KB Home (NYSE: KBH) after market close Wednesday reported net income rose 15% to $96.8 million for its fiscal fourth quarter ended November 30, 2018 compared to the prior-year quarter, and diluted earnings per share increased 14% to $.96. The Wall Street consensus estimate was a gain of $0.93 per share.

A KB home in Perris, California.
A KB home in Perris, California.

Results for the quarter included:

  • Total revenues decreased 4% to $1.35 billion.
  • Deliveries increased slightly to 3,389 homes.
  • Net orders for the fourth quarter decreased 12% to 2,013. Net order value declined 21% to $738.3 million.
    • Company-wide, net orders per community averaged 2.9 per month, compared to 3.4 per month.
  • The fourth quarter cancellation rate as a percentage of gross orders was flat at 28%.
  • The number of homes in ending backlog totaled 4,108, compared to 4,411.
  • Ending backlog value of $1.43 billion decreased 14%, reflecting fewer homes in backlog and the lower average selling price of those homes due to a shift in geographic mix.
  • Ending community count grew 7% to 240. Average community count for the fourth quarter increased 2% to 232, and was 7% higher compared to the 2018 third quarter.
  • Average selling price declined 5% to $395,200 due primarily to a shift in geographic mix of homes delivered.
  • Home building operating income totaled $121.9 million, compared to $131.9 million. Home building operating income margin was 9.1%, down 30 basis points. Excluding inventory-related charges of $9.1 million in the quarter and $7.1 million in the year-earlier quarter, this metric was 9.7%, compared to 9.9%.
    • Housing gross profit margin was 18.1% in both the 2018 and 2017 fourth quarters.
      • Housing gross profit margin excluding inventory-related charges improved 10 basis points to 18.7%. Adjusted housing gross profit margin, a metric that excludes inventory-related charges and the amortization of previously capitalized interest, was 22.8%, compared to 23.5%.
    • Selling, general and administrative expenses as a percentage of housing revenues were 9.0%, up 30 basis points from last year’s fourth-quarter record-low result, largely due to increased marketing expenses to support new community openings in the quarter and 2019.
  • Total pretax income was $128.9 million, compared to $137.3 million.
  • The Company’s effective tax rate of approximately 25% decreased from approximately 39%, mainly due to the reduction in the federal corporate income tax rate under the Tax Cuts and Jobs Act (“TCJA”).

For the fiscal year:

  • Total revenues grew 4% to $4.55 billion.
  • Deliveries rose 4% to 11,317 homes.
  • Average selling price increased slightly to $399,200.
  • Home building operating income grew 22% to $345.7 million. Homebuilding operating income margin was 7.6%, up 110 basis points. Excluding inventory-related charges, this metric was 8.3%, up 120 basis points and within the Company’s 2019 target range of 8% to 9% under its Returns-Focused Growth Plan.
    • Housing gross profit margin increased 120 basis points to 17.5%.
    • Selling, general and administrative expenses as a percentage of housing revenues held steady at 9.8%.
  • Pretax income rose 27% to $368.0 million.
  • The Company’s income tax expense of $197.6 million and effective tax rate of approximately 54% primarily reflected a non-cash charge of $112.5 million recorded for the impact of the TCJA.
    • Excluding this charge, the Company’s adjusted income tax expense and adjusted effective tax rate were $85.1 million and approximately 23%, respectively.
    • In the twelve months ended November 30, 2017, the Company’s income tax expense and effective tax rate were $109.4 million and approximately 38%, respectively.
  • Net income totaled $170.4 million, or $1.71 per diluted share. Excluding the TCJA-related charge, the Company’s adjusted net income was $282.9 million, or $2.82 per diluted share, compared to $180.6 million, or $1.85 per diluted share.

Baance sheet data:

  • The Company had total liquidity of $1.05 billion, including cash and cash equivalents of $574.4 million.
    • There were no cash borrowings outstanding under the Company’s unsecured revolving credit facility.
    • Primarily reflecting an increase in the Company’s investments in land and land development, operating activities provided net cash of $221.5 million in 2018, compared to $513.2 million in 2017.
  • Inventories increased by $319.5 million, or 10%, to $3.58 billion.
    • Investments in land acquisition and development rose to $1.89 billion for 2018, compared to $1.52 billion for 2017.
      • Total investments for the 2018 fourth quarter increased from the year-earlier quarter to $443.3 million.
    • Lots owned or controlled grew to 53,627, of which 74% were owned.
    • The Company reduced its land held for future development or sale by 37% to $237.8 million, or 7% of total inventories, from 11%.
  • Notes payable decreased by $264.6 million to $2.06 billion, largely due to the Company’s repayment of the entire $300.0 million in aggregate principal amount of its 7 1/4% Senior Notes upon their June 15, 2018 maturity using internally generated cash.
    • The ratio of debt to capital improved 500 basis points to 49.7%. The ratio of net debt to capital improved 380 basis points to 41.6%, which is within the Company’s recently updated 2019 target range of 35% to 45% under its Returns-Focused Growth Plan.
  • Stockholders’ equity increased by $161.2 million to $2.09 billion, with the Company’s earnings over the twelve months ended November 30, 2018 more than offsetting the effect of the above-described TCJA-related charge.
    • The Company repurchased approximately 1.8 million shares of its common stock during the fourth quarter at a total cost of $35.0 million under the program authorized by its board of directors in May 2018. The Company is authorized to repurchase approximately 2.2 million additional shares under this program.
    • Book value per share grew by $1.88 to $24.01.
    • Return on equity excluding the impact of the TCJA-related charge improved 440 basis points to 14.4%, near the high end of the Company’s 2019 target range under its Returns-Focused Growth Plan.

“Fiscal 2018 was a year of considerable progress, as we achieved or exceeded most of the financial targets under our three-year Returns-Focused Growth Plan within two years,” said Jeffrey Mezger, chairman, president and chief executive officer. “Along with a further increase in our scale to $4.55 billion in total revenues, we meaningfully enhanced our profitability, producing an operating income margin within our 2019 target range, and improved our return metrics above their target levels. We also took a balanced approach in allocating the substantial cash flow we generated toward supporting our future growth, reducing our debt and returning capital to stockholders through repurchases of our common stock. Through these efforts, we ended the year with a higher community count, a measurably lower leverage ratio and a book value of approximately $24 per share.”

“We believe we are well positioned for 2019, with an anticipated 10% to 15% increase in our community count,” continued Mezger. “In addition, we have taken proactive steps to reposition many of our existing and future communities to make our product more affordable. Our business model enables us to efficiently move with demand, leveraging our existing plan series to add smaller square footage options to our communities, and adjusting the specification levels within our homes. This operational flexibility expands the range of choices for our home buyers, in moving up or down in square footage and upgrading options in our design studios — both distinctive advantages of our highly customer-centric approach to home building.”