UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Commission File No. 001-9195
KB HOME
10990 Wilshire BoulevardLos 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.
Yesþ No o
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).
Yesþ Noo
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT’S CLASSES OF COMMON STOCK AS OF MAY 31, 2005.
Common stock, par value $1.00 per share, 95,945,820 shares outstanding, including 14,152,930 shares held by the Registrant’s Grantor Stock Ownership Trust and excluding 17,015,587 shares held in treasury.
KB HOMEFORM 10-QINDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
See accompanying notes.
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KB HOMENOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
Comprehensive Income
The following table presents the components of comprehensive income (in thousands):
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In the normal course of its business, the Company issues certain representations, warranties and guarantees related to its home sales, land sales, commercial construction and mortgage loan originations that may be affected by FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
OVERVIEW
Total revenues for the three months ended May 31, 2005 increased $559.9 million, or 35.7%, to $2.13 billion from $1.57 billion for the three months ended May 31, 2004. For the six months ended May 31, 2005, total revenues increased $842.7 million, or 28.8%, to $3.77 billion from $2.92 billion for the year-earlier period. The increases in total revenues for the three-month and six-month periods of 2005 compared to the corresponding periods of 2004 resulted primarily from higher housing revenues. Net income for the second quarter of 2005 increased 77.8% to $181.5 million, or $2.06 per diluted share, from $102.1 million, or $1.20 per diluted share, for the second quarter of 2004. Net income for the six months ended May 31, 2005 rose 72.6% to $304.3 million, or $3.47 per diluted share, compared to $176.3 million, or $2.08 per diluted share, for the six months ended May 31, 2004. The increases in net income in the second quarter and first half of 2005 compared to the corresponding periods of 2004 were principally driven by higher revenues and improved operating income margins, partly offset by a slight increase in the Company’s effective tax rate.
CONSTRUCTION
Construction revenues increased by $562.2 million, or 36.1%, to $2.12 billion in the second quarter of 2005 from $1.56 billion in the second quarter of 2004 mainly due to an increase in housing revenues. The Company’s construction revenues are generated from operations in the United States and France. The Company’s domestic operating divisions are grouped into four regions: “West Coast” – California; “Southwest” – Arizona, Nevada and New Mexico; “Central” – Colorado, Illinois, Indiana and Texas; and “Southeast” – Florida, Georgia, North Carolina and South Carolina.
Housing revenues for the quarter ended May 31, 2005 increased by 36.9%, or $570.5 million, to $2.11 billion from $1.54 billion in the year-earlier period as a result of a 19.8% increase in unit deliveries and a 14.3% increase in the Company’s average selling price. Housing revenues increased substantially in all of the Company’s geographic regions. In the United States, housing revenues rose 40.3% to $1.84 billion on 7,232 unit deliveries in the three months ended May 31, 2005 from $1.31 billion on 6,014 units in the corresponding period of 2004. Housing revenues from the West Coast region for the second quarter of 2005 totaled $637.8 million, up 32.6% from $481.0 million in the year-earlier period. Unit deliveries in the West Coast region in the second quarter of 2005 increased 17.7% to 1,417 from 1,204 in the second quarter of 2004. Housing revenues from the Southwest region rose 45.5% to $525.4 million in the three months ended May 31, 2005 from $361.2 million in the same period a year ago. Unit deliveries in the Southwest region increased 13.0% to 2,033 in the second quarter of 2005 from 1,799 in the second quarter of 2004. In the Central region, second quarter housing revenues increased 20.6% to $335.0 million in 2005 from $277.8 million in 2004, as deliveries rose 12.4% to 2,117 units from 1,884 units in the prior year’s quarter. In the Southeast region, housing revenues rose 78.4% to $342.5 million in the second quarter of 2005 from $192.0 million in the same quarter of 2004. Unit deliveries in the region increased 47.7% to 1,665 units in the second quarter of 2005 from 1,127 units in the year-earlier quarter. Revenues from French housing operations for the three months ended May 31, 2005 rose 18.0% to $274.1 million on 1,303 unit deliveries compared to $232.3 million on 1,110 unit deliveries in the year-earlier period.
During the second quarter of 2005, the Company’s overall average selling price increased 14.3% to $247,800 from $216,800 in the same quarter a year ago. The Company’s domestic average selling price rose 16.6% to $254,500 in the second quarter of 2005 from $218,200 in the same period of 2004. For the three months ended May 31, 2005, the average selling price in the Company’s West Coast region increased 12.7% to $450,100 from $399,500 for the same period a year ago. The average selling price in the Southwest region rose 28.7% to $258,400 in the second quarter of 2005 from $200,800 for the same period of 2004. In both the West Coast and Southwest regions, high demand for housing combined with constrained housing supply continued to support higher prices. In the Central region, the average selling price in the second quarter of 2005 increased 7.4% to $158,300 from $147,400 in the year-earlier period. In the Southeast region, the average selling price increased 20.7% to $205,700 in the second quarter of 2005 from $170,400 in the same quarter of 2004. In France, the average selling price for the three months ended May 31, 2005 increased slightly to $210,400 from $209,300 in the year-earlier quarter, primarily due to favorable foreign exchange rates.
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The Company’s commercial business in France generated revenues of $.6 million in the second quarter of 2005 and $6.1 million in the second quarter of 2004. Revenues from Company-wide land sales totaled $4.9 million in the second quarter of 2005 compared to $7.7 million in the second quarter of 2004. Generally, land sale revenues fluctuate with management decisions to maintain or decrease the Company’s land ownership position in a particular market or markets based upon the volume of its holdings, the strength and number of competing developers entering the particular market at given points in time, the availability of land in the particular market served by the Company and prevailing market conditions.
For the first six months of 2005, construction revenues increased by $848.8 million, or 29.3%, to $3.75 billion from $2.90 billion for the same period a year ago as a result of higher housing revenues. Housing revenues totaled $3.73 billion on 15,382 units in the first half of 2005 compared to $2.88 billion on 13,320 units for the same period a year ago. Housing operations in the United States produced revenues of $3.23 billion on 13,086 units in the first six months of 2005 and $2.46 billion on 11,350 units in the comparable period of 2004. During the first half of 2005, housing revenues from the West Coast region increased 23.9% to $1.13 billion from $911.6 million in the first half of 2004, on an 8.7% increase in unit deliveries during the period to 2,512 from 2,310 in the corresponding period of 2004. Housing revenues from the Southwest region increased 31.0% to $892.2 million in the first half of 2005 from $681.3 million in the comparable period of 2004, as unit deliveries in the region increased 4.4% to 3,605 from 3,453. Housing revenues from the Central region increased 17.9% to $618.7 million in the first six months of 2005 from $524.8 million in the same period of 2004, with unit deliveries in the region increasing 12.6% to 3,990 from 3,542. In the Southeast region, housing revenues increased 73.4% to $594.0 million in the first half of 2005 from $342.5 million in the same period a year ago, as unit deliveries rose 45.7% to 2,979 from 2,045. French housing revenues totaled $498.2 million on 2,296 unit deliveries in the first half of 2005 compared to $415.9 million on 1,970 unit deliveries in the corresponding period of 2004.
The Company-wide average new home price increased 12.4% to $242,700 in the first half of 2005 from $215,900 in the year-earlier period. For the first half of 2005, the average selling price in the West Coast region rose 13.9% to $449,700 from $394,700 for the first half of 2004 and the average selling price in the Southwest region increased 25.4% to $247,500 from $197,300, as continued constraints in the supply of housing in both regions drove prices up. The average selling price in the Central region increased 4.7% in the first six months of 2005 to $155,100 from $148,200 in the same period of 2004. In the Southeast region, the average selling price rose 19.0% to $199,400 in the first half of 2005 from $167,500 in the first half of 2004. In France, the average selling price for the six-month period increased 2.8% to $217,000 in 2005 compared to $211,100 in 2004, primarily due to favorable foreign exchange rates in the first quarter of 2005.
The Company’s commercial activities in France generated revenues of $2.8 million in the first six months of 2005 compared with revenues of $9.1 million in the first six months of 2004 due to a decrease in commercial activity. Company-wide revenues from land sales totaled $13.1 million in the first half of 2005 compared to $14.6 million in the first half of 2004.
Operating income increased by $128.0 million, or 76.7%, to $294.8 million in the second quarter of 2005 from $166.8 million in the second quarter of 2004. As a percentage of construction revenues, operating income increased 3.2 percentage points to 13.9% in the three months ended May 31, 2005 compared to 10.7% in the same period a year ago, due to an increase in the housing gross margin. Gross profits increased by $200.2 million, or 54.4%, to $568.0 million in the second quarter of 2005 from $367.8 million in the year-earlier quarter. Gross profits as a percentage of construction revenues rose 3.2 percentage points to 26.8% in the second quarter of 2005 from 23.6% in the same quarter of 2004 primarily due to an increase in the housing gross margin. During the same period, housing gross profits increased by $199.3 million to $566.2 million from $366.9 million. Housing gross margin increased 3.0 percentage points to 26.8% in the second quarter of 2005 from 23.8% in the year-earlier quarter as the combination of enhanced operating efficiencies and higher average selling prices exceeded the impact of higher material costs. Commercial activities in France generated profits of $1.1 million during the three months ended May 31, 2005, compared with $1.0 million generated during the three months ended May 31, 2004. Land sales generated $.7 million during the second quarter of 2005 compared to essentially break-even results during the second quarter of 2004.
Selling, general and administrative expenses totaled $273.3 million in the three-month period ended May 31, 2005 compared to $201.0 million in the three months ended May 31, 2004. As a percentage of housing revenues, selling, general and administrative expenses improved to 12.9% in the second quarter of 2005 from 13.0% in the same period a year ago.
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For the first six months of 2005, operating income increased 71.3%, or $204.1 million, to $490.4 million from $286.3 million in the corresponding period of 2004. As a percentage of construction revenues, operating income increased 3.2 percentage points to 13.1% in the first half of 2005 from 9.9% in the first half of 2004 due to a higher housing gross margin. Housing gross profits increased by $314.0 million, or 47.3%, to $978.1 million in the first half of 2005 from $664.1 million in the first half of 2004, with the housing gross margin increasing to 26.2% from 23.1%. This 3.1 percentage point increase in the Company’s housing gross margin for the six months ended May 31, 2005 reflected enhanced operating efficiencies and higher average selling prices. Commercial activities in France produced profits of $1.5 million in the first half of 2005, compared with $1.9 million in the first half of 2004. Company-wide land sales generated profits of $4.6 million and $.6 million in the first six months of 2005 and 2004, respectively.
Selling, general and administrative expenses increased to $493.8 million for the first half of 2005 from $380.3 million for the same period of 2004. As a percentage of housing revenues, selling, general and administrative expenses remained flat at 13.2% in the first six months of 2005 and 2004.
Interest income totaled $.8 million in the second quarter of 2005 and $1.0 million in the second quarter of 2004. For the first six months, interest income totaled $1.8 million in 2005 and $2.2 million in 2004. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and mortgages receivable as well as fluctuations in interest rates.
Interest expense (net of amounts capitalized) decreased by $2.3 million to $4.0 million in the second quarter of 2005 from $6.3 million in the second quarter of 2004. For the six months ended May 31, 2005, interest expense decreased by $4.4 million to $6.4 million from $10.8 million in the corresponding period of 2004. Gross interest incurred in the three months and six months ended May 31, 2005 was higher than that incurred in the corresponding year-ago periods by $10.5 million and $21.1 million, respectively, due to higher debt levels in 2005. Offsetting the interest incurred was an increase in the percentage of interest capitalized, which rose to 90.9% in the second quarter of 2005 from 81.3% in the same period of 2004. For the six months ended May 31, 2005, this percentage increased to 92.5% from 83.2% for the six months ended May 31, 2004. The higher percentage of interest capitalized during the three months and six months ended May 31, 2005 resulted from a greater proportion of land under development compared to the three months and six months ended May 31, 2004.
Minority interests totaled $19.1 million in the second quarter of 2005 and $13.9 million in the second quarter of 2004. For the first half of 2005, minority interests totaled $33.4 million compared with $22.6 million in the first half of 2004. Minority interests for the three months and six months ended May 31, 2005 and 2004 were comprised of the minority ownership portion of income from consolidated subsidiaries and joint ventures related to residential and commercial activities. The increases in minority interests in the three-month and six-month periods ended May 31, 2005 primarily related to increased activity from a consolidated joint venture in California as well as higher earnings from KBSA.
On February 7, 2005, the Company transferred 481,352 shares of KBSA stock, held by the Company, to KBSA to fulfill certain equity compensation obligations of KBSA to certain KBSA employees. Since the transfer of shares, as of February 7, 2005, the Company has maintained a 49% equity interest in KBSA and has 68% of the voting rights associated with KBSA stock. KBSA continues to be consolidated in the Company’s financial statements.
Equity in pretax income of unconsolidated joint ventures totaled $2.2 million in the second quarter of 2005 and $2.4 million in the second quarter of 2004. The Company’s joint ventures generated combined revenues of $33.7 million during the three months ended May 31, 2005 compared with $55.2 million in the corresponding period of 2004. For the first half of 2005, the Company’s equity in pretax income of unconsolidated joint ventures totaled $7.8 million compared to $3.7 million for the same period of 2004. Combined revenues from these joint ventures totaled $92.7 million in the first half of 2005 and $85.7 million in the first half of 2004. All of the joint venture revenues in the 2005 and 2004 periods were generated from residential properties. The increased results from joint ventures in the first six months of 2005 primarily reflected additional joint venture activity in California and France.
MORTGAGE BANKING
Interest income and interest expense totaled $2.5 million and $1.4 million, respectively, in the second quarter of 2005. Interest income for the quarter ended May 31, 2005 increased by $.1 million from the year-earlier quarter, and interest expense for the quarter ended May 31, 2005 increased by $.5 million from the same period of 2004. For
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the first six months of 2005, interest income from mortgage banking activities increased slightly to $5.1 million and related interest expense increased by $1.1 million to $3.1 million from the same period of 2004. Interest income for the three-month and six-month periods ended May 31, 2005 increased slightly primarily due to higher interest rates on first mortgages held under commitments of sale in 2005 offset by a decrease in the mortgage banking subsidiary’s retention rate. The term “retention rate” refers to the percentage of the Company’s domestic homebuyers using its mortgage banking subsidiary as a loan originator. Interest expense increased in the three-month and six-month periods of 2005 mainly due to higher interest rates on notes payable during the periods as compared to the year-earlier periods.
The following table presents mortgage loan origination and sales data, including loans brokered to wholesale mortgage bankers, for the Company’s mortgage banking operations (dollars in thousands):
Other mortgage banking revenues, which principally consist of gains on sales of mortgages and servicing rights and, to a lesser extent, mortgage loan origination fees and mortgage servicing income, decreased to $7.5 million in the second quarter of 2005 from $9.9 million in the second quarter of 2004. For the six months ended May 31, 2005, other mortgage banking revenues decreased to $12.6 million in 2005 from $18.8 million in the same period of 2004. The decreases in the three-month and six-month periods of 2005 compared to the corresponding periods of 2004 were primarily due to a shift towards adjustable rate products from fixed rate products and a lower retention rate.
The mortgage banking subsidiary’s retention rate decreased to 53% in the second quarter of 2005 from 63% in the corresponding quarter of 2004 due to increased competition in the mortgage banking marketplace and consumer demand for more diverse loan products.
General and administrative expenses associated with mortgage banking activities totaled $8.2 million in the second quarter of 2005 and $8.9 million for the corresponding period of 2004. For the six months ended May 31, these expenses totaled $13.5 million in 2005 and $17.4 million in 2004. General and administrative expenses for the three-month and six-month periods ended May 31, 2005 included a $3.2 million charge related to the settlement of a matter with HUD. Despite this charge, general and administrative expenses decreased in both periods of 2005 mainly as a result of efforts to reduce and align costs with the mortgage banking subsidiary’s lower loan origination volume.
INCOME TAXES
Income tax expense totaled $93.5 million in the second quarter of 2005 and $50.4 million in the second quarter of 2004. For the first six months of 2005, income tax expense totaled $156.8 million compared to $86.9 million in the corresponding period of 2004. These income tax expense amounts represented effective income tax rates of approximately 34% in 2005 and 33% in 2004. During 2004, the American Jobs Creation Act was signed into law. The Company is evaluating the potential impact of this law on the years ending November 30, 2005 and 2006, but at the present time, does not expect that it will have a material impact on the Company’s financial position or result of operations.
Liquidity and Capital Resources
The Company assesses its liquidity in terms of its ability to generate cash to fund its operating and investing activities. Historically, the Company has funded its construction and mortgage banking activities with internally
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generated cash flows and external sources of debt and equity financing. During the six-month period ended May 31, 2005, operating, investing and financing activities used net cash of $128.1 million compared to $44.2 million used inthe six-month period ended May 31, 2004.
Operating activities used $320.8 million of cash during the first six months of 2005 and $285.3 million during the corresponding period of 2004. The Company’s uses of operating cash in the first half of 2005 included net investments in inventories of $795.1 million (excluding $113.9 million of inventories acquired through seller financing and $42.5 million of inventory of consolidated VIEs) and other operating uses of $37.5 million. The uses of cash in the first six months of 2005 were partially offset by six months’ earnings of $304.3 million, a decrease in receivables of $130.5 million, an increase in accounts payable, accrued expenses and other liabilities of $38.4 million and various noncash items deducted from net income.
In the first six months of 2004, uses of operating cash included net investments in inventories of $525.3 million (excluding the effect of the Palmetto and Groupe Avantis acquisitions, $38.4 million of inventories acquired through seller financing and $19.4 million of inventory of consolidated VIEs), a decrease in accounts payable, accrued expenses and other liabilities of $13.3 million and other operating uses of $13.2 million. Partially offsetting these uses of cash in the first six months of 2004 were six months’ earnings of $176.3 million, a decrease in receivables of $46.1 million, and various noncash items deducted from net income.
Investing activities used $39.6 million of cash in the first half of 2005 compared to $113.9 million in the year-earlier period. In the first six months of 2005, $28.5 million was used for investments in unconsolidated joint ventures and $11.5 million was used for net purchases of property and equipment. The cash used was partially offset by proceeds of $.2 million received from mortgage-backed securities, which were principally used to pay down the collateralized mortgage obligations for which the mortgage-backed securities had served as collateral and $.2 million provided from net sales of mortgages held for long-term investment. In the first six months of 2004, $56.5 million, net of cash acquired, was used for the acquisitions of Palmetto and Groupe Avantis, $48.6 million was used for investments in unconsolidated joint ventures and $10.5 million was used for net purchases of property and equipment. The cash used in 2004 was partly offset by proceeds of $1.5 million received from mortgage-backed securities and $.2 million received from net sales of mortgages held for investment.
Financing activities provided cash of $232.3 million in first six months of 2005 and $355.0 million in the first six months of 2004. In the first six months of 2005, sources of cash included $298.1 million in proceeds from the issuance of the $300 Million Senior Notes and $68.8 million from the issuance of common stock under employee stock plans. Partially offsetting the cash provided were payments of $65.0 million on short-term borrowings, payments of $34.0 million to minority interests, dividend payments of $30.5 million, repurchases of common stock of $5.0 million and payments of $.1 million on collateralized mortgage obligations. On December 15, 2004, pursuant to the 2004 Shelf Registration, the Company issued the $300 Million Senior Notes at 99.357% of the principal amount of the notes. The notes, which are due January 15, 2015, with interest payable semi-annually, represent senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The $300 Million Senior Notes may be redeemed, in whole at any time or from time to time in part at a price equal to the greater of (1) 100% of their principal amount and (2) the sum of the present values of the remaining scheduled payments, plus, in each case a premium, plus accrued and unpaid interest to the applicable redemption date. The $300 Million Senior Notes are unconditionally guaranteed jointly and severally by the Guarantor Subsidiaries on a senior unsecured basis. The Company used all of the net proceeds from the issuance of the $300 Million Senior Notes to repay borrowings under the $1 Billion Credit Facility. On December 2, 2004, the Company’s board of directors increased the annual cash dividend on the Company’s common stock to $.75 per share from $.50 per share. The first quarterly dividend at the increased rate of $.1875 per share was paid on February 24, 2005 to stockholders of record on February 10, 2005. (The per share amounts reflect the impact of the two-for-one stock split effected in April, 2005.)
Financing activities in the first six months of 2004 resulted in net cash inflows due to $248.7 million in proceeds from the sale of 5 3/4% senior notes, $171.2 million in proceeds from short-term borrowings and $29.0 million from the issuance of stock under employee stock plans. Partially offsetting these sources were repurchases of common stock of $66.1 million, cash dividend payments of $19.7 million, payments to minority interests of $7.1 million and payments on collateralized mortgage obligations of $1.0 million.
As of May 31, 2005, the Company had $362.6 million available under its $1 Billion Credit Facility, net of $209.9 million of outstanding letters of credit. French unsecured financing agreements, totaling $224.0 million, had in the
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aggregate $213.9 million available at May 31, 2005. In addition, the Company’s mortgage banking operation had $291.0 million available under its $300.0 million master loan and security agreement and all of its $150.0 million master loan and security agreement available at the end of the second quarter of 2005. The Company’s mortgage banking subsidiary also has a $300.0 million purchase and sale agreement, which allows it to accelerate the sale of its mortgage loan inventory resulting in a more effective use of the warehouse facilities. This agreement is not committed and may be terminated at the discretion of the counterparties. The debt of the Company’s mortgage banking subsidiary is non-recourse to the Company’s construction business.
The Company’s financial leverage, as measured by the ratio of construction debt to total capital, was 50.0% at May 31, 2005 compared to 50.7% at May 31, 2004. Construction debt to total capital is not a financial measure in accordance with generally accepted accounting principles (“GAAP”). However, the Company believes this ratio is preferable to total debt to total capital, the most comparable GAAP measure, in order to maintain comparability with other publicly traded homebuilders for stockholders, investors and analysts. A reconciliation of the non-GAAP measure, construction debt to total capital, to the most comparable GAAP measure, total debt to total capital, follows (in thousands):
The Company believes it has adequate resources and sufficient credit line facilities to satisfy its current and reasonably anticipated future requirements for funds to acquire capital assets and land, to construct homes, to fund its mortgage banking operations and to meet any other needs of its business, both on a short and long-term basis.
Subsequent Events
Pursuant to the 2004 Shelf Registration, on June 2, 2005, the Company issued $300 million of 6 1/4% senior notes at 99.533% of the principal amount of the notes, and on June 27, 2005, issued an additional $150 million of 6 1/4% senior notes in the same series at 100.614% of the principal amount of the notes plus accrued interest from June 2, 2005. The $450 Million Senior Notes, which are due June 15, 2015, with interest payable semi-annually, represent senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The notes may be redeemed, in whole at any time or from time to time in part at a price equal to the greater of (1) 100% of their principal amount and (2) the sum of the present values of the remaining scheduled payments, plus, in each case a premium, plus accrued and unpaid interest to the applicable redemption date. The notes are unconditionally guaranteed jointly and severally by the Guarantor Subsidiaries on a senior unsecured basis. The Company used all of the net proceeds from the issuance of the $450 Million Senior Notes to repay borrowings under its $1 Billion Credit Facility.
On June 30, 2005, the Company entered into an agreement to sell substantially all of the assets of its mortgage banking subsidiary to Countrywide Home Loans, Inc. (“Countrywide”), a subsidiary of Countrywide Financial Corporation, and to concurrently establish a joint venture with Countrywide which will make home loans to the
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Company’s homebuyers. The Company and Countrywide will each maintain a 50% ownership interest in the joint venture with Countrywide providing oversight of the joint venture’s operations. It is anticipated that the transaction will be accounted for as an unconsolidated joint venture by the Company. Under the terms of the agreement, the Company will receive all cash in exchange for the assets sold. The Company does not currently believe that the transaction, which is expected to close in the fourth quarter of 2005, will have a material impact on its financial position or results of operations.
Off-Balance Sheet Arrangements
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 arrangements allows the Company to reduce the risks associated with land ownership and development; reduce its financial commitments, including interest and other carrying costs; and minimize land inventories. As of May 31, 2005, excluding consolidated VIEs, the Company had cash deposits and/or letters of credit totaling $238.3 million which were associated with land option contracts having an aggregate purchase price of $3.28 billion.
The Company is often required to obtain bonds and letters of credit in support of its obligations to various municipalities and other government agencies with respect to subdivision improvements, including roads, sewers and water among other things. At May 31, 2005, the Company had outstanding approximately $921.1 million and $209.9 million of performance bonds and letters of credit, respectively. The Company does not believe that any currently outstanding bonds or letters of credit will be called.
Critical Accounting Policies
There have been no significant changes to the Company’s critical accounting policies and estimates during the three months and six months ended May 31, 2005 compared to those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended November 30, 2004.
Outlook
The Company’s residential backlog as of May 31, 2005 consisted of 27,089 units, representing aggregate future revenues of approximately $6.79 billion. The Company’s backlog units and backlog value as of May 31, 2005 increased by 31.3% and 51.5%, respectively, from the 20,636 units that represented aggregate future revenues of approximately $4.48 billion as of May 31, 2004. Company-wide net orders of 12,290 for the second quarter of 2005 increased 14.6% from the 10,726 net orders generated in the second quarter of 2004.
The Company’s domestic operations accounted for approximately $5.69 billion of backlog value on 21,856 units at May 31, 2005, up from $3.79 billion on 17,343 units at May 31, 2004. In the Company’s West Coast region, the backlog value increased 52.2% to approximately $2.15 billion on 4,837 units at May 31, 2005, up from $1.41 billion on 3,525 units at May 31, 2004. Net orders in the West Coast region rose 30.3% to 2,025 units in the second quarter of 2005 from 1,554 units for the same quarter a year ago. In the Southwest region, the backlog value increased 49.7% to approximately $1.43 billion on 5,544 units at May 31, 2005, up from approximately $954.7 million on 4,815 units at May 31, 2004, while net orders rose 3.1% to 2,457 units in the second quarter of 2005 from 2,382 in the year-earlier quarter. In the Company’s Central region, backlog totaled approximately $903.7 million on 5,810 units at the end of the second quarter of 2005, up 9.7% from $816.1 million on 5,431 units a year earlier despite the Central region net orders for the second quarter of 2005 decreasing slightly to 3,201 from 3,210 net orders in the same period of 2004. In the Company’s Southeast region, the backlog value rose 98.2% to approximately $1.21 billion on 5,665 units at May 31, 2005 compared to $611.3 million on 3,572 units at May 31, 2004. Net orders in the region increased 18.4% to 2,523 units in the second quarter of 2005 from 2,131 units for the same period a year ago.
In France, the value of residential backlog at May 31, 2005 was approximately $1.10 billion on 5,233 units, up from $688.2 million on 3,293 units a year earlier. The Company’s French operations generated 2,084 net orders in the second quarter of 2005, an increase of 43.8% compared to the 1,449 net orders posted in the second quarter of 2004.
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The Company’s French commercial operations had no backlog at May 31, 2005 compared to $13.7 million at May 31, 2004, due to a decrease in commercial activities.
Substantially all of the homes included in residential backlog are expected to be delivered; however, cancellation rates could increase, particularly if market conditions deteriorate, or mortgage interest rates increase, thereby decreasing backlog and related future revenues.
The Company continues to have a positive outlook for the remainder of fiscal 2005 as a result of its strong unit and dollar backlog, solid cash and borrowing positions and commitment to adhere to the disciplines of its KBnxt operational business model. The overall strength of the Company’s homebuilding business combined with the generally favorable operating environment, overall healthy housing market and historically low mortgage interest rates are expected to lead the Company to record operating and financial results for the 2005 fiscal year. The Company believes that it is well-positioned to achieve increased profitability for the balance of fiscal 2005 as anticipated increases in unit delivery volume and average selling prices are expected to drive revenue growth and operating margins are also expected to expand. In the second half of fiscal 2005, the Company plans to further develop its existing businesses in the 36 markets across the United States and in France in which it currently operates. With a strong platform for future growth, the Company will continue to emphasize de novo and organic growth during the balance of fiscal 2005, further developing its existing operations while considering entry into adjacent markets. The Company believes its growth strategy for fiscal 2005 is aligned with its objective of becoming an investment grade company. The Company expects to continue to create shareholder value in the remainder of fiscal 2005 by operating its geographically diverse business in accordance with its proven KBnxt operational business model.
Safe Harbor Statement
Investors are cautioned that certain statements contained in this document, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to securities analysts and stockholders during presentations about the Company are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which 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, unit deliveries, expenses, margins, earnings or earnings per share 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 units 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 the KB Home, economic and market factors and the homebuilding industry, among other things. These statements are not guarantees of future performance, and the Company has no specific intention to update these statements.
Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements made by the Company or Company officials due to a number of factors. The principal important risk factors that could cause the Company’s actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in general economic conditions, material prices and availability, labor costs and availability, interest rates and the Company’s debt levels, the secondary market for loans, consumer confidence, competition, currency exchange rates (insofar as they affect the Company’s operations in France), environmental factors, government regulations affecting the Company’s operations, the availability and cost of land in desirable areas and the continued impact of terrorist activities and United States response, unanticipated violations of Company policy, unanticipated legal or regulatory proceedings or claims, and conditions in the capital, credit and homebuilding markets. See the Company’s Annual Report on Form 10-K for the year ended November 30, 2004 and other Company filings with the Securities and Exchange Commission for a further discussion of risks and uncertainties applicable to the Company’s business.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company primarily enters into debt obligations to support general corporate purposes, including acquisitions and the operations of its subsidiaries. The Company is subject to interest rate risk on its 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 the Company’s earnings or cash flows. In connection with the Company’s mortgage banking operations, mortgage loans held for sale and the master loan and security agreements are subject to interest rate risk; however, such obligations reprice frequently and are short-term in duration and accordingly the risk is not considered material.
The following table sets forth as of May 31, 2005, the Company’s long-term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated market value (in thousands):
For additional information regarding the Company’s market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2004.
Item 4. Controls and Procedures
The Company has established disclosure controls and procedures to ensure the information required to be disclosed by KB Home, including its consolidated entities, in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, (the”Act”) is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Under the supervision and with the participation of senior management, including the Company’s Chairman and Chief Executive Officer (“Principal Executive Officer”) and Chief Financial Officer (“Principal Financial Officer”), the Company evaluated its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Act. Based on this evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of May 31, 2005 to ensure the timely disclosure of required information in the Company’s periodic Securities and Exchange Commission filings.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 2005 Annual Meeting of Stockholders of the Company was held on April 7, 2005, at which the following matters set forth in the Company’s Proxy Statement dated February 14, 2005, which was filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, were voted upon with the results indicated below. All numbers reported are shares of the Company’s common stock.
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Item 5. Other Information
The following table presents residential information in terms of unit deliveries to home buyers and net orders taken by geographical region for the three months and six months ended May 31, 2005 and 2004, together with backlog data in terms of units and value by geographical region as of May 31, 2005 and 2004.
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Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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INDEX OF EXHIBITS
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