Revenues Total $811.5 MillionNet
Income of $30.0 Million, or $.31 Per Diluted ShareAverage
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 HOMERECONCILIATION 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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190326005375/en/
Jill Peters, Investor Relations Contact(310) 893-7456 or
jpeters@kbhome.comCara Kane, Media Contact(321) 299-6844 or
ckane@kbhome.com
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