Housing Bubble
KB Home reports record first quarter earnings
March 14 , 2003
LOS ANGELES, /PRNewswire-FirstCall/ -- KB Home, one of the nation's largest homebuilders, today announced record financial results for its first quarter ended February 28, 2003.
"We are very pleased to begin our fiscal 2003 year with record first quarter results," said Bruce Karatz, KB Home chairman and chief executive officer. "The ability to expand our business profitably has enabled us to sustain earnings growth despite the uncertain economic conditions which have persisted throughout the country for the last couple of years. The economies of scale we have continued to achieve with the growth of our business and the opportunistic pricing environment converted the Company's 4 percent increase in unit deliveries into a 24 percent increase in the bottom line when compared to 2002."
Net income rose to $52.8 million in the first quarter of 2003 from $42.7 million in the first quarter of 2002. The combination of higher unit delivery volume and higher operating margin drove the Company's net income to a new first quarter record. Net income for the first quarter of 2003 was negatively impacted by a $4.3 million pretax charge, included in interest expense, related to the Company's early extinguishment of its 9 5/8% senior subordinated notes. These notes, which were scheduled to mature in 2006, were redeemed in February 2003 using a portion of the proceeds from the Company's issuance of $300 million of 7 3/4% senior subordinated notes due 2010. Due to the Company's adoption of Statement of Financial Accounting Standards No. 145, an accounting standard issued in 2002, this early extinguishment charge, which previously would have been accounted for as an extraordinary item, was included in results from continuing operations in the first quarter of 2003.
Total revenues for the first quarter of 2003 totaled $1.09 billion, up 20 percent from the year-earlier quarter primarily due to higher housing revenues. In the first quarter of 2003, housing revenues rose 19 percent to $1.06 billion from $893.8 million in the year-earlier quarter reflecting higher unit volume and a higher average selling price. Unit deliveries increased to 5,263 in the first quarter of 2003 from 5,081 in the same quarter of 2002 while the Company's overall average selling price rose 13 percent to $201,700 in 2003 from $177,900 in 2002. The year-over-year increase in the Company's average selling price in the first quarter of 2003 primarily reflected increases of 16 percent and 14 percent in the West Coast and French regions, respectively.
Construction pretax income for the first quarter increased 35% to $75.1 million in 2003 from $55.4 million in the year-earlier quarter, reflecting a 100 basis-point improvement in operating margin to 8.0% and higher unit delivery volume. The Company's housing gross margin rose 150 basis points to 21.5% for the three months ended February 28, 2003 compared to 20.0% for the same period of 2002. The increase reflects operating efficiencies as well as price increases in select markets in which the Company operates.
The Company's mortgage banking operations generated pretax income of $3.7 million in the first quarter of 2003, down from $8.2 million in the same quarter of 2002. The Company's first quarter 2003 results were tempered by a $4.6 million negative pretax impact related to the adoption of Statement of Position No. 01-6 "Accounting by Certain Entities (including Entities With Trade Receivables) That Lend to or Finance the Activities of Others" ("SOP 01-6") as of the beginning of the quarter. The adoption of SOP 01-6 results in servicing rights income being recognized when the related loan is sold, rather than upon the loan closing as was permitted under previous accounting guidance. This has the effect of deferring the Company's recognition of servicing rights income for loans that it originates until the following month when loan settlement typically occurs. Thus, the adoption of SOP 01-6 effectively reduced the mortgage banking operations' income in the first quarter by deferring servicing rights income into the second quarter of 2003. The remaining quarters of 2003 are not expected to be materially affected by the adoption of SOP 01-6 since each quarter will include an offsetting impact from the previous quarter. Absent the impact of the change in accounting, pretax income from the mortgage banking operations for the first quarter of 2003 would have been up slightly from the year-earlier quarter.
The Company's backlog value reached approximately $2.63 billion in the first quarter of 2003, exhibiting double-digit growth as compared to $2.30 billion in the first quarter of 2002. The Company had approximately two quarters of projected 2003 deliveries in backlog at February 28, 2003. "Our backlog value at February 28, 2003 improved 14% on a year-over-year basis to $2.63 billion and established a new first quarter-end record," said Karatz. "The robust backlog underpinning our financial forecast provides confidence in our prospects for the remainder of 2003 as we pursue our goal of sustained earnings growth in 2003 and beyond. We remain confident in our previously announced diluted earnings per share estimate of $8.00 for 2003."
"We are pleased that our solid financial position and the cash flows generated from our thriving business have afforded us the opportunity to accomplish organic expansion, acquisitions and share repurchases over the last couple of years," Karatz commented. "During the first quarter, in addition to investing to organically increase the number of communities we operate, we continued to repurchase shares of our undervalued common stock. Subsequent to the end of the quarter, on March 6, 2003, we consummated the acquisition of Colony Homes, which will serve to introduce KB Home to three new dynamic markets, Atlanta, Charlotte and Raleigh, further strengthening our foothold in our Southeast region. We expect the Company's sound financial structure to continue to be a key advantage as we move forward in pursuit of growth, through organic expansion, de novo entry and by potential acquisitions, in the remainder of 2003."
Source: KB Home
