KBH

KB HOME 10-Q Summary: Period Ended August 31, 2002

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended August 31, 2002, and the nine-month period ended on that date. KB HOME operates in two primary segments: construction (homebuilding) and mortgage banking. The company operates in the United States (West Coast, Southwest, and Central regions) and France. As of August 31, 2002, there were 47,881,679 shares of common stock outstanding.

Key Financial Metrics

Note: All dollar amounts in thousands except per share data. Debt figure combines Construction and Mortgage Banking notes/mortgages payable.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 7.2% for the nine months and 4.7% for the quarter compared to the prior year, driven primarily by higher housing revenues and increased average selling prices.
• Profitability: Net income rose 51.6% for the nine months and 38.9% for the quarter. This was fueled by a 1.0 to 1.4 percentage point increase in housing gross margins and higher pretax income from mortgage banking.
• Unit Deliveries: Housing unit deliveries were essentially flat for the quarter (6,490 vs. 6,473) but increased 4.8% for the nine months (17,520 vs. 16,724).
• Average Selling Price: The company-wide average selling price increased 7.6% for the quarter and 4.6% for the nine months, reflecting price increases in various markets.
• Interest Expense: Net interest expense decreased significantly (30.7% for the nine months) due to lower interest rates and a higher percentage of interest capitalized (69.3% vs. 60.9% in the prior year).
• Stock Repurchases: The company repurchased 4.0 million shares for $190.8 million during the nine-month period, completing its initial authorization and securing a new authorization for 2.0 million additional shares.

Guidance, Outlook, and Risks

• Backlog: Residential backlog reached a record $2.64 billion (13,561 units) as of August 31, 2002, a 14.6% increase in value from the prior year. West Coast backlog value surged 51.5%.
• 2002 Outlook: Management expects to deliver slightly more than 25,000 homes for the full year 2002. They anticipate a strong finish to the year driven by new community openings and improved margins.
• Expansion: The company is focusing on expansion in the southeastern U.S., specifically Florida. A subsequent event noted the acquisition of American Heritage Homes (AHH) in Orlando/Tampa for approximately $74 million on September 30, 2002.
• Risks: Key risks include changes in general economic conditions, interest rates, consumer confidence, and the impact of terrorist activities. Cancellations of backlog could occur if market conditions deteriorate.
• Liquidity: The company maintains a debt-to-total capital ratio of 51.0%, within its target range of 45-55%. It has significant available capacity under its credit facilities ($579.6 million domestic unsecured and $268.8 million French unsecured).

Investor Verification Checklist

• Backlog Cancellation Rates: Verify if the record backlog value translates to actual deliveries given the risk of cancellations in a volatile economic environment.
• Land Inventory Valuation: Review the $2.2 billion inventory balance, specifically the $386.7 million in land under development, to assess potential impairment risks if market conditions soften.
• Interest Rate Sensitivity: Assess the impact of rising mortgage rates on both the company's mortgage banking segment and the affordability of its homebuyers.
• Acquisition Integration: Monitor the financial impact and integration progress of the American Heritage Homes (AHH) acquisition announced post-period.
• Share Count Dilution: Confirm the net effect of the stock repurchase program versus the issuance of shares under employee plans on future earnings per share.