KB HOME 10-Q Summary: Period Ended August 31, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended August 31, 2009, and the nine months ended August 31, 2009, for KB HOME, a homebuilder operating in the West Coast, Southwest, Central, and Southeast regions of the United States. The company also operates a financial services segment providing title, insurance, and mortgage banking services. The reporting period reflects continued challenging operating conditions due to the housing market downturn, characterized by an oversupply of homes, rising foreclosures, and tight credit standards.
Key Financial Metrics
| Metric | Nine Months Ended Aug 31, 2009 | Nine Months Ended Aug 31, 2008 | Three Months Ended Aug 31, 2009 | Three Months Ended Aug 31, 2008 |
|---|---|---|---|---|
| Total Revenues | $1,150.3 million | $2,114.9 million | $458.5 million | $681.6 million |
| Net Loss | $(202.5) million | $(668.8) million | $(66.0) million | $(144.7) million |
| Loss Per Share (Diluted) | $(2.64) | $(8.63) | $(0.87) | $(1.87) |
| Operating Cash Flow | $113.2 million | $30.2 million | N/A | N/A |
| Cash and Restricted Cash | $1,057.7 million | $1,250.8 million (Nov 30, 2008) | $1,057.7 million | N/A |
| Total Debt (Mortgages & Notes) | $1,812.8 million | $1,941.5 million (Nov 30, 2008) | $1,812.8 million | N/A |
| Housing Gross Margin | 6.4% | -6.4% | 11.1% | 3.9% |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 46% for the nine months and 33% for the quarter compared to the prior year. This was driven by a 36% reduction in homes delivered (5,446 vs. 8,526) and a 12% decline in average selling prices ($209,200 vs. $238,300) over the nine-month period.
- Loss Reduction: Despite lower revenues, the net loss improved significantly, decreasing by 70% for the nine months and 54% for the quarter. This improvement was primarily due to reduced inventory impairment charges, lower selling, general, and administrative (SG&A) expenses, and improved gross margins.
- Impairment Charges: Pretax, noncash inventory impairment and land option contract abandonment charges totaled $91.5 million for the nine months ended August 31, 2009, a significant decrease from $401.1 million in the prior year period.
- SG&A Reduction: SG&A expenses decreased 43% to $217.6 million for the nine months, reflecting workforce reductions and operational consolidations.
- Debt Management: The company issued $265 million in 9.1% senior notes due 2017 and used proceeds to repurchase $250 million of 6.375% senior notes due 2011, extending the maturity profile of its public debt.
Guidance, Outlook, and Risks
- Outlook: Management anticipates lower year-over-year revenues and homes delivered in the fourth quarter of 2009 but expects improved bottom-line results. The company is focusing on three goals: generating cash, restoring profitability, and positioning for market recovery.
- Product Strategy: The company is rolling out "The Open Series," a value-engineered product line targeting first-time homebuyers, which accounted for 62% of net orders in the third quarter.
- Backlog: Backlog at August 31, 2009, was 3,722 net orders valued at approximately $734.1 million, down from 4,774 orders valued at $1.13 billion a year ago.
- Risks and Contingencies:
- Defective Drywall: The company recorded a $5.7 million warranty charge for homes in Florida and Louisiana containing allegedly defective drywall. It is reviewing other locations and may face further litigation.
- SEC Investigation: On October 2, 2009, the SEC notified the company of a formal investigation regarding possible accounting and disclosure issues.
- ERISA Litigation: A class-action lawsuit regarding alleged stock option backdating practices is pending, with a trial tentatively scheduled for November 2010.
- Joint Venture Guarantees: The company has potential exposure under guarantees for unconsolidated joint ventures, including a several guaranty with a maximum potential responsibility of approximately $182.7 million if enforced.
Key Facts for Investor Verification
- Verify the sufficiency of the $139.8 million warranty liability reserve, particularly regarding the defective drywall issue and potential future claims.
- Monitor the outcome of the SEC investigation initiated in October 2009 regarding accounting and disclosure practices.
- Assess the impact of the company's credit rating (BB- with negative outlook) on its ability to access external financing and the cost of capital.
- Review the status of unconsolidated joint ventures, specifically those in default or at risk of default, and the potential for the company to be required to consolidate them or honor guarantees.
- Track the adoption and market reception of "The Open Series" product line as a driver for future net orders and margin improvement.