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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
  • Transcript

    • 1. KB HOME KB Home Accounting Project Group 6 (Gold/Thurs) Rajeev Kalavar, Delia Chavarria, Prentiss Douglass, Herman Ng, and Ganesh Vasudeva
    • 2. 2 Agenda The KB Story • Pre 2005 – The Growth Years •Macro Economic Conditions • Post 2005 – The Bubble Bursts •Macro Economic Conditions Financial Statements • B/S, I/S, Cashflow Analysis • Strategic Analysis - Ratios The Future • Observations • Recommendations Overview • History and Background • Products & Strategy
    • 3. 3 Overview  History/Background - Headquartered in Los Angeles, California - Mission to serve entry-level housing market with affordable homes - Expanded into international markets, but currently now only serves the US - Market Capitalization: ~$1.3B; Working Capital: ~($454)M as of Q3’08 - Q2’07 is the beginning of 6 straight quarters of net losses F/S Analysis Strategic Analysis RecommendationsOverview 1957 KBH Founded 1961 IPO 1989 Phases out of IL & NJ 2000 Becomes Fortune 500 Company 2005 Partnership with Martha Stewart Living; Sells KBHMC to Countrywide 2008 #1 Admired homebuilder - Fortune 2007 Sale of French subsidiary
    • 4. 4 Overview  Products - Attached and detached single family homes, townhomes, and condominiums - Financial services: mortgage banking, title, and insurance services F/S Analysis Strategic Analysis RecommendationsOverview
    • 5. 5 Pre-2005: Economic Conditions F/S Analysis Strategic Analysis RecommendationsOverview • Index measures the residential housing market. • It tracks changes in the value of the residential real estate market • Since the late 90s, home prices increase and continue through 2005 • Home price increases In turn drive home ownership to record levels (and vice versa) • Since late 90’s, home ownership continues to increase through 2005 RECORD HOME PRICES RECORD HOME OWNERSHIP
    • 6. 6 Pre-2005: Economic Conditions F/S Analysis Strategic Analysis RecommendationsOverview • Sub-prime loans dramatically increase affordability • Ownership now possible with 0 down payment, loans available to individuals with bad credit • Affordability increases as a result of taking on more debt • Avg income remains stagnant, leading to highly leveraged, but VERY SATISFIED home owners! AFFORDABILITY ON THE RISE HIGHLY LEVERAGED OWNERSHIP
    • 7. 7 KB’s Expansion through 2005  Flourishing environment for Home builders  Aggressive growth strategy F/S Analysis Strategic Analysis RecommendationsOverview 19601963 1965 1973 1992 1998 2001 2003 2004 2005 - Acquisitions to enter new markets - Partnership with Martha Stewart Living - Partnership with Disney - Built to Order Homes
    • 8. 8 Adjustable Rate Mortgages Predatory lending Adjustable Rate Mortgages Increasing Inventory Supply Predatory lending Adjustable Rate Mortgages Rising Interest Rate following Introductory Rate Increasing Inventory Supply Predatory lending Adjustable Rate Mortgages Increasing default rates Rising Interest Rate following Introductory Rate Increasing Inventory Supply Predatory lending Adjustable Rate Mortgages Credit and Banking Meltdown Increasing default rates Rising Interest Rate following Introductory Rate Increasing Inventory Supply Predatory lending Adjustable Rate Mortgages POP! Post 2005: Bubble burst
    • 9. 9 0 10 20 30 40 50 60 70 80 90 11/30/20022/28/20035/30/20038/30/2003 11/30/20032/29/20045/30/20048/30/2004 11/30/20042/28/20055/30/20058/30/2005 11/30/20052/28/20065/30/20068/30/2006 11/30/20062/28/20075/30/20078/30/2007 11/30/20072/29/20085/30/20088/30/2008 KB Home Pulte Centex Toll Brothers StockPrice($)  Key Competitors - Pulte Homes, Centex, Toll Brothers, DR Horton, and Richmond American  Stock Price The Competitive Landscape F/S Analysis Strategic Analysis RecommendationsOverview
    • 10. 10 KB Homes 2003-2008  The KB Story F/S Analysis Strategic Analysis RecommendationsOverview 0 10 20 30 40 50 60 70 80 90 11/30/20022/28/20035/30/20038/30/2003 11/30/20032/29/20045/30/20048/30/2004 11/30/20042/28/20055/30/20058/30/2005 11/30/20052/28/20065/30/20068/30/2006 11/30/20062/28/20075/30/20078/30/2007 11/30/20072/29/20085/30/20088/30/2008 Source: finance.google.com StockPrice($) Date 01/16/03-Raises FY 2003 Guidance($8.00)-DJ 06/19/03-Raises FY 2003 Guidance($8.25)-DJ 03/10/03-acquires Colony Homes 09/05/03-acquires Zale Homes 01/06/04-acquires Palmetto Homes 06/08/04-acquires Dura Builders 12/16/04-Raises FY EPS Guidance($14.50) 06/30/05-CountryWide to acquire Mortgage subsidiary of KB Homes 10/12/05-Announces collaboration with Martha Steward Living 12/06/05-Joint Venture with Shaw 03/22/06-Reiterates FY 2006 outlook ($11.25) 06/15/06-Lowers FY 2006 EPS ($10.25) 08/24/08-SEC inquiry into stock option grants 11/14/06-CEO Karatz resigns 03/27/07-Lawsuit, backdating options 02/07/08-Lawsuit, appraisals propping value 06/11/08-settles lawsuit, water polution 07/16/08- Lawsuit, arms- length conflict of interest 9/15/08-Lehman files for bankcruptcy, Financial crisis hits KB Home Acquisitions Lawsuits and Settlements
    • 11. 11 Key Accounting Standards  Homebuilding Revenue Recognition: SFAS 66 “Accounting for Sales of Real Estate”  Inventory and Cost of Sales: SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”  Goodwill: SFAS 142 “Accounting for Goodwill and Other Intangible Assets”  Fair Value: SFAS 157 “Fair Value Measurements” F/S Analysis Strategic Analysis RecommendationsOverview
    • 12. 12 USD Millions 11/30/03 11/30/04 11/30/05 11/30/06 11/30/07 8/31/08 Assets Homebuilding Cash and Short Term Investments 117 191 145 700 1,325 942 Receivables 430 514 581 224 296 188 Inventories 2,883 4,143 6,128 5,752 3,312 2,563 Investments in unconsolidated joint ventures 33 168 275 381 297 250 Deferred income taxes 166 218 223 431 222 222 Goodwill 229 249 235 177 68 43 Other assets 125 142 124 160 141 110 Subtotal: Assets from Homebuilding 3,983 5,625 7,711 7,825 5,662 4,320 Financial Services 253 210 30 44 44 58 Assets of discontinued operations - - - 1,394 - - Total Assets 4,236 5,835 7,741 9,264 5,706 4,378 Liabilities Homebuilding Accounts payable 554 749 893 626 700 646 Accrued expenses and other liabilities 575 811 1,411 1,601 976 706 Mortgages and notes payable 1,254 1,976 2,464 2,920 2,162 1,877 Subtotal 2,383 3,536 4,768 5,147 3,837 3,230 Financial services 171 118 55 26 18 15 Liabilities of discontinued operations - - - 1,168 - - Minority Interests 89 127 145 - - - Total Liabilities 2,643 3,781 4,968 6,341 3,855 3,244 Stockholders’ Equity Preferred stock - - - - - - Common stock 54 110 114 115 115 115 Paid-in capital 538 596 743 826 852 863 Retained earnings 1,462 1,849 2,571 2,975 1,969 1,239 Accumulated other comprehensive income (loss) 39 60 29 63 (23) (23) Deferred Compensation (7) (7) (15) - - - Grantor stock ownership trust (165) (160) (141) (134) (133) (131) Treasury stock (328) (394) (528) (922) (929) (930) Total Stockholders’ Equity 1,593 2,054 2,773 2,923 1,851 1,134 Total Liabilities and Stockholders’ Equity 4,236 5,835 7,741 9,264 5,706 4,378 Financial Results KB HOME - Balance Sheets Balance Sheet Analysis F/S Analysis Strategic Analysis RecommendationsOverview
    • 13. 13 (2,000) (1,750) (1,500) (1,250) (1,000) (750) (500) (250) - 250 500 750 1,000 1,250 1,500 11/30/03 11/30/04 11/30/05 11/30/06 11/30/07 8/31/08 $Millions Cash and Short Term Investments Receivables Accounts payable Accrued expenses and other liabilities Current Portion of mortgages and notes payable Working Capital Balance Sheet Analysis  Working Capital Trend Note: Inventory is excluded from Working Capital as it primarily consists of land F/S Analysis Strategic Analysis RecommendationsOverview
    • 14. 14 2003 2004 2005 2006 2007 2008 USD Millions FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 YTD Q3'08 Total Revenues 5,851 7,053 8,155 9,380 6,417 2,115 Homebuilding Revenues 5,775 7,008 8,123 9,360 6,401 2,108 Construction and land costs (4,479) (5,326) (5,955) (7,666) (6,826) (2,322) Selling, general and administrative expenses (734) (910) (980) (1,124) (825) (380) Goodwill impairment - - - - (108) (25) Operating income (loss) 563 772 1,189 570 (1,358) (619) Interest income 3 4 4 6 29 29 Loss on early redemption/interest expense (24) (18) (16) (17) (13) - Minority Interests (27) (69) - - - (10) Equity income (loss) of unconsolidated joint ventures 3 18 14 (21) (152) (92) Homebuilding pretax income (loss) 518 707 1,190 538 (1,495) (692) Financial Services Revenues 75 44 31 20 16 7 Expenses (39) (36) (20) (6) (5) (3) Equity in income of unconsolidated joint venture - - 0 19 23 13 Financial services pretax income 36 9 11 34 34 17 Income (loss) from continuing operations 554 715 1,202 572 (1,461) (675) Income tax benefit (expense) (183) (241) (447) (179) 46 6 Income (loss) from continuing operations 371 474 755 393 (1,415) (669) Income from discontinued operations, net of tax - - 69 89 47 - Gain on sale of discontinued operations net of tax - - - - 438 - Net income (loss) 371 474 824 482 (929) (669) KB HOME - Income Statements Financial Results Income Statement Analysis F/S Analysis Strategic Analysis RecommendationsOverview
    • 15. 15 Percent Change in Homes Delivered by Market Segment 9% 4% -31% -31% -8% -5% -3% 16% -35%-34% -40% -30% -20% -10% 0% 10% 20% W est Southw est C entral Southeast Total Market Segment PercentChange % change 05-06 % change 06-07 Percent Change in Revenues by Market Segment 15% -39% -31% 10% 16% 31% 0% -42% -32% -14% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% W est Southw est Central Southeast Total Market Segment PercentChange % change 05-06 % change 06-07  Revenue by Segment Income Statement Analysis F/S Analysis Strategic Analysis RecommendationsOverview West Coast Southwest Central Southeast Revenue Breakdown by Segment - 2007
    • 16. 16 USD Millions 11/30/03 11/30/04 11/30/05 11/30/06 11/30/07 Cash flows from operating activities Net income (loss) 371 474 824 482 (929) Income from discontinued operations, net of income taxes - - (69) (89) (47) Gain on sale of discontinued operations, net of income taxes - - - - (438) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Equity in (income) loss of unconsolidated joint ventures (3) (18) (14) 2 129 Distributions of earnings from unconsolidated joint ventures 0 11 12 14 42 Gain on sale of investment in unconsolidated joint venture - - - (28) - Gain on sale of mortgage banking assets - - (27) - - Amortization of discounts and issuance costs 2 2 2 2 2 Depreciation and amortization 22 22 18 18 17 Provision for deferred income taxes 12 (51) 3 (189) 208 Excess tax benefit associated with exercise of stock options 7 - - (15) (1) Stock option income tax benefits - 11 37 - - Stock-based compensation expense - 2 6 19 9 Inventory and joint venture impairments and land option contract abandonments - 37 43 431 1,410 Goodwill impairment - - - - 108 Changes in assets and liabilities: Receivables 340 (1) 50 (24) (71) Inventories (465) (989) (1,808) (356) 780 Accounts payable, accrued expenses and other liabilities 122 328 697 206 (341) Minority Interest 27 69 - - - Other, net 34 24 56 7 17 Net cash provided (used) by operating activities — continuing operations 470 (79) (171) 480 897 Net cash provided by operating activities — discontinued operations - - 87 230 297 Net cash provided (used) by operating activities 470 (79) (84) 710 1,194 KB HOME - Cash Flow Statements Cash Flow Statement Analysis  Cash Flow from Operating Activities F/S Analysis Strategic Analysis RecommendationsOverview
    • 17. 17 Cash Flow Statement Analysis  Cash Flow from Investing and Financing Activities F/S Analysis Strategic Analysis RecommendationsOverview USD Millions 11/30/03 11/30/04 11/30/05 11/30/06 11/30/07 Cash flows from investing activities Sale of discontinued operations, net of cash divested - - - - 740 Acqusitions of companies (106) (122) - - - Sale of investment in unconsolidated joint venture - - - 58 - Purchase of mortgage banking assets 6 (0) - - - Sale of mortgage banking assets 8 6 42 - - Investments in unconsolidated joint ventures (10) (129) (118) (238) (242) Purchases of property and equipment, net (13) (23) (22) (18) 1 Other, net - - 1 1 - Net cash provided (used) by investing activities — continuing operations (115) (268) (96) (197) 499 Net cash used by investing activities — discontinued operations - - (2) (4) (12) Net cash provided (used) by investing activities (115) (268) (98) (201) 487 Cash flows from financing activities Net payments on credit agreements and other short-term borrowings (516) 179 (379) (84) - Proceeds from (redemption of) term loan 166 - - 400 (400) Redemption of senior subordinated notes - (175) - - (250) Proceeds from issuance of senior notes - 596 748 298 - Payment of collateral mortgage (7) (6) - - - Payments on mortgages, land contracts and other loans (87) (56) (39) (37) (114) Issuance of common stock under employee stock plans 30 42 102 65 12 Excess tax benefit associated with exercise of stock options - - - 15 1 Payments of cash dividends (12) (39) (62) (78) (77) Repurchases of common stock (108) (66) (135) (394) (7) Minority Interest (12) (32) - - - Net cash provided (used) by financing activities — continuing operations (546) 443 235 186 (835) Net cash used by financing activities — discontinued operations - - (119) (215) (307) Net cash provided (used) by financing activities (546) 443 116 (29) (1,142) Net increase (decrease) in cash and cash equivalents (661) 175 18 (231) (655) KB HOME - Cash Flow Statements
    • 18. 18 2003 2004 2005 2006 2007 KB Home 2.73 2.51 2.07 2.08 1.66 Pulte 5.10 2.88 2.78 2.21 1.48 Centex 1.51 0.95 1.43 1.23 1.13 Toll Brothers 2.49 1.27 1.56 1.30 0.89 Comparative NOAT (Net Operating Asset Turnover) 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 KB Home 36% 36% 42% 17% -37% 26% 26% 34% 17% -39% Pulte 86% 58% 61% 25% -39% 18% 25% 28% 11% -48% Centex 21% 18% 28% 3% -40% 27% 24% 26% 5% -116% Toll Brothers 49% 28% 49% 33% 2% 18% 21% 29% 20% 1% Comparative ROE (Return on Equity)Comparative RNOA (Return on Net Operating Assets) 2003 2004 2005 2006 2007 KB Home 13% 15% 20% 8% -22% Pulte 17% 20% 22% 11% -27% Centex 14% 19% 20% 2% -36% Toll Brothers 20% 22% 31% 25% 2% Comparative NOPM (Net Operating Profit Margin)  RNOA & ROE  NOPM  NOAT Ratio Analysis - Profitability F/S Analysis Strategic Analysis RecommendationsOverview
    • 19. 19 2003 2004 2005 2006 2007 KB Home 45 51 55 30 37 Pulte 11 11 11 8 7 Centex 29 26 21 16 9 Toll Brothers 28 24 24 24 21 Comparative Days Payable Outstanding 2003 2004 2005 2006 2007 KB Home 27 27 26 9 17 Pulte N/A N/A N/A N/A N/A Centex 340 90 70 59 59 Toll Brothers 23 14 12 20 14 Comparative Days Receivable Outstanding 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 KB Home 3.04 3.11 2.97 3.00 2.94 0.51 0.56 0.43 0.59 1.14 Pulte 2.41 2.50 2.63 3.24 3.33 0.16 0.10 0.27 0.18 0.44 Centex 7.44 4.79 5.57 5.06 3.53 4.63 1.42 1.15 1.20 0.93 Toll Brothers 4.53 3.57 3.40 3.90 4.69 0.85 0.73 0.65 0.74 0.96 Comparative Liquidity Ratios Current Ratio Quick Ratio  Liquidity  DSO  DPO Ratio Analysis – Working Capital F/S Analysis Strategic Analysis RecommendationsOverview
    • 20. 20  Liabilities to Equity Ratio Ratio Analysis F/S Analysis Strategic Analysis RecommendationsOverview 2003 2004 2005 2006 2007 KB Home 1.66 1.84 1.79 2.17 2.08 Pulte 1.34 1.30 1.19 1.00 1.37 Centex 4.27 3.67 3.26 1.58 2.54 Toll Brothers 1.56 1.56 1.30 1.22 1.05 Liabilities to Equity Ratio Comparative Debt Ratios
    • 21. 21 Strategic Analysis F/S Analysis Strategic Analysis RecommendationsOverview Strengths Weaknesses  Well-positioned in areas expected to experience the strongest long-term population and job growth.  Huge growth potential in the industry (top 10 publicly owned homebuilders only have 24% market share).  Very familiar with the process to acquire other companies to expand into other markets if needed.  Distressed housing market due to tighter lending standards, oversupply of homes, increased foreclosure activities, poor economic conditions.  Purchases land before plans are approved leads to impairment charges. Moody's Bond rating 11/26/08 (recent downgrade from Ba3 to Ba2 → speculative grade) Opportunities Threats  Diversification in attractive markets that exhibit growth potential through the acquisition of companies or land at distressed prices.  Exit from markets that no longer have growth potential.  Potential for bankruptcy if KBH becomes too highly leveraged.  Outflow of cash if KBH does not modify the payment schedule for many of the loans that are due to be repaid within the next 5 years.  Outflow of cash due to expenses associated with government investigations and other litigation.
    • 22. 22  Management of Working Capital Accounts Payable - Action Item: Decrease spending and seek favorable payment terms - Example: Taking 5 additional days to pay Accounts Payable would equate to $100M in cash Shift to Debt to Long-Term - Action Item: Shift short-term notes payable to long-term notes payable. Issuance of Equity - If additional financing is needed, issue equity rather than debt. “Last Resort” for cash - Liquidate land Recommendation 1 F/S Analysis Strategic Analysis RecommendationsOverview
    • 23. 23  Expand in Other High Potential Markets - A perfect time to acquire small struggling public homebuilders - Purchase high potential land cheaply Recommendation 2 F/S Analysis Strategic Analysis RecommendationsOverview
    • 24. 24  Develop partnerships with rental/timeshare companies - Generate a positive revenue stream by renting out homes until the company can start building again. - For example: Turn Condominium Complexes  Apartments Recommendation 3 F/S Analysis Strategic Analysis RecommendationsOverview
    • 25. 25 Question? F/S Analysis Strategic Analysis RecommendationsOverview Q&A
    • 26. 26 Appendix F/S Analysis Strategic Analysis RecommendationsOverview APPENDIX
    • 27. 27 USD Millions 11/30/03 11/30/04 11/30/05 11/30/06 11/30/07 8/31/08 % 11/30/03 11/30/04 11/30/05 11/30/06 11/30/07 8/31/08 Assets Homebuilding Cash and Short Term Investments 117 191 145 700 1,325 942 3 3 2 8 23 22 Receivables 430 514 581 224 296 188 10 9 8 2 5 4 Inventories 2,883 4,143 6,128 5,752 3,312 2,563 68 71 79 62 58 59 Investments in unconsolidated joint ventures 33 168 275 381 297 250 1 3 4 4 5 6 Deferred income taxes 166 218 223 431 222 222 4 4 3 5 4 5 Goodwill 229 249 235 177 68 43 5 4 3 2 1 1 Other assets 125 142 124 160 141 110 3 2 2 2 2 3 Subtotal: Assets from Homebuilding 3,983 5,625 7,711 7,825 5,662 4,320 94 96 100 84 99 99 Financial Services 253 210 30 44 44 58 6 4 0 0 1 1 Assets of discontinued operations - - - 1,394 - - - - - 15 - - Total Assets 4,236 5,835 7,741 9,264 5,706 4,378 100 100 100 100 100 100 Liabilities Homebuilding Accounts payable 554 749 893 626 700 646 13 13 12 7 12 15 Accrued expenses and other liabilities 575 811 1,411 1,601 976 706 14 14 18 17 17 16 Mortgages and notes payable 1,254 1,976 2,464 2,920 2,162 1,877 30 34 32 32 38 43 Subtotal 2,383 3,536 4,768 5,147 3,837 3,230 56 61 62 56 67 74 - Financial services 171 118 55 26 18 15 4 2 1 0 0 0 Liabilities of discontinued operations - - - 1,168 - - - - - 13 - - Minority Interests 89 127 145 - - - 2 2 2 - - - Total Liabilities 2,643 3,781 4,968 6,341 3,855 3,244 62 65 64 68 68 74 Stockholders’ Equity Preferred stock - - - - - - - - - - - - Common stock 54 110 114 115 115 115 1 2 1 1 2 3 Paid-in capital 538 596 743 826 852 863 13 10 10 9 15 20 Retained earnings 1,462 1,849 2,571 2,975 1,969 1,239 35 32 33 32 35 28 Accumulated other comprehensive income (loss) 39 60 29 63 (23) (23) 1 1 0 1 (0) (1) Deferred Compensation (7) (7) (15) - - - (0) (0) (0) - - - Grantor stock ownership trust (165) (160) (141) (134) (133) (131) (4) (3) (2) (1) (2) (3) Treasury stock (328) (394) (528) (922) (929) (930) (8) (7) (7) (10) (16) (21) Total Stockholders’ Equity 1,593 2,054 2,773 2,923 1,851 1,134 38 35 36 32 32 26 Total Liabilities and Stockholders’ Equity 4,236 5,835 7,741 9,264 5,706 4,378 100 100 100 100 100 100 Financial Results % Analysis KB HOME - Balance Sheets Balance Sheet Analysis F/S Analysis Strategic Analysis RecommendationsOverview
    • 28. 28 Balance Sheet Details Inventory Goodwill Assets and liabilities from discontinued ops
    • 29. 29 Balance Sheet Details (cont’d) Mortgages and notes payable Retained Earnings Net income 11/30/2007 Dividends 11/30/2007 Retained Earnings
    • 30. 30 Stockholder’s Equity
    • 31. 31 2003 2004 2005 2006 2007 2008 % 2003 2004 2005 2006 2007 2008 USD Millions FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 YTD Q3'08 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 YTD Q3'08 Total Revenues 5,851 7,053 8,155 9,380 6,417 2,115 100 100 100 100 100 100 Homebuilding Revenues 5,775 7,008 8,123 9,360 6,401 2,108 100 100 100 100 100 100 Construction and land costs (4,479) (5,326) (5,955) (7,666) (6,826) (2,322) (77) (76) (73) (82) (106) (110) Selling, general and administrative expenses (734) (910) (980) (1,124) (825) (380) (13) (13) (12) (12) (13) (18) Goodwill impairment - - - - (108) (25) - - - - (2) (1) Operating income (loss) 563 772 1,189 570 (1,358) (619) 10 11 15 6 (21) (29) Interest income 3 4 4 6 29 29 0 0 0 0 0 1 Loss on early redemption/interest expense (24) (18) (16) (17) (13) - (0) (0) (0) (0) (0) - Minority Interests (27) (69) - - - (10) (0) (1) - - - (0) Equity income (loss) of unconsolidated joint ventures 3 18 14 (21) (152) (92) 0 0 0 (0) (2) (4) Homebuilding pretax income (loss) 518 707 1,190 538 (1,495) (692) 9 10 15 6 (23) (33) Financial Services Revenues 75 44 31 20 16 7 1 1 0 0 0 0 Expenses (39) (36) (20) (6) (5) (3) (1) (1) (0) (0) (0) (0) Equity in income of unconsolidated joint venture - - 0 19 23 13 - - 0 0 0 1 Financial services pretax income 36 9 11 34 34 17 1 0 0 0 1 1 Income (loss) from continuing operations 554 715 1,202 572 (1,461) (675) 9 10 15 6 (23) (32) Income tax benefit (expense) (183) (241) (447) (179) 46 6 (3) (3) (5) (2) 1 0 Income (loss) from continuing operations 371 474 755 393 (1,415) (669) 6 7 9 4 (22) (32) Income from discontinued operations, net of tax - - 69 89 47 - - - 1 1 1 - Gain on sale of discontinued operations net of tax - - - - 438 - - - - - 7 - Net income (loss) 371 474 824 482 (929) (669) 6 7 10 5 (14) (32) KB HOME - Income Statements Financial Results % Analysis Income Statement Analysis F/S Analysis Strategic Analysis RecommendationsOverview
    • 32. 32 Income Statement Details Revenues Construction costs
    • 33. 33 Post-2005: Economic Conditions F/S Analysis Strategic Analysis RecommendationsOverview • Foreclosures rise across the US, many in regions KB has expanded in. • Inventories rise, severe downward pressure on price of new homes • Recessionary market, falling home prices – a perfect storm on the horizon for Home Builders • 1,3 ARMs start resetting; highly leveraged owners cannot afford new payments • Some paying more than house is worth • The housing bust has started snowballing HOME PRICES CRASH RECORD FORECLOSURES
    • 34. 34 Balance Sheet Analysis F/S Analysis Strategic Analysis RecommendationsOverview 4% 1% 12%7% 23% 19% 44% 16% 0% 60% 69% 44% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% November 2006 November 2007 August 2008 Greater than Five Years Three to Five Years One to Three Years Less than One Year Mortgages and Notes Payable – Maturity Schedule $1,296M $232M $349M $348M $498M $19M $1,296M $129M $200M $1,296M $1,295M
    • 35. 35  Operating Activities - Net decrease in inventories due to curtailment of inventory investments in light of challenging housing market conditions and our diminished future sales expectations. -Discontinued Operations are results from the French subsidiary that was sold in 2007. - Inventory and joint venture impairments and land option contract abandonments are related to West Coast and Southwest reporting segments.  Investing Activities - Sale of Discontinued Operations see above. - Investments in Unconsolidated Joint Ventures refer to balance sheet notes.  Financing Activities - Primary activity relates to redemption and proceeds from notes to operate the company. In light of the deteriorating market conditions in 2007, KBH took several decisive actions during the year to generate cash flow, reduce debt levels and strengthen its balance sheet. Cash Flow Statement Analysis F/S Analysis Strategic Analysis RecommendationsOverview

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