KB Home — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended August 31, 2021. KB Home builds and sells homes across four U.S. regions and also provides insurance and title services; mortgage lending is conducted through its 50%-owned unconsolidated joint venture, KBHS.
Financial and operating results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $1.467 billion | $999.0 million | $4.050 billion | $2.989 billion |
| Net income | $150.1 million | $78.4 million | $390.5 million | $190.2 million |
| Diluted EPS | $1.60 | $0.83 | $4.11 | $2.02 |
| Homebuilding operating margin | 11.6% | 8.9% | 11.1% | 6.7% |
| Housing gross margin | 21.5% | 19.9% | 21.3% | 18.5% |
- Q3 homebuilding revenue rose 47%, supported by 3,425 home deliveries, up 35%, and an 11% increase in average selling price to $426,800. Nine-month deliveries were 9,793, up 26%, and average selling price rose 8% to $412,000.
- Q3 homebuilding operating income increased 91% to $169.9 million. Results included a $5.1 million debt-extinguishment charge; excluding it, pretax income was $179.3 million, up 77% year over year.
- Q3 housing gross margin improved 160 basis points. Favorable pricing and lower relative capitalized-interest amortization more than offset higher construction costs. SG&A was 9.9% of housing revenue, versus 11.0% a year earlier.
- Q3 net orders declined 3% to 4,085, while net order value rose 22% to $2.009 billion; cancellation rate improved to 9% from 17%. Backlog value increased 89% year over year to $4.842 billion, representing 10,694 homes.
- Financial-services pretax income was $9.4 million in Q3, down 3%, as lower KBHS joint-venture earnings offset higher insurance and title revenue. Nine-month financial-services pretax income increased 24% to $28.5 million.
Cash, debt and liquidity
- Cash and cash equivalents were $350.1 million at August 31, 2021, down from $681.2 million at November 30, 2020. Nine-month operating cash flow was negative $180.2 million, compared with positive $329.2 million a year earlier; inventory growth used $760.4 million of cash.
- Cash used in investing activities was $26.6 million and cash used in financing activities was $124.4 million for the nine months. Financing included $188.2 million of share repurchases and $41.0 million of dividends, partly offset by proceeds from new debt.
- Notes payable totaled $1.864 billion. Debt-to-capital was 39.6%; net debt-to-capital rose to 34.7% from 28.6% at November 30, 2020, largely reflecting lower cash. Total liquidity was $1.142 billion, including $791.4 million available under the $800 million revolver, with no revolver borrowings.
- KB Home issued $390 million of 4.00% senior notes due 2031 and used part of the proceeds to buy back $269.8 million of 7.00% notes due 2021. It redeemed the remaining $180.2 million of those notes on September 15, after quarter-end. Management said the transactions extended debt maturities by more than two years and lowered the weighted-average borrowing rate by about 70 basis points.
Outlook, commentary and risks
- Management cited strong housing demand, low mortgage rates, limited housing supply and favorable demographics, while noting supply-chain disruption, shortages and cost increases in materials, labor constraints, and permitting, inspection and utility delays. It expected these construction challenges to persist through year-end and into 2022.
- Q4 2021 outlook: Housing revenue of $1.65–$1.75 billion; average selling price about $450,000; housing gross margin of 21.6%–22.0% assuming no inventory-related charges; housing operating margin about 11.8% on the same assumption; effective tax rate about 24%.
- FY 2021 outlook: Housing revenue about $5.74 billion; average selling price about $422,600; homebuilding operating margin about 11.5% assuming no inventory-related charges; return on equity about 20%.
- FY 2022 outlook: Housing revenue over $7.00 billion; year-end community count expected to increase about 20% and average community count about 10% versus 2021. Management planned more than 200 new community openings over the next five quarters.
- Management warned that pandemic developments, inflation, weaker housing demand, financing-market constraints and worsening construction bottlenecks could impair targets. The outlook is forward-looking and not a guarantee.
- Q3 tax expense benefited from $21.5 million of federal energy tax credits; nine-month credits totaled $39.0 million. The credit extension was expected to benefit future periods but was stated to run through December 31, 2021.
- Q3 included $6.7 million of inventory impairment and land-option abandonment charges. The filing says impairment estimates depend on assumptions about future cash flows and asset realization.
- Contingencies include approximately 650 outstanding Florida Chapter 558 construction-defect notices; the company could not estimate reasonably possible losses beyond recorded accruals or potential shortfalls in recoveries. A Northern California townhome matter had a reasonably possible additional loss range of $0–$3.0 million. The company also had $1.06 billion of performance bonds outstanding and did not expect a material amount to be called.
Most important facts for investors to verify
- Whether backlog converts to deliveries and revenue as expected despite labor, materials and permitting constraints, and whether the planned community openings occur on schedule.
- Whether price increases continue to offset construction-cost inflation and preserve the reported margin gains.
- Cash generation and liquidity as land and inventory investment expand; reconcile negative operating cash flow with earnings and planned growth spending.
- Debt maturity, leverage and post-quarter redemption effects, including the actual impact on financing costs and liquidity.
- Developments in Florida and California construction-defect matters, warranty and self-insurance estimates, and recoverability of insurance claims.
- Whether tax-credit benefits and stated guidance assumptions remain applicable, particularly the energy-efficient-home credit’s scheduled expiration.