KBH

KB Home (Kaufman and Broad Home Corp.) 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended May 31, 1999, and the six months ended on that date. KB Home is a residential homebuilder and mortgage banking company operating in the United States (California, Other U.S., and Texas), France, and Mexico. The reporting period includes the full impact of the Lewis Homes acquisition (closed January 7, 1999) and the completion of the General Homes acquisition (closed January 4, 1999).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 61.5% for the six months and 60.4% for the quarter, driven primarily by a 61.3% increase in housing revenues and a 69.8% increase in mortgage banking pretax income.
• Unit Deliveries: Housing unit deliveries rose 56.0% for the six months (9,418 units vs. 6,038) and 50.7% for the quarter (5,139 units vs. 3,409). This growth was fueled by acquisitions (Lewis Homes, General Homes) and organic expansion in "Other U.S." markets.
• Acquisition Impact: The Lewis Homes acquisition added significant scale, including approximately 24,000 lots and a backlog of 900 homes at the time of purchase. The transaction was financed via a $200 million term loan and the issuance of 7.9 million shares of common stock.
• Expense Trends: Selling, general, and administrative (SG&A) expenses increased significantly ($76.9 million for six months) due to goodwill amortization from acquisitions and investments in the "KB2000" operational model and Year 2000 compliance. However, SG&A as a percentage of revenue improved slightly.
• Interest Capitalization: The percentage of interest capitalized increased to 62.5% for the six months (vs. 45.2% in 1998), reducing net interest expense despite higher gross interest incurred.

Guidance, Outlook, and Risks

• Backlog: As of May 31, 1999, the residential backlog reached a record high of 11,296 units valued at approximately $1.80 billion, representing a 49.0% increase in units and 60.5% in value compared to the prior year.
• 2000 Outlook: The Company aims to deliver approximately 21,500 units in fiscal year 1999. Management expects to be the largest homebuilder in the U.S. by unit deliveries in 1999.
• Year 2000 Compliance: The Company has invested approximately $3.7 million (as of June 30, 1999) toward Year 2000 compliance. Four high-priority projects are certified complete; a contingency plan (Project 13) is expected by September 1999. Risks remain regarding third-party suppliers and government agencies.
• Market Risks: Key risks include rising mortgage interest rates, economic downturns, and consumer confidence. The Company is reducing exposure in Mexico, planning to sell remaining lots after delivering current backlog due to unsettled economic conditions there.
• Liquidity: The Company maintains $290.5 million available under its $500 million domestic revolving credit facility and $89.6 million under French facilities. Management believes resources are adequate for current and anticipated needs.

Investor Verification Checklist

• Verify the integration progress and financial performance of the Lewis Homes and General Homes acquisitions, specifically regarding the $177.6 million goodwill amortization impact.
• Monitor mortgage interest rate trends and their potential impact on the $1.8 billion backlog and future unit deliveries.
• Review the status of the Year 2000 contingency plan and third-party vendor compliance, as failures could disrupt operations.
• Assess the sustainability of the 18.4% construction gross margin given the mix of higher-priced Lewis Homes units versus lower-priced "Other U.S." deliveries.
• Confirm the execution of the 21,500 unit delivery goal for fiscal 1999 against actual quarterly performance.