KB Home Narrows Q3 loss; generates income from home building ops

FROM BIG BUILDER:

KB Home Q3 earnings hit this a.m.

Here’s Wells Fargo home building sector analyst Carl Reichardt’s “takeaway:”

KBH’s orders were particularly weak in our opinion, although the company did have a tough comparison, with Q309 orders up 62% yr/yr. Margins and costs seem to have stabilized for KBH, but with a build-to-order business model, KBH cannot rely on spec homes in order to drive volume, so KBH’s weak backlog (down 32% sequentially and 42% yr/yr) indicates Q4 revenues and margins should be weaker than Q3 in our opinion, which is not consistent with historical, seasonal trends.

We’ll have more analysis on bigbuilderonline.com later.

Here’s the KB Home release:

Total Revenues of $501 Million, Up 9% Year over Year
Homebuilding Business Generates Operating Income for the First Time in Nearly Four Years
Net Loss Narrows to Near Break-Even Results

LOS ANGELES, Sep 24, 2010 (BUSINESS WIRE) — KB Home (NYSE: KBH), one of America’s premier homebuilders, today reported results for its third quarter ended August 31, 2010. Results and developments include:

■Total revenues increased to $501.0 million in the third quarter of 2010, up 9% from $458.5 million in the third quarter of 2009, marking the first time in nearly four years that the Company has generated year-over-year quarterly revenue growth. The increase reflected higher housing revenues, with the number of homes delivered up 4% from a year ago to 2,320 and the average selling price up 6% year over year to $214,200.
■The Company’s homebuilding business generated operating income of $8.4 million for the quarter ended August 31, 2010, compared to an operating loss of $42.1 million for the year-earlier quarter. The improvement in the current quarter results was driven by an increase in homes delivered, a higher housing gross margin, and lower selling, general and administrative expenses.
■The third quarter 2010 net loss totaled $1.4 million, or $.02 per diluted share, improving from a net loss of $66.0 million, or $.87 per diluted share, for the year-earlier quarter. The current quarter results included $3.3 million of inventory impairment and land option contract abandonment charges, compared to $47.7 million for inventory and joint venture impairments and land option contract abandonments recorded in the third quarter of 2009.
■The Company’s cash, cash equivalents and restricted cash at August 31, 2010 totaled $1.04 billion. The Company’s debt balance at August 31, 2010 was $1.80 billion, down $19.5 million from $1.82 billion at November 30, 2009.
■The Company added approximately 3,700 owned or controlled lots to its inventory in the third quarter of 2010, primarily in its West Coast and Central regions. As of August 31, 2010, the Company owned and controlled over 41,000 lots.
■Backlog at August 31, 2010 totaled 2,169 homes, representing potential future housing revenues of approximately $455.3 million. At August 31, 2009, the Company’s backlog totaled 3,722 homes, representing potential future housing revenues of approximately $734.1 million. Company-wide net orders decreased 39% to 1,314 in the third quarter of 2010 from 2,158 in the year-earlier quarter.

“Strong top-line growth in revenues, an expanded housing gross margin and lower selling, general and administrative expenses were the key drivers of our improved financial results in the third quarter of 2010,” said Jeffrey Mezger, president and chief executive officer. “We believe our results for the quarter demonstrate that with the disciplined execution of our business strategies we are generating greater operational efficiencies and are making solid progress toward our goal of achieving sustained profitability.”

Total revenues of $501.0 million for the quarter ended August 31, 2010 rose 9% from the year-earlier quarter, reflecting an increase in housing revenues. Housing revenues increased from the year-earlier period as a result of a 4% year-over-year increase in the number of homes delivered and a 6% year-over-year increase in the average selling price. The Company delivered 2,320 homes at an average selling price of $214,200 in the 2010 third quarter, compared to 2,240 homes delivered at an average selling price of $202,800 in the year-earlier quarter. Third-quarter land sale revenues totaled $1.9 million in 2010 and $2.1 million in 2009.

The Company’s homebuilding business generated operating income of $8.4 million in the third quarter of 2010, representing an improvement of $50.5 million from an operating loss of $42.1 million in the same quarter of 2009. This marked the first time in nearly four years that the Company’s homebuilding business has posted quarterly operating income, which reflected higher gross profits, resulting from an increase in homes delivered and a higher housing gross margin, as well as lower selling, general and administrative expenses. The Company had $3.3 million of inventory impairment and land option contract abandonment charges in the 2010 third quarter, compared to $24.5 million of such charges in the year-earlier quarter. The Company’s third-quarter housing gross margin was 17.5% in 2010, an increase of 6.4 percentage points from 11.1% in 2009. Excluding inventory impairment and land option contract abandonment charges, the housing gross margin rose by 3.6 percentage points to 18.2% in the current quarter from 14.6% in the year-earlier quarter. Land sales produced break-even results in the third quarter of 2010. This compared to a loss of $8.4 million in the third quarter of 2009, which included $8.5 million of impairment charges related to planned future land sales.

Selling, general and administrative expenses decreased by $5.3 million, or 6%, to $78.6 million in the third quarter of 2010, compared to $83.9 million in the year-earlier period. The decrease reflected, among other things, the impact of Company-wide cost-saving initiatives and income associated with long-term, cash-settled compensation tied to the Company’s stock price, partially offset by higher legal and advertising expenses. As a percentage of housing revenues, the Company’s selling, general and administrative expenses improved by 2.7 percentage points to 15.8% in the third quarter of 2010, compared to 18.5% in the year-earlier quarter, and was substantially lower than the ratios of 27.5% and 22.4% in the first and second quarters of 2010, respectively.

The Company’s share of losses from unconsolidated homebuilding joint ventures totaled $1.9 million in the third quarter of 2010. This compared to a share of losses totaling $26.3 million in the third quarter of 2009, which included $23.2 million of impairment charges.

Financial services operations, which include the Company’s equity interest in KBA Mortgage, LLC, an unconsolidated mortgage banking joint venture with Bank of America, N.A., generated pretax income of $2.4 million in the current quarter and $5.6 million in the year-earlier quarter.

The Company posted a net loss of $1.4 million, or $.02 per diluted share, in the third quarter of 2010, including pretax, noncash charges of $3.3 million for inventory impairments and land option contract abandonments and an after-tax charge of $3.0 million to record a valuation allowance against the net deferred tax assets generated from the quarter’s loss. These results improved from the third quarter of 2009, when the Company generated a net loss of $66.0 million, or $.87 per diluted share, including pretax, noncash charges of $47.7 million for inventory and joint venture impairments and land option contract abandonments, and an after-tax charge of $35.5 million to record a valuation allowance against the net deferred tax assets generated from the quarter’s loss.

Net orders in the third quarter of 2010 were 1,314, down 39% from 2,158 in the year-earlier period. As a percentage of beginning backlog, the Company’s cancellation rate was 21% in the current quarter, compared to 20% in the 2009 third quarter. The Company’s backlog at August 31, 2010 totaled 2,169 homes, a 42% decrease from 3,722 homes in backlog at August 31, 2009. Potential future housing revenues in backlog at August 31, 2010 decreased 38% to $455.3 million, from $734.1 million at the end of the 2009 third quarter, primarily due to the lower number of homes in backlog.

“Despite generally favorable conditions for homebuyers, including high affordability and record-low mortgage interest rates, we experienced a year-over-year decline in our third quarter net orders due to a reduction in housing demand following the April 30, 2010 expiration of the federal homebuyer tax credit, a challenging economic environment, a decrease in our overall community count and a tough comparison against the strong net orders we reported a year ago,” said Mezger.

“The housing market continues to face significant headwinds from high unemployment and foreclosures, which are impeding a broader recovery, and recent net order trends in the homebuilding industry have injected additional caution into our near-term outlook,” continued Mezger. “Nonetheless, building on our improved operating results for the third quarter, we intend to maintain our strategic initiatives to open new communities in select locations that are expected to offer attractive potential sales growth, and to carefully evaluate land investment opportunities that meet our standards so that we are well-positioned, financially and operationally, for the long term.”

The Company delivered 5,428 homes in the nine months ended August 31, 2010, nearly unchanged from the year-earlier period, while the average selling price decreased 1% year over year to $208,100. For the first nine months of fiscal 2010, Company-wide revenues totaled $1.14 billion, compared to $1.15 billion for the year-earlier period. The Company posted a net loss of $86.8 million, or $1.13 per diluted share, for the nine months ended August 31, 2010, including pretax, noncash charges of $16.7 million for inventory impairments and land option contract abandonments, and an after-tax charge of $37.0 million to record a valuation allowance against net deferred tax assets. In the nine months ended August 31, 2009, the Company generated a net loss of $202.5 million, or $2.64 per diluted share, including pretax, noncash charges of $129.5 million for inventory and joint venture impairments and land option contract abandonments, and an after-tax charge of $89.9 million to record a valuation allowance against net deferred tax assets.

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