KB Home (KBH) — Form 10-Q Summary
Reporting period: Three and six months ended May 31, 2020. KB Home builds homes across four U.S. regions and operates a financial services segment. The filing was signed July 9, 2020.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $914.0 million | $1,021.8 million | $1,989.9 million | $1,833.3 million |
| Pretax income | $67.8 million | $56.8 million | $136.6 million | $91.3 million |
| Net income | $52.0 million | $47.5 million | $111.7 million | $77.5 million |
| Diluted EPS | $0.55 | $0.51 | $1.19 | $0.82 |
- Q2 homebuilding revenue fell 11% year over year to $910.3 million; deliveries declined 10% to 2,499 homes and average selling price eased to $364,100 from $367,700.
- Q2 homebuilding operating income was $51.6 million, nearly flat year over year. Operating margin rose to 5.7% from 5.1%; excluding inventory-related and severance charges, management reported 6.9% versus 5.5%.
- Housing gross margin improved to 18.2% from 17.2%. SG&A was 12.6% of housing revenue, versus 12.1%, including $6.7 million of severance charges.
- First-half revenue increased 9% and net income increased 44%, reflecting strong first-quarter performance; second-quarter disruption sharply weakened orders and deliveries.
- Six-month operating cash flow was positive $154.7 million, versus cash used of $180.3 million a year earlier. Cash increased by $121.2 million during the half. The 2020 cash-flow improvement reflected net income and a $100.1 million inventory reduction, partly offset by a $117.3 million decrease in accounts payable, accrued expenses and other liabilities.
Financial position and liquidity
- At May 31, cash and cash equivalents were $575.0 million in homebuilding and $576.0 million consolidated, including financial services cash.
- Notes payable totaled $1.77 billion. Debt-to-capital was 41.5%, versus 42.3% at November 30, 2019; net debt-to-capital was 32.4%, versus 35.2%.
- Total liquidity was $1.36 billion, including $787.6 million available under the $800 million revolving credit facility; there were no revolver cash borrowings. The next stated senior-note maturity is $450 million in December 2021.
- Stockholders’ equity was $2.49 billion. Inventories were $3.61 billion, down from $3.70 billion at November 30, 2019.
Material changes, outlook and risks
- COVID-19 restrictions, temporary sales-center closures, reduced construction capacity and service delays disrupted Q2 operations. Net orders fell 57% to 1,758; cancellations rose to 43% from 15%. Ending backlog declined 14% to 5,080 homes, valued at $1.90 billion, down 12% year over year.
- Management said order trends improved from April’s low point. In the first five weeks of Q3, gross orders rose 10% and net orders 11% year over year; the cancellation rate was 20%. The company cautioned that this short period may not predict the full quarter.
- Q3 outlook: housing revenue of $820–$880 million; average selling price of $395,000–$400,000; housing gross margin of 18.8%–19.4%, assuming no inventory charges; and homebuilding operating margin of 5.7%–6.5%, excluding inventory charges. Management expected average community count to decline in the low-single-digit percentage range year over year.
- Full-year outlook: housing revenue of $3.75–$3.95 billion; average selling price of $385,000–$395,000; housing gross margin of 18.6%–19.2%, assuming no inventory charges; and homebuilding operating margin of 6.4%–7.2%, excluding inventory charges and Q2 severance. Average community count was expected to be approximately flat year over year.
- Management forecast annualized savings of approximately $40 million from workforce realignment and reductions. It planned to continue targeted land investment and preserve cash, while warning that the pandemic could materially reduce orders, deliveries, revenue, cash flow and profitability; no assurance was given that the recovery would continue.
- Q2 included $4.4 million of inventory-related charges, mainly land-option abandonments. Management warned future impairments or abandonments could be material if market conditions deteriorate.
- Contingencies include approximately 503 outstanding Florida construction-defect notices; the company could not estimate reasonably possible losses above its accrual or any shortfall in estimated insurance recoveries. For a Northern California townhome claim, additional loss above accrual was reasonably possible in an estimated range of $0–$8 million.
- The filing reported $789.6 million of performance bonds and $45.9 million of letters of credit outstanding; the company did not expect a material amount to be called. It reported compliance with applicable debt covenants at May 31, 2020.
Important facts for investors to verify
- Whether improved Q3 orders and cancellation rates persisted beyond the initial five-week period, and whether the stated revenue and margin outlook was achieved.
- How backlog conversion, home deliveries, pricing and community count developed amid ongoing COVID-19 and economic uncertainty.
- Whether cash generation and liquidity remained adequate, and how the December 2021 senior-note maturity was addressed.
- Whether inventory assumptions, land-option decisions or construction-defect claims led to material additional charges or lower insurance recoveries.
- How much of reported earnings and margins depended on joint-venture income, tax benefits and the timing of capitalized-interest amortization.