UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2005
Commission File Number: 1-11749
Lennar Corporation
(Exact name of registrant as specified in its charter)
700 Northwest 107th Avenue, Miami, Florida 33172
(Address of principal executive offices) (Zip Code)
(305) 559-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES x NO ¨
Common shares outstanding as of June 30, 2005:
Class A
Class B
Part I. Financial Information
Item 1. Financial Statements
Lennar Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
May 31,
2005
ASSETS
Homebuilding:
Cash
Receivables, net
Inventories:
Finished homes and construction in progress
Land under development
Consolidated inventory not owned
Total inventories
Investments in unconsolidated entities
Other assets
Financial services (1)
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and other liabilities
Liabilities related to consolidated inventory not owned
Senior notes and other debts payable
Total liabilities
Stockholders’ equity:
Preferred stock
Class A common stock of $0.10 par value per share, 125,124 shares issued at May 31, 2005
Class B common stock of $0.10 par value per share, 32,726 shares issued at May 31, 2005
Additional paid-in capital
Retained earnings
Unearned compensation
Deferred compensation plan; 683 Class A common shares and 68 Class B common shares at May 31, 2005
Deferred compensation liability
Treasury stock, at cost; 4,462 Class A common shares at May 31, 2005
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to condensed consolidated financial statements.
1
Condensed Consolidated Statements of Earnings
(Dollars in thousands, except per share amounts)
Three Months Ended
Six Months Ended
Revenues:
Homebuilding
Financial services
Total revenues
Costs and expenses:
Corporate general and administrative
Total costs and expenses
Equity in earnings from unconsolidated entities
Management fees and other income (expense), net
Loss on redemption of 9.95% senior notes
Earnings from continuing operations before provision for income taxes
Provision for income taxes
Earnings from continuing operations
Discontinued operations:
Earnings from discontinued operations before provision for income taxes (2)
Earnings from discontinued operations
Net earnings
Basic earnings per share:
Diluted earnings per share:
Cash dividends per Class A common share
Cash dividends per Class B common share
2
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities:
Net earnings from continuing operations
Adjustments to reconcile net earnings from continuing operations to net cash used inoperating activities:
Depreciation and amortization
Amortization of discount on debt
Tax benefit from employee stock plans and vesting of restricted stock
Deferred income tax provision
Changes in assets and liabilities, net of effect from acquisitions:
(Increase) decrease in receivables
Increase in inventories
(Increase) decrease in other assets
Decrease in financial services loans held-for-sale
Decrease in accounts payable and other liabilities
Net earnings from discontinued operations
Adjustment to reconcile net earnings from discontinued operations to net cash used inoperating activities (includes gain on sale of discontinued operations of ($15,816) in 2005)
Net cash used in operating activities
Cash flows from investing activities:
Net additions to operating properties and equipment
Contributions to unconsolidated entities
Distributions from unconsolidated entities
Increase in financial services mortgage loans
Purchases of investment securities
Proceeds from investment securities
Proceeds from sale of discontinued operations
Acquisitions, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Net repayments under financial services short-term debt
Net borrowings under revolving credit facilities
Net proceeds from issuance of 5.60% senior notes
Redemption of 9.95% senior notes
Net proceeds from issuance of senior floating-rate notes due 2009
Proceeds from other borrowings
Principal payments on term loan B and other borrowings
Common stock:
Issuances
Repurchases
Dividends
Net cash used in financing activities
Net decrease in cash
Cash at beginning of period
Cash at end of period
3
Condensed Consolidated Statements of Cash Flows — (Continued)
Summary of cash:
Supplemental disclosures of non-cash investing and financing activities:
Purchases of inventory financed by sellers
4
Notes to Condensed Consolidated Financial Statements
(1) Basis of Presentation
Basis of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Lennar Corporation and all subsidiaries, partnerships and other entities in which Lennar Corporation has a controlling interest and variable interest entities (see Note 13) in which Lennar Corporation is deemed to be the primary beneficiary (the “Company”). The Company’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in variable interest entities in which the Company is not deemed to be the primary beneficiary, are accounted for by the equity method. All significant intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the November 30, 2004 audited financial statements in the Company’s Annual Report on Form 10-K for the year then ended. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the accompanying condensed consolidated financial statements have been made.
The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The condensed consolidated statements of earnings for the three and six months ended May 31, 2005 are not necessarily indicative of the results to be expected for the full year.
Reclassification
Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform with the 2005 presentation. These reclassifications had no impact on reported net earnings.
Discontinued Operations
In May 2005, the Company sold a subsidiary of the Financial Services Division’s title company. As a result of the sale, the subsidiary’s results are presented as discontinued operations for the three and six months ended May 31, 2005 and 2004 (see Note 2).
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
5
(1) Basis of Presentation – (Continued)
Stock-Based Compensation
The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair market value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, to stock-based employee compensation (unaudited):
Net earnings, as reported
Add: Total stock-based employee compensation expense included in reported net earnings, net of tax
Deduct: Total stock-based employee compensation expense determined under fair market value based method for all awards, net of tax
Pro forma net earnings
Earnings per share:
Basic—as reported
Basic—pro forma
Diluted—as reported
Diluted—pro forma
Revenue Recognition
Effective December 1, 2004, as a result of the determination that the Company met all applicable requirements under SFAS No. 66, Accounting for Sales of Real Estate, the Company began to apply the percentage-of-completion method to its mid-to-high-rise condominium projects under construction. In accordance with SFAS No. 66, the Company records revenue as a portion of the value of non-cancelable condominium unit contracts when (1) construction is beyond a preliminary stage, (2) the buyer is committed to the extent of being unable to require a full refund except for non-delivery of the unit, (3) sufficient units have already been sold to assure the entire property will not revert to rental property, (4) sales prices are collectible and (5) aggregate sales proceeds and costs can be reasonably estimated. Revenue recognized under the percentage-of-completion method is calculated based upon the percentage of total costs incurred in relation to total estimated costs to complete, and is adjusted for estimated cancellations due to potential customer defaults. The change to the percentage-of-completion method did not have a material impact on the Company’s financial condition as of May 31, 2005 or its results of operations or cash flows for the three and six months ended May 31, 2005. Actual revenues and costs to complete construction in the future could differ from the Company’s current estimates. If the Company’s estimates of revenues and development costs change, then its revenues, cost of sales and related cumulative profits will be revised in the period that estimates change.
6
(2) Discontinued Operations
In May 2005, the Company sold North American Exchange Company (“NAEC”), a subsidiary of the Financial Services Division’s title company, which generated a $15.8 million pretax gain. NAEC’s revenues for the three and six months ended May 31, 2005 were $1.7 million and $3.3 million, respectively, compared to $0.8 million and $1.6 million, respectively, for the three and six months ended May 31, 2004. As of May 31, 2005, there were no remaining assets or liabilities of discontinued operations. As of November 30, 2004, assets and liabilities of discontinued operations were $1.0 million and $0.3 million, respectively.
(3) Acquisitions
During 2005, the Company expanded its presence through homebuilding asset acquisitions in markets where the Company currently has operations. In connection with these acquisitions, the Company paid $107.1 million, net of cash acquired. The results of operations of these acquisitions are included in the Company’s results of operations since their respective acquisition dates. The pro forma effect of these acquisitions on the Company’s results of operations is not presented as the effect is not material.
(4) Operating and Reporting Segments
The Company has two operating and reporting segments: Homebuilding and Financial Services. The Company’s reportable operating segments are strategic business units that offer different products and services. Segment amounts include all elimination adjustments made in consolidation.
The Homebuilding Division’s operations primarily include the sale and construction of single-family attached and detached homes and the purchase, development and sale of residential land directly and through unconsolidated entities in which the Company has investments. At May 31, 2005, the Company had homebuilding divisions located in the following states: Arizona, California, Colorado, Florida, Illinois, Maryland, Minnesota, Nevada, New Jersey, North Carolina, South Carolina, Texas, and Virginia.
Financial Services
The Financial Services Division provides mortgage financing, title insurance, closing services and insurance agency services for both buyers of the Company’s homes and others. Substantially all of the loans it originates are sold in the secondary mortgage market on a servicing released, non-recourse basis; however, the Division remains liable for customary representations and warranties related to loan sales. The Financial Services Division also provides high-speed Internet and cable television services to residents of the Company’s communities and others. At May 31, 2005, the Financial Services Division operated in the following states: Arizona, California, Colorado, Connecticut, District of Columbia, Florida, Idaho, Illinois, Maryland, Minnesota, Nevada, New Jersey, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington and Wisconsin.
7
(4) Operating and Reporting Segments – (Continued)
Financial information relating to the continuing operations of the Company’s reportable segments was as follows (unaudited):
Homebuilding revenues:
Sales of homes
Sales of land
Total homebuilding revenues
Homebuilding costs and expenses:
Cost of homes sold
Cost of land sold
Selling, general and administrative
Total homebuilding costs and expenses
Homebuilding operating earnings
Financial services revenues
Financial services costs and expenses
Financial services operating earnings
Total segment operating earnings
Corporate general and administrative expenses
During the three and six months ended May 31, 2005, interest included in the Homebuilding Division’s cost of homes sold was $36.2 million and $66.6 million, respectively, compared to $28.6 million and $51.2 million, respectively, in the same periods last year. During the three and six months ended May 31, 2005, interest included in the Homebuilding Division’s cost of land sold was $9.4 million and $9.9 million, respectively, compared to $1.4 million and $4.0 million, respectively, in the same periods last year. During the three and six months ended May 31, 2005, all other interest related to the Homebuilding Division, totaling $1.0 million and $1.1 million, respectively, compared to $0.1 million and $0.2 million, respectively, in the same periods last year, was included in management fees and other income (expense), net.
At May 31, 2005 and November 30, 2004, the Homebuilding Division’s goodwill, net of accumulated amortization, was $184.2 million and $183.4 million, respectively.
8
(5) Investment in Unconsolidated Entities
Summarized condensed financial information on a combined 100% basis related to unconsolidated entities in which the Company has investments that are accounted for by the equity method was as follows:
(In thousands)
Assets:
Inventories
Liabilities and equity:
Notes and mortgages payable
Equity of:
The Company
Others
Total liabilities and equity
In some instances, the Company and/or its partners have provided guarantees of debt of certain unconsolidated entities on a pro rata basis. At May 31, 2005, the Company had repayment guarantees of $247.0 million and limited maintenance guarantees of $550.4 million related to unconsolidated entity debt. When the Company and/or its partners provide a guarantee, the unconsolidated entity generally receives more favorable terms from its lenders than would otherwise be available to it. The limited maintenance guarantees only apply if an unconsolidated entity defaults on its loan arrangements and the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. If the Company is required to make a payment under a limited maintenance guarantee to bring the value of the collateral up to the specified percentage of the loan balance, the payment would constitute a capital contribution or loan to the unconsolidated entity and increase the Company’s share of any funds the unconsolidated entity distributes. At May 31, 2005, there were no assets held as collateral that, upon the occurrence of any triggering event or condition under a guarantee, the Company could obtain and liquidate to recover all or a portion of the amounts to be paid under a guarantee.
9
(6) Earnings Per Share
Basic earnings per share is computed by dividing net earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Basic and diluted earnings per share were calculated as follows (unaudited):
Numerator for basic earnings per share - net earnings
Interest on zero-coupon convertible senior subordinated notes due 2021, net of tax
Numerator for diluted earnings per share from continuing operations
Numerator for diluted earnings per share from discontinued operations
Numerator for diluted earnings per share - net earnings
Denominator for basic earnings per share - weighted average shares
Effect of dilutive securities:
Employee stock options and restricted stock
Zero-coupon convertible senior subordinated notes due 2021
Denominator for diluted earnings per share
Anti-dilutive options outstanding at May 31, 2005 and 2004 were not material.
10
(6) Earnings Per Share – (Continued)
In 2001, the Company issued zero-coupon convertible senior subordinated notes due 2021. The indenture relating to the notes provides that the notes are convertible into the Company’s Class A common stock during limited periods after the market price of the Company’s Class A common stock exceeds 110% of the accreted conversion price at the rate of 14.2 Class A common shares per $1,000 face amount of notes at maturity, which would total 9.0 million shares. For this purpose, the “market price” is the average closing price of the Company’s Class A common stock over the last twenty trading days of a fiscal quarter.
Other events that would cause the notes to be convertible are: (a) a call of the notes for redemption; (b) the credit ratings assigned to the notes by any two of Moody’s Investors Service, Inc., Standard & Poor’s Ratings Services and Fitch Ratings are two rating levels below the initial rating; (c) a distribution to all holders of the Company’s Class A common stock of options expiring within 60 days entitling the holders to purchase common stock for less than its quoted price; or (d) a distribution to all holders of the Company’s Class A common stock of common stock, assets, debt, securities or rights to purchase securities with a per share value exceeding 15% of the closing price of the Class A common stock on the day preceding the declaration date for the distribution.
The calculation of diluted earnings per share included 9.0 million shares for the three and six months ended May 31, 2005 and 2004, related to the dilutive effect of the zero-coupon convertible senior subordinated notes due 2021.
(7) Financial Services
The assets and liabilities related to the Company’s Financial Services Division (the “Division”) were as follows:
Mortgage loans held-for-sale, net
Mortgage loans, net
Title plants
Investment securities held-to-maturity
Goodwill, net
Other (including limited-purpose finance subsidiaries)
Notes and other debts payable
11
(7) Financial Services – (Continued)
At May 31, 2005, the Division had warehouse lines of credit totaling $900 million to fund its mortgage loan activities. Borrowings under the facilities were $687.0 million at May 31, 2005. The warehouse lines of credit mature in April 2007 ($600 million) and in August 2005 ($300 million), at which time the Division expects the facilities to be renewed. At May 31, 2005, the Division had advances under a conduit funding agreement with a major financial institution amounting to $17.6 million. The Division also had a $20 million revolving line of credit with a bank that matures in July 2005, at which time the Division expects the line of credit to be renewed. Borrowings under the line of credit were $18.9 million at May 31, 2005.
(8) Cash
Cash as of May 31, 2005 and November 30, 2004 included $53.2 million and $127.3 million, respectively, of cash held in escrow for approximately three days and $19.2 million and $12.0 million, respectively, of restricted deposits.
(9) Debt
In May 2005, the Company amended its senior unsecured credit facilities (the “Credit Facilities”), which provide the Company with up to $1.4 billion of financing. The Credit Facilities consist of a $976.9 million revolving credit facility maturing in May 2009 and a $418.6 million revolving credit facility maturing in June 2005 (extended from May 2005). The Company may elect to convert borrowings under the revolving credit facility maturing in June 2005 to a term loan, which would mature in May 2009. The Credit Facilities are guaranteed by substantially all of the Company’s subsidiaries other than finance company subsidiaries (which include mortgage and title insurance subsidiaries). Interest rates are LIBOR-based, and the margins are set by a pricing grid with thresholds that adjust based on changes in the Company’s leverage ratio and credit ratings, or to an alternate base rate, as described in the credit agreement. At May 31, 2005, $113.0 million was outstanding under the Credit Facilities.
In June 2005, the Company replaced the Credit Facilities with a new senior unsecured credit facility (the “New Facility”). The New Facility consists of a $1.7 billion revolving credit facility maturing in June 2010. The New Facility also includes access to an additional $500 million via an accordion feature, under which the New Facility may be increased to $2.2 billion, subject to additional commitments. The Company repaid the outstanding balance under the Credit Facilities with borrowings under the New Facility. The New Facility is guaranteed by substantially all of the Company’s subsidiaries other than finance company subsidiaries (which include mortgage and title insurance subsidiaries). Interest rates on outstanding borrowings are LIBOR-based, with margins determined based on changes in the Company’s leverage ratio and credit ratings, or to an alternate base rate, as described in the credit agreement.
At May 31, 2005, the Company had letters of credit outstanding in the amount of $837.8 million. The majority of these letters of credit are posted with regulatory bodies to guarantee the Company’s performance of certain development and construction activities or are posted in lieu of cash deposits on option contracts. Of the Company’s total letters of credit outstanding, $214.2 million were collateralized against certain borrowings available under the Credit Facilities.
In June 2005, the Company entered into a letter of credit facility with a financial institution. The purpose of the letter of credit facility is to facilitate the issuance of up to $150 million of letters of credit on a senior unsecured basis through the facility’s expiration date of June 2008.
12
(9) Debt – (Continued)
In September 2004, the Company entered into a structured letter of credit facility (the “LC Facility”) with a financial institution. The purpose of the LC Facility is to facilitate the issuance of up to $200 million of letters of credit on a senior unsecured basis. In connection with the transaction, the financial institution issued $200 million of their senior notes, which were linked to the Company’s performance on the LC Facility. If there is an event of default under the LC Facility, including the Company’s failure to reimburse a draw against an issued letter of credit, the financial institution would assign its claim against the Company, to the extent of the amount due and payable by the Company under the LC Facility, to its noteholders in lieu of their principal repayment on their performance linked notes. At May 31, 2005, the Company had letters of credit outstanding in the amount of $198.3 million under the LC Facility.
In April 2005, the Company sold $300 million of 5.60% senior notes due 2015 (the “Senior Notes”) at a price of 99.771% in a private placement. Proceeds from the offering, after initial purchaser’s discount and expenses, were $297.5 million. The Company added the proceeds to the Company’s working capital to be used for general corporate purposes. Interest on the Senior Notes is due semi-annually. The Senior Notes are unsecured and unsubordinated. Substantially all of the Company’s subsidiaries other than finance company subsidiaries guaranteed the Senior Notes. At May 31, 2005, the carrying value of the Senior Notes was $299.3 million. The Company has agreed to exchange the Senior Notes for notes (the “Exchange Notes”) that will be registered under the Securities Act of 1933, as amended. The Exchange Notes will have substantially identical terms as the Senior Notes, except that the Exchange Notes will not include the transfer restrictions of the Senior Notes.
On July 6, 2005, the Company offered an additional $200 million of Senior Notes in a private placement. The offering was made in addition to the Company’s $300 million private placement of Senior Notes that it completed in April 2005. The Company expects to complete the offering on July 13, 2005. The offering has not been registered under the Securities Act of 1933, and the Senior Notes may not be offered or sold in the United States absent registration under the Securities Act or an exemption from the registration requirements. This information shall not constitute an offer to sell or a solicitation of an offer to buy the Senior Notes.
In May 2005, the Company redeemed all of its outstanding 9.95% senior notes due 2010 (the “Notes”). The redemption price was $337.7 million, or 104.975% of the principal amount of the Notes outstanding, plus accrued and unpaid interest as of the redemption date. The redemption of the notes resulted in a $34.9 million pretax loss.
13
(10) Product Warranty
Warranty and similar reserves for homes are established at an amount estimated to be adequate to cover potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a home. Reserves are determined based on historical data and trends with respect to similar product types and geographical areas. Warranty reserves are included in accounts payable and other liabilities in the accompanying condensed consolidated balance sheets. The activity in the Company’s warranty reserve was as follows (unaudited):
Warranty reserve, beginning of period
Provision
Payments
Warranty reserve, end of period
(11) Stockholders’ Equity
The Company’s Board of Directors previously authorized a stock repurchase program to permit future purchases of up to 20 million shares of the Company’s outstanding common stock. During the three and six months ended May 31, 2005, the Company repurchased a total of 2.4 million and 4.4 million shares, respectively, of its outstanding Class A common stock under the stock repurchase program for an aggregate purchase price of $126.9 million, or $52.36 per share, and $232.2 million, or $53.26 per share, respectively. As of May 31, 2005, 13.2 million shares of common stock can be repurchased in the future under the program.
At May 31, 2005, the Company had a shelf registration statement effective under the Securities Act of 1933, as amended, under which it could sell to the public up to $320 million of debt securities, common stock, preferred stock or other securities. In June 2005, a new shelf registration statement increased the amount of securities available for issuance to $1.0 billion. At May 31, 2005, the Company had another shelf registration statement effective under the Securities Act of 1933, as amended, under which it could issue up to $400 million of equity or debt securities in connection with acquisitions of companies or interests in companies, businesses or assets.
During the three and six months ended May 31, 2005, the Company issued 0.3 million and 1.4 million shares, respectively, of its common stock as a result of stock option exercises.
14
(12) Comprehensive Income
Comprehensive income represents changes in stockholders’ equity from non-owner sources. The components of comprehensive income were as follows (unaudited):
Unrealized gain on interest rate swaps, net of 37.75% tax effect
Unrealized gain (loss) on available-for-sale investment securities, net of 37.75% tax effect
Comprehensive income
(13) Consolidation of Variable Interest Entities
In December 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46(R) (“FIN 46(R)”), which further clarified and amended FIN 46, Consolidation of Variable Interest Entities, which requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Prior to the issuance of FIN 46(R), entities were generally consolidated by an enterprise when it had a controlling financial interest through ownership of a majority voting interest in the entity.
Unconsolidated Entities
At May 31, 2005, the Company had investments in and advances to unconsolidated entities established to acquire and develop land for sale to the Company in connection with its homebuilding operations, for sale to third parties or for the construction of homes for sale to third-party homebuyers. The Company evaluated all its partnership agreements entered into (or that had reconsideration events) during the six months ended May 31, 2005 under FIN 46(R), and as a result, the Company consolidated entities under
FIN 46(R) that at May 31, 2005 had total combined assets and liabilities of $8.9 million and $2.9 million, respectively.
At May 31, 2005, the Company’s investment in unconsolidated entities was $1.0 billion; however, the Company’s estimated maximum exposure to loss with regard to unconsolidated entities was its investments in these entities in addition to the exposure under the guarantees discussed in Note 5.
Option Contracts
The Company evaluated all its option contracts for land and determined it was the primary beneficiary of certain of these option contracts. Although the Company does not have legal title to the optioned land, under FIN 46(R), the Company, if it is deemed to be the primary beneficiary, is required to consolidate the land under option at the purchase price of the optioned land. During the six months ended May 31, 2005, the effect of the consolidation of these option contracts was an increase of $168.7 million to consolidated inventory not owned with a corresponding increase to liabilities related to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2005. This increase was offset primarily by the Company exercising its options to acquire land under certain contracts
15
(13) Consolidation of Variable Interest Entities – (Continued)
previously consolidated under FIN 46(R) and deconsolidation of certain option contracts due to reconsideration events, resulting in a net decrease in consolidated inventory not owned of $3.5 million. To reflect the purchase price of the inventory consolidated under FIN 46(R), the Company reclassified $30.4 million of related option deposits from land under development to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2005. The liabilities related to consolidated inventory not owned represent the difference between the purchase price of the optioned land and the Company’s cash deposits.
At May 31, 2005, the Company’s exposure to loss related to its option contracts with third parties and unconsolidated entities represented its non-refundable deposits and advanced costs totaling $438.6 million. Additionally, the Company posts letters of credit in lieu of cash deposits under certain option deposits.
(14) New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”).
SFAS No. 123(R) establishes accounting standards for transactions in which a company exchanges its equity instruments for goods or services. In particular, this Statement will require companies to record compensation expense for all share-based payments, such as employee stock options, at fair market value. This Statement’s effective date was changed by the SEC in April 2005 and is now effective for the first quarter of the first fiscal year that begins after June 15, 2005 (the Company’s fiscal quarter beginning December 1, 2005). The Company is currently reviewing the effect of this Statement on its consolidated financial statements.
In March 2005, the SEC released Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment. SAB No. 107 provides the SEC staff position regarding the application of SFAS No. 123(R). SAB No. 107 contains interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB No. 107 also highlights the importance of disclosures made related to the accounting for share-based payment transactions. The Company is currently reviewing the effect of SAB No. 107 on its consolidated financial statements.
16
(15) Supplemental Financial Information
The Company’s obligations to pay principal, premium, if any, and interest under the Company’s Credit Facilities, senior floating-rate notes due 2007, senior floating-rate notes due 2009, 7 5/8% senior notes due 2009, 5.95% senior notes due 2013, 5.50% senior notes due 2014 and 5.60% senior notes due 2015 are guaranteed by substantially all of the Company’s subsidiaries other than finance company subsidiaries. The guarantees are full and unconditional and the guarantor subsidiaries are 100% directly or indirectly owned by Lennar Corporation. The Company has determined that separate, full financial statements of the guarantors would not be material to investors and, accordingly, supplemental financial information for the guarantors is presented as follows:
Condensed Consolidating Balance Sheet
May 31, 2005
Cash and receivables, net
Investments in subsidiaries
Intercompany
Stockholders’ equity
17
(15) Supplemental Financial Information – (Continued)
November 30, 2004
18
Condensed Consolidating Statement of Earnings
Three Months Ended May 31, 2005
Earnings (loss) from continuing operations before provision (benefit) for income taxes
Provision (benefit) for income taxes
Earnings from discontinued operations, net of tax
Equity in earnings from subsidiaries
Three Months Ended May 31, 2004
Management fees and other income, net
19
Six Months Ended May 31, 2005
Six Months Ended May 31, 2004
20
Condensed Consolidating Statement of Cash Flows
Net earnings from discontinuing operations
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
Net cash provided by (used in) operating activities
Increase in investments in unconsolidatedentities, net
Other
Net repayments under financial servicesshort-term debt
Principal payments on other borrowings
Net cash provided by (used in) financing activities
21
Net borrowings (repayments) under term loan B and other borrowings
Net increase (decrease) in cash
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included under Item 1 of this document and our audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for our fiscal year ended November 30, 2004.
Some of the statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Quarterly Report on Form 10-Q, are “forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption “Risk Factors Relating to Our Business” included in our Annual Report on Form 10-K for our fiscal year ended November 30, 2004 and in our other filings with the Securities and Exchange Commission. We do not undertake any obligation to update forward-looking statements.
Outlook
In fiscal 2005, we continue to see strong demand for our homes and continued strength in the homebuilding market. We also continue to anticipate growth in the volume of our mid-to-high-rise residential business, which we operate primarily through joint ventures in order to mitigate risk. In addition, we remain a growth-focused company, and we expect to continue to employ a diversified growth strategy to enhance future opportunities for our company. This will entail increasing sales organically as well as acquiring small and possibly large homebuilders. We expect this combination of organic growth and strategic acquisitions to result in, among other things, cost savings and growth of ancillary services.
While we may be negatively impacted by factors including higher interest rates, higher building costs, shortages of certain building materials, increasing inventory levels in the industry and speculative buying, we believe we will be able to manage these challenges through favorable pricing conditions in strategic markets and through continued efforts to control costs. Also, our strong balance sheet and access to capital afford us the opportunity to continue to build on our strong record of growth in existing markets while we continue to look for opportunities to grow into new markets.
(1) Results of Operations
Overview
We have historically experienced, and expect to continue to experience, variability in quarterly results. Our results of operations for the three and six months ended May 31, 2005 are not necessarily indicative of the results to be expected for the full year.
23
Earnings from continuing operations were $233.2 million, or $1.42 per share diluted ($1.51 per share basic), in the second quarter of 2005, compared to $201.2 million, or $1.22 per share diluted ($1.30 per share basic), in the second quarter of 2004. For the six months ended May 31, 2005, earnings from continuing operations were $426.0 million, or $2.59 per share diluted ($2.75 per share basic), compared to $340.3 million, or $2.06 per share diluted ($2.19 per share basic), in 2004.
The following tables set forth selected financial and operational information related to our Homebuilding Division for the periods indicated (unaudited):
Selected Financial and Operational Data
(Dollars in thousands, except average sales price)
Gross margin on home sales
Selling, general and administrative expenses as a % of revenues from home sales
Operating margin as a % of revenues from home sales
Average sales price
24
Summary of Home and Backlog Data By Region
At May 31, 2005, our market regions consisted of homebuilding divisions located in the following states: East:Florida, Maryland, Virginia, New Jersey, North Carolina and South Carolina. Central: Texas, Illinois, and Minnesota. West: California, Colorado, Arizona and Nevada.
At or for the Six
Months Ended
Deliveries
East
Central
West
Total
Of the total deliveries listed above, 259 and 491, respectively, represent deliveries from unconsolidated entities for the three and six months ended May 31, 2005, compared to 162 and 321 deliveries in the same periods last year.
New Orders
Of the total new orders listed above, 430 and 752, respectively, represent new orders from unconsolidated entities for the three and six months ended May 31, 2005, compared to 489 and 810 new orders in the same periods last year.
Backlog – Homes
Of the total homes in backlog listed above, 1,846 represents homes in backlog from unconsolidated entities at May 31, 2005, compared to 1,320 homes at May 31, 2004.
Backlog – Dollar Value (In thousands)
Of the total dollar value of homes in backlog listed above, $768,731 represents the backlog dollar value from unconsolidated entities at May 31, 2005, compared to $536,309 of backlog dollar value at May 31, 2004.
25
Backlog represents the number of homes under sales contracts. Homes are sold using sales contracts, which are generally accompanied by sales deposits. In some instances, purchasers are permitted to cancel sales contracts if they are unable to close on the sale of their existing home, fail to qualify for financing or under certain other circumstances. Although cancellations can delay the sales of our homes, they have not had a material impact on our sales, operations or liquidity because we closely monitor our prospective buyers’ ability to obtain financing and use that information to adjust construction start plans to match anticipated deliveries of homes. We do not recognize revenue on homes under sales contracts until the sales are closed and title passes to the new homeowners, except for our mid-to-high-rise condominium projects under construction for which revenue is recognized under percentage-of-completion accounting.
The number of homesites owned and homesites to which we had access through option contracts with third parties or joint ventures (“JV”) (i.e., controlled homesites) for each of our market regions were as follows (unaudited):
May 31, 2004
At May 31, 2005, 18% of the homesites we owned were subject to home purchase contracts. At May 31, 2005, our backlog of sales contracts was 20,536 homes ($7.3 billion), compared to 19,417 homes ($5.9 billion) at May 31, 2004. The increase in the backlog of homes was primarily attributable to our growth and strong demand for our homes, which resulted in higher new orders in 2005, compared to 2004. As a result of our growth, inventories, excluding consolidated inventory not owned, increased 33% from November 30, 2004 to May 31, 2005, while revenues from sales of homes increased 27% and 30%, respectively, for the three and six months ended May 31, 2005, compared to the prior year.
Three Months Ended May 31, 2005 versus Three Months Ended May 31, 2004
Revenues from home sales increased 27% in the second quarter of 2005 to $2.6 billion from $2.1 billion in 2004. Revenues were higher primarily due to a 15% increase in the number of new home deliveries and a 10% increase in the average sales price of homes delivered in 2005. New home deliveries, excluding unconsolidated entities, increased to 8,951 homes in the second quarter of 2005 from 7,765 homes last year. In the second quarter of 2005, new home deliveries were higher in each of our regions, compared to 2004. The average sales price of new homes delivered increased to $293,000 in the second quarter of 2005 from $266,000 in 2004.
26
Gross margins on home sales were $654.1 million, or 24.9%, in the second quarter of 2005, compared to $483.7 million, or 23.4%, in 2004. Gross margin percentage on home sales increased 150 basis points primarily due to favorable pricing conditions. This increase was primarily attributable to strong improvement in our West region and improvement in our East region (primarily Florida), which was partially offset by lower margins in our Central region.
Homebuilding interest expense (primarily included in cost of homes sold and cost of land sold) was $46.6 million for the three months ended May 31, 2005, compared to $30.1 million in the same period last year. The increase in homebuilding interest expense was primarily due to an increase in the number of new home deliveries, as well as land sales.
Selling, general and administrative expenses as a percentage of revenues from home sales improved to 11.8% in the second quarter of 2005 from 12.1% in 2004. This improvement was primarily due to an increase in the number of new home deliveries in the second quarter of 2005.
Gross profit on land sales totaled $72.7 million in the second quarter of 2005, compared to $56.5 million in 2004. Some of these land sales were from consolidated joint ventures, which resulted in minority interest expense. Minority interest expense from these land sales and other activities of the consolidated joint ventures was $19.4 million and $1.3 million, respectively, in the second quarter of 2005 and 2004 and is included in management fees and other income (expense), net.
Management fees and other income (expense), net, totaled ($8.7) million in the second quarter of 2005, compared to $18.7 million in 2004, primarily due to increased minority interest expense. Equity in earnings from unconsolidated entities was $21.7 million in the second quarter of 2005, compared to $14.0 million last year. Sales of land, equity in earnings from unconsolidated entities and management fees and other income (expense), net may vary significantly from period to period depending on the timing of land sales and other transactions entered into by us and unconsolidated entities in which we have investments.
Six Months Ended May 31, 2005 versus Six Months Ended May 31, 2004
Revenues from home sales increased 30% in the six months ended May 31, 2005 to $4.8 billion from $3.7 billion in 2004. Revenues were higher primarily due to a 16% increase in the number of home deliveries and a 12% increase in the average sales price of new homes delivered in 2005. New home deliveries, excluding unconsolidated entities, increased to 16,528 homes in the six months ended May 31, 2005 from 14,260 homes last year. In the six months ended May 31, 2005, new home deliveries were higher in each of our regions, compared to 2004, with the largest contribution coming from our West region. The average sales price of new homes delivered increased to $292,000 in the six months ended May 31, 2005 from $261,000 in 2004.
Gross margins on home sales were $1.2 billion, or 24.8%, in the six months ended May 31, 2005, compared to $857.5 million, or 23.0%, in 2004. Gross margin percentage on home sales increased 180 basis points primarily due to favorable pricing conditions. This increase was primarily attributable to strong improvement in our West region and improvement in our East region (Florida), which was partially offset by lower margins in our Central region.
Homebuilding interest expense (primarily included in cost of homes sold and cost of land sold) was $77.6 million for the six months ended May 31, 2005, compared to $55.4 million in the same period last year. The increase in homebuilding interest expense was primarily due to an increase in the number of new home deliveries, as well as land sales.
27
Selling, general and administrative expenses as a percentage of revenues from home sales improved to 11.9% in the six months ended May 31, 2005 from 12.2% in 2004. This improvement was primarily due to an increase in the number of new home deliveries in 2005.
Gross profit on land sales totaled $96.2 million in the six months ended May 31, 2005, compared to $92.2 million in 2004. Some of these land sales were from consolidated joint ventures, which resulted in minority interest expense. Minority interest expense from these land sales and other activities of the consolidated joint ventures was $20.7 million and $0.6 million, respectively, in the six months ended May 31, 2005 and 2004 and is included in management fees and other income, net.
Management fees and other income, net, totaled $5.3 million in the six months ended May 31, 2005, compared to $36.7 million in 2004, primarily due to increased minority interest expense. Equity in earnings from unconsolidated entities was $37.9 million in the six months ended May 31, 2005, compared to $19.2 million last year. Sales of land, equity in earnings from unconsolidated entities and management fees and other income, net may vary significantly from period to period depending on the timing of land sales and other transactions entered into by us and unconsolidated entities in which we have investments.
The following table presents selected financial and operational information related to our Financial Services Division for the periods indicated (unaudited):
Revenues
Costs and expenses
Operating earnings from continuing operations
Dollar value of mortgages originated
Number of mortgages originated
Mortgage capture rate of Lennar homebuyers
Number of title and closing service transactions
Number of title policies issued
Operating earnings from continuing operations for the Financial Services Division were $19.0 million in the second quarter of 2005, compared to $32.0 million last year. The decrease was primarily due to reduced profitability from our mortgage operations as a result of a more competitive mortgage environment, as well as a $6.5 million pretax gain generated from monetizing a majority of our alarm monitoring contracts during the second quarter of 2004.
28
Operating earnings from continuing operations for the Financial Services Division were $35.2 million in the six months ended May 31, 2005, compared to $54.7 million last year. The decrease was primarily due to reduced profitability from our mortgage operations as a result of a more competitive mortgage environment, as well as a $6.5 million pretax gain generated from monetizing a majority of our alarm monitoring contracts during 2004. This decrease was partially offset by improved profitability from our title operations.
Corporate General and Administrative Expenses
Corporate general and administrative expenses as a percentage of total revenues were 1.4% and 1.5% in the three and six months ended May 31, 2005, respectively, compared to 1.3% and 1.4% in the same periods last year.
Loss on Redemption of 9.95% Senior Notes
In May 2005, we redeemed all of our outstanding 9.95% senior notes, which resulted in a $34.9 million pretax loss on redemption, or $0.13 per share diluted, for the three and six months ended May 31, 2005.
In 2005, we generated a $15.8 million pretax gain on the sale of a subsidiary of the Financial Services Division’s title company. As a result of the sale, the subsidiary’s results are presented as discontinued operations for the three and six months ended May 31, 2005 and 2004. Earnings from discontinued operations for the three and six months ended May 31, 2005 were $10.3 million and $10.7 million, respectively, compared to $0.2 million and $0.4 million in the same periods in the prior year.
(2) Financial Condition and Capital Resources
At May 31, 2005, we had cash related to our homebuilding and financial services operations of $189.5 million, compared to $223.5 million at May 31, 2004. We finance our land acquisition and development activities, construction activities, financial services activities and general operating needs primarily with cash generated from our operations and public debt issuances, as well as cash borrowed under our revolving credit facilities and warehouse lines of credit.
Operating Cash Flow Activities
In the six months ended May 31, 2005, cash flows used in operating activities totaled $592.2 million, compared to $298.6 million in the same period last year. This increase consists primarily of an increase in construction in progress due to increased housing starts to support a higher backlog and a decrease in accounts payable and other liabilities, offset by net earnings and a decrease in receivables.
29
Investing Cash Flow Activities
Cash flows used in investing activities totaled $257.5 million in the six months ended May 31, 2005, compared to $364.4 million in the same period last year. In the six months ended May 31, 2005, we had net contributions of $133.9 million to unconsolidated entities, compared to $277.5 million in the same period last year. Additionally, we used $107.1 million of cash for acquisitions during the six months ended May 31, 2005, compared to $64.1 million during the same period last year. The results of operations of these acquisitions are included in our results of operations since their respective acquisition dates. We are always looking at the possibility of acquiring homebuilders and other companies. However, we have no agreements or understandings regarding any significant transactions.
Financing Cash Flow Activities
Homebuilding debt to total capital is a financial measure commonly used in the homebuilding industry and is presented to assist in understanding the leverage of our homebuilding operations. By providing a measure of leverage of our homebuilding operations, management believes that this enables readers of our financial statements to better understand our financial position and performance. Our homebuilding debt to total capital is calculated as follows (unaudited):
Homebuilding debt
Total capital
Homebuilding debt to total capital
The increase in the ratio primarily resulted from our use of cash to fund inventory additions to support future growth, as well as share repurchases under our stock repurchase program. In addition to the use of capital in our homebuilding and financial services operations, we actively evaluate various other uses of capital which fit into our homebuilding and financial services strategies and appear to meet our profitability and return on capital requirements. This may include acquisitions of or investments in other entities, the payment of dividends or repurchases of our outstanding common stock or debt. These activities may be funded through any combination of our credit facilities, cash generated from operations, sales of assets or the issuance of public debt, common stock or preferred stock.
Our average debt outstanding was $2.4 billion during the six months ended May 31, 2005, compared to $1.6 billion during the same period last year. The average rate for interest incurred was 6.1% in the six months ended May 31, 2005, compared to 7.3% in the same period last year. Interest incurred for the six months ended May 31, 2005 was $77.5 million, compared to $64.1 million in the same period last year. The majority of our short-term financing needs, including financings for land acquisition and development activities, construction activities and general operating needs, are met with cash generated from operations and funds available under our senior unsecured credit facilities (the “Credit Facilities”), which were amended in May 2005. The Credit Facilities provide us with up to $1.4 billion of financing. The Credit Facilities consist of a $976.9 million revolving credit facility maturing in May 2009 and a $418.6 million revolving credit facility maturing in June 2005 (extended from May 2005). We may elect to
30
convert borrowings under the revolving credit facility maturing in June 2005 to a term loan, which would mature in May 2009. The Credit Facilities are guaranteed by substantially all of our subsidiaries other than finance company subsidiaries (which include mortgage and title insurance subsidiaries). Interest rates are LIBOR-based, and the margins are set by a pricing grid with thresholds that adjust based on changes in our leverage ratio and credit ratings, or to an alternate base rate, as described in the credit agreement. At May 31, 2005, $113.0 million was outstanding under the Credit Facilities. During the six months ended May 31, 2005, the average daily amount outstanding under the Credit Facilities was $269.4 million.
In June 2005, we replaced the Credit Facilities with a new senior unsecured credit facility (the “New Facility”). The New Facility consists of a $1.7 billion revolving credit facility maturing in June 2010. The New Facility also includes access to an additional $500 million via an accordion feature, under which the New Facility may be increased to $2.2 billion, subject to additional commitments. We repaid the outstanding balance under the Credit Facilities with borrowings under the New Facility. The New Facility is guaranteed by substantially all of our subsidiaries other than finance company subsidiaries (which include mortgage and title insurance subsidiaries). Interest rates on outstanding borrowings are LIBOR-based, with margins determined based on changes in our leverage ratio and credit ratings, or to an alternate base rate, as described in the credit agreement.
At May 31, 2005, we had letters of credit outstanding in the amount of $837.8 million. The majority of these letters of credit are posted with regulatory bodies to guarantee our performance of certain development and construction activities or are posted in lieu of cash deposits on option contracts. Of our total letters of credit outstanding, $214.2 million were collateralized against certain borrowings available under the Credit Facilities.
In June 2005, we entered into a letter of credit facility with a financial institution. The purpose of the letter of credit facility is to facilitate the issuance of up to $150 million of letters of credit on a senior unsecured basis through the facility’s expiration date of June 2008.
In September 2004, we entered into a structured letter of credit facility (the “LC Facility”) with a financial institution. The purpose of the LC Facility is to facilitate the issuance of up to $200 million of letters of credit on a senior unsecured basis. In connection with the transaction, the financial institution issued $200 million of their senior notes, which were linked to our performance on the LC Facility. If there is an event of default under the LC Facility, including our failure to reimburse a draw against an issued letter of credit, the financial institution would assign its claim against us, to the extent of the amount due and payable by us under the LC Facility, to its noteholders in lieu of their principal repayment on their performance linked notes. At May 31, 2005, we had letters of credit outstanding in the amount of $198.3 million under the LC Facility.
In April 2005, we sold $300 million of 5.60% senior notes due 2015 (the “Senior Notes”) at a price of 99.771% in a private placement. Proceeds from the offering, after initial purchaser’s discount and expenses, were $297.5 million. We added the proceeds to our working capital to be used for general corporate purposes. Interest on the Senior Notes is due semi-annually. The Senior Notes are unsecured and unsubordinated. Substantially all of our subsidiaries other than finance company subsidiaries guaranteed the Senior Notes. At May 31, 2005, the carrying value of the Senior Notes was $299.3 million. We have agreed to exchange the Senior Notes for notes (the “Exchange Notes”) that will be registered under the Securities Act of 1933, as amended. The Exchange Notes will have substantially identical terms as the Senior Notes, except that the Exchange Notes will not include the transfer restrictions of the Senior Notes.
31
On July 6, 2005, we offered an additional $200 million of Senior Notes in a private placement. The offering was made in addition to our $300 million private placement of Senior Notes that we completed in April 2005. We expect to complete the offering on July 13, 2005. The offering has not been registered under the Securities Act of 1933, and the Senior Notes may not be offered or sold in the United States absent registration under the Securities Act or an exemption from the registration requirements. This information shall not constitute an offer to sell or a solicitation of an offer to buy the Senior Notes.
In May 2005, we redeemed all of our outstanding 9.95% senior notes due 2010 (the “Notes”). The redemption price was $337.7 million, or 104.975% of the principal amount of the Notes outstanding, plus accrued and unpaid interest as of the redemption date. The redemption of the Notes resulted in a $34.9 million pretax loss.
At May 31, 2005, our Financial Services Division had warehouse lines of credit totaling $900 million to fund its mortgage loan activities. Borrowings under the facilities were $687.0 million at May 31, 2005. The warehouse lines of credit mature in April 2007 ($600 million) and in August 2005 ($300 million), at which time we expect the facilities to be renewed. At May, 31, 2005, we had advances under a conduit funding agreement with a major financial institution amounting to $17.6 million. We also had a $20 million revolving line of credit with a bank that matures in July 2005, at which time we expect the line of credit to be renewed. Borrowings under the line of credit were $18.9 million at May 31, 2005.
Changes in Capital Structure
Our Board of Directors previously authorized a stock repurchase program to permit future purchases of up to 20 million shares of our outstanding common stock. During the three and six months ended May 31, 2005, we repurchased a total of 2.4 million and 4.4 million shares, respectively, of our outstanding Class A common stock under our stock repurchase program for an aggregate purchase price of $126.9 million, or $52.36 per share, and $232.2 million, or $53.26 per share, respectively. As of May 31, 2005, 13.2 million shares of common stock can be repurchased in the future under the program.
On May 16, 2005, we paid cash dividends of $0.1375 per share for both our Class A and Class B common stock to holders of record at the close of business on May 6, 2005, as declared by our Board of Directors on March 29, 2005. On June 28, 2005, our Board of Directors declared a quarterly cash dividend of $0.1375 per share for both our Class A and Class B common stock payable on August 15, 2005 to holders of record at the close of business on August 5, 2005.
In recent years, we have sold convertible and non-convertible debt into public markets, and at May 31, 2005, we had a shelf registration statement effective under the Securities Act of 1933, as amended, under which we could sell to the public up to $320 million of debt securities, common stock, preferred stock or other securities. In June 2005, a new shelf registration statement increased the amount of securities available for issuance to $1.0 billion. At May 31, 2005, we had another shelf registration statement effective under the Securities Act of 1933, as amended, under which we could issue up to $400 million of equity or debt securities in connection with acquisitions of companies or interests in companies, businesses or assets.
Based on our current financial condition and credit relationships, we believe that our operations and borrowing resources will provide for our current and long-term capital requirements at our anticipated levels of growth.
32
Off-Balance Sheet Arrangements
We strategically invest in unconsolidated entities that acquire and develop land for our homebuilding operations, for sale to third parties or for the construction of homes for sale to third-party homebuyers. Through these entities, we reduce and share our risk by limiting the amount of our capital invested in land, while increasing access to potential future homesites. The use of these entities also, in some instances, enables us to acquire land to which we could not otherwise obtain access, or could not obtain access on as favorable terms, without the participation of a strategic partner. Our partners in these entities generally are unrelated homebuilders, land sellers or other real estate entities.
At May 31, 2005, the unconsolidated entities in which we had investments had total assets of $6.0 billion and total liabilities of $3.6 billion, which included $2.8 billion of notes and mortgages payable. In some instances, we and/or our partners have provided guarantees of debt of certain unconsolidated entities on a pro rata basis. At May 31, 2005, we had repayment guarantees of $247.0 million and limited maintenance guarantees of $550.4 million related to unconsolidated entity debt. When we and/or our partners provide a guarantee, the unconsolidated entity generally receives more favorable terms from its lenders than would otherwise be available to it. The limited maintenance guarantees only apply if an unconsolidated entity defaults on its loan arrangements and the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. If we are required to make a payment under a limited maintenance guarantee to bring the value of the collateral up to the specified percentage of the loan balance, the payment would constitute a capital contribution or loan to the unconsolidated entity and increase our share of any funds the unconsolidated entity distributes. At May 31, 2005, there were no assets held as collateral that, upon the occurrence of any triggering event or condition under a guarantee, we could obtain and liquidate to recover all or a portion of the amounts to be paid under a guarantee.
Contractual Obligations and Commercial Commitments
During the second quarter of 2005, our obligations related to our homebuilding debt changed significantly. In particular, we redeemed our outstanding 9.95% senior notes due 2010 and issued $300 million of 5.60% senior notes due 2015 as discussed under “Financing Cash Flow Activities.” The following summarizes our contractual debt obligations at May 31, 2005 (unaudited):
Payments Due by Period
Contractual Obligations
Six months
endingNovember 30,2005
Homebuilding - Senior notes and other debts payable
Financial Services - Notes and other debts payable (including limited-purpose finance subsidiaries)
Interest commitments under interest bearing debt
Total contractual cash obligations related to debt
33
We are subject to the usual obligations associated with entering into contracts (including option contracts) for the purchase, development and sale of real estate in the routine conduct of our business. Option contracts for the purchase of land enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we are ready to build homes on them. This reduces our financial risk associated with land holdings. At May 31, 2005, we had access to approximately 205,000 homesites through option contracts with third parties and unconsolidated entities in which we had investments. At May 31, 2005, we had $438.6 million of non-refundable option deposits and advanced costs related to certain of these homesites.
We are committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $837.8 million at May 31, 2005. Additionally, we had outstanding performance and surety bonds related to site improvements at various projects with estimated costs to complete of $1.6 billion. We do not believe that draws upon these bonds, if any, will have a material effect on our financial position, results of operations or cash flows.
Our Financial Services Division had a pipeline of loans in process of $4.2 billion at May 31, 2005. To minimize credit risk, we use the same credit policies in the approval of our commitments as are applied to our lending activities. Loans in process for which interest rates were committed to the borrowers totaled $508.0 million as of May 31, 2005. Substantially all of these commitments were for periods of 60 days or less. Since a portion of our commitments is expected to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash requirements.
Our Financial Services Division uses mandatory mortgage-backed securities (“MBS”) forward commitments and MBS option contracts to hedge its interest rate exposure during the period from when it extends an interest rate lock to a loan applicant until the time at which the loan is sold to an investor. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by entering into MBS primarily with investment banks with primary dealer status and with permanent investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and current market value. At May 31, 2005, we had open commitments amounting to $311.5 million to sell MBS with varying settlement dates through July 2005.
(3) New Accounting Pronouncements
See Note 14 of our condensed consolidated financial statements included under Item 1 of this document for a discussion on new accounting pronouncements applicable to our company.
(4) Critical Accounting Policies
Effective December 1, 2004, as a result of the determination that we met all applicable requirements under Statement of Financial Accounting Standards (“SFAS”) No. 66, Accounting for Sales of Real Estate, we began to apply the percentage-of-completion method to our mid-to-high-rise condominium projects under construction. In accordance with SFAS No. 66, we record revenue as a portion of the value of non-cancelable condominium unit contracts when (1) construction is beyond a preliminary stage, (2) the buyer is committed to the extent of being
34
unable to require a full refund except for non-delivery of the unit, (3) sufficient units have already been sold to assure the entire property will not revert to rental property, (4) sales prices are collectible and (5) aggregate sales proceeds and costs can be reasonably estimated. Revenue recognized under the percentage-of-completion method is calculated based upon the percentage of total costs incurred in relation to total estimated costs to complete, and is adjusted for estimated cancellations due to potential customer defaults. The change to the percentage-of-completion method did not have a material impact on our financial condition as of May 31, 2005 or our results of operations or cash flows for the three and six months ended May 31, 2005. Actual revenues and costs to complete construction in the future could differ from our current estimates. If our estimates of revenues and development costs change, then our revenues, cost of sales and related cumulative profits will be revised in the period that estimates change.
We believe that there have been no other significant changes to our critical accounting policies during the six months ended May 31, 2005, as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended November 30, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks related to fluctuations in interest rates on our investments, debt obligations, mortgage loans and mortgage loans held-for-sale. We utilize derivative instruments, including interest rate swaps, in conjunction with our overall strategy to manage our exposure to changes in interest rates. We also utilize forward commitments and option contracts to mitigate the risk associated with our mortgage loan portfolio.
During the second quarter of 2005, our market risks related to our homebuilding debt changed significantly. In particular, we redeemed our outstanding 9.95% senior notes due 2010 and issued $300 million of 5.60% senior notes due 2015 as discussed under “Financing Cash Flow Activities.”
The following table provides information at May 31, 2005 about our significant derivative financial instruments and fixed and variable rate debt instruments that are sensitive to changes in interest rates. For homebuilding and financial services debt, the table presents principal cash flows and related weighted average effective interest rates by expected maturity dates and estimated fair market values at May 31, 2005. Weighted average variable interest rates are based on the variable interest rates at May 31, 2005. For interest rate swaps, the table presents notional amounts and weighted average interest rates by contractual maturity dates and estimated fair market values at May 31, 2005. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contracts. Our limited-purpose finance subsidiaries have placed mortgages and other receivables as collateral for various long-term financings. These limited-purpose finance subsidiaries pay the principal of, and interest on, these financings almost entirely from the cash flows generated by the related pledged collateral and are excluded from the following table.
35
Information Regarding Interest Rate Sensitivity
Principal (Notional) Amount by
Expected Maturity and Average Interest Rate
Six monthsendingNovember 30,
Fair MarketValue atMay 31,
(Dollars in millions)(Unaudited)
LIABILITIES
Senior notes and other debts payable:
Fixed rate
Average interest rate
Variable rate
Financial services:
Notes and other debts payable:
OTHER FINANCIAL INSTRUMENTS
Homebuilding liabilities:
Interest rate swaps:
Variable to fixed – notional amount
Average pay rate
Average receive rate
Item 4. Controls and Procedures
Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) participated in an evaluation by our management of the effectiveness of our disclosure controls and procedures as of the end of our fiscal quarter that ended on May 31, 2005. Based on their participation in that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of May 31, 2005 to ensure that required information is disclosed on a timely basis in our reports filed under the Securities Exchange Act.
Our CEO and CFO also participated in an evaluation by our management of any changes in our internal control over financial reporting that occurred during the quarter ended May 31, 2005. That evaluation did not identify any changes that have materially affected, or are likely to materially affect, our internal control over financial reporting.
36
Part II. Other Information
Item 1. Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Our Board of Directors previously authorized a stock repurchase program to permit future purchases of up to 20 million shares of our outstanding common stock. During the three months ended May 31, 2005, we repurchased the following shares of our Class A common stock (amounts in thousands, except per share amounts) (unaudited):
Period
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans orPrograms
March 1, 2005 to March 31, 2005
April 1, 2005 to April 30, 2005
May 1, 2005 to May 31, 2005
Item 3. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were resolved by vote at the March 29, 2005 annual meeting of stockholders of Lennar Corporation:
(1) The following members of the Board of Directors were re-elected to hold office until 2008:
Stuart A. Miller
Steven J. Saiontz
Robert J. Strudler
(2) Stockholders did not approve a stockholder proposal regarding environmental matters. The results of the vote were as follows:
Votes
For
Against
Broker
Non-votes
37
Item 5. Not applicable.
Item 6. Exhibits.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.
/s/ Bruce E. Gross
/s/ Diane J. Bessette
39
Exhibit Index
Description