KB Home finishes year with $1.33 billion cash, $837 million debt; will focus on profitability in 2008

By Jennifer Lanning Drey

Portland, Ore., Jan. 8 - KB Home ended fiscal 2007 with a cash balance of $1.33 billion and debt net of cash of $837 million, company executives reported Tuesday during KB Home's fourth-quarter earnings conference call.

The company's Nov. 30 debt position represents a 62% reduction from the same date in 2006.

"Entering 2008 our capital structure is in excellent shape and we are well-positioned to capture potential opportunities as they arise to reload our lot pipeline for higher margin deliveries," Jeffrey Mezger, KB Home's chief executive officer, said during the call.

KB Home increased its cash balance by $625.2 million during fiscal 2007, generating nearly $700 million in cash during the fourth quarter.

The company had no outstanding borrowings on its $1.5 billion bank revolver at the end of the fiscal year. Its ratio of debt to total capital was 53.9% at Nov. 30.

Despite KB Home's strong cash position, the company was forced during the fourth quarter to seek a waiver under its revolving credit facility related to a consolidated tangible net worth covenant. During the call, company executives said the need for the waiver resulted from impairments and a valuation allowance recorded on certain deferred tax assets. The company is working with its lenders to obtain an amendment to the covenants, which it expects to complete in the first quarter.

"We have a longstanding relationship with many of our banks and remain confident, especially in light of our strong cash position and low leverage, that we will successfully negotiate the necessary modifications to our bank agreement by the end of this quarter," Dom Cecere, KB Home's chief financial officer, said during the call.

Profits over cash

KB Home's primary goal in 2008 will be to restore profitability rather than to generate cash, Mezger said later during the call.

"You can always use more cash, but we don't need it now to run the business. What we need is more profit. That's where the focus will be in 2008," he said during the question-and-answer portion of the call.

KB Home reported a loss from continuing operations before income taxes of $399.0 million for the quarter ended Nov. 30, which the company said was due to pretax, non-cash charges of $403.4 million associated with inventory and joint venture impairments and the abandonment of certain land contracts.

The loss compares to a loss from continuing operations before income taxes of $171.1 million in the comparable 2006 quarter, which was due to $343.3 million of pretax, non-cash impairment and abandonment charges, the company said in its fourth-quarter earnings release.

"These are not the financial results that any CEO wants to report to shareholders," Mezger said, but immediately added that the company has made progress over the last 12 months at improving its homebuilding operations, strengthening its financial position and rightsizing its overhead structure.

The company estimates that its community count will be down by 25% to 30% in 2008 versus 2007 as it chooses not to invest the cash required to open communities where it cannot achieve its financial targets, he said.

KB Home is a Los Angeles-based builder of single-family homes.

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