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| KBH > SEC Filings for KBH > Form 10-Q on 9-Oct-2009 | All Recent SEC Filings |
9-Oct-2009
Quarterly Report
Results of Operations
OVERVIEW
Revenues are generated from our homebuilding operations and our financial
services operations. The following table presents a summary of our results for
the nine months and three months ended August 31, 2009 and 2008 (in thousands,
except per share amounts):
Nine Months Ended August 31, Three Months Ended August 31,
2009 2008 2009 2008
Revenues:
Homebuilding $ 1,145,014 $ 2,107,517 $ 456,348 $ 679,115
Financial services 5,268 7,382 2,103 2,495
Total $ 1,150,282 $ 2,114,899 $ 458,451 $ 681,610
Pretax loss:
Homebuilding $ (231,879 ) $ (691,892 ) $ (82,668 ) $ (157,733 )
Financial services 11,676 16,945 5,620 5,988
Total pretax loss (220,203 ) (674,947 ) (77,048 ) (151,745 )
Income tax benefit 17,700 6,100 11,000 7,000
Net loss $ (202,503 ) $ (668,847 ) $ (66,048 ) $ (144,745 )
Basic and diluted loss per share $ (2.64 ) $ (8.63 ) $ (.87 ) $ (1.87 )
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Operating conditions during the three months ended August 31, 2009 remained
challenging, reflecting the impact of the ongoing downturn in the overall
housing market and the weak U.S. economy. A general oversupply of new and resale
homes, exacerbated by rising mortgage delinquencies and foreclosures, continued
to depress prices and intensify competition, while poor job market conditions,
tight mortgage lending standards and weak consumer confidence restrained demand.
These negative factors were partially offset to varying degrees in some markets
by continued improvement in housing affordability, government tax incentives,
and relatively low mortgage interest rates.
Amid these mixed conditions, we delivered fewer homes and generated lower
revenues in the 2009 third quarter compared to the same period a year ago, but
we reduced our net loss by more than half and increased our net orders by 62%.
We believe these net loss and net order improvements are largely the result of
strategies we have put into action over the past several quarters to achieve
three primary goals: generating cash and maintaining a strong balance sheet;
restoring the profitability of our homebuilding operations; and positioning our
business to capitalize on a housing market recovery when it occurs. As these
goals remain our core strategic focus, and as we expect market conditions to
change little through the remainder of our current fiscal year, we anticipate
reporting lower year-over-year revenues and homes delivered in the 2009 fourth
quarter, but improved year-over-year bottom line results.
Our total revenues of $458.5 million for the three months ended August 31, 2009
declined 33% from $681.6 million for the three months ended August 31, 2008,
primarily due to a decrease in housing revenues. Housing revenues totaled
$454.2 million in the third quarter of 2009, down 32% from $668.3 million in the
year-earlier quarter, reflecting decreases in both the number of homes we
delivered and our average selling price. We use the term "home" in this
discussion and analysis to refer to a single-family residence, whether it is a
single-family home or other type of residential property. We delivered 2,240
homes in the third quarter of 2009, down 20% from the 2,788 homes we delivered
in the year-earlier quarter. The decrease was largely attributable to our
Southwest and Southeast homebuilding segments, where the number of homes
delivered fell 26% and 47%, respectively, on a year-over-year basis. In our West
Coast homebuilding segment, the number of homes delivered in the third quarter
of 2009 was down 8% from the year-earlier quarter, while in the Central
homebuilding segment the number of homes delivered increased 5%. The overall
average selling price of our
homes decreased 15% to $202,800 in the third quarter of 2009 from $239,700 in
the corresponding quarter of 2008, reflecting year-over-year decreases in each
of our homebuilding segments.
The number of homes delivered in the three months ended August 31, 2009
decreased from the year-earlier quarter mainly due to a 37% reduction in the
number of active communities we operated. "Active communities" are those that
deliver five or more homes in a particular reporting period. We have
strategically reduced the number of active communities we operate over the past
several quarters to align our business operations with the significantly reduced
home sales activity we have experienced relative to the peak levels of a few
years ago. We have done this primarily by exiting underperforming markets,
operating fewer communities in weaker markets and curtailing land acquisitions
and development activities. As a result of these efforts, our inventory balance
of $1.91 billion at August 31, 2009 was 25% lower than the $2.56 billion balance
at August 31, 2008. Our ongoing nationwide rollout of The Open Series™ product
line, which is described further below under "Outlook," also contributed to our
reduced active community count in the third quarter of 2009, as it temporarily
reduced the number of homes delivered in some transitioning communities.
The decline in our average selling price in the third quarter of 2009 relative
to the year-earlier quarter reflected targeted price reductions we implemented
in some markets in response to intense competition, as well as our rollout of
value-engineered product, including The Open Series, at lower price points
compared to our pre-existing product.
Included in our total revenues were financial services revenues of $2.1 million
in the third quarter of 2009 and $2.5 million in the third quarter of 2008.
Financial services revenues decreased in the three months ended August 31, 2009
mainly due to the lower number of homes we delivered in the period compared to a
year ago, which reduced title and insurance services revenue.
We incurred a net loss of $66.0 million, or $.87 per diluted share, in the third
quarter of 2009, compared to a net loss of $144.7 million, or $1.87 per diluted
share, for the year-earlier period. The reduction in our third quarter 2009 net
loss compared to the year-earlier quarter was due to a decrease in total charges
for inventory and joint venture impairments and land option contract
abandonments, an increase in our housing gross margin, and a decrease in our
selling, general and administrative expenses. Our net loss for the three months
ended August 31, 2009 included pretax, noncash charges of $47.7 million for
inventory and joint venture impairments and land option contract abandonments,
and $5.7 million to increase our warranty liability for allegedly defective
drywall material that was or may have been installed in some of our homes. We
also recorded a $35.5 million after-tax valuation allowance charge against net
deferred tax assets in the third quarter of 2009 to fully reserve the tax
benefits generated from our pretax loss. In the year-earlier quarter, our net
loss included $82.2 million of pretax, noncash inventory and joint venture
impairment charges and a $58.1 million after-tax valuation allowance charge
against net deferred tax assets. Our housing gross margin in the third quarter
of 2009 increased to 11.1% from 3.9% in the year-earlier quarter. Excluding
inventory-related charges of $16.0 million in the 2009 third quarter and
$38.5 million in the 2008 third quarter, our housing gross margin improved
year-over-year to 14.6% from 9.6%, mainly due to our ongoing implementation of
initiatives to roll out more cost-effective product, reduce direct construction
costs and increase operating efficiencies, consistent with the principles of our
KBnxt operational business model. Our selling, general and administrative
expenses in the three months ended August 31, 2009 decreased 37% to
$83.9 million, down from $133.2 million in the year-earlier quarter, reflecting
operational consolidations and workforce reductions we have implemented over the
past several quarters to reduce our overhead costs.
Total revenues for the nine months ended August 31, 2009 were $1.15 billion,
down 46% from $2.11 billion in the year-earlier period. Included in our total
revenues were financial services revenues of $5.3 million in the first nine
months of 2009 and $7.4 million in the year-earlier period. Our net loss for the
nine months ended August 31, 2009 totaled $202.5 million, or $2.64 per diluted
share, including pretax, noncash charges of $129.5 million for inventory and
joint venture impairments and land option contract abandonments, and an
after-tax valuation allowance charge of $89.9 million against net deferred tax
assets to fully reserve the tax benefits generated from our pretax loss in the
period. For the nine months ended August 31, 2008, we incurred a net loss of
$668.8 million, or $8.63 per diluted share, including pretax, noncash charges of
$482.7 million for inventory and joint venture impairments and land option
contract abandonments, and $24.6 million for goodwill impairment, and an
after-tax valuation charge of $257.0 million against the net deferred tax assets
generated during the period.
Consistent with our goal of maintaining a strong cash position and balance
sheet, we ended the 2009 third quarter with $1.06 billion of cash and cash
equivalents and restricted cash, no cash borrowings under the Credit Facility
and no public debt maturities until 2011. Our debt balance at August 31, 2009
was $1.81 billion, down $128.7 million from the end of our 2008 fiscal year,
mainly due to the maturity and repayment of the $200 Million Senior Subordinated
Notes on December 15, 2008 and our purchase of $250.0 million in aggregate
principal amount of 6 3/8% senior notes due 2011, partly offset by the issuance
of the $265 Million Senior Notes and the addition of debt associated with
previously unconsolidated joint ventures that were consolidated in the third
quarter of 2009.
Our backlog at August 31, 2009 was comprised of 3,722 net orders, representing
projected future housing revenues of approximately $734.1 million, compared to a
backlog at August 31, 2008 of 4,774 net orders representing potential future
housing revenues of approximately $1.13 billion. Our lower backlog at the end of
the third quarter of 2009 compared to the year-earlier quarter mainly reflected
lower inventory levels, a reduction in the number of active communities we
operated, lower year-over-year second quarter net orders and lower average
selling prices.
Our homebuilding operations generated 2,158 net orders in the three months ended
August 31, 2009, up 62% from 1,329 net orders in the year-earlier quarter. This
increase reflected strong net orders of our value-engineered product line,
including The Open Series, in communities where we have introduced it, and
improvement in our cancellation rate. Our value-engineered product accounted for
62% of our total net orders in the third quarter of 2009, up from 50% in the
second quarter of 2009. We plan to continue to roll out these product designs in
more communities and believe the positive momentum generated from our product
transition will favorably impact our net orders in the fourth quarter of 2009.
As a percentage of gross orders, our third-quarter cancellation rate improved to
27% from 51% in the third quarter of 2008, with each of our homebuilding
segments experiencing improvement. Our cancellation rate as a percentage of
beginning backlog also improved in the third quarter of 2009, to 20% from 22% in
the third quarter of 2008.
HOMEBUILDING
We have grouped our homebuilding activities into four reportable segments, which
we refer to as West Coast, Southwest, Central and Southeast. As of August 31,
2009, these segments consisted of ongoing operations located in the following
states: West Coast - California; Southwest - Arizona and Nevada; Central -
Colorado and Texas; and Southeast - Florida, North Carolina and South Carolina.
As described further under "Outlook," we announced in September 2009 that we are
resuming homebuilding operations in the Washington, D.C. metro market, which
will be grouped into our Southeast segment.
The following table presents a summary of certain financial and operational data
for our homebuilding operations (dollars in thousands, except average selling
price):
Nine Months Ended August 31, Three Months Ended August 31,
2009 2008 2009 2008
Revenues:
Housing $ 1,139,472 $ 2,031,725 $ 454,212 $ 668,292
Land 5,542 75,792 2,136 10,823
Total 1,145,014 2,107,517 456,348 679,115
Costs and expenses:
Construction and land costs
Housing 1,066,882 2,162,558 404,006 642,467
Land 15,461 159,655 10,569 11,265
Total 1,082,343 2,322,213 414,575 653,732
Selling, general and administrative
expenses 217,647 379,914 83,878 133,211
Goodwill impairment - 24,570 - -
Total 1,299,990 2,726,697 498,453 786,943
Operating loss $ (154,976 ) $ (619,180 ) $ (42,105 ) $ (107,828 )
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Nine Months Ended August 31, Three Months Ended August 31,
2009 2008 2009 2008
Homes delivered 5,446 8,526 2,240 2,788
Average selling price $ 209,200 $ 238,300 $ 202,800 $ 239,700
Housing gross margin 6.4 % -6.4 % 11.1 % 3.9 %
Selling, general and administrative
expenses as a percent of housing
revenues 19.1 % 18.7 % 18.5 % 19.9 %
Operating loss as a percent of
homebuilding revenues -13.5 % -29.4 % -9.2 % -15.9 %
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The following tables present homes delivered, net orders and cancellation rates (based on gross orders) by reporting segment and with respect to our unconsolidated joint ventures for the three-month and nine-month periods ended August 31, 2009 and 2008, and our ending backlog at August 31, 2009 and 2008:
Three Months Ended August 31,
Homes Delivered Net Orders Cancellation Rates
Segment 2009 2008 2009 2008 2009 2008
West Coast 669 731 591 361 23 % 48 %
Southwest 314 425 355 282 20 37
Central 783 745 808 506 28 43
Southeast 474 887 404 180 32 74
Total 2,240 2,788 2,158 1,329 27 % 51 %
Unconsolidated joint
ventures 37 45 17 39 32 % 57 %
Nine Months Ended August 31,
Homes Delivered Net Orders Cancellation Rates
Segment 2009 2008 2009 2008 2009 2008
West Coast 1,589 1,948 1,978 1,877 21 % 37 %
Southwest 822 1,699 936 1,228 21 33
Central 1,755 2,507 2,478 1,701 25 44
Southeast 1,280 2,372 1,503 2,172 28 42
Total 5,446 8,526 6,895 6,978 24 % 40 %
Unconsolidated joint
ventures 115 194 90 218 38 % 38 %
August 31,
Backlog - Value
Backlog - Homes (In Thousands)
Segment 2009 2008 2009 2008
West Coast 970 1,119 $ 293,329 $ 391,525
Southwest 462 835 75,439 190,279
Central 1,444 1,205 218,430 230,154
Southeast 846 1,615 146,896 321,321
Total 3,722 4,774 $ 734,094 $ 1,133,279
Unconsolidated joint ventures 42 233 $ 15,456 $ 136,918
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Revenues. Homebuilding revenues decreased by $222.8 million, or 33%, to
$456.3 million in the three months ended August 31, 2009 from $679.1 million in
the year-earlier quarter, mainly due to a decrease in housing revenues. Housing
revenues of $454.2 million for the three months ended August 31, 2009 fell by
$214.1 million, or 32%, from $668.3 million in the year-earlier quarter,
reflecting a 20% decrease in homes delivered and a 15% decline in the average
selling price. We delivered 2,240 homes in the third quarter of 2009, down from
2,788 homes delivered in the year-earlier quarter, largely due to a 37%
reduction in the number of active communities we operated. We have strategically
reduced the number of active communities we operate over the past several
quarters to align our business operations with the significantly reduced home
sales activity we have experienced relative to the peak levels of a few years
ago. We expect our reduction in active communities to decrease the number of
homes we deliver and the amount of revenues we generate from our housing
operations on a year-over-year basis in the fourth quarter of 2009.
Our overall average selling price of $202,800 for the three months ended
August 31, 2009 decreased from $239,700 in the year-earlier period, reflecting
lower average selling prices in each of our geographic segments. Year-over-year,
average selling prices declined 13% in our West Coast segment, 28% in our
Southwest segment, 18% in our Central segment and 15% in our Southeast segment,
due to downward pricing pressures. These pressures included, to varying degrees
depending on local market circumstances, difficult economic and job market
conditions, intense competition from homebuilders and sellers of existing and
foreclosed homes, and our rollout of value-engineered product at price points
lower than those of our pre-existing product in order to meet consumer demand
for more affordable homes. We expect our overall average selling price to
decrease in the fourth quarter of 2009 as these downward pricing pressures are
likely to continue.
Homebuilding revenues for the nine months ended August 31, 2009 decreased by
$962.5 million, or 46%, to $1.15 billion from $2.11 billion for the year-earlier
period, due to lower housing and land sale revenues. Housing revenues for the
nine months ended August 31, 2009 totaled $1.14 billion, down 44% from
$2.03 billion in the year-earlier period, due to a 36% decrease in homes
delivered and a 12% decline in our average selling price. We delivered 5,446
homes in the first nine months of 2009, down from 8,526 homes in the first nine
months of 2008, primarily due to a reduction in the number of active communities
we operated. Due to the downward pricing pressures described above, our average
selling price decreased to $209,200 in the first nine months of 2009 from
$238,300 in the corresponding period of 2008.
Revenues from land sales totaled $2.1 million in the three months ended
August 31, 2009, compared to $10.8 million in the year-earlier period. For the
nine months ended August 31, 2009, revenues from land sales totaled $5.5 million
compared to $75.8 million for the corresponding period of 2008. Generally, land
sale revenues fluctuate with our decisions to maintain or decrease our land
ownership positions in certain markets based upon the volume of our holdings,
our marketing strategy, the strength and number of competing developers entering
particular markets at given points in time, the availability of land in markets
we serve, and prevailing market conditions. Land sale revenues for the nine
months ended August 31, 2009 decreased substantially compared to the nine months
ended August 31, 2008 as we sold a greater volume of land in the year-earlier
period that no longer fit our marketing strategy, rather than hold it for future
development.
Operating Loss. Our homebuilding business generated operating losses of
$42.1 million in the third quarter of 2009 and $107.8 million in the
year-earlier quarter, principally due to losses from housing operations. Our
homebuilding operating losses represented negative 9.2% of homebuilding revenues
in the three months ended August 31, 2009 and negative 15.9% of homebuilding
revenues in the year-earlier period. The homebuilding operating loss improved on
a percentage basis in the three months ended August 31, 2009 compared to the
year-earlier period due to an increase in our housing gross margin and a
reduction in our selling, general and administrative expenses as a percent of
revenues.
Within our housing operations, the 2009 third quarter operating loss decreased
from the year-earlier quarter due to lower pretax, noncash charges for inventory
impairments and land option contract abandonments, an improved gross margin and
lower selling, general and administrative expenses. Inventory impairment and
land option contract abandonment charges totaled $16.0 million in the third
quarter of 2009, down from $38.5 million in the third quarter of 2008. Of the
inventory-related charges recorded in the 2009 third quarter, 48% related to our
West Coast segment, 39% related to our Central segment and 13% related to our
Southeast segment. There were no inventory impairment or land option contract
abandonment charges in our Southwest segment in the third quarter of 2009.
The inventory impairments we recorded in the third quarters of 2009 and 2008
reflected declining asset values in certain markets due to difficult economic
and housing market conditions, including a persistent oversupply of new and
resale homes, rising foreclosure activity, heightened competition for orders,
and turmoil and tightening in the consumer mortgage lending and other credit
markets. The charges for land option contract abandonments reflected our
termination of land option contracts on projects that no longer met our
investment standards. Our housing gross margin, including inventory-related
charges, improved by 7.2 percentage points to 11.1% in the third quarter of 2009
from 3.9% in the year-earlier quarter. Excluding the inventory-related charges
of $16.0 million in the third quarter of 2009 and $38.5 million in the third
quarter of 2008, our housing gross margin would have been 14.6% in 2009 and 9.6%
in 2008. This margin improvement reflects the combined impact of our initiatives
to roll out more cost-effective product, such as The Open Series, reduce direct
construction costs and increase operating efficiencies, consistent with the
principles of our KBnxt operational business model. Our margins were also
favorably impacted by the inventory-related charges incurred in prior quarters.
Company-wide land sales generated a loss of $8.4 million in the three months
ended August 31, 2009, including $8.5 million of pretax, noncash impairment
charges related to planned future land sales. In the three months ended
August 31, 2008, land sales produced a loss of $.4 million, which included
$.6 million of similar impairment charges.
As of August 31, 2009, the aggregate carrying value of inventory that had been
impacted by pretax, noncash impairment charges was $849.4 million, representing
136 communities and various other land parcels. As of November 30, 2008, the
aggregate carrying value of inventory that had been impacted by pretax, noncash
impairment charges was $1.01 billion, representing 163 communities and various
other land parcels.
Selling, general and administrative expenses in the three months ended
August 31, 2009 decreased by $49.3 million, or 37%, to $83.9 million from
$133.2 million in the year-earlier period. The year-over-year decrease was
driven by the operational consolidations and workforce reductions we have
implemented over the past several quarters to adjust our operations to the
significantly reduced home sales activity we have experienced relative to the
peak levels of a few years ago. Most of the cost reductions in the third quarter
of 2009 were related to lower salary and other payroll-related expenses stemming
from a 31% decrease in our personnel from the year-earlier quarter. As a percent
of housing revenues, selling, general and administrative expenses decreased to
18.5% in the three months ended August 31, 2009 from 19.9% in the corresponding
2008 period. We expect our selling, general and administrative expenses as a
percent of housing revenues to improve slightly in the fourth quarter of 2009
relative to the year-earlier quarter. However, we expect the ratio to remain
above historical levels in part due to our strategic decision to maintain an
operational platform that can effectively take advantage of long-term growth
opportunities that we expect will arise as housing markets stabilize.
Our homebuilding business posted operating losses of $155.0 million for the nine
months ended August 31, 2009 and $619.2 million for the nine months ended
August 31, 2008, due to losses from both housing operations and land sales. As a
percentage of homebuilding revenues, the operating loss improved to negative
13.5% in the first nine months of 2009 from negative 29.4% in the first nine
months of 2008, largely as a result of the expansion of our housing gross margin
to positive 6.4% from negative 6.4% in the year-earlier period. This improvement
was primarily due to a decrease in pretax, noncash charges for inventory
impairments and land option contract abandonments and the favorable impact of
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