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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended May 31, 2001.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from [________] to [________].
Commission File No. 1-9195
KB HOME
(Exact name of registrant as specified in its charter)
Delaware 95-3666267
(State of incorporation) (IRS employer identification number)
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
(Address and telephone number of principal executive offices)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
Yes [X] No [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK AS OF MAY 31, 2001.
Common stock, par value $1.00 per share, 44,282,789 shares outstanding,
including 8,580,326 shares held by the Registrant's Grantor Stock Ownership
Trust and excluding 1,448,100 shares held in treasury.
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KB HOME
FORM 10-Q
INDEX
PAGE
NUMBER(s)
---------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income --
Six Months and Three Months ended May 31, 2001 and 2000 3
Consolidated Balance Sheets --
May 31, 2001 and November 30, 2000 4
Consolidated Statements of Cash Flows --
Six Months ended May 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KB HOME
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts - Unaudited)
Six Months Ended May 31, Three Months Ended May 31,
----------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
TOTAL REVENUES $ 1,888,010 $ 1,705,767 $ 1,066,945 $ 906,182
=========== =========== =========== ===========
CONSTRUCTION:
Revenues $ 1,860,148 $ 1,679,962 $ 1,051,953 $ 893,737
Construction and land costs (1,503,514) (1,374,236) (850,662) (733,605)
Selling, general and administrative expenses (239,176) (214,483) (133,286) (110,555)
----------- ----------- ----------- -----------
Operating income 117,458 91,243 68,005 49,577
Interest income 1,841 3,747 937 1,826
Interest expense, net of amounts capitalized (19,299) (13,182) (9,464) (7,118)
Minority interests (12,320) (12,524) (6,398) (6,722)
Equity in pretax income of unconsolidated
joint ventures 1,556 1,490 1,086 1,036
Gain on issuance of French subsidiary stock -- 39,630 -- --
----------- ----------- ----------- -----------
Construction pretax income 89,236 110,404 54,166 38,599
----------- ----------- ----------- -----------
MORTGAGE BANKING:
Revenues:
Interest income 9,671 10,839 5,097 5,574
Other 18,191 14,966 9,895 6,871
----------- ----------- ----------- -----------
27,862 25,805 14,992 12,445
Expenses:
Interest (8,934) (9,611) (4,638) (4,735)
General and administrative (9,142) (6,484) (4,616) (3,609)
----------- ----------- ----------- -----------
Mortgage banking pretax income 9,786 9,710 5,738 4,101
----------- ----------- ----------- -----------
TOTAL PRETAX INCOME 99,022 120,114 59,904 42,700
Income taxes (33,700) (28,200) (20,400) (15,000)
----------- ----------- ----------- -----------
NET INCOME $ 65,322 $ 91,914 $ 39,504 $ 27,700
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 1.85 $ 2.23 $ 1.11 $ .70
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $ 1.77 $ 2.18 $ 1.07 $ .68
=========== =========== =========== ===========
BASIC AVERAGE SHARES OUTSTANDING 35,331 41,232 35,691 39,817
=========== =========== =========== ===========
DILUTED AVERAGE SHARES OUTSTANDING 36,920 42,214 36,803 $ 40,712
=========== =========== =========== ===========
CASH DIVIDENDS PER COMMON SHARE $ .150 $ .150 $ .075 $ .075
=========== =========== =========== ===========
See accompanying notes.
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KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands - Unaudited)
May 31, November 30,
2001 2000
----------- -----------
ASSETS
CONSTRUCTION:
Cash and cash equivalents $ 3,847 $ 21,385
Trade and other receivables 311,246 306,581
Inventories 1,883,206 1,657,401
Investments in unconsolidated joint ventures 8,346 10,407
Deferred income taxes 69,294 73,842
Goodwill 186,261 202,177
Other assets 96,653 89,975
----------- -----------
2,558,853 2,361,768
----------- -----------
MORTGAGE BANKING:
Cash and cash equivalents 13,714 11,696
Receivables:
First mortgages and mortgage-backed securities 38,216 43,137
First mortgages held under commitments of sale and
other receivables 429,274 403,165
Other assets 9,320 9,155
----------- -----------
490,524 467,153
----------- -----------
TOTAL ASSETS $ 3,049,377 $ 2,828,921
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CONSTRUCTION:
Accounts payable $ 297,100 $ 311,537
Accrued expenses and other liabilities 203,093 201,672
Mortgages and notes payable 1,119,672 987,980
----------- -----------
1,619,865 1,501,189
----------- -----------
MORTGAGE BANKING:
Accounts payable and accrued expenses 15,093 11,135
Notes payable 405,492 385,294
Collateralized mortgage obligations secured by
mortgage-backed securities 26,037 29,928
----------- -----------
446,622 426,357
----------- -----------
Minority interests:
Consolidated subsidiaries and joint ventures 59,368 56,866
Company obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely debentures of the Company 189,750 189,750
----------- -----------
249,118 246,616
----------- -----------
Common stock 45,731 44,397
Paid-in capital 256,430 240,761
Retained earnings 658,381 598,374
Accumulated other comprehensive income (11,949) (9,564)
Grantor stock ownership trust (186,484) (190,872)
Treasury stock, at cost (28,337) (28,337)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 733,772 654,759
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,049,377 $ 2,828,921
=========== ===========
See accompanying notes.
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KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - Unaudited)
Six Months Ended May 31,
---------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 65,322 $ 91,914
Adjustments to reconcile net income to net cash used by
operating activities:
Equity in pretax income of unconsolidated joint ventures (1,556) (1,490)
Minority interests 12,320 12,524
Gain on issuance of French subsidiary stock -- (39,630)
Amortization of discounts and issuance costs 615 501
Depreciation and amortization 21,768 20,113
Provision for deferred income taxes 4,548 3,496
Change in:
Receivables (30,774) 41,199
Inventories (203,371) (161,532)
Accounts payable, accrued expenses and other liabilities (9,058) (36,695)
Other, net 12,007 (16,967)
--------- ---------
Net cash used by operating activities (128,179) (86,567)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in unconsolidated joint ventures 3,617 (187)
Net sales (originations) of mortgages held
for long-term investment 849 (220)
Payments received on first mortgages and
mortgage-backed securities 4,072 3,244
Purchases of property and equipment, net (3,696) (7,221)
--------- ---------
Net cash provided (used) by investing activities 4,842 (4,384)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) credit agreements and
other short-term borrowings (108,485) 120,070
Proceeds from issuance of senior subordinated notes 247,500 --
Issuance of French subsidiary stock -- 113,118
Payments on collateralized mortgage obligations (3,891) (3,071)
Payments on mortgages, land contracts and other loans (12,174) (11,941)
Payments to minority interests (9,818) (10,789)
Payments of cash dividends (5,315) (6,064)
Repurchases of common stock -- (108,933)
--------- ---------
Net cash provided by financing activities 107,817 92,390
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,520) 1,439
Cash and cash equivalents at beginning of period 33,081 28,367
--------- ---------
Cash and cash equivalents at end of period $ 17,561 $ 29,806
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 20,064 $ 23,206
========= =========
Income taxes paid $ 11,682 $ 22,761
========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Cost of inventories acquired through seller financing $ 22,434 $ 11,621
========= =========
See accompanying notes.
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in the annual financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements
for the year ended November 30, 2000 contained in the Company's 2000
Annual Report to Stockholders.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the Company's financial
position as of May 31, 2001, the results of its consolidated operations
for the six months and three months ended May 31, 2001 and 2000, and its
consolidated cash flows for the six months ended May 31, 2001 and 2000.
The results of operations for the six months and three months ended May
31, 2001 are not necessarily indicative of the results to be expected
for the full year. The consolidated balance sheet at November 30, 2000
has been taken from the audited financial statements as of that date.
2. Inventories
Inventories consist of the following (in thousands):
May 31, November 30,
2001 2000
---------- ----------
Homes, lots and improvements in production $1,409,830 $1,115,824
Land under development 473,376 541,577
---------- ----------
Total inventories $1,883,206 $1,657,401
========== ==========
The impact of capitalizing interest costs on consolidated pretax income
is as follows (in thousands):
Six Months Ended May 31, Three Months Ended May 31,
------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Interest incurred $ 52,311 $ 44,390 $ 26,524 $ 22,798
Interest expensed (19,299) (13,182) (9,464) (7,118)
-------- -------- -------- --------
Interest capitalized 33,012 31,208 17,060 15,680
Interest amortized (27,250) (17,397) (15,624) (9,366)
-------- -------- -------- --------
Net impact on consolidated pretax income $ 5,762 $ 13,811 $ 1,436 $ 6,314
======== ======== ======== ========
3. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
average number of common shares outstanding for the period. Diluted
earnings per share is calculated by dividing net income by the average
number of common shares outstanding including all dilutive potentially
issuable shares under various stock option plans and stock purchase
contracts.
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Earnings Per Share (continued)
The following table presents a reconciliation of average shares
outstanding (in thousands):
Six Months Ended Three Months Ended
May 31, May 31,
-------------------- --------------------
2001 2000 2001 2000
------ ------ ------ ------
Basic average shares outstanding 35,331 41,232 35,691 39,817
Net effect of stock options
assumed to be exercised 1,589 982 1,112 895
------ ------ ------ ------
Diluted average shares outstanding 36,920 42,214 36,803 40,712
====== ====== ====== ======
4. Comprehensive Income
The following table presents the components of comprehensive income (in
thousands):
Six Months Ended May 31, Three Months Ended May 31,
------------------------- --------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income $ 65,322 $ 91,914 $ 39,504 $ 27,700
Foreign currency translation adjustment (3,003) (2,794) (8,839) (2,541)
Net derivative gains 618 -- 2,218 --
-------- -------- -------- --------
Comprehensive income $ 62,937 $ 89,120 $ 32,883 $ 25,159
======== ======== ======== ========
5. Segment Information
The Company has identified two reportable segments: construction and
mortgage banking. Information for the Company's reportable segments is
presented in its consolidated statements of income and consolidated
balance sheets included herein. The Company's reporting segments follow
the same accounting policies used for the Company's consolidated
financial statements. Management evaluates a segment's performance based
upon a number of factors including pretax results.
6. Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998.
This statement addresses the accounting for and disclosure of derivative
instruments, including derivative instruments imbedded in other
contracts, and hedging activities. The statement requires the Company to
recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are either offset
against the change in fair value of assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion
of a derivative's change is recognized in earnings. The adoption of the
new statement as of December 1, 2000 has not had a significant impact on
the earnings or financial position of the Company. As of May 31, 2001,
the Company had $.6 million in net derivative gains included in other
comprehensive income.
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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Recent Accounting Pronouncements (continued)
The Company manages its interest rate risk on mortgage loans held for
sale and its estimated future commitments to originate and close
mortgage loans at fixed prices through the use of mandatory forward
commitments to sell mortgage-backed securities and best-efforts whole
loan delivery commitments. The Company estimates the portion of the
locked mortgage loan pipeline that is expected to close in order to
determine the amount of hedging instruments. These hedging instruments
are classified as cash flow hedges, generally have maturities of three
months or less, and are effective as hedges for interest rate market
risk on mortgage loans held for sale and estimated future commitments.
Accordingly, gains and losses are included in other comprehensive income
until the ultimate disposition of the contract.
7. Mortgages and Notes Payable
On February 8, 2001, pursuant to its universal shelf registration
statement filed with the Securities and Exchange Commission on December
5, 1997 (the "1997 Shelf Registration"), the Company issued $250.0
million of 9 1/2% senior subordinated notes at 100% of the principal
amount of the notes. The notes, which are due February 15, 2011 with
interest payable semi-annually, represent unsecured obligations of the
Company and are subordinated to all existing and future senior
indebtedness of the Company. The notes are redeemable at the option of
the Company, in whole, or in part, at 104.750% of their principal amount
beginning February 15, 2006, and thereafter at prices declining annually
to 100% on and after February 15, 2009. Proceeds from the issuance of
the notes were used to pay down bank borrowings.
On May 24, 2001, the Company's mortgage banking subsidiary renewed its
Master Loan and Security Agreement with an investment bank and reduced
the maximum amount available under the agreement from $250.0 million to
$200.0 million. The agreement, which expires on May 25, 2002, provides
for a facility fee based on the $200.0 million maximum amount available
and provides for interest to be paid monthly at the Eurodollar Rate plus
an applicable spread on amounts borrowed. The amounts outstanding under
the Master Loan and Security Agreement are secured by a borrowing base,
which includes certain mortgage loans held under commitments of sale and
are repayable from sales proceeds. There are no compensating balance
requirements under the agreement. The agreement includes financial
covenants and restrictions which, among other things, require the
maintenance of certain financial statement ratios, a minimum tangible
net worth and a minimum net income.
8. Reclassifications
Certain amounts in the consolidated financial statements of prior years
have been reclassified to conform to the 2001 presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Total revenues for the three months ended May 31, 2001 increased $160.8
million, or 17.7%, to $1.07 billion from $906.2 million for the three
months ended May 31, 2000. For the six months ended May 31, 2001, total
revenues increased $182.2 million, or 10.7%, to $1.89 billion from $1.71
billion in the year-earlier period. The increases in total revenues for
the three-month and six-month periods of 2001 compared to 2000 were due
to higher housing and commercial revenues. Net income for the second
quarter of 2001 totaled $39.5 million, or $1.07 per diluted share
compared with second quarter 2000 net income of $27.7 million or $.68
per diluted share. For the six months ended May 31, 2001, net income
totaled $65.3 million or $1.77 per diluted share compared to $91.9
million or $2.18 per diluted share for the six months ended May 31,
2000. Results for the first six months of 2000 included a one-time gain
of $39.6 million, or $.94 per diluted share, on the issuance of stock by
the Company's French subsidiary (the French IPO gain) in an initial
public offering in February 2000. Excluding the French IPO gain, net
income was $52.3 million or $1.24 per diluted share for the six months
ended May 31, 2000. The increase in earnings per share in the second
quarter of 2001 was principally driven by higher unit volume, a higher
housing gross margin and an increase in pretax income from mortgage
banking operations. Earnings per share rose in the first six months of
2001 primarily due to increased unit volume, higher housing gross margin
and a 12.5% reduction in the average number of diluted shares
outstanding as compared to the year-earlier period due to stock
repurchases made during the later half of 2000.
CONSTRUCTION
Revenues rose by $158.2 million, or 17.7%, to $1.05 billion in the
second quarter of 2001 from $893.7 million in the second quarter of 2000
due to an increase in housing and commercial revenues. Housing revenues
for the period increased by 21.9%, or $182.8 million, to $1.02 billion
from $836.5 million in the year-earlier period as a result of a 13.5%
increase in unit deliveries, excluding joint ventures, and a 7.4%
increase in the Company's average selling price. Housing revenues in the
United States increased 25.6% to $923.3 million on 5,012 unit deliveries
in the second quarter of 2001 from $735.2 million on 4,440 units in the
corresponding quarter of 2000. Housing revenues from the West Coast
region for the second quarter of 2001 totaled $391.4 million, up 29.6%
from $302.0 million in the year-earlier period. Unit deliveries in the
West Coast region in the second quarter of 2001 increased 15.0% to 1,388
units from 1,207 units in the second quarter of 2000 as the average
number of active communities in the region rose 2.4% to 84 from 82.
Housing revenues from the Southwest region totaled $235.0 million for
the three months ended May 31, 2001 compared to $192.7 million for the
same period a year ago, an increase of 22.0%. Unit deliveries in the
Southwest region increased to 1,503 units in the second quarter of 2001
from 1,349 units in the second quarter of 2000 despite a 6.5% decrease
in the average number of active communities in the region to 72 from 77.
In the Central region, housing revenues increased 23.5% to $296.9
million in the second quarter of 2001 from $240.5 million in the
year-earlier quarter as unit deliveries rose 12.6% to 2,121 units from
1,884 units with the average number of active communities of 105 nearly
flat with the year-earlier quarter. Revenues from French housing
operations during the three months ended May 31, 2001 decreased to $96.0
million on 711 units from $101.3 million on 602 units in the
year-earlier period, reflecting a lower average selling price and an
adverse foreign currency translation impact.
During the second quarter of 2001, the Company's overall average selling
price increased 7.4% to $178,100 from $165,900 in the same quarter a
year ago. The Company's domestic average selling price rose 11.2% to
$184,200 in the second quarter of 2001 from $165,600 in the same period
of 2000 as a result of price increases implemented in certain markets
within each region. For the three months ended May 31, 2001, the average
selling price in the Company's West Coast region increased 12.7% to
$282,000 from $250,200 for the same period a year ago and the average
selling price in the Southwest region rose 9.5% to $156,300 from
$142,800. In the Central region, the average selling price increased
9.6% to $140,000 in the second quarter of 2001 from $127,700 in the
second quarter of 2000. In France, the average selling price for the
three months ended May 31, 2001 decreased 19.7% to $135,000 from
$168,200 in the year-earlier quarter primarily due to a higher
proportion of deliveries generated from condominiums, which are
typically priced below single-family detached homes, and an adverse
foreign currency translation impact. This impact in the second quarter
accounted for a nearly 8.0% year-over-year decline in the average
selling price.
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The Company's commercial activities in France generated revenues of $7.0
million in the second quarter of 2001. By comparison, the Company
recorded no commercial revenues in the second quarter of 2000. Revenues
from Company-wide land sales totaled $25.7 million in the second quarter
of 2001 compared to $57.3 million in the second quarter of 2000. Land
sales were higher in 2000 as the Company was actively executing its
asset repositioning strategy which included land sales in various
markets.
For the first six months of 2001, construction revenues increased by
$180.2 million, or 10.7%, to $1.86 billion, from $1.68 billion for the
same period a year ago as a result of higher housing and commercial
revenues, partly offset by a reduction in land sale revenues. Housing
revenues totaled $1.81 billion on 10,251 units in the first half of 2001
compared to $1.61 billion on 9,607 units for the same period a year ago.
Housing operations in the United States produced revenues of $1.63
billion on 8,987 units in the first six months of 2001 and $1.42 billion
on 8,485 units in the comparable period of 2000. During the first half
of 2001, housing revenues from the West Coast region increased 12.2% to
$664.2 million from $592.2 million in the first half of 2000, on a 1.5%
increase in deliveries during the period to 2,369 units from 2,335 in
2000. Housing revenues from the Southwest region increased 13.1% to
$429.6 million from $379.8 million as unit deliveries in the region rose
5.3% to 2,751 from 2,613. Housing revenues from the Central region
increased 18.3% to $533.4 million in the first six months of 2001 from
$450.8 million in the same period of 2000 with deliveries in the region
increasing 9.3% to 3,867 from 3,537. French housing revenues totaled
$181.2 million on 1,264 units in the first half of 2001 compared to
$183.5 million on 1,118 units in the corresponding period of 2000.
The Company-wide average new home price increased 5.4% to $176,400 in
the first half of 2001 from $167,300 in the year-earlier period. For the
first half of 2001, the average selling price in the West Coast region
increased 10.6% to $280,400 from $253,600 for the first half of 2000 and
the average selling price in the Southwest region rose 7.4% to $156,100
from $145,400. The average selling price in the Central region increased
8.2% in the first six months of 2001 to $137,900 from $127,500 in the
same period of 2000. The higher average selling prices in each of the
Company's domestic regions in the first half of 2001 resulted from
selected increases in sales prices in certain markets. In France, the
average selling price for the six-month period decreased 12.7% to
$143,300 in 2001 compared to $164,100 in 2000, primarily due to an
increase in the proportion of deliveries generated from condominiums, as
well as an adverse foreign currency translation impact.
The Company's commercial activities in France generated revenues of
$16.4 million in the first six months of 2001. During the first six
months of 2000, the Company had no commercial revenues. Company-wide
revenues from land sales decreased to $35.4 million in the first half of
2001 from $72.6 million in the first half of 2000.
Operating income increased by $18.4 million to $68.0 million in the
second quarter of 2001 from $49.6 million in the second quarter of 2000.
As a percentage of construction revenues, operating income rose .9
percentage points to 6.5% in the three months ended May 31, 2001 from
5.6% in the same period a year ago, reflecting a higher housing gross
margin and a lower selling, general and administrative expense ratio.
Gross profits increased by $41.2 million, or 25.7%, to $201.3 million in
the second quarter of 2001 from $160.1 million in the prior year's
period. During this same period, housing gross profits increased by
$40.3 million to $200.3 million from $160.0 million. Housing gross
margin increased to 19.7% in the second quarter of 2001 from 19.1% in
the year-earlier quarter. This .6 percentage point improvement was
driven by both aggressive price increases and lower construction costs.
Commercial activities in France generated profits of $1.1 million during
the three months ended May 31, 2001, while no commercial profits were
recorded during the three months ended May 31, 2000. Land sales
generated essentially break-even results in the second quarters of 2001
and 2000.
Selling, general and administrative expenses totaled $133.3 million in
the three-month period ended May 31, 2001 compared to $110.6 million in
the three months ended May 31, 2000. As a percentage of housing
revenues, selling, general and administrative expenses were 13.1% in the
second quarter of 2001 compared to 13.2% in the same period a year ago.
For the first six months of 2001, operating income increased by $26.2
million to $117.5 million from $91.2 million in the corresponding period
of 2000. As a percentage of construction revenues, operating income
increased .9 percentage points to 6.3% in the first half of 2001 from
5.4% in the first half of 2000 due to both a
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higher housing gross margin and an improved selling, general and
administrative expense ratio. Housing gross profits increased by $48.2
million, or 15.8%, to $353.9 million in the first half of 2001 from
$305.7 million in the first half of 2000 with the housing gross margin
increasing to 19.6% from 19.0%. The increase in the Company's housing
gross margin for the six months ended May 31, 2001 resulted primarily
from higher average selling prices and lower construction costs.
Commercial activities in France produced profits of $2.5 million in the
first half of 2001, while no commercial profits were generated in the
first half of 2000. Company-wide land sales generated nominal profits in
the first six months of both 2001 and 2000.
Selling, general and administrative expenses increased by $24.7 million
to $239.2 million for the first six months of 2001 from $214.5 million
for the same period of 2000. As a percentage of housing revenues,
selling, general and administrative expenses improved by .1 percentage
point to 13.2% for the first six months of 2001 from 13.3% in the
corresponding period of 2000.
Interest income totaled $.9 million in the second quarter of 2001
compared to $1.8 million in the second quarter of 2000. For the first
six months, interest income totaled $1.8 million in 2001 and $3.7
million in 2000. The decline in interest income in the second quarter
and first half of 2001 reflected a decrease in the interest bearing
average balances of short-term investments and mortgages receivable
compared to the same periods a year ago.
Interest expense (net of amounts capitalized) increased by $2.4 million
to $9.5 million in the second quarter of 2001 from $7.1 million in the
second quarter of 2000. For the six months ended May 31, 2001, interest
expense increased by $6.1 million to $19.3 million from $13.2 million
for the six months ended May 31, 2000. Gross interest incurred in the
three months and six months ended May 31, 2001 was higher than that
incurred in the corresponding year-ago periods by $3.7 million and $7.9
million, respectively, due to increased debt levels associated with the
share repurchases executed by the Company throughout 2000. In addition,
the percentage of interest capitalized during the three months ended May
31, 2001 decreased to 64.3% from 68.8% in the same period of 2000. For
the six-month periods ended May 31, this percentage decreased to 63.1%
in 2001 from 70.3% in 2000.
Minority interests totaled $6.4 million in the second quarter of 2001
and $6.7 million in the second quarter of 2000. For the first half of
2001, minority interests totaled $12.3 million compared with $12.5
million in the first half of 2000. Minority interests for the three
months and six months ended May 31, 2001 were comprised of two major
components: pretax income of consolidated subsidiaries and joint
ventures related to residential and commercial activities and
distributions associated with the Company's Feline Prides. In the
three-month and six-month periods of both 2001 and 2000, distributions
associated with the Feline Prides totaled $3.8 million and $7.6 million,
respectively.
Equity in pretax income of unconsolidated joint ventures totaled $1.1
million in the second quarter of 2001 compared to $1.0 million recorded
in the second quarter of 2000. The Company's joint ventures generated
combined revenues of $22.8 million during the three months ended May 31,
2001 compared with $35.1 million in the corresponding period of 2000.
For the first half of 2001, the Company's equity in pretax income of
unconsolidated joint ventures totaled $1.6 million compared to $1.5
million for the same period of 2000. Combined revenues from these joint
ventures totaled $41.8 million in the first half of 2001 and $63.5
million in the first half of 2000. Combined revenues from unconsolidated
joint ventures were lower during the three-month and six-month periods
ended May 31, 2001 as compared to the same periods of 2000 due to a
decrease in joint venture unit deliveries. All of the joint venture
revenues in the 2001 and 2000 periods were generated from residential
properties.
MORTGAGE BANKING
Interest income and interest expense decreased by $.5 million and $.1
million, respectively, in the second quarter of 2001 compared to the
same quarter a year ago. For the first six months of 2001, interest
income from mortgage banking activities decreased by $1.2 million and
related interest expense decreased by $.7 million from the same period
of 2000. Interest income for the three and six-month periods ended May
31, 2001 was lower primarily due to a decrease in market interest rates
on first mortgages held under commitments of sale and other receivables
outstanding as compared to the same periods a year earlier. Similarly,
interest expense was down in the three-month and six-month periods of
2001, mainly due to a decrease in the interest rates on notes payable
outstanding during the periods.
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Other mortgage banking revenues increased by $3.0 million to $9.9
million in the second quarter of 2001 from $6.9 million in the prior
year's second quarter. For the first half of 2001, other mortgage
banking revenues totaled $18.2 million, an increase of $3.2 million from
$15.0 million in the first half of 2000. The increases were primarily
the result of higher gains on the sale of servicing rights partly due to
higher volume and increased retention.
General and administrative expenses associated with mortgage banking
activities increased by $1.0 million to $4.6 million in the second
quarter of 2001 from $3.6 million for the same period a year ago. For
the six-month period, these expenses totaled $9.1 million in 2001 and
$6.5 million in 2000. The increase in general and administrative
expenses in 2001 was due to the expansion of certain ancillary
businesses, higher staff levels in place to accommodate the Company's
growing backlog and the overall growth of the mortgage company in
anticipation of higher origination volumes expected in 2001.
INCOME TAXES
Income tax expense totaled $20.4 million and $15.0 million in the second
quarters of 2001 and 2000, respectively. For the first six months of
2001, income tax expense totaled $33.7 million compared to $28.2 million
in the same period of 2000. The income tax amounts represented effective
income tax rates of approximately 34% in 2001 and 35% in 2000 (excluding
the gain on issuance of French subsidiary stock).
LIQUIDITY AND CAPITAL RESOURCES
The Company assesses its liquidity in terms of its ability to generate
cash to fund its operating and investing activities. Historically, the
Company has funded its construction and mortgage banking concerns with
internally generated operating results and external sources of debt and
equity financing. For the six months ended May 31, 2001, net cash used
by operating, investing and financing activities totaled $15.5 million
compared to $1.4 million provided in the six months ended May 31, 2000.
Operating activities used $128.2 million of cash during the first six
months of 2001 compared to $86.6 million used during the same period of
2000. The Company's uses of operating cash in the first half of 2001
included investments in inventories of $203.4 million (excluding $22.4
million of inventories acquired through seller financing), an increase
in receivables of $30.8 million and a decrease in accounts payable,
accrued expenses and other liabilities of $9.1 million. Partially
offsetting these uses was cash provided from six months' earnings of
$65.3 million, other operating sources of $12.0 million and various
noncash items deducted from net income.
Operating activities for the first six months of 2000 used cash to fund
an investment of $161.5 million in inventories (excluding $11.6 million
of inventories acquired through seller financing), a gain on the
issuance of French subsidiary stock of $39.6 million, a decrease in
accounts payable, accrued expenses and other liabilities of $36.7
million and other operating uses of $17.0 million. Sources of operating
cash in the first six months of 2000 included six months' earnings of
$91.9 million, a decrease in receivables of $41.2 million and various
noncash items deducted from net income.
Investing activities provided $4.8 million of cash in the first half of
2001 compared to $4.4 million used in the year-earlier period. In the
first six months of 2001, cash was provided from proceeds of $4.1
million received from mortgage-backed securities, which were principally
used to pay down the collateralized mortgage obligations for which the
mortgage-backed securities had served as collateral, distributions of
$3.6 million relating to investments in unconsolidated joint ventures
and net sales of $.8 million of mortgages held for long term investment.
The cash provided was partially offset by cash used for net purchases of
property and equipment of $3.7 million. In the first six months of 2000,
$7.2 million was used for net purchases of property and equipment, $.2
million was used for investments in unconsolidated joint ventures, and
$.2 million was used for originations of mortgages held for long-term
investment. Partially offsetting these uses were $3.2 million of
proceeds received from mortgage-backed securities.
Financing activities in the first six months of 2001 provided $107.8
million of cash compared to $92.4 million provided in the first half of
2000. In the first six months of 2001, $247.5 million of cash was
provided from the issuance of 9 1/2% senior subordinated notes.
Partially offsetting the cash provided were net payments on borrowings
of $120.7 million, payments to minority interests of $9.8 million, cash
dividend payments of $5.3
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million and payments on collateralized mortgage obligations of $3.9
million. Pursuant to its 1997 Shelf Registration, the Company issued the
9 1/2% senior subordinated notes at 100% of the principal amount of the
notes. The notes, which are due February 15, 2011 with interest payable
semi-annually, represent unsecured obligations of the Company and are
subordinated to all existing and future senior indebtedness of the
Company. The notes are redeemable at the option of the Company, in
whole, or in part, at 104.750% of their principal amount beginning
February 15, 2006, and thereafter at prices declining annually to 100%
on and after February 15, 2009.
Financing activities in the first six months of 2000 resulted in net
cash inflows due to proceeds from the issuance of French subsidiary
stock of $113.1 million and net proceeds from borrowings of $108.1
million. Partially offsetting these sources were payments for
repurchases of common stock of $108.9 million, payments to minority
interests of $10.8 million, cash dividend payments of $6.1 million and
payments on collateralized mortgage obligations of $3.0 million.
On May 24, 2001, the Company's mortgage banking subsidiary renewed its
Master Loan and Security Agreement with an investment bank and reduced
the maximum amount available under the agreement from $250.0 million to
$200.0 million. The agreement, which expires on May 25, 2002, provides
for a facility fee based on the $200.0 million maximum amount available
and provides for interest to be paid monthly at the Eurodollar Rate plus
an applicable spread on amounts borrowed. The amounts outstanding under
the Master Loan and Security Agreement are secured by a borrowing base,
which includes certain mortgage loans held under commitments of sale and
are repayable from sales proceeds. There are no compensating balance
requirements under the agreement. The agreement includes financial
covenants and restrictions which, among other things, require the
maintenance of certain financial statement ratios, a minimum tangible
net worth and a minimum net income.
As of May 31, 2001 the Company had a total of $536.9 million available
under its $732.0 million domestic unsecured credit facility. The
Company's French unsecured financing agreements, totaling $271.9
million, had in the aggregate $136.4 million available at May 31, 2001.
In addition, the Company's mortgage banking operations had $47.2 million
available under its $300.0 million Mortgage Warehouse Facility and $47.3
million available under its $200.0 million Master Loan and Security
Agreement at quarter-end. The Company's financial leverage, as measured
by the ratio of debt to total capital, was 54.8% at May 31, 2001
compared to 54.5% at May 31, 2000.
The Company believes it has adequate resources and sufficient credit
line facilities to satisfy its current and reasonably anticipated future
requirements for funds to acquire capital assets and land, to construct
homes, to fund its mortgage banking operations and to meet any other
needs of its business, both on a short and long-term basis.
OUTLOOK
The Company's residential backlog, excluding joint ventures, reached
$2.40 billion as of May 31, 2001, a 17.1% increase over the prior year
and the highest level for any quarter end in the Company's history.
Backlog units at May 31, 2001 increased 14.3% to 14,022 from 12,268
units, representing aggregate future revenues of approximately $2.05
billion, at May 31, 2000. Company-wide net orders for the second quarter
of 2001 totaled 7,370, down 6.0% compared to the 7,837 net orders in the
second quarter of 2000.
The Company's domestic operations accounted for approximately $2.12
billion of backlog value on 11,909 units at May 31, 2001, up from $1.74
billion on 10,408 units at May 31, 2000. Backlog in the West Coast
region totaled approximately $790.9 million on 2,769 units at May 31,
2001, compared to $755.2 million on 3,063 units at May 31, 2000. Net
orders in the West Coast region decreased 29.2% to 1,541 in the second
quarter of 2001 from 2,178 for the same quarter a year ago. This
decrease was primarily attributable to fewer net orders in Northern
California, a market where the general economy has been adversely
impacted by a softening in the technology sector. The Company's
Southwest operations demonstrated significant year-over-year growth in
backlog levels with the backlog value at May 31, 2001 increasing to
approximately $523.8 million on 3,388 units from $413.7 million on 2,892
units at May 31, 2000, while net orders of 1,855 in the second quarter
of 2001 were essentially flat with the year-earlier quarter. Backlog in
the Company's Central region totaled approximately $805.0 million on
5,752 units at the end of the second quarter of 2001 compared
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to $570.0 million on 4,453 units a year earlier. Central region net
orders for the second quarter of 2001 were up 6.6% to 3,078 units from
2,888 units in the same period of 2000. The average number of active
communities in the Company's domestic operations for the second quarter
of 2001 was 261, nearly flat with 263 for the same quarter a year ago.
In France, the value of residential backlog at May 31, 2001 was
approximately $285.3 million on 2,113 units, up from $315.2 million on
1,860 units a year earlier. The Company's net orders in France totaled
896 units in both the second quarter of 2001 and the second quarter of
2000. The value of backlog associated with the Company's French
commercial development activities rose to approximately $49.4 million at
May 31, 2001 from $7.2 million at May 31, 2000.
Substantially all of the homes included in residential backlog are
expected to be delivered in 2001; however, cancellations could occur,
particularly if market conditions deteriorate or mortgage interest rates
increase, thereby decreasing backlog and related future revenues.
Company-wide net orders, excluding joint ventures, for the month of June
2001 decreased 4.8% from the comparable period of 2000. During this same
period, domestic net orders were down 8.1%, reflecting decreases of
28.1% and 15.3% in West Coast and Central net orders, respectively,
partially offset by a 26.0% increase in Southwest net orders. In France,
net orders for the first four weeks of the Company's 2001 third quarter
increased approximately 25.3% compared with the same period a year ago.
The Company achieved significant year-over-year earnings growth in the
first half of 2001 and remains confident in its outlook for the
remainder of the year with appropriate caution that the homebuilding
industry is impacted by a variety of economic factors including consumer
confidence, employment levels and interest rates. For the rest of 2001,
the Company intends to continue to focus on high-growth markets while at
the same time looking for ways to increase efficiencies and leverage its
volume to take advantage of economies of scale. The Company hopes to
continue to increase overall unit delivery growth in future years
through the strategies it has in place. The Company's growth strategies
include the expansion of existing operations to achieve optimal market
volume levels and the possible entry into new geographic markets through
acquisitions or de novo entry. Growth in the Company's existing markets
will be driven by the Company's ability to increase the average number
of active communities in its major markets.
Since the previous quarter, the Company has increased its delivery
projections for 2001 and currently expects to deliver approximately
24,400 homes for the year. The Company also currently anticipates
another record level of earnings in 2001 based upon such projected
deliveries. However, these goals could be materially affected by various
risk factors such as changes in general economic conditions either
nationally, in the U.S. or France, or in the localized regions in which
the Company operates; continued diminution in domestic job growth or
employment levels; a continued downturn in the economy's pace; continued
uncertainties associated with California's electricity supply problems;
or changes in home mortgage interest rates or consumer confidence, among
other things.
SAFE HARBOR STATEMENT
Investors are cautioned that certain statements contained in this
document, as well as some statements by the Company in periodic press
releases and some oral statements by Company officials to securities
analysts and stockholders during presentations about the Company are
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). Statements which
are predictive in nature, which depend upon or refer to future events or
conditions, or which include words such as "expects", "anticipates",
"intends", "plans", "believes", "estimates", "hopes", and similar
expressions constitute forward-looking statements. In addition, any
statements concerning future financial performance (including future
revenues, earnings or growth rates), ongoing business strategies or
prospects, and possible future Company actions, which may be provided by
management are also forward-looking statements as defined by the Act.
Forward-looking statements are based on current expectations and
projections about future events and are subject to risks, uncertainties,
and assumptions about the Company, economic and market factors and the
homebuilding industry, among other things. These statements are not
guaranties of future performance, and the Company has no specific
intention to update these statements.
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Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements made by the Company or
Company officials due to a number of factors. The principal important
risk factors that could cause the Company's actual performance and
future events and actions to differ materially from such forward-looking
statements include, but are not limited to, changes in general economic
conditions, material prices, labor costs, interest rates, uncertainties
associated with California's electricity supply problems, the secondary
market for loans, consumer confidence, competition, currency exchange
rates (insofar as they affect the Company's operations in France),
environmental factors, government regulations affecting the Company's
operations, the availability and cost of land in desirable areas,
unanticipated violations of Company policy, unanticipated legal
proceedings, and conditions in the capital, credit and homebuilding
markets. See the Company's Annual Report on Form 10-K for the year ended
November 30, 2000 and other Company filings with the Securities and
Exchange Commission for a further discussion of risks and uncertainties
applicable to the Company's business.
The Company undertakes no obligation to update any forward-looking
statements in this Report on Form 10-Q or elsewhere.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 Annual Meeting of Stockholders of the Company was held on April
5, 2001, at which the following matters set forth in the Company's Proxy
Statement dated March 1, 2001, which was filed with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934, were voted upon with the results indicated below.
All numbers reported are shares of the Company's common stock.
(1) The nominees listed below were elected directors for a
three-year term expiring at the 2004 Annual Meeting of
Stockholders with the respective votes set forth opposite their
names:
Authority
Nominee For Withheld
---------------- ---------- ----------
Ronald W. Burkle 39,625,714 478,212
Dr. Ray R. Irani 39,922,386 181,540
Guy Nafilyan 38,432,492 1,671,434
Luis G. Nogales 39,931,927 171,999
Ms. Jane Evans and Messrs. James A. Johnson, Barry Munitz and Sanford C.
Sigoloff continue as directors and, if nominated, will next stand for
re-election at the 2002 Annual Meeting of Stockholders; Messrs. Henry G.
Cisneros and Bruce Karatz also continue as directors and, if nominated,
will next stand for re-election at the 2003 Annual Meeting of
Stockholders.
(2) A proposal seeking approval of the KB Home 2001 Stock Incentive
Plan was approved with the votes as set forth below:
For Against Withheld
---------- ---------- ----------
21,689,080 13,304,606 174,630
(3) A proposal seeking re-approval of the KB Home Performance-Based
Incentive Plan for Senior Management was approved with the votes
as set forth below:
For Against Withheld
---------- ---------- ----------
36,772,118 3,147,616 166,659
(4) A stockholder resolution concerning the hiring of a proxy
advisory firm for one year was not approved with the votes as
set forth below:
For Against Withheld
---------- ---------- ----------
1,398,476 33,384,073 385,827
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ITEM 5. OTHER INFORMATION
Geographical Information
The following table presents residential information in terms of unit
deliveries to home buyers and net orders taken by geographical region
for the three months and six months ended May 31, 2001 and 2000,
together with backlog data in terms of units and value by geographical
region as of May 31, 2001 and 2000.
Three Months Ended May 31,
--------------------------------------------
Deliveries Net Orders
------------------ ------------------
Market 2001 2000 2001 2000
------ ----- ----- ----- -----
West Coast 1,388 1,207 1,541 2,178
Southwest 1,503 1,349 1,855 1,875
Central 2,121 1,884 3,078 2,888
Foreign 711 602 896 896
----- ----- ----- -----
Total 5,723 5,042 7,370 7,837
===== ===== ===== =====
Unconsolidated Joint Ventures 98 137 74 121
===== ===== ===== =====
Six Months Ended May 31, May 31,
----------------------------------- --------------------------------------------
Backlog - Value
Deliveries Net Orders Backlog - Units In Thousands
--------------- ---------------- ---------------- ------------------------
Market 2001 2000 2001 2000 2001 2000 2001 2000
------ ------ ----- ------ ------ ------ ------ ---------- ----------
West Coast 2,369 2,335 2,717 3,519 2,769 3,063 $ 790,862 $ 755,243
Southwest 2,751 2,613 3,828 3,398 3,388 2,892 523,751 413,692
Central 3,867 3,537 5,609 4,791 5,752 4,453 805,022 570,012
Foreign 1,264 1,122 1,560 1,454 2,113 1,860 285,255 315,151
------ ----- ------ ------ ------ ------ ---------- ----------
Total 10,251 9,607 13,714 13,162 14,022 12,268 $2,404,890 $2,054,098
====== ===== ====== ====== ====== ====== ========== ==========
Unconsolidated Joint Ventures 182 260 139 236 165 195 $ 33,330 $ 36,660
====== ===== ====== ====== ====== ====== ========== ==========
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
24 The consent of Ernst & Young LLP, independent auditors, filed as
an exhibit to the Company's 2000 Annual Report on Form 10-K, is
incorporated by reference herein.
Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended May 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KB HOME
-----------------------------------------
Registrant
Dated July 13, 2001 /s/ BRUCE KARATZ
------------- -----------------------------------------
Bruce Karatz
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated July 13, 2001 /s/ WILLIAM R. HOLLINGER
------------- -----------------------------------------
William R. Hollinger
Senior Vice President and Controller
(Principal Accounting Officer)