KB Home (NYSE: KBH) after market close Wednesday reported net income of $47.5 million, or $.51 per diluted share, for its second quarter ended May 31, 2019. The gain compared to $57.3 million, or $.57 per diluted share in the prior-year quarter. The gain beat analyst expectations for a net of $0.39 per share.

Shares of KBH shot up nearly 6% to $24.94 in after-market trading Wednesday.

The results included:

Three Months Ended May 31, 2019 (comparisons on a year-over-year basis)

  • Total revenues were $1.02 billion, compared to $1.10 billion.
  • Homes delivered increased 2% to 2,768.
  • Average selling price decreased 8% to $367,700, mainly due to a shift in the geographic mix of homes delivered and a changing mix of communities within the company’s West Coast region.
  • Homebuilding operating income was $52.1 million, compared to $74.2 million. Homebuilding operating income margin was 5.1%, down 170 basis points. Excluding inventory-related charges of $4.3 million in the quarter and $6.5 million in the year-earlier quarter, this metric was 5.5%, compared to 7.3%.
  • Housing gross profit margin increased slightly to 17.2% from 17.1%.
  • The housing gross profit margin primarily reflected the favorable impacts of lower amortization of previously capitalized interest and the company’s adoption of a new accounting standard (ASC 606) in fiscal year 2019, which were offset by pricing pressure on orders in the 2018 fourth quarter and 2019 first quarter due to weaker market conditions during those periods, certain West Coast region communities with relatively high average selling prices and margins having closed out in previous quarters, and reduced operating leverage due to lower housing revenues and higher expenses supporting community count growth.
  • Housing gross profit margin excluding inventory-related charges was 17.6%, compared to 17.7%. Adjusted housing gross profit margin, a metric that excludes inventory-related charges and the amortization of previously capitalized interest, was 21.3%, compared to 22.2%.
  • Selling, general and administrative expenses as a percentage of housing revenues were 12.1%, compared to last year’s second quarter record-low ratio of 10.4%, mainly reflecting increased marketing expenses to support new community openings, the company’s adoption of ASC 606 and reduced operating leverage due to lower housing revenues.
  • As a result of its adoption of ASC 606, the company changed the classification and timing of recognition of certain model complex costs. In the current quarter, these changes favorably impacted the company’s housing gross profit margin and negatively impacted its selling, general and administrative expense ratio by approximately 80 basis points in each case.
  • Total pretax income was $56.8 million, compared to $78.3 million.
  • The company’s income tax expense and effective tax rate were $9.3 million and approximately 16%, respectively, which primarily reflected the favorable impacts of $4.3 million of federal energy tax credits the company earned from building energy-efficient homes and $.9 million of excess tax benefits related to stock-based compensation. Without these items, the company’s effective tax rate would have approximated 26%.
  • For the three months ended May 31, 2018, the company’s income tax expense and effective tax rate were $21.0 million and approximately 27%, respectively.
  • Net income totaled $47.5 million, or $.51 per diluted share, compared to $57.3 million, or $.57 per diluted share.

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

  • Net orders grew by 532, or 15%, to 4,064, with net order value increasing by $170.7 million, or 13%, to $1.53 billion.
  • Both net orders and net order value rose in each of the company’s four regions.
  • Company-wide, net orders per community averaged 5.4 per month, compared to 5.5 per month.
  • The cancellation rate as a percentage of gross orders improved to 15% from 18%.
  • The number of homes in ending backlog increased 2% to 5,927.
  • Ending backlog value decreased to $2.17 billion from $2.24 billion, mainly due to the lower average selling price of the homes in backlog within the company’s West Coast region.
  • Average community count increased 17% to 252. Ending community count grew 21% to 255. The improvement in the company’s average and ending community counts reflected increases in each of its four regions.

Balance Sheet as of May 31, 2019 (comparisons to November 30, 2018)

  • The company had total liquidity of $597.4 million, including cash and cash equivalents of $178.9 million and available capacity under its unsecured revolving credit facility of $418.5 million, with $50.0 million of cash borrowings outstanding under the facility.
  • Cash and cash equivalents decreased by $395.5 million, mainly due to the company’s repayment of all $230.0 million in aggregate principal amount of its 1.375% convertible senior notes at their February 1, 2019 maturity and cash used by operating activities.
  • Operating activities used net cash of $180.3 million, primarily for investments in inventories.
  • Inventories increased by $198.0 million, or 6%, to $3.78 billion.
  • Investments in land acquisition and development totaled $782.8 million for the six months ended May 31, 2019, and lots owned or controlled increased to 54,752.
  • Notes payable decreased by $205.7 million to $1.85 billion, primarily reflecting the above-mentioned repayment of convertible senior notes.
  • In the first half of 2019, the company extended its debt maturities through the repayment of all $400.0 million in aggregate principal amount of its 4.75% senior notes that were scheduled to mature on May 15, 2019 using $400.0 million of net proceeds from concurrent public senior notes offerings completed in the 2019 first quarter.
  • The company’s ratio of debt to capital of 45.8% improved 390 basis points from November 30, 2018 and 930 basis points from May 31, 2018. The ratio of net debt to capital increased 170 basis points to 43.3%.

“We are pleased with our second quarter performance, as we made significant progress on our Returns-Focused Growth Plan. Two of the key objectives of this Plan are to grow our business and strengthen our balance sheet. This quarter’s results demonstrate further achievement in both areas, with average community count growth of 17% year over year — our most substantial increase in four years — and a 930-basis point reduction in our debt to capital ratio, to 45.8% over the same period,” said Jeffrey Mezger, chairman, president and CEO.

“Demand for our products was strong at 5.4 net orders per community, per month, keeping pace with the exceptional absorption rate we generated in last year’s second quarter. We were well positioned throughout this Spring selling season, with the ongoing expansion of our community count driving a 15% year-over-year increase in net orders. With net order value up 13% year over year to $1.5 billion, driven by double digit order growth in each of our four regions, and continued year-over-year community count growth anticipated for our third and fourth quarters, we are confident we can produce further improvement in our results in the second half of this year.”