KB Home — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended August 31, 2020. KB Home is a U.S. homebuilder operating across four homebuilding regions, with related insurance and title services.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $999.0 million | $1,160.8 million | $2,988.9 million | $2,994.1 million |
| Homebuilding revenue | $995.1 million | $1,156.9 million | $2,977.8 million | $2,984.3 million |
| Pretax income | $101.3 million | $91.9 million | $238.0 million | $183.2 million |
| Net income | $78.4 million | $68.1 million | $190.2 million | $145.6 million |
| Diluted EPS | $0.83 | $0.73 | $2.02 | $1.55 |
- Q3 housing revenue fell 15%, as deliveries declined 16% to 2,545 homes; average selling price edged up 1% to $384,700. Nine-month deliveries fell 2% to 7,796, while average selling price increased 2% to $379,800.
- Q3 housing gross margin improved 140 basis points to 19.9%; adjusted housing gross margin, a non-GAAP measure excluding inventory-related charges and capitalized-interest amortization, was 23.7%, up 140 basis points. Homebuilding operating margin increased to 8.9% from 7.4%.
- Net orders rose 27% year over year in Q3 to 4,214, while the cancellation rate improved to 17% from 20%. Ending backlog increased 8% to 6,749 homes, valued at $2.57 billion. For the nine months, orders declined 6% and cancellations rose to 23% from 18%.
- Financial services pretax income increased to $9.7 million in Q3 and $23.1 million for nine months, principally reflecting higher equity income from the mortgage-banking joint venture.
- Nine-month operating cash flow was $329.2 million, versus cash used of $152.1 million in 2019. Cash and cash equivalents were $722.0 million in homebuilding at August 31; consolidated cash including financial services was $723.1 million. Investing cash use was $18.4 million and financing cash use was $42.6 million.
- Notes payable totaled $1.75 billion, broadly unchanged from November 30, 2019. Debt-to-capital was 40.5%, and net debt-to-capital, a non-GAAP measure, was 28.6%, down from 42.3% and 35.2%, respectively. The $800 million revolving facility had no cash borrowings and $787.6 million available; total liquidity was $1.51 billion. The next scheduled debt maturity was $450 million in December 2021.
Changes, outlook, and management commentary
- COVID-19 restrictions and disruptions sharply reduced orders and delayed construction and deliveries in Q2. As restrictions eased, orders rebounded; Q3 orders were the highest for any quarter since 2007, according to management. Deliveries and revenue nevertheless remained affected by the smaller beginning backlog.
- Management curtailed land investment to preserve liquidity, then resumed land acquisition and development as demand strengthened. Nine-month land and land-development investment fell 15% to $1.04 billion; lots owned or controlled declined 7% from November 2019 to 60,278.
- Q3 results included $6.9 million of inventory-related charges. Nine-month results included $16.9 million of inventory-related charges and $6.7 million of severance charges; the workforce actions were estimated to generate about $40 million in annualized savings.
- After quarter-end, net orders for the first five weeks of Q4 were up 39% year over year and cancellations were 12%, versus 19%. Management cautioned that the recovery remained uncertain and lumber costs could pressure margins.
- Q4 2020 outlook: housing revenue of $1.05–$1.15 billion; average selling price about $415,000; housing gross margin of 20.0%–20.4%, assuming no inventory charges; and homebuilding operating margin of 9.0%–9.4%, excluding inventory charges.
- Full-year 2020 outlook: housing revenue about $4.06 billion and average selling price about $389,000. Full-year 2021 housing revenue outlook was $5.1–$5.5 billion, with average community count expected to be flat versus 2020. These are forward-looking estimates, not guarantees.
- The board increased the quarterly dividend from $0.09 to $0.15 per share after quarter-end. No shares were repurchased under the repurchase authorization during the nine-month period.
Risks and contingencies
- Management identified pandemic resurgence, renewed restrictions, recession and unemployment, mortgage availability, material and subcontractor costs, land development delays, and access to financing as risks to demand, deliveries, margins, liquidity, and forecasts. Future inventory impairments or land-option abandonments could be material.
- At August 31, 2020, the company disclosed approximately 583 outstanding Florida construction-defect notices, mainly involving stucco and water intrusion. It said losses could exceed accruals and recoveries could be lower, but it could not estimate the reasonably possible excess.
- For a Northern California townhome construction-defect matter, the company disclosed a reasonably possible loss above its accrual of $0–$5 million. It also reported $818.0 million of performance bonds and $41.7 million of letters of credit outstanding, and said it did not expect a material amount to be called.
Most important facts for investors to verify
- Whether the strong Q3 and early-Q4 order pace converts into deliveries and revenue, given lower community counts and pandemic-related delivery delays.
- Whether forecast margins withstand lumber and other construction-cost pressures, and whether additional inventory impairments or land-option charges arise.
- Liquidity and covenant compliance, including the ability to refinance the $450 million December 2021 maturity and fund resumed land investment.
- Developments in the Florida and California construction-defect matters, associated insurance recoveries, and the adequacy of recorded accruals.
- Performance of the KBHS mortgage joint venture and continued homebuyer access to mortgage financing.