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TheStreet Open House

KB Home Reports 2013 Second Quarter Results

Stock quotes in this article: KBH

KB Home (NYSE: KBH), one of the nation’s largest and most recognized homebuilders, today reported results for its second quarter ended May 31, 2013. Highlights and developments include the following:

Three Months Ended May 31, 2013

  • Revenues increased 73% to $524.4 million from $302.9 million for the year-earlier quarter, reflecting an increase in the number of homes delivered and higher average selling prices across all of the Company’s homebuilding regions.
    • Homes delivered rose 39% from the year-earlier quarter to 1,797 homes, the seventh consecutive quarter of year-over-year growth.
    • The Company’s overall average selling price of $290,400 increased $57,400, or 25%, from the second quarter of 2012, marking the highest second quarter average selling price since 2006 and the twelfth consecutive quarter of year-over-year improvement.
      • The higher average selling price reflected the Company’s ongoing strategy of repositioning its operations into higher-performing choice locations in land-constrained growth markets that feature greater demand for larger homes, and continued emphasis on pricing discipline to drive profitability. It also resulted from a greater percentage of homes delivered from the Company’s West Coast homebuilding region, where the Company has prioritized its investments, as well as the overall market increases in home prices.
      • Compared to the year-earlier quarter, average selling prices increased 15% in each of the Company’s West Coast and Central homebuilding regions, 26% in the Southwest homebuilding region and 16% in the Southeast homebuilding region.
  • Homebuilding operating income of $8.7 million improved by $24.2 million from an operating loss of $15.5 million for the year-earlier quarter. As a percentage of homebuilding revenues, the Company’s homebuilding operating income improved by 680 basis points to 1.7%, compared to the year-earlier operating loss.
    • The Company produced a second quarter operating profit for the first time since 2006, and has now reported operating income for the past four quarters.
    • Operating income for the current quarter included a $15.9 million charge associated with water intrusion-related repairs at certain of the Company’s communities in central and southwest Florida. Excluding this charge, the Company had operating income of $24.6 million for the quarter.
      • The housing gross profit margin was 15.1%, compared to 15.8% in the year-earlier quarter. The current quarter housing gross profit margin included the water intrusion-related charge and land option contract abandonment charges of $.3 million.
        • In the second quarter of 2012, the housing gross profit margin included favorable warranty adjustments of $11.2 million and insurance recoveries of $10.0 million, which were partly offset by inventory impairment charges of $9.9 million.
        • The Company’s adjusted housing gross profit margin, which excludes the above-mentioned charges and items, improved by 610 basis points to 18.2% for the current quarter from 12.1% for the year-earlier quarter.
        • The year-over-year improvement in the Company’s adjusted housing gross profit margin was primarily due to the Company’s ongoing execution of strategies targeting growth and profitability, including its investments in higher-performing choice locations, and actions to optimize prices for its homes and generate greater operating efficiencies.
      • Compared to the year-earlier quarter, selling, general and administrative expenses as a percentage of housing revenues improved by 760 basis points to 13.4%, the Company’s lowest second-quarter level since 2006.
        • Reflecting higher homebuilding revenues, the Company’s selling, general and administrative expenses increased to $70.1 million in the current quarter from $63.1 million in the same quarter a year ago. The Company generated homebuilding revenue growth of $221.2 million compared to the year-earlier quarter with only a limited increase in selling, general and administrative expenses. In addition, the 2012 second quarter included a charge of $8.8 million associated with a court judgment on a contract dispute matter that the Company is appealing.
        • The improved selling, general and administrative expense ratio reflected both higher revenues and the Company’s continued focus on containing and leveraging its overhead.
  • Interest expense of $14.5 million was flat with the year-earlier quarter.
  • The Company’s financial services operations generated pretax income of $2.0 million, compared to $1.5 million for the year-earlier quarter. In January, the Company formed a mortgage banking company — Home Community Mortgage — in partnership with its preferred mortgage lender, Nationstar Mortgage LLC, that is expected to begin offering mortgage banking services to the Company’s homebuyers in the latter part of the year.
  • The Company’s net loss improved by $21.1 million, or 88%, to $3.0 million, compared to a net loss of $24.1 million in the second quarter of 2012. On a diluted per share basis, the Company’s net loss also improved substantially to $.04 from $.31.
    • Excluding the $15.9 million water intrusion-related charge, the Company generated net income of $12.9 million for the 2013 second quarter versus the net loss reported.

Six Months Ended May 31, 2013

  • Revenues totaled $929.6 million, up 67% from $557.4 million for the year-earlier period.
  • Homes delivered increased 35% to 3,282, up from 2,440 in the six months ended May 31, 2012.
  • The overall average selling price of $281,700 was up 24% year over year from $226,400 in 2012.
  • Homebuilding operating income totaled $9.1 million, a significant improvement from an operating loss of $46.7 million for the corresponding period of 2012.
  • The Company’s net loss of $15.4 million, or $.19 per diluted share, narrowed by $54.5 million from the net loss of $69.9 million, or $.91 per diluted share, for the six months ended May 31, 2012.

Backlog and Net Orders

  • Potential future housing revenues in backlog at May 31, 2013 increased to $826.6 million, up 19% from $693.4 million at May 31, 2012.
    • The number of homes in the Company’s backlog rose 6% to 3,128 at May 31, 2013 from 2,962 at May 31, 2012.
  • The overall value of second quarter net orders was $639.6 million, up 27% from $503.1 million in the year-earlier quarter.
    • Each of the Company’s homebuilding regions generated a year-over-year increase in net order value, ranging from 10% in the Southwest region to 46% in the Southeast region.
  • The Company generated 2,162 net orders in the second quarter of 2013, up 6% from 2,049 net orders in the year-earlier quarter.
    • The year-over-year increase in net orders reflected growth in the Company’s Central and Southeast homebuilding regions of 8% and 31%, respectively, partly offset by lower net orders in its West Coast and Southwest homebuilding regions.
    • The second quarter cancellation rate as a percentage of gross orders was 27% in 2013, essentially flat with 26% in 2012. As a percentage of beginning backlog, the second quarter cancellation rate was 29% in 2013 and 32% in 2012.

Balance Sheet

  • Cash, cash equivalents and restricted cash totaled $580.9 million at May 31, 2013, compared to $668.7 million at February 28, 2013 and $567.1 million at November 30, 2012. The Company’s cash, cash equivalents and restricted cash at May 31, 2013 decreased by $87.8 million from the end of the 2013 first quarter, largely due to inventory growth of $91.6 million during the same period.
    • The Company’s unrestricted cash and cash equivalents decreased by $85.4 million to $538.6 million from $624.0 million at February 28, 2013.
    • Reflecting land and land development investment activity during the quarter, the Company’s operating activities used net cash of $56.6 million, compared to $19.7 million provided in the second quarter of 2012.
  • Inventories increased to $2.03 billion at May 31, 2013 from $1.71 billion at November 30, 2012.
    • The Company’s land and land development investments rose to $574.7 million for the six months ended May 31, 2013 from $195.5 million for the year-earlier period, reflecting strategic investments made in each of the Company’s homebuilding regions to promote profitable growth.
    • The Company owned or controlled 52,725 lots at May 31, 2013, an increase of 18% from 44,752 lots owned or controlled at November 30, 2012.
  • The Company’s debt balance of $1.94 billion at May 31, 2013 increased from $1.72 billion at November 30, 2012, mainly due to the public issuance of $230 million of convertible senior notes in the 2013 first quarter.
  • On March 12, 2013, the Company entered into a $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. The Company had no borrowings outstanding under its unsecured revolving credit facility as of May 31, 2013.
  • Stockholders’ equity increased to $470.8 million at May 31, 2013 from $376.8 million at November 30, 2012, mainly reflecting the Company’s public issuance of 6,325,000 shares of its common stock in the first quarter of 2013.

Management Comments

“Our strong second quarter results demonstrate the successful execution of our business strategies and improved operating leverage,” said Jeffrey Mezger, president and chief executive officer. “In particular, our ongoing investment strategy to reposition our operations continues to produce favorable returns. Combined with our community placement and product initiatives, our actions to optimize pricing and margins while maintaining a healthy pace of net orders per community have generated substantial increases in our net order value, average selling price, revenues and operating income, and significantly expanded our housing gross margin. KB Home is well positioned in some of the strongest housing markets across the country. With the limited supply of homes available for sale and robust demand in many of our served markets, we have deliberately emphasized price and value creation over sales pace to effectively optimize our land assets. Reflecting these strategic priorities, our overall net order unit growth moderated, while our net order value increased significantly from a year ago.”

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