Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2010

Commission File Number: 1-11749

 

 

Lennar Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   95-4337490

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

700 Northwest 107th Avenue, Miami, Florida 33172

(Address of principal executive offices) (Zip Code)

(305) 559-4000

(Registrant’s telephone number, including area code)

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    x                Accelerated filer     ¨               Non-accelerated filer    ¨               Smaller reporting company     ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

Common stock outstanding as of June 30, 2010:

 

Class A

   153,650,497

Class B

   31,291,294

 

 

 


Part I. Financial Information

 

Item 1. Financial Statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

(unaudited)

 

     May 31,
2010 (1)
   November 30,
2009 (1)

ASSETS

     

Lennar Homebuilding:

     

Cash and cash equivalents

   $ 1,087,698    1,330,603

Restricted cash

     134,929    9,225

Income tax receivables

     11,769    334,428

Receivables, net

     62,178    122,053

Inventories:

     

Finished homes and construction in progress

     1,604,258    1,503,346

Land under development

     2,082,505    1,990,430

Consolidated inventory not owned

     475,371    594,213
           

Total inventories

     4,162,134    4,087,989

Investments in unconsolidated entities

     609,653    599,266

Other assets

     299,726    263,803
           
     6,368,087    6,747,367

Rialto Investments:

     

Cash and cash equivalents

     62,932    —  

Defeasance cash to retire notes payable

     33,723    —  

Loans receivable

     1,192,002    —  

Investments in unconsolidated entities

     65,176    9,874

Other assets

     22,581    —  
           
     1,376,414    9,874

Lennar Financial Services

     504,379    557,550
           

Total assets

   $ 8,248,880    7,314,791
           

 

(1) As a result of the adoption of certain provisions of Accounting Standards Codification (“ASC”) Topic 810, Consolidations, (“ASC 810”) the Company is required to separately disclose on its condensed consolidated balance sheets the assets of consolidated variable interest entities (“VIEs”) that are owned by the consolidated VIEs and non-recourse liabilities of consolidated VIEs.

As of May 31, 2010, total assets include $2,137.7 million related to consolidated VIEs of which $61.8 million is included in Lennar Homebuilding cash and cash equivalents, $0.1 million in Lennar Homebuilding restricted cash, $6.4 million in Lennar Homebuilding receivables, net, $236.6 million in Lennar Homebuilding finished homes and construction in progress, $334.2 million in Lennar Homebuilding land under development, $36.9 million in Lennar Homebuilding investments in unconsolidated entities, $154.3 million in Lennar Homebuilding other assets, $61.5 million in Rialto Investments cash and cash equivalents, $33.7 million in Rialto Investments defeasance cash to retire notes payable, $1,192.0 million in Rialto Investments loans receivable and $20.2 million in Rialto Investments other assets.

As of November 30, 2009, total assets include $819.3 million related to consolidated VIEs of which $25.9 million is included in Lennar Homebuilding cash and cash equivalents, $1.5 million in Lennar Homebuilding restricted cash, $5.5 million in Lennar Homebuilding receivables, net, $253.2 million in Lennar Homebuilding finished homes and construction in progress, $341.0 million in Lennar Homebuilding land under development, $35.3 million in Lennar Homebuilding investments in unconsolidated entities and $156.9 million in Lennar Homebuilding other assets.

 

See accompanying notes to condensed consolidated financial statements.

 

1


Lennar Corporation and Subsidiaries

Condensed Consolidated Balance Sheets — (Continued)

(In thousands, except per share amounts)

(unaudited)

 

     May 31,
2010 (2)
    November 30,
2009 (2)
 

LIABILITIES AND EQUITY

    

Lennar Homebuilding:

    

Accounts payable

   $ 173,509      169,596   

Liabilities related to consolidated inventory not owned

     404,563      518,359   

Senior notes and other debts payable

     2,890,212      2,761,352   

Other liabilities

     781,556      862,584   
              
     4,249,840      4,311,891   

Rialto Investments:

    

Notes payable and other liabilities

     628,596      —     

Lennar Financial Services

     341,511      414,886   
              

Total liabilities

     5,219,947      4,726,777   
              

Stockholders’ equity:

    

Preferred stock

     —        —     

Class A common stock of $0.10 par value per share; Authorized: May 31, 2010 and November 30, 2009 – 300,000 shares; Issued: May 31, 2010 – 165,312 shares and November 30, 2009 – 165,155 shares

     16,531      16,515   

Class B common stock of $0.10 par value per share; Authorized: May 31, 2010 and November 30, 2009 – 90,000 shares; Issued: May 31, 2010 – 32,971 shares and November 30, 2009 – 32,964 shares

     3,297      3,296   

Additional paid-in capital

     2,222,715      2,208,934   

Retained earnings

     846,833      828,424   

Treasury stock, at cost; May 31, 2010 – 11,662 Class A common shares and 1,680 Class B common shares; November 30, 2009 – 11,543 Class A common shares and 1,680 Class B common shares

     (615,483   (613,690
              

Total stockholders’ equity

     2,473,893      2,443,479   
              

Noncontrolling interests

     555,040      144,535   
              

Total equity

     3,028,933      2,588,014   
              

Total liabilities and equity

   $ 8,248,880      7,314,791   
              

 

(2) As of May 31, 2010, total liabilities include $874.8 million related to consolidated VIEs of which $13.0 million is included in Lennar Homebuilding accounts payable, $186.8 million in Lennar Homebuilding senior notes and other debts payable, $47.4 million in Lennar Homebuilding other liabilities and $627.6 million in Rialto Investments notes payable and other liabilities.

As of November 30, 2009, total liabilities include $274.5 million related to consolidated VIEs of which $27.2 million is included in Lennar Homebuilding accounts payable, $187.2 million in Lennar Homebuilding senior notes and other debts payable and $60.1 million in Lennar Homebuilding other liabilities.

See accompanying notes to condensed consolidated financial statements.

 

2


Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(unaudited)

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
     2010     2009     2010     2009  

Revenues:

        

Lennar Homebuilding

   $ 705,328      805,229      1,226,104      1,334,263   

Lennar Financial Services

     74,536      86,624      127,901      150,653   

Rialto Investments

     34,617      —        34,918      —     
                          

Total revenues

     814,481      891,853      1,388,923      1,484,916   
                          

Costs and expenses:

        

Lennar Homebuilding (1)

     656,689      839,275      1,158,654      1,445,834   

Lennar Financial Services

     60,883      70,085      115,149      133,622   

Rialto Investments

     19,514      465      20,917      1,021   

Corporate general and administrative

     22,234      29,774      44,874      57,249   
                          

Total costs and expenses

     759,320      939,599      1,339,594      1,637,726   
                          

Lennar Homebuilding equity in loss from unconsolidated entities (2)

     (1,402   (59,890   (10,296   (62,807

Other income (expense), net (3)

     (253   (8,029   13,950      (43,834

Other interest expense

     (17,516   (14,493   (36,181   (26,522

Rialto Investments equity in loss from unconsolidated entities

     (436   —        (293   —     
                          

Earnings (loss) before income taxes

     35,554      (130,158   16,509      (285,973

Benefit (provision) for income taxes (4)

     11,030      (1,547   22,602      (3,395
                          

Net earnings (loss) (including net earnings (loss) attributable to noncontrolling interests)

     46,584      (131,705   39,111      (289,368

Less: Net earnings (loss) attributable to noncontrolling interests

     6,865      (6,520   5,915      (8,254
                          

Net earnings (loss) attributable to Lennar

   $ 39,719      (125,185   33,196      (281,114
                          

Basic and diluted earnings (loss) per share

   $ 0.21      (0.76   0.18      (1.74
                          

Cash dividends per each Class A and Class B common share

   $ 0.04      0.04      0.08      0.08   
                          

 

(1) Lennar Homebuilding costs and expenses include $5.6 million and $13.1 million, respectively, of valuation adjustments for the three and six months ended May 31, 2010; and $42.0 million and $93.2 million, respectively, of valuation adjustments for the three and six months ended May 31, 2009.
(2) Lennar Homebuilding equity in loss from unconsolidated entities includes $50.1 million of valuation adjustments related to assets of unconsolidated entities in which the Company has investments, for both the three and six months ended May 31, 2009.
(3) Other income (expense), net includes $7.0 million and $44.2 million, respectively, of valuation adjustments to investments in unconsolidated entities for the three and six months ended May 31, 2009.
(4) Benefit (provision) for income taxes includes a valuation allowance of $2.0 million and $4.8 million, respectively, for the three and six months ended May 31, 2010; and $44.4 million and $102.2 million, respectively, for the three and six months ended May 31, 2009.

See accompanying notes to condensed consolidated financial statements.

 

3


Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

     Six Months Ended
May 31,
 
     2010     2009  

Cash flows from operating activities:

    

Net earnings (loss) (including net earnings (loss) attributable to noncontrolling interests)

   $ 39,111      (289,368

Adjustments to reconcile net earnings (loss) (including net earnings (loss) attributable to noncontrolling interests) to net cash provided by operating activities:

    

Depreciation and amortization

     6,350      10,163   

Amortization of discount/premium on debt, net

     1,179      994   

Lennar Homebuilding equity in loss from unconsolidated entities, including $50.1 million of the Company’s share of valuation adjustments related to assets of unconsolidated entities for the six months ended May 31, 2009

     10,296      62,807   

Distributions of earnings from Lennar Homebuilding unconsolidated entities

     772      1,739   

Rialto Investments equity in loss from unconsolidated entities

     293      —     

Distributions of earnings from Rialto Investments unconsolidated entities

     717      —     

Share-based compensation expense

     11,639      15,592   

Gain on retirement of Lennar Homebuilding other debt

     (13,617   —     

Loss on retirement of Lennar Homebuilding senior notes

     11,714      —     

Valuation adjustments and write-offs of option deposits and pre-acquisition costs

     14,971      137,471   

Changes in assets and liabilities:

  

Decrease (increase) in restricted cash

     30      (16,162

Decrease in receivables

     389,042      235,110   

(Increase) decrease in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs

     (131,262   225,014   

Decrease in other assets

     18,106      17,740   

Decrease (increase) in Lennar Financial Services loans held-for-sale

     12,218      (38,629

Decrease in accounts payable and other liabilities

     (96,885   (109,742
              

Net cash provided by operating activities

     274,674      252,729   
              

Cash flows from investing activities:

  

Increase in restricted cash related to cash collateralized letters of credit

     (125,895   —     

Net additions to operating properties and equipment

     (942   (649

Investments in and contributions to Lennar Homebuilding unconsolidated entities

     (58,151   (108,438

Distributions of capital from Lennar Homebuilding unconsolidated entities

     12,771      3,707   

Investments in and contributions to Rialto Investments unconsolidated entities

     (56,315   (9,874

Investments in and contributions to Rialto Investments consolidated entities (net of $87.8 million cash and cash equivalents consolidated)

     (177,225   —     

Increase in Rialto Investments defeasance cash to retire notes payable

     (33,723   —     

Decrease in Lennar Financial Services loans held-for-investment

     1,393      2,843   

Purchases of investment securities

     (5,726   (84

Proceeds from sales and maturities of investment securities

     619      14,579   
              

Net cash used in investing activities

     (443,194   (97,916
              

Cash flows from financing activities:

  

Net borrowings (repayments) under Lennar Financial Services debt

     (56,500   50,924   

Proceeds from 6.95% senior notes due 2018

     247,323      —     

Debt issuance costs of 6.95% senior notes due 2018

     (3,438   —     

Proceeds from 2.00% convertible senior notes due 2020

     276,500      —     

Debt issuance costs of 2.00% convertible senior notes due 2020

     (5,347   —     

Partial redemption of 5.125% senior notes due 2010

     (152,710   —     

Partial redemption of 5.95% senior notes due 2011

     (137,973   —     

 

4


Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows — (Continued)

(In thousands)

(unaudited)

 

     Six Months Ended
May 31,
 
     2010     2009  

Partial redemption of 5.95% senior notes due 2013

   $ (84,738   —     

Proceeds from 12.25% senior notes due 2017

     —        392,392   

Debt issuance costs of 12.25% senior notes due 2017

     —        (5,500

Redemption of 7 5/8% senior notes due 2009

     —        (281,477

Proceeds from other borrowings

     3,926      15,788   

Principal payments on other borrowings

     (83,446   (52,597

Exercise of land option contracts from an unconsolidated land investment venture

     (27,625   (8,075

Receipts related to noncontrolling interests

     10,130      3,558   

Payments related to noncontrolling interests

     (3,128   (3,366

Common stock:

    

Issuances

     1,753      123,780   

Repurchases

     (1,793   (1,075

Dividends

     (14,787   (13,256
              

Net cash (used in) provided by financing activities

     (31,853   221,096   
              

Net (decrease) increase in cash and cash equivalents

     (200,373   375,909   

Cash and cash equivalents at beginning of period

     1,457,438      1,203,422   
              

Cash and cash equivalents at end of period

   $ 1,257,065      1,579,331   
              

Summary of cash and cash equivalents:

    

Lennar Homebuilding

   $ 1,087,698      1,447,011   

Lennar Financial Services

     106,435      132,320   

Rialto Investments

     62,932      —     
              
   $ 1,257,065      1,579,331   
              

Supplemental disclosures of non-cash investing and financing activities:

    

Non-cash contributions to Lennar Homebuilding unconsolidated entities

   $ 3,322      239   

Purchases of inventories financed by sellers

   $ 9,714      90,080   

Rialto Investments real estate acquired through, or in lieu of, foreclosure

   $ 2,847      —     

Consolidations of newly formed or previously unconsolidated entities, net:

    

Receivables

   $ —        521   

Loans receivable

   $ 1,183,460      —     

Inventories

   $ 27,538      85,430   

Investments in unconsolidated entities

   $ (16,882   (25,585

Investments in consolidated entities

   $ (177,225   —     

Other assets

   $ 64,377      4,325   

Debts payable and other liabilities

   $ (683,680   (64,744

Noncontrolling interests

   $ (397,588   53   

See accompanying notes to condensed consolidated financial statements.

 

5


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

(1) Basis of Presentation

Basis of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Lennar Corporation and all subsidiaries, partnerships and other entities in which Lennar Corporation has a controlling interest and VIEs (see Note 15) in which Lennar Corporation is deemed to be the primary beneficiary (the “Company”). The Company’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in VIEs in which the Company is not deemed to be the primary beneficiary, are accounted for by the equity method. All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended November 30, 2009 filed on Form 8-K dated April 26, 2010. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the accompanying condensed consolidated financial statements have been made.

The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The condensed consolidated statements of operations for the three and six months ended May 31, 2010 are not necessarily indicative of the results to be expected for the full year.

On December 1, 2009, the Company adopted certain provisions of ASC 810. As required by these provisions, the presentation of noncontrolling interests, previously referred to as minority interests, has been changed on the condensed consolidated balance sheets to be reflected as a component of total equity and on the condensed consolidated statements of operations to separately disclose the amount of net earnings (loss) attributable to Lennar and the noncontrolling interests. In addition, the Company has also presented the changes in equity attributable to both Lennar Corporation and the noncontrolling interests of its subsidiaries (see Note 4).

In addition, on December 1, 2009, the Company also adopted other provisions of ASC 810 that amended the consolidation guidance applicable to VIEs and the definition of a VIE, and require enhanced disclosures to provide more information about an enterprise’s involvement in a VIE. ASC 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE. The adoption of these provisions resulted in certain additional disclosures and in the deconsolidation of certain option contracts totaling $75.5 million, previously included in the Company’s consolidated inventory not owned in its condensed consolidated balance sheets (see Note 15).

Reclassifications

Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform with the 2010 presentation. These reclassifications had no impact on the Company’s results of operations. For the three and six months ended May 31, 2009, the Company included other interest expense as a component of other income (expense), net in the condensed consolidated statements of operations. In 2010, the Company separately disclosed other interest expense in its condensed consolidated statements of operations and reclassified prior year amounts to conform with the 2010 presentation. In addition, as a result of the Company’s new reportable segment, Rialto Investments, the Company reclassified certain prior year amounts in the condensed consolidated financial statements to conform with the 2010 presentation.

 

6


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

(2) Operating and Reporting Segments

The Company’s operating segments are aggregated into reportable segments, based primarily upon similar economic characteristics, geography and product type. The Company’s reportable segments consist of:

 

  (1) Homebuilding East

 

  (2) Homebuilding Central

 

  (3) Homebuilding West

 

  (4) Homebuilding Houston

 

  (5) Lennar Financial Services

 

  (6) Rialto Investments

Information about homebuilding activities in states which are not economically similar to other states in the same geographic area is grouped under “Homebuilding Other,” which is not considered a reportable segment.

The Rialto Investments (“Rialto”) segment is a new reportable segment that met the reportable segment criteria set forth in GAAP beginning in the first quarter of 2010. All prior year segment information has been restated to conform with the 2010 presentation. The change had no effect on the Company’s condensed consolidated financial statements, except for certain reclassifications (see Note 1). Rialto focuses on commercial and residential real estate opportunities arising from dislocations in the United States real estate markets and the eventual restructure and recapitalization of those markets.

Evaluation of segment performance is based primarily on operating earnings (loss) before income taxes. Operations of the Company’s homebuilding segments primarily include the construction and sale of single-family attached and detached homes, and to a lesser extent, multi-level residential buildings, as well as the purchase, development and sale of residential land directly and through the Company’s unconsolidated entities. Operating earnings (loss) for the homebuilding segments consist of revenues generated from the sales of homes and land, equity in earnings (loss) from unconsolidated entities and other income (expense), net, less the cost of homes and land sold, selling, general and administrative expenses and other interest expense of the segment. The Company’s reportable homebuilding segments, and all other homebuilding operations not required to be reported separately, have divisions located in:

East: Florida, Maryland, New Jersey and Virginia

Central: Arizona, Colorado and Texas (1)

West: California and Nevada

Houston: Houston, Texas

Other: Georgia, Illinois, Minnesota, North Carolina and South Carolina

 

(1) Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.

Operations of the Lennar Financial Services segment include primarily mortgage financing, title insurance and closing services for both buyers of the Company’s homes and others. Substantially all of the loans the Lennar Financial Services segment originates are sold in the secondary mortgage market on a servicing released, non-recourse basis; although, the Company remains liable for certain limited representations and warranties related to loan sales. Lennar Financial Services operating earnings consist of revenues generated primarily from mortgage financing, title insurance and closing services, less the cost

 

7


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

-of such services and certain selling, general and administrative expenses incurred by the segment. The Lennar Financial Services segment operates primarily in the same states as the Company’s homebuilding operations, as well as in other states.

Operations of the Rialto segment include sourcing, underwriting, pricing, managing, turning around and ultimately monetizing real estate assets, as well as providing similar services to others in markets across the country. Rialto Investments operating earnings (loss) consists of revenues generated primarily from accretable interest income associated with the portfolios of real estate loans acquired in partnership with the FDIC, fees for sub-advisory services and equity in earnings (loss) from unconsolidated entities, less the costs incurred by the segment for managing the portfolios and providing advisory services.

Each reportable segment follows the same accounting principles described in Note 1 – “Summary of Significant Accounting Policies” to the consolidated financial statements for the year ended November 30, 2009 filed on Form 8-K dated April 26, 2010. In addition, the Rialto Investments reportable segment also follows the accounting policies identified in Section 4 of Item 2 of this Form 10-Q, “Critical Accounting Policies.” Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent stand alone entity during the periods presented.

Financial information relating to the Company’s operations was as follows:

 

(In thousands)    May 31,
2010
   November 30,
2009

Assets:

     

Homebuilding East

   $ 1,520,175    1,469,671

Homebuilding Central

     717,251    703,669

Homebuilding West

     1,998,977    1,986,558

Homebuilding Houston

     228,398    214,706

Homebuilding Other

     750,221    756,068

Rialto Investments (1)

     1,376,414    9,874

Lennar Financial Services

     504,379    557,550

Corporate and unallocated

     1,153,065    1,616,695
           

Total assets

   $ 8,248,880    7,314,791
           

 

(1) Consists primarily of assets of consolidated VIEs (see Note 8).

 

8


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
(In thousands)    2010     2009     2010     2009  

Revenues:

        

Homebuilding East

   $ 223,887      229,047      365,947      409,745   

Homebuilding Central

     101,871      92,589      167,954      155,298   

Homebuilding West

     179,267      277,717      343,584      418,943   

Homebuilding Houston

     103,286      116,876      179,080      197,904   

Homebuilding Other

     97,017      89,000      169,539      152,373   

Lennar Financial Services

     74,536      86,624      127,901      150,653   

Rialto Investments

     34,617      —        34,918      —     
                          

Total revenues (1)

   $ 814,481      891,853      1,388,923      1,484,916   
                          

Operating earnings (loss):

        

Homebuilding East

   $ 15,735      (1,204   36,258      (33,496

Homebuilding Central

     (456   (18,577   (7,703   (45,223

Homebuilding West

     1,664      (90,551   (6,228   (149,881

Homebuilding Houston

     9,187      6,217      14,641      6,432   

Homebuilding Other

     3,338      (12,343   (2,045   (22,566

Lennar Financial Services

     13,653      16,539      12,752      17,031   

Rialto Investments

     14,667      (465   13,708      (1,021
                          

Total operating earnings (loss)

     57,788      (100,384   61,383      (228,724

Corporate and unallocated

     (22,234   (29,774   (44,874   (57,249
                          

Earnings (loss) before income taxes

   $ 35,554      (130,158   16,509      (285,973
                          

 

(1) Total revenues are net of sales incentives of $90.4 million ($31,100 per home delivered) and $164.1 million ($33,600 per home delivered), respectively, for the three and six months ended May 31, 2010, compared to $165.2 million ($52,600 per home delivered) and $273.1 million ($51,800 per home delivered), respectively, for the three and six months ended May 31, 2009.

 

9


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Valuation adjustments and write-offs relating to the Company’s operations were as follows:

 

(In thousands)    Three Months Ended
May  31,
   Six Months Ended
May 31,
   2010    2009    2010    2009

Valuation adjustments to finished homes, CIP and land on which the Company intends to build homes:

           

East

   $ 2,467    8,793    2,764    22,271

Central

     191    2,173    1,290    10,254

West

     1,924    15,626    2,613    34,024

Houston

     40    97    100    243

Other

     420    7,869    4,344    8,546
                     

Total

     5,042    34,558    11,111    75,338
                     

Valuation adjustments to land the Company intends to sell or has sold to third parties:

           

East

     45    1,978    45    2,117

Central

     446    1,100    1,780    1,178

West

     116    2,528    116    2,528
                     

Total

     607    5,606    1,941    5,823
                     

Write-offs of option deposits and pre-acquisition costs:

           

East

     —      —      —      5,780

Central

     —      —      —      82

West

     —      1,188    —      1,703

Houston

     —      —      —      721

Other

     —      653    —      3,786
                     

Total

     —      1,841    —      12,072
                     

Company’s share of valuation adjustments related to assets of unconsolidated entities:

           

East

     —      251    —      251

Central

     —      854    —      854

West

     —      48,945    1,216    48,945
                     

Total

     —      50,050    1,216    50,050
                     

Valuation adjustments to investments in unconsolidated entities:

           

East

     401    —      401    2,566

Central

     —      4,537    —      12,155

West

     —      2,476    —      28,026

Other

     —      —      —      1,491
                     

Total

     401    7,013    401    44,238
                     

Write-offs of other receivables:

           

Other

     —      —      1,518    —  
                     

Total

     —      —      1,518    —  
                     

Total valuation adjustments and write-offs of option deposits and pre-acquisition costs and other receivables

   $ 6,050    99,068    16,187    187,521
                     

The Company recorded significantly lower valuation adjustments during the three and six months ended May 31, 2010. Up until the expiration of the Federal homebuyer tax credit at the end of April, demand trends in the communities in which the Company is selling homes indicated that the market may be stabilizing and that homebuyers are more confident and are taking advantage of increased affordability resulting from lower home prices, historically low interest rates and government stimulus programs despite a high unemployment rate, foreclosures and tight credit standards. If these trends do not continue and there is further deterioration in the homebuilding market, it may cause additional pricing pressures and slower absorption.

 

10


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

This may potentially lead to additional valuation adjustments in the future. In addition, market conditions may cause the Company to re-evaluate its strategy regarding certain assets that could result in further valuation adjustments and/or additional write-offs of option deposits and pre-acquisition costs due to abandonment of those options contracts.

(3) Lennar Homebuilding Investments in Unconsolidated Entities

Summarized condensed financial information on a combined 100% basis related to Lennar Homebuilding’s unconsolidated entities that are accounted for by the equity method was as follows:

 

Statements of Operations

  
      Three Months Ended
May 31,
    Six Months Ended
May 31,
 
(In thousands)    2010     2009     2010     2009  

Revenues

   $ 42,768      53,460      99,523      119,243   

Costs and expenses

     68,820      580,167      148,000      695,365   
                          

Net loss of unconsolidated entities (1)

   $ (26,052   (526,707   (48,477   (576,122
                          

The Company’s share of net loss recognized

   $ (1,402   (59,890   (10,296   (62,807
                          

 

(1) The net loss of unconsolidated entities for the three and six months ended May 31, 2009 was primarily related to valuation adjustments recorded by the unconsolidated entities. The Company’s exposure to such losses was significantly lower as a result of its small ownership interest in the respective unconsolidated entities or its previous valuation adjustments to its investments in unconsolidated entities.

 

Balance Sheets

  

(Dollars in thousands)

   May 31,
2010
    November 30,
2009
 

Assets:

    

Cash and cash equivalents

   $ 118,942      171,946   

Inventories

     3,581,140      3,628,491   

Other assets

     300,914      403,383   
              
   $ 4,000,996      4,203,820   
              

Liabilities and equity:

    

Accounts payable and other liabilities

   $ 325,064      366,141   

Debt

     1,438,161      1,588,390   

Equity of:

    

The Company

     609,653      599,266   

Others

     1,628,118      1,650,023   
              

Total equity of unconsolidated entities

     2,237,771      2,249,289   
              
   $ 4,000,996      4,203,820   
              

The Company’s equity in its unconsolidated entities

     27   27
              

In fiscal 2007, the Company sold a portfolio of land to a strategic land investment venture with Morgan Stanley Real Estate Fund II, L.P., an affiliate of Morgan Stanley & Co., Inc., in which the Company has a 20% ownership interest and 50% voting rights. Due to the Company’s continuing involvement, the transaction did not qualify as a sale by the Company under GAAP; thus, the inventory has remained on the Company’s consolidated balance sheet in consolidated inventory not owned. As of May 31, 2010 and November 30, 2009, the portfolio of land (including land development costs) of $452.1 million and $477.9 million, respectively, is reflected as inventory in the summarized condensed financial information related to Lennar Homebuilding’s unconsolidated entities.

The Lennar Homebuilding unconsolidated entities in which the Company has investments usually finance their activities with a combination of partner equity and debt financing. In some instances, the Company and its partners have guaranteed debt of certain unconsolidated entities.

 

11


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

The summary of the Company’s net recourse exposure related to the Lennar Homebuilding unconsolidated entities in which the Company has investments was as follows:

 

(In thousands)    May 31,
2010
    November 30,
2009
 

Several recourse debt – repayment

   $ 37,316      42,691   

Several recourse debt – maintenance

     49,769      75,238   

Joint and several recourse debt – repayment

     75,017      85,799   

Joint and several recourse debt – maintenance

     71,592      81,592   

Land seller debt and other debt recourse exposure

     —        2,420   
              

The Company’s maximum recourse exposure

     233,694      287,740   

Less: joint and several reimbursement agreements with the Company’s partners

     (87,757   (93,185
              

The Company’s net recourse exposure

   $ 145,937      194,555   
              

During the six months ended May 31, 2010, the Company reduced its maximum recourse exposure related to indebtedness of Lennar Homebuilding unconsolidated entities by $54.0 million, of which $32.0 million was paid by the Company and $22.0 million related to the reduction of joint ventures, the reduction of joint and several recourse debt and the joint ventures selling inventory. As of May 31, 2010, the Company had $13.1 million of obligation guarantees recorded as a liability on its condensed consolidated balance sheet. The obligation guarantees are estimated based on current facts and circumstances and any unexpected changes may lead the Company to incur additional liabilities under its obligation guarantees in the future.

The recourse debt exposure in the previous table represents the Company’s maximum recourse exposure to loss from guarantees and does not take into account the underlying value of the collateral or the other assets of the borrowers that are available to repay the debt or to reimburse the Company for any payments on its guarantees. The Lennar Homebuilding unconsolidated entities that have recourse debt have a significant amount of assets and equity. The summarized balance sheets of the Lennar Homebuilding unconsolidated entities with recourse debt were as follows:

 

(In thousands)    May 31,
2010
   November 30,
2009

Assets

   $ 1,095,862    1,324,993

Liabilities

     638,937    777,836

Equity

     456,925    547,157

In addition, in most instances in which the Company has guaranteed debt of a Lennar Homebuilding unconsolidated entity, the Company’s partners have also guaranteed that debt and are required to contribute their share of the guarantee payment. Some of the Company’s guarantees are repayment guarantees and some are maintenance guarantees. In a repayment guarantee, the Company and its venture partners guarantee repayment of a portion or all of the debt in the event of a default before the lender would have to exercise its rights against the collateral. In the event of default, if the Company’s venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, the Company may be liable for more than its proportionate share, up to its maximum recourse exposure, which is the full amount covered by the joint and several guarantee. The maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. If the Company is required to make a payment under a maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment would constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase the Company’s share of any funds the unconsolidated entity distributes.

In many of the loans to Lennar Homebuilding unconsolidated entities, the Company and its joint venture partners (or entities related to them) have been required to give guarantees of completion to the lenders. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, very often the guarantee is to complete only the phases as to which construction has already commenced and for

 

12


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

which loan proceeds were used.

During the three months ended May 31, 2010, there were payments of $5.0 million under the Company’s maintenance guarantees and there were other loan paydowns of $21.1 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During the three months ended May 31, 2009, there were payments of $18.0 million under the Company’s maintenance guarantees and there were other loan repayments of $19.7 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During the three months ended May 31, 2010 and 2009, there were no payments under completion guarantees.

During the six months ended May 31, 2010, there were payments of $5.0 million under the Company’s maintenance guarantees and there were other loan paydowns of $27.0 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During the six months ended May 31, 2009, there were payments of $18.0 million under the Company’s maintenance guarantees and there were other loan repayments of $38.5 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During the six months ended May 31, 2010, there were no payments under completion guarantees. During the six months ended May 31, 2009, there was a payment of $5.6 million under a completion guarantee related to one joint venture. Payments made under guarantees are recorded primarily as contributions to the Company’s Lennar Homebuilding unconsolidated entities.

As of May 31, 2010, the fair values of the maintenance guarantees, completion guarantees and repayment guarantees were not material. The Company believes that as of May 31, 2010, in the event it becomes legally obligated to perform under a guarantee of the obligation of a Lennar Homebuilding unconsolidated entity due to a triggering event under a guarantee, most of the time the collateral should be sufficient to repay at least a significant portion of the obligation or the Company and its partners would contribute additional capital into the venture.

In certain instances, the Company has placed performance letters of credit and surety bonds with municipalities for its joint ventures (see Note 11).

The total debt of the Lennar Homebuilding unconsolidated entities in which the Company has investments was as follows:

 

(Dollars in thousands)    May 31,
2010
    November 30,
2009
 

The Company’s net recourse exposure

   $ 145,937      194,555   

Reimbursement agreements from partners

     87,757      93,185   
              

The Company’s maximum recourse exposure

   $ 233,694      287,740   
              

Non-recourse bank debt and other debt (partners’ share of several recourse)

   $ 104,482      140,078   

Non-recourse land seller debt or other debt

     46,604      47,478   

Non-recourse bank debt with completion guarantees

     607,876      608,397   

Non-recourse bank debt without completion guarantees

     445,505      504,697   
              

Non-recourse debt to the Company

     1,204,467      1,300,650   
              

Total debt

   $ 1,438,161      1,588,390   
              

The Company’s maximum recourse exposure as a % of total JV debt

     16   18
              

 

13


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements — (Continued)

(unaudited)

 

(4) Equity and Comprehensive Income (Loss)

The following table reflects the changes in equity attributable to both Lennar Corporation and the noncontrolling interests of its consolidated subsidiaries in which it has less than a 100% ownership interest for both the six months ended May 31, 2010 and 2009:

 

          Stockholders’ Equity        
(In thousands)   Total
Equity
    Class A
Common Stock
  Class B
Common Stock
  Additional Paid
in Capital
  Treasury
Stock
    Retained
Earnings
    Noncontrolling
Interests
 

Balance at November 30, 2009

  $ 2,588,014      16,515   3,296   2,208,934   (613,690   828,424      144,535   

Net earnings (including net earnings attributable to noncontrolling interests)

    39,111      —     —     —     —        33,196      5,915   

Employee stock and directors plans

    3,878      16   1   5,654   (1,793   —        —     

Amortization of restricted stock

    8,127      —     —     8,127   —        —        —     

Cash dividends

    (14,787   —     —     —     —        (14,787   —     

Receipts related to noncontrolling interests

    10,130      —     —     —     —        —        10,130   

Payments related to noncontrolling interests

    (3,128   —     —     —     —        —        (3,128

Rialto Investments non-cash consolidations

    397,588      —     —     —     —        —        397,588   
                                     

Balance at May 31, 2010

  $ 3,028,933      16,531   3,297   2,222,715   (615,483   846,833      555,040   
                                     
          Stockholders’ Equity        
(In thousands)   Total
Equity
    Class A
Common Stock
  Class B
Common Stock
  Additional Paid
in Capital
  Treasury
Stock
    Retained
Earnings
    Noncontrolling
Interests
 

Balance at November 30, 2008

  $ 2,788,753      14,050   3,296   1,944,626   (612,124   1,273,159      165,746   

Net loss (including net loss attributable
to noncontrolling interests)

    (289,368   —     —     —     —        (281,114   (8,254

Issuance of Class A common shares

    123,778      1,281   —     122,497   —        —        —     

Employee stock and directors plans

    19,977      207   —     20,845   (1,075   —        —     

Amortization of restricted stock

    9,614      —     —     9,614   —        —        —     

Cash dividends

    (13,256   —     —     —     —        (13,256   —     

Receipts related to noncontrolling interests

    3,558      —     —     —     —        —        3,558   

Payments related to noncontrolling interests

    (3,366   —     —     —     —        —        (3,366

Non-cash activity related to noncontrolling
interests

    815      —     —     —     —        —        815   
                                     

Balance at May 31, 2009

  $ 2,640,505      15,538   3,296   2,097,582   (613,199   978,789      158,499   
                                     

Comprehensive income (loss) attributable to Lennar was the same as its net earnings (loss) attributable to Lennar for both the three and six months ended May 31, 2010 and 2009. Comprehensive income (loss) attributable to noncontrolling interests was the same as the net earnings (loss) attributable to noncontrolling interests for both the three and six months ended May 31, 2010 and 2009.

The Company has a stock repurchase program which permits the purchase of up to 20 million shares of its outstanding common stock. There were no share repurchases during both the three and six months ended May 31, 2010 and 2009 under the stock repurchase program. As of May 31, 2010, 6.2 million shares of common stock can be repurchased in the future under the program.

During the three months ended May 31, 2010, treasury stock increased by an immaterial amount of common shares. During the six months ended May 31, 2010, treasury stock increased by 0.1 million common shares, in connection with activity related to the Company’s equity compensation plan and forfeitures of restricted stock.

 

14


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(5) Income Taxes

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required, if based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the more-likely-than-not realization threshold criterion. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, the Company’s experience with loss carryforwards not expiring unused and tax planning alternatives.

Based upon an evaluation of all available evidence, during the three and six months ended May 31, 2010, the Company recorded an additional valuation allowance of $2.0 million and $4.8 million, respectively, against the entire amount of deferred tax assets generated during the periods. At May 31, 2010 and November 30, 2009, the Company’s deferred tax asset valuation allowance was $652.2 million and $647.4 million, respectively. In future periods, the allowance could be reduced based on sufficient evidence indicating that it is more likely than not that a portion or all of the Company’s deferred tax assets will be realized.

At May 31, 2010 and November 30, 2009, the Company had $46.0 million and $77.2 million, respectively, of gross unrecognized tax benefits. During the six months ended May 31, 2010, total unrecognized tax benefits decreased by $31.2 million primarily as a result of the withdrawal of an issue by the IRS and settlements with state taxing authorities. If the Company were to recognize these tax benefits, $24.9 million would affect the Company’s effective tax rate.

The Company expects the total amount of unrecognized tax benefits to decrease by $14.4 million within twelve months as a result of the settlement of certain tax accounting items with the IRS with respect to the prior examination cycle that carried over to the current years under examination, and as a result of the conclusion of examinations with a number of state taxing authorities. The majority of these items were previously recorded as deferred tax liabilities and the settlement will not affect the Company’s tax rate.

At May 31, 2010, the Company had $26.8 million accrued for interest and penalties, of which $1.3 million was recorded during the six months ended May 31, 2010. The accrual for interest was reduced by $8.1 million during the six months ended May 31, 2010 as a result of settlements with state taxing authorities and the withdrawal of an issue by the IRS. At November 30, 2009, the Company had $33.6 million accrued for interest and penalties.

The IRS is currently examining the Company’s federal income tax returns for fiscal years 2005 through 2009, and certain state taxing authorities are examining various fiscal years. The final outcome of these examinations is not yet determinable. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for fiscal years 2003 and subsequent years.

(6) Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net earnings (loss) attributable to common stockholders 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.

Effective December 1, 2009, the Company adopted certain provisions under ASC Topic 260, Earnings per Share. Under these provisions, all outstanding nonvested shares that contain non-forfeitable rights to dividends or dividend equivalents that participate in undistributed earnings with common stock are considered participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. The two class method is an earnings allocation formula that determines earnings per

 

15


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

share for each class of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed earnings. The Company’s restricted common stock (“nonvested shares”) are considered participating securities. For the three and six months ended May 31, 2009, the nonvested shares were excluded from the calculation of the denominator for diluted loss per share because including them would be anti-dilutive due to the Company’s net loss during those periods. The adoption of these provisions did not have a material impact to the Company’s basic and diluted loss per share.

Basic and diluted earnings (loss) per share were calculated as follows:

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
(In thousands, except per share amounts)    2010    2009     2010    2009  

Numerator:

          

Net earnings (loss) attributable to Lennar

   $ 39,719    (125,185   33,196    (281,114

Less: distributed earnings allocated to nonvested shares

     75    50      162    113   

Less: undistributed earnings allocated to nonvested shares

     336    —        203    —     
                        

Numerator for basic earnings (loss) per share

     39,308    (125,235   32,831    (281,227

Plus: interest on 2.00% convertible senior notes due 2020, net of tax

     252    —        252    —     
                        

Numerator for diluted earnings (loss) per share

   $ 39,560    (125,235   33,083    (281,227
                        

Denominator:

          

Denominator for basic earnings (loss) per share – weighted average common shares outstanding

     183,012    164,582      182,836    161,601   

Effect of dilutive securities:

          

Share-based payment

     443    —        243    —     

2.00% convertible senior notes due 2020

     2,936    —        1,468    —     
                        

Denominator for diluted earnings (loss) per share – weighted average common shares outstanding

     186,391    164,582      184,547    161,601   
                        

Basic earnings (loss) per share

   $ 0.21    (0.76   0.18    (1.74
                        

Diluted earnings (loss) per share

   $ 0.21    (0.76   0.18    (1.74
                        

Options to purchase 1.9 million and 7.3 million shares, respectively, of common stock were outstanding and anti-dilutive for the three months ended May 31, 2010 and 2009. Options to purchase 2.2 million and 8.0 million shares, respectively, of common stock were outstanding and anti-dilutive for the six months ended May 31, 2010 and 2009.

 

16


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(7) Lennar Financial Services Segment

The assets and liabilities related to the Lennar Financial Services segment were as follows:

 

(In thousands)    May 31,
2010
   November 30,
2009

Assets:

     

Cash and cash equivalents

   $ 106,435    126,835

Restricted cash

     25,807    25,646

Receivables, net (1)

     100,566    123,967

Loans held-for-sale (2)

     170,201    182,706

Loans held-for-investment, net

     22,466    25,131

Investments held-to-maturity

     7,619    2,512

Goodwill

     34,046    34,046

Other (3)

     37,239    36,707
           
   $ 504,379    557,550
           

Liabilities:

     

Notes and other debts payable

   $ 161,057    217,557

Other (4)

     180,454    197,329
           
   $ 341,511    414,886
           

 

(1) Receivables, net primarily relate to loans sold to investors for which the Company had not yet been paid as of May 31, 2010 and November 30, 2009, respectively.
(2) Loans held-for-sale relate to unsold loans carried at fair value.
(3) Other assets include mortgage loan commitments carried at fair value of $6.0 million and $4.7 million, respectively, as of May 31, 2010 and November 30, 2009.
(4) Other liabilities include forward contracts carried at fair value of $4.1 million and $3.6 million, respectively, as of May 31, 2010 and November 30, 2009.

At May 31, 2010, the Lennar Financial Services segment had a warehouse repurchase facility that matures in July 2010 with a maximum aggregate commitment of $125 million and a warehouse repurchase facility that matured in June 2010 with a maximum aggregate commitment of $200 million. In addition, at May 31, 2010, the Lennar Financial Services segment had a warehouse repurchase facility that was renewed in May 2010 and matures in April 2011 with a maximum aggregate commitment of $100 million and an additional uncommitted amount of $100 million. At May 31, 2010, the maximum aggregate commitment under these facilities totaled $425 million.

In June 2010, the Lennar Financial Services segment amended its warehouse repurchase facility that matured in June 2010 by extending its maturity to August 2010 and reducing the maximum aggregate commitment to $100 million.

The Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and expects the facilities to be renewed or replaced with other facilities when they mature. Borrowings under the facilities were $161.0 million and $217.5 million, respectively, at May 31, 2010 and November 30, 2009, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $170.9 million and $266.9 million, respectively, at May 31, 2010 and November 30, 2009. If the facilities are not renewed, the borrowings under the lines of credit will be paid off by selling the mortgage loans held-for-sale to investors and by collecting on receivables on loans sold but not yet paid. Without the facilities, the Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.

 

17


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(8) Rialto Investments Segment

The assets and liabilities related to the Rialto segment were as follows:

 

(In thousands)    May 31,
2010
   November 30,
2009

Assets:

     

Cash and cash equivalents

   $ 62,932    —  

Defeasance cash to retire notes payable

     33,723    —  

Loans receivable

     1,192,002    —  

Investments in unconsolidated entities

     65,176    9,874

Other

     22,581    —  
           
   $ 1,376,414    9,874
           

Liabilities:

     

Notes payable and other liabilities

   $ 628,596    —  
           

Rialto’s operating earnings (loss) for the three and six months ended May 31, 2010 and 2009 was as follows:

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
(In thousands)    2010     2009     2010     2009  

Revenues

   $ 34,617      —        34,918      —     

Costs and expenses

     19,514      465      20,917      1,021   

Rialto Investments equity in loss from unconsolidated entities

     (436   —        (293   —     
                          

Operating earnings (loss) (1)

   $ 14,667      (465   13,708      (1,021
                          

 

(1) Operating earnings for both the three and six months ended May 31, 2010 include $9.6 million of net earnings attributable to noncontrolling interests.

In February 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the Federal Deposit Insurance Corporation (“FDIC”), for approximately $243 million (net of transaction costs and a $22 million working capital reserve). The LLCs hold performing and non-performing loans formerly owned by 22 failed financial institutions. The two portfolios consist of more than 5,500 distressed residential and commercial real estate loans with an aggregate unpaid principal balance of approximately $3 billion and had an initial fair value of approximately $1.2 billion. The FDIC retained a 60% equity interest in the LLCs and provided $626.9 million of notes with 0% interest, which are non-recourse to the Company. In accordance with GAAP, interest has not been imputed because the notes are with, and guaranteed by, a governmental agency. The notes are secured by the loans held by the LLCs. Additionally, if the LLCs exceed expectations and meet certain internal rate of return and distribution thresholds, the Company’s equity interest in the LLCs could be reduced from 40% down to 30%, with a corresponding increase to the FDIC’s equity interest from 60% up to 70%. Although the Company’s equity interest could decrease, the Company would most likely yield a higher return on its investment. As of May 31, 2010, the notes payable balance was $626.9 million; however, during the three months ended May 31, 2010, $33.7 million of cash collections on loans in excess of expenses was deposited in a defeasance account, established solely for the repayment of the notes payable, per the agreement with the FDIC. The funds in the defeasance account will be used to retire the notes payable upon their maturity.

The LLCs met the accounting definition of VIEs and since the Company was determined to be the primary beneficiary, the Company consolidated the LLCs. The LLCs are considered VIEs due to the FDIC’s guarantee on the $626.9 million notes payable, as well as the Company’s $10 million guarantee of servicer performance. The Company was determined to be the primary beneficiary because it has the power to direct the activities of the LLCs that most significantly impact the LLCs’ performance through its management agreement. At May 31, 2010, these consolidated LLCs had total combined assets and liabilities of $1.3 billion and $0.6 billion, respectively.

 

18


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

As of May 31, 2010, all of the acquired loans for which (1) there was evidence of credit quality deterioration since origination and (2) for which it was deemed probable that the Company would be unable to collect all contractually required principal and interest payments were accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310-30”). For loans accounted for under ASC 310-30, management determined the value of the loan portfolio based on extensive due diligence on the loans, the underlying properties and the borrowers, as well as through various valuation methodologies. Factors considered in the valuation were projected cash flows for the loans, type of loan and related collateral, classification status and current discount rates.

Under ASC 310-30, loans were pooled together according to common risk characteristics. The excess of the cash flows expected to be collected from the loans receivable at acquisition over the initial investment for those loans receivable is referred to as the accretable yield and is recognized in interest income over the expected life of the pools primarily using the constant effective yield method. The difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the nonaccretable difference. Changes in the expected cash flows of loans receivable from the date of acquisition will either impact the accretable yield or result in a charge to the provision for loan losses in the period in which the changes become probable. Prepayments are treated as a reduction of cash flows expected to be collected and a reduction of contractually required payments such that the nonaccretable difference is not affected. Subsequent material decreases to the expected cash flows related to loan impairment will generally result in a charge to the provision for loan losses, resulting in an increase to the allowance for loan losses, and a reclassification from accretable yield to nonaccretable difference. Subsequent increases in cash flows will result in a recovery of any previously recorded allowance for loan losses, to the extent applicable, and a reclassification from nonaccretable difference to accretable yield. Certain amounts related to the ASC 310-30 loans are estimates and may change as the Company obtains additional information related to the respective loans.

The second quarter of 2010 was the first quarter that the Company recorded accretable interest income on its loan portfolios. The accretion of interest income is based on various estimates regarding loan performance. As the Company continues to obtain additional information related to the respective loans, these estimates may change from quarter-to-quarter. Therefore, the amounts of accretable interest income recorded for the three and six months ended May 31, 2010 are not necessarily indicative of the results to be expected for the full year. The estimate of the total contractually required payments of the loans receivable at acquisition was $3.7 billion, the cash flows expected to be collected on loans receivable being accounted for under ASC 310-30 were $1.6 billion, and the carrying amount of those loans receivable was $1.2 billion. The accretable yield related to the loans receivable at both February 9, 2010 and May 31, 2010 was $0.3 billion. During the three months ended May 31, 2010, the Rialto segment recognized $32.8 million of accretable interest income related to the loans receivable. At May 31, 2010, there were loans receivable with a carrying value of approximately $100 million for which interest income was not being recognized.

In addition to the acquisition and management of the FDIC portfolios, an affiliate in the Rialto segment is a sub-advisor to the AllianceBernstein L.P. (“AB”) fund formed under the Federal government’s Public-Private Investment Program (“PPIP”) to purchase real estate related securities from banks and other financial institutions. The sub-advisor receives management fees for sub-advisory services. The Company committed to invest $75 million of the total equity commitments of approximately $1.2 billion made by private investors in this fund, and the U.S. Treasury has committed to a matching amount of approximately $1.2 billion of equity in the fund, as well as agreed to extend up to approximately $2.3 billion of financing. During the three and six months ended May 31, 2010, the Company invested $15.0 million and $56.3 million, respectively, in the AB PPIP fund. As of May 31, 2010, the Company’s investment in the AB PPIP fund was $57.8 million.

Additionally, another subsidiary in the Rialto segment also has a $7.4 million, or approximately 5%, investment in a service and infrastructure provider to the residential home loan market (the “Servicer”), which provides services to the consolidated LLCs.

 

19


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Summarized condensed financial information on a combined 100% basis related to Rialto’s investments in unconsolidated entities that are accounted for by the equity method as of May 31, 2010 was as follows:

 

Balance Sheets

  

(In thousands)

   May 31,
2010
   November 30,
2009 (1)
 

Assets:

     

Cash and cash equivalents

   $ 35,535    2,229   

Investments

     3,556,824    —     

Other assets

     193,294    179,985   
             
   $ 3,785,653    182,214   
             

Liabilities and equity:

     

Accounts payable and other liabilities

   $ 164,841    58,209   

Partner loans

     137,820    135,570   

Debt

     1,725,000    —     

Equity of:

     

Rialto Investments

     65,176    9,874   

Others

     1,692,816    (21,439
             

Total equity of unconsolidated entities

     1,757,992    (11,565
             
   $ 3,785,653    182,214   
             

 

(1) Amounts included as of November 30, 2009 relate only to the Servicer because the Company did not invest in the AB PPIP fund until December 2009.

 

Statements of Operations

  
      Three Months Ended
May 31,
    Six Months Ended
May 31,
 
(In thousands)    2010     2009     2010     2009  

Revenues

   $ 87,995      16,442      119,327      21,236   

Costs and expenses

     65,225      26,976      74,024      35,432   
                          

Net earnings (loss) of unconsolidated entities

     22,770      (10,534   45,303      (14,196
                          

Rialto Investments’ share of net loss recognized

   $ (436   —        (293   —     
                          

(9) Lennar Homebuilding Cash and Cash Equivalents

Cash and cash equivalents as of May 31, 2010 and November 30, 2009 included $1.8 million and $5.8 million, respectively, of cash held in escrow for approximately three days.

(10) Lennar Homebuilding Restricted Cash

Restricted cash consists primarily of $125.9 million of cash used to collateralize letters of credit. Restricted cash also includes customer deposits on home sales held in restricted accounts until title transfers to the homebuyer, as required by the state and local governments in the locations in which the homes were sold.

 

20


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(11) Lennar Homebuilding Senior Notes and Other Debts Payable

 

(Dollars in thousands)    May 31,
2010
   November 30,
2009

5.125% senior notes due 2010

   $ 99,229    249,955

5.95% senior notes due 2011

     113,140    244,727

5.95% senior notes due 2013

     266,035    347,471

5.50% senior notes due 2014

     248,509    248,365

5.60% senior notes due 2015

     501,321    501,424

6.50% senior notes due 2016

     249,774    249,760

12.25% senior notes due 2017

     392,726    392,392

6.95% senior notes due 2018

     247,323    —  

2.00% convertible senior notes due 2020

     276,500    —  

Mortgage notes on land and other debt

     495,655    527,258
           
   $ 2,890,212    2,761,352
           

In February 2010, the Company terminated its $1.1 billion senior unsecured revolving credit facility (the “Credit Facility”). The Company had no outstanding borrowings under the Credit Facility as it was only being used to issue letters of credit. The Company entered into cash-collateralized letter of credit agreements with two banks with a capacity totaling $225 million. As of May 31, 2010, the Company had $124.6 million of cash-collateralized letters of credit.

The Company’s performance letters of credit outstanding were $78.1 million and $97.7 million, respectively, at May 31, 2010 and November 30, 2009. The Company’s financial letters of credit outstanding were $195.5 million and $205.4 million, respectively, at May 31, 2010 and November 30, 2009. Performance letters of credit are generally posted with regulatory bodies to guarantee the Company’s performance of certain development and construction activities, and financial letters of credit are generally posted in lieu of cash deposits on option contracts and for insurance risks, credit enhancements and as other collateral. Additionally, at May 31, 2010, the Company had outstanding performance and surety bonds related to site improvements at various projects (including certain projects of the Company’s joint ventures) of $777.6 million. Although significant development and construction activities have been completed related to these site improvements, these bonds are generally not released until all development and construction activities are completed. As of May 31, 2010, there were approximately $324.7 million, or 42%, of costs to complete related to these site improvements. The Company does not presently anticipate any draws upon these bonds, but if such draws occur, the Company does not believe they would have a material effect on its financial position, results of operations or cash flows.

In May 2010, the Company issued $250 million of 6.95% senior notes due 2018 (the “6.95% Senior Notes”) at a price of 98.929% in a private placement. Proceeds from the offering, after payment of initial purchaser’s discount and expenses, were $243.9 million. The Company used the net proceeds of the sale of the 6.95% Senior Notes to fund purchases pursuant to its tender offer for its 5.125% senior notes due October 2010, its 5.95% senior notes due 2011 and its 5.95% senior notes due 2013. Interest on the 6.95% Senior Notes is due semi-annually beginning December 1, 2010. The 6.95% Senior Notes are unsecured and unsubordinated, and may at some time be guaranteed by some or substantially all of the Company’s subsidiaries. At May 31, 2010, the carrying amount of the 6.95% Senior Notes was $247.3 million.

In May 2010, the Company issued $276.5 million of 2.00% convertible senior notes due 2020 (the “2.00% Convertible Senior Notes”) at a price of 100% in a private placement. Proceeds from the offering, after payment of expenses, were $271.2 million. The net proceeds will be used for general corporate purposes, including repayments or repurchases of existing senior notes or other indebtedness. The 2.00% Convertible Senior Notes are convertible into shares of the Lennar Class A common stock at the initial conversion rate of 36.1827 shares of common stock per $1,000 principal amount of the 2.00% Convertible Senior Notes, which is equivalent to an initial conversion price of approximately $27.64 per share of Class A common stock, subject to anti-dilution adjustments. Holders of the 2.00% Convertible Senior Notes will have the right to require the Company to repurchase them for cash equal to 100% of their principal amount, plus accrued but unpaid interest, on each of December 1, 2013 and December 1, 2015. The

 

21


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Company will have the right to redeem the 2.00% Convertible Senior Notes at any time on or after December 1, 2013 for 100% of their principal amount, plus accrued but unpaid interest. Interest on the 2.00% Senior Notes is due semi-annually beginning December 1, 2010. Beginning with the six-month interest period commencing December 1, 2013, under certain circumstances based on the average trading price of the 2.00% Convertible Senior Notes, the Company may be required to pay contingent interest. The 2.00% Convertible Senior Notes are unsecured and unsubordinated, and may at some time be guaranteed by some or substantially all of the Company’s subsidiaries. At May 31, 2010, the carrying amount of the 2.00% Convertible Senior Notes was $276.5 million.

In May 2010, the Company repurchased $289.4 million aggregate principal amount of its senior notes due 2010, 2011 and 2013 through a tender offer that ran from April 27, 2010 through May 25, 2010, resulting in a pre-tax loss of $10.8 million. Through the tender offer, the Company repurchased $76.4 million principal amount of its 5.125% senior notes due October 2010, $130.8 million of its 5.95% senior notes due 2011 and $82.3 million of its 5.95% senior notes due 2013.

In addition to the tender offer, during the six months ended May 31, 2010, the Company repurchased $74.4 million principal amount of its 5.125% senior notes due October 2010 and $1.0 million principal amount of its 5.95% senior notes due 2011, resulting in a net pre-tax loss of $0.9 million. During the six months ended May 31, 2010, the Company also retired $98.3 million of mortgage notes on land and other debt, resulting in a pre-tax gain of $13.6 million.

(12) Product Warranty

Warranty and similar reserves for homes are established at an amount estimated to be adequate to cover potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a home. Reserves are determined based on historical data and trends with respect to similar product types and geographical areas. The Company regularly monitors the warranty reserve and makes adjustments to its pre-existing warranties in order to reflect changes in trends and historical data as information becomes available. Warranty reserves are included in other liabilities in the accompanying condensed consolidated balance sheets. The activity in the Company’s warranty reserve was as follows:

 

     Three Months Ended
May 31,
    Six Months Ended
May 31,
 
(In thousands)    2010     2009     2010     2009  

Warranty reserve, beginning of period

   $ 141,825      139,696      157,896      129,449   

Warranties issued during the period

     6,731      7,888      11,870      13,281   

Adjustments to pre-existing warranties from changes in estimates

     163      9,704      (739   28,780   

Payments

     (22,255   (15,114   (42,563   (29,336
                          

Warranty reserve, end of period

   $ 126,464      142,174      126,464      142,174   
                          

As of May 31, 2010, the Company identified approximately 810 homes delivered in Florida primarily during its 2006 and 2007 fiscal years that are confirmed to have defective Chinese drywall and resulting damage. This represents a small percentage of homes the Company delivered in Florida (4.0%) and nationally (1.0%) during those fiscal years in the aggregate. Defective Chinese drywall appears to be an industry-wide issue as other homebuilders have publicly disclosed that they are experiencing similar issues with defective Chinese drywall.

Based on its efforts to date, the Company has not identified defective Chinese drywall in homes delivered by the Company outside of Florida. The Company is continuing its investigation of homes delivered during the relevant time period in order to determine whether there are additional homes, not yet inspected, with defective Chinese drywall and resulting damage. If the outcome of the Company’s inspections identifies more homes than the Company has estimated to have defective Chinese drywall, it might require an increase to the Company’s warranty reserve in the future.

 

22


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Through May 31, 2010, the Company has accrued $80.7 million of warranty reserves related to homes confirmed as having defective Chinese drywall, as well as an estimate for homes not yet inspected that may contain Chinese drywall. No additional amount was accrued during the three and six months ended May 31, 2010. As of May 31, 2010, the warranty reserve, net of payments, was $37.3 million. During the six months ended May 31, 2010, the Company received payments of $40 million related to its receivable for covered damages under its insurance coverage relative to the costs it has incurred and expects to incur remedying the homes confirmed and estimated to have defective Chinese drywall and resulting damage. As of May 31, 2010, the Company’s insurance receivable for covered damages under its insurance coverage was $1.6 million. The Company is also seeking reimbursement from its subcontractors, insurers and others for costs the Company has incurred or expects to incur to investigate and repair defective Chinese drywall and resulting damage.

(13) Share-Based Payment

During the three and six months ended May 31, 2010 and 2009, compensation expense related to the Company’s share-based payment awards was as follows:

 

     Three Months Ended
May 31,
   Six Months Ended
May 31,
(In thousands)    2010    2009    2010    2009

Stock options

   $ 1,530    2,989    3,512    5,978

Nonvested shares

     3,811    4,883    8,127    9,614
                     

Total compensation expense for share-based awards

   $ 5,341    7,872    11,639    15,592
                     

During both the three and six months ended May 31, 2010 and 2009, the Company granted an immaterial amount of stock options and did not issue any nonvested shares.

(14) Financial Instruments

The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at May 31, 2010 and November 30, 2009, using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The table excludes cash and cash equivalents, restricted cash, defeasance cash to retire notes payable, receivables, net, income tax receivables and accounts payable, which had fair values approximating their carrying amounts due to the short maturities of these instruments.

 

     May 31, 2010    November 30, 2009
(In thousands)    Carrying
Amount
   Fair
Value
   Carrying
Amount
   Fair
Value

ASSETS

           

Rialto Investments:

           

Loans receivable

   $ 1,192,002    1,192,002    —      —  

Lennar Financial Services:

           

Loans held-for-investment, net

   $ 22,466    23,566    25,131    26,818

Investments held-to-maturity

   $ 7,619    7,630    2,512    2,529

LIABILITIES

           

Lennar Homebuilding:

           

Senior notes and other debts payable

   $ 2,890,212    2,869,713    2,761,352    2,754,737

Rialto Investments:

           

Notes payable

   $ 626,906    589,095    —      —  

Lennar Financial Services:

           

Notes and other debts payable

   $ 161,057    161,057    217,557    217,557

 

23


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

The following methods and assumptions are used by the Company in estimating fair values:

Lennar Homebuilding—For senior notes and other debts payable, the fair value of fixed-rate borrowings is based on quoted market prices. The Company’s variable-rate borrowings are tied to market indices and approximate fair value due to the short maturities associated with the majority of the instruments.

Rialto Investments—The fair value for loans receivable is based on discounted cash flows as of May 31, 2010. For notes payable, the fair value of the zero percent notes provided by the FDIC was calculated based on a 5-year treasury yield as of May 31, 2010.

Lennar Financial Services—The fair values are based on quoted market prices, if available. The fair values for instruments that do not have quoted market prices are estimated by management on the basis of discounted cash flows or other financial information.

GAAP provides a framework for measuring fair value, expands disclosures about fair value measurements and establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows:

Level 1: Fair value determined based on quoted prices in active markets for identical assets.

Level 2: Fair value determined using significant other observable inputs.

Level 3: Fair value determined using significant unobservable inputs.

The Company’s financial instruments measured at fair value at May 31, 2010 on a recurring basis are all within the Lennar Financial Services segment and are summarized below:

 

Financial Instruments

   Fair Value
Hierarchy
   Fair Value at
May 31, 2010
 
(Dollars in thousands)            

Loans held-for-sale (1)

   Level 2    $ 170,201   

Mortgage loan commitments

   Level 2    $ 6,012   

Forward contracts

   Level 2    $ (4,094

 

(1) The aggregate fair value of loans held-for-sale of $170.2 million exceeds its aggregate principal balance of $163.9 million by $6.3 million.

The estimated fair values of the Lennar Financial Services segment financial instruments have been determined by using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts.

Loans held-for-sale— Fair value is based on independent quoted market prices, where available, or the prices for other mortgage whole loans with similar characteristics.

Mortgage loan commitments— Fair value of commitments to originate loans is based upon the difference between the current value of similar loans and the price at which the Lennar Financial Services segment has committed to originate the loans. The fair value of commitments to sell loan contracts is the estimated amount that the Lennar Financial Services segment would receive or pay to terminate the commitments at the reporting date based on market prices for similar financial instruments.

Forward contracts— Fair value is based on quoted market prices for similar financial instruments.

 

24


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(15) Consolidation of Variable Interest Entities

GAAP requires the consolidation of VIEs in which an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIEs economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company’s variable interest in VIEs may be in the form of (1) equity ownership, (2) contracts to purchase assets, (3) management and development agreements between the Company and a VIE, (4) loans provided by the Company to a VIE or other partner and/or (5) guarantees provided by members to banks and other third parties. The Company examines specific criteria and uses its judgment when determining if the Company is the primary beneficiary of a VIE. Factors considered in determining whether the Company is the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights or voting rights, level of economic disproportionality between the Company and the other partner(s) and contracts to purchase assets from VIEs.

Generally, all major decision making in the Company’s joint ventures is shared between all partners. In particular, business plans and budgets are generally required to be unanimously approved by all partners. Usually, management and other fees earned by the Company are nominal and believed to be at market and there is no significant economic disproportionality between the Company and other partners. Generally, the Company purchases less than a majority of the joint venture’s assets and the purchase prices under the Company’s option contracts are believed to be at market.

Generally, Lennar Homebuilding unconsolidated entities become VIEs and consolidate when the other partner(s) lack the intent and financial wherewithal to remain in the entity. As a result, the Company continues to fund operations and debt paydowns through partner loans or substituted capital contributions.

The Company evaluated all joint venture agreements as of May 31, 2010. Based on the Company’s evaluation, there were no material entities that consolidated during the three and six months ended May 31, 2010, except for the FDIC LLCs. These LLCs are considered VIEs due to FDIC’s guarantee on the $626.9 million notes payable, as well as the Company’s $10 million guarantee of servicer performance. In addition, the Company was determined to be the primary beneficiary because it has the power to direct the activities of the LLCs that most significantly impact the LLCs’ performance through its management and servicer contracts. During the three and six months ended May 31, 2010, there were no VIEs that deconsolidated.

At May 31, 2010 and November 30, 2009, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $609.7 million and $599.3 million, respectively, and the Rialto Investments segment’s investments in unconsolidated entities as of May 31, 2010 and November 30, 2009 were $65.2 million and $9.9 million, respectively.

Consolidated VIEs

As of May 31, 2010, the carrying amount of the VIEs’ assets and non-recourse liabilities that consolidated were $2,137.7 million and $874.8 million, respectively. Those assets are owned by, and those liabilities are obligations of, the VIEs, not the Company.

A VIE’s assets can only be used to settle obligations of a VIE. The VIEs are not guarantors of Company’s senior notes and other debts payable. In addition, the assets held by a VIE usually are collateral for that VIE’s debt. The Company and other partners do not generally have an obligation to make capital contributions to a VIE unless the Company and/or the other partner(s) have entered into debt guarantees with a VIE’s banks. Other than debt guarantee agreements with a VIE’s banks, there are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to a VIE. While the Company has option contracts to purchase land from certain of its VIEs, the Company is not required to purchase the asset and could walk away from the contract.

 

25


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Unconsolidated VIEs

At May 31, 2010 and November 30, 2009, the Company’s recorded investments in VIEs that are unconsolidated and its estimated maximum exposure to loss were as follows:

 

As of May 31, 2010

     
(In thousands)    Investments in
Unconsolidated
VIEs
   Lennar’s
Maximum
Exposure to Loss

Lennar Homebuilding (1)

   $ 84,934    141,975

Rialto Investments (2)

     65,176    85,564
           

Total

   $ 150,110    227,539
           

As of November 30, 2009

     
(In thousands)    Investments in
Unconsolidated
VIEs
   Lennar’s
Maximum
Exposure to Loss

Lennar Homebuilding (1)

   $ 84,352    84,352

Rialto Investments (2)

     9,874    9,874
           

Total

   $ 94,226    94,226
           

 

(1) At May 31, 2010, the maximum exposure to loss of Lennar Homebuilding’s investments in unconsolidated VIEs is limited to its investments in the unconsolidated VIEs in addition to $56.5 million of recourse debt of one of the unconsolidated VIEs. At November 30, 2009, the maximum exposure to loss of Lennar Homebuilding’s investments in unconsolidated VIEs is limited to its investments in the unconsolidated VIEs.
(2) For Rialto’s investment in unconsolidated VIEs, the Company made a $75 million commitment to fund capital in the AB PPIP fund. As of May 31, 2010, the Company had contributed $56.3 million of the $75 million commitment and it cannot walk away from its commitment to fund capital. Therefore, as of May 31, 2010, the maximum exposure to loss for Rialto’s unconsolidated VIEs was higher than the carrying amount of its investment. At November 30, 2009, the maximum recourse exposure to loss of Rialto’s investment in unconsolidated VIEs was limited to its investments in the unconsolidated entities.

While these entities are VIEs, the Company has determined that the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance is shared. While the Company generally manages the day-to-day operations of the VIEs, the VIEs have an executive committee made up of representatives from each partner. The members of the executive committee have equal vote and major decisions require unanimous consent and approval from all members. The Company does not have the unilateral ability to exercise participating voting rights without partner consent. Furthermore, the Company’s economic interest is not significantly disproportionate to the point where it would indicate that the Company has the power to direct these activities.

The Company and other partners do not generally have an obligation to make capital contributions to the VIEs, except for the Company’s $18.7 million remaining commitment to the AB PPIP fund and $56.5 million of recourse debt of one of the Lennar Homebuilding unconsolidated VIEs. There are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to the VIEs. While the Company has option contracts to purchase land from certain of its unconsolidated VIEs, the Company is not required to purchase the asset and could walk away from the contract.

 

26


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Option Contracts

The Company has access to land through option contracts, which generally enables it to control portions of properties owned by third parties (including land funds) and unconsolidated entities until the Company has determined whether to exercise the option.

A majority of the Company’s option contracts require a non-refundable cash deposit or irrevocable letter of credit based on a percentage of the purchase price of the land. The Company’s option contracts sometimes include price adjustment provisions, which adjust the purchase price of the land to its approximate fair value at the time of acquisition or are based on the fair value at the time of takedown.

The Company’s investments in option contracts are recorded at cost unless those investments are determined to be impaired, in which case the Company’s investments are written down to fair value. The Company reviews option contracts for indicators of impairment during each reporting period. The most significant indicator of impairment is a decline in the fair value of the optioned property such that the purchase and development of the optioned property would no longer meet the Company’s targeted return on investment with appropriate consideration given to the length of time available to exercise the option. Such declines could be caused by a variety of factors including increased competition, decreases in demand or changes in local regulations that adversely impact the cost of development. Changes in any of these factors would cause the Company to re-evaluate the likelihood of exercising its land options.

Some option contracts contain a predetermined take-down schedule for the optioned land parcels. However, in almost all instances, the Company is not required to purchase land in accordance with those take-down schedules. In substantially all instances, the Company has the right and ability to not exercise its option and forfeit its deposit without further penalty, other than termination of the option and loss of any unapplied portion of its deposit and pre-acquisition costs. Therefore, in substantially all instances, the Company does not consider the take-down price to be a firm contractual obligation.

When the Company does not intend to exercise an option, it writes off any unapplied deposit and pre-acquisition costs associated with the option contract.

The Company evaluates all option contracts for land to determine whether it is the primary beneficiary of certain of these option contracts. Although the Company does not have legal title to the optioned land, if the Company is deemed to be the primary beneficiary, it is required to consolidate the land under option at the purchase price of the optioned land. During the six months ended May 31, 2010, the effect of consolidation of these option contracts was a net increase of $5.5 million to consolidated inventory not owned with a corresponding increase to liabilities related to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2010. In addition, consolidated inventory not owned decreased due (1) to the Company exercising its options to acquire land under certain contracts previously consolidated and (2) the deconsolidation of certain option contracts totaling $75.5 million related to the adoption of certain new provisions under ASC 810, resulting in a decrease in consolidated inventory not owned of $118.8 million for the six months ended May 31, 2010. To reflect the purchase price of the inventory consolidated, the Company reclassified the related option deposits from land under development to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2010. The liabilities related to consolidated inventory not owned primarily represent the difference between the option exercise prices for the optioned land and the Company’s cash deposits.

The Company’s exposure to loss related to its option contracts with third parties and unconsolidated entities consisted of its non-refundable option deposits and pre-acquisition costs totaling $141.3 million and $127.4 million, respectively, at May 31, 2010 and November 30, 2009. Additionally, the Company had posted $48.8 million and $58.2 million, respectively, of letters of credit in lieu of cash deposits under certain option contracts as of May 31, 2010 and November 30, 2009.

 

27


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(16) New Accounting Pronouncements

In December 2007, the FASB updated certain provisions of ASC Topic 805, Business Combinations, (“ASC 805”). These provisions broaden the guidance of ASC 805, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition requirement of assets acquired, liabilities assumed and interests transferred as a result of business combinations. ASC 805 expands on required disclosures to improve the financial statement users’ abilities to evaluate the nature and financial effects of business combinations. ASC 805 was effective for business combinations that close on or after December 1, 2009. The adoption of these new provisions did not have a material effect on the Company’s condensed consolidated financial statements.

In April 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, (“ASU 2010-18”). Under ASU 2010-18, modification of loans accounted for within a pool under provisions for loans acquired with deteriorated credit quality does not result in removal of such loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity must continue to consider whether the pool of assets in which the modified loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans acquired with deteriorated credit quality that are not accounted for within a pool. Loans accounted for individually that were acquired with deteriorated credit quality continue to be subject to the accounting provisions for troubled debt restructuring by creditors. The amended guidance is to be applied prospectively, with early application permitted. ASU 2010-18 is effective for modifications of loans accounted for within a pool that occur on or after September 1, 2010. The adoption of this ASU did not have a material effect on the Company’s condensed consolidated financial statements.

 

28


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(17) Supplemental Financial Information

The indentures governing the principal amounts of the Company’s 5.125% senior notes due 2010, 5.95% senior notes due 2011, 5.95% senior notes due 2013, 5.50% senior notes due 2014, 5.60% senior notes due 2015, 6.50% senior notes due 2016, 12.25% senior notes due 2017, 6.95% senior notes due 2018 and 2.00% convertible senior notes due 2020 require that, if any of the Company’s subsidiaries directly or indirectly guarantee at least $75 million principal amount of debt of Lennar Corporation, those subsidiaries must also guarantee Lennar Corporation’s obligations with regard to its senior notes. Until recently, the Company had a Credit Facility that required that substantially all of the Company’s subsidiaries guarantee Lennar Corporation’s obligations under the Credit Facility, and therefore, those subsidiaries also guaranteed the Company’s obligations with regard to its senior notes. The Company recently terminated the Credit Facility and therefore there are no guarantors of Lennar Corporation’s obligations with regard to its senior notes. The entities referred to as “guarantors” in the following tables are subsidiaries that would have been guarantors if the Credit Facility were still in effect. Supplemental financial information for the guarantors is presented as follows:

Condensed Consolidating Balance Sheet

May 31, 2010

 

(In thousands)

   Lennar
Corporation
    Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
    Eliminations     Total

ASSETS

           

Lennar Homebuilding:

           

Cash and cash equivalents, restricted cash, receivables, net and income tax receivables

   $ 1,088,556      139,742    68,276      —        1,296,574

Inventories

     —        3,591,381    570,753      —        4,162,134

Investments in unconsolidated entities

     —        572,740    36,913      —        609,653

Other assets

     47,146      98,283    154,297      —        299,726

Investments in subsidiaries

     3,422,300      839,849    —        (4,262,149   —  
                             
     4,558,002      5,241,995    830,239      (4,262,149   6,368,087

Rialto Investments

     68,971      —      1,307,443      —        1,376,414

Lennar Financial Services

     —        150,097    354,282      —        504,379
                             

Total assets

   $ 4,626,973      5,392,092    2,491,964      (4,262,149   8,248,880
                             

LIABILITIES AND EQUITY

           

Lennar Homebuilding:

           

Accounts payable and other liabilities

   $ 238,603      658,095    58,367      —        955,065

Liabilities related to consolidated inventory not owned

     —        404,563    —        —        404,563

Senior notes and other debts payable

     2,394,557      210,050    285,605      —        2,890,212

Intercompany

     (481,081   645,109    (164,028   —        —  
                             
     2,152,079      1,917,817    179,944      —        4,249,840

Rialto Investments

     1,001      —      627,595      —        628,596

Lennar Financial Services

     —        51,975    289,536      —        341,511
                             

Total liabilities

     2,153,080      1,969,792    1,097,075      —        5,219,947

Stockholders’ equity

     2,473,893      3,422,300    839,849      (4,262,149   2,473,893

Noncontrolling interests

     —        —      555,040      —        555,040
                             

Total equity

     2,473,893      3,422,300    1,394,889      (4,262,149   3,028,933
                             

Total liabilities and equity

   $ 4,626,973      5,392,092    2,491,964      (4,262,149   8,248,880
                             

 

29


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(17) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Balance Sheet

November 30, 2009

 

(In thousands)

   Lennar
Corporation
   Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
    Eliminations     Total

ASSETS

            

Lennar Homebuilding:

            

Cash and cash equivalents, restricted cash, receivables, net and income tax receivables

   $ 1,564,529    198,524    33,256      —        1,796,309

Inventories

     —      3,493,784    594,205      —        4,087,989

Investments in unconsolidated entities

     —      563,984    35,282      —        599,266

Other assets

     44,232    63,040    156,531      —        263,803

Investments in subsidiaries

     3,389,625    522,148    —        (3,911,773   —  
                            
     4,998,386    4,841,480    819,274      (3,911,773   6,747,367

Rialto Investments

     9,874    —      —        —        9,874

Lennar Financial Services

     —      153,545    404,005      —        557,550
                            

Total assets

   $ 5,008,260    4,995,025    1,223,279      (3,911,773   7,314,791
                            

LIABILITIES AND EQUITY

            

Lennar Homebuilding:

            

Accounts payable and other liabilities

   $ 246,501    702,091    83,588      —        1,032,180

Liabilities related to consolidated inventory not owned

     —      518,359    —        —        518,359

Senior notes and other debts payable

     2,234,093    223,545    303,714      —        2,761,352

Intercompany

     84,187    102,454    (186,641   —        —  
                            
     2,564,781    1,546,449    200,661      —        4,311,891

Rialto Investments

     —      —      —        —        —  

Lennar Financial Services

     —      58,951    355,935      —        414,886
                            

Total liabilities

     2,564,781    1,605,400    556,596      —        4,726,777

Stockholders’ equity

     2,443,479    3,389,625    522,148      (3,911,773   2,443,479

Noncontrolling interests

     —      —      144,535      —        144,535
                            

Total equity

     2,443,479    3,389,625    666,683      (3,911,773   2,588,014
                            

Total liabilities and equity

   $ 5,008,260    4,995,025    1,223,279      (3,911,773   7,314,791
                            

 

30


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(17) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Operations

Three Months Ended May 31, 2010

 

(In thousands)

   Lennar
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Revenues:

          

Lennar Homebuilding

   $ —        690,449      14,879      —        705,328   

Lennar Financial Services

     —        43,027      46,458      (14,949   74,536   

Rialto Investments

     1,823      —        32,794      —        34,617   
                                

Total revenues

     1,823      733,476      94,131      (14,949   814,481   
                                

Costs and expenses:

          

Lennar Homebuilding

     —        633,727      23,915      (953   656,689   

Lennar Financial Services

     —        38,158      35,415      (12,690   60,883   

Rialto Investments

     5,363      —        14,151      —        19,514   

Corporate general and administrative

     21,000      —        —        1,234      22,234   
                                

Total costs and expenses

     26,363      671,885      73,481      (12,409   759,320   
                                

Lennar Homebuilding equity in loss from
unconsolidated entities

     —        (1,382   (20   —        (1,402

Other income (expense), net

     9,496      (262   —        (9,487   (253

Other interest expense

     (12,027   (17,516   —        12,027      (17,516

Rialto Investments equity in loss from unconsolidated entities

     (436   —        —        —        (436
                                

Earnings (loss) before income taxes

     (27,507   42,431      20,630      —        35,554   

Benefit (provision) for income taxes

     18,392      (6,536   (826   —        11,030   

Equity in earnings from subsidiaries

     48,834      12,939      —        (61,773   —     
                                

Net earnings (including net earnings attributable to noncontrolling interests)

     39,719      48,834      19,804      (61,773   46,584   

Less: Net earnings attributable to noncontrolling interests

     —        —        6,865      —        6,865   
                                

Net earnings attributable to Lennar

   $ 39,719      48,834      12,939      (61,773   39,719   
                                

 

31


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(17) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Operations

Three Months Ended May 31, 2009

 

(In thousands)

   Lennar
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Revenues:

          

Lennar Homebuilding

   $ —        791,525      13,704      —        805,229   

Lennar Financial Services

     —        45,405      52,334      (11,115   86,624   

Rialto Investments

     —        —        —        —        —     
                                

Total revenues

     —        836,930      66,038      (11,115   891,853   
                                

Costs and expenses:

          

Lennar Homebuilding

     —        817,415      23,810      (1,950   839,275   

Lennar Financial Services

     —        41,663      35,988      (7,566   70,085   

Rialto Investments

     465      —        —        —        465   

Corporate general and administrative

     28,140      —        —        1,634      29,774   
                                

Total costs and expenses

     28,605      859,078      59,798      (7,882   939,599   
                                

Lennar Homebuilding equity in loss from
unconsolidated entities

     —        (59,744   (146   —        (59,890

Other income (expense), net

     8,658      (7,893   —        (8,794   (8,029

Other interest expense

     (12,027   (14,493   —        12,027      (14,493
                                

Earnings (loss) before income taxes

     (31,974   (104,278   6,094      —        (130,158

Benefit (provision) for income taxes

     4,278      (1,299   (4,526   —        (1,547

Equity in earnings (loss) from subsidiaries

     (97,489   8,088      —        89,401      —     
                                

Net earnings (loss) (including net loss attributable to noncontrolling interests)

     (125,185   (97,489   1,568      89,401      (131,705

Less: Net loss attributable to noncontrolling interests

     —        —        (6,520   —        (6,520
                                

Net earnings (loss) attributable to Lennar

   $ (125,185   (97,489   8,088      89,401      (125,185
                                

 

32


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(17) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Operations

Six Months Ended May 31, 2010

 

(In thousands)

   Lennar
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Revenues:

          

Lennar Homebuilding

   $ —        1,198,196      27,908      —        1,226,104   

Lennar Financial Services

     —        75,089      82,219      (29,407   127,901   

Rialto Investments

     2,124      —        32,794      —        34,918   
                                

Total revenues

     2,124      1,273,285      142,921      (29,407   1,388,923   
                                

Costs and expenses:

          

Lennar Homebuilding

     —        1,117,785      43,808      (2,939   1,158,654   

Lennar Financial Services

     —        73,358      65,630      (23,839   115,149   

Rialto Investments

     6,766      —        14,151      —        20,917   

Corporate general and administrative

     42,431      —        —        2,443      44,874   
                                

Total costs and expenses

     49,197      1,191,143      123,589      (24,335   1,339,594   
                                

Lennar Homebuilding equity in loss from unconsolidated entities

     —        (10,257   (39   —        (10,296

Other income, net

     18,738      13,932      —        (18,720   13,950   

Other interest expense

     (23,792   (36,181   —        23,792      (36,181

Rialto Investments equity in loss from unconsolidated entities

     (293   —        —        —        (293
                                

Earnings (loss) before income taxes

     (52,420   49,636      19,293      —        16,509   

Benefit for income taxes

     34,265      (11,144   (519   —        22,602   

Equity in earnings from subsidiaries

     51,351      12,859      —        (64,210   —     
                                

Net earnings (including net earnings attributable to noncontrolling interests)

     33,196      51,351      18,774      (64,210   39,111   

Less: Net earnings attributable to noncontrolling interests

     —        —        5,915      —        5,915   
                                

Net earnings attributable to Lennar

   $ 33,196      51,351      12,859      (64,210   33,196   
                                

 

33


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(17) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Operations

Six Months Ended May 31, 2009

 

(In thousands)

   Lennar
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Revenues:

          

Lennar Homebuilding

   $ —        1,310,148      24,115      —        1,334,263   

Lennar Financial Services

     —        80,191      97,106      (26,644   150,653   

Rialto Investments

     —        —        —        —        —     
                                

Total revenues

     —        1,390,339      121,221      (26,644   1,484,916   
                                

Costs and expenses:

          

Lennar Homebuilding

     —        1,422,617      38,290      (15,073   1,445,834   

Lennar Financial Services

     —        73,086      69,107      (8,571   133,622   

Rialto Investments

     1,021      —        —        —        1,021   

Corporate general and administrative

     53,867      —        —        3,382      57,249   
                                

Total costs and expenses

     54,888      1,495,703      107,397      (20,262   1,637,726   
                                

Lennar Homebuilding equity in loss from unconsolidated entities

     —        (62,661   (146   —        (62,807

Other income (expense), net

     17,438      (43,862   —        (17,410   (43,834

Other interest expense

     (23,792   (26,522   —        23,792      (26,522
                                

Earnings (loss) before income taxes

     (61,242   (238,409   13,678      —        (285,973

(Provision) benefit for income taxes

     7,418      (2,909   (7,904   —        (3,395

Equity in earnings (loss) from subsidiaries

     (227,290   14,028      —        213,262      —     
                                

Net earnings (loss) (including net loss attributable to noncontrolling interests)

     (281,114   (227,290   5,774      213,262      (289,368

Less: Net loss attributable to noncontrolling interests

     —        —        (8,254   —        (8,254
                                

Net earnings (loss) attributable to Lennar

   $ (281,114   (227,290   14,028      213,262      (281,114
                                

 

34


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(17) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Cash Flows

Six Months Ended May 31, 2010

 

(Dollars in thousands)

  Lennar
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Cash flows from operating activities:

         

Net earnings (including net earnings attributable to noncontrolling interests)

  $ 33,196      51,351      18,774      (64,210   39,111   

Adjustments to reconcile net earnings (including net earnings attributable to noncontrolling interests) to net cash provided by (used in) operating activities

    334,167      (181,405   18,591      64,210      235,563   
                               

Net cash provided by (used in) operating activities

    367,363      (130,054   37,365      —        274,674   
                               

Cash flows from investing activities:

         

Increase in restricted cash related to cash collateralized letters of credit

    (125,895   —        —        —        (125,895

Investments in and contributions to Lennar Homebuilding unconsolidated entities, net

    —        (43,411   (1,969   —        (45,380

Investments in and contributions to Rialto Investments unconsolidated entities

    (56,315   —        —        —        (56,315

Investments in and contributions to Rialto Investments consolidated entities (net of $87.8 million cash and cash equivalents consolidated)

    (265,059   —        87,834      —        (177,225

Increase in Rialto Investments defeasance cash to retire notes payable

    —        —        (33,723   —        (33,723

Other

    (769   (3,787   (100   —        (4,656
                               

Net cash provided by (used in) investing activities

    (448,038   (47,198   52,042      —        (443,194
                               

Cash flows from financing activities:

         

Net repayments under Lennar Financial Services debt

    —        (16   (56,484   —        (56,500

Proceeds from 6.95% senior notes due 2018

    247,323      —        —        —        247,323   

Debt issuance costs of 6.95% senior notes due 2018

    (3,438   —        —        —        (3,438

Proceeds from 2.00% convertible senior notes due 2020

    276,500      —        —        —        276,500   

Debt issuance costs of 2.00% convertible senior notes due 2020

    (5,347   —        —        —        (5,347

Partial redemption of 5.125% senior notes due 2010

    (152,710   —        —        —        (152,710

Partial redemption of 5.95% senior notes due 2011

    (137,973   —        —        —        (137,973

Partial redemption of 5.95% senior notes due 2013

    (84,738   —        —        —        (84,738

Net repayments on other borrowings

    —        (55,253   (24,267   —        (79,520

Exercise of land option contracts from an unconsolidated land investment venture

    —        (27,625   —        —        (27,625

Net receipts related to noncontrolling interests

    —        —        7,002      —        7,002   

Common stock:

         

Issuances

    1,753      —        —        —        1,753   

Repurchases

    (1,793   —        —        —        (1,793

Dividends

    (14,787   —        —        —        (14,787

Intercompany

    (321,980   256,148      65,832      —        —     
                               

Net cash provided by (used in) financing activities

    (197,190   173,254      (7,917   —        (31,853
                               

Net increase (decrease) in cash and cash equivalents

    (277,865   (3,998   81,490      —        (200,373

Cash and cash equivalents at beginning of period

    1,223,169      154,313      79,956      —        1,457,438   
                               

Cash and cash equivalents at end of period

  $ 945,304      150,315      161,446      —        1,257,065   
                               

 

35


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements — (Continued)

(unaudited)

 

(17) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Cash Flows

Six Months Ended May 31, 2009

 

(Dollars in thousands)

  Lennar
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Cash flows from operating activities:

         

Net earnings (loss) (including net earnings (loss) attributable to noncontrolling interests)

  $ (281,114   (227,290   5,774      213,262      (289,368

Adjustments to reconcile net earnings (loss) (including net earnings (loss) attributable to noncontrolling interests) to net cash provided by (used in) operating activities

    183,978      712,298      (140,917   (213,262   542,097   
                               

Net cash provided by (used in) operating activities

    (97,136   485,008      (135,143   —        252,729   
                               

Cash flows from investing activities:

         

Investments in and contributions to Lennar Homebuilding unconsolidated entities, net

    —        (102,193   (2,538   —        (104,731

Investments in and contributions to Rialto Investments unconsolidated entities

    (9,874   —        —        —        (9,874

Other

    (34   14,107      2,616      —        16,689   
                               

Net cash provided by (used in) investing activities

    (9,908   (88,086   78      —        (97,916
                               

Cash flows from financing activities:

         

Net borrowings (repayments) under financial services debt

    —        (47   50,971      —        50,924   

Net proceeds from 12.25% senior notes due 2017

    386,892      —        —        —        386,892   

Redemption of 7 5/8% senior notes due 2009

    (281,477   —        —        —        (281,477

Net repayments on other borrowings

    —        (649   (36,160   —        (36,809

Exercise of land option contracts from an unconsolidated land investment venture

    —        (8,075   —        —        (8,075

Net receipts related to noncontrolling interests

    —        —        192      —        192   

Common stock:

         

Issuances

    123,780      —        —        —        123,780   

Repurchases

    (1,075   —        —        —        (1,075

Dividends

    (13,256   —        —        —        (13,256

Intercompany

    228,673      (344,633   115,960      —        —     
                               

Net cash provided by (used in) financing activities

    443,537      (353,404   130,963      —        221,096   
                               

Net increase (decrease) in cash and cash equivalents

    336,493      43,518      (4,102   —        375,909   

Cash and cash equivalents at beginning of period

    1,007,594      125,437      70,391      —        1,203,422   
                               

Cash and cash equivalents at end of period

  $ 1,344,087      168,955      66,289      —        1,579,331   
                               

 

36


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included under Item 1 of this Report and our audited consolidated financial statements and accompanying notes for our fiscal year ended November 30, 2009 filed on Form 8-K dated April 26, 2010.

Some of the statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Quarterly Report on Form 10-Q, are “forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for our fiscal year ended November 30, 2009. We do not undertake any obligation to update forward-looking statements, except as required by Federal securities laws.

Outlook

During the first half of fiscal 2010, we continued to see a housing market that was trying to stabilize. This stabilization process was impacted by the expiration of the Federal homebuyer tax credit at the end of April. As a result, our new sales orders for the quarter were down 10% from the prior year, with the entire decline coming in the month of May. The tax credit expiration accelerated sales activity to the pre-May period and it may take a couple of months for demand to rebuild. While we experienced a slow down in new orders in May, we believe that this will be temporary and that the market will improve in the second half of 2010.

We have remained focused on improving our core business and returning our company to profitability in 2010. Over the past several years, we have made great strides in lowering our construction costs and repositioning our product offering to target first-time and value-focused homebuyers. As a result of implementing these strategies, our operating margins have improved. In addition, we have made significant progress on right-sizing our business and have aggressively reduced our overhead structure. We narrowed our focus to concentrate on generating strong operating margins and became less focused on driving volume.

Along with the improvement in our core business, our recently formed Rialto Investments segment has already started to contribute to our bottom line results. During the second quarter, our Rialto Investments segment generated $5 million of operating earnings primarily from the Federal Deposit Insurance Corporation (“FDIC”) loan portfolios acquired in the first quarter. We expect this segment to be a growing component of our operating earnings in the future.

With our strong, liquid balance sheet, we are well positioned to capitalize on future high-return investment opportunities. We have achieved year-to-date profitability through our second quarter and although challenges still remain in the housing market, we believe that our core businesses are on the right track to achieving sustainable profitability.

 

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(1) Results of Operations

Overview

We historically have experienced, and expect to continue to experience, variability in quarterly results. Our results of operations for the three and six months ended May 31, 2010 are not necessarily indicative of the results to be expected for the full year.

The net earnings attributable to Lennar were $39.7 million, or $0.21 per basic and diluted share, in the second quarter of 2010, compared to net loss attributable to Lennar of $125.2 million, or $0.76 per basic and diluted share, in the second quarter of 2009. Net earnings attributable to Lennar was $33.2 million, or $0.18 per basic and diluted share, in the six months ended May 31, 2010, compared to net loss attributable to Lennar of $281.1 million, or $1.74 per basic and diluted share, in the six months ended May 31, 2009. The improvement in operating results year over year were a result of lower valuation adjustments, reduced sales incentives and cost reduction initiatives implemented during the downturn such as, lowering our construction costs, repositioning our product offering to target first-time value-focused homebuyers and reducing our overhead structure. Gross margin percentage on home sales improved for the three and six months ended May 31, 2010, compared to the same periods last year, primarily due to a reduction in valuation adjustments, which were not material in the three and six months ended May 31, 2010, and reduced sales incentives offered to homebuyers as a percentage of revenues from home sales.

 

38


Financial information relating to our operations was as follows:

 

(In thousands)    Three Months Ended
May 31,
    Six Months Ended
May 31,
 
   2010     2009     2010     2009  

Lennar Homebuilding revenues:

        

Sales of homes

   $ 694,758      788,600      1,208,106      1,311,358   

Sales of land

     10,570      16,629      17,998      22,905   
                          

Total homebuilding revenues

     705,328      805,229      1,226,104      1,334,263   
                          

Lennar Homebuilding costs and expenses:

        

Cost of homes sold

     551,347      712,508      966,319      1,201,084   

Cost of land sold

     8,563      14,241      14,638      31,047   

Selling, general and administrative

     96,779      112,526      177,697      213,703   
                          

Total homebuilding costs and expenses

     656,689      839,275      1,158,654      1,445,834   
                          

Lennar Homebuilding operating margins

     48,639      (34,046   67,450      (111,571

Lennar Homebuilding equity in loss from unconsolidated entities

     (1,402   (59,890   (10,296   (62,807

Other income (expense), net

     (253   (8,029   13,950      (43,834

Other interest expense

     (17,516   (14,493   (36,181   (26,522
                          

Lennar Homebuilding operating earnings (loss)

   $ 29,468      (116,458   34,923      (244,734
                          

Lennar Financial Services revenues

   $ 74,536      86,624      127,901      150,653   

Lennar Financial Services costs and expenses

     60,883      70,085      115,149      133,622   
                          

Lennar Financial Services operating earnings

   $ 13,653      16,539      12,752      17,031   
                          

Rialto Investments revenues

   $ 34,617      —        34,918      —     

Rialto Investments costs and expenses

     19,514      465      20,917      1,021   

Rialto Investments equity in loss from unconsolidated entities

     (436   —        (293   —     
                          

Rialto Investments operating earnings (loss) (1)

   $ 14,667      (465   13,708      (1,021
                          

Total operating earnings (loss)

   $ 57,788      (100,384   61,383      (228,724

Corporate general and administrative expenses

     (22,234   (29,774   (44,874   (57,249
                          

Earnings (loss) before income taxes

   $ 35,554      (130,158   16,509      (285,973
                          

 

(1) Rialto Investments operating earnings for both the three and six months ended May 31, 2010 include $9.6 million of net earnings attributable to noncontrolling interests.

Three Months Ended May 31, 2010 versus Three Months Ended May 31, 2009

Revenues from home sales decreased 12% in the second quarter of 2010 to $694.8 million from $788.6 million in 2009. Revenues were lower primarily due to an 8% decrease in the number of home deliveries, excluding unconsolidated entities, and a 5% decrease in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, decreased to 2,902 homes in the second quarter of 2010 from 3,138 homes last year. The average sales price of homes delivered decreased to $240,000 in the second quarter of 2010 from $251,000 in the same period last year, primarily due to product mix as fewer deliveries occurred in our Homebuilding West segment. Sales incentives offered to homebuyers as a percentage of home sales revenue improved to 11.5% in the second quarter of 2010, from 17.3% in the second quarter of 2009 and 12.5% in the first quarter of 2010.

Gross margins on home sales were $143.4 million, or 20.6%, in the second quarter of 2010, compared to gross margins on home sales of $76.1 million, or 9.6%, in the second quarter of 2009, which included $34.6 million of valuation adjustments. Gross margin percentage on home sales improved compared to last year primarily due to the reduction in valuation adjustments and reduced sales incentives offered to homebuyers as a percentage of revenues from home sales.

 

39


Selling, general and administrative expenses were reduced by $15.7 million, or 14%, in the second quarter of 2010, compared to the same period last year, primarily due to reductions in legal and occupancy expenses. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 13.9% in the second quarter of 2010, from 14.3% in 2009.

Gross profits on land sales totaled $2.0 million in the second quarter of 2010, compared to gross profits on land sales of $2.4 million in the second quarter of 2009, net of $5.6 million of valuation adjustments and $1.8 million of write-offs of deposits and pre-acquisition costs.

Lennar Homebuilding equity in loss from unconsolidated entities was $1.4 million in the second quarter of 2010, compared to Lennar Homebuilding equity in loss from unconsolidated entities of $59.9 million in the second quarter of 2009, which included $50.1 million of valuation adjustments related to assets of unconsolidated entities in which we have investments.

Other expense, net, totaled $0.3 million in the second quarter of 2010, which included a pre-tax loss of $10.8 million related to the repurchase of senior notes through a tender offer, offset by other income and a $4.3 million pre-tax gain on the extinguishment of other debt. This is compared to other expense, net, of $8.0 million in the second quarter of 2009, which included $7.0 million of valuation adjustments to our investments in unconsolidated entities.

Homebuilding interest expense was $37.1 million in the second quarter of 2010 ($19.3 million was included in cost of homes sold, $0.3 million in cost of land sold and $17.5 million in other interest expense), compared to $41.9 million in the second quarter of 2009 ($22.9 million was included in cost of homes sold, $4.4 million in cost of land sold and $14.5 million in other interest expense). Despite an increase in debt, interest expense decreased primarily due to an increase in qualifying assets eligible for interest capitalization and savings resulting from the termination of our senior unsecured revolving credit facility during the first quarter of 2010.

Net earnings (loss) attributable to noncontrolling interests were $6.9 million and ($6.5) million, respectively, in the second quarter of 2010 and 2009.

Sales of land, Lennar Homebuilding equity in loss from unconsolidated entities, other expense, net and net earnings (loss) attributable to noncontrolling interests may vary significantly from period to period depending on the timing of land sales and other transactions entered into by us and unconsolidated entities in which we have investments.

Operating earnings for the Lennar Financial Services segment was $13.7 million in the second quarter of 2010, compared to operating earnings of $16.5 million in the same period last year. The decrease in profitability was due primarily to decreased volume in the segment’s mortgage and title operations, partially offset by $5.1 million of proceeds received from the previous sale of a cable system.

In the second quarter of 2010, operating earnings for the Rialto Investments segment were $14.7 million (which includes $9.6 million of net earnings attributable to noncontrolling interests), compared to an operating loss of $0.5 million in the same period last year. In the second quarter of 2010, revenues in this segment were $34.6 million, which consisted primarily of accretable interest income associated with portfolios of real estate loans acquired in partnership with the FDIC. In the second quarter of 2010, expenses in this segment were $19.5 million, which consisted primarily of carrying costs related to those portfolios of real estate loans, underwriting expenses and general and administrative expenses.

Corporate general and administrative expenses were reduced by $7.5 million, or 25%, in the second quarter of 2010, compared to the second quarter of 2009 primarily due to our cost reduction initiatives implemented during the downturn. Corporate general and administrative expenses as a percentage of total revenues decreased to 2.7% in the second quarter of 2010, from 3.3% in the second quarter of 2009.

During the three months ended May 31, 2010, we generated deferred tax assets of $2.0 million and recorded a non-cash valuation allowance against the entire amount of deferred tax assets generated. A reduction of the carrying amount of deferred tax assets by a valuation allowance is required, if based on available evidence, it is more likely than not that such assets will not be realized.

 

40


Our overall effective income tax rates were (38.45%) and (1.25%), respectively, for the three months ended May 31, 2010 and 2009. The change in the effective tax rate, compared to same period during 2009, resulted primarily from the reversal of gross unrecognized tax benefits as a result of the withdrawal of an issue by the IRS.

Six Months Ended May 31, 2010 versus Six Months Ended May 31, 2009

Revenues from home sales decreased 8% in the six months ended May 31, 2010 to $1,208.1 million from $1,311.4 million in 2009. Revenues were lower primarily due to a 7% decrease in the number of home deliveries, excluding unconsolidated entities. New home deliveries, excluding unconsolidated entities, decreased to 4,890 homes in the six months ended May 31, 2010 from 5,274 homes last year. The average sales price of homes delivered for the six months ended May 31, 2010 and 2009 was $247,000 and $248,000, respectively. Sales incentives offered to homebuyers as a percentage of home sales revenue improved to 11.9% in the six months ended May 31, 2010, from 17.2% in the six months ended May 31, 2009.

Gross margins on home sales were $241.8 million, or 20.0%, in the six months ended May 31, 2010, compared to gross margins on home sales of $110.3 million, or 8.4%, in the six months ended May 31, 2009, which included $75.3 million of valuation adjustments. Gross margin percentage on home sales improved compared to last year primarily due to the reduction in valuation adjustments and reduced sales incentives offered to homebuyers as a percentage of revenues from home sales.

Selling, general and administrative expenses were reduced by $36.0 million, or 17%, in the six months ended May 31, 2010, compared to the same period last year, primarily due to reductions in legal and occupancy expenses. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 14.7% in the six months ended May 31, 2010, from 16.3% in 2009.

Gross profits on land sales totaled $3.4 million in the six months ended May 31, 2010, compared to losses on land sales of $8.1 million in the six months ended May 31, 2009, which included $5.8 million of valuation adjustments and $12.1 million of write-offs of deposits and pre-acquisition costs.

Lennar Homebuilding equity in loss from unconsolidated entities was $10.3 million in the six months ended May 31, 2010, compared to Lennar Homebuilding equity in loss from unconsolidated entities of $62.8 million in the six months ended May 31, 2009, which included $50.1 million of valuation adjustments related to assets of unconsolidated entities in which we have investments.

Other income (expense), net, totaled $14.0 million in the six months ended May 31, 2010, which included a pre-tax loss of $10.8 million related to the repurchase of senior notes through a tender offer, offset by other income and a $13.6 million pre-tax gain on the extinguishment of other debt. This is compared to other income (expense), net, of ($43.8) million in the six months ended May 31, 2009, which included $44.2 million of valuation adjustments to our investments in unconsolidated entities.

Homebuilding interest expense was $70.3 million in the six months ended May 31, 2010 ($33.7 million was included in cost of homes sold, $0.4 million in cost of land sold and $36.2 million in other interest expense), compared to $58.8 million in the six months ended May 31, 2009 ($27.7 million was included in cost of homes sold, $4.6 million in cost of land sold and $26.5 million in other interest expense). Interest expense increased primarily due to the interest related to the $400 million 12.25% of senior notes due 2017 issued during the second quarter of 2009.

Net earnings (loss) attributable to noncontrolling interests were $5.9 million and ($8.3) million, respectively, in the six months ended May 31, 2010 and 2009.

Sales of land, Lennar Homebuilding equity in loss from unconsolidated entities, other income (expense), net and net earnings (loss) attributable to noncontrolling interests may vary significantly from period to period depending on the timing of land sales and other transactions entered into by us and unconsolidated entities in which we have investments.

 

41


Operating earnings for the Lennar Financial Services segment were $12.8 million in the six months ended May 31, 2010, compared to operating earnings of $17.0 million in the same period last year. The decrease in profitability was due primarily to decreased volume in the segment’s mortgage and title operations, partially offset by $5.1 million of proceeds received from the previous sale of a cable system.

In the six months ended May 31, 2010, operating earnings for the Rialto Investments segment were $13.7 million (which includes $9.6 million of net earnings attributable to noncontrolling interests), compared to an operating loss of $1.0 million in the same period last year. In the six months ended May 31, 2010, revenues in this segment were $34.9 million, which consisted primarily of accretable interest income associated with the portfolios of real estate loans acquired in partnership with the FDIC. In the six months ended May 31, 2010, expenses in this segment were $20.9 million, which consisted primarily of carrying costs related to those portfolios of real estate loans, underwriting expenses and general and administrative expenses.

Corporate general and administrative expenses were reduced by $12.4 million, or 22%, for the six months ended May 31, 2010, compared to the same period last year primarily due to our cost reduction initiatives implemented during the downturn. As a percentage of total revenues, corporate general and administrative expenses decreased to 3.2% in the six months ended May 31, 2010, from 3.9% in the same period last year.

During the six months ended May 31, 2010, we generated deferred tax assets of $4.8 million and recorded a non-cash valuation allowance against the entire amount of deferred tax assets generated. A reduction of the carrying amount of deferred tax assets by a valuation allowance is required, if based on available evidence, it is more likely than not that such assets will not be realized.

Our overall effective income tax rates were (213.36%) and (1.22%), respectively, for the six months ended May 31, 2010 and 2009. The change in the effective tax rate, compared to the same period in 2009, resulted primarily from the reversal of gross unrecognized tax benefits as a result of the withdrawal of an issue by the IRS and settlements with state taxing authorities.

Homebuilding Segments

We have grouped our homebuilding activities into four reportable segments, which we refer to as Homebuilding East, Homebuilding Central, Homebuilding West and Homebuilding Houston, based primarily upon similar economic characteristics, geography and product type. Information about homebuilding activities in states that do not have economic characteristics that are similar to those in other states in the same geographic area is grouped under “Homebuilding Other.” References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to homebuilding segments are to those reportable segments.

At May 31, 2010, our reportable homebuilding segments and Homebuilding Other consisted of homebuilding divisions located in:

East: Florida, Maryland, New Jersey and Virginia

Central: Arizona, Colorado and Texas (1)

West: California and Nevada

Houston: Houston, Texas

Other: Georgia, Illinois, Minnesota, North Carolina and South Carolina

 

(1) Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.

 

42


The following tables set forth selected financial and operational information related to our homebuilding operations for the periods indicated:

Selected Financial and Operational Data

 

     Three Months Ended    Six Months Ended
     May 31,    May 31,
(In thousands)    2010    2009    2010    2009

Revenues:

           

East:

           

Sales of homes

   $ 219,101    214,937    357,794    393,309

Sales of land

     4,786    14,110    8,153    16,436
                     

Total East

     223,887    229,047    365,947    409,745
                     

Central:

           

Sales of homes

     100,085    91,624    165,860    153,526

Sales of land

     1,786    965    2,094    1,772
                     

Total Central

     101,871    92,589    167,954    155,298
                     

West:

           

Sales of homes

     177,612    276,506    340,143    416,996

Sales of land

     1,655    1,211    3,441    1,947
                     

Total West

     179,267    277,717    343,584    418,943
                     

Houston:

           

Sales of homes

     100,943    116,533    174,770    195,154

Sales of land

     2,343    343    4,310    2,750
                     

Total Houston

     103,286    116,876    179,080    197,904
                     

Other:

           

Sales of homes

     97,017    89,000    169,539    152,373
                     

Total Other

     97,017    89,000    169,539    152,373
                     

Total homebuilding revenues

   $ 705,328    805,229    1,226,104    1,334,263
                     

 

43


     Three Months Ended     Six Months Ended  
     May 31,     May 31,  
(In thousands)    2010     2009     2010     2009  

Operating earnings (loss):

        

East:

        

Sales of homes

   $ 23,216      (2,947   38,699      (18,784

Sales of land

     1,070      5,179      2,304      (303

Equity in earnings (loss) from unconsolidated entities

     266      (938   (553   (2,636

Other income (expense), net

     (2,524   2,714      8,059      (2,974

Other interest expense

     (6,293   (5,212   (12,251   (8,799
                          

Total East

     15,735      (1,204   36,258      (33,496
                          

Central:

        

Sales of homes

     2,482      (9,081   140      (26,072

Sales of land

     223      (446   (846   (328

Equity in loss from unconsolidated entities

     (370   (1,181   (798   (1,823

Other expense, net

     (545   (5,667   (1,411   (13,124

Other interest expense

     (2,246   (2,202   (4,788   (3,876
                          

Total Central

     (456   (18,577   (7,703   (45,223
                          

West:

        

Sales of homes

     6,289      (22,864