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KB Home (NYSE: KBH), one of the nation’s largest and most recognized homebuilders, today reported results for its first quarter ended February 28, 2013. Highlights and developments include the following:
Three Months Ended February 28, 2013
Revenues increased 59% to $405.2 million from $254.6 million for the first quarter of 2012 as a result of an increase in the number of homes delivered and a higher average selling price. Compared to the year-earlier quarter, revenues were up across all of the Company’s homebuilding regions.
The Company delivered 1,485 homes, up 29% from the first quarter of 2012, reflecting increases in three of its four homebuilding regions.
The overall average selling price of $271,300 was $52,300, or 24%, higher than the year-earlier quarter, marking the Company’s 11th consecutive quarter of year-over-year improvement, and its highest first-quarter average selling price since 2006.
The higher average selling price in the current quarter reflected, among other things, the Company’s ongoing strategy of repositioning its operations to serve its core first-time and first move-up homebuyers in higher-performing choice locations in land-constrained growth markets that feature higher household incomes and greater demand for larger homes and more design options, as well as generally rising home prices.
Average selling prices were higher in all four of the Company’s homebuilding regions, with year-over-year increases ranging from 13% in the Central region to 22% in the Southwest region.
Marking the third consecutive quarter that the Company has generated homebuilding operating income, and the first time it has posted first-quarter operating income since 2007, the Company produced operating income of $.5 million for the current quarter, a $31.6 million improvement from an operating loss of $31.1 million for the year-earlier quarter.
As a percentage of homebuilding revenues, the Company’s homebuilding operating income improved 12.5 percentage points from an operating loss in the first quarter of 2012.
The housing gross profit margin improved by 680 basis points to 14.8% from 8.0% in the year-earlier quarter. There were no inventory impairment charges in the 2013 first quarter, compared to $6.6 million of such charges a year ago.
The current quarter housing gross profit margin improved by 420 basis points from the 2012 first quarter housing gross profit margin, excluding the inventory impairment charges, of 10.6%.
The year-over-year improvement largely reflects the Company’s ongoing strategic actions targeting growth and profitability, which helped to drive higher revenues, reduce homebuyer closing cost allowances and generate greater operating efficiencies.
Reflecting higher homebuilding revenues, the Company’s selling, general and administrative expenses increased to $59.1 million in the current quarter from $51.2 million in the same quarter a year ago. However, as a percentage of housing revenues, these expenses improved by 570 basis points to 14.7%.
The improved selling, general and administrative expense percentage reflected increased delivery volume and higher average selling prices, along with the Company’s focus on containing and leveraging its overhead costs.
The Company’s selling, general and administrative expense percentage was at its lowest first-quarter level since 2007.
Interest expense totaled $15.2 million, compared to $16.3 million in the year-earlier quarter. In the first quarter of 2012, interest expense included a $2.0 million loss on the early extinguishment of debt.
In the first quarter of 2013, the Company’s financial services operations generated pretax income of $2.7 million, compared to $2.0 million in the year-earlier quarter. In January, the Company in partnership with Nationstar Mortgage LLC, its preferred mortgage lender, formed a mortgage banking company that is expected to begin offering mortgage banking services to the Company’s homebuyers in the latter part of the year.
The Company’s current quarter net loss narrowed by $33.3 million, or 73%, to $12.5 million, compared to a net loss of $45.8 million in first quarter of 2012. On a per share basis, the Company’s net loss result also improved significantly to $.16 from $.59 in the year-earlier quarter.
Effective December 1, 2012, the Company elected to reclassify closing cost allowances it gives to certain homebuyers from selling, general and administrative expenses to construction and land costs in its consolidated statements of operations in order to be more consistent with the practice of other public homebuilders. This had the effect of decreasing both the Company’s housing gross profits and selling, general and administrative expenses by $2.1 million and $4.4 million for the three months ended February 28, 2013 and February 29, 2012, respectively, which represented .5% and 1.7% of housing revenues, respectively. The reclassification had no impact on consolidated operating income (loss) or net income (loss) amounts previously reported. All prior period amounts have been reclassified to conform to the 2013 presentation.
Backlog and Net Orders
Potential future housing revenues in backlog at February 28, 2013 increased to $703.9 million, up 53% from $460.0 million at February 29, 2012.
The number of homes in the Company’s backlog rose 25% to 2,763 at February 28, 2013 from 2,203 at February 29, 2012.
The overall value of first quarter net orders was $506.8 million, up 83% from $277.5 million in the year-earlier quarter.
Each of the Company’s four homebuilding regions generated a year-over-year increase in net order value, ranging from 41% in the Central region to 133% in the West Coast region.
Net orders rose 40% to 1,671 in the first quarter of 2013, up from 1,197 in the year-earlier quarter.
The year-over-year increase in net orders reflected double-digit growth in each of the Company’s homebuilding regions, with increases ranging from 19% in the Central region to 83% in the West Coast region.
The first quarter cancellation rate as a percentage of gross orders improved to 32% in 2013 from 36% in 2012. As a percentage of beginning backlog, the first quarter cancellation rate was 30% in 2013 and 31% in 2012.
Cash, cash equivalents and restricted cash totaled $668.7 million at February 28, 2013, up $101.6 million from $567.1 million at November 30, 2012.
The Company’s unrestricted cash and cash equivalents increased by $99.2 million to $624.0 million from $524.8 million at November 30, 2012.
The higher cash balance at February 28, 2013 was primarily due to the capital markets transactions completed in the current quarter, which generated total net proceeds of $332.9 million, as described below.
In the current quarter, the Company’s operating activities used net cash of $211.0 million, up from $109.6 million in the first quarter of 2012, largely due to investments in land and land development that drove inventories higher in the first quarter of 2013 compared to the 2012 year-end level.
Inventories totaled $1.94 billion at February 28, 2013 and $1.71 billion at November 30, 2012.
The Company’s land and land development investments totaled $344.9 million for the three months ended February 28, 2013, compared to $112.6 million for the prior-year quarter. The Company made strategic investments in each of its homebuilding regions in the current quarter, with the majority made in California, a key driver of the Company’s improving results.
The Company owned or controlled 47,312 lots at February 28, 2013, an increase of 6% from 44,752 lots owned or controlled at November 30, 2012.
The Company’s debt balance of $1.96 billion at February 28, 2013 increased from $1.72 billion at November 30, 2012, reflecting the public issuance of $230 million in aggregate principal amount of 1.375% convertible senior notes due 2019, which generated net cash proceeds of $223.1 million.
The Company’s next scheduled debt maturity is in 2014, when the remaining $76.0 million of its 5 3/4% senior notes become due.
On March 12, 2013, the Company entered into a new $200 million unsecured revolving credit facility with a syndicate of financial institutions. The facility contains an accordion feature under which the aggregate commitment may be increased to up to $300 million, subject to certain conditions and the availability of additional bank commitments. The new facility supports the Company’s capital structure by providing an additional source of readily accessible liquidity. To date, the Company has not made any borrowings under this facility.
Stockholders’ equity increased to $473.1 million at February 28, 2013 from $376.8 million at November 30, 2012, largely due to the Company’s public issuance of 6,325,000 shares of its common stock on January 29, 2013, which generated net cash proceeds of $109.8 million.
“Our strategies targeting growth and profitability are working as evidenced by our significantly improved financial and operational results in the first quarter,” said Jeffrey Mezger, president and chief executive officer. “Our revenues grew by 59% from a year ago, driven by both higher deliveries and increased pricing power in our served markets, reflecting the success of our land repositioning initiatives and a shift in consumer demand to larger homes. Our revenue growth, combined with our actions to generate greater operating efficiencies and reduce sales incentives, increased our operating margin significantly and produced substantially better bottom line results. We also experienced robust net order growth and ended the quarter with our backlog value up 53% from a year ago. These results, in combination with our current strategic growth plans, the strengthening recovery of housing markets, low mortgage interest rates and firming consumer confidence, reinforce our optimism for the remainder of the year.”