LEN

Business Context and Reporting Period

This Form 10-Q covers Lennar Corporation for the quarterly and six-month periods ended May 31, 2003. Lennar operates two primary segments: Homebuilding (construction and sale of single-family homes and land) and Financial Services (mortgage financing, title insurance, and related services). The company reported strong growth in deliveries and new orders, driven by expansion in California and the entry into the Illinois market.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 35% for the three months and 33% for the six months compared to the same periods in 2002. Homebuilding revenues rose 36% (quarterly) and 33% (six-month) due to a 25% increase in deliveries and an 8% increase in average sales price.
• Profitability: Net earnings increased 51% for the quarter and 50% for the six-month period. Operating margins for home sales improved to 13.2% (quarterly) and 12.6% (six-month) from 12.7% and 12.0% in the prior year.
• Operational Volume: Home deliveries totaled 7,571 units for the quarter and 13,401 for the six months, up from 6,016 and 10,926 respectively in 2002. New orders reached 9,798 units for the quarter and 16,509 for the six months.
• Cash Flow: Operating cash flow turned negative, using $128.6 million for the six months ended May 31, 2003, compared to providing $30.4 million in the prior year. This was primarily due to a $468.4 million increase in inventories to support growth and a reduction in accounts payable.

Guidance, Outlook, and Risks

• Capital Structure: In February 2003, the company issued $350 million of 5.95% senior notes due 2013. In May 2003, credit facilities were amended to provide up to $1.3 billion in financing. In June 2003, the company called its 3 7/8% zero-coupon senior convertible debentures due 2018 for redemption; approximately 26% had been converted to equity as of June 30, 2003.
• Acquisitions: The company acquired two homebuilders in 2003 for approximately $100 million, expanding presence in California and South Carolina.
• Accounting Changes (FIN 46): The company is evaluating the impact of FASB Interpretation No. 46 regarding the consolidation of variable interest entities. While no material impact on net earnings is expected, it may require the consolidation of certain unconsolidated partnerships and land options, potentially increasing reported assets and liabilities.
• Stock Distribution: In April 2003, a 10% stock distribution of Class B common stock was made to shareholders. EPS figures have been adjusted to reflect this.
• Risks: Management cites risks related to general economic conditions, interest rates, land availability, and the potential impact of new accounting standards on balance sheet presentation.

Investor Verification Checklist

• Inventory Levels: Verify the $3.75 billion inventory balance and the $468 million increase, ensuring it aligns with the reported backlog and delivery pipeline.
• Debt Redemption: Confirm the status of the 3 7/8% convertible debentures called for redemption in July 2003 and the final conversion rate versus cash repayment.
• FIN 46 Impact: Monitor future filings for the final determination on the consolidation of unconsolidated partnerships and land options, which could alter leverage ratios.
• Margin Sustainability: Assess whether the 24.5% gross margin is sustainable given the mix of markets (strength in West vs. softness in Texas) and potential material/labor cost inflation.
• Cash Burn: Review the negative operating cash flow of $128.6 million to ensure sufficient liquidity exists to fund the $4.2 billion backlog without excessive new debt issuance.