KB Home Reports Second Quarter 2012 Results

KB Home (NYSE: KBH), one of America’s premier homebuilders, today reported results for its second quarter ended May 31, 2012. Highlights and developments include the following:

Three Months Ended May 31, 2012

• Revenues totaled $302.9 million, up 11% from $271.7 million for the second quarter of 2011, reflecting an increase in the number of homes delivered and a higher average selling price.
  • Three of the Company’s four homebuilding regions posted year-over-year growth, with revenues up 24% in the West Coast region, 5% in the Southeast region, and 4% in the Central region.
  • The Company delivered 1,290 homes, up 2% from the year-earlier quarter, with increases of 13% and 5% in the Company’s Central and Southeast regions, respectively, partly offset by decreases in the West Coast and Southwest regions.
  • The average selling price of $233,000 was 9% higher than the $213,400 for the year-earlier quarter, reflecting notable increases of 33% in the West Coast region and 14% in the Southwest region. These increases were partially offset by decreases of 8% and 1% in the Central and Southeast regions, respectively.
• The housing gross profit margin improved to 16.9% from 7.3% in the second quarter of 2011 and 9.7% in the first quarter of 2012.
  • The current quarter housing gross profit margin reflected favorable warranty adjustments of $11.2 million, resulting from trends in the Company’s claims experience, and an insurance recovery of $10.0 million for previously incurred expenses relating to construction defects, including repair costs for allegedly defective drywall material manufactured in China.
  • Excluding inventory impairment charges of $9.9 million in the current quarter and inventory impairment and land option contract abandonment charges of $20.6 million in the year-earlier quarter, the second quarter housing gross profit margin was 20.3% in 2012 and 14.9% in 2011.
• Selling, general and administrative expenses totaled $66.5 million, compared to $62.5 million in the year-earlier quarter. The increase reflected a charge of $8.8 million associated with an unfavorable court decision in a Southern California contract dispute that the Company is appealing, partly offset by cost-saving initiatives.
  • Selling, general and administrative expenses as a percentage of housing revenues improved to 22.1% from 23.2% in the year-earlier quarter. Excluding the $8.8 million charge, selling, general and administrative expenses as a percentage of housing revenues were 19.2% in the second quarter of 2012.
• The homebuilding operating loss narrowed substantially to $15.5 million from $57.5 million in the year-earlier quarter.
  • The current quarter operating loss included the favorable warranty adjustments and insurance recovery, which were mostly offset by the inventory impairment and court decision charges. The Company’s operating loss in the year-earlier quarter included a loss on loan guaranty of $14.6 million related to a former joint venture investment, in addition to the inventory impairment and land option contract abandonment charges.
  • The homebuilding operating loss as a percentage of homebuilding revenues improved to 5.2%, from 21.3% in the second quarter of 2011 and 12.4% in the first quarter of 2012.
• The Company’s net loss of $24.1 million, or $.31 per diluted share, narrowed significantly from the net loss of $68.5 million, or $.89 per diluted share, in the year-earlier quarter. The current quarter net loss included an income tax benefit of $4.5 million, which primarily resulted from a state income tax refund. In the year-earlier quarter, the Company had an income tax benefit of $.3 million.

Six Months Ended May 31, 2012

• Homes delivered increased 10% to 2,440, up from 2,214 homes delivered in the year-earlier period.
• The average selling price of $226,400 was up 8% from $210,100 for the corresponding period of 2011.
• Revenues totaled $557.4 million, up 19% from $468.7 million for the year-earlier period.
• The Company’s net loss of $69.9 million, or $.91 per diluted share, was greatly improved from the net loss of $183.0 million, or $2.38 per diluted share, in the first six months of 2011.

Backlog and Net Orders

• The Company had a backlog of 2,962 homes, representing potential future housing revenues of $693.4 million, as of May 31, 2012, compared to a backlog of 2,422 homes, representing potential future housing revenues of $501.5 million, as of May 31, 2011.
  • Backlog homes and value at May 31, 2012 increased 22% and 38%, respectively, year over year, with three of the Company’s four regions posting year-over-year increases in backlog homes and value.
• The value of net orders generated in the second quarter of 2012 was $503.1 million, up 18% from $427.5 million in the year-earlier quarter.
  • Three of the Company’s regions reported increases in net order value, with the West Coast region up 31% to $235.3 million, the Central region up 12% to $155.5 million, and the Southeast region up 6% to $67.7 million.
• The value of net orders generated in the first six months of 2012 increased 9% to $780.6 million, up from $716.3 million in the prior year period.
• Net orders rose to 2,049 in the second quarter of 2012, up 3% from 1,998 in the year-earlier quarter, reflecting increases in the Company’s West Coast and Central regions. These increases were partly offset by decreases in the Southwest and Southeast regions, reflecting the Company’s ongoing strategic repositioning of its operations in these two regions.
  • Net orders in the current quarter were up 71% from the first quarter of 2012.
  • The cancellation rate as a percentage of gross orders was 26% in the current quarter, compared to 25% in the year-earlier quarter and 36% in the first quarter of 2012. As a percentage of beginning backlog, the cancellation rate was 32% in the second quarter of 2012 and 39% in the second quarter of 2011.

Balance Sheet

• Total cash and cash equivalents of $377.4 million at May 31, 2012 included unrestricted cash of $314.3 million. At February 29, 2012, cash and cash equivalents totaled $368.1 million, including unrestricted cash of $304.2 million.
  • The Company generated $19.7 million of positive net cash flow from operating activities in the 2012 second quarter, compared to $109.6 million of net cash used by operating activities in the first quarter of 2012.
• Inventories at May 31, 2012 were $1.73 billion, comparable to the balance at November 30, 2011.
  • Land and land development spending totaled $195.5 million in the first six months of 2012, compared to $302.8 million in the year-earlier period. The majority of the Company’s investments in land and land development in both periods were made in California and Texas.
  • The Company owned and controlled 44,695 lots as of May 31, 2012, an increase of 11% from 40,170 lots owned and controlled at November 30, 2011.

• The Company’s debt balance of $1.58 billion at May 31, 2012 remained level compared to November 30, 2011.

Financial Services

The operational transition to Nationstar Mortgage LLC (“Nationstar”) as the Company’s preferred mortgage lender is progressing as planned. Nationstar began accepting new loan applications from the Company’s homebuyers on May 1, 2012. The Company expects its alliance with Nationstar to result in improved mortgage origination execution for its homebuyers and, in turn, a more predictable business flow as the transition gains momentum. Nationstar is one of the country’s leading non-bank mortgage servicers and a lender that will offer a wide array of financing options and mortgage loan products to the Company's homebuyers at all of the Company’s communities nationwide.

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