KB Home, Los Angeles (NYSE:KBH) surprised Wall Street Friday morning byreporting net income $17.4 million, $.23 per diluted share, for its fiscalfourth quarter ended Nov. 30. Analysts were expecting a loss of 17 cents pershare.
Shares of KB shot up 6% at market open Friday to $15.20 on heavy volume.
The profit was driven by higher gross margins, lower SG#38;A, better closingprices and an income tax benefit of $2.0 million. In the year-earlierquarter, with a tax benefit of $191.7 million, KB reported net income of$100.7 million. The current quarter results included $3.2 million ofinventory impairment and land option contract abandonment charges, comparedto $77.2 million in the comparable quarter last year.
On a pretax basis, KB generated income of $15.4 million in the quarter ofcompared to a loss of $91.0 million reported in the year-earlier quarter.
Revenues were $451.0 million, down from $674.6 million in last year'squarter as a result of lower housing and land sale revenues. Fourth quarterhousing revenues fell 28% to $446.0 million as closings dropped 37% to 1,918homes. The average selling price, however, increased 14% from $203,400 to$232,500. Land sale revenues totaled $1.9 million in the 2010 fourthquarter, compared to $52.7 million in the corresponding quarter of 2009.
New orders fell 25% to 1,085 from 1,446 in last year's quarter. As apercentage of beginning backlog, the Company's cancellation rate was 29%compared to 17% in the 2009 fourth quarter. As a percentage of gross sales,the cancellation rate was 37% in 2010 and 31% in 2009.
Backlog at November 30, 2010 totaled 1,336 homes, a 37% decrease from 2,126at the same time last year, and backlog value was down 38% to $263.8 millionfrom $422.5 million.
Housing gross margin rose to 19.1%, up 12.3 percentage points from 6.8% inthe comparable period in 2009, including the $2.9 million of inventoryimpairment and land option contract abandonment charges. Excluding charges,the housing gross margin increased to 19.7% in the current quarter from19.0% in the year-earlier quarter.
SG&A dropped 35%, or $29.7 million, to $55.7 million, due to costreductions and the lower number of homes delivered. As a percentage ofhousing revenues, SG&A was down 1.3 percentage points to 12.5% in thefourth quarter of 2010 compared to 13.8% in the year-earlier quarter, and27.5%, 22.4% and 15.8%, in the first, second and third quarters of 2010,respectively.
Financial services, including the company's interest in KBA Mortgage, LLC,an unconsolidated mortgage banking joint venture with a subsidiary of Bankof America, N.A., generated pretax income of $3.6 million and $7.5 millionin the year-earlier quarter. The decrease was primarily due to lower incomegenerated from the joint venture as the number of loans it originateddeclined.
Losses from unconsolidated home-building joint ventures totaled $1.6 millionin the quarter, compared to $1.8 million in the fourth quarter of 2009.
KB ended the quarter and the fiscal year with $1.02 billion in cash and adebt balance of $1.78 billion, down $44.8 million from $1.82 billion atNovember 30, 2009.
For the fiscal year, KB delivered 7,346 homes, down 13% from theyear-earlier period, while the average selling price increased 4%year-over-year to $214,500. Revenues totaled $1.59 billion, compared to$1.82 billion for the year-earlier period. KB posted a net loss of $69.4million, or -$.90 per diluted share, for the year ended November 30, 2010,including charges of $19.9 million for inventory impairments and land optioncontract abandonments, and an income tax benefit of $7.0 million. For theyear ended November 30, 2009, the Company generated a net loss of $101.8million, or -$1.33 per share.
"Entering 2011, housing market conditions remain difficult due to softdemand and a general oversupply of homes available for sale," said JeffreyMezger, KB Home president and CEO. "While there are indications that theoverall economy has started to recover, the lack of improvement inemployment and consumer confidence is likely to continue to hinder asustained housing recovery. Nonetheless, we believe that with ourdemonstrated ability to improve our operational and financial resultsthrough the ongoing downturn and a strong balance sheet that enables us toopportunistically grow our community count and potential housing revenues,we are well positioned for the future."
Home-building analysts were impressed. Michael Rehaut at J.P. Morgan saidin his note to investors: "Overall, while KBH¹s 25% order decline ismodestly disappointing, not only do we note that this number is roughlyin-line with the builders¹ average 26% order decline in 3Q, but moreimportantly, we believe the company¹s better than expected gross margin andSG&A as gross margins expanded 150 bps (ex-charges) versus guidance ofdown 100-200 bps, and SG&A improved 330 bps seq., well ahead of our 50bps estimate represent solid positive surprises, and should drive thestock higher today. Critically, we believe the strong improvement inSG&A represents an important ³turning point² for the company, as it hadbeen a key source of concern and relative underperformance in 1H10."
Stephen East at Ticonderoga Securities wrote, "KBH turned in a surprising, and impressive, profit that appears to be clean. A strong, much-improved gross margin combined with an excellent improvement in SG&A-well ahead of even our optimistic expectation-led to a solid EPS number."
Carl Reichardt at Wells Fargo was a bit more restrained, saying, "KBH's gross margin and SG&A results this quarter were very strong in our opinion. If they are sustainable and without any significant one-time events this quarter, we believe the company is better positioned going forward than previously thought from a profitability standpoint. However, we believe the disappointing order and closing volume may overshadow the improved margins - backlog is lower than it has been since before 1998 (as far back as we have the data) and offers little evidence of any improvement in demand."