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KBH > SEC Filings for KBH > Form 10-Q on 9-Jul-2014All Recent SEC Filings

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Form 10-Q for KB HOME


9-Jul-2014

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):
                         Six Months Ended May 31,                         Three Months Ended May 31,
                  2014            2013           Variance           2014            2013           Variance
Revenues:
Homebuilding  $ 1,010,663     $  924,604             9  %       $   562,396     $  521,788             8  %
Financial
services            5,031          5,021             -                2,611          2,618             -
Total         $ 1,015,694     $  929,625             9  %       $   565,007     $  524,406             8  %
Pretax income
(loss):
Homebuilding  $    34,372     $  (21,168 )              (a)     $    25,171     $   (6,151 )              (a)
Financial
services            3,315          4,637           (29 )%             1,753          1,978           (11 )%
Total pretax
income (loss)      37,687        (16,531 )              (a)          26,924         (4,173 )              (a)
Income tax
benefit
(expense)            (500 )        1,100                (a)            (300 )        1,200                (a)
Net income
(loss)        $    37,187     $  (15,431 )              (a)     $    26,624     $   (2,973 )              (a)
Basic
earnings
(loss) per
share         $       .43     $     (.19 )              (a)     $       .30     $     (.04 )              (a)
Diluted
earnings
(loss) per
share         $       .40     $     (.19 )              (a)     $       .27     $     (.04 )              (a)

(a) Percentage not meaningful. Although conditions in individual housing markets varied during the six months ended May 31, 2014, the overall housing environment was favorable, with relatively low inventories of new and existing homes available for sale, continued sales price appreciation and firm demand for housing. Encouraging reports of economic, employment and income growth during the 2014 second quarter also gave us confidence that we can sustain the momentum our business generated during the first half of the year into the second half. We believe we are on track to meet our primary financial and operational goals for 2014. Our solid earnings performance trend continued in the 2014 second quarter, and we produced year-over-year improvement in key financial metrics, including average selling prices, revenues, housing gross profit margin, and selling, general and administrative expenses as a percentage of housing revenues. We have now posted year-over-year revenue increases for the last 11 consecutive quarters and operating income improvement for the past 10 consecutive quarters. We believe our strong second quarter performance reflects both the success of our strategic actions taken over the past few years and generally strengthening housing markets. Our principal strategic initiative since 2012 has been to reposition our homebuilding activities toward higher-performing, desirable locations in land-constrained growth markets, which we have implemented largely through substantial investments in land and land development. We invested $1.14 billion in land and land development in 2013 and an additional $859.6 million in the six months ended May 31, 2014. Alongside our repositioning and inventory-related investment initiatives, we have refined our products to better meet consumer preferences, and we have undertaken continuous efforts to contain costs and improve our operational efficiency. To advance the profitable growth of our business through our repositioned operating platform, we have evolved our priorities to focus on expanding our community count, enhancing profitability per home delivered and increasing our revenues, in part by balancing the sales pace and home selling prices at our new home communities open for sales, and by using features of our KBnxt operational business model to generate incremental earnings from a variety of lot and product premiums, and design studio options and upgrades. We use the term "community count" to refer to the number of new home communities with at least five homes/lots left to sell at the end of a reporting period. Consistent with our current strategic priorities, in the first half of 2014, in addition to acquiring several attractive large land positions in our served markets across the country, we continued to invest in land development to convert our owned land into new home


communities open for sales. These activities resulted in an average community count of 191 for the second quarter of 2014, up 7% from the year-earlier quarter. For the six months ended May 31, 2014, our average community count of 191 increased 9% compared to the corresponding period of 2013. This increase in average community count contributed to our net orders increasing 5% year over year for the three-month and six-month periods ended May 31, 2014. Further, reflecting our repositioned operational footprint and management of our land assets to maximize revenues and profitability, as well as relatively healthy consumer demand, the value of our net orders increased 19% in the three-month and six-month periods ended May 31, 2014 compared to the corresponding year-earlier periods. Our net order value for a given period represents the potential future housing revenues associated with net orders, including various lot and product premiums, and homebuyer spending on design studio options and upgrades for homes in backlog during the same period. As of May 31, 2014, potential future housing revenues in backlog totaled $1.03 billion, up 24% from May 31, 2013, reflecting a 9% increase in the number of homes in our backlog and higher average selling prices compared to the previous year. We believe the growth in our net orders and net order value in the three-month and six-month periods ended May 31, 2014, as well as the year-over-year increase in our backlog at the end of the current quarter, illustrate the success of our integrated strategic approach to drive profitable growth. We expect our business to continue its positive trajectory in the second half of the year. Three Months Ended May 31, 2014
Revenues. Total revenues of $565.0 million for the three months ended May 31, 2014 increased 8% from $524.4 million for the three months ended May 31, 2013 as a result of higher housing and land sale revenues in the current period. Housing revenues for the 2014 second quarter rose 7% to $559.8 million from $521.8 million for the year-earlier quarter due to an increase in our overall average selling price, partly offset by a slight decrease in the number of homes delivered. 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. Land sale revenues for the three months ended May 31, 2014 totaled $2.6 million. We had no land sales in the year-earlier period. Our total revenues for each of the three-month periods ended May 31, 2014 and 2013 included financial services revenues of $2.6 million.

Homes Delivered. We delivered 1,751 homes in the three months ended May 31, 2014, down 3% from 1,797 homes delivered in the year-earlier period.

Average Selling Price. Our overall average selling price of homes delivered increased to $319,700 for the second quarter of 2014, up 10% from $290,400 for the year-earlier quarter.

Operating Income. Our homebuilding operating income of $34.3 million for the three months ended May 31, 2014 increased $25.6 million from $8.7 million for the corresponding period of 2013. The year-over-year improvement primarily reflected an increase in housing gross profits that was partly offset by a slight increase in selling, general and administrative expenses. As a percentage of homebuilding revenues, operating income rose 440 basis points to 6.1% for the three months ended May 31, 2014, compared to 1.7% for the year-earlier period.

Housing Gross Profits. Housing gross profits rose 34% to $105.7 million for the three months ended May 31, 2014 from $78.8 million for the year-earlier period. Our housing gross profit margin improved to 18.9% in the current quarter from 15.1% in the second quarter of 2013. Our housing gross profits for the 2014 second quarter included land option contract abandonment charges of $.4 million. The 2013 second quarter housing gross profits included a net warranty charge of $15.9 million associated with water intrusion-related repairs of homes at certain of our communities in central and southwest Florida, and land option contract abandonment charges of $.3 million.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses rose slightly to $71.5 million for the three months ended May 31, 2014 from $70.1 million for the year-earlier period. As a percentage of housing revenues, selling, general and administrative expenses improved 60 basis points to 12.8% for the three months ended May 31, 2014, from 13.4% for the year-earlier period, primarily due to higher year-over-year housing revenues and our actions to contain costs.

Interest Expense. Interest expense of $8.6 million for the three months ended May 31, 2014 decreased from $14.5 million for the year-earlier period, reflecting an increase in the amount of inventory qualifying for interest capitalization in the current period.

Net Income (Loss). Net income increased to $26.6 million, or $.27 per diluted share, for the three months ended May 31, 2014, compared to a net loss of $3.0 million, or $.04 per diluted share, for the three months ended May 31, 2013, mainly due to our higher revenues, expanded housing gross profit margin and improved selling, general and administrative expenses as a percentage of housing revenues. In the second quarter of 2014, our net income included the land option contract abandonment charges mentioned above and income tax expense of $.3 million. Our net loss in the second quarter of 2013 included the net


water intrusion-related charge and the land option contract abandonment charges mentioned above, which were partly offset by an income tax benefit of $1.2 million.
Six Months Ended May 31, 2014
Revenues. Total revenues of $1.02 billion for the six months ended May 31, 2014 increased 9% from $929.6 million for the corresponding period of 2013 due to higher housing and land sale revenues in the 2014 period. Housing revenues rose 8% to $999.9 million for the first half of 2014 from $924.6 million for the year-earlier period, reflecting an increase in our overall average selling price that was partly offset by a slight decrease in the number of homes delivered. Land sale revenues for the six months ended May 31, 2014 totaled $10.7 million. We had no land sales in the year-earlier period. Our total revenues for each of the six-month periods ended May 31, 2014 and 2013 included financial services revenues of $5.0 million.

Homes Delivered. We delivered 3,193 homes in the first six months of 2014, down 3% from 3,282 homes delivered in the year-earlier period.

Average Selling Price. Our overall average selling price of homes delivered rose to $313,200 for the first half of 2014, up 11% from $281,700 for the year-earlier period.

Net Income (Loss). Net income increased to $37.2 million, or $.40 per diluted share, for the six months ended May 31, 2014, compared to a net loss of $15.4 million, or $.19 per diluted share, for the six months ended May 31, 2013. In the six months ended May 31, 2014, our net income included a $3.2 million gain on the sale of our interest in an unconsolidated joint venture in Maryland (that was included in equity in income (loss) of unconsolidated joint ventures in our consolidated statement of operations), which was partly offset by land option contract abandonment charges of $.8 million and income tax expense of $.5 million. Our net loss for the six months ended May 31, 2013 included net water intrusion-related charges of $17.5 million and land option contract abandonment charges of $.3 million, which were partially offset by an income tax benefit of $1.1 million.

Balance Sheet
Cash, Cash Equivalents and Restricted Cash. Our cash, cash equivalents and restricted cash totaled $528.7 million at May 31, 2014, compared to $572.0 million at November 30, 2013. Of our total cash, cash equivalents and restricted cash at May 31, 2014 and November 30, 2013, $484.5 million and $530.1 million, respectively, was unrestricted. The decrease in total cash, cash equivalents and restricted cash was primarily due to our investments in land and land development during the six months ended May 31, 2014, partly offset by total net proceeds of $531.6 million from the underwritten public issuance of the 4.75% Senior Notes due 2019 and the 2014 Common Stock Offering. Our operating activities used net cash of $554.5 million in the first six months of 2014, up from $267.6 million of net cash used in the corresponding period of 2013, largely due to our investments in land and land development that drove our inventories higher at May 31, 2014 compared to the November 30, 2013 level.

Inventories. Reflecting our investments in land and land development of $859.6 million and the distribution of land we received from Inspirada in the six months ended May 31, 2014, our inventory balance of $3.01 billion at May 31, 2014 increased 31% from $2.30 billion at November 30, 2013. We made strategic investments in land and land development in each of our homebuilding reporting segments during the six months ended May 31, 2014, the majority of which were made in our West Coast homebuilding reporting segment. With these substantial inventory investments, we ended our 2014 second quarter with a land inventory portfolio comprised of 57,377 lots owned or controlled, representing an increase of 9% compared to the end of the 2013 second quarter, though a 6% decrease from the 61,095 lots owned or controlled at November 30, 2013. The decrease from November 30, 2013 primarily reflected land option contract abandonments during the six months ended May 31, 2014.

Investments in Unconsolidated Joint Ventures. Our investments in unconsolidated joint ventures decreased to $67.6 million at May 31, 2014 from $130.2 million at November 30, 2013, primarily due to $70.6 million of land distributed to us from Inspirada and the above-noted sale of our interest in an unconsolidated joint venture in Maryland. These transactions were partly offset by capital contributions made to various unconsolidated joint ventures during the six months ended May 31, 2014.

Mortgages and Notes Payable. Our debt balance increased to $2.57 billion at May 31, 2014 from $2.15 billion at November 30, 2013, reflecting the underwritten public issuance of the 4.75% Senior Notes due 2019 during the 2014 second quarter. Our ratio of debt to capital was 78.4% at May 31, 2014, compared to 80.0% at November 30, 2013. Our ratio of net debt to capital (a calculation that is described below under "Non-GAAP Financial Measures") was 74.2% at May 31, 2014, compared to 74.6% at November 30, 2013.


Stockholders' Equity. Our stockholders' equity increased to $709.7 million at May 31, 2014 from $536.1 million at November 30, 2013, primarily due to the 2014 Common Stock Offering and the net income we generated for the six months ended May 31, 2014.

Net Orders and Backlog
Net Orders. Net orders from our homebuilding operations rose 5% to 2,269 for the three months ended May 31, 2014 from 2,162 for the year-earlier period. The year-over-year increase in net orders in the second quarter of 2014 reflected our increased average community count as we continued to convert the substantial land and land development investments we have made over the past several quarters into new home communities open for sales.

The year-over-year growth in net orders for the 2014 second quarter reflected increases of 12% in both our Southwest and Central homebuilding reporting segments, partly offset by decreases of 1% in our West Coast homebuilding reporting segment and 7% in our Southeast homebuilding reporting segment.

The value of the net orders we generated in the three months ended May 31, 2014 increased 19% to $763.2 million from $639.6 million in the year-earlier period.

All four homebuilding reporting segments generated year-over-year increases in net order value in the second quarter of 2014, with our West Coast homebuilding reporting segment up 18% to $344.7 million, our Southwest homebuilding reporting segment up 15% to $56.5 million, our Central homebuilding reporting segment up 26% to $250.4 million, and our Southeast homebuilding reporting segment up 13% to $111.6 million.

For the six months ended May 31, our net orders increased 5% to 4,034 in 2014 from 3,833 in 2013. The value of the net orders we generated in the first half of 2014 rose 19% to $1.36 billion from $1.15 billion in the year-earlier period.

Our second quarter cancellation rate was 28% in 2014 and 27% in 2013. For the six months ended May 31, 2014, our cancellation rate of 29% was flat with the year-earlier period. 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 May 31, 2014 was comprised of 3,398 homes, representing potential future housing revenues of $1.03 billion, and at May 31, 2013 was comprised of 3,128 homes, representing potential future housing revenues of $826.6 million. The number of homes in our backlog increased 9% year over year, primarily due to the 5% year-over-year increase in our net orders for the six months ended May 31, 2014. The potential future housing revenues in our backlog at May 31, 2014 rose 24% from May 31, 2013, reflecting the increased number of homes in our backlog and a higher average selling price.

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

                             Six Months Ended May 31,         Three Months Ended May 31,
                               2014            2013               2014             2013
Net orders                       4,034           3,833               2,269          2,162
Net order value           $  1,363,328     $ 1,146,441     $       763,156      $ 639,638
Cancellation rate                   29 %            29 %                28 %           27 %
Ending backlog - homes           3,398           3,128               3,398          3,128
Ending backlog - value    $  1,025,877     $   826,613     $     1,025,877      $ 826,613
Ending community count             194             185                 194            185
Average community count            191             176                 191            178

The increases in our average community count for the three-month and six-month periods ended May 31, 2014 compared to the corresponding year-earlier periods reflected our strategic community positioning efforts and increased land and land development activities, which resulted in our opening more new home communities for sales in 2014 than in the prior year. We expect that our


average community count will continue to increase through the remainder of 2014 as a result of the substantial inventory-related investments we made in 2013 and the first half of 2014, and our planned future investments and new home community openings.

HOMEBUILDING
The following table presents a summary of certain financial and operational data
for our homebuilding operations (dollars in thousands, except average selling
price):
                                        Six Months Ended May 31,          Three Months Ended May 31,
                                          2014              2013             2014              2013
Revenues:
Housing                              $    999,942       $  924,604     $     559,815       $   521,788
Land                                       10,721                -             2,581                 -
Total                                   1,010,663          924,604           562,396           521,788
Costs and expenses:
Construction and land costs
Housing                                  (816,208 )       (786,263 )        (454,102 )        (442,998 )
Land                                       (9,626 )              -            (2,458 )               -
Total                                    (825,834 )       (786,263 )        (456,560 )        (442,998 )
Selling, general and administrative
expenses                                 (132,818 )       (129,196 )         (71,544 )         (70,099 )
Total                                    (958,652 )       (915,459 )        (528,104 )        (513,097 )
Operating income                     $     52,011       $    9,145     $      34,292       $     8,691
Homes delivered                             3,193            3,282             1,751             1,797
Average selling price                $    313,200       $  281,700     $     319,700       $   290,400
Housing gross profit margin as a
percentage of housing revenues               18.4 %           15.0 %            18.9 %            15.1 %
Adjusted housing gross profit margin
as a percentage of housing revenues          18.5 %           16.9 %            18.9 %            18.2 %
Selling, general and administrative
expenses as a percentage of housing
revenues                                     13.3 %           14.0 %            12.8 %            13.4 %
Operating income as a percentage of
homebuilding revenues                         5.1 %            1.0 %             6.1 %             1.7 %

We have grouped our homebuilding activities into four reporting segments, which we refer to as West Coast, Southwest, Central and Southeast. As of May 31, 2014, our homebuilding reporting segments consisted of ongoing operations located in the following states: West Coast - California; Southwest - Arizona and Nevada; Central - Colorado, New Mexico and Texas; and Southeast - Florida, Maryland, North Carolina and Virginia. The following tables present homes delivered, net orders, cancellation rates, net order value, average community count, and ending backlog (number of homes and value) by homebuilding reporting segment (dollars in thousands):

                                Six Months Ended May 31,
                Homes Delivered        Net Orders        Cancellation Rate
Segment          2014        2013     2014     2013      2014         2013
West Coast       830        1,103    1,089    1,117       20 %          21 %
Southwest        336          351      392      388       26            23
Central        1,360        1,208    1,842    1,621       33            35
Southeast        667          620      711      707       30            27
Total          3,193        3,282    4,034    3,833       29 %          29 %


                                         Six Months Ended May 31,
                         Net Order Value                       Average Community Count
Segment          2014           2013        Variance           2014          2013    Variance
West Coast   $   643,954    $   554,111        16 %         42                 39       8  %
Southwest        104,900         92,952        13           19                 16      19
Central          419,354        332,113        26           81                 83      (2 )
Southeast        195,120        167,265        17           49                 38      29
Total        $ 1,363,328    $ 1,146,441        19 %        191                176       9  %


                                Three Months Ended May 31,
                Homes Delivered        Net Orders        Cancellation Rates
Segment          2014        2013     2014     2013       2014          2013
West Coast       484          594      583      587        19 %           20 %
Southwest        175          211      211      189        25             23
Central          765          637    1,085      968        31             32
Southeast        327          355      390      418        30             22
Total          1,751        1,797    2,269    2,162        28 %           27 %


                                      Three Months Ended May 31,
                       Net Order Value                     Average Community Count
Segment         2014         2013       Variance           2014          2013    Variance
West Coast   $ 344,671    $ 292,769        18 %         41                 38       8  %
Southwest       56,512       49,246        15           18                 16      13
Central        250,381      198,621        26           82                 84      (2 )
Southeast      111,592       99,002        13           50                 40      25
Total        $ 763,156    $ 639,638        19 %        191                178       7  %


                                           May 31,
                   Backlog - Homes                    Backlog - Value
Segment       2014     2013    Variance        2014          2013       Variance
West Coast     679      698      (3 )%     $   389,402    $ 337,878        15 %
Southwest      244      220      11             67,060       48,524        38
Central      1,830    1,562      17            405,850      296,949        37
Southeast      645      648       -            163,565      143,262        14
Total        3,398    3,128       9  %     $ 1,025,877    $ 826,613        24 %

Revenues. Homebuilding revenues rose to $562.4 million for the three months ended May 31, 2014, up 8%, from $521.8 million for the year-earlier period, reflecting increased revenues from housing operations and land sales. Housing revenues rose 7% to $559.8 million for the three months ended May 31, 2014 from $521.8 million for the corresponding period of 2013 due to an increase in our overall average selling price that was partly offset by a slight decrease in the number of homes delivered. We delivered a total of 1,751 homes in the second quarter of 2014, down 3% from 1,797 homes delivered in the year-earlier quarter as year-over-year decreases of 19%, 17% and 8% in homes delivered from our West Coast, Southwest and Southeast homebuilding reporting segments, respectively, were mostly offset by an increase of 20% from our Central homebuilding reporting segment. The decreases in homes delivered from the West Coast and Southwest homebuilding reporting segments generally reflected fewer


homes in backlog in these segments at the beginning of the 2014 second quarter, compared to the year-earlier quarter. The decrease in homes delivered from the Southeast homebuilding reporting segment was primarily due to fewer net orders from this segment in the 2014 second quarter as compared to the year-earlier quarter. In the Central homebuilding reporting segment, the year-over-year increase in deliveries reflected 23% more homes in backlog at the beginning of the 2014 second quarter compared to the year-earlier quarter.
The overall average selling price of homes delivered increased 10% to $319,700 for the three months ended May 31, 2014 from $290,400 for the year-earlier period. The higher average selling price for the 2014 second quarter reflected our strategic community positioning efforts, which have shifted our community mix toward markets and submarkets that generally feature buyers with higher household incomes; strong demand, including demand for larger home sizes (as . . .

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