KB HOME 10-Q Summary: Period Ended May 31, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended May 31, 2009, and the six months ended May 31, 2009, for KB HOME, a homebuilder operating in the West Coast, Southwest, Central, and Southeast regions of the United States. The company operates two primary segments: Homebuilding and Financial Services. The reporting period reflects continued turbulent operating conditions due to the prolonged housing market downturn, economic recession, and tight mortgage lending standards.
Key Financial Metrics
| Metric | Six Months Ended May 31, 2009 | Six Months Ended May 31, 2008 | Three Months Ended May 31, 2009 | Three Months Ended May 31, 2008 |
|---|---|---|---|---|
| Total Revenues | $691.8 million | $1,433.3 million | $384.5 million | $639.1 million |
| Net Loss | $(136.5) million | $(524.1) million | $(78.4) million | $(255.9) million |
| Loss Per Share (Diluted) | $(1.78) | $(6.77) | $(1.03) | $(3.30) |
| Cash and Cash Equivalents | $997.4 million | $1,305.1 million (6mo) | $997.4 million | $1,305.1 million (6mo) |
| Restricted Cash | $102.2 million | $115.4 million | $102.2 million | $115.4 million |
| Total Debt (Mortgages & Notes) | $1,711.7 million | $1,941.5 million | $1,711.7 million | $1,941.5 million |
| Net Cash Provided by Operating Activities | $83.5 million | $66.7 million | N/A | N/A |
| Backlog (Homes) | 3,804 | 6,233 | 3,804 | 6,233 |
| Backlog (Value) | $796.9 million | $1,465.9 million | $796.9 million | $1,465.9 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 52% year-over-year for the six-month period and 40% for the quarter. This was driven by a 44% decrease in homes delivered (3,206 vs. 5,738) and a 10% decline in average selling prices ($213,700 vs. $237,600) over the six months.
- Improved Loss Position: Despite lower revenues, the net loss narrowed significantly compared to the prior year. The six-month loss decreased by approximately 74% ($136.5M vs. $524.1M), and the quarterly loss decreased by approximately 70% ($78.4M vs. $255.9M).
- Reduced Impairment Charges: A primary driver of the improved loss was a significant reduction in noncash charges. Inventory impairment and land option contract abandonment charges totaled $67.0 million for the six months ended May 31, 2009, compared to $361.9 million in the prior year period. Goodwill impairment charges of $24.6 million recorded in the prior year were absent in the current period.
- Cost Reductions: Selling, general, and administrative (SG&A) expenses decreased 46% year-over-year for the six-month period ($133.8M vs. $246.7M) due to workforce reductions and operational consolidations.
- Debt Reduction: Total debt decreased by $229.8 million from the prior fiscal year-end, primarily due to the repayment of $200 million in senior subordinated notes in December 2008.
Guidance, Outlook, and Risks
- Outlook: Management anticipates continued difficult market conditions for the remainder of fiscal 2009, resulting in lower year-over-year homes delivered and revenues. However, they expect favorable year-over-year net order comparisons in the third and fourth quarters due to the rollout of the new "The Open Series" product line.
- Strategic Goals: The company remains focused on three goals: generating cash and maintaining a strong balance sheet, restoring homebuilding profitability, and positioning for market recovery. This includes reducing inventory, exiting underperforming markets, and lowering active community counts.
- Liquidity: The company ended the period with $1.10 billion in cash and restricted cash. The credit facility commitment was reduced to $650 million due to tangible net worth covenants, with $456.5 million available for borrowing. The company is in compliance with all debt covenants.
- Risks: Key risks include further deterioration in housing market conditions, rising foreclosure rates, tight credit markets, and the potential need for additional inventory impairment charges if market conditions worsen beyond current expectations. The company also faces litigation regarding ERISA fiduciary duties related to stock option backdating.
Investor Verification Checklist
- Inventory Valuation: Verify the assumptions used for the $888.4 million of inventory carrying value impacted by prior impairment charges and the adequacy of current impairment provisions given market volatility.
- Joint Venture Exposure: Review the $171.2 million investment in unconsolidated joint ventures and the associated guarantees (including a potential $182.7 million exposure under a specific several guaranty) for potential off-balance-sheet liabilities.
- Credit Facility Covenants: Monitor compliance with the Credit Facility's tangible net worth and leverage ratios, noting the requirement to maintain an Interest Reserve Account due to a Coverage Ratio below 1.00.
- Backlog Conversion: Assess the risk of order cancellations, which improved to 20% in the quarter but remain a significant factor in revenue realization.
- Deferred Tax Assets: Confirm the status of the $910.8 million valuation allowance against deferred tax assets and the likelihood of utilizing net operating losses in the future.