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KB Home Reports 2018 Third Quarter Results

September 25, 2018 4:10 PM

Revenues Up 7% to $1.2 Billion;

Housing Gross Profit Margin Expands 180 Basis Points;

Earnings Per Diluted Share Increases 71% to $.87

LOS ANGELES--(BUSINESS WIRE)-- KB Home (NYSE: KBH) today reported results for its third quarter ended August�31, 2018.

“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 homebuilding 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,” continued Mezger. “During the quarter, we significantly expanded our existing Jacksonville, Florida operations by acquiring approximately 2,100 owned and controlled lots from a regional homebuilder. 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.”

Three Months Ended August 31, 2018 (comparisons on a year-over-year basis)

Nine Months Ended August 31, 2018 (comparisons on a year-over-year basis)

Backlog and Net Orders (comparisons on a year-over-year basis)

Balance Sheet as of August 31, 2018 (comparisons to November 30, 2017)

Earnings Conference Call

The conference call to discuss the Company’s third quarter 2018 earnings will be broadcast live TODAY at 2:00 p.m. Pacific Time, 5:00 p.m. Eastern Time. To listen, please go to the Investor Relations section of the Company’s website at www.kbhome.com.

About KB Home

KB Home (NYSE: KBH) is one of the largest homebuilders in the United States, with more than 600,000 homes delivered since our founding in 1957. We operate in 36 markets in eight states, primarily serving first-time and first move-up homebuyers, as well as active adults. We are differentiated in offering customers the ability to personalize what they value most in their home, from choosing their lot, floor plan, and exterior, to selecting design and décor choices in our KB Home Studios. In addition, our industry leadership in sustainability helps to lower the cost of homeownership for our buyers compared to a typical resale home. We take a broad approach to sustainability, encompassing energy efficiency, water conservation, healthier indoor environments, smart home capabilities and waste reduction. KB Home is the first national builder to have earned awards under all of the U.S. EPA’s homebuilder programs — ENERGY STAR®, WaterSense® and Indoor airPLUS®. We invite you to learn more about KB Home by visiting www.kbhome.com, calling 888-KB-HOMES,�or connecting with us on Facebook.com/KBHome or Twitter.com/KBHome.

Forward-Looking and Cautionary Statements

Certain matters discussed in this press release, including any statements that are predictive in nature or concern future market and economic conditions, business and prospects, our future financial and operational performance, or our future actions and their expected results are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and projections about future events and are not guarantees of future performance. We do not have a specific policy or intent of updating or revising forward-looking statements. Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The most important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to the following: general economic, employment and business conditions; population growth, household formations and demographic trends; conditions in the capital, credit and financial markets; our ability to access external financing sources and raise capital through the issuance of common stock, debt or other securities, and/or project financing, on favorable terms; the execution of any share repurchases pursuant to our board of directors’ authorization; material and trade costs and availability; changes in interest rates; our debt level, including our ratio of debt to capital, and our ability to adjust our debt level and maturity schedule; our compliance with the terms of our revolving credit facility; volatility in the market price of our common stock; weak or declining consumer confidence, either generally or specifically with respect to purchasing homes; competition from other sellers of new and resale homes; weather events, significant natural disasters and other climate and environmental factors; government actions, policies, programs and regulations directed at or affecting the housing market (including the TCJA, the Dodd-Frank Act, tax benefits associated with purchasing and owning a home, and the standards, fees and size limits applicable to the purchase or insuring of mortgage loans by government-sponsored enterprises and government agencies), the homebuilding industry, or construction activities; changes in existing tax laws or enacted corporate income tax rates, including those resulting from regulatory guidance and interpretations issued with respect to the TCJA; changes in U.S. trade policies, including the imposition of tariffs and duties on homebuilding materials and products, and related trade disputes with and retaliatory measures taken by other countries; the availability and cost of land in desirable areas; our warranty claims experience with respect to homes previously delivered and actual warranty costs incurred; costs and/or charges arising from regulatory compliance requirements or from legal, arbitral or regulatory proceedings, investigations, claims or settlements, including unfavorable outcomes in any such matters resulting in actual or potential monetary damage awards, penalties, fines or other direct or indirect payments, or injunctions, consent decrees or other voluntary or involuntary restrictions or adjustments to our business operations or practices that are beyond our current expectations and/or accruals; our ability to use/realize the net deferred tax assets we have generated; our ability to successfully implement our current and planned strategies and initiatives related to our product, geographic and market positioning, gaining share and scale in our served markets and in entering into new markets; our operational and investment concentration in markets in California; consumer interest in our new home communities and products, particularly from first-time homebuyers and higher-income consumers; our ability to generate orders and convert our backlog of orders to home deliveries and revenues, particularly in key markets in California; our ability to successfully implement our Returns-Focused Growth Plan and achieve the associated revenue, margin, profitability, cash flow, community reactivation, land sales, business growth, asset efficiency, return on invested capital, return on equity, net debt-to-capital ratio and other financial and operational targets and objectives; income tax expense volatility associated with stock-based compensation; the ability of our homebuyers to obtain residential mortgage loans and mortgage banking services; the performance of mortgage lenders to our homebuyers; the performance of KBHS Home Loans, LLC, our mortgage banking joint venture with Stearns Lending, LLC; information technology failures and data security breaches; and other events outside of our control. Please see our periodic reports and other filings with the Securities and Exchange Commission for a further discussion of these and other risks and uncertainties applicable to our business.

�

KB HOME

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months and Nine Months Ended August�31, 2018 and 2017

(In Thousands, Except Per Share Amounts - Unaudited)

�
� � Three Months Ended August 31, � Nine Months Ended August 31,
2018 � 2017 2018 � 2017
Total revenues $ 1,225,347 � $ 1,144,001 � $ 3,198,393 � $ 2,965,391 �
Homebuilding:
Revenues $ 1,221,875 $ 1,140,787 $ 3,189,753 $ 2,957,105
Costs and expenses (1,116,262 ) (1,064,096 ) (2,965,939 ) (2,805,578 )
Operating income 105,613 76,691 223,814 151,527
Interest income 458 347 2,739 747
Interest expense — — — (6,307 )
Equity in income (loss) of unconsolidated joint ventures 3,493 � (814 ) 2,326 � (679 )
Homebuilding pretax income 109,564 � 76,224 � 228,879 � 145,288 �
Financial services:
Revenues 3,472 3,214 8,640 8,286
Expenses (945 ) (890 ) (2,855 ) (2,525 )
Equity in income of unconsolidated joint ventures 2,585 � 660 � 4,365 � 1,600 �
Financial services pretax income 5,112 � 2,984 � 10,150 � 7,361 �
Total pretax income 114,676 79,208 239,029 152,649
Income tax expense (27,200 ) (29,000 ) (165,500 ) (56,400 )
Net income $ 87,476 � $ 50,208 � $ 73,529 � $ 96,249 �
Earnings per share:
Basic $ .99 � $ .58 � $ .83 � $ 1.12 �
Diluted $ .87 � $ .51 � $ .75 � $ 1.00 �
Weighted average shares outstanding:
Basic 87,951 � 85,974 � 87,565 � 85,517 �
Diluted 101,072 � 98,912 � 101,213 � 97,624 �
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KB HOME

CONSOLIDATED BALANCE SHEETS

(In Thousands - Unaudited)

�
� � August 31,
2018 		� November 30,
2017
Assets
Homebuilding:
Cash and cash equivalents $ 354,361 $ 720,630
Receivables 279,608 244,213
Inventories 3,688,855 3,263,386
Investments in unconsolidated joint ventures 62,436 64,794
Deferred tax assets, net 468,969 633,637
Other assets 108,919 � 102,498
4,963,148 5,029,158
Financial services 11,541 � 12,357
Total assets $ 4,974,689 � $ 5,041,515
�
Liabilities and stockholders’ equity
Homebuilding:
Accounts payable $ 259,947 $ 213,463
Accrued expenses and other liabilities 634,466 575,930
Notes payable 2,063,127 � 2,324,845
2,957,540 3,114,238
Financial services 1,200 966
Stockholders’ equity 2,015,949 � 1,926,311
Total liabilities and stockholders’ equity $ 4,974,689 � $ 5,041,515
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KB HOME

SUPPLEMENTAL INFORMATION

For the Three Months and Nine Months Ended August�31, 2018 and 2017

(In Thousands, Except Average Selling Price - Unaudited)

�
� � Three Months Ended August 31, � Nine Months Ended August 31,
2018 � 2017 2018 � 2017
Homebuilding revenues:
Housing $ 1,219,620 $ 1,137,406 $ 3,177,928 $ 2,944,013
Land 2,255 � 3,381 � 11,825 � 13,092 �
Total $ 1,221,875 � $ 1,140,787 � $ 3,189,753 � $ 2,957,105 �
�
�
Homebuilding costs and expenses:
Construction and land costs
Housing $ 999,499 $ 953,413 $ 2,631,634 $ 2,488,577
Land 2,010 � 1,588 � 10,597 � 11,100 �
Subtotal 1,001,509 955,001 2,642,231 2,499,677
Selling, general and administrative expenses 114,753 � 109,095 � 323,708 � 305,901 �
Total $ 1,116,262 � $ 1,064,096 � $ 2,965,939 � $ 2,805,578 �
�
�
Interest expense:
Interest incurred $ 35,228 $ 43,434 $ 115,096 $ 131,172
Loss on early extinguishment of debt — — — 5,685
Interest capitalized (35,228 ) (43,434 ) (115,096 ) (130,550 )
Total $ — � $ — � $ — � $ 6,307 �
�
�
Other information:
Depreciation and amortization $ 2,183 $ 2,343 $ 6,559 $ 7,157
Amortization of previously capitalized interest 53,288 � 55,204 � 148,071 � 145,059 �
�
�
Average selling price:
West Coast $ 693,200 $ 682,500 $ 675,200 $ 639,600
Southwest 308,300 291,400 306,800 290,000
Central 301,000 280,800 300,400 282,100
Southeast 283,300 � 277,300 � 280,800 � 284,500 �
Total $ 408,200 � $ 411,400 � $ 400,800 � $ 389,000 �
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�
KB HOME

SUPPLEMENTAL INFORMATION

For the Three Months and Nine Months Ended August 31, 2018 and 2017

(Dollars in Thousands - Unaudited)

�
� � Three Months Ended August 31, � Nine Months Ended August 31,
2018 � 2017 2018 � 2017
Homes delivered:
West Coast 825 890 2,155 2,226
Southwest 636 454 1,724 1,297
Central 1,082 1,032 2,911 2,898
Southeast 445 � 389 � 1,138 � 1,148
Total 2,988 � 2,765 � 7,928 � 7,569
�
�
Net orders:
West Coast 724 853 2,500 2,744
Southwest 505 549 1,715 1,634
Central 986 859 3,329 3,094
Southeast 470 � 347 � 1,457 � 1,132
Total 2,685 � 2,608 � 9,001 � 8,604
�
�
Net order value:
West Coast $ 424,956 $ 547,049 $ 1,620,241 $ 1,835,910
Southwest 167,247 168,300 544,448 484,833
Central 280,088 256,502 960,688 899,392
Southeast 145,787 � 100,081 � 427,763 � 320,731
Total $ 1,018,078 � $ 1,071,932 � $ 3,553,140 � $ 3,540,866
�
�
�
August 31, 2018 August 31, 2017
Homes Value Homes Value
Backlog data:
West Coast 1,227 $ 771,264 1,431 $ 938,902
Southwest 1,079 343,093 1,141 336,523
Central 2,200 627,916 2,175 641,101
Southeast 978 � 293,070 � 708 � 199,416
Total 5,484 � $ 2,035,343 � 5,455 � $ 2,115,942
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KB HOME
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(In Thousands, Except Percentages and Per Share Amounts - Unaudited)

This press release contains, and Company management’s discussion of the results presented in this press release may include, information about the Company’s adjusted housing gross profit margin, adjusted income tax expense, adjusted net income, adjusted diluted earnings per share, adjusted effective tax rate and ratio of net debt to capital, none of which are calculated in accordance with generally accepted accounting principles (“GAAP”). The Company believes these non-GAAP financial measures are relevant and useful to investors in understanding its operations and the leverage employed in its operations, and may be helpful in comparing the Company with other companies in the homebuilding industry to the extent they provide similar information. However, because they are not calculated in accordance with GAAP, these non-GAAP financial measures may not be completely comparable to other companies in the homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, these non-GAAP financial measures should be used to supplement their respective most directly comparable GAAP financial measures in order to provide a greater understanding of the factors and trends affecting the Company’s operations.

Adjusted Housing Gross Profit Margin

The following table reconciles the Company’s housing gross profit margin calculated in accordance with GAAP to the non-GAAP financial measure of the Company’s adjusted housing gross profit margin:

�
� � Three Months Ended August 31, � Nine Months Ended August 31,
2018 � 2017 2018 � 2017
Housing revenues $ 1,219,620 $ 1,137,406 $ 3,177,928 $ 2,944,013
Housing construction and land costs (999,499 ) (953,413 ) (2,631,634 ) (2,488,577 )
Housing gross profits 220,121 183,993 546,294 455,436
Add: Inventory-related charges (a) 8,414 � 8,113 � 19,925 � 18,122 �
Housing gross profits excluding inventory-related charges 228,535 192,106 566,219 473,558
Add: Amortization of previously capitalized interest (b) 53,016 � 55,036 � 143,733 � 143,254 �
Adjusted housing gross profits $ 281,551 � $ 247,142 � $ 709,952 � $ 616,812 �
Housing gross profit margin 18.0 % 16.2 % 17.2 % 15.5 %
Housing gross profit margin excluding inventory-related charges 18.7 % 16.9 % 17.8 % 16.1 %
Adjusted housing gross profit margin 23.1 % 21.7 % 22.3 % 21.0 %
�
(a) � � Represents inventory impairment and land option contract abandonment charges associated with housing operations.
�
(b) Represents the amortization of previously capitalized interest associated with housing operations.

Adjusted housing gross profit margin is a non-GAAP financial measure, which the Company calculates by dividing housing revenues less housing construction and land costs excluding (1) housing inventory impairment and land option contract abandonment charges (as applicable) recorded during a given period and (2) amortization of previously capitalized interest associated with housing operations, by housing revenues. The most directly comparable GAAP financial measure is housing gross profit margin. The Company believes adjusted housing gross profit margin is a relevant and useful financial measure to investors in evaluating the Company’s performance as it measures the gross profits the Company generated specifically on the homes delivered during a given period. This non-GAAP financial measure isolates the impact that housing inventory impairment and land option contract abandonment charges, and the amortization of previously capitalized interest associated with housing operations, have on housing gross profit margins, and allows investors to make comparisons with the Company’s competitors that adjust housing gross profit margins in a similar manner. The Company also believes investors will find adjusted housing gross profit margin relevant and useful because it represents a profitability measure that may be compared to a prior period without regard to variability of housing inventory impairment and land option contract abandonment charges, and amortization of previously capitalized interest associated with housing operations. This financial measure assists management in making strategic decisions regarding community location and product mix, product pricing and construction pace.

Adjusted Income Tax Expense, Adjusted Net Income, Adjusted Diluted Earnings Per Share and Adjusted Effective Tax Rate

The following table reconciles the Company’s income tax expense, net income, diluted earnings per share and effective tax rate for the nine months ended August 31, 2018 calculated in accordance with GAAP to the non-GAAP financial measures of adjusted income tax expense, adjusted net income, adjusted diluted earnings per share and adjusted effective tax rate, respectively:

�
� � Nine Months Ended August 31,
2018 � 2017
As Reported � TCJA Adjustment � As Adjusted As Reported
Total pretax income $ 239,029 $ — $ 239,029 $ 152,649
Income tax expense (a) (165,500 ) 111,200 � (54,300 ) (56,400 )
Net income $ 73,529 � $ 111,200 � $ 184,729 � $ 96,249 �
Diluted earnings per share $ .75 � $ 1.84 � $ 1.00 �
Weighted average shares outstanding — diluted 101,213 � 101,213 � 97,624 �
Effective tax rate (a) 69 % 23 % 37 %
�
(a) � � For the nine months ended August 31, 2018, income tax expense and adjusted income tax expense, as well as the related effective tax rate and adjusted effective tax rate, include the favorable impacts of the reduction in the federal corporate income tax rate from 35% to 21%, effective January 1, 2018, $7.2 million of federal energy tax credits the Company earned from building energy efficient homes, and $3.0 million of excess tax benefits from stock-based compensation as a result of the Company’s adoption of Accounting Standards Update No. 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” effective December 1, 2017. For the nine months ended August 31, 2017, income tax expense and the effective tax rate included the favorable impact of $3.8 million of federal energy tax credits.

The Company’s adjusted income tax expense, adjusted net income, adjusted diluted earnings per share and adjusted effective tax rate are non-GAAP financial measures, which the Company calculates by excluding a non-cash charge of $111.2 million recorded in the 2018 first quarter from its reported income tax expense, net income, diluted earnings per share and effective tax rate, respectively. This charge was primarily due to the Company’s previously announced accounting re-measurement of its deferred tax assets based on the above-noted reduction in the federal corporate income tax rate under the TCJA. The most directly comparable GAAP financial measures are the Company’s income tax expense, net income, diluted earnings per share and effective tax rate. The Company believes that these non-GAAP measures are meaningful to investors as they allow for an evaluation of the Company’s operating results without the impact of the TCJA-related charge.

Ratio of Net Debt to Capital

The following table reconciles the Company’s ratio of debt to capital calculated in accordance with GAAP to the non-GAAP financial measure of the Company’s ratio of net debt to capital:

�
� � August 31,
2018 		� November 30,
2017
Notes payable $ 2,063,127 $ 2,324,845
Stockholders’ equity 2,015,949 � 1,926,311 �
Total capital $ 4,079,076 � $ 4,251,156 �
Ratio of debt to capital 50.6 % 54.7 %
�
�
Notes payable $ 2,063,127 $ 2,324,845
Less: Cash and cash equivalents (354,361 ) (720,630 )
Net debt 1,708,766 1,604,215
Stockholders’ equity 2,015,949 � 1,926,311 �
Total capital $ 3,724,715 � $ 3,530,526 �
Ratio of net debt to capital 45.9 % 45.4 %
�

The ratio of net debt to capital is a non-GAAP financial measure, which the Company calculates by dividing notes payable, net of homebuilding cash and cash equivalents, by capital (notes payable, net of homebuilding cash and cash equivalents, plus stockholders’ equity). The most directly comparable GAAP financial measure is the ratio of debt to capital. The Company believes the ratio of net debt to capital is a relevant and useful financial measure to investors in understanding the leverage employed in the Company’s operations.

KB Home

Investor Relations Contact

Jill Peters, 310-893-7456

[email protected]

or

Media Contact

Susan Martin, 310-231-4142

[email protected]

Source: KB Home

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