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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2002
Commission File Number: 1-11749
Lennar Corporation
(Exact name of registrant as specified in its charter)
Delaware 95-4337490
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 Northwest 107th Avenue, Miami, Florida 33172
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (305) 559-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO ____
Common shares outstanding as of June 30, 2002:
Common 54,979,874
Class B Common 9,700,462
================================================================================
Part I. Financial Information
Item 1. Financial Statements
Lennar Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
May 31, November 30,
2002 2001
- ------------------------------------------------------------------------------------------------------
ASSETS
Homebuilding:
Cash $ 461,497 824,013
Receivables, net 51,222 24,345
Inventories 2,802,260 2,416,541
Investments in unconsolidated partnerships 324,510 300,064
Other assets 262,833 253,933
---------------------------
3,902,322 3,818,896
Financial services 653,968 895,530
- ------------------------------------------------------------------------------------------------------
Total assets $ 4,556,290 4,714,426
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding:
Accounts payable and other liabilities $ 680,512 755,726
Senior notes and other debts payable, net 1,502,718 1,505,255
---------------------------
2,183,230 2,260,981
Financial services 509,866 794,183
- ------------------------------------------------------------------------------------------------------
Total liabilities 2,693,096 3,055,164
Stockholders' equity:
Preferred stock - -
Common stock of $0.10 par value per share,
64,836 shares issued at May 31, 2002 6,484 6,412
Class B common stock of $0.10 par value per share,
9,700 shares issued at May 31, 2002 970 974
Additional paid-in capital 867,474 843,924
Retained earnings 1,173,310 996,998
Unearned restricted stock (8,892) (10,833)
Treasury stock, at cost; 9,847 common shares at May 31, 2002 (158,927) (158,927)
Accumulated other comprehensive loss (17,225) (19,286)
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,863,194 1,659,262
- ------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 4,556,290 4,714,426
======================================================================================================
See accompanying notes to consolidated condensed financial statements.
1
Lennar Corporation and Subsidiaries
Consolidated Condensed Statements of Earnings
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
May 31, May 31,
----------------------------- -------------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Revenues:
Homebuilding $ 1,461,804 1,273,349 2,603,923 2,295,167
Financial services 109,813 118,184 215,438 200,408
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 1,571,617 1,391,533 2,819,361 2,495,575
- ----------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Homebuilding 1,267,912 1,101,518 2,277,296 2,007,698
Financial services 83,102 84,529 165,303 159,495
Corporate general and administrative 19,780 18,387 36,404 34,175
Interest 30,530 29,366 54,578 53,114
- ----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,401,324 1,233,800 2,533,581 2,254,482
- ----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 170,293 157,733 285,780 241,093
Income taxes 64,286 60,727 107,882 92,821
- ----------------------------------------------------------------------------------------------------------------------
Net earnings $ 106,007 97,006 177,898 148,272
======================================================================================================================
Basic earnings per share $ 1.66 1.55 2.80 2.38
======================================================================================================================
Diluted earnings per share $ 1.51 1.40 2.54 2.15
======================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------
Cash dividends per common share $ 0.0125 0.0125 0.025 0.025
- ----------------------------------------------------------------------------------------------------------------------
Cash dividends per Class B common share $ 0.01125 0.01125 0.0225 0.0225
======================================================================================================================
See accompanying notes to consolidated condensed financial statements.
2
Lennar Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended
May 31,
-------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 177,898 148,272
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 20,002 23,985
Amortization of discount on debt 12,516 8,065
Tax benefit from exercise of stock options 8,410 7,400
Equity in earnings from unconsolidated partnerships (12,908) (6,515)
Increase in deferred income taxes 16,565 31,072
Changes in assets and liabilities, net of effect from acquisitions:
Increase in receivables (40,020) (124,706)
Increase in inventories (304,596) (225,193)
Increase in other assets (17,304) (4,693)
Decrease in financial services loans held for sale or disposition 253,373 54,025
Decrease in accounts payable and other liabilities (83,550) (198,186)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 30,386 (286,474)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net additions to operating properties and equipment (5,746) (8,324)
Increase in investments in unconsolidated partnerships, net (14,094) (13,073)
Decrease in financial services mortgage loans 14,462 626
Decrease in financial services mortgage servicing rights - 10,812
Purchases of investment securities (20,934) (11,067)
Proceeds from investment securities 15,000 10,800
Acquisitions, net of cash acquired (21,251) -
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (32,563) (10,226)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under financial services short-term debt (264,927) 6,144
Net proceeds from issuance of 5.125% zero-coupon convertible
senior subordinated notes - 224,250
Proceeds from other borrowings 17 110
Principal payments on other borrowings (100,959) (11,122)
Limited-purpose finance subsidiaries, net 46 588
Common stock:
Issuance 15,585 16,313
Dividends (1,586) (1,540)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (351,824) 234,743
- ----------------------------------------------------------------------------------------------------------
Net decrease in cash (354,001) (61,957)
Cash at beginning of period 877,274 333,877
- ----------------------------------------------------------------------------------------------------------
Cash at end of period $ 523,273 271,920
==========================================================================================================
3
Lennar Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows -- Continued
(Unaudited)
(In thousands)
Six Months Ended
May 31,
-------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------
Summary of cash:
Homebuilding $ 461,497 219,002
Financial services 61,776 52,918
- ---------------------------------------------------------------------------------------------------------
$ 523,273 271,920
- ---------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized $ 5,944 10,670
Cash paid for income taxes $ 120,943 116,086
Supplemental disclosures of non-cash investing and financing activities:
Purchases of inventory financed by sellers $ 3,351 17,685
=========================================================================================================
See accompanying notes to consolidated condensed financial statements.
4
Lennar Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
(Unaudited)
(1) Basis of Presentation
The accompanying consolidated condensed financial statements include the
accounts of Lennar Corporation and all subsidiaries, partnerships and other
entities in which a controlling interest is held (the "Company"). The Company's
investments in unconsolidated partnerships in which a significant, but less than
controlling, interest is held are accounted for by the equity method.
Controlling interest is determined based on a number of factors, which include
the Company's ownership interest and participation in the management of the
partnership. All significant intercompany transactions and balances have been
eliminated. The financial statements have been prepared by management without
audit by independent public accountants and should be read in conjunction with
the November 30, 2001 audited financial statements in the Company's Annual
Report on Form 10-K for the year then ended. However, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for fair presentation of the accompanying consolidated condensed
financial statements have been made. Certain prior year amounts in the
consolidated condensed financial statements have been reclassified to conform
with the current period presentation.
The Company historically has experienced, and expects to continue to experience,
variability in quarterly results. The consolidated condensed statements of
earnings for the three and six months ended May 31, 2002 are not necessarily
indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
(2) Operating and Reporting Segments
The Company has two operating and reporting segments: Homebuilding and Financial
Services. The Company's reportable segments are strategic business units that
offer different products and services.
Homebuilding operations include the sale and construction of single-family
attached and detached homes in 16 states. These activities also include the
purchase, development and sale of residential land by the Company and
unconsolidated partnerships in which it has investments.
The Financial Services Division provides mortgage financing, title insurance and
closing services for both the Company's homebuyers and others. This Division
resells the residential mortgage loans it originates in the secondary mortgage
market and also provides high-speed Internet access, cable television and alarm
monitoring services for both the Company's homebuyers and other customers.
5
(3) Earnings Per Share
Basic earnings per share is computed by dividing earnings attributable to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. Basic and diluted earnings per share
were calculated as follows (unaudited):
Three Months Ended Six Months Ended
May 31, May 31,
--------------------------------- --------------------------
(In thousands, except per share amounts) 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------------
Numerator:
Numerator for basic earnings per share -
net earnings $ 106,007 97,006 177,898 148,272
Interest on zero-coupon senior convertible
debentures due 2018, net of tax 1,599 1,518 3,177 3,016
-------------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share $ 107,606 98,524 181,075 151,288
=========================================================================================================================
Denominator:
Denominator for basic earnings per share -
weighted average shares 63,724 62,699 63,514 62,398
Effect of dilutive securities:
Employee stock options and restricted stock 1,612 1,776 1,646 1,857
Zero-coupon senior convertible debentures due 2018 6,105 6,105 6,105 6,105
-------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 71,441 70,580 71,265 70,360
=========================================================================================================================
Basic earnings per share $ 1.66 1.55 2.80 2.38
=========================================================================================================================
Diluted earnings per share $ 1.51 1.40 2.54 2.15
=========================================================================================================================
In the second quarter of 2001, the Company issued zero-coupon convertible senior
subordinated notes due 2021 (the "Notes"). The Notes are convertible into the
Company's common stock if the sale price of the Company's common stock exceeds
certain thresholds or in other specified instances, at the rate of approximately
6.4 shares per $1,000 face amount at maturity, which would total approximately 4
million shares. These shares were not included in the calculation of diluted
earnings per share for the three and six months ended May 31, 2002 and 2001
because the average closing price of the Company's common stock over the last
twenty trading days of the second quarter did not exceed 110% of the accreted
conversion price ($66.44 per share at May 31, 2002).
6
(4) Financial Services
The assets and liabilities related to the Company's financial services
operations are summarized as follows:
(Unaudited)
May 31, November 30,
(In thousands) 2002 2001
---------------------------------------------------------------------------------------------------------
Assets:
Cash and receivables, net $ 180,881 161,060
Mortgage loans held for sale or disposition, net 332,567 587,694
Mortgage loans, net 28,882 41,590
Title plants 15,556 15,530
Goodwill, net 30,236 25,158
Other 54,275 51,352
Limited-purpose finance subsidiaries 11,571 13,146
-------------------------------------------------------------------------------------------------------
$ 653,968 895,530
=======================================================================================================
Liabilities:
Notes and other debts payable $ 408,958 693,931
Other 89,337 87,106
Limited-purpose finance subsidiaries 11,571 13,146
-------------------------------------------------------------------------------------------------------
$ 509,866 794,183
=======================================================================================================
(5) Cash
Cash as of May 31, 2002 and November 30, 2001 included $45.6 million and $64.4
million, respectively, of cash held in escrow for approximately three days.
(6) Debt
In May 2002, the Company amended and restated its senior secured credit
facilities (the "Amended Facilities"), to provide the Company with up to $1.3
billion of financing. The Amended Facilities consist of a $653 million revolving
credit facility maturing in April 2006, a $273 million 364-day revolving credit
facility maturing in April 2003 and a $400 million term loan B maturing in May
2007. The Company may elect to convert borrowings under the 364-day revolving
credit facility to a term loan, which would mature in April 2006. At May 31,
2002, $393 million was outstanding under the term loan B and no amounts were
borrowed under the revolving credit facilities. Interest rates are LIBOR-based
and the margins are set by a pricing grid with thresholds that adjust based on
changes in the Company's leverage ratio and the Amended Facilities' credit
rating.
(7) Comprehensive Income
The Company has various interest rate swap agreements which effectively fix the
variable interest rate on approximately $400 million of outstanding debt related
to its homebuilding operations. The swap agreements have been designated as
cash flow hedges and, accordingly, are reflected at their fair value in the
consolidated condensed balance sheets. The related loss is deferred, net of
tax, in stockholders' equity as accumulated other comprehensive loss.
Comprehensive income consists of net earnings adjusted for the change in
accumulated other comprehensive loss in the consolidated condensed balance
sheets. Comprehensive income was $180.0 million and $136.5 million for the six
months ended May 31, 2002 and 2001, respectively.
7
(8) New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 no longer requires or permits the amortization
of goodwill and indefinite-lived assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with this statement. This impairment test uses a fair value approach
rather than the undiscounted cash flows approach previously required by SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The Company adopted SFAS No. 142 on December 1, 2001.
No impairment charges were recognized from the adoption of this statement.
Pro forma net earnings for the three and six months ended May 31, 2001 were
$98.5 million, or $1.42 per diluted share ($1.57 per basic share), and $151.3
million, or $2.19 per diluted share ($2.43 per basic share), respectively, after
adding back amortization of goodwill, net of tax, of $1.5 million and $3.1
million, respectively.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 provides guidance for financial
accounting and reporting for impairment or disposal of long-lived assets. SFAS
No. 144 supercedes SFAS No. 121. SFAS No. 144 is effective for the Company in
fiscal 2003. Management does not currently believe that the implementation of
SFAS No. 144 will have a material impact on the Company's financial condition or
results of operations.
(9) Subsequent Event
In June 2002, the Company acquired a controlling interest in The Fortress Group,
Inc. ("Fortress"), a regional homebuilder, and commenced a tender offer to
acquire the remaining Fortress common stock that the Company does not own. In
total, the Company will pay approximately $50.7 million in cash for Fortress,
including the amount already paid for the preferred stock, common stock and
warrants through which it acquired its controlling interest. Completion of the
tender offer and the subsequent closing of the merger are expected to be
finalized during July 2002. Concurrent with the acquisition, Fortress entered
into a separate agreement to sell its Texas-based homebuilding operations,
Wilshire Homes, for $23 million. These transactions will result in a net cost
to the Company for Fortress of approximately $27.7 million.
8
(10) Supplemental Financial Information
During May 2000, the Company issued $325 million of 9.95% senior notes due 2010.
The Company's obligations to pay principal, premium, if any, and interest under
the notes are guaranteed on a joint and several basis by substantially all of
its subsidiaries, other than subsidiaries engaged in mortgage and title
reinsurance activities. The Company has determined that separate, full
financial statements of the guarantors would not be material to investors and,
accordingly, supplemental financial information for the guarantors is presented.
Consolidating statements of cash flows are not presented because cash flows for
the non-guarantor subsidiaries were not significant for any of the periods
presented.
Consolidating Condensed Balance Sheet
May 31, 2002
(Unaudited)
Lennar Guarantor Non-Guarantor
(In thousands) Corporation Subsidiaries Subsidiaries Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Homebuilding:
Cash and receivables, net $ 390,348 122,361 10 - 512,719
Inventories - 2,795,770 6,490 - 2,802,260
Investments in unconsolidated
partnerships - 324,510 - - 324,510
Other assets 85,528 177,305 - - 262,833
Investments in subsidiaries 2,245,741 227,657 - (2,473,398) -
- ----------------------------------------------------------------------------------------------------------------------------
2,721,617 3,647,603 6,500 (2,473,398) 3,902,322
Financial services - 28,441 625,527 - 653,968
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,721,617 3,676,044 632,027 (2,473,398) 4,556,290
============================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Homebuilding:
Accounts payable and other
liabilities $ 239,481 441,031 - - 680,512
Senior notes and other debts
payable, net 1,470,955 31,763 - - 1,502,718
Intercompany (852,013) 948,088 (96,075) - -
- ----------------------------------------------------------------------------------------------------------------------------
858,423 1,420,882 (96,075) - 2,183,230
Financial services - 9,421 500,445 - 509,866
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 858,423 1,430,303 404,370 - 2,693,096
Stockholders' equity 1,863,194 2,245,741 227,657 (2,473,398) 1,863,194
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 2,721,617 3,676,044 632,027 (2,473,398) 4,556,290
============================================================================================================================
9
(10) Supplemental Financial Information, Continued
Consolidating Condensed Balance Sheet
November 30, 2001
Lennar Guarantor Non-Guarantor
(In thousands) Corporation Subsidiaries Subsidiaries Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Homebuilding:
Cash and receivables, net $ 710,748 137,610 - - 848,358
Inventories - 2,410,117 6,424 - 2,416,541
Investments in unconsolidated
partnerships - 300,064 - - 300,064
Other assets 83,983 169,950 - - 253,933
Investments in subsidiaries 1,955,678 197,821 - (2,153,499) -
- ----------------------------------------------------------------------------------------------------------------------------
2,750,409 3,215,562 6,424 (2,153,499) 3,818,896
Financial services - 24,762 870,768 - 895,530
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,750,409 3,240,324 877,192 (2,153,499) 4,714,426
============================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Homebuilding:
Accounts payable and other
liabilities $ 295,188 460,320 218 - 755,726
Senior notes and other debts
payable, net 1,460,610 44,645 - - 1,505,255
Intercompany (664,651) 773,091 (108,440) - -
- ----------------------------------------------------------------------------------------------------------------------------
1,091,147 1,278,056 (108,222) - 2,260,981
Financial services - 6,590 787,593 - 794,183
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,091,147 1,284,646 679,371 - 3,055,164
Stockholders' equity 1,659,262 1,955,678 197,821 (2,153,499) 1,659,262
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 2,750,409 3,240,324 877,192 (2,153,499) 4,714,426
- ----------------------------------------------------------------------------------------------------------------------------
10
(10) Supplemental Financial Information, Continued
---------------------------------------------
Consolidating Condensed Statement of Earnings
Three Months Ended May 31, 2002
(Unaudited)
Lennar Guarantor Non-Guarantor
(In thousands) Corporation Subsidiaries Subsidiaries Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------------
Revenues:
Homebuilding $ - 1,461,804 - - 1,461,804
Financial services - 13,283 96,530 - 109,813
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues - 1,475,087 96,530 - 1,571,617
- ------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Homebuilding - 1,267,775 137 - 1,267,912
Financial services - 9,750 73,352 - 83,102
Corporate general and administrative 19,780 - - - 19,780
Interest - 30,530 - - 30,530
- ------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 19,780 1,308,055 73,489 - 1,401,324
- ------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (19,780) 167,032 23,041 - 170,293
Provision (benefit) for income taxes (7,292) 63,055 8,523 - 64,286
Equity in earnings from subsidiaries 118,495 14,518 - (133,013) -
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 106,007 118,495 14,518 (133,013) 106,007
==============================================================================================================================
Consolidating Condensed Statement of Earnings
Three Months Ended May 31, 2001
(Unaudited)
Lennar Guarantor Non-Guarantor
(In thousands) Corporation Subsidiaries Subsidiaries Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------------
Revenues:
Homebuilding $ - 1,273,347 2 - 1,273,349
Financial services - 14,176 104,008 - 118,184
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues - 1,287,523 104,010 - 1,391,533
- ------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Homebuilding - 1,101,389 129 - 1,101,518
Financial services - 15,443 69,086 - 84,529
Corporate general and administrative 18,387 - - - 18,387
Interest - 29,366 - - 29,366
- ------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 18,387 1,146,198 69,215 - 1,233,800
- ------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (18,387) 141,325 34,795 - 157,733
Provision (benefit) for income taxes (6,255) 54,411 12,571 - 60,727
Equity in earnings from subsidiaries 109,138 22,224 - (131,362) -
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 97,006 109,138 22,224 (131,362) 97,006
==============================================================================================================================
11
(10) Supplemental Financial Information, Continued
---------------------------------------------
Consolidating Condensed Statement of Earnings
Six Months Ended May 31, 2002
(Unaudited)
Lennar Guarantor Non-Guarantor
(In thousands) Corporation Subsidiaries Subsidiaries Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------------
Revenues:
Homebuilding $ - 2,603,917 6 - 2,603,923
Financial services - 24,371 191,067 - 215,438
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues - 2,628,288 191,073 - 2,819,361
- ------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Homebuilding - 2,277,009 287 - 2,277,296
Financial services - 20,267 145,036 - 165,303
Corporate general and administrative 36,404 - - - 36,404
Interest - 54,578 - - 54,578
- ------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 36,404 2,351,854 145,323 - 2,533,581
- ------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (36,404) 276,434 45,750 - 285,780
Provision (benefit) for income taxes (13,554) 104,354 17,082 - 107,882
Equity in earnings from subsidiaries 200,748 28,668 - (229,416) -
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 177,898 200,748 28,668 (229,416) 177,898
- ------------------------------------------------------------------------------------------------------------------------------
Consolidating Condensed Statement of Earnings
Six Months Ended May 31, 2001
(Unaudited)
Lennar Guarantor Non-Guarantor
(In thousands) Corporation Subsidiaries Subsidiaries Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------------
Revenues:
Homebuilding $ - 2,295,163 4 - 2,295,167
Financial services - 25,073 175,335 - 200,408
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues - 2,320,236 175,339 - 2,495,575
- ------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Homebuilding - 2,007,442 256 - 2,007,698
Financial services - 31,263 128,232 - 159,495
Corporate general and administrative 34,175 - - - 34,175
Interest - 53,114 - - 53,114
- ------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 34,175 2,091,819 128,488 - 2,254,482
- ------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (34,175) 228,417 46,851 - 241,093
Provision (benefit) for income taxes (12,411) 87,941 17,291 - 92,821
Equity in earnings from subsidiaries 170,036 29,560 - (199,596) -
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 148,272 170,036 29,560 (199,596) 148,272
- ------------------------------------------------------------------------------------------------------------------------------
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Some of the statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations are "forward-looking
statements" as that term is defined in the Private Securities Litigation Reform
Act of 1995. By their nature, forward-looking statements involve risks,
uncertainties and other factors that may cause actual results to differ
materially from those which the statements anticipate. Factors which may affect
our results include, but are not limited to, changes in general economic
conditions, the market for homes generally and in areas where we have
developments, the availability and cost of land suitable for residential
development, materials prices, labor costs, interest rates, consumer confidence,
competition, terrorist acts or other acts of war, environmental factors and
government regulations affecting our operations. See our Annual Report on Form
10-K for the year ended November 30, 2001 for a further discussion of these and
other risks and uncertainties applicable to our business.
(1) Results of Operations
Overview
Net earnings were $106.0 million, or $1.51 per share diluted ($1.66 per share
basic), in the second quarter of 2002, compared to $97.0 million, or $1.40 per
share diluted ($1.55 per share basic), in the second quarter of 2001. For the
six months ended May 31, 2002, net earnings were $177.9 million, or $2.54 per
share diluted ($2.80 per share basic), compared to $148.3 million, or $2.15 per
share diluted ($2.38 per share basic) in 2001.
Homebuilding
The following tables set forth selected financial and operational information
related to our Homebuilding Division for the periods indicated (unaudited):
Three Months Ended Six Months Ended
(Dollars in thousands, except May 31, May 31,
average sales price) --------------------------------- ---------------------------------
2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------
Revenues:
Sales of homes $ 1,397,596 1,255,356 2,507,370 2,252,850
Sales of land and other revenues 57,513 15,559 83,645 35,802
Equity in earnings from
unconsolidated partnerships 6,695 2,434 12,908 6,515
----------------------------------------------------------------------------------------------------------------
Total revenues 1,461,804 1,273,349 2,603,923 2,295,167
Costs and expenses:
Cost of homes sold 1,062,109 956,047 1,915,505 1,731,348
Cost of land and other expenses 48,332 10,333 69,799 28,278
Selling, general and administrative 157,471 135,138 291,992 248,072
----------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,267,912 1,101,518 2,277,296 2,007,698
----------------------------------------------------------------------------------------------------------------
Operating earnings $ 193,892 171,831 326,627 287,469
================================================================================================================
Gross margin on home sales 24.0% 23.8% 23.6% 23.1%
S,G&A expenses as a % of
revenues from home sales 11.3% 10.8% 11.6% 11.0%
-----------------------------------------------------------------------
Operating margin as a % of
revenues from home sales 12.7% 13.1% 12.0% 12.1%
-----------------------------------------------------------------------
Average sales price $ 237,000 235,000 235,000 234,000
================================================================================================================
13
Summary of Home and Backlog Data By Region
(Dollars in thousands) At or for the Six
Three Months Ended Months Ended
May 31, May 31,
-------------------------- --------------------------
Deliveries 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------------
East 1,979 1,839 3,519 3,198
Central 1,757 1,531 3,245 2,745
West 2,163 1,983 3,926 3,667
-------------------------------------------------------------------------------------------------------------------------
Subtotal 5,899 5,353 10,690 9,610
Unconsolidated partnerships 117 265 236 521
-------------------------------------------------------------------------------------------------------------------------
Total 6,016 5,618 10,926 10,131
=========================================================================================================================
New Orders
-------------------------------------------------------------------------------------------------------------------------
East 2,911 2,409 5,046 4,385
Central 1,973 2,033 3,632 3,760
West 2,947 2,437 5,234 4,539
-------------------------------------------------------------------------------------------------------------------------
Subtotal 7,831 6,879 13,912 12,684
Unconsolidated partnerships 231 351 353 629
-------------------------------------------------------------------------------------------------------------------------
Total 8,062 7,230 14,265 13,313
=========================================================================================================================
Backlog - Homes
-------------------------------------------------------------------------------------------------------------------------
East 5,027 3,955
Central 2,336 2,647
West 4,355 4,323
-------------------------------------------------------------------------------------------------------------------------
Subtotal 11,718 10,925
Unconsolidated partnerships 393 620
-------------------------------------------------------------------------------------------------------------------------
Total 12,111 11,545
=========================================================================================================================
Backlog Dollar Value
(including unconsolidated partnerships) $ 3,065,373 2,769,624
=========================================================================================================================
Our market regions consist of the following states: East: Florida, Maryland,
Virginia, New Jersey, North Carolina and South Carolina. Central: Texas and
Minnesota. West: California, Colorado, Arizona and Nevada. In addition, we have
unconsolidated partnerships in other states.
Revenues from sales of homes increased 11% in both the three and six months
ended May 31, 2002, compared to the same periods in 2001. Revenues were higher
due primarily to a 10% and 11% increase in the number of new home deliveries for
the three and six months ended May 31, 2002, respectively, compared to the same
periods in 2001. New home deliveries were higher primarily due to increases in
home deliveries in Texas and Arizona, and our entry into the Carolinas this
year.
Gross margin percentages on home sales were 24.0% and 23.6% in the three and six
months ended May 31, 2002, compared to 23.8% and 23.1%, respectively, in the
same periods last year. Margins were strongest in the East Region and softer in
the Central Region, primarily due to the continued use of incentives in the
Texas market.
14
Selling, general and administrative expenses as a percentage of revenues from
home sales were 11.3% and 11.6% in the three and six months ended May 31, 2002,
respectively, compared to 10.8% and 11.0% in the same periods last year. The
increases in 2002 were primarily due to an increase in insurance costs and real
estate broker commissions, compared to the same periods last year.
Sales of land and other revenues, net totaled $9.2 million and $13.8 million in
the three and six months ended May 31, 2002, respectively, compared to $5.2
million and $7.5 million in the same periods in 2001. Equity in earnings from
unconsolidated partnerships was $6.7 million and $12.9 million in the three and
six months ended May 31, 2002, respectively, compared to $2.4 million and $6.5
million in the same periods last year. Margins achieved on land sales and equity
in earnings from unconsolidated partnerships may vary significantly from period
to period depending on the timing of land sales by us and our unconsolidated
partnerships.
At May 31, 2002, our backlog of sales contracts was 12,111 homes ($3.1 billion),
compared to 11,545 homes ($2.8 billion) at May 31, 2001. The higher backlog was
primarily attributable to our recent acquisitions and growth in the number of
active communities, which resulted in higher new orders in 2002 compared to
2001.
Financial Services
The following table presents selected financial data related to our Financial
Services Division for the periods indicated (unaudited):
Three Months Ended Six Months Ended
May 31, May 31,
---------------------------- ----------------------
(Dollars in thousands) 2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------------------
Revenues $ 109,813 118,184 215,438 200,408
Costs and expenses 83,102 84,529 165,303 159,495
---------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 26,711 33,655 50,135 40,913
===========================================================================================================================
Dollar value of mortgages originated $ 1,269,627 1,343,905 2,420,084 2,242,140
---------------------------------------------------------------------------------------------------------------------------
Number of mortgages originated 7,500 8,300 14,200 13,900
---------------------------------------------------------------------------------------------------------------------------
Mortgage capture rate of Lennar homebuyers 80% 78% 81% 78%
---------------------------------------------------------------------------------------------------------------------------
Number of title transactions 47,000 46,000 94,000 78,000
===========================================================================================================================
Operating earnings from our Financial Services Division increased to $26.7
million and $50.1 million in the three and six months ended May 31, 2002,
respectively, compared to $20.4 million and $27.6 million (excluding a $13
million gain on the sale of our mortgage servicing rights in 2001) in the same
periods last year. The increase in both periods was a result of a higher capture
rate of Lennar homebuyers and a higher profit per loan originated in 2002. The
six month increase was also due to a higher volume of new home deliveries in
2002 compared to 2001.
Corporate General and Administrative
Corporate general and administrative expenses as a percentage of total revenues
were 1.3% in both the three and six months ended May 31, 2002, compared to 1.3%
and 1.4% in the three and six months ended May 31, 2001, respectively.
15
Interest
Interest expense totaled $30.5 million, or 1.9% of total revenues, and $54.6
million, or 1.9% of total revenues, in the three and six months ended May 31,
2002, respectively, compared to interest expense of $29.4 million, or 2.1% of
total revenues, and $53.1 million, or 2.1% of total revenues, respectively, in
the same periods last year. The weighted average interest rate for interest
incurred was 7.8% in the six months ended May 31, 2002, compared to 8.0% last
year. The average debt outstanding was $1.5 billion for both the six months
ended May 31, 2002 and 2001.
(2) Liquidity and Financial Resources
In the six months ended May 31, 2002, $30.4 million of cash was provided by
operating activities, compared to $286.5 million of cash used in operating
activities in 2001. Cash generated in 2002 was primarily due to net earnings of
$177.9 million and $253.4 million of cash received from the sale in 2002 of
loans which we had originated near the end of fiscal 2001. Cash received from
the sale of loans was used to pay down our financial services warehouse lines of
credit. The generation of cash was offset primarily by $304.6 million of cash
used to increase inventories due to a higher number of active communities as we
continue to grow and $83.6 million used to reduce accounts payable and other
liabilities.
Earnings before interest, income taxes, depreciation and amortization ("EBITDA")
were $210.6 million and $360.4 million in the three and six months ended May 31,
2002, respectively, compared to $200.5 million and $318.2 million in the three
and six months ended May 31, 2001, respectively.
Cash used in investing activities totaled $32.6 million in the six months ended
May 31, 2002, compared to $10.2 million in the corresponding period in 2001. In
the first six months of 2002, we used $21.3 million of cash for acquisitions.
The majority of our short-term financing needs are met with cash generated from
operations and funds available under our senior secured credit facilities. In
May 2002, we amended and restated our senior secured credit facilities (the
"Amended Facilities"), to provide us with up to $1.3 billion of financing. The
Amended Facilities consist of a $653 million revolving credit facility maturing
in April 2006, a $273 million 364-day revolving credit facility maturing in
April 2003 and a $400 million term loan B maturing in May 2007. We may elect to
convert borrowings under the 364-day revolving credit facility to a term loan,
which would mature in April 2006. At May 31, 2002, $393 million was outstanding
under the term loan B and no amounts were borrowed under the revolving credit
facilities. Interest rates are LIBOR-based and the margins are set by a pricing
grid with thresholds that adjust based on changes in our leverage ratio and the
Amended Facilities' credit rating. At May 31, 2002, we had letters of credit
outstanding in the amount of $211.4 million, of which $161.0 million were
collateralized against certain borrowings available under the Amended
Facilities.
Our Financial Services Division finances its mortgage loan activities by
pledging them as collateral for borrowings under a line of credit totaling $355
million. Borrowings under the financial services line of credit were $339.3
million at May 31, 2002.
In the normal course of business, we enter into partnerships that acquire and
develop land for our homebuilding operations or for sale to third parties.
Through partnerships, we reduce and share our risk and the amount invested in
land while increasing access to potential future homesites.
16
Partnerships are either consolidated with our operations or accounted for by the
equity method of accounting. The selection between these two methods involves
judgment as to the level of control we have over the partnerships. Controlling
interest is determined based on a number of factors, which include our ownership
interest and participation in the management of the partnership. Our investments
in unconsolidated partnerships in which a significant, but less than
controlling, interest is held are accounted for by the equity method of
accounting. Many of the partnerships in which we invest are accounted for by the
equity method of accounting. We do not include in our income our pro rata
partnership earnings resulting from land sales to our homebuilding divisions.
Instead, we account for those earnings as a reduction of our cost of purchasing
the land from the partnerships, which increases our profit when title passes to
a third party homebuyer. This in effect defers recognition of our share of the
partnership earnings until we sell the land.
In some instances, we and/or our partners in unconsolidated partnerships have
provided guarantees of partnership debt. At May 31, 2002, we had recourse
guarantees of $55.6 million and limited maintenance guarantees of $169.4
million. When we provide guarantees, the partnership generally receives more
favorable terms from its lenders. A limited maintenance guarantee only applies
if the partnership defaults on its loan arrangements and the fair value of the
collateral (generally land and improvements) is less than a specified percentage
of the loan balance. If we were required to make a payment under one of these
guarantees to bring the fair value of the collateral above the specified
percentage of the loan balance, the payment constitutes a capital contribution
or loan to the unconsolidated partnership and increases our share of any funds
distributed by the partnership.
In June 2001, our Board of Directors increased our previously authorized stock
repurchase program to permit future purchases of up to 10 million shares of our
outstanding common stock. We may repurchase these shares in the open market from
time-to-time. During the six months ended May 31, 2002, we did not repurchase
any of our outstanding common stock.
We have shelf registration statements under the Securities Act of 1933, as
amended, relating to up to $970 million of equity or debt securities which we
may sell for cash and up to $400 million of equity or debt securities which we
may issue in connection with acquisitions of companies or interests in them,
businesses or assets. As of May 31, 2002, no securities had been issued under
these registration statements.
Based on our current financial condition and financial market resources,
management believes that our operations and capital resources will provide for
our current and long-term capital requirements at our anticipated levels of
growth.
Recent Development
In June 2002, we acquired a controlling interest in The Fortress Group, Inc.
("Fortress"), a regional homebuilder, and commenced a tender offer to acquire
the remaining Fortress common stock that we do not own. In total, we will pay
approximately $50.7 million in cash for Fortress, including the amount already
paid for the preferred stock, common stock and warrants through which we
acquired our controlling interest. Completion of the tender offer and the
subsequent closing of the merger are expected to be finalized during July 2002.
Concurrent with the acquisition, Fortress entered into a separate agreement to
sell its Texas-based homebuilding operations, Wilshire Homes, for $23 million.
These transactions will result in a net cost to us for Fortress of approximately
$27.7 million.
17
(3) Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks related to fluctuations in interest rates on our
debt obligations, mortgage loans and mortgage loans held for sale or
disposition. We utilize derivative instruments, including interest rate swaps,
to manage our exposure to changes in interest rates. We also utilize forward
commitments and option contracts to mitigate the risk associated with our
mortgage loan portfolio.
Our Annual Report on Form 10-K for the year ended November 30, 2001 contains
information about market risks under "Item 7A. Quantitative and Qualitative
Disclosures About Market Risk." There have been no material changes in our
market risks during the six months ended May 31, 2002.
Part II. Other Information
Items 1-3. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The following matter was resolved by vote at the April 2, 2002 annual meeting of
stockholders of Lennar Corporation:
The following members of the Board of Directors were re-elected to hold office
until 2005:
Votes For Votes Withheld
----------- --------------
Stuart A. Miller 144,421,157 1,281,565
Steven J. Saiontz 144,415,710 1,287,012
Robert J. Strudler 144,919,093 783,629
Other directors whose terms of office continued after the meeting:
Irving Bolotin
Steven L. Gerard
Jonathan M. Jaffe
R. Kirk Landon
Sidney Lapidus
Leonard Miller
Herve Ripault
Donna E. Shalala
18
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: Not applicable.
(b) Reports on Form 8-K: The Registrant filed a report on Form 8-K
dated May 8, 2002. The report provided information relating to
the Company's execution of a Memorandum of Understanding with
Pacific Century Homes, Inc. relating to a proposed transaction in
which the Company would acquire a portion of the homesites owned
by Pacific Century Homes, Inc. and receive options to purchase
the remainder of its homesites.
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LENNAR CORPORATION
--------------------------
(Registrant)
Date: July 15, 2002 /s/ BRUCE E. GROSS
------------- --------------------------
Bruce E. Gross
Vice President and
Chief Financial Officer
Date: July 15, 2002 /s/ DIANE J. BESSETTE
------------- --------------------------
Diane J. Bessette
Vice President and
Controller
19