KBH

KB HOME 10-K Summary: Fiscal Year Ended November 30, 1997

Business Context and Reporting Period

Kaufman and Broad Home Corporation (KB HOME) is a builder of single-family homes with domestic operations in seven western U.S. states and international operations in France and Mexico. The company also provides mortgage banking services through its subsidiary, Kaufman and Broad Mortgage Company (KBMC). This report covers the fiscal year ended November 30, 1997. In 1997, the company achieved a record 11,443 unit deliveries, surpassing the previous record of 10,249 units set in 1996.

Key Financial Metrics

Note: 1996 results included a $170.8 million non-cash charge for impairment of long-lived assets. Excluding this charge, 1996 net income was $48.0 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 5.1% to $1.88 billion, driven primarily by an 11.7% increase in housing unit deliveries to 11,443 units. This growth was partially offset by a 2.2% decline in the average selling price to $159,700.
• Profitability: Net income rebounded to $58.2 million in 1997 from a net loss of $61.2 million in 1996. The 1996 loss was largely due to the $170.8 million impairment charge. Excluding the charge, 1997 net income represented a 21.3% increase over the adjusted 1996 figure.
• Geographic Shift: Deliveries outside California increased 31.4% to 5,642 units, accounting for 54% of domestic deliveries. Conversely, California deliveries declined 8.5% to 4,731 units as the company reduced active communities in the state to improve margins.
• International Performance: French deliveries rose 38% to 1,032 units, aided by the mid-year acquisition of SMCI developments. Mexico operations achieved profitability with 38 units delivered.
• Backlog: Ending backlog increased 48% to 4,214 units (valued at $666.7 million), reflecting the success of the "KB2000" pre-sale strategy.

Guidance, Outlook, and Risks

• Strategic Initiatives: The company is focused on two initiatives: accelerating growth and implementing the "KB2000" business model, which emphasizes pre-sales, customer surveys, and process-driven efficiency.
• Future Goals: Management set a goal to deliver in excess of 16,000 units company-wide in 1999. They aim to double 1999 deliveries in specific identified markets compared to 1996 levels.
• Capital Position: The company maintains a strong capital position with $488.4 million available under a $500 million revolving credit facility and $54.2 million available in French credit lines.
• Risks: Key risks include the cyclical nature of the housing industry, interest rate fluctuations, availability and cost of land, and economic conditions in France and Mexico. The company also noted the "Year 2000" computer issue, though management anticipates no material adverse effect.
• Unusual Items: The 1996 financials were significantly impacted by a $170.8 million non-cash impairment charge related to long-term development assets in California and France. Land sale revenues were also abnormally high in 1996 ($68.2 million) due to an aggressive asset sale program, dropping to $13.6 million in 1997.

Investor Verification Checklist

• Backlog Conversion: Verify the conversion rate of the record 4,214-unit backlog into actual deliveries in 1998, noting the risk of cancellations due to financing issues.
• Margin Trends: Monitor the gross profit margin, which declined to 18.2% in 1997 from 18.8% in 1996, to ensure the KB2000 model improves profitability as projected.
• California Exposure: Assess the impact of continued selective land investment in California, where market share fell to 6.2%, on overall revenue stability.
• Debt Structure: Review the terms of the new $175 million senior notes issued in late 1997 and the redemption of the $100 million senior notes to understand future interest obligations.
• Acquisition Integration: Evaluate the full-year performance of the San Antonio operations and the integration of the SMCI French developments.