Market Overview

KB Home Reports 2019 First Quarter Results


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

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

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,
calling 888-KB-HOMES, or connecting with us on

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



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  
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:
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