KB Home — FY2022 Form 10-K
Reporting period: Fiscal year ended November 30, 2022. This 10-K reports full-year results; fourth-quarter data are noted where disclosed. KB Home builds and sells homes across nine states and four homebuilding segments. Homebuilding generated 99.7% of FY2022 revenue; financial services generated 0.3%.
Financial and operating results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $6.904 billion | $5.725 billion |
| Pretax income | $1.072 billion | $695.3 million |
| Net income | $816.7 million | $564.7 million |
| Diluted EPS | $9.09 | $6.01 |
| Homes delivered | 13,738 | 13,472 |
| Average selling price | $500,800 | $422,700 |
| Housing gross margin | 24.3% | 21.6% |
| Homebuilding operating margin | 15.1% | 11.6% |
| Operating cash flow | $183.4 million | $(37.3) million |
| Cash and cash equivalents at year-end | $328.5 million | $290.8 million |
| Notes payable at year-end | $1.839 billion | $1.685 billion |
| Total liquidity at year-end | $1.262 billion | $1.082 billion |
- Revenue rose 21%; net income rose 45% and diluted EPS rose 51%. Homebuilding revenue growth reflected 2% more deliveries and an 18% higher average selling price.
- Housing gross margin increased 2.7 percentage points. Excluding inventory-related charges, the company’s non-GAAP adjusted housing gross margin was 24.8%, up from 21.8%.
- Inventory-related charges totaled $37.3 million, versus $12.0 million in FY2021, including $24.1 million of inventory impairments and $13.2 million of land-option abandonment charges.
- Operating cash flow turned positive, but included a $785.6 million increase in inventories. Cash used in investing activities was $71.8 million; cash used in financing activities was $73.6 million.
- Debt-to-capital was 33.4%, down from 35.8%. Interest incurred was $120.9 million and was fully capitalized, so the company reported no interest expense for FY2022. $510 million of year-end borrowings were variable-rate; management estimated a 100-basis-point rate increase would add about $5.1 million of annual interest at that balance.
Material changes and demand trends
- FY2022 net orders fell 33% to 10,856; cancellation rate rose to 26% from 10%. Year-end backlog declined 27% by homes and 25% by value, to 7,662 homes and $3.692 billion.
- The fourth-quarter downturn was sharper: net orders and net order value fell 80% and 79% year over year. The cancellation rate reached 68%, versus 13% in the prior-year quarter.
- Management attributed weaker second-half demand principally to sharply higher mortgage rates, elevated inflation, prior home-price increases, financial-market volatility and broader economic and geopolitical uncertainty.
- Owned or controlled lots declined 21% to 68,795. The company abandoned 15,678 previously controlled lots in the second half and reduced land investment as demand softened.
- Financial-services pretax income was essentially flat at $38.5 million. KBHS, the mortgage joint venture, had lower origination margins amid rising rates and competition; a $20.3 million increase in the fair value of interest-rate lock commitments supported its results.
Outlook, risks and contingencies
- FY2023 outlook: Housing revenue guidance is $5.0–$6.0 billion, below FY2022’s $6.88 billion. The company did not provide full-year guidance for other metrics, citing uncertainty and limited visibility.
- FY2023 Q1 outlook: Housing revenue of $1.25–$1.40 billion; average selling price of $490,000–$500,000; homebuilding operating margin of 9.5%–10.5%; housing gross margin of 20%–21%; and effective tax rate of about 23%. Margin guidance assumes no inventory-related charges. Management expected Q1 net orders to fall 50%–60% year over year; orders in the first six weeks were down 68%.
- Management expects affordability pressures, higher cancellations and weaker orders to continue into 2023, alongside supply-chain constraints, construction-cost pressure and permitting, inspection and utility delays. It is using price reductions and other concessions, while seeking to lower direct costs and cycle times. Land investment is expected to remain below the prior two years.
- Management cited long-term housing fundamentals, including favorable demographics, underproduction of new homes and low resale inventory, and said it believed the company had a strong balance sheet and sufficient liquidity for at least the next 12 months.
- Key risks include further rate increases and reduced affordability; an inability to offset cost inflation through pricing; construction labor and materials shortages; land-value impairment; geographic concentration, especially in California; extreme weather and insurance availability; regulatory and environmental requirements; and warranty, construction-defect and cybersecurity exposures.
- Florida construction-defect matters included approximately 531 outstanding Chapter 558 noticed claims at year-end, primarily involving stucco and water intrusion. The company had accrued estimated probable losses and recorded expected recoveries, but could not estimate reasonably possible additional losses or future claims.
- Year-end self-insurance liabilities were $176.0 million, with $32.7 million of estimated probable recoveries. The auditor identified valuation of these liabilities and recoveries as a critical audit matter. The 10-year limited structural warranty and long-tail construction-defect claims are additional estimation risks.
- Other notable items: the company repurchased $150 million of stock in FY2022 and had $150 million remaining under its authorization; the Inflation Reduction Act extended and modified energy-efficient home tax credits and introduced a 1% excise tax on stock repurchases after December 31, 2022. The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.
Important facts for investors to verify
- Whether orders, cancellations and backlog stabilize, and whether FY2023 revenue and first-quarter margin guidance are achieved.
- How much pricing concessions and construction-cost reductions affect realized selling prices, gross margins and cash generation.
- Whether inventory values remain recoverable and whether further impairments or land-option abandonments occur.
- Liquidity and covenant headroom as operating cash flows, land spending and variable-rate borrowing needs change.
- Developments in Florida construction-defect claims, insurance recoveries and self-insurance estimates.
- Potential effects of California and other environmental, energy and water regulations, and the continuing ERP-system implementation.