KB Home — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended August 31, 2023; year-over-year comparisons are with the corresponding 2022 periods. KB Home builds homes across four U.S. regions and also operates insurance and title-service businesses. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $1.587 billion | $1.845 billion | $4.737 billion | $4.964 billion |
| Pretax income | $194.5 million | $326.2 million | $571.7 million | $787.2 million |
| Net income | $149.9 million | $255.3 million | $439.9 million | $600.3 million |
| Diluted EPS | $1.80 | $2.86 | $5.18 | $6.63 |
| Homebuilding operating margin | 11.3% | 17.7% | 11.4% | 15.3% |
| Housing gross profit margin | 21.5% | 26.7% | 21.3% | 25.0% |
- Q3 housing revenue was $1.574 billion, down 14%; deliveries fell 7% to 3,375 and average selling price decreased 8% to $466,300. For the nine months, housing revenue declined 5%, deliveries were nearly flat at 9,829, and average selling price fell 4% to $479,200.
- Q3 homebuilding pretax income decreased 43% to $184.6 million. Financial-services pretax income rose to $9.9 million from $4.6 million; the nine-month result declined 14% to $27.3 million, primarily reflecting lower joint-venture income.
- Q3 gross-margin pressure reflected price concessions, higher construction costs and product/geographic mix. Selling, general and administrative expenses were 10.2% of housing revenue, versus 8.9% a year earlier.
- Income tax expense was $44.6 million in Q3 and $131.8 million for the nine months; effective tax rates were 22.9% and 23.1%, respectively.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $772.5 million, compared with cash used of $224.0 million in 2022. The 2023 inflow included a $355.3 million reduction in inventory; accounts payable, accrued expenses and other liabilities declined by $100.5 million.
- Investing cash outflow was $44.8 million. Financing cash outflow was $445.6 million, including $249.6 million of stock repurchases, $150.0 million of net revolver repayments and $41.6 million of dividends.
- At August 31, 2023, homebuilding cash and cash equivalents were $612.1 million; total cash and cash equivalents in the cash-flow statement were $612.4 million. Total liquidity was $1.70 billion, including $1.083 billion available under the $1.09 billion revolving credit facility. There were no revolver cash borrowings outstanding.
- Notes payable totaled $1.690 billion, down from $1.839 billion at November 30, 2022. Debt-to-capital was 30.6%, versus 33.4%. The $360 million term loan matures in 2026; senior notes mature from 2027 through 2031. The company reported compliance with debt covenants.
- Equity was $3.830 billion. The company repurchased 5.66 million shares for approximately $249.6 million during the nine months and had $325.4 million remaining under its authorization. The quarterly dividend increased from $0.15 to $0.20 per share.
Material changes and operating trends
- Q3 net orders increased 52% to 3,097; net order value rose 54% to $1.512 billion. Monthly net orders per community were 4.3 versus 3.1, while the cancellation rate improved to 21% from 35%.
- Despite stronger quarterly orders, backlog at August 31 fell 35% year over year to 7,008 homes valued at $3.395 billion. The Central region’s backlog value declined 62%; West Coast backlog value fell 11%.
- Community count averaged 240 in Q3, up 9% year over year. Land and land-development investment was $1.32 billion for the nine months, down 33%; land acquisitions fell 57%. Management said investment rose sequentially in Q2 and Q3 and expects acquisition activity to increase in Q4.
- Management reported improving construction cycle times and supply-chain conditions, but build times remained longer than historical norms. It cited selective buyer incentives, including mortgage-rate buydowns, to support orders and reduce cancellations.
Outlook, risks and contingencies
- Q4 2023 guidance: Housing revenue of $1.55–$1.65 billion; average selling price of about $486,000; homebuilding operating margin of about 10.5% and housing gross margin of about 20.5%, each assuming no inventory-related charges; SG&A at about 10.0% of housing revenue; effective tax rate of about 24%; net orders of 2,070–2,760; and ending community count approximately flat sequentially.
- FY 2023 guidance: Housing revenue of about $6.31 billion, average selling price of about $481,000, homebuilding operating margin of about 11.3% and housing gross margin of about 21.3%, both assuming no inventory-related charges; SG&A at about 10.0% of housing revenue; tax rate about 23%; average community count up about 9%, with year-end count around 230.
- FY 2024 outlook: Housing revenue of $6.50–$7.00 billion and year-end community count expected to increase about 15% from 2023. Management expects Q4 net orders to decline sequentially partly due to seasonality, and Q4 delivered average selling price to decrease year over year. These are forward-looking estimates, not guarantees.
- Key uncertainties include elevated mortgage rates and inflation, affordability and consumer confidence, economic and capital-market conditions, supply-chain and construction-cost pressures, land availability, and the company’s ability to convert backlog into deliveries. Management expects some production challenges to persist in Q4.
- Florida construction-defect matters included approximately 485 outstanding Chapter 558 noticed claims at quarter-end, many concerning stucco and water intrusion. The company had recorded an estimated probable loss and insurance-recovery receivable but said reasonably possible excess losses or recovery shortfalls could not be estimated. Trade partners’ insurers had indicated inability to continue paying costs in some cases.
- Other exposures include $1.32 billion of performance bonds, land option deposits of $39.2 million tied to land with a $1.20 billion aggregate purchase price, and warranty and self-insurance estimates subject to claims and actuarial uncertainty. Management did not believe a material amount of outstanding bonds or letters of credit would be called.
- S&P reaffirmed KB Home’s BB credit rating in April 2023 and changed the outlook from positive to stable. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter, apart from ongoing ERP implementation.
Most important facts for investors to verify
- Whether Q4 and FY 2023 revenue, pricing, margins, orders and community-count guidance were achieved, and how buyer concessions affected realized margins.
- Whether order growth translates into backlog conversion and deliveries, particularly in the West Coast and Central regions; monitor cancellations and construction cycle times.
- Whether operating cash generation remains strong as land investment increases, alongside repurchases and dividends; reconcile inventory movements with cash flow.
- Liquidity, debt maturities, access to credit facilities and covenant headroom, particularly amid housing-market or credit-market stress.
- Developments in the Florida construction-defect claims, related accruals and insurance recoveries, as well as changes in warranty and self-insurance estimates.