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Financial Accounting - KB Homes 2008
 

Financial Accounting - KB Homes 2008

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  • Market cap as of 11/29/08 Working capital as of 8/31/08 Q207 = 5/31/07
  • Homebuilding Revenue Recognition.   As discussed in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K, revenues from housing and other real estate sales are recognized in accordance with Statement of Financial Accounting Standards No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”), when sales are closed and title passes to the buyer. Sales are closed when all of the following conditions are met: a sale is consummated, a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured.   Inventories and Cost of Sales.   As discussed in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K, inventories are stated at cost, unless the carrying amount of the parcel or community is determined not to be recoverable, in which case the inventories are written down to fair value in accordance with SFAS No. 144. Fair value is determined based on estimated future cash flows discounted for inherent risks associated with the real estate assets, or other valuation techniques. Due to uncertainties in the estimation process, it is possible that actual results could differ from those estimates. Our inventories typically do not consist of completed projects.
  • Inventory - Changes due to less homes and lots in production and less land under development. Inventory includes land and land development costs, direct construction costs, capitalized interest, and real estate taxes Goodwill - Changes due to impairment charges of $107.9M. Goodwill relates to the acquisitions that KBH made in prior years to enter new markets. Discontinued Operations - Associated with KBH’s French subsidiary. Previously presented as a separate reporting segment. Total Liabilities - Changes due to the increased acquisition of mortgages and notes payable. This capital is primarily used to operate KBH’s business. Retained Earnings - Changes due to inventory impairment charges, abandonment of option contracts write-off, goodwill impairment, and joint venture impairment.
  • Revenue - Decrease due to year-over-year decrease in net orders, decrease in average selling prices, and decrease in number of homes delivered. Construction Costs - $1.1B in write-down of land value and $144M write-down for the abandonment of land option contracts in West and Southwest segments – reflected as part of construction costs. Operating Income - Affected by abandonment of option contracts write-offs, inventory, goodwill, and joint venture impairment charges. Equity Loss of Unconsolidated Joint Ventures - Reflects impairment charges of $156M, including $123.4M of valuation adjustments related to the KBH’s investments in certain unconsolidated joint ventures. Gain on Sale of Discontinued Operations - On July 10, 2007, KBH sold its 49% equity interest in its French subsidiary, KBSA.
  • RNOA = NOPAT/ Avg. NOA. Which is the net operating asset profit after tax divided by average net operating assets. RNOA is also broken out into profitability and asset productivity. The operating profit after tax is decreasing at a faster rate than the operating assets. ROE = Profit Margin x Asset Turnover x Leverage Factor. This is a reflection of how much profit is generate with invested shareholder dollars. over time, the Profit margin is decreasing rapidly while both asset turnover and leverage are increasing NOPM: NOPAT/Rev Without revenues coming in, our denominator is decreasing. Worse still is that KBH’s costs and expenses are exceeding their revenues thus showing a negative gross profit. In years previous, the profit had been decreasing due to decreasing revenue while land costs and expenses have been fairly consistent. NOAT: Net operating asset turnover ratio: Revenues / net operating assets How many sales dollars are generate by invested assets. Decreasing, but better than some of the competitors. By disaggregating this, we may find that while sales are decreasing, but not as quickly as net operating assets.
  • Current Ratio is made up of Current Assets over current Liabilities. This has not changed much over the past few years. Investments due to unconsolidated joint ventures is not part of their core business, so this was excluded from core assets. As was deferred taxes, goodwill and other assets. Current liabilities excluded notes and mortgages payable from the calculation. Quick Ratio has increased because KBH has increased their cash holding. This might be seen as a wildly positive, but Quick is made up of Cash + MS + AR. They are likely not increasing their land holding, so they are sitting on their cash right now waiting for the right time. In previous years, they might have been too quick to purchase land for future development which is why their quick ratio < 1.0 DSO is days sales outstanding (receivable mgmt) which is AR/ Sales. KBH is doing a good job managing its income assets by have a short number of days for purchasers to pay them. DPO is days payable outstanding (AP management) which is AP/COGS. In this case, they are able to delay payment to vendors longer than any of the other manufacturers that we looked at. While KBH was consistently around 27 days during the earlier part of the time period, they were able to cut that by two thirds in 2006 but appear to be heading in the wrong direction by nearly doubling to 17 days in 07.
  • Liabitilies to Equity are twice as high as the current leader in the field: Toll Brothers. In the case of KB as well as all the others, they are financing more on credit than they are with equity. Further disaggregation of the figures reveals that while KBH has decreased their liabilities from 2006, the equity has not kept pace. In particular, the retained earnings are 2/3 of what they were in 2006. From our experience looking at the figures, KBH is not in a good position in several areas, but they are not in as dire straights as Centex. Looking at market leader: Toll Brothers, they have have to L to E ratio as KB.
  • Accounts Payable Rationale: Stretching out payables will allow the company to more effectively utilize their funds. Taking 5 additional days to pay A/P = $100M + in cash. Getting back to their 2005 DPO figures of 55 days would equate to a little over $300M in additional cash. Debt Debt – Almost $600M is due within the next three years. Refinancing is key to turning. Equity Equity – Raise a round of equity, similar to CB Richard Ellis’ announcement of raising 50M Land Land – Not recommended - due to historical cycles of the business, land will increases in value over time
  • Two companies with low market capitalizations (cheap acquisitions) are CCC (homes along the CA coast) and K Hovnanian and Beazer (who operates in virtually the same states as KBH and has a similar first time home buyer operating model) Purchase quality tracts of land cheaply for development. In a market where homes prices are small, price and location will play a big factor in value Assess the need to remain in those markets that have declined the most in terms of revenues and exit those markets in order to focus the company’s efforts in entering other markets that have a solid growth potential.
  • This would likely only work in their vacation-type markets for timeshares, but would work elsewhere for rentals.
  • Inventory - Changes due to less homes and lots in production and less land under development. Inventory includes land and land development costs, direct construction costs, capitalized interest, and real estate taxes Goodwill - Changes due to impairment charges of $107.9M. Goodwill relates to the acquisitions that KBH made in prior years to enter new markets. Discontinued Operations - Associated with KBH’s French subsidiary. Previously presented as a separate reporting segment. Total Liabilities - Changes due to the increased acquisition of mortgages and notes payable. This capital is primarily used to operate KBH’s business. Retained Earnings Changes due to inventory impairment charges, abandonment of option contracts write-off, goodwill impairment, and joint venture impairment.
  • This would likely only work in their vacation-type markets for timeshares, but would work elsewhere for rentals.
  • This would likely only work in their vacation-type markets for timeshares, but would work elsewhere for rentals.
  • Revenue - Decrease due to year-over-year decrease in net orders, decrease in average selling prices, and decrease in number of homes delivered. Construction Costs - $1.1B in write-down of land value and $144M write-down for the abandonment of land option contracts in West and Southwest segments – reflected as part of construction costs. Operating Income - Affected by abandonment of option contracts write-offs, inventory, goodwill, and joint venture impairment charges. Equity Loss of Unconsolidated Joint Ventures - Reflects impairment charges of $156M, including $123.4M of valuation adjustments related to the KBH’s investments in certain unconsolidated joint ventures. Gain on Sale of Discontinued Operations - On July 10, 2007, KBH sold its 49% equity interest in its French subsidiary, KBSA.
  • Fed cuts rates to 1% on October 29, 2008 - US new-home sales hit lowest level in 17 years in October 2008 (Census Bureau) - Oversupply of new and resale homes - Rising foreclosure activity - Heightened competition - Reduced home affordability - Turmoil in the mortgage finance and credit markets - Decreased real estate speculation - Decreased consumer confidence

Financial Accounting - KB Homes 2008 Financial Accounting - KB Homes 2008 Presentation Transcript