KB HOME 10-Q Summary: Period Ended August 31, 2001
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended August 31, 2001, and the nine-month period ended on that date. KB HOME operates in two primary segments: construction (residential and commercial homebuilding) and mortgage banking. The company operates in the United States (West Coast, Southwest, and Central regions) and France. As of August 31, 2001, there were 50,321,172 shares of common stock outstanding.
Key Financial Metrics
| Metric | Nine Months Ended Aug 31, 2001 | Nine Months Ended Aug 31, 2000 | Three Months Ended Aug 31, 2001 | Three Months Ended Aug 31, 2000 |
|---|---|---|---|---|
| Total Revenues | $3,123,323,000 | $2,686,791,000 | $1,235,313,000 | $981,024,000 |
| Net Income | $125,709,000 | $136,553,000 | $60,387,000 | $44,639,000 |
| Diluted EPS | $3.36 | $3.32 | $1.58 | $1.14 |
| Operating Income (Construction) | $217,238,000 | $167,124,000 | $99,780,000 | $75,881,000 |
| Construction Gross Margin | 19.7% (9mo) | 19.3% (9mo) | 20.0% (3mo) | 19.8% (3mo) |
| Cash and Equivalents | $45,181,000 (Total) | $45,192,000 (Total) | As of Aug 31, 2001 | |
| Total Debt (Mortgages/Notes) | $1,620,924,000 | $1,373,274,000 | As of Aug 31, 2001 | |
| Debt to Total Capital Ratio | 53.4% | 53.1% | As of Aug 31, 2001 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 16.2% for the nine months and 25.9% for the quarter compared to the prior year, driven primarily by higher housing revenues and unit deliveries.
- Unit Deliveries: Excluding joint ventures, unit deliveries rose 13.4% to 6,473 units in the third quarter and 9.2% to 16,724 units for the nine months.
- Pricing Power: The company-wide average selling price increased 6.8% to $179,500 in the third quarter and 6.0% to $177,600 for the nine months.
- One-Time Items: The prior year (2000) nine-month results included a one-time gain of $39.6 million from the issuance of stock by the French subsidiary. Excluding this, 2001 net income for the nine months was higher than the adjusted 2000 figure.
- Acquisition: The company acquired Trademark Home Builders, Inc. in July 2001 for approximately $30.1 million, marking its entry into the Florida market.
- Capital Structure: $189.8 million of "Feline Prides" mandatorily converted into common stock in August 2001, eliminating future minority interest distributions associated with these securities.
Guidance, Outlook, and Risks
- Backlog: As of August 31, 2001, the residential backlog (excluding joint ventures) was 13,464 units valued at approximately $2.31 billion, an 11.1% increase in units and 13.4% in value compared to the prior year.
- Full Year Guidance: Management expects to deliver approximately 24,400 homes for the full fiscal year 2001 and anticipates a record level of earnings, though this is subject to economic conditions.
- Impact of September 11: The filing notes that optimism has been tempered by the September 11, 2001 terrorist attacks and the subsequent U.S. military response. Net orders declined 13.9% in September 2001 compared to the prior year, with domestic orders falling 20.5%. Cancellation rates have increased slightly.
- Strategic Response: The company plans to take a conservative posture on cash expenditures, renegotiate land option periods, and review overhead structures to prepare for potential economic downturns.
- Accounting Changes: The company plans to early adopt SFAS No. 142 (Goodwill) in the first quarter of fiscal 2002, which will eliminate approximately $28.0 million in annual amortization expense.
Investor Verification Checklist
- Verify the sustainability of the 13.4% increase in unit deliveries given the 20.5% drop in domestic net orders reported for September 2001.
- Confirm the impact of the September 11 events on cancellation rates and the ability to meet the 24,400 home delivery target for fiscal 2001.
- Review the details of the $250 million senior subordinated notes issued in February 2001 and the associated interest expense.
- Assess the integration and performance of the newly acquired Trademark Home Builders in the Florida market.
- Monitor the company's liquidity position, specifically the utilization of the $732 million domestic unsecured revolving credit facility.
- Track the outcome of the first goodwill impairment test required under SFAS No. 142, scheduled for December 1, 2001.