KB Home, Los Angeles (NYSE:KBH) on Friday reported a net loss of $9.6 million (-$.13 per diluted share) for its fiscal third quarter ended August 31. The results, which included $1.2 million in impairments, a $7.5 million reversal of warranty claims charges and a $2.5 million charge to deferred tax assets, compared with a loss of $1.4 million (-$.02 per share) in the prior-year quarter, which included $3.5 million in impairments and a $3 million charge to tax assets.
The results beat analyst expectations for a loss of 19 cents per share.
Revenues fell 27% to $367.3 million in the quarter as closings dropped 31% to 1,603, partly offset by a 6% increase in average selling price from last year's quarter to $227,400. The ASP in the West, however, declined from $352,200 in last year's third quarter to $334,800 in this year's quarter.
New orders surged 40% to 1,838 in quarter, far ahead of an increase in the 15% range expected by analysts. Orders rose in all four geographic regions, with increases ranging from 22% in the Central region to 73% in the West Coast region. The cancellation rate fell to 29% from 33% in last year's quarter.
Backlog at quarter's end was 2,657 homes in backlog with an aggregate value of $559.3 million, up 22% from the year-earlier quarter in units and up 23% in dollars. The company did not report lot or community counts.
Gross margin decreased to 16.9% from 17.5% in the 2010 third quarter but improved from 13.4% and 14.9% in the first and second quarters of 2011.Minus charges, the margin was 17.2%, down from 18.2% a year earlier.
Selling, general and administrative expenses dropped 23%, or $18.4 million, to $60.2 million on downsizing overhead, recovery of legal expenses from insurance carriers and a lower volume of homes delivered. As a percentage of housing revenues, the SG&A was 16.5%, down from 25.4% in the first quarter, from 23.2% in the second quarter of 2011 and up from 15.8% in the third quarter of 2010.
Financial services operations, which included the now defunct JV mortgage arrangement with Bank of America, generated pretax income of $1.1 million for the quarter, down from $2.4 million for the year-earlier quarter. The equity in loss of the JV was $0.9 million, down from income of $1.0 million in the year-earlier quarter. The JV stopped accepting loan applications and offering mortgage banking services in late June, when KB entered into a marketing services agreement with MetLife Home Loans.
KB ended the quarter with $477.4 million in cash and cash equivalents and$113.2 million in restricted cash and long-term debt of $1.59 billion, down$188.8 million from $1.78 billion at November 30, 2010 due to the repayment of $100.0 million in aggregate principal amount of 6 3/8% senior notes at their August 15, 2011 maturity.
"Our strategic actions over the past several quarters of investing in attractive land positions, opening new communities, and reducing construction and overhead costs are yielding measurable results," said Jeffrey Mezger, KB president and CEO, in the earnings release. "We remain carefully focused on extending and sustaining the positive sequential trends we have established and ending the year with a strong fourth quarter, giving us momentum as we enter 2012."
Analysts took note of the outperformance in orders but remained wary.
Adam Rudiger at Wells Fargo, said in an investor note, "While orders were very strong and well above our expectations, KBH has stopped reporting active community count, and we therefore do not know how much of the strength should be attributed to community count growth. Based upon our review of the company's website at the end of June, there were 14% more communities than there were a year ago."
Rudiger, and others, pointed out the company's eroding cash position. "With an additional ~$230MM expected outlay sometime before calendar year end to settle the SouthEdge litigation, unrestricted cash is expected to decline further, although the company should see some positive cash flow benefits from seasonality in Q4."
Stephen East at Ticonderoga Securities wrote, "KBH turned in a result that was palpably better than the last couple of quarters with Orders the obvious bright spot. From a cost perspective the story is still quite weak as the clean margins--factoring out what look to be once-time benefits--were not where they should be, making for a difficult road. The strong Orders flow gives KBH a fighting chance on reaching profitability but we need to see better organic gross margins along with continued progress on the SG&A front."
In his research note, J.P. Morgan's Michael Rehaut said, "While order growth ... well above our 12%E and the Street's +17% consensus represents a solid positive, in our view, at the same time, we note that core gross margins of 15.2% were solidly below our 16.5%E, and represents a partial offset to this positive. However, due to an SG&A ratio 100 bps lower than our estimate, core operating margins of -1.3% were roughly in-line with our -1.0%E.Lastly, the company's cash position declined $145 million sequentially, largely driven by the $100 million debt paydown during the quarter, resulting in a net debt-to-capital ratio of 69.8%."