KB Home — FY2014 Form 10-K
Reporting period: Fiscal year ended November 30, 2014; fourth-quarter figures are identified separately. KB Home builds and sells homes through four U.S. homebuilding segments. Homebuilding represented 99.5% of FY2014 revenue.
Financial and operating performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $2.401 billion | $2.097 billion |
| Pretax income | $94.9 million | $38.4 million |
| Net income | $918.3 million | $40.0 million |
| Diluted earnings per share | $9.25 | $0.46 |
| Homes delivered | 7,215 | 7,145 |
| Average selling price | $328,400 | $291,700 |
| Housing gross profit margin | 18.1% | 16.7% |
| Adjusted housing gross profit margin (non-GAAP) | 18.7% | 18.4% |
- Revenue increased 14%, primarily reflecting a 13% rise in average selling price and a 1% increase in deliveries. Net orders increased 6% to 7,567; cancellation rate improved to 31% from 32%.
- Year-end backlog rose 14% to 2,909 homes, with potential housing revenue of $914.0 million, up 34%. Ending community count increased 19% to 227.
- FY2014 net income includes an $825.2 million fourth-quarter deferred-tax-asset valuation-allowance reversal. Fourth-quarter net income was $852.8 million on $796.0 million revenue and $28.6 million pretax income; the tax benefit, not operating earnings, drove the quarter’s reported net income.
- Homebuilding operating income was $116.0 million, up 26%. Housing gross profit rose 24% to $429.5 million. FY2014 included $37.6 million of inventory impairment charges and $1.8 million of land-option abandonment charges; FY2013 included a $32.0 million net warranty charge, chiefly for Florida water-intrusion repairs.
- Operating cash flow was negative $630.7 million, versus negative $443.5 million in FY2013, mainly reflecting land and development investment. Cash, cash equivalents and restricted cash totaled $383.6 million at year-end, including $356.4 million unrestricted. Land and land-development investment was approximately $1.47 billion.
- Debt was $2.577 billion, compared with $2.150 billion a year earlier. Debt-to-capital improved to 61.8% from 80.0%, largely because equity rose; net debt-to-capital was 57.9%. The company had $200 million available under its revolving credit facility and no borrowings outstanding under it.
- West Coast, Central and Southwest segments reported FY2014 pretax income of $116.3 million, $47.2 million and $6.0 million, respectively; Southeast reported a pretax loss of $11.2 million.
Outlook, risks and unusual items
- Management expected FY2015 average community count to grow 15%–20%, land and land-development investment of $1.1–$1.4 billion, and net-order growth generally within the community-count growth range. It expected to be profitable for FY2015, conditional on continued housing-market progress.
- For Q1 FY2015, management projected revenue of $440–$490 million and break-even results, including about $7 million of expected gains from land monetization. It warned that gross margin would decline significantly year over year and sequentially, citing construction-cost pressure, reduced operating leverage, delivery mix and pricing incentives.
- Management cited uneven housing demand, tight mortgage credit, potential interest-rate increases, rising land/material/labor costs, regulatory and permitting delays, and potential competition and sales-incentive pressure as risks. It also noted dependence on mortgage availability and its 49.9%-owned Home Community Mortgage joint venture.
- Inventory impairment charges were $37.6 million in FY2014, including $26.6 million related to planned land sales and a change in strategy for two properties. Further impairments or land-option abandonment charges remain possible if market conditions or plans change.
- Contingencies include a Nevada development-contract lawsuit with a reasonably possible loss range of zero to approximately $55 million plus prejudgment interest; a Florida water-intrusion warranty matter where losses could exceed the accrued amount by up to $3 million; and a Florida Attorney General inquiry for which the company could not estimate a loss range. The company estimated construction-defect claim losses of $70–$100 million, while noting actual costs could be higher.
- The next scheduled senior-note maturity was $199.9 million in June 2015. The company said it expected to have resources and capital-market access to meet it. It reported compliance with debt covenants at year-end.
Most important facts for investors to verify
- How much of FY2014’s reported net income and EPS reflects the one-time $825.2 million tax valuation-allowance reversal, versus recurring operating performance; and whether deferred tax assets are ultimately realizable.
- Whether land investment converts into community openings, deliveries and operating cash flow, given negative operating cash flow and the 40% year-over-year increase in inventory.
- Whether the forecast Q1 margin decline and break-even result, and the FY2015 profitability outlook, are borne out as costs, incentives, demand and delivery mix evolve.
- Debt refinancing and liquidity, particularly the June 2015 maturity, covenant headroom and the availability and cost of external financing.
- Developments in Florida warranty claims and the Attorney General inquiry, the Nevada litigation, and the adequacy of impairment and self-insurance estimates.