KB Home ends Q1 with $857 million cash, cuts debt to $1.7 billion, but joint-venture woes loom

By Paul Deckelman

New York, April 5 - KB Home ended its 2011 fiscal first quarter with $857 million of cash, down sequentially from its fiscal fourth quarter and from year-ago levels - but also lowered its debt balance to $1.7 billion, down from both the previous quarter and a year earlier.

Company executives speaking on the Los Angeles-based homebuilder's conference call with analysts following the release of those figures on Tuesday said that they would continue to scrutinize the company's capital structure - but they also warned that the company faces a sizable probable obligation relating to the troubled South Edge LLC development joint venture in Las Vegas involving a KB subsidiary.

KB's executive vice president and chief financial officer, Jeff Kaminski, noted that as of the end of the 2011 fiscal first quarter on Feb. 28, the company had cash, cash equivalents and restricted cash totaling $857 million, of which $735.8 million was unrestricted.

The amount was down from cash levels of $1.02 billion at the end of the fiscal 2010 fourth quarter last Nov. 30 and was also down from the $1.29 billion of cash and equivalents on the balance sheet at the end of the fiscal 2010 first quarter a year ago, which included $90.2 million of restricted cash.

Kaminski said the lower cash balance versus the fourth quarter reflected "the normal seasonal cash burn of a low-delivery [of new homes] quarter, our first-quarter land acquisition and development spending and a heavier bond interest payment schedule."

South Edge casts long shadow

He added that "as we plan our cash management for the rest of the year and evaluate our capital structure, we remain mindful of our South Edge obligations and continue to evaluate our financing strategy going forward."

As a result of an unfavorable court ruling earlier in the year, allowing lenders to push the joint venture into an involuntary Chapter 11 bankruptcy, KB estimates its potential obligations related to South Edge - 48.5% owned by KB Home Nevada Inc. - at as much as $212 million, and took a total of $77 million in related first-quarter charges.

Kaminski called the $212 million estimate "a fair starting point for the cash impact from that issue," although he pointed out that "there are other strategies than an outright cash outflow from the company that we could employ to reduce the cash impact. Partnering, financial partners, etc. are the things we looking at. The timing is uncertain, the resolution is uncertain, but there's a range of options we are looking at there."

Debt balance down

KB had a debt balance of $1.7 billion at Feb. 28 - a decrease of $73.8 million from the $1.78 billion that it recorded at the end of the previous quarter, reflecting the repayment during the period of secured debt. The debt level was also down from $1.82 billion a year earlier.

However, an analyst noted during the question-and-answer portion of the call that KB's leverage ratio of net debt to capitalization had grown to about 62%, versus 44.8% a year earlier, a consequence of its reduced cash position, and wanted to know if KB has any leverage target.

Kaminski acknowledged a factor the analyst pointed out - that a large deferred tax asset stemming from carryovers of losses racked up in previous years is not on the balance sheet.

He estimated this at "over $800 million of valuation allowance right now that would significantly move our leverage ratio, so it remains our company's focus and one of our highest priorities to remain and continue down the path of sustained profitability, so that we're able to recapture that DTA and fix a lot of issues right now with our leverage ratio as a result. So we're watching it closely. We are mindful of the obligations that we have, and we'll continue to maintain and watch the capital structure."

Results fall from year ago

Faced with continued spotty recovery in the housing market, and running against robust year-ago comps fueled by since-expired government tax breaks aimed at boosting home-buying, KB turned in results this past quarter which the company's president and chief executive officer, Jeffrey T. Mezger, termed "disappointing."

Revenues for the quarter totaled $196.9 million, a 25% plunge from $264 million in the 2010 first quarter, primarily due to a 28% year-over-year decrease in homes delivered to 949; this was only partly offset by a 4% year-over-year increase in the average selling price of a home to $205,700.

KB had a pre-tax loss of $114.1 million during the quarter, more than twice the year-earlier pre-tax loss of $54.5 million; the latest quarter's figure was swelled by various non-cash charges, including those related to South Edge, consisting of a joint-venture impairment charge of $53.7 million and a loss on loan guaranty of $22.8 million.

The company posted a net loss of $114.5 million, or $1.49 per diluted share, versus year-earlier red ink of $54.7 million, or 71 cents per share.

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