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July 9, 2020, 4:41 p.m. EDT

10-Q: KB HOME

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(EDGAR Online via COMTEX) -- 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):
                                   Three Months Ended May 31,                     Six Months Ended May 31,
                               2020           2019         Variance         2020            2019          Variance
        Revenues:
        Homebuilding       $  910,280     $ 1,018,671         (11)  %   $ 1,982,662     $ 1,827,459            8  %
        Financial services      3,690           3,132           18            7,243           5,827           24
        Total revenues     $  913,970     $ 1,021,803         (11)  %   $ 1,989,905     $ 1,833,286            9  %
        Pretax income:
        Homebuilding       $   60,185     $    52,169           15  %   $   123,220     $    84,207           46  %
        Financial services      7,604           4,592           66           13,417           7,065           90
        Total pretax
        income                 67,789          56,761           19          136,637          91,272           50
        Income tax expense    (15,800 )        (9,300 )        (70 )        (24,900 )       (13,800 )        (80 )
        Net income         $   51,989     $    47,461           10  %   $   111,737     $    77,472           44  %
        Basic earnings per
        share              $      .57     $       .54            6  %   $      1.23     $       .88           40  %
        Diluted earnings
        per share          $      .55     $       .51            8  %   $      1.19     $       .82           45  %
        


During the 2020 first half, we, like many companies worldwide, experienced an extraordinary change in business conditions in mid-March that created a sharp difference in our results between the first and second quarters. Our 2020 first quarter was particularly strong, as we generated the highest revenues, net orders, ending backlog and ending backlog value for any first quarter since 2007 and increased our net income 99% year over year. We had positive momentum entering the 2020 second quarter with the number of homes in backlog at the beginning of the quarter ("beginning backlog") up 26% year over year. In mid-March 2020, however, the COVID-19 pandemic and related COVID-19 control responses in our served markets, including quarantines, "stay-at-home" orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations, severely impacted housing market conditions during our second quarter and beyond. The unprecedented steep drop in employment and economic activity in March led the National Bureau of Economic Research to determine that the United States entered into, and continues to be in, a recession. In April, the national unemployment rate reached its highest level since the Great Depression, and the unemployment rates in the states where we operate surged. The extreme economic contraction from mid-March through May together with ongoing uncertainty about the virulence of COVID-19 and the availability of generally effective therapeutics or a vaccine, as well as the duration and parameters of COVID-19 control responses, created significant volatility in capital markets; disrupted secondary mortgage markets, in part due to CARES Act relief provisions for outstanding mortgage loans; weakened consumer confidence and decreased demand for new homes (including homes ordered in the first quarter) for most of our 2020 second quarter.

factors. Many of the home purchase cancellations were on homes that had not yet been started, though about 20% were scheduled for delivery during the quarter. Among the markets with the largest impact to our second quarter net orders were the Inland Empire and Bay Area in California; Las Vegas, Nevada; Houston, Texas; and Orlando, Florida.

The following table presents information concerning our net orders, cancellation rates, ending backlog and community count for the three-month and six-month periods ended May 31, 2020 and 2019 (dollars in thousands):







                                     Three Months Ended May 31,         Six Months Ended May 31,
                                        2020             2019             2020            2019
        Net orders                         1,758           4,064            5,253           6,739
        Net order value (a)       $      688,444     $ 1,532,688     $  2,071,098     $ 2,554,775
        Cancellation rates (b)                43 %            15 %             27 %            17 %
        Ending backlog - homes             5,080           5,927            5,080           5,927
        Ending backlog - value    $    1,903,017     $ 2,173,173     $  1,903,017     $ 2,173,173
        Ending community count               244             255              244             255
        Average community count              247             252              248             248
        


(a) Net order value represents the potential future housing revenues associated with net orders generated during the period, as well as homebuyer selections of lot and product premiums and design studio options and upgrades for homes in backlog during the same period.

(b) Cancellation rates represent the total number of contracts for new homes cancelled during a period divided by the total (gross) orders for new homes generated during the same period.

Net Orders. Our second quarter has typically been our strongest quarter for net orders. However, the COVID-19 pandemic and associated COVID-19 control responses in our served markets negatively affected our gross orders, which decreased 36% year over year, and elevated our cancellation rate. As a result, for the three months ended May 31, 2020, net orders from our homebuilding operations fell 57% from the year-earlier period. Reflecting the progression of COVID-19 pandemic-related impacts, our gross orders for March and April 2020 decreased 4% and 59%, respectively, as compared to the corresponding months of 2019. We experienced steady improvement in our order trends beginning in May, which was further fueled by welcoming walk-in traffic to our communities. For May 2020, the year-over-year decrease in gross orders moderated to 42%, reflecting the easing of the COVID-19 control responses in our served markets and our gradual resumption of more normalized operations in the latter part of the month. Our 2020 net orders were down 10% in March, 107% in April and 55% in May, each as compared to the corresponding year-earlier period.







        HOMEBUILDING
        The following table presents a summary of certain financial and operational data
        for our homebuilding operations (dollars in thousands, except average selling
        price):
                                                Three Months Ended May 31,         Six Months Ended May 31,
                                                  2020              2019             2020            2019
        Revenues:
        Housing                              $    909,978       $ 1,017,799     $  1,981,788     $ 1,815,970
        Land                                          302               872              874          11,489
        Total                                     910,280         1,018,671        1,982,662       1,827,459
        Costs and expenses:
        Construction and land costs
        Housing                                  (744,151 )        (843,071 )     (1,629,632 )    (1,504,399 )
        Land                                         (302 )            (673 )           (874 )       (10,200 )
        Total                                    (744,453 )        (843,744 )     (1,630,506 )    (1,514,599 )
        Selling, general and administrative
        expenses                                 (114,238 )        (122,828 )       (240,372 )      (229,422 )
        Total                                    (858,691 )        (966,572 )     (1,870,878 )    (1,744,021 )
        Operating income                     $     51,589       $    52,099     $    111,784     $    83,438
        Homes delivered                             2,499             2,768            5,251           4,920
        Average selling price                $    364,100       $   367,700     $    377,400     $   369,100
        Housing gross profit margin as a
        percentage of housing revenues               18.2 %            17.2 %           17.8 %          17.2 %
        Housing gross profit margin
        excluding inventory-related charges
        as a percentage of housing revenues          18.7 %            17.6 %           18.3 %          17.6 %
        Adjusted housing gross profit margin
        as a percentage of housing revenues          21.9 %            21.3 %           21.5 %          21.3 %
        Selling, general and administrative
        expenses as a percentage of housing
        revenues                                     12.6 %            12.1 %           12.1 %          12.6 %
        Operating income as a percentage of
        homebuilding revenues                         5.7 %             5.1 %            5.6 %           4.6 %
        


For reporting purposes, we organize our homebuilding operations into four segments - West Coast, Southwest, Central and Southeast. As of May 31, 2020, our homebuilding reporting segments consisted of ongoing operations located in the following states to the extent permitted by applicable public health orders as part of their respective COVID-19 control responses: West Coast - California and Washington; Southwest - Arizona and Nevada; Central - Colorado and Texas; and Southeast - Florida and North Carolina. The following tables present homes delivered, net orders, cancellation rates as a percentage of gross orders, net order value, average community count and ending backlog (number of homes and value) by homebuilding reporting segment (dollars in thousands):







                                             Three Months Ended May 31,
                          Homes Delivered              Net Orders          Cancellation Rates
        Segment            2020          2019        2020       2019          2020         2019
        West Coast               585       680          555     1,141               37 %   14  %
        Southwest                552       566          305       768               50     10
        Central                  955     1,067          719     1,498               36     17
        Southeast                407       455          179       657               61     19
        Total                  2,499     2,768        1,758     4,064               43 %   15  %
        








                                                 Three Months Ended May 31,
                                 Net Order Value                       Average Community Count
        Segment          2020           2019       Variance        2020           2019        Variance
        West Coast   $   324,936    $   664,431      (51)  %            75             67         12  %
        Southwest         99,464        241,729       (59 )             37             42        (12 )
        Central          212,445        438,302       (52 )             90             94         (4 )
        Southeast         51,599        188,226       (73 )             45             49         (8 )
        Total        $   688,444    $ 1,532,688      (55)  %           247            252        (2)  %
                                                  Six Months Ended May 31,
                           Homes Delivered                Net Orders             Cancellation Rates
        Segment          2020           2019         2020          2019           2020          2019
        West Coast         1,379          1,177     1,534            1,840             23 %       17  %
        Southwest          1,155          1,049     1,070            1,301             27         12
        Central            1,923          1,891     1,936            2,424             25         20
        Southeast            794            803       713            1,174             36         19
        Total              5,251          4,920     5,253            6,739             27 %       17  %
                                 Net Order Value                       Average Community Count
        Segment          2020           2019       Variance        2020           2019        Variance
        West Coast   $   923,352    $ 1,084,892      (15)  %            75             64         17  %
        Southwest        356,684        412,568       (14 )             38             40         (5 )
        Central          585,926        722,568       (19 )             89             94         (5 )
        Southeast        205,136        334,747       (39 )             46             50         (8 )
        Total        $ 2,071,098    $ 2,554,775      (19)  %           248            248          -  %
                                                          May 31,
                                 Backlog - Homes                           Backlog - Value
        Segment          2020           2019       Variance        2020           2019        Variance
        West Coast         1,198          1,378      (13)  %   $   705,357    $   806,651       (13)  %
        Southwest          1,153          1,178        (2 )        380,454        372,699          2
        Central            2,001          2,247       (11 )        609,156        669,037         (9 )
        Southeast            728          1,124       (35 )        208,050        324,786        (36 )
        Total              5,080          5,927      (14)  %   $ 1,903,017    $ 2,173,173       (12)  %
        


Revenues. Homebuilding revenues for the three months ended May 31, 2020 decreased 11% from the year-earlier period primarily due to a decline in housing revenues.

particular markets at given points in time, the availability of opportunities to sell land at acceptable prices and prevailing market conditions.

Jul 09, 2020

COMTEX_367893465/2041/2020-07-09T16:41:25

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