KBH

KB Home 10-K Summary: Fiscal Year Ended November 30, 2003

Business Context and Reporting Period

This filing covers the fiscal year ended November 30, 2003, for KB Home, a leading homebuilder with operations in the United States and France. The company operates two primary segments: construction (99% of revenue) and mortgage banking. Domestically, KB Home operates in 10 states across 31 markets, organized into West Coast, Southwest, Central, and Southeast regions. Internationally, it operates through a majority-owned subsidiary, Kaufman & Broad S.A. (KBSA), in France. The company utilizes the "KBnxt" operational business model, emphasizing pre-sales, customer customization, and geographic diversification.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 16.3% year-over-year, driven by a 7.4% increase in unit deliveries and an 8.2% increase in the average selling price.
• Profitability: Net income rose 17.9% to $370.8 million. Housing gross profit margins improved to 22.5% from 21.3% in 2002.
• Regional Performance:
  • Southeast: Deliveries surged 416% to 3,504 units due to acquisitions (Colony Homes) and expansion.
  • Central: Deliveries declined 20% to 7,659 units due to market softness, despite increased active communities.
  • France: Revenues increased 30.4% primarily due to favorable foreign exchange rates.
• Acquisitions: Completed acquisitions of Colony Homes (Georgia/North Carolina) and Zale Homes (Illinois) during the year, expanding geographic footprint.
• Debt Reduction: Total debt decreased significantly, with the construction debt-to-total capital ratio dropping to 44.0% from 47.8%.

Guidance, Outlook, and Risks

Outlook: Management expects unit deliveries to increase by approximately 12% in fiscal 2004, driven by organic growth and recent acquisitions (including Palmetto Traditional Homes acquired in January 2004). The company anticipates record diluted earnings per share for 2004, supported by increased volume, slightly higher gross margins, and improved SG&A ratios.

Dividend: On December 5, 2003, the Board increased the annual cash dividend to $1.00 per share (from $0.30), with the first quarterly payment at the new rate of $0.25 scheduled for February 2004.

Risks and Contingencies:

• Economic Sensitivity: Business is cyclical and sensitive to interest rates, consumer confidence, and employment levels.
• Land Availability: Success depends on acquiring land at favorable terms; shortages or price increases could impact results.
• Regulatory/Environmental: Subject to extensive zoning, environmental, and building regulations, particularly in California and France.
• Foreign Currency: A 10% strengthening of the U.S. dollar against the euro would decrease 2003 revenues by approximately $90.5 million.

Investor Verification Checklist

• Backlog Realization: Verify the conversion rate of the $3.07 billion backlog into 2004 revenues, considering potential cancellations due to interest rate hikes.
• Central Region Recovery: Monitor the turnaround strategy for the Central region, which saw a 20% drop in deliveries despite increased active communities.
• Acquisition Integration: Assess the financial integration and performance of Colony Homes, Zale Homes, and the post-year-end Palmetto acquisition.
• Interest Rate Exposure: Review the impact of rising mortgage rates on both homebuyer demand and the mortgage banking segment's retention rate (which dropped to 73% in 2003).
• Foreign Exchange Impact: Evaluate the sustainability of French revenue growth given the significant contribution from favorable exchange rates.