KB Home — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended February 28, 2018. Comparisons are with the three months ended February 28, 2017, except balance-sheet comparisons, which are with November 30, 2017. Amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q1 2018 | Comparable period | Change / context |
|---|---|---|---|
| Total revenue | $871.6 million | $818.6 million | Up 6% |
| Homebuilding revenue | $869.2 million | $816.2 million | Up 6%; housing revenue rose 7% to $866.5 million |
| Homes delivered | 2,223 | 2,224 | Essentially flat |
| Average selling price of delivered homes | $389,800 | $364,600 | Up 7% |
| Housing gross profit margin | 16.1% | 14.6% | Up 150 basis points; excluding inventory-related charges, 16.7% vs. 15.1% |
| Homebuilding operating income | $44.0 million | $25.3 million | Up 74%; operating margin 5.1% vs. 3.1% |
| Total pretax income | $46.0 million | $21.5 million | Up 115% |
| Net income (loss) | $(71.3) million | $14.3 million | Reported loss reflects a $111.2 million noncash tax charge related to the Tax Cuts and Jobs Act (TCJA) |
| GAAP diluted EPS | $(0.82) | $0.15 | Reported loss includes the TCJA charge |
| Adjusted net income and diluted EPS (non-GAAP) | $39.9 million; $0.40 | $14.3 million; $0.15 | Excludes the TCJA-related charge; company-defined measure |
| Cash from operating activities | $(141.7) million | $(77.0) million | Greater cash use, mainly reflecting inventory investment and working-capital movements |
| Cash and cash equivalents | $560.3 million homebuilding; $560.8 million consolidated | $720.6 million homebuilding at November 30, 2017 | Consolidated cash declined about $160.1 million during the quarter |
| Notes payable | $2.36 billion | $2.32 billion at November 30, 2017 | Debt-to-capital 56.0%; net debt-to-capital 49.3% (non-GAAP) |
Orders, backlog, and segments
- Net orders increased 8% to 2,784; net order value increased 8% to $1.17 billion. Cancellation rate improved to 20% from 23%.
- Quarter-end backlog rose 4% to 4,972 homes and 10% in value to $1.97 billion; average backlog home selling price was up 5% year over year.
- Average community count fell 7% to 222, while net order absorption increased 17% to 4.2 per community per month. Ending community count was 219, versus 240 a year earlier.
- Southwest was a growth leader: homebuilding revenue rose 29% and operating income more than doubled. West Coast revenue rose 9% and operating income 34%. Central revenue was nearly flat and operating income declined 4%. Southeast revenue fell 14%, but the segment returned to operating income from a prior-year operating loss.
- Financial services pretax income increased to $1.9 million from $1.6 million. Approximately 50% of homebuyers obtaining mortgage financing used KBHS, the company’s 50%-owned mortgage joint venture.
Liquidity, debt, and capital allocation
- KB Home had no cash borrowings under its $500 million unsecured revolving credit facility and $463.1 million available for cash borrowing after outstanding letters of credit. The facility matures July 2021.
- The company reported compliance with its debt covenants. Its liquidity was $560.3 million against a $163.7 million minimum requirement; its leverage ratio was 0.560 against a maximum of 0.650.
- Senior-note and other debt principal payments were scheduled at $300.0 million in 2018, $673.5 million in 2019, $350.0 million in 2020, $800.0 million in 2022, and $250.0 million thereafter. The 2018 amount includes $300 million of 7.25% senior notes due June 15, 2018.
- Land and land-development investment totaled $465.0 million, versus $302.1 million a year earlier; 61% was for land acquisition. The quarterly dividend was $0.025 per share.
Outlook, commentary, and notable items
- Management described housing demand as supported by job growth and consumer confidence, with tight for-sale supply in most served markets, and cited execution of its Returns-Focused Growth Plan.
- For Q2 2018, management expected housing revenue of $990 million–$1.05 billion, average selling price of $400,000–$405,000, housing gross margin of 16.8%–17.2% assuming no inventory charges, and homebuilding operating margin of 5.9%–6.4% excluding inventory charges.
- For full-year 2018, management expected housing revenue of $4.55 billion–$4.85 billion, average selling price of $400,000–$410,000, housing gross margin of 17.4%–17.9% excluding inventory charges, and homebuilding operating margin of 7.4%–8.0% excluding inventory charges. It expected average community count flat to down 5% year over year and ending community count slightly higher than 2017.
- The $111.2 million TCJA-related tax charge was primarily from remeasuring deferred tax assets for the lower federal corporate tax rate. The accounting was provisional; the company expected to complete its analysis within the one-year measurement period. It estimated about $50 million of future AMT-credit refunds, subject to sequestration.
- Inventory impairment and land-option abandonment charges totaled $5.0 million, versus $4.0 million. Management said housing margin improvement reflected community-level pricing and mix actions, partly offset by higher construction costs.
- A Northern California homeowners’ association alleged approximately $100 million of construction-defect damages. KB Home had accrued its estimated probable loss and recorded an estimated insurance-recovery receivable, but said it could not estimate any reasonably possible loss above the accrual while its investigation remained preliminary.
- Other risks include housing-market and interest-rate changes, labor and material costs, land availability, financing access, deferred-tax-asset realization, warranty and construction-defect claims, and the company’s California market concentration. Management said there had been no material change in previously disclosed risk factors or market risk.
Most important facts for investors to verify
- Whether reported housing margins, order growth, backlog conversion, and 2018 guidance were achieved, particularly given the lower community count.
- The final TCJA accounting, deferred-tax-asset recoverability, and timing and amount of AMT-credit refunds; distinguish GAAP results from company-adjusted figures.
- Cash use and inventory investment, including whether higher land spending produces expected returns and whether impairments or option abandonments increase.
- Debt maturities and refinancing or repayment plans, especially the $300 million due in 2018 and the $673.5 million due in 2019, alongside liquidity and covenant headroom.
- Developments in the Northern California construction-defect matter, related insurance recoveries, and the adequacy of warranty and self-insurance reserves.