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Financial Accounting - KB Homes 2008

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Financial Accounting - KB Homes 2008

  1. 1. KB HOME KB Home Accounting Project Group 6 (Gold/Thurs) Rajeev Kalavar, Delia Chavarria, Prentiss Douglass, Herman Ng, and Ganesh Vasudeva
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 25 Question? F/S Analysis Strategic Analysis RecommendationsOverview Q&A
  26. 26. 26 Appendix F/S Analysis Strategic Analysis RecommendationsOverview APPENDIX
  27. 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. 28 Balance Sheet Details Inventory Goodwill Assets and liabilities from discontinued ops
  29. 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. 30 Stockholder’s Equity
  31. 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. 32 Income Statement Details Revenues Construction costs
  33. 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. 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. 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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