KB Home — FY2015 Form 10-K
Reporting period: Fiscal year ended November 30, 2015. KB Home builds and sells residential homes across nine states; homebuilding generated 99.6% of FY2015 revenue. The filing also reports fourth-quarter results.
Financial and operating performance
- Revenue: Total revenue was $3.032 billion, up 26% year over year. Homebuilding revenue was $3.021 billion; housing revenue rose 23% to $2.908 billion.
- Deliveries and demand: Homes delivered increased 14% to 8,196; average selling price rose 8% to $354,800. Net orders increased 22% to 9,253, while cancellations improved to 27% from 31%. Year-end backlog rose 36% to 3,966 homes, valued at $1.281 billion.
- Profitability: Pretax income increased 34% to $127.0 million. Net income was $84.6 million, or $0.85 diluted EPS, compared with $918.3 million, or $9.25 diluted EPS, in FY2014. The prior-year result included an $825.2 million deferred-tax valuation-allowance reversal.
- Margins: Housing gross margin declined to 16.3% from 18.1%; adjusted housing gross margin, a non-GAAP measure, fell to 21.0% from 22.5%. Higher land, development and construction costs and greater amortization of capitalized interest pressured margins. Homebuilding operating margin was 4.6%, versus 4.9%.
- Cash flow and liquidity: Operating activities generated $181.2 million, versus $630.7 million used in FY2014, as inventory investment declined. Year-end cash and cash equivalents were $559.0 million, with restricted cash of $9.3 million. The $275 million revolving facility had no cash borrowings and $250.7 million available for cash borrowing.
- Debt: Notes payable totaled $2.626 billion, up from $2.577 billion. Debt-to-capital was 60.8%; net debt-to-capital was 54.9%, down from 57.9%. The company reported compliance with debt covenants.
- Fourth quarter: Revenue was $985.8 million and net income was $44.0 million, compared with $796.0 million and $852.8 million, respectively, in Q4 FY2014. The prior-year quarter’s net income included the large tax valuation-allowance reversal.
Material changes and management outlook
- Average community count rose 22% to 244; year-end count increased 9% to 247. Management said backlog and community growth positioned the company for further growth in 2016.
- Management forecast FY2016 housing revenue of $3.35 billion to $3.65 billion, year-over-year improvement in housing gross margin, and lower SG&A as a percentage of revenue. It planned $1.0 billion to $1.3 billion of land and land-development investment, subject to market conditions and returns.
- Management cited favorable but uneven housing conditions, while noting that demand depends on employment, income, consumer confidence, mortgage availability and interest rates. Higher land, labor and material costs, fourth-quarter weather and trade shortages affected FY2015 performance.
- On January 12, 2016, the board authorized repurchases of up to 10 million shares. By January 22, 2016, 3.025 million shares had been repurchased for $30.5 million.
Risks, contingencies and unusual items
- Key risks include housing-market weakness, tighter or more expensive mortgage credit, land and construction-cost inflation, subcontractor shortages, cancellations, and inventory impairment. The filing also highlights drought and water restrictions in California, Arizona and Nevada, plus regulatory and environmental exposure.
- Self-insured construction-defect losses were estimated at $65 million to $95 million; actual costs could be higher. The Florida water-intrusion repair effort was substantially winding down, but claims and recoveries remained subject to estimation.
- A Florida Attorney General inquiry was expected to be resolved through an agreement subject to court approval; the company said its accrual was adequate. A tentative wage-and-hour litigation settlement remained subject to judicial approval.
- In Nevada development litigation, the company said a reasonably possible loss could exceed the amount accrued by $0 to approximately $55 million plus prejudgment interest; outcome was uncertain. A San Diego water-board notice could lead to penalties above $100,000, though the company did not expect a material financial-statement effect.
- Net deferred tax assets were $782.2 million at year-end, and realization depends on future taxable income. Management estimated approximately $2 billion of future pretax income would be needed to realize its deferred tax assets.
Important facts for investors to verify
- Whether FY2016 revenue and margin guidance was achieved, particularly given FY2015 cost inflation and margin compression.
- Whether backlog converted to deliveries and revenue as expected, and whether cancellation rates and community growth remained favorable.
- Cash generation, planned land investment, debt maturities and covenant headroom, including the $265 million of 9.10% notes due in 2017.
- Developments in Florida warranty claims and recoveries, the Florida inquiry, wage settlement and Nevada litigation exposure.
- Deferred-tax-asset realizability and the impact of the new share-repurchase authorization on liquidity and leverage.