KB Home (KBH) reported a net loss of $68.5 million or 89 cents per share in the second quarter of fiscal 2011, compared with a net loss of $30.7 million or 40 cents per share a year ago.
However, excluding inventory impairments and land option contract abandonment charges of $20.6 million and a loss of $14.6 million on loan guaranty related to the company’s investment in South Edge, LLC, the adjusted net loss stood at $33.3 million or 43 cents per share, which is much wider than the Zacks Consensus Estimate of a loss of 32 cents per share.
Total revenue fell 27% to $271.7 million, mainly driven by a 28% decline in housing revenues to $270 million. The decrease in housing revenues reflected a 29% decrease in the number of homes delivered to 1,265 homes, partly offset by a 3% rise in average selling price to $213,400. However, quarterly revenues were higher than the Zacks Consensus Estimate of $266 million.
Meanwhile, net orders fell 11% to 1,998 homes from 2,244 homes a year ago. As a percentage of gross orders, the company’s cancellation rate was 25% in the quarter compared with 24% in the prior-year period.
As of May 31, 2011, the company’s backlog totaled 2,422 homes, a decline of 24% from 3,175 homes in the year-ago period. Potential housing revenues from backlog fell 23% to $501.5 million as of May 31, 2011 from $648.2 million as of May 31, 2010, primarily due to the lower number of homes in backlog.
The company’s homebuilding business (including housing and land) posted an operating loss of $57.5 million in the quarter compared with $17.3 million in the second quarter of fiscal 2010.
Selling, general and administrative (SG&A) expenses dipped 25% to $62.5 million from $83.0 million a year ago. Lower SG&A expenses were attributed to the company’s efficient organizational structure, reduced overhead, lower legal expenses and lower volume of homes delivered.
The Financial Services business, which include the KB Home’s equity interest in an unconsolidated mortgage banking joint venture, registered a 14% rise in revenues to $1.76 million. The segment reported a pre-tax income of $1.6 million in the quarter versus $4.2 million in the year-earlier quarter.
The reduction in pre-tax income was driven by lower equity in the unconsolidated joint venture’s income. The lower equity income was the result of lower mortgage loan originations and lower profits per loan.
KB Home had cash and cash equivalents of $735.3 million and total debt of $956.4 million as of May 31, 2011. The debt-to-capitalization ratio worsened to 79% in the same period from 77% as of February 28, 2010.
Our Take
A depressed housing industry is the biggest concern for any homebuilder including KB Home. Besides, there is no sign of a speedy recovery. Home sales declined consistently in each of the first three months of the year. The situation is feared to deteriorate further. Moreover, a lack of geographic diversity signifies that the company is heavily exposed to fluctuations in limited markets.
In addition, house prices also plunged continuously, driven by an excess supply of homes in the face of depressed demand and tough competition from resale homes, foreclosed homes, short sale homes and rental housing.
However, the company’s constant effort to redesign and upgrade its existing product lines is worth mentioning. It is also aggressively buying lots with a view to expand and improve its business in fiscal 2011 and beyond. KB Home recently purchased 180 lots in the eastern parts of Austin, expecting a strong demand for homes in the region.
More importantly, KB Home has no significant debt maturities for the next three to four years, implying the availability of liquidity to capitalize on potential growth opportunities.
Thus, keeping these in mind, the shares of KB Home are maintaining a Zacks #3 Rank, which translates into a short-term “Hold” rating.
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