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KBH > SEC Filings for KBH > Form 10-Q on 10-Oct-2013All Recent SEC Filings

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Form 10-Q for KB HOME


10-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

                             Results of Operations
OVERVIEW
Revenues are generated from our homebuilding and financial services operations.
The following table presents a summary of our consolidated results of operations
(dollars in thousands, except per share amounts):
                  Nine Months Ended August 31,       Three Months Ended August 31,                Variance
                       2013              2012             2013              2012        Nine Months      Three Months
Revenues:
Homebuilding    $      1,470,404     $  974,055     $       545,800     $  421,555           51  %            29  %
Financial
services                   8,195          7,859               3,174          2,949            4                8
Total           $      1,478,599     $  981,914     $       548,974     $  424,504           51  %            29  %
Pretax income
(loss):
Homebuilding    $          3,006     $  (89,307 )   $        24,174     $  (11,798 )        (a)              (a)
Financial
services                   7,041          7,830               2,404          4,359          (10 )%           (45 )%
Total pretax
income (loss)             10,047        (81,477 )            26,578         (7,439 )        (a)              (a)
Income tax
benefit                    1,800         14,800                 700         10,700          (88 )            (93 )
Net income
(loss)          $         11,847     $  (66,677 )   $        27,278     $    3,261          (a)              736  %
Basic earnings
(loss) per
share           $            .14     $     (.86 )   $           .32     $      .04          (a)              700  %
Diluted
earnings (loss)
per share       $            .14     $     (.86 )   $           .30     $      .04          (a)              650  %

(a) Percentage not meaningful. The housing market recovery continued to advance during the nine months ended August 31, 2013, supported by steady demand, low inventories of homes available for sale, and generally favorable economic conditions and demographic trends. Housing demand was fueled primarily by high housing affordability, largely due to relatively low mortgage loan interest rates, even with an increase during the third quarter, and positive consumer confidence. Although the performance of housing markets remains varied and the recent uptick in mortgage loan interest rates and home price levels has slowed sales activity in some markets, we expect to see a steady rise in demand for housing in the coming quarters as consumers adjust to both higher mortgage loan interest rates and selling prices. We are encouraged by the strength of the current housing environment as compared to a year ago, and believe there will be additional progress through the remainder of 2013 and into 2014. In the three months and nine months ended August 31, 2013, we generated meaningful improvement in most of our financial and operational metrics, including increases in revenues, housing gross profit margin, net income and earnings per share, primarily due to our efforts over the past few years to reposition our homebuilding activities and investments toward higher-performing, desirable locations in land-constrained growth markets, to refine our products to meet consumer preferences and to execute on related profitability and growth strategies, as well as the strengthening housing markets. We ended the 2013 third quarter with potential future housing revenues in backlog of $808.5 million, up 9% from a year ago, even though the number of homes in our backlog decreased 3% from August 31, 2012, mainly due to a 9% year-over-year decline in our third quarter 2013 net orders. Our year-over-year net orders moderated largely due to our emphasis on expanding our housing gross profit margins and managing our land assets to maximize revenues and investment returns amid relatively healthy consumer demand. This emphasis helped produce a higher average selling price for our homes delivered in the current quarter and increase the overall value of our third quarter net orders to $528.9 million, up 7% from the year-earlier quarter. During the 2013 third quarter, we also saw favorable year-over-year performance in the number of homes delivered; selling, general and administrative expenses as a percentage of housing revenues; and homebuilding operating income. Since 2013 began, we have taken a number of steps to further strengthen our business and to support our ongoing community positioning and related profitability and growth strategies. We raised total net proceeds of $332.2 million through the concurrent underwritten public issuance of the $230 Million Convertible Senior Notes and the Common Stock Offering; entered into the


Credit Facility; invested $889.2 million in land and land development; and formed a mortgage banking company in partnership with Nationstar to offer mortgage banking services to our homebuyers, as further discussed below. Three Months Ended August 31, 2013
Revenues. Total revenues of $549.0 million for the three months ended August 31, 2013 increased 29% from $424.5 million for the three months ended August 31, 2012, primarily due to higher homebuilding revenues, which were generated entirely from housing operations. Housing revenues rose 29% to $545.8 million for the third quarter of 2013 from $421.6 million for the year-earlier quarter, reflecting increases in the number of homes delivered and average selling prices across all of our homebuilding reporting segments. We use the term "home" in this discussion and analysis to refer to a single-family residence, whether it is a single-family home or other type of residential property. Our total revenues included financial services revenues of $3.2 million for the three months ended August 31, 2013 and $2.9 million for the three months ended August 31, 2012.

? Homes Delivered. We delivered 1,825 homes in the third quarter of 2013, up 6% from 1,720 homes delivered in the year-earlier quarter. This increase was primarily due to our higher backlog level at the beginning of the current quarter, which was up 6% on a year-over-year basis, and reflected the strategic positioning of our communities in markets and submarkets where demand is relatively strong.

? Average Selling Price. Our overall average selling price of homes delivered increased to $299,100 in the third quarter of 2013, up $54,000 or 22%, from $245,100 in the year-earlier quarter. This increase reflected our strategic community positioning efforts, which have resulted in more of our served markets and submarkets generally featuring buyers with higher household incomes who choose larger home sizes and spend more on design options and features at our KB Home Studios; our emphasis on pricing discipline to earn incremental revenues and drive profitability; and general market increases in home prices. In our West Coast homebuilding reporting segment, which contributed nearly half of our housing revenues for the quarter, there was a 25% year-over-year increase in the average selling price largely as a result of a shift in our geographic mix to communities in coastal submarkets in California, which feature generally higher selling prices and demand for homes as compared to inland submarkets in the state.

Operating Income. Our homebuilding operating income of $36.0 million for the three months ended August 31, 2013 increased by $25.1 million from $10.9 million for the three months ended August 31, 2012. The year-over-year improvement reflected higher housing gross profits, partly offset by higher selling, general and administrative expenses in the third quarter of 2013.

? Housing Gross Profits. Housing gross profits of $99.4 million for the three months ended August 31, 2013 rose by $29.2 million from $70.2 million for the year-earlier period. Our housing gross profit margin improved to 18.2% in the current quarter, compared to 16.7% in the third quarter of 2012. Our housing gross profit margin for the three months ended August 31, 2013 included a charge of $5.9 million associated with water intrusion-related repairs of homes at certain of our communities in central and southwest Florida. In the third quarter of 2012, our housing gross profit margin included probable insurance recoveries of $16.5 million, which were partially offset by $6.4 million of inventory impairment charges. Excluding the above-mentioned charges and items for 2013 and 2012, our adjusted housing gross profit margin expanded by 500 basis points to 19.3% in the third quarter of 2013 from 14.3% in the year-earlier quarter. The calculation of adjusted housing gross profit margin, which we believe provides a clearer measure of the performance of our business, is described below under "Non-GAAP Financial Measures." The year-over-year improvement in our adjusted housing gross profit margin primarily reflected our ongoing execution of strategies targeting growth and profitability and our actions to generate greater operating efficiencies, partly offset by the impact of higher direct construction labor and material costs in the 2013 period.

? Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased by $4.2 million, or 7%, to $63.5 million for the three months ended August 31, 2013 from $59.3 million for the year-earlier period, reflecting, among other things, the higher volume of homes delivered in the current quarter and corresponding higher housing revenues. As a percentage of housing revenues, selling, general and administrative expenses improved by 250 basis points to 11.6% for the three months ended August 31, 2013, from 14.1% for the year-earlier period, primarily due to higher housing revenues, our ongoing focus on containing and leveraging our overhead costs while positioning for future growth, and an offset to expenses in the current period of $6.2 million associated with outstanding cash-settled, equity-based compensation awards due to a decrease in the market price of our common stock.

? Interest Expense. Interest expense of $11.3 million for the three months ended August 31, 2013 decreased from $23.1 million for the year-earlier period, reflecting an increase in the amount of inventory qualifying for interest capitalization in the current period, and the inclusion of an $8.3 million loss on an early extinguishment of debt associated with the repurchase of certain of our senior notes due 2014 and 2015 pursuant to the applicable July 2012 Tender Offers in the three months ended August 31, 2012.


Net Income. Our net income increased to $27.3 million, or $.30 per diluted share, for the three months ended August 31, 2013, compared to $3.3 million, or $.04 per diluted share, for the three months ended August 31, 2012. In the current quarter, our net income included the above-mentioned water intrusion-related charge and an income tax benefit of $.7 million. Our net income in the third quarter of 2012 included the above-mentioned probable insurance recoveries and an income tax benefit of $10.7 million, which were partially offset by the $8.3 million loss on the early extinguishment of debt, and the inventory impairment charges mentioned above. Our diluted earnings per share for the 2013 third quarter reflected a year-over-year increase of 22% in the number of weighted average diluted shares outstanding due to the impact of the Common Stock Offering and the issuance of the $230 Million Convertible Senior Notes in 2013.

Nine Months Ended August 31, 2013
Revenues. Total revenues of $1.48 billion for the nine months ended August 31, 2013 increased 51% from $981.9 million for the corresponding period of 2012. Our total revenues included financial services revenues of $8.2 million for the nine months ended August 31, 2013 and $7.9 million for the corresponding period of 2012.

? Homes Delivered. We delivered 5,107 homes in the first nine months of 2013, up 23% from 4,160 in the year-earlier period.

? Average Selling Price. Our overall average selling price of $287,900 for the nine months ended August 31, 2013 increased 23% from $234,100 for the corresponding year-earlier period.

Net Income (Loss). We generated net income of $11.8 million, or $.14 per diluted share, for the nine months ended August 31, 2013, compared to a net loss of $66.7 million, or $.86 per diluted share, for the year-earlier period. Net income for the first nine months of 2013 included net water intrusion-related charges of $23.5 million, land option contract abandonment charges of $.3 million, and an income tax benefit of $1.8 million. Our net loss for the first nine months of 2012 included probable insurance recoveries of $26.5 million, favorable warranty adjustments of $11.2 million, and an income tax benefit of $14.8 million. These items were partly offset by $22.9 million of inventory impairment charges, a $10.3 million loss on the early extinguishment of debt associated with the repurchase of certain of our senior notes pursuant to the January 2012 and July 2012 Tender Offers, and an $8.8 million charge recorded as a result of an unfavorable court decision that we are appealing.

Balance Sheet
Cash, Cash Equivalents and Restricted Cash. Our cash, cash equivalents and restricted cash totaled $424.9 million at August 31, 2013, compared to $567.1 million at November 30, 2012. Of our total cash, cash equivalents and restricted cash at August 31, 2013 and November 30, 2012, $383.3 million and $524.8 million, respectively, was unrestricted. The decrease in our total cash, cash equivalents and restricted cash was largely due to investments in land and land development during the nine months ended August 31, 2013, partly offset by our concurrent underwritten public issuance of the $230 Million Convertible Senior Notes and the Common Stock Offering in the first quarter of 2013, which generated total net proceeds of $332.2 million. In the first nine months of 2013, our operating activities used net cash of $401.5 million, up from $75.8 million in the corresponding period of 2012, mainly due to investments in land and land development that drove our inventories higher at August 31, 2013 compared to the November 30, 2012 level.

Inventories. Reflecting our investments in land and land development of $889.2 million in the first nine months of the year, our inventory balance of $2.23 billion at August 31, 2013 increased 31% from $1.71 billion at November 30, 2012. We made strategic investments in land and land development in each of our homebuilding reporting segments during the nine months ended August 31, 2013, with the majority of our investments made in our West Coast homebuilding reporting segment. We ended our 2013 third quarter with a land inventory portfolio comprised of 55,877 lots owned or controlled, representing an increase of 25% from the 44,752 lots owned or controlled at November 30, 2012.

Mortgages and Notes Payable. Our debt balance was $1.94 billion at August 31, 2013, compared to $1.72 billion at November 30, 2012. Our debt balance at August 31, 2013 reflected the underwritten public issuance of the $230 Million Convertible Senior Notes in the first quarter of 2013. Our ratio of debt to total capital was 79.5% at August 31, 2013, compared to 82.1% at November 30, 2012. Our ratio of net debt to total capital (a calculation that is described below under "Non-GAAP Financial Measures") was 75.2% at August 31, 2013, compared to 75.4% at November 30, 2012.

Stockholders' Equity. Our stockholders' equity increased to $498.0 million at August 31, 2013 from $376.8 million at November 30, 2012, primarily due to the Common Stock Offering in the first quarter of 2013 and the net income we generated for the nine months ended August 31, 2013, partly offset by the cash dividends we paid on our common stock in each of the first three quarters of 2013.


Net Orders and Backlog
Net Orders. Reflecting our emphasis on housing gross profit margin expansion and value creation over sales pace, net orders from our homebuilding operations decreased 9% to 1,736 in the third quarter of 2013 from 1,900 in the year-earlier quarter. The year-over-year decline in overall net orders reflected decreases in our West Coast and Central homebuilding reporting segments of 35% and 3%, respectively, partly offset by increases in our Southwest and Southeast homebuilding reporting segments of 17% and 20%, respectively.

? The decline in net orders from our West Coast homebuilding reporting segment was largely due to a 22% decrease in the average community count in this segment that resulted from the combination of a shift in our investment strategy favoring coastal submarkets in this segment, and our selling through several communities in more inland submarkets in the third quarter of 2012 that were intentionally not replaced. We also experienced some delays in opening new communities in the 2013 third quarter to complete entitlement and development activities, which in some cases were impacted by extended municipal processing times during the year due to increased construction activity and local government budget and job cuts. Additionally, in the 2013 third quarter, we deliberately managed our sales pace in certain higher-margin communities to drive profitability.

? The overall value of the net orders we generated in the third quarter of 2013 increased 7% to $528.9 million from $493.3 million in the year-earlier quarter as a result of the higher average selling prices in each of our homebuilding reporting segments. Three of our four homebuilding reporting segments generated year-over-year increases in net order value in the current quarter, with our Southwest homebuilding reporting segment up 30% to $44.9 million, our Central homebuilding reporting segment up 18% to $160.6 million, and our Southeast homebuilding reporting segment up 37% to $96.3 million. The value of net orders generated by our West Coast homebuilding reporting segment in the 2013 third quarter decreased 10% from the year-earlier quarter to $227.1 million, reflecting the decline in the number of net orders in this segment, partly offset by a higher average selling price.

? For the nine months ended August 31, our net orders increased 8% to 5,569 in 2013 from 5,146 in 2012. The value of the net orders we generated in the nine months ended August 31, 2013 increased 32% to $1.68 billion from $1.27 billion in the year-earlier period.

? Our third quarter cancellation rate was 33% in 2013 and 29% in 2012. We define our cancellation rate in a given period as the total number of contracts for new homes canceled divided by the total new (gross) orders for homes during the same period.

Backlog. Our backlog at August 31, 2013 was comprised of 3,039 homes, representing potential future housing revenues of $808.5 million, and at August 31, 2012 was 3,142 homes, representing potential future housing revenues of $744.7 million. The number of homes in our backlog decreased 3% year over year, primarily due to the 9% year-over-year decline in our third quarter 2013 net orders. The potential future housing revenues in our backlog at August 31, 2013 rose 9% from August 31, 2012, reflecting a higher average selling price.


The following table presents information concerning our net orders, cancellation rate, ending backlog and community count (dollars in thousands):

                                         Nine Months Ended August 31,          Three Months Ended August 31,
                                            2013               2012              2013                 2012
Net orders                                     5,569             5,146              1,736                1,900
Net order value                       $    1,675,364       $ 1,273,876     $      528,922       $      493,277
Cancellation rate                                 30 %              29 %               33 %                 29 %
Ending backlog - homes                         3,039             3,142              3,039                3,142
Ending backlog - value                $      808,483       $   744,744     $      808,483       $      744,744
Ending community count                           189               166                189                  166
Average community count                          179               182                187                  172

Effective December 1, 2012, we revised the methodology for determining our community count. Based on our current methodology, an approach used by many other public homebuilders, our community count represents the number of new home communities with at least five homes/lots left to sell at the end of a reporting period. Previously, our community count represented the number of new home communities with at least one home/lot left to sell at the end of a reporting period. Community count information for all periods presented in this report reflects our current methodology.
Our higher average community count for the three months ended August 31, 2013 compared to the corresponding year-earlier period reflected the impact of our strategic community positioning efforts and increased land acquisition and land development activities, as well as our opening of new communities for sales. We expect that our average community count will continue to increase through the remainder of 2013 as a result of the substantial inventory-related investments we made in 2012 and in the nine months ended August 31, 2013, additional investments we intend to make in the fourth quarter, and planned new community openings. Reflecting the investments we have made, our ending community count as of August 31, 2013 increased 14% to 189 from 166 at August 31, 2012.


HOMEBUILDING
The following table presents a summary of certain financial and operational data
for our homebuilding operations (dollars in thousands, except average selling
price):
                                         Nine Months Ended August 31,            Three Months Ended August 31,
                                            2013                2012               2013                 2012
Revenues:
Housing                              $     1,470,404       $    974,055      $      545,800       $      421,555
Land                                               -                  -                   -                    -
Total                                      1,470,404            974,055             545,800              421,555
Costs and expenses:
Construction and land costs
Housing                                   (1,232,644 )         (836,229 )          (446,381 )           (351,356 )
Land                                               -                  -                   -                    -
Total                                     (1,232,644 )         (836,229 )          (446,381 )           (351,356 )
Selling, general and administrative
expenses                                    (192,652 )         (173,644 )           (63,456 )            (59,332 )
Total                                     (1,425,296 )       (1,009,873 )          (509,837 )           (410,688 )
Operating income (loss)              $        45,108       $    (35,818 )    $       35,963       $       10,867
Homes delivered                                5,107              4,160               1,825                1,720
Average selling price                $       287,900       $    234,100      $      299,100       $      245,100
Housing gross profit margin as a
percentage of housing revenues                  16.2 %             14.1  %             18.2 %               16.7 %
Adjusted housing gross profit margin
as a percentage of housing revenues             17.8 %             12.6  %             19.3 %               14.3 %
Selling, general and administrative
expenses as a percentage of housing
revenues                                        13.1 %             17.8  %             11.6 %               14.1 %
Operating income (loss) as a

percentage of homebuilding revenues 3.1 % (3.7 )% 6.6 % 2.6 %

We have grouped our homebuilding activities into four reporting segments, which we refer to as West Coast, Southwest, Central and Southeast. As of August 31, 2013, our homebuilding reporting segments consisted of ongoing operations located in the following states: West Coast - California; Southwest - Arizona, Nevada and New Mexico; Central - Colorado and Texas; and Southeast - Florida, Maryland, North Carolina and Virginia. The following tables present homes delivered, net orders, cancellation rates and ending backlog by homebuilding reporting segment:

                               Three Months Ended August 31,
                Homes Delivered        Net Orders        Cancellation Rates
Segment          2013        2012     2013     2012       2013          2012
West Coast       555          541      427      658        25 %           23 %
Southwest        194          186      180      154        24             16
Central          757          700      743      765        41             35
Southeast        319          293      386      323        27             27
Total          1,825        1,720    1,736    1,900        33 %           29 %


                               Nine Months Ended August 31,
                Homes Delivered        Net Orders        Cancellation Rates
Segment          2013        2012     2013     2012       2013          2012
West Coast     1,658        1,180    1,544    1,547        23 %           26 %
Southwest        545          513      568      523        23             19
Central        1,965        1,723    2,364    2,212        37             34
Southeast        939          744    1,093      864        27             30
Total          5,107        4,160    5,569    5,146        30 %           29 %


                                 August 31,
                                           Backlog - Value
                  Backlog - Homes          (in thousands)
Segment            2013        2012       2013         2012
West Coast         570          830    $ 276,031    $ 327,528
Southwest          206          213       48,646       40,727
Central          1,548        1,507      315,900      251,900
Southeast          715          592      167,906      124,589
Total            3,039        3,142    $ 808,483    $ 744,744

Revenues. Our homebuilding revenues for the three months ended August 31, 2013 and 2012 were generated solely from housing operations. Housing revenues rose 29% to $545.8 million for the three months ended August 31, 2013 from $421.6 million for the year-earlier period as a result of increases in homes delivered and higher average selling prices across all of our homebuilding reporting segments. We delivered a total of 1,825 homes in the third quarter of 2013, up 6% from 1,720 homes delivered in the year-earlier quarter. The increase in homes delivered was largely due to our higher backlog level at the beginning of the current quarter, which was up 6% on a year-over-year basis, while our backlog conversion ratio of 58% in the current quarter remained consistent with the year-earlier quarter. Our higher beginning backlog level primarily reflected the strategic positioning of our communities in markets and submarkets where demand is relatively strong. In the third quarter of 2013, each of our homebuilding reporting segments posted year-over-year increases in the number of homes delivered, ranging from 3% in our West Coast homebuilding reporting segment to 9% in our Southeast homebuilding reporting segment. We use the term "backlog conversion ratio" in this discussion and analysis to refer to the number of . . .

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