KB Home says cash balance readies it to capitalize on market comeback

By Jennifer Lanning Drey

Portland, Ore., Jan. 12 - KB Home ended 2009 with $1.29 billion of cash, cash equivalents and restricted cash at Nov. 30, an amount that will allow it to opportunistically capitalize on the housing market recovery, Jeffrey Mezger, chief executive officer of the company, said Tuesday during its fourth-quarter and year-end earnings conference call.

In addition, KB Home expects to receive a $191 million tax refund in the first quarter.

"We will prudently manage this cash position while investing appropriately as we prepare to open more communities within our existing footprint," Mezger said.

The company's land acquisition activities are focused on finished lots that are strategically aligned with the markets and demographics of its core business, he said.

KB Home increased its pace of land acquisition activity in the fourth quarter, with the majority of its 2009 purchases occurring during the period, Mezger said.

The CEO also reported that the company exceeded its cash flow goals for 2009, generating operating cash flows of $236.7 million during the fourth quarter.

Net debt was $531 million at Nov. 30, down $224 million from where it stood at the end of the third quarter, which was due to the positive operating cash flows during the fourth quarter, William Hollinger, chief accounting officer of KB Home, reported during the call.

Total debt was $1.82 billion at Nov. 30, roughly flat as compared to the end of the third quarter, but down from $1.94 billion at fiscal year-end 2008. The reduction was largely due to the redemption of public debt during 2009.

Ample liquidity

Based on its year-end cash balance and the expected cash tax refund expected in the first quarter, KB Home believes it has adequate liquidity to satisfy current and reasonably anticipated future requirements for funds, Hollinger said during the call.

At year-end, KB Home had no borrowings under its revolving credit facility and was in compliance with all of its debt covenants, he said.

"We ended the year with a strong, conservatively leveraged balance sheet and a robust cash position that will enhance our ability to capitalize on emerging opportunities," Hollinger said.

Revolver commitment reduced

KB Home also reported that in December, it voluntarily reduced the aggregate commitment under its revolving credit facility to $200 million from $650 million, based on its current and expected future cash flows. Hollinger said the reduction was made to reduce ongoing fees.

"Given that we have no plans to borrow under the facility, it was appropriate to reduce the fees in this manner," he said.

The facility now supports the company's outstanding letters of credit, which totaled $175 million at year end, he said.

Positioning to be profitable

Looking forward into 2010, KB Home is focused on positioning itself to achieve consistent, sustainable profitability, Mezger said, adding that if the housing market were to stabilize at current levels, KB Home believes it could achieve profitability in the latter half of 2010.

However, the CEO warned that it remains challenging for the company to forecast the market in 2010, given the volatility that remains.

For the fourth quarter, KB Home reported $674.6 million in revenues, down 27% from revenues of $919 million in the same period of 2008. The company said lower housing revenues were partially offset by higher revenues from land sales during the period.

The company reported net income of $100.7 million for the fourth quarter, which included an income tax benefit of $191.7 million. On a pretax basis, the company posted a loss of $91.0 million for the quarter, mainly due to non-cash charges for inventory and joint venture impairments and the abandonment of land-option contracts.

Net orders increased by 12% in the fourth quarter, as compared to the same period in 2008, which primarily reflected a lower cancellation rate.

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

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