KB Home Fiscal Q3 Earnings Exceed Expectations

KB Home (NYSE: KBH), Los Angeles, on Tuesday after market close reported net income of $87.5 million, or $.87 per diluted share, for its third quarter ended August 31, 2018, an increase of 74% in income and 71% in per share earnings compared to the same period last year. Analysts polled by The Wall Street Journal were looking for a gain of $0.77 per share. Shares of KB were up nearly 5% in after-market trading Tuesday.

“We produced solid third quarter results, generating a 71% increase in our diluted earnings per share,” said Jeffrey Mezger, chairman, president and chief executive officer. “Our core home building business continued to perform very well, as healthy demand in our served markets and effective execution on our distinctive customer-centric operating model drove revenue expansion, a 190-basis point improvement in operating margin, and a meaningful increase in net income.”

“Our strong earnings growth coupled with the substantial cash flows we have generated provides us with considerable flexibility to increase the scale of our business,” said Jeffrey Mezger, chairman, president and CEO. “During the quarter, we significantly expanded our existing Jacksonville, Florida operations by acquiring approximately 2,100 owned and controlled lots from a regional home builder. We also expanded our West Coast presence by entering the attractive Seattle, Washington market. The continued successful execution of our three-year Returns-Focused Growth Plan, which is centered around enhancing asset efficiency, reducing leverage and improving returns, enabled us to make these and other substantial investments in land and land development as well as pay off $300 million of debt, all using internally generated cash. We are pleased to report that we remain on track to achieve many of the 2019 financial targets under our plan a year earlier than projected.”

Among the earnings highlights:

• Total revenues grew 7% to $1.23 billion.
• Deliveries rose 8% to 2,988 homes.
• Average selling price decreased slightly to $408,200.
• Home building operating income increased 38% to $105.6 million. Home building operating income margin improved 190 basis points to 8.6%. Excluding inventory-related charges of $8.4 million in the quarter and $8.1 million in the year-earlier quarter, this metric improved to 9.3% from 7.4%.
  • Housing gross profit margin expanded 180 basis points to 18.0%.
    • Housing gross profit margin excluding inventory-related charges improved to 18.7% from 16.9%.
    • Adjusted housing gross profit margin, a metric that excludes inventory-related charges and the amortization of previously capitalized interest, rose 140 basis points to 23.1%.
  • Selling, general and administrative expenses as a percentage of housing revenues were 9.4%, improving 20 basis points to a new third-quarter record low.
• Equity in income of unconsolidated joint ventures increased to $3.5 million from a loss of $.8 million, primarily due to a land sale gain recognized by an unconsolidated joint venture in Arizona.
• Total pretax income increased 45% to $114.7 million.
• The company’s effective tax rate of approximately 24% decreased from approximately 37%, mainly due to the reduction in the federal corporate income tax rate under the Tax Cuts and Jobs Act (“TCJA”).
• Net income rose 74% to $87.5 million, and earnings per share increased 71% to $.87 per diluted share.
• Net orders for the third quarter increased 3% to 2,685. Net order value declined 5% to $1.02 billion.
  • Company-wide, net orders per community averaged 4.1 per month, up 11% from 3.7 per month, reflecting increases in each of the Company’s four regions.
• The cancellation rate as a percentage of gross orders was 26% for the third quarter, compared to 25%.
• The number of homes in ending backlog increased slightly to 5,484, while ending backlog value decreased 4% to $2.04 billion.
  • The decrease in backlog value was mainly due to a shift in geographic mix from the Company’s West Coast region, where the average community count for the quarter was 16% lower.
• Ending community count declined 3% to 224. Average community count decreased 7% to 217.
• The company had total liquidity of $816.7 million, including cash and cash equivalents of $354.4 million.
  • There were no cash borrowings outstanding under the company’s unsecured revolving credit facility.
  • Reflecting a $321.0 million increase in the company’s investments in land and land development, operating activities used net cash of $49.5 million for the first nine months of 2018. For the corresponding period of 2017, operating activities provided net cash of $103.3 million.
• Inventories increased by $425.5 million, or 13%, to $3.69 billion.
  • Land acquisition and development rose 29% to $1.44 billion for the nine months ended August 31, 2018, compared to $1.12 billion for the corresponding period of 2017.
    • Total investments for the quarter increased 44% from the year-earlier quarter to $600.9 million, including the company’s expansion of its Jacksonville, Florida operations and its entry into the Seattle, Washington market.
  • Lots owned or controlled grew 15% to 53,399, of which 75% were owned.
  • The company reduced its land held for future development or sale by $135.2 million to $240.0 million, or 7% of total inventories.
• Notes payable decreased by $261.7 million to $2.06 billion, largely due to the company’s repayment of the entire $300.0 million in aggregate principal amount of its 7 1/4% Senior Notes upon their June 15, 2018 maturity using internally generated cash.
  • The ratio of debt to capital improved 410 basis points to 50.6%. The ratio of net debt to capital was essentially flat at 45.9% and remained within the Company’s 2019 target range under its Returns-Focused Growth Plan.
  • On August 31, 2018, Fitch upgraded the Company’s credit rating to BB- with a stable outlook.
• Stockholders’ equity increased by $89.6 million to $2.02 billion, with the company’s earnings over the nine months ended August 31, 2018 more than offsetting the effect of the $111.2 million TCJA-related charge in the 2018 first quarter. Book value per share grew by $.68 to $22.81.