KB Home — FY2011 Form 10-K
Reporting period: Fiscal year ended November 30, 2011; comparisons are primarily with FY2010. The filing also reports fourth-quarter results. KB Home builds and sells homes across four U.S. homebuilding segments; homebuilding contributed 99.2% of FY2011 revenue.
Financial and operating performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Total revenue | $1.316 billion | $1.590 billion |
| Net loss | $178.8 million; $2.32 per share | $69.4 million; $0.90 per share |
| Homebuilding operating loss | $103.1 million | $16.0 million |
| Homes delivered | 5,812 | 7,346 |
| Average selling price | $224,600 | $214,500 |
| Housing gross margin | 13.4% | 17.4% |
| Housing gross margin excluding impairment and land-option abandonment charges (non-GAAP) | 15.4% | 18.6% |
| Operating cash flow | Used $347.5 million | Used $134.0 million |
| Cash, cash equivalents and restricted cash at year-end | $479.5 million, including $415.1 million unrestricted | $1.020 billion, including $904.4 million unrestricted |
| Debt at year-end | $1.584 billion | $1.776 billion |
| Debt to total capital | 78.2% | 73.8% |
| Net debt to total capital (non-GAAP) | 71.4% | 54.5% |
| Inventory | $1.732 billion | $1.697 billion |
Revenue fell 17%, largely because deliveries declined 21%; the 5% increase in average selling price partly offset the lower volume. Net orders edged up to 6,632 from 6,556, while the average cancellation rate rose to 29% from 28%. Year-end backlog increased 61% to 2,156 homes, representing approximately $459.0 million of potential housing revenue, up 74% year over year.
FY2011 operating cash use reflected the net loss and a $253.5 million decrease in accounts payable, accrued expenses and other liabilities, including South Edge-related payments. Investing activities provided $13.1 million, including $80.6 million from selling a rental property; financing activities used $155.9 million. Cash and liquidity declined substantially after $251.9 million of South Edge-related payments, repayment of $100 million of notes at maturity, and other debt repayments.
Material changes and unusual items
- Housing gross margin fell from 17.4% to 13.4%, reflecting weaker delivery volume, mix and operating leverage. SG&A declined to $247.9 million from $289.5 million, but rose as a share of housing revenue to 19.0% from 18.4%.
- The annual net loss included $25.8 million of noncash inventory impairment and land-option abandonment charges, a $53.7 million noncash South Edge joint-venture impairment, and a $30.8 million South Edge loan-guaranty loss. A $19.8 million gain related to winding down KBA Mortgage partly offset these items. The company also recorded a $76.7 million valuation allowance charge against deferred tax assets.
- South Edge’s bankruptcy reorganization was completed in 2011. KB Home paid $251.9 million in the fourth quarter, wrote off its remaining investment, and estimated the fair value of its share of approximately 600 developable acres at $75.2 million. The land is held through Inspirada Builders, LLC; realization depends on development and market assumptions.
- The former KBA Mortgage joint venture ceased mortgage originations after June 30, 2011. KB Home entered a marketing agreement with MetLife Home Loans, which subsequently announced it would cease forward mortgage banking. KB Home said it was evaluating alternatives to reestablish a mortgage-banking relationship.
- FY2011 fourth-quarter results were positive: revenue was $479.9 million, net income $13.9 million and diluted earnings per share $0.18, despite the full-year loss.
Outlook, risks and contingencies
Management expected housing markets to remain volatile and generally weak in 2012 and said the timing of a sustained recovery could not be predicted. It identified achieving and maintaining profitability, generating cash and protecting the balance sheet, and positioning for future growth as priorities. These are management expectations, not a guarantee of results.
- FY2012 planned land and land-development investment was $400 million to $600 million, depending on market and financial conditions. Management intended to manage toward a cash-neutral position, continue selective land purchases, and open approximately 25 communities in the first half of 2012. California and Texas were expected to remain the main investment focus.
- Management cited improved late-2011 orders and backlog, and expected new communities and value-engineered homes to support future deliveries and cost efficiencies. Persistent weak employment and consumer confidence, tight mortgage lending, foreclosures and resale-home competition could constrain sales, pricing and margins.
- Other significant risks include further land and joint-venture impairments, construction-cost inflation or labor/material shortages, regulatory and environmental constraints, warranty and construction-defect claims, and restricted access to financing. Approximately 32% of inventory was estimated to have a six-year-or-longer realization horizon.
- Debt maturities included $249.6 million in 2014 and $749.1 million in 2015; the company reported $106.0 million of contractual interest payments due in 2012. It had no unsecured revolving credit facility, and its letter-of-credit facilities required cash collateral. Management said it believed resources and expected financing access would be adequate, but gave no assurance.
- Deferred tax assets remain subject to realization uncertainty: the company reported an $847.8 million valuation allowance against deferred tax assets. An ownership change under Internal Revenue Code Section 382 could limit use of tax attributes.
- Litigation: a Nevada development-contract case sought rescission or, alternatively, $55 million plus unspecified punitive and other damages; KB Home said loss exposure could range from zero to the claimed damages and the trial was set for September 2012. Separately, a December 2011 jury verdict imposed $9.8 million, excluding legal fees and interest, in a California project case; the company accrued $4.0 million and estimated ultimate loss of $4 million to $12 million. It planned post-trial motions and possibly an appeal.
- The filing describes Chinese drywall warranty claims: 87 affected homes remained unresolved at November 30, 2011, with $4.8 million of estimated remaining repair costs; 11 related lawsuits were pending. The company also reported $94.9 million of estimated self-insurance liabilities and $361.6 million of performance bonds outstanding.
- After year-end, KB Home announced tender offers for up to $250 million of specified 2014 and 2015 notes, conditional in part on issuing new unsecured senior debt. Completion and final amounts were not assured in the filing.
Key investor verification points
- Reconcile the improvement in year-end backlog and net orders with FY2012 deliveries, cancellations and realized selling prices.
- Track housing gross margin, SG&A as a percentage of revenue, and the quality of any return to profitability, including the effects of noncash charges.
- Assess cash burn and unrestricted liquidity after South Edge payments, land investment and debt service; confirm the outcome and financing terms of the note tender offers.
- Evaluate South Edge land valuation and development assumptions, future inventory impairment exposure, and progress monetizing long-dated inventory.
- Monitor mortgage availability and replacement financing arrangements following the KBA Mortgage wind-down and MetLife’s announced exit.
- Check developments in the Nevada and California litigation, drywall claims, and the adequacy of warranty and self-insurance reserves.
- Consider the substantial debt burden and 2014–2015 maturities alongside the company’s stated cash-neutral objective and planned land spending.