KB Home — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended August 31, 2022. KB Home builds and sells homes across four U.S. regions and provides insurance and title services; mortgage services are offered through an unconsolidated joint venture.
Financial and operating performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $1.845 billion | $1.467 billion | $4.964 billion | $4.050 billion |
| Pretax income | $326.2 million | $174.2 million | $787.2 million | $471.4 million |
| Net income | $255.3 million | $150.1 million | $600.3 million | $390.5 million |
| Diluted EPS | $2.86 | $1.60 | $6.63 | $4.11 |
| Homes delivered | 3,615 | 3,425 | 9,952 | 9,793 |
| Average selling price | $508,700 | $426,800 | $497,200 | $412,000 |
- Q3 homebuilding revenue rose 26%, while homebuilding operating income increased 91% to $325.1 million. Operating margin was 17.7%, up from 11.6%; GAAP housing gross margin rose to 26.7% from 21.5%. Adjusted housing gross margin, a company-defined non-GAAP measure excluding specified inventory charges, was 27.0% versus 22.0%.
- For the first nine months, homebuilding revenue grew 23%, operating income rose 70%, and operating margin increased to 15.3% from 11.1%. Housing gross margin was 25.0% versus 21.3%.
- Q3 net orders fell 50% to 2,040 and net order value declined 51% to $979.0 million. Monthly net orders per community slowed to 3.1 from 6.6, and the cancellation rate rose to 35% from 9%. Ending backlog value nevertheless increased 9% to $5.26 billion, with 10,756 homes.
- Nine-month operating cash flow was negative $224.0 million, versus negative $180.2 million a year earlier, principally reflecting a $954.2 million inventory increase. Investing cash outflow was $54.1 million; financing provided $183.2 million. Cash and cash equivalents were $197.3 million at period end.
- Notes payable totaled $2.03 billion, up from $1.69 billion at November 30, 2021; debt-to-capital was 36.8%, compared with 35.8%. Total liquidity was $928.8 million, including $733.4 million available under the revolving credit facility. The company reported compliance with its debt covenants.
Changes, outlook, and management commentary
- Management attributed stronger delivered-home revenue and margins mainly to higher selling prices established when buyers contracted in earlier, stronger market conditions, along with lower relative interest amortization and improved SG&A leverage. Persistent material, labor, supply-chain, permitting, inspection, and utility constraints raised costs and extended construction cycles; cycle time expanded 11 days in Q3.
- Management said demand weakened significantly in Q3 as higher mortgage rates, home prices, inflation, financial-market volatility, and broader uncertainty weighed on affordability and buyer confidence. It expects lower orders and higher cancellations in Q4 and into 2023, while citing longer-term support from demographics, housing underproduction, and low resale inventory.
- The company reduced Q3 land acquisitions 71% year over year to $135.3 million and shifted focus toward developing land already owned or controlled. It abandoned 8,761 controlled lots during the quarter. Inventory increased to $5.74 billion from $4.80 billion at November 30, 2021.
- Q4 2022 outlook: Housing revenue of $1.95–$2.05 billion; average selling price around $503,000; homebuilding operating margin about 16.7%; housing gross margin 25.0%–26.0%; SG&A about 8.8% of housing revenue; effective tax rate about 24%; ending community count 235–250. Margin estimates assume no inventory-related charges.
- Full-year 2022 outlook: Housing revenue of $6.90–$7.00 billion; average selling price around $500,000; homebuilding operating margin 15.7%–16.0%; housing gross margin 25.1%–25.4%; SG&A about 9.4% of housing revenue; effective tax rate about 24%; return on equity about 26%. Margin estimates assume no inventory-related charges. These are management estimates, not guarantees.
- Q3 financial-services pretax income declined 51% to $4.6 million, mainly because the mortgage joint venture recorded a $6.3 million fair-value loss on interest-rate lock commitments; nine-month segment pretax income rose 11% to $31.7 million.
Debt, unusual items, and contingencies
- KB Home issued $350 million of 7.25% notes due 2030 and used the proceeds, with cash, to redeem $350 million of 7.50% notes due 2022. The redemption generated a $3.6 million early-extinguishment loss. A $350 million revolving-facility borrowing was outstanding at quarter end.
- A new term loan had a $310 million commitment at August 31, 2022, with no amount drawn; an additional $50 million lender commitment was obtained on October 3, raising the commitment to $360 million. Management intended to use proceeds toward redeeming $350 million of 7.625% notes due 2023.
- The Inflation Reduction Act extended and modified federal energy-efficient home tax credits and introduced a 1% excise tax on stock repurchases after December 31, 2022; the company was evaluating other effects. Q3 tax expense was $70.9 million, with a 21.7% effective tax rate, versus $24.1 million and 13.8% a year earlier.
- Inventory impairment and land-option abandonment charges totaled $8.5 million in Q3 and $9.4 million for the nine months. Management reported no active communities or land parcels with impairment indicators at quarter end, but noted estimates may change with market conditions.
- Florida construction-defect notices included approximately 512 outstanding claims at August 31, primarily involving stucco and water intrusion. The company had recorded estimated probable losses and recoveries, but said losses could exceed accruals and recoveries could fall short; it could not reasonably estimate the potential excess. It also reported $1.26 billion of performance bonds and $43.1 million of letters of credit outstanding.
- Other material risks include demand and mortgage-rate sensitivity, construction and supply constraints, land and inventory exposure, warranty and self-insurance estimates, litigation, and access to financing. The company reported disclosure controls effective and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether order trends, cancellation rates, backlog conversion, and community-level pricing support the Q4 and full-year guidance as affordability pressures continue.
- Whether construction delays and input costs affect deliveries and margins, and whether inventory or land-option charges increase.
- Cash generation and liquidity needs as inventory remains elevated; debt levels, facility availability, covenant compliance, and the planned refinancing of 2023 notes.
- Actual outcomes and insurance recoveries for Florida construction-defect claims, along with changes in warranty and self-insurance estimates.
- The assumptions underlying non-GAAP adjusted margins and management’s guidance, including the explicit assumption of no inventory-related charges.