KB Home — Q2 2024 Form 10-Q
Business context and reporting period. KB Home is a U.S. homebuilder with four homebuilding regions—West Coast, Southwest, Central and Southeast—and a financial services segment. This unaudited quarterly report covers the three and six months ended May 31, 2024; the balance-sheet comparison is with November 30, 2023. Dollar amounts below are in millions unless stated otherwise.
Financial and operating performance
| Metric | Three months ended May 31, 2024 | Year-over-year change | Six months ended May 31, 2024 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $1,709.8 | Down 3% | $3,177.6 | Up 1% |
| Pretax income | $221.1 | Up 3% | $395.8 | Up 5% |
| Net income | $168.4 | Up 2% | $307.1 | Up 6% |
| Diluted earnings per share | $2.15 | Up 11% | $3.91 | Up 16% |
| Homebuilding operating margin | 11.1% | 11.5% prior year | 10.9% | 11.4% prior year |
| Housing gross profit margin | 21.1% | Unchanged | 21.3% | Unchanged |
Q2 homebuilding revenue was $1,701.5 million, down 3%, as deliveries fell 4% to 3,523 homes; average selling price edged up to $483,000. The housing gross margin was flat year over year, while higher selling, general and administrative expenses (SG&A) lifted SG&A to 10.1% of housing revenue from 9.6%. Financial services pretax income rose 16% to $13.3 million in Q2 and 43% to $24.8 million for the first half, primarily reflecting higher earnings from the KBHS mortgage joint venture.
First-half diluted EPS benefited from higher net income and fewer weighted-average shares following repurchases. Net income included a $12.5 million gain on the sale of an investment in a privately held technology company; the filing does not state the after-tax or per-share effect separately.
Cash flow, balance sheet and capital
- Cash flow: First-half operating cash flow was $90.0 million, versus $608.7 million a year earlier. The current period included a $195.3 million inventory investment, compared with a $413.8 million inventory reduction in the prior period. Investing cash outflow was $29.0 million; financing cash outflow was $144.1 million, including $100.0 million in share repurchases and $35.1 million in dividends.
- Cash and liquidity: Cash and cash equivalents were $643.5 million on the homebuilding balance sheet; consolidated cash flow reporting showed $644.3 million, including financial services cash. Total liquidity was $1.73 billion, comprising cash and $1.08 billion available under the $1.09 billion revolving credit facility. There were no cash borrowings under that facility.
- Debt: Notes payable totaled $1.70 billion, compared with $1.69 billion at November 30, 2023. Debt-to-capital was 29.8%, down from 30.7%. The $360 million term loan matures in August 2026; senior notes mature from 2027 through 2031 and thereafter. The company reported compliance with debt covenants.
- Inventory and investment: Inventory was $5.34 billion, up $201.5 million since November 30, 2023. First-half land and land-development investment rose 64% to $1.26 billion. Lots owned or controlled increased 17% to 65,533; 39% were controlled under land option contracts, up from 27%.
- Capital returns: KB Home repurchased 1.59 million shares for $100 million in the first half and increased its quarterly dividend 25% to $0.25 per share. A new $1 billion repurchase authorization was approved in April; $950 million remained available at May 31, 2024.
Material changes and operating trends
- Q2 net orders increased 2% to 3,997 and net order value rose 7% to $2.03 billion. Monthly net orders per community increased to 5.5 from 5.2, while the cancellation rate improved to 13% from 22%.
- Ending backlog was 6,270 homes valued at $3.12 billion, down 14% in homes and 10% in value year over year, but up 8% and 12%, respectively, from the prior quarter. The Central region was a key weakness: Q2 revenue fell 31% and segment operating income fell 41% year over year. West Coast revenue rose 24% and operating income rose 56%.
- Homebuilding operating income declined 7% in Q2 and 4% in the first half, despite lower inventory-related charges. Management attributed margin pressure principally to higher SG&A and, in some regions, construction costs and product or geographic mix.
- Build times improved, supply-chain disruptions had largely subsided, and a higher portion of beginning backlog was delivered in Q2 than a year earlier. Management said concessions, particularly mortgage-rate buydowns, continued to support orders and affordability.
Outlook, risks and contingencies
Company outlook: For Q3 2024, KB Home forecast housing revenue of $1.65–$1.75 billion, average selling price of about $482,000, homebuilding operating margin of 10.8%–11.4%, and housing gross margin of 21.0%–21.4%, assuming no inventory-related charges. It expected average community count to increase in the low single digits and ending community count to rise by a mid-to-high single-digit percentage year over year.
For full-year 2024, the company forecast housing revenue of $6.70–$6.90 billion, average selling price of $485,000–$495,000, homebuilding operating margin of 11.0%–11.4%, and housing gross margin of 21.1%–21.5%, assuming no inventory-related charges. It expected SG&A of approximately 10.1% of housing revenue, an effective tax rate of approximately 23%, and year-end community count of 250–255. Management expects higher year-over-year land acquisition activity in the remaining quarters, subject to market conditions and investment criteria, while continuing to balance sales pace, pricing and construction starts.
- Management cited volatile, elevated mortgage rates and affordability as ongoing headwinds, alongside uncertainty around inflation, consumer confidence, employment, the economy, housing demand, materials and labor costs, permitting, and access to financing. It cautioned that first-half results are not necessarily indicative of future performance.
- At May 31, 2024, approximately 434 Florida Chapter 558 construction-defect claims remained outstanding, many involving stucco and water intrusion. Some trade-partner insurers reportedly could no longer pay certain claim costs. KB Home said losses could exceed accruals and recoveries could be lower, but it could not estimate reasonably possible excess amounts.
- The U.S. Department of Justice Civil Division subpoenaed the company in September 2023 for documents and testimony concerning inspection, rating, marketing and advertising of ENERGY STAR homes. KB Home is cooperating; any loss or penalty was considered reasonably possible but not probable or estimable.
- Outstanding performance bonds were $1.31 billion and letters of credit totaled $54.2 million across the facilities disclosed. The company did not expect a material amount to be called. It also had $98.4 million in cash deposits tied to land options with aggregate purchase prices of $2.13 billion; these generally do not require specific performance, but deposits may be forfeited.
- Warranty, self-insurance and legal liabilities depend on estimates and actuarial assumptions. The company warned actual claims, resolution costs and recoveries could differ materially. The report also noted ongoing implementation of a new ERP system, with old and new systems both used for financial reporting; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether Q3 and full-year revenue and margin forecasts are achieved, especially given rate volatility, affordability and anticipated buyer concessions.
- Whether orders convert into deliveries and cash flow, and whether backlog value and cancellation trends continue to improve.
- Whether planned community expansion and higher land investment generate returns without further SG&A or inventory pressure.
- Developments in Florida construction-defect claims, related insurance recoveries, and the DOJ ENERGY STAR investigation, for which potential exposure is not quantified.
- Cash generation and capital allocation, including the pace of repurchases and dividends relative to land investment and liquidity needs.