KB Home — FY2021 Form 10-K
Reporting period: Fiscal year ended November 30, 2021; comparisons are primarily with fiscal 2020. KB Home builds and sells homes across nine states. Homebuilding generated 99.7% of 2021 revenue.
Financial and operating results
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | $5.725 billion | $4.183 billion | +37% |
| Net income | $564.7 million | $296.2 million | +91% |
| Diluted EPS | $6.01 | $3.13 | +92% |
| Homes delivered | 13,472 | 10,672 | +26% |
| Average selling price | $422,700 | $388,900 | +9% |
| Housing gross margin (GAAP) | 21.6% | 18.9% | +2.7 pts |
| Homebuilding operating margin | 11.6% | 7.6% | +4.0 pts |
| Operating cash flow | $(37.3) million | $310.7 million | Down |
Housing gross margin excluding inventory-related charges was 21.8%; management’s adjusted margin, which also excludes amortization of previously capitalized interest, was 24.4%. Both are non-GAAP measures. Return on equity rose to 19.9% from 11.8%.
Net orders increased 21% to 16,206 and net order value rose 45% to $7.68 billion. Year-end backlog grew 35% to 10,544 homes and 67% in value to $4.95 billion; substantially all was expected to deliver in FY2022. The cancellation rate declined to 10% from 20%. Average community count fell 12% to 214, as strong sales accelerated sell-outs and supply and permitting delays slowed openings.
Cash flow from operations turned negative mainly because inventory increased $897.8 million as KB Home invested in land and development to support growth. Cash and cash equivalents were $292.1 million at year-end; reported total liquidity was $1.08 billion, including $791.4 million available under its credit facility. Inventory was $4.80 billion, up from $3.90 billion.
Notes payable had a carrying value of $1.685 billion ($1.70 billion aggregate principal); debt-to-capital was 35.8%, down from 39.6%. There were no credit-facility borrowings. The company issued $390 million of 4.00% notes due 2031 and repaid its 7.00% notes due 2021, extending maturities and reducing its weighted average borrowing rate by about 70 basis points. Its next senior-note maturity was $350 million of 7.50% notes due September 2022.
Material changes and notable items
- Strong demand and higher selling prices more than offset rising construction and material costs. Management attributed about 110 basis points of margin pressure to higher construction services and material costs.
- Supply-chain disruption, trade shortages, and permitting, inspection, and utility delays extended construction cycle times by several weeks and delayed deliveries and community openings.
- Inventory-related charges decreased to $12.0 million from $28.7 million. FY2021 included a $5.1 million debt-extinguishment loss; FY2020 included $6.7 million of severance charges.
- Income tax expense was $130.6 million and the effective rate 18.8%, versus 18.6% in FY2020. Federal energy-efficiency credits benefited FY2021; the company forecast a higher tax rate if those credits were not extended.
- Operating cash flow declined despite higher earnings, reflecting the substantial increase in inventory investment. The company repurchased 4.67 million shares for $188.2 million and paid $54.1 million in dividends.
Outlook, risks, and contingencies
Management’s FY2022 outlook was for housing revenue of $7.20–$7.60 billion, average selling price of $480,000–$490,000, homebuilding operating margin of 15.7%–16.5% and year-end community count growth of 20%–25%. The margin forecast assumes no inventory-related charges; management expected sequential housing gross-margin expansion starting in the second quarter. It also forecast ROE above 26% and an effective tax rate of about 25%, assuming no extension of federal energy tax credits. For FY2022 Q1, it projected housing revenue of $1.43–$1.53 billion and an average selling price near $472,000.
Management cited favorable demographics, limited new- and resale-home supply, and relatively low mortgage rates as supportive, while cautioning that inflation, higher mortgage rates, weaker buyer affordability or confidence, persistent supply and labor constraints, and delayed community openings could impair demand, deliveries, costs, and margins. It expected supply and construction challenges to persist into 2022, potentially throughout the year. The outlook is forward-looking and subject to material uncertainty.
- Construction and land: Land availability and cost, contractor capacity, volatile materials prices, permitting delays, and reliance on third-party suppliers and builders could affect growth and profitability.
- Market exposure: Operations are concentrated in California, Florida, Nevada, and Texas. Natural disasters, climate-related impacts, and regulatory changes may raise costs or disrupt operations; California is the largest revenue market.
- Contingencies: The company reported approximately 543 outstanding Florida Chapter 558 construction-defect notices, primarily involving stucco and water intrusion; some trade-partner insurers reportedly could not continue paying claim costs. It could not estimate reasonably possible losses beyond recorded accruals or future claims. For a Northern California townhome dispute, an additional loss of $0–$3 million was reasonably possible.
- Insurance and warranty: Self-insurance liability was $189.1 million, with $57.8 million of estimated probable related recoveries; warranty liability was $96.2 million. Estimates depend on long-tail claims, recovery assumptions, and construction quality.
- Other risks: Mortgage availability and lender performance, KBHS joint-venture performance, cybersecurity and ERP implementation, legal and environmental matters, and realization of deferred tax assets are identified risks. Management said liquidity was sufficient for anticipated needs for at least 12 months and reported compliance with debt covenants.
Important facts for investors to verify
- Whether projected FY2022 revenue, margins, community growth, and ROE are achieved, particularly given the stated supply, labor, permitting, inflation, and mortgage-rate risks.
- Whether backlog converts to deliveries as expected and whether the lower cancellation rate and strong order pace persist.
- How inventory expansion and land-development spending affect operating cash flow, liquidity, and returns.
- The timing and funding of the $350 million senior-note maturity in September 2022, alongside other near-term obligations.
- Developments in Florida and other construction-defect claims, insurance recoveries, and self-insurance estimates.
- Whether energy tax credits are extended and how tax-rate changes affect cash taxes and earnings.