do not believe that our exposure related to any defaults by these
particular unconsolidated joint ventures is material to our consolidated financial position or
results of operations.
In the ordinary course of our business, we enter into land option contracts in order to procure
land for the construction of homes. The use of such option agreements 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 sheet. 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 FASB
Interpretation No. 46(R), certain of our land option contracts may create a variable interest
for us, with the land seller being identified as a VIE. As of May 31, 2008, excluding
consolidated VIEs, we had cash deposits totaling $26.3 million, which were associated with land
option contracts having an aggregate purchase price of $680.6 million.
We also evaluate land option contracts in accordance with SFAS No. 49 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 $101.0 million at May 31, 2008 and $221.1
million at November 30, 2007.
We are often required to obtain performance bonds and letters of credit in support of our
obligations to various municipalities and other government agencies in connection with
subdivision improvements such as roads, sewers and water. At May 31, 2008, we had approximately
$868.7 million of performance bonds and $210.1 million of letters of credit outstanding. In the
event any such performance bonds or letters of credit are called, we would be obligated to
reimburse the issuer of the performance bond or letter of credit. At this time, we do not
believe that a material amount of any currently outstanding performance bonds or letters of
credit will be called. The expiration dates of letters of credit coincide with the expected
completion dates of the related projects. If the obligations related to a project are ongoing,
annual extensions of the letters of credit are typically granted on a year-to-year basis.
Performance bonds do not have stated expiration dates. Rather, we are released from the
performance bonds as the contractual performance is completed.
We have, and require the majority of our subcontractors to have, general liability insurance
(including construction defect coverage) and workers compensation insurance. These insurance
policies protect us against a portion of our risk of loss from claims related to our
homebuilding activities, subject to certain self-insured retentions, deductibles and other
coverage limits. We self-insure a portion of our overall risk through the use of a captive
insurance subsidiary. We record expenses and liabilities based on the costs required to cover
our self-insured retention and deductible amounts under our insurance policies, and on the
estimated costs of potential claims and claim adjustment expenses above our coverage limits or
not covered by our policies. These estimated costs are based on an analysis of our historical
claims and include an estimate of construction defect claims incurred but not yet reported. We
engage a third-party actuary that uses our historical claim data to estimate our unpaid claims,
claim adjustment expenses and incurred but not reported claims reserves for the risks that we
are assuming under the self-insured portion of our general liability insurance. Projection of
losses related to these liabilities is subject to a high degree of variability due to
uncertainties such as trends in construction defect claims relative to our markets and the types
of product we build, claim settlement patterns, insurance industry practices and legal
interpretations, among others. Because of the high degree of judgment required in determining
these estimated liability amounts, actual future costs could differ significantly from our
currently estimated amounts.
45
Critical Accounting Policies
Except as set forth below, there have been no significant changes to our critical accounting
policies and estimates during the six months ended May 31, 2008 compared to 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 fiscal year ended November 30, 2007.
Inventory Impairments and Abandonments. Each parcel or community in our owned inventory is
assessed to determine if indicators of potential impairment exist. If indicators of potential
impairment exist for a parcel or community, the identified inventory is evaluated for
recoverability in accordance with SFAS No. 144. Impairment indicators are assessed separately
for each parcel or community on a quarterly basis and include, but are not limited to:
significant decreases in sales rates, average selling prices, home delivery volume or gross
margins; significant increases in budgeted land development and construction costs or
cancellation rates; or projected losses on expected future housing or land sales. When an
indicator of potential impairment is identified, we test 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 our
expectations related to: market supply and demand, including estimates concerning average
selling prices; sales incentives; sales and cancellation rates; and anticipated land
development, construction, and overhead costs to be incurred. These estimates are specific to
each community and may vary among communities.
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 conditions in the market in which the asset is located at the time an assessment
is made. These factors are specific to each community and may vary among communities.
Our optioned inventory is assessed to determine whether it continues to meet our internal
investment standards. 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, home delivery volume and gross margins; estimated land development and
construction costs; and projected profitability on expected future housing or land sales. When a
decision is made to not exercise a land option contract due to market conditions and/or changes
in market strategy, we write off the costs, including non-refundable deposits and
pre-acquisition costs, related to the abandoned project.
The value of the land and housing inventory we currently own or control depends on market
conditions, including estimates of future demand for, and the revenues that can be generated
from, such inventory. We have analyzed trends and other information related to each of the
markets where we do business and have incorporated this information as well as our current
outlook into the assumptions we use in our impairment analyses. Due to the judgment and
assumptions applied in the estimation process with respect to impairments and abandonments, it
is possible that actual results could differ from those estimated.
We believe the carrying value of our remaining inventory is currently recoverable. However, if
housing market conditions worsen in the future beyond our current expectations, or if future
changes in our marketing strategy significantly affect any key assumptions used in our fair
value calculations, we may need to take additional charges in future periods for abandonments or
inventory impairments, or both, related to existing assets in future periods. Any such non-cash
charges would have an adverse effect on our consolidated financial position and results of
operations.
Goodwill. We have recorded goodwill in connection with various acquisitions in prior years.
Goodwill represents the excess of the purchase price over the fair value of net assets acquired.
In accordance with SFAS No. 142, we test goodwill for potential impairment annually as of
November 30 and between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying amount. We evaluate
goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is
to identify potential impairment by comparing the fair value of a reporting unit to the book
value, including goodwill. If the fair value of a reporting unit exceeds the book value,
goodwill is not considered impaired. If the book value exceeds the fair value, the second step
of the process is performed to
46
measure the amount of impairment. In accordance with SFAS No. 142, we have determined that our
reporting units are the same as our reporting segments. We have four homebuilding reporting
units (West Coast, Southwest, Central and Southeast) and one financial services reporting unit.
The process of evaluating goodwill for impairment involves the determination of the fair value
of our reporting units. Inherent in such fair value determinations are certain judgments and
estimates relating to future cash flows, including our interpretation of current economic
indicators and market valuations, and assumptions about our strategic plans with regard to our
operations. To the extent additional information arises, market conditions change or our
strategies change, it is possible that our conclusion regarding whether existing goodwill is
impaired could change and result in a material effect on our consolidated financial position or
results of operations.
In performing our impairment analysis, we developed a range of fair values for our homebuilding
and financial services reporting units using a discounted cash flow methodology and a market
multiple methodology. For the financial services reporting unit, we also used a comparable
transaction methodology.
The discounted cash flow methodology establishes fair value by estimating the present value of
the projected future cash flows to be generated from the reporting unit. The discount rate
applied to the projected future cash flows to arrive at the present value is intended to reflect
all risks of ownership and the associated risks of realizing the stream of projected future cash
flows. The discounted cash flow methodology uses our projections of financial performance for a
five-year period. The most significant assumptions used in the discounted cash flow methodology
are the discount rate, the terminal value and expected future revenues, gross margins and
operating margins, which vary among reporting units.
The market multiple methodology establishes fair value by comparing us to other publicly traded
companies that are similar to us from an operational and economic standpoint. The market
multiple methodology compares us to the comparable companies on the basis of risk
characteristics in order to determine our risk profile relative to the comparable companies as a
group. This analysis generally focuses on quantitative considerations, which include financial
performance and other quantifiable data and qualitative considerations, which include any
factors which are expected to impact future financial performance. The most significant
assumptions affecting the market multiple methodology are the market multiples and control
premium. The market multiples we use are: a) price to net book value and b) enterprise value to
revenue (for each of the homebuilding reporting units). A control premium represents the value
an investor would pay above minority interest transaction prices in order to obtain a
controlling interest in the respective company. The comparable transaction methodology
establishes fair value similar to the market multiple methodology, utilizing recent transactions
within the industry as the market multiple. However, no control premium is applied when using
the comparable transaction methodology because these transactions represent control
transactions.
Based on the results of our impairment evaluation performed as of April 30, 2008, we recorded an
impairment charge of $24.6 million in the quarter ended May 31, 2008 related to our Central
reporting segment, where all of the goodwill previously recorded was determined to be impaired.
The charge was recorded at our corporate level because all goodwill is carried at that level.
Our goodwill balance of $43.4 million at May 31, 2008 related entirely to our Southeast
reporting segment. If housing market conditions deteriorate further or if our marketing strategy
in the Southeast reporting unit changes, it is possible that goodwill in this reporting unit may
become impaired in future periods.
Income Taxes. We account for income taxes in accordance with SFAS No. 109. The provision for, or
benefit from, income taxes is calculated using the asset and liability method, under which
deferred tax assets and liabilities are recorded based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Deferred tax assets are evaluated on a
quarterly basis to determine whether a valuation allowance is required. In accordance with SFAS
No. 109, we assess whether a valuation allowance should be established based on our
determination of whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets depends primarily
on the generation of future taxable income during the periods in which those temporary
differences become deductible. Judgment is required in determining the future tax consequences
of events that have been recognized in our consolidated financial statements and/or tax returns.
Differences between anticipated and actual outcomes of these future tax consequences could have
a material impact on our consolidated financial position or results of operations.
47
As discussed in Note 13. Income Taxes, in the Notes to Consolidated Financial Statements in this
quarterly report, we implemented the provisions of FASB Interpretation No. 48 effective December
1, 2007. The cumulative effect of the adoption of FASB Interpretation No. 48 was recorded in the
first half of 2008 as a $2.5 million reduction to beginning retained earnings. In accordance
with the provisions of FASB Interpretation No. 48, we recognized, in our consolidated financial
statements, the impact of a tax position if a tax returns position or future tax position is
more likely than not to prevail (defined as a likelihood of more than 50% of being sustained
upon audit, based on the technical merits of the tax position).
We recognize accrued interest and penalties related to unrecognized tax benefits in the
consolidated financial statements as a component of the income tax provision consistent with our
historical accounting policy. Our liability for unrecognized tax benefits, combined with accrued
interest and penalties, is reflected as a component of accrued expenses and other liabilities in
our consolidated balance sheet.
Prior to the adoption of FASB Interpretation No. 48, we applied Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies, (SFAS No. 5), to assess and
provide for potential income tax exposures. In accordance with SFAS No. 5, we maintained
reserves for tax contingencies based on reasonable estimates of the tax liabilities, interest,
and penalties (if any) that may result from such audits. FASB Interpretation No. 48
substantially changes the applicable accounting model and is likely to cause greater volatility
in the consolidated statements of operations and effective tax rates as more items are
recognized and/or derecognized discretely within income tax expense.
Outlook
At May 31, 2008, our backlog of new home orders totaled 6,233 homes, representing projected
future housing revenues of approximately $1.47 billion. These backlog measures declined 54% and
61%, respectively, from 13,672 homes, representing approximately $3.74 billion in projected
future housing revenues, at May 31, 2007. Our substantially lower backlog of homes at the end of
the 2008 second quarter reflected the combined impact over the past several quarters of negative
year-over-year net order results, lower average selling prices and our strategic efforts to
reduce inventory and active community counts to align with lower levels of demand. Our active
community count in the second quarter of 2008 was down 37% from the year-earlier quarter as a
result of our actions to reduce our operations in certain markets as backlog is delivered and to
completely exit other markets that no longer fit our current marketing strategy.
Our lower year-over-year active community count also reduced our operating results in the second
quarter of 2008 compared to the year-earlier quarter. Our homebuilding operations generated
4,200 net orders in the second quarter of 2008, down 42% from the 7,265 net orders generated in
the corresponding quarter of 2007 and our year-over-year homes delivered and revenues were also
lower. Nonetheless, our second quarter 2008 net orders were nearly triple the 1,449 net orders
posted in the first quarter of 2008, partly due to our improved cancellation rate. Our second
quarter 2008 cancellation rate based on gross orders of 27% improved from 53% in the first
quarter of 2008, 58% in the fourth quarter of 2007 and 34% in the second quarter of 2007.
We currently believe that market conditions will continue to be challenging for the remainder of
2008 with foreclosure activity continuing to rise, consumer mortgage lending and other credit
markets continuing to be unsettled and consumer confidence continuing to decline. Although
substantially reduced home prices and relatively low consumer mortgage interest rates have
improved housing affordability, many potential homebuyers are reluctant to purchase homes for
several reasons including: an inability to obtain adequate financing; an inability to sell their
existing home at a perceived fair price or at a price that covers their existing mortgage;
anxiety about current economic conditions or employment prospects; or expectations that home
prices will fall further. This demand-side dynamic in conjunction with rising foreclosures is
sustaining the oversupply of unsold new and existing homes and competitive pricing pressures
that have generated the extremely challenging conditions our industry has experienced since the
second half of 2006.
For the past two years, we have made financial strength and operational repositioning the
centerpiece of our strategic response to the declining markets and reduced levels of demand. We
have built and conserved our cash, reduced our inventory and active community counts, and
consolidated operations in some markets, while selectively exiting others. Our central priority
as we move ahead is to restore the profitability of our homebuilding operations. In the near
term, our focus on profitability means selling homes at the right price, with the right product
and the right marketing strategy for each individual market in which we operate. It also
48
means continuing our efforts to reduce costs and operate more efficiently in accordance with the
built-to-order principles of our KBnxt operational business model while preparing for a future
housing market recovery.
We have reduced our inventory levels and active community count substantially over the past
several quarters in order to establish what we believe is a solid platform for growth in the
future. However, we will continue to assess and re-assess our geographic footprint, seeking
optimal volume levels at which to operate, and adjust our community counts to maximize financial
performance. We expect to continue to operate with fewer active communities until we see
reasonable signs of a housing market recovery to support additional investments in new
properties or projects. As a result, we expect our delivery volume and related revenues to
remain below year-earlier levels for the remainder of 2008 and, if market conditions decline
further, we may need to take additional charges for inventory impairments in future quarters. In
addition, our second-half of 2008 and possibly our 2009 results could be adversely affected if
general economic conditions deteriorate, if job losses accelerate, if consumer mortgage lending
becomes less available or more expensive, or if consumer confidence continues to fall, any or
all of which would further diminish the prospects for a recovery in housing markets.
Based in large part on the aggressive actions we have taken in 2007 and the first half of 2008,
we believe we are well-positioned financially and strategically to navigate the current housing
market downturn and to capitalize on potential future opportunities for growth. We ended the
second quarter of 2008 with a substantial cash balance of $1.31 billion and no borrowings
outstanding under our Credit Facility. We believe our cash position and reduced leverage enhance
our ability to capitalize on potential opportunities to strategically reload our land and lot
pipeline for higher margin deliveries in future periods in markets and under circumstances that
meet our marketing plans and internal investment standards.
Meanwhile, we believe that a meaningful improvement in housing market conditions will require a
sustained decrease in inventory levels, price stabilization, reduced foreclosure rates, and the
restoration of consumer confidence that will support a decision to buy a home. While it is
difficult to predict when these events will occur, we believe we have responded with the right
strategy to the dramatic reversal in the housing markets in the last few years and that we are
well-positioned to navigate the future. The long-term fundamentals of our business remain
strong, especially for builders like us that focus on first-time homebuyers. We remain focused
on operating our business prudently, in line with volume levels that market conditions support.
We also intend to pursue our goal of restoring profitability, while maintaining our strong
financial position. Longer term, we believe favorable demographics and continuing population
growth in our markets will drive demand for new homes, and that our operating approach and
financial resources will allow us to capitalize on a housing market recovery when it comes.
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 which 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, selling prices, expenses, expense ratios, margins,
liquidity, 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 and business
conditions; adverse market conditions that could result
49
in
additional inventory impairments, abandonment charges or goodwill impairments, including an oversupply of
unsold homes and declining home prices, among other things; material prices and availability;
labor costs and availability; changes in interest rates; our debt level; declines in consumer
confidence; increases in competition; weather conditions, significant natural disasters and
other environmental factors; government regulations; the availability and cost of land in
desirable areas; government investigations and shareholder lawsuits regarding our past stock
option grant practices and the restatement of certain of our financial statements; other legal
or regulatory proceedings or claims; conditions in the capital, credit (including consumer
mortgage lending standards, the availability of consumer mortgage financing and mortgage
foreclosure rates) and homebuilding markets; the ability and/or willingness of participants in
our unconsolidated joint ventures to fulfill their obligations; our ability to access our
available capacity under our Credit Facility; 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.
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 and senior
subordinated notes. For fixed-rate debt, changes in interest rates generally affect the fair
market 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 sets forth principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair market value of our long-term debt obligations as of May 31,
2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
Fiscal Year of Expected Maturity |
|
Fixed Rate Debt (a) |
|
|
Interest Rate |
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
|
|
|
|
|
% |
2009 |
|
|
200,000 |
|
|
|
8.6 |
|
2010 |
|
|
298,646 |
|
|
|
7.8 |
|
2011 |
|
|
348,726 |
|
|
|
6.4 |
|
2012 |
|
|
|
|
|
|
|
|
Thereafter |
|
|
1,296,043 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,143,415 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at May 31, 2008 |
|
$ |
1,983,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes senior and senior subordinated notes. The fixed-rate debt expected to mature
in our 2009 fiscal year is scheduled to mature on December 15, 2008. The fixed-rate debt
with a fiscal year of expected maturity of 2010 has been called for redemption by us. The
redemption date is July 14, 2008 and the redemption price is 101.938% of the principal
amount plus all accrued interest to the date of redemption. |
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 fiscal year
ended November 30, 2007.
Item 4. Controls and Procedures
We have established disclosure controls and procedures to ensure the 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 Chief Financial 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
50
this evaluation, our Principal Executive Officer and
our Principal Financial Officer concluded that our disclosure controls and procedures were
effective as of May 31, 2008.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Derivative Litigation
On July 10, 2006, a shareholder derivative action, Wildt v. Karatz, et al., was filed in Los
Angeles Superior Court. On August 8, 2006, a virtually identical shareholder derivative lawsuit,
Davidson v. Karatz, et al., was also filed in Los Angeles Superior Court. These actions, which
ostensibly are brought on our behalf, allege, among other things, that defendants (various of
our current and former directors and officers) breached their fiduciary duties to us by, among
other things, backdating grants of stock options to various current and former executives in
violation of our shareholder-approved stock option plans, and seek unspecified money damages and
injunctive and other equitable relief. Defendants have not yet responded to the complaints. On
January 22, 2007, the court entered an order, pursuant to an agreement among the parties and us,
providing, among other things, that, to preserve the status quo without prejudicing any partys
substantive rights, our former Chairman and Chief Executive Officer shall not exercise any of
his outstanding options, at any price, during the period in which the order is in effect.
Pursuant to further stipulated orders, these terms remain in effect and are now scheduled to
expire on September 3, 2008, unless otherwise agreed in writing. The plaintiffs have agreed to
stay their cases while the parallel federal court derivative lawsuits discussed below are
pursued. A stipulation and order effectuating the parties agreement to stay the state court
actions was entered by the court on February 7, 2007. The parties may extend the agreement that
options will not be exercised by our former Chairman and Chief Executive Officer beyond the
current September 3, 2008 expiration date.
On August 16, 2006, a shareholder derivative lawsuit, Redfield v. Karatz, et al., was filed in
the United States District Court for the Central District of California. On August 31, 2006, a
virtually identical shareholder derivative lawsuit, Staehr v. Karatz, et al., was also filed in
the United States District Court for the Central District of California. These actions, which
ostensibly are brought on our behalf, allege, among other things, that defendants (various of
our current and former directors and officers) breached their fiduciary duties to us by, among
other things, backdating grants of stock options to various current and former executives in
violation of our shareholder-approved stock option plans and seek unspecified money damages and
injunctive and other equitable relief. Unlike Wildt and Davidson, however, these lawsuits also
include substantive claims under the federal securities laws. On January 9, 2007, plaintiffs
filed a consolidated complaint. All defendants filed motions to dismiss the complaint on April
2, 2007. Subsequently, plaintiffs filed a motion for partial summary judgment against certain of
the defendants. Pursuant to stipulated orders, the motions to dismiss and the motion for partial
summary judgment remained suspended for several months while the parties engaged in settlement
discussions. Although settlement discussions are ongoing, activity in the litigation has
recently recommenced. On May 14, 2008, the Court ordered that the partial summary judgment
motion shall be taken off calendar, subject to being reset at a future time, following
resolution of the pending motions to dismiss. Defendants various motions to dismiss are
scheduled to be argued at a hearing on August 18, 2008. Discovery has not commenced.
Government Investigations
In August 2006, we announced that we had received an informal inquiry from the SEC relating to
our stock option grant practices. In January 2007, we were informed of the SECs decision to
conduct a formal investigation of this matter. The DOJ is also looking into these practices but
has informed KB Home that it is not a target of this investigation. We have cooperated with
these government agencies and intend to continue to do so.
ERISA Litigation
On March 16, 2007, plaintiffs Reba Bagley and Scott Silver filed an action brought under Section
502 of the 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, and certain of our current and former officers. After the Court allowed leave to file
an amended complaint, on April 3, 2008, plaintiffs filed an amended complaint adding Tolan Beck
and Rod Hughes as additional plaintiffs and dismissing certain
51
individuals as defendants. All
four plaintiffs claim to be former employees of KB Home who participated in the 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 Plan about our alleged prior stock
option backdating practices and by failing to remove our stock as an investment option under the
Plan. Plaintiffs allege that this breach of fiduciary duties caused plaintiffs to earn less on
their Plan accounts than they would have earned but for defendants alleged breach of duties.
Plaintiffs seek unspecified money damages and injunctive and other equitable relief. On May 16,
2008, we filed a motion to dismiss on the ground that plaintiffs allegations fail to state a
claim against us. Plaintiffs filed an opposition to the motion on June 20, 2008. We filed our
reply in support of the motion on July 7, 2008, and the hearing on the motion is scheduled for
August 4, 2008. Because of the pendency of our motion to dismiss (and a separate motion to
dismiss filed by the individual defendants), no discovery has been taken in the lawsuit.
Storm Water Matter
In January 2003, we received a request for information from the EPA pursuant to Section 308 of
the Clean Water Act. Several other public homebuilders received similar requests. The request
sought information about storm water pollution control program implementation at certain of our
construction sites, and we provided information pursuant to the request. In May 2004, on behalf
of the EPA, the DOJ asserted that certain regulatory requirements applicable to storm water
discharges had been violated on certain occasions at certain of our construction sites, and
unspecified civil penalties and injunctive relief might be warranted. We explored with the EPA,
DOJ and other homebuilders methods of resolving the matter. In May 2008, we signed a consent
decree with the EPA, DOJ and various states affecting our storm water pollution practices at our
construction sites. Other homebuilders also signed similar consent decrees. In June 2008, the
DOJ filed suit in the United States District Court for the Eastern District of Virginia (Civil
Action No. 1:08CV603) and simultaneously submitted our consent decree for approval by the court,
which, if entered, will resolve the issues in the suit. The DOJ also published a notice of
lodging of our consent decree in the Federal Register (73 Fed. Reg. 35,711), which triggered the
opening of a 30-day public comment period. After the public comment period, the DOJ will ask
the court to sign and enter our consent decree as final. The court may require a hearing before
signing and entering the consent decree. We anticipate that our consent decree will become
final during the third fiscal quarter. Under the consent decree, we have agreed to pay a civil
penalty of $1.2 million and undertake certain storm management practices, among other items.
Other Matters
We are also involved in litigation and governmental proceedings incidental to our business.
These cases are in various procedural stages and, based on reports of counsel, we believe that
provisions or reserves made for potential losses are adequate and any liabilities or costs
arising out of currently pending litigation should not have a materially adverse effect on our
consolidated financial position or results of operations.
Item 1A. Risk Factors
There have been no material changes from our risk factors as previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended November 30, 2007 and our Quarterly Report on Form
10-Q for the quarter ended February 29, 2008.
Item 4. Submission of Matters to a Vote of Security Holders
Our 2008 Annual Meeting of Stockholders was held on April 3, 2008. The results of the matters
voted on at the Annual Meeting were reported in our Quarterly Report on Form 10-Q for the
quarter ended February 29, 2008, filed on April 9, 2008, and are incorporated herein by this
reference.
52
Item 6. Exhibits
Exhibits
31.1 |
|
Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
|
Certification of Domenico Cecere, Executive Vice President and Chief Financial Officer
of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 |
|
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. |
32.2 |
|
Certification of Domenico Cecere, Executive Vice President and Chief Financial 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. |
53
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.
|
|
|
|
|
|
KB HOME
Registrant
|
|
Dated July 10, 2008 |
/s/ JEFFREY T. MEZGER
|
|
|
Jeffrey T. Mezger |
|
|
President and Chief Executive
Officer
(Principal Executive Officer) |
|
|
|
|
|
Dated July 10, 2008 |
/s/ DOMENICO CECERE
|
|
|
Domenico Cecere |
|
|
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer) |
|
54
INDEX OF EXHIBITS
31.1 |
|
Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
|
Certification of Domenico Cecere, Executive Vice President and Chief Financial Officer
of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 |
|
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. |
32.2 |
|
Certification of Domenico Cecere, Executive Vice President and Chief Financial 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. |
55