KB Home
Jun 25, 2010

KB Home Reports Second Quarter 2010 Financial Results

Net Loss Narrows as Housing Gross Margin Improves
Homes Delivered Increases for the First Time in Fourteen Quarters
Land Acquisition Activity Accelerates

LOS ANGELES, Jun 25, 2010 (BUSINESS WIRE) -- KB Home (NYSE:KBH), one of America's premier homebuilders, today reported financial results for its second quarter ended May 31, 2010. Results and developments include:

"With a mix of positive and negative factors affecting the housing market in the second quarter, we maintained favorable trends in our gross, operating and pretax margins, as well as in our bottom line results, through the consistent implementation of our strategic initiatives," said Jeffrey Mezger, president and chief executive officer of KB Home. "While our net orders were down for the quarter compared to a year ago due to fewer active communities, general economic weakness, and the expiration of the federal homebuyer tax credit, our net orders were up sequentially from this year's first quarter and were solid on a per community basis. We believe this bodes well for our ability to generate future revenue growth as we expand our community count. To support this expansion, we continue to invest opportunistically in attractive land assets that meet our strict financial and operational requirements. Overall, we believe the steady improvement in our financial results over the past several quarters illustrates how our business strategies are bringing us closer to our goal of achieving sustained profitability."

Total revenues of $374.1 million for the quarter ended May 31, 2010 decreased 3% from the year-earlier quarter due to lower housing revenues, reflecting a 4% year-over-year decrease in the average selling price, partly offset by a 1% year-over-year increase in homes delivered. The Company delivered 1,782 homes at an average selling price of $207,900 in the 2010 second quarter, compared to 1,761 homes delivered at an average selling price of $216,200 in the prior year's quarter. Second quarter land sale revenues totaled $2.1 million in both 2010 and 2009.

The Company's homebuilding business narrowed its operating loss to $17.3 million in the second quarter of 2010, an improvement of $49.2 million, or 74%, from $66.5 million in the second quarter of 2009. The improvement was largely due to higher gross profits generated from a higher housing gross margin, partly offset by increased selling, general and administrative expenses. The Company had no inventory impairment or land option contract abandonment charges in the 2010 second quarter, compared to $42.3 million of such charges in the year-earlier quarter. The Company's second quarter housing gross margin was 17.7% in 2010, an improvement of 15.8 percentage points from 1.9% in the corresponding period of 2009. Excluding inventory impairment and land option contract abandonment charges in the 2009 second quarter, the housing gross margin increased 5.0 percentage points in the current quarter from 12.7% in the year-earlier quarter. Land sales in the second quarter of 2010 generated break-even results, compared to a loss of $1.2 million in the second quarter of 2009, which included $1.3 million of impairment charges related to planned future land sales.

Selling, general and administrative expenses were $83.0 million in the second quarter of 2010 compared to $72.6 million in the year-earlier period, reflecting, among other things, higher legal and advertising expenses. As a percentage of housing revenues, the Company's selling, general and administrative expenses were 22.4% in the second quarter of 2010, compared to 19.1% in the year-earlier quarter.

Interest expense, net of amounts capitalized, increased to $16.5 million in the second quarter of 2010 from $11.5 million in the year-earlier quarter, largely due to a lower balance of inventory qualifying for interest capitalization. The increase also reflected a write-off of $.4 million of debt issuance costs during the current quarter in connection with the Company's voluntary termination of its revolving credit facility, which was scheduled to expire in November 2010.

The Company's share of losses from unconsolidated homebuilding joint ventures fell to $1.5 million in the second quarter of 2010. This compared to a loss of $11.8 million in the second quarter of 2009, which included $7.2 million of impairment charges.

Financial services operations, which include the Company's equity interest in an unconsolidated mortgage banking joint venture, generated pretax income of $4.2 million in the current quarter and $4.4 million in the year-earlier quarter.

The Company posted a net loss of $30.7 million, or $.40 per diluted share, in the second quarter of 2010, including an after-tax charge of $12.8 million to record a valuation allowance against the net deferred tax assets generated from the quarter's loss. These results improved substantially from the second quarter of 2009, when the Company generated a net loss of $78.4 million, or $1.03 per diluted share, including pretax, noncash charges of $49.5 million for inventory and joint venture impairments and the abandonment of land option contracts, and an after-tax charge of $31.7 million to record a valuation allowance against the net deferred tax assets generated from the quarter's loss.

Net orders in the second quarter of 2010 were 2,244, down 23% from 2,910 in the year-earlier period. As a percentage of beginning backlog, the cancellation rate was 26% in the current quarter, compared to 27% in the 2009 second quarter. The Company's backlog at the end of the 2010 second quarter was 3,175 homes, a 17% decrease from 3,804 homes at the end of the second quarter of 2009. At May 31, 2010, potential future housing revenues from homes in backlog totaled $648.2 million, a 19% decrease from potential future housing revenues of $796.9 million at May 31, 2009, reflecting the lower number of homes in backlog and a lower average selling price.

For the six months ended May 31, 2010, Company-wide revenues totaled $638.0 million, down 8% from $691.8 million in the year-earlier period. The decrease was mainly due to lower housing revenues. The number of homes delivered in the first six months of fiscal 2010 decreased 3% year over year to 3,108, while the average selling price declined 5% year over year to $203,500. The Company posted a net loss of $85.4 million, or $1.11 per diluted share, for the six months ended May 31, 2010, including pretax, noncash charges of $13.4 million for inventory impairments and land option contract abandonments, and an after-tax charge of $34.0 million to record a valuation allowance against net deferred tax assets. In the six months ended May 31, 2009, the Company generated a net loss of $136.5 million, or $1.78 per diluted share, including pretax, noncash charges of $81.8 million for inventory and joint venture impairments and land option contract abandonments, and a $54.4 million after-tax charge to record a valuation allowance against net deferred tax assets.

The Conference Call on the Second Quarter 2010 earnings will be broadcast live TODAY at 8:30 a.m. Pacific Daylight Time, 11:30 a.m. Eastern Daylight Time. To listen, please go to the Investor Relations section of the Company's website at www.kbhome.com.

KB Home, one of the nation's premier homebuilders, has delivered over half a million quality homes for families since its founding in 1957. The Los Angeles-based company is distinguished by its Built to Order(TM) homebuilding approach that puts a custom home experience within reach of its customers at an affordable price. KB Home's award-winning home designs and communities meet the needs of first-time, move-up and active adult homebuyers. KB Home was named to FORTUNE(R) magazine's 2010 list of the World's Most Admired Companies for the sixth consecutive year, and ranked #1 for "Innovation" among homebuilders. The Company trades under the ticker symbol "KBH" and was the first homebuilder listed on the New York Stock Exchange. For more information about any of KB Home's new home communities, call 888-KB-HOMES or visit www.kbhome.com.

Certain matters discussed in this press release, including any statements that are predictive in nature or concern future market and economic conditions, business and prospects, our future financial and operational performance, or our future actions and their expected results are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and projections about future events and are not guarantees of future performance. We do not have a specific policy or intent of updating or revising forward-looking statements. Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The most important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to: general economic, employment and business conditions; adverse market conditions that could result in additional impairments or abandonment charges and operating losses, including an oversupply of unsold homes, declining home prices and increased foreclosure and short sale activity, among other things; conditions in the capital and credit markets (including consumer mortgage lending standards, the availability of consumer mortgage financing and mortgage foreclosure rates); material prices and availability; labor costs and availability; changes in interest rates; inflation; our debt level; weak or declining consumer confidence, either generally or specifically with respect to purchasing homes; competition for home sales from other sellers of new and existing homes, including sellers of homes obtained through foreclosures or short sales; weather conditions, significant natural disasters and other environmental factors; government actions, policies, programs and regulations directed at or affecting the housing market (including, but not limited to, tax credits, tax incentives and/or subsidies for home purchases, and programs intended to modify existing mortgage loans and to prevent mortgage foreclosures), the homebuilding industry, or construction activities; the availability and cost of land in desirable areas; legal or regulatory proceedings or claims; the ability and/or willingness of participants in our unconsolidated joint ventures to fulfill their obligations; our ability to access capital; our ability to use the net deferred tax assets we have generated; our ability to successfully implement our current and planned product, geographic and market positioning (including, but not limited to, our efforts to expand our inventory base/pipeline with desirable land positions or interests at reasonable cost and to expand our community count), revenue growth and cost reduction strategies; consumer interest in our new product designs, including The Open SeriesTM; and other events outside of our control. Please see our periodic reports and other filings with the Securities and Exchange Commission for a further discussion of these and other risks and uncertainties applicable to our business.

KB HOME
CONSOLIDATED STATEMENTS OF OPERATIONS

For the Six Months and Three Months Ended May 31, 2010 and 2009

(In Thousands, Except Per Share Amounts - Unaudited)

Six Months Three Months
2010 2009 2010 2009
Total revenues $ 638,030 $ 691,831 $ 374,052 $ 384,470
Homebuilding:
Revenues $ 635,025 $ 688,666 $ 372,514 $ 382,925
Costs and expenses (688,576 ) (801,537 ) (389,833 ) (449,404 )
Operating loss (53,551 ) (112,871 ) (17,319 ) (66,479 )
Interest income 1,025 5,279 601 1,766
Interest expense, net of amounts capitalized (35,925 ) (20,123 ) (16,518 ) (11,471 )
Equity in loss of unconsolidated joint ventures (2,732 ) (21,496 ) (1,548 ) (11,754 )
Homebuilding pretax loss (91,183 ) (149,211 ) (34,784 ) (87,938 )
Financial services:
Revenues 3,005 3,165 1,538 1,545
Expenses (1,885 ) (1,654 ) (992 ) (794 )
Equity in income of unconsolidated joint venture 4,950 4,545 3,629 3,604
Financial services pretax income 6,070 6,056 4,175 4,355
Total pretax loss (85,113 ) (143,155 ) (30,609 ) (83,583 )
Income tax benefit (expense) (300 ) 6,700 (100 ) 5,200
Net loss $ (85,413 ) $ (136,455 ) $ (30,709 ) $ (78,383 )
Basic and diluted loss per share $ (1.11 ) $ (1.78 ) $ (.40 ) $ (1.03 )
Basic and diluted average shares outstanding 76,844 76,822 76,854 76,281
KB HOME
CONSOLIDATED BALANCE SHEETS

(In Thousands - Unaudited)

May 31, November 30,
2010 2009
Assets
Homebuilding:
Cash and cash equivalents $ 985,756 $ 1,174,715
Restricted cash 107,757 114,292
Receivables 137,033 337,930
Inventories 1,686,289 1,501,394
Investments in unconsolidated joint ventures 103,605 119,668
Other assets 151,433 154,566
3,171,873 3,402,565
Financial services 30,364 33,424
Total assets $ 3,202,237 $ 3,435,989
Liabilities and stockholders' equity
Homebuilding:
Accounts payable $ 321,585 $ 340,977
Accrued expenses and other liabilities 503,231 560,368
Mortgages and notes payable 1,755,366 1,820,370
2,580,182 2,721,715
Financial services 6,874 7,050
Stockholders' equity 615,181 707,224
Total liabilities and stockholders' equity $ 3,202,237 $ 3,435,989
KB HOME
SUPPLEMENTAL INFORMATION

For the Six Months and Three Months Ended May 31, 2010 and 2009

(In Thousands - Unaudited)

Six Months Three Months
Homebuilding revenues: 2010 2009 2010 2009
Housing $ 632,579 $ 685,260 $ 370,421 $ 380,806
Land 2,446 3,406 2,093 2,119
Total $ 635,025 $ 688,666 $ 372,514 $ 382,925
Six Months Three Months
Costs and expenses: 2010 2009 2010 2009
Construction and land costs

Housing $ 530,950 $ 662,876 $ 304,756 $ 373,453
Land 2,433 4,892 2,087 3,357
Subtotal 533,383 667,768 306,843 376,810
Selling, general and administrative expenses 155,193 133,769 82,990 72,594
Total $ 688,576 $ 801,537 $ 389,833 $ 449,404
Six Months Three Months
Interest expense, net of amounts capitalized: 2010 2009 2010 2009
Interest incurred $ 60,104 $ 57,277 $ 29,419 $ 28,019

Loss on voluntary termination of revolving credit facility

1,802 - 436 -
Interest capitalized (25,981 ) (37,154 ) (13,337 ) (16,548 )
Total $ 35,925 $ 20,123 $ 16,518 $ 11,471
Six Months Three Months
Other information: 2010 2009 2010 2009
Depreciation and amortization $ 2,845 $ 3,602 $ 1,423 $ 1,776
Amortization of previously capitalized interest 51,769 43,372 28,383 26,480
KB HOME
SUPPLEMENTAL INFORMATION

For the Six Months and Three Months Ended May 31, 2010 and 2009

(Unaudited)

Six Months Three Months
Average sales price: 2010 2009 2010 2009
West Coast $ 323,900 $ 315,400 $ 327,300 $ 319,300
Southwest 159,100 186,500 160,600 176,200
Central 161,500 164,900 166,700 157,500
Southeast 154,300 173,800 154,000 173,700
Total $ 203,500 $ 213,700 $ 207,900 $ 216,200

Six Months Three Months
Homes delivered: 2010 2009 2010 2009
West Coast 840 920 500 569
Southwest 575 508 359 241
Central 1,079 972 550 525
Southeast 614 806 373 426
Total 3,108 3,206 1,782 1,761
Unconsolidated joint ventures 55 78 34 55
Six Months Three Months
Net orders: 2010 2009 2010 2009
West Coast 1,037 1,387 608 928
Southwest 664 581 351 359
Central 1,511 1,670 796 1,048
Southeast 945 1,099 489 575
Total 4,157 4,737 2,244 2,910
Unconsolidated joint ventures 46 73 27 45
May 31, 2010 May 31, 2009
Backlog data: Backlog Homes Backlog Value Backlog Homes Backlog Value
(Dollars in thousands)
West Coast 720 $ 241,383 1,048 $ 334,600
Southwest 371 60,278 421 72,429
Central 1,351 224,212 1,419 228,723
Southeast 733 122,365 916 161,104
Total 3,175 $ 648,238 3,804 $ 796,856

Unconsolidated joint ventures

28

$ 11,760 62 $ 24,118
KB HOME
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

For the Six Months and Three Months Ended May 31, 2010 and 2009

(In Thousands, Except Percentages - Unaudited)

This press release contains information about the Company's housing gross margin, excluding inventory impairment and land option contract abandonment charges. In addition, Company management reports on the ratio of net debt to total capital. Both of these financial measures are not calculated in accordance with generally accepted accounting principles (GAAP). The Company believes these non-GAAP financial measures are relevant and useful to investors in understanding its operations and the leverage employed in its operations, and may be helpful in comparing the Company with other companies in the homebuilding industry to the extent they provide similar information. However, because the housing gross margin, excluding inventory impairment and land option contract abandonment charges, and the ratio of net debt to total capital are not calculated in accordance with GAAP, these financial measures may not be completely comparable to other companies in the homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance measures prescribed by GAAP. Rather, these non-GAAP measures should be used to supplement their respective most directly comparable GAAP financial measures in order to provide a greater understanding of the factors and trends affecting the Company's operations.

Housing Gross Margin, Excluding Inventory Impairment and Land Option Contract Abandonment Charges

The following table reconciles the Company's housing gross margin calculated in accordance with GAAP to the non-GAAP financial measure of the Company's housing gross margin, excluding inventory impairment and land option contract abandonment charges:

Six Months Three Months
2010 2009 2010 2009
Housing revenues $ 632,579 $ 685,260 $ 370,421 $ 380,806
Housing construction and land costs (530,950 )

(662,876 ) (304,756 ) (373,453 )
Housing gross margin 101,629

22,384 65,665 7,353
Add: Inventory impairment and land option contract abandonment charges 13,362 65,640 - 40,970

Housing gross margin, excluding inventory impairment and land option contract abandonment charges

$ 114,991 $ 88,024 $ 65,665 $ 48,323
Housing gross margin as a percentage of housing revenues 16.1 % 3.3 % 17.7 % 1.9 %

Housing gross margin, excluding inventory impairment and land option contract abandonment charges, as a percentage of housing revenues

18.2 % 12.8 % 17.7 % 12.7 %

Housing gross margin, excluding inventory impairment and land option contract abandonment charges, is a non-GAAP financial measure, which the Company calculates by dividing housing revenues less housing construction and land costs before pretax, noncash inventory impairment and land option contract abandonment charges associated with housing operations recorded during a given period, by housing revenues. The most directly comparable GAAP financial measure is housing gross margin. The Company believes housing gross margin, excluding inventory impairment and land option contract abandonment charges, is a relevant and useful financial measure to investors in evaluating the Company's performance as it measures the gross profit the Company generated specifically on the homes delivered during a given period and enhances the comparability of housing gross margins between periods. This financial measure assists management in making strategic decisions regarding product mix, product pricing and construction pace. The Company also believes investors will find housing gross margin, excluding inventory impairment and land option contract abandonment charges, relevant and useful because it represents a profitability measure that may be compared to a prior period without regard to variability of charges for inventory impairments or land option contract abandonments.

KB HOME
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(In Thousands, Except Percentages - Unaudited)

Ratio of Net Debt to Total Capital

The following table reconciles the Company's ratio of debt to total capital calculated in accordance with GAAP to the non-GAAP financial measure of the Company's ratio of net debt to total capital:

May 31, November 30,
2010 2009
Mortgages and notes payable $ 1,755,366 $ 1,820,370
Stockholders' equity 615,181 707,224
Total capital $ 2,370,547 $ 2,527,594
Ratio of debt to total capital 74.0 % 72.0 %
Mortgages and notes payable $ 1,755,366 $ 1,820,370
Less: Cash and cash equivalents and restricted cash (1,093,513 ) (1,289,007 )
Net debt 661,853 531,363
Stockholders' equity 615,181 707,224
Total capital $ 1,277,034 $ 1,238,587
Ratio of net debt to total capital 51.8 % 42.9 %

The ratio of net debt to total capital is a non-GAAP financial measure, which the Company calculates by dividing mortgages and notes payable, net of homebuilding cash and cash equivalents and restricted cash, by total capital (mortgages and notes payable, net of homebuilding cash and cash equivalents and restricted cash, plus stockholders' equity). The most directly comparable GAAP measure is the ratio of debt to total capital. The Company believes the ratio of net debt to total capital is a relevant and useful financial measure to investors in understanding the leverage employed in its operations and as an indicator of the Company's ability to obtain external financing.

SOURCE: KB Home

KB Home
Kelly Masuda, Investor Relations
310-893-7434
kmasuda@kbhome.com
or
Heather Reeves, Media Contact
310-231-4142
hreeves-x@kbhome.com

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