Market Overview

KB Home Reports 2019 First Quarter Results

Share:

Revenues Total $811.5 Million
Net Income of $30.0
Million, or $.31 Per Diluted Share

Average Community Count
Increases 10% to 244

KB Home (NYSE:KBH) today reported results for its first quarter ended
February 28, 2019.

"We made continued progress on our Returns-Focused Growth Plan in the
first quarter, which contributed to our results, including the healthy
year-over-year expansion of our gross margin," said Jeffrey Mezger,
chairman, president and chief executive officer. "With the balanced
allocation of our substantial operating cash flows since the start of
our Plan in 2016, we have fueled significant growth in our business,
measurably decreased our debt balance and reduced our shares
outstanding. We have repaid over $800 million in debt, which is
producing a tailwind to our gross margin, as we spread a lower level of
interest across a larger active inventory balance. During the first
quarter, we repaid $230 million of convertible notes, which also
meaningfully reduced our diluted share count."

"We are beginning to see healthy growth in our average community count,
which was up 10% in the first quarter," continued Mezger. "This
increase, together with a substantial number of planned openings still
to come, positions us to capitalize on demand during the spring selling
season. Although the decline in net orders during the 2018 fourth
quarter impacted our first-quarter housing revenues, we are encouraged
by improving market conditions, which we believe should enable us to
generate stronger revenues in the 2019 second half."

Three Months Ended February 28, 2019
(comparisons on a year-over-year basis)

  • Total revenues decreased 7% to $811.5 million.
  • Deliveries totaled 2,152 homes.
  • Average selling price decreased 5% to $370,900, primarily due to a
    shift in the geographic mix of homes delivered and a lower average
    selling price in the Company's West Coast region.
  • Homebuilding operating income totaled $31.3 million, compared to $44.0
    million. Homebuilding operating income margin was 3.9%, down 120 basis
    points. Excluding inventory-related charges of $3.6 million in the
    quarter and $5.0 million in the year-earlier quarter, this metric was
    4.3%, compared to 5.6%.
    • Housing gross profit margin increased to 17.1%, compared to 16.1%.
      • Housing gross profit margin excluding inventory-related
        charges improved 90 basis points to 17.6%. Adjusted housing
        gross profit margin, a metric that excludes inventory-related
        charges and the amortization of previously capitalized
        interest was 21.3%, compared to 21.4%.
      • The increase in housing gross profit margin primarily
        reflected lower amortization of previously capitalized
        interest and a change in the Company's accounting for certain
        model complex costs, partly offset by other items.
        • The Company changed the classification and timing of
          recognition of certain model complex costs due to its
          adoption of Accounting Standards Codification Topic 606,
          "Revenue from Contracts with Customers" ("ASC 606"),
          effective December 1, 2018. The change in the
          classification of such costs was from construction and
          land costs to selling, general and administrative expenses.
    • Selling, general and administrative expenses as a percentage of
      housing revenues were 13.4%, compared to a first quarter
      record-low ratio of 11.0% in 2018, mainly due to lower housing
      revenues, the above-mentioned impact of adopting ASC 606, and
      increased marketing expenses to support new community openings.
  • Total pretax income was $34.5 million, compared to $46.0 million.
  • The Company's income tax expense and effective tax rate were $4.5
    million and approximately 13%, respectively, which reflected the
    favorable impacts of a $3.3 million reversal of a deferred tax asset
    valuation allowance and $2.0 million of excess tax benefits from
    stock-based compensation, partly offset by $.8 million of other items.
    Without these items, the Company's effective tax rate would have
    approximated 26%.
    • In the 2018 first quarter, the Company's income tax expense of
      $117.3 million and effective tax rate of approximately 255%
      reflected the impact of a non-cash charge of $111.2 million due to
      the Tax Cuts and Jobs Act of 2017 ("TCJA").
    • Excluding this charge, the Company's 2018 first quarter adjusted
      income tax expense and adjusted effective tax rate were $6.1
      million and approximately 13%, respectively. The adjusted income
      tax expense and adjusted effective tax rate reflected the
      favorable impacts of $4.0 million of federal energy tax credits
      the Company earned from building energy efficient homes and $2.2
      million of excess tax benefits from stock-based compensation.
      Without these credits and benefits, the Company's adjusted
      effective tax rate in the 2018 first quarter would have
      approximated 27%.
  • Net income rose to $30.0 million and diluted earnings per share
    increased to $.31, compared to a net loss of $71.3 million, or $.82
    per diluted share, which included the above-mentioned TCJA-related
    charge.

Backlog and Net Orders (comparisons on a
year-over-year basis)

  • Net orders decreased by 109, or 4%, to 2,675, with net order value
    declining $151.0 million, or 13%, to $1.02 billion. The decreases were
    primarily attributable to the Company's West Coast region.
    • Company-wide, net orders per community averaged 3.7 per month,
      compared to 4.2 per month.
  • The cancellation rate as a percentage of gross orders was flat at 20%.
  • The number of homes in ending backlog totaled 4,631, compared to 4,972.
  • Ending backlog value of $1.66 billion decreased 16%, reflecting fewer
    homes in backlog and the lower average selling price of those homes
    primarily due to a shift in geographic mix.
  • Ending community count grew 13% to 248. Average community count
    increased 10% to 244.
    • The improvement in the Company's ending and average community
      counts reflected increases in each of its four regions. Ending
      community count growth ranged from 4% in the Company's Central
      region to 26% in its Southeast region.

Balance Sheet as of February 28, 2019
(comparisons to November 30, 2018)

  • The Company had total liquidity of $978.5 million, including cash and
    cash equivalents of $511.7 million.
  • Cash and cash equivalents decreased by $62.7 million, primarily
    reflecting the Company's repayment of all $230.0 million in aggregate
    principal amount of 1.375% convertible senior notes upon their
    February 1, 2019 maturity and cash used by operating activities,
    partly offset by $400.0 million of net proceeds from concurrent public
    senior notes offerings completed in the quarter.
    • Operating activities used net cash of $198.2 million, primarily
      for investments in inventories.
    • There were no cash borrowings outstanding under the Company's
      unsecured revolving credit facility.
  • Inventories increased by $100.9 million, or 3%, to $3.68 billion.
    • Investments in land acquisition and development totaled $384.2
      million for the 2019 first quarter, and lots owned or controlled
      increased to 54,744.
  • Notes payable increased by $143.3 million to $2.20 billion, reflecting
    the Company's concurrent public offerings of $300.0 million in
    aggregate principal amount of 6.875% senior notes due 2027 and an
    additional $100.0 million in aggregate principal amount of the
    Company's existing series of 7.625% senior notes due 2023, partly
    offset by the above-mentioned repayment of convertible senior notes.
    • Reflecting the increase in notes payable, the Company's ratio of
      debt to capital increased 120 basis points to 50.9%. The ratio of
      net debt to capital rose 270 basis points to 44.3%, but remained
      within the Company's 2019 target range of 35% to 45% under its
      Returns-Focused Growth Plan.
    • On March 8, 2019, the Company optionally redeemed the entire
      $400.0 million in aggregate principal amount of its 4.75% senior
      notes, which were scheduled to mature on May 15, 2019.

Earnings Conference Call

The conference call to discuss the Company's 2019 first quarter earnings
will be broadcast live TODAY at 2:00 p.m. Pacific Time, 5:00 p.m.
Eastern Time. To listen, please go to the Investor Relations section of
the Company's website at www.kbhome.com.

About KB Home

KB Home (NYSE:KBH) is one of the largest homebuilders in the United
States, with more than 600,000 homes delivered since our founding in
1957. We operate in 38 markets in eight states, primarily serving
first-time and first move-up homebuyers, as well as second move-up and
active adults. We are differentiated in offering customers the ability
to personalize what they value most in their home, from choosing their
lot, floor plan, and exterior, to selecting design and décor choices in
our KB Home Studios. In addition, our industry leadership in
sustainability helps to lower the cost of homeownership for our buyers
compared to a typical resale home. We take a broad approach to
sustainability, encompassing energy efficiency, water conservation,
healthier indoor environments, smart home capabilities and waste
reduction. KB Home is the first national builder to have earned awards
under all of the U.S. EPA's homebuilder programs — ENERGY STAR®,
WaterSense® and Indoor airPLUS®. We invite you to learn more about KB
Home by visiting www.kbhome.com,
calling 888-KB-HOMES, or connecting with us on Facebook.com/KBHome
or Twitter.com/KBHome.

Forward-Looking and Cautionary Statements

Certain matters discussed in this press release, including any
statements that are predictive in nature or concern future market and
economic conditions, business and prospects, our future financial and
operational performance, or our future actions and their expected
results are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking
statements are based on current expectations and projections about
future events and are not guarantees of future performance. We do not
have a specific policy or intent of updating or revising forward-looking
statements. Actual events and results may differ materially from those
expressed or forecasted in forward-looking statements due to a number of
factors. The most important risk factors that could cause our actual
performance and future events and actions to differ materially from such
forward-looking statements include, but are not limited to the
following: general economic, employment and business conditions;
population growth, household formations and demographic trends;
conditions in the capital, credit and financial markets; our ability to
access external financing sources and raise capital through the issuance
of common stock, debt or other securities, and/or project financing, on
favorable terms; the execution of any share repurchases pursuant to our
board of directors' authorization; material and trade costs and
availability; changes in interest rates; our debt level, including our
ratio of debt to capital, and our ability to adjust our debt level and
maturity schedule; our compliance with the terms of our revolving credit
facility; volatility in the market price of our common stock; weak or
declining consumer confidence, either generally or specifically with
respect to purchasing homes; competition from other sellers of new and
resale homes; weather events, significant natural disasters and other
climate and environmental factors; any failure of lawmakers to agree on
a budget or appropriation legislation to fund the federal government's
operations, and financial markets' and businesses' reactions to that
failure; government actions, policies, programs and regulations directed
at or affecting the housing market (including the TCJA, the Dodd-Frank
Act, tax benefits associated with purchasing and owning a home, and the
standards, fees and size limits applicable to the purchase or insuring
of mortgage loans by government-sponsored enterprises and government
agencies), the homebuilding industry, or construction activities;
changes in existing tax laws or enacted corporate income tax rates,
including those resulting from regulatory guidance and interpretations
issued with respect to the TCJA; changes in U.S. trade policies,
including the imposition of tariffs and duties on homebuilding materials
and products, and related trade disputes with and retaliatory measures
taken by other countries; the availability and cost of land in desirable
areas; our warranty claims experience with respect to homes previously
delivered and actual warranty costs incurred; costs and/or charges
arising from regulatory compliance requirements or from legal, arbitral
or regulatory proceedings, investigations, claims or settlements,
including unfavorable outcomes in any such matters resulting in actual
or potential monetary damage awards, penalties, fines or other direct or
indirect payments, or injunctions, consent decrees or other voluntary or
involuntary restrictions or adjustments to our business operations or
practices that are beyond our current expectations and/or accruals; our
ability to use/realize the net deferred tax assets we have generated;
our ability to successfully implement our current and planned strategies
and initiatives related to our product, geographic and market
positioning, gaining share and scale in our served markets and in
entering into new markets; our operational and investment concentration
in markets in California; consumer interest in our new home communities
and products, particularly from first-time homebuyers and higher-income
consumers; our ability to generate orders and convert our backlog of
orders to home deliveries and revenues, particularly in key markets in
California; our ability to successfully implement our Returns-Focused
Growth Plan and achieve the associated revenue, margin, profitability,
cash flow, community reactivation, land sales, business growth, asset
efficiency, return on invested capital, return on equity, net
debt-to-capital ratio and other financial and operational targets and
objectives; income tax expense volatility associated with stock-based
compensation; the ability of our homebuyers to obtain residential
mortgage loans and mortgage banking services; the performance of
mortgage lenders to our homebuyers; the performance of KBHS Home Loans,
LLC, our mortgage banking joint venture with Stearns Lending, LLC;
information technology failures and data security breaches; and other
events outside of our control. Please see our periodic reports and other
filings with the Securities and Exchange Commission for a further
discussion of these and other risks and uncertainties applicable to our
business.

KB HOME

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended February 28, 2019 and 2018

(In Thousands, Except Per Share Amounts - Unaudited)

 
Three Months Ended February 28,
2019   2018
Total revenues $ 811,483   $ 871,623  
Homebuilding:
Revenues $ 808,788 $ 869,205
Costs and expenses (777,449 ) (825,202 )
Operating income 31,339 44,003
Interest income 1,105 1,003
Equity in loss of unconsolidated joint ventures (406 ) (845 )
Homebuilding pretax income 32,038   44,161  
Financial services:
Revenues 2,695 2,418
Expenses (1,024 ) (953 )
Equity in income of unconsolidated joint ventures 802   419  
Financial services pretax income 2,473   1,884  
Total pretax income 34,511 46,045
Income tax expense (4,500 ) (117,300 )
Net income (loss) $ 30,011   $ (71,255 )
Earnings (loss) per share:
Basic $ .34   $ (.82 )
Diluted $ .31   $ (.82 )
Weighted average shares outstanding:
Basic 86,972   87,155  
Diluted 96,962   87,155  
 

KB HOME

CONSOLIDATED BALANCE SHEETS

(In Thousands - Unaudited)

   
February 28,
2019
November 30,
2018
Assets
Homebuilding:
Cash and cash equivalents $ 511,690 $ 574,359
Receivables 313,609 292,830
Inventories 3,683,763 3,582,839
Investments in unconsolidated joint ventures 57,134 61,960
Property and equipment, net 55,330 24,283
Deferred tax assets, net 433,295 441,820
Other assets 89,560   83,100
5,144,381 5,061,191
Financial services 29,275   12,380
Total assets $ 5,173,656   $ 5,073,571
 
Liabilities and stockholders' equity
Homebuilding:
Accounts payable $ 209,015 $ 258,045
Accrued expenses and other liabilities 631,381 666,268
Notes payable 2,203,589   2,060,263
3,043,985 2,984,576
Financial services 1,174 1,495
Stockholders' equity 2,128,497   2,087,500
Total liabilities and stockholders' equity $ 5,173,656   $ 5,073,571
 

KB HOME

SUPPLEMENTAL INFORMATION

For the Three Months Ended February 28, 2019 and 2018

(In Thousands, Except Average Selling Price - Unaudited)

   
Three Months Ended February 28,
2019 2018
Homebuilding revenues:
Housing $ 798,171 $ 866,540
Land 10,617   2,665  
Total $ 808,788   $ 869,205  
 
 
Homebuilding costs and expenses:
Construction and land costs
Housing $ 661,328 $ 727,080
Land 9,527   2,398  
Subtotal 670,855 729,478
Selling, general and administrative expenses 106,594   95,724  
Total $ 777,449   $ 825,202  
 
 
Interest expense:
Interest incurred $ 34,788 $ 39,944
Interest capitalized (34,788 ) (39,944 )
Total $   $  
 
 
Other information:
Depreciation and amortization $ 7,914 $ 2,180
Amortization of previously capitalized interest 30,547   42,350  
 
 
Average selling price:
West Coast $ 607,500 $ 652,800
Southwest 326,400 303,800
Central 285,000 294,700
Southeast 298,100   278,200  
Total $ 370,900   $ 389,800  
 
KB HOME

SUPPLEMENTAL INFORMATION

For the Three Months Ended February 28, 2019 and 2018

(Dollars in Thousands - Unaudited)

   
Three Months Ended February 28,
2019   2018
Homes delivered:
West Coast 497 592
Southwest 483 500
Central 824 821
Southeast 348   310
Total 2,152   2,223
 
 
Net orders:
West Coast 699 807
Southwest 533 568
Central 926 996
Southeast 517   413
Total 2,675   2,784
 
 
Net order value:
West Coast $ 420,461 $ 580,422
Southwest 170,839 176,942
Central 284,266 299,928
Southeast 146,521   115,800
Total $ 1,022,087   $ 1,173,092
 
 
 
February 28, 2019 February 28, 2018
Homes Value Homes Value
Backlog data:
West Coast 917 $ 533,076 1,097 $ 800,065
Southwest 976 315,797 1,156 352,560
Central 1,816 537,351 1,957 599,690
Southeast 922   272,060   762   214,368
Total 4,631   $ 1,658,284   4,972   $ 1,966,683
 

KB HOME
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(In
Thousands, Except Percentages and Per Share Amounts - Unaudited)

This press release contains, and Company management's discussion of the
results presented in this press release may include, information about
the Company's adjusted housing gross profit margin, adjusted income tax
expense, adjusted net income, adjusted diluted earnings per share,
adjusted effective tax rate and ratio of net debt to capital, none of
which are calculated in accordance with generally accepted accounting
principles ("GAAP"). The Company believes these non-GAAP financial
measures are relevant and useful to investors in understanding its
operations and the leverage employed in its operations, and may be
helpful in comparing the Company with other companies in the
homebuilding industry to the extent they provide similar information.
However, because they are not calculated in accordance with GAAP, these
non-GAAP financial measures may not be completely comparable to other
companies in the homebuilding industry and, thus, should not be
considered in isolation or as an alternative to operating performance
and/or financial measures prescribed by GAAP. Rather, these non-GAAP
financial measures should be used to supplement their respective most
directly comparable GAAP financial measures in order to provide a
greater understanding of the factors and trends affecting the Company's
operations.

Adjusted Housing Gross Profit Margin

The following table reconciles the Company's housing gross profit margin
calculated in accordance with GAAP to the non-GAAP financial measure of
the Company's adjusted housing gross profit margin:

  Three Months Ended February 28,
2019   2018
Housing revenues $ 798,171 $ 866,540
Housing construction and land costs (661,328 ) (727,080 )
Housing gross profits 136,843 139,460
Add: Inventory-related charges (a) 3,555   4,985  
Housing gross profits excluding inventory-related charges 140,398 144,445
Add: Amortization of previously capitalized interest (b) 29,986   41,369  
Adjusted housing gross profits $ 170,384   $ 185,814  
Housing gross profit margin 17.1 % 16.1 %
Housing gross profit margin excluding inventory-related charges 17.6 % 16.7 %
Adjusted housing gross profit margin 21.3 % 21.4 %
(a)   Represents inventory impairment and land option contract abandonment
charges associated with housing operations.
(b) Represents the amortization of previously capitalized interest
associated with housing operations.

Adjusted housing gross profit margin is a non-GAAP financial measure,
which the Company calculates by dividing housing revenues less housing
construction and land costs excluding (1) housing inventory impairment
and land option contract abandonment charges (as applicable) recorded
during a given period and (2) amortization of previously capitalized
interest associated with housing operations, by housing revenues. The
most directly comparable GAAP financial measure is housing gross profit
margin. The Company believes adjusted housing gross profit margin is a
relevant and useful financial measure to investors in evaluating the
Company's performance as it measures the gross profits the Company
generated specifically on the homes delivered during a given period.
This non-GAAP financial measure isolates the impact that housing
inventory impairment and land option contract abandonment charges, and
the amortization of previously capitalized interest associated with
housing operations, have on housing gross profit margins, and allows
investors to make comparisons with the Company's competitors that adjust
housing gross profit margins in a similar manner. The Company also
believes investors will find adjusted housing gross profit margin
relevant and useful because it represents a profitability measure that
may be compared to a prior period without regard to variability of
housing inventory impairment and land option contract abandonment
charges, and amortization of previously capitalized interest associated
with housing operations. This financial measure assists management in
making strategic decisions regarding community location and product mix,
product pricing and construction pace.

Adjusted Income Tax Expense, Adjusted Net
Income, Adjusted Diluted Earnings Per Share and Adjusted Effective Tax
Rate

The following table reconciles the Company's income tax expense, net
income (loss), diluted earnings (loss) per share and effective tax rate
calculated in accordance with GAAP to the non-GAAP financial measures of
adjusted income tax expense, adjusted net income, adjusted diluted
earnings per share and adjusted effective tax rate, respectively:

  Three Months Ended February 28,
2019   2018
As Reported As Reported   TCJA Adjustment   As Adjusted
Total pretax income $ 34,511 $ 46,045 $ $ 46,045
Income tax expense (a) (4,500 ) (117,300 ) 111,200   (6,100 )
Net income (loss) $ 30,011   $ (71,255 ) $ 111,200   $ 39,945  
Diluted earnings (loss) per share $ .31   $ (.82 ) $ .40  
Weighted average shares outstanding — diluted 96,962   87,155   101,401  
Effective tax rate (a) 13 % 255 % 13 %
(a)   For the three months ended February 28, 2019, income tax expense and
the related effective tax rate included the favorable impacts of a
$3.3 million reversal of a deferred tax asset valuation allowance
and $2.0 million of excess tax benefits from stock-based
compensation, partly offset by $.8 million of other items. For the
three months ended February 28, 2018, income tax expense and
adjusted income tax expense, as well as the related effective tax
rate and adjusted effective tax rate, included the favorable impacts
of $4.0 million of federal energy tax credits the Company earned
from building energy efficient homes and $2.2 million of excess tax
benefits from stock-based compensation.

The Company's adjusted income tax expense, adjusted net income, adjusted
diluted earnings per share and adjusted effective tax rate are non-GAAP
financial measures, which the Company calculates by excluding a non-cash
charge of $111.2 million recorded in the 2018 first quarter from its
reported income tax expense, net loss, diluted loss per share and
effective tax rate, respectively. This charge was primarily due to the
Company's accounting re-measurement of its deferred tax assets based on
the reduction in the federal corporate income tax rate from 35% to 21%,
effective January 1, 2018, under the TCJA. The most directly comparable
GAAP financial measures are the Company's income tax expense, net income
(loss), diluted earnings (loss) per share and effective tax rate. The
Company believes these non-GAAP measures are meaningful to investors as
they allow for an evaluation of the Company's operating results without
the impact of the TCJA-related charge.

Ratio of Net Debt to Capital

The following table reconciles the Company's ratio of debt to capital
calculated in accordance with GAAP to the non-GAAP financial measure of
the Company's ratio of net debt to capital:

  February 28,
2019
  November 30,
2018
Notes payable $ 2,203,589 $ 2,060,263
Stockholders' equity 2,128,497   2,087,500  
Total capital $ 4,332,086   $ 4,147,763  
Ratio of debt to capital 50.9 % 49.7 %
 
 
Notes payable $ 2,203,589 $ 2,060,263
Less: Cash and cash equivalents (511,690 ) (574,359 )
Net debt 1,691,899 1,485,904
Stockholders' equity 2,128,497   2,087,500  
Total capital $ 3,820,396   $ 3,573,404  
Ratio of net debt to capital 44.3 % 41.6 %

The ratio of net debt to capital is a non-GAAP financial measure, which
the Company calculates by dividing notes payable, net of homebuilding
cash and cash equivalents, by capital (notes payable, net of
homebuilding cash and cash equivalents, plus stockholders' equity). The
most directly comparable GAAP financial measure is the ratio of debt to
capital. The Company believes the ratio of net debt to capital is a
relevant and useful financial measure to investors in understanding the
leverage employed in the Company's operations.

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