KB Home — FY2017 Form 10-K
Reporting period: Fiscal year ended November 30, 2017. This is an annual report; the filing also provides unaudited fourth-quarter results. KB Home primarily builds and sells homes across seven states, with homebuilding generating 99.7% of fiscal 2017 revenue.
Financial and operating performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenue | $4.369 billion | $3.595 billion | +22% |
| Net income | $180.6 million | $105.6 million | +71% |
| Diluted EPS | $1.85 | $1.12 | +65% |
| Homes delivered | 10,909 | 9,829 | +11% |
| Average selling price | $397,400 | $363,800 | +9% |
| Net orders | 10,900 | 10,283 | +6% |
| Ending backlog | 4,411 homes; $1.660 billion | 4,420 homes; $1.519 billion | Units roughly flat; value +9% |
Housing revenue increased 21% to $4.335 billion. Housing gross profit margin was 16.3%, versus 16.2% in 2016; excluding inventory-related charges it was 16.9%, versus 16.6%. Homebuilding operating income rose 86% to $283.4 million, and its margin increased to 6.5% from 4.3%. The SG&A ratio improved to 9.8% from 10.9%. Inventory impairment and land-option abandonment charges totaled $25.2 million, down from $52.8 million.
Operating cash flow was $513.2 million, compared with $188.7 million. Cash and cash equivalents were approximately $720.9 million at year-end. Notes payable fell $315.3 million to $2.325 billion; debt-to-capital improved to 54.7% from 60.5%, and net debt-to-capital to 45.4% from 54.3%. The company reported $462.4 million available for cash borrowing under its revolving credit facility and compliance with its covenants.
Material changes and notable items
- Growth reflected more home deliveries and higher selling prices, alongside favorable demand in most served markets. West Coast revenue rose 33%; Southeast revenue fell 6%, with the Metro Washington, D.C. wind-down contributing to lower deliveries there.
- Land and land-development investment increased to $1.52 billion from $1.36 billion. Year-end owned or optioned lots totaled 46,371, up from 44,825; 25% were controlled under options versus 21% a year earlier.
- KB Home redeemed and repaid the remaining $265 million of 9.10% notes due 2017 using internally generated cash; early redemption produced a $5.7 million charge. The $300 million 7.25% notes due June 2018 were the next scheduled senior-note maturity.
- The company’s financial-services mortgage joint venture KBHS began operating in 2017. About 25% of homebuyers using mortgage financing used KBHS, compared with 37% using the prior venture in 2016; financial-services pretax income increased to $13.1 million from $4.5 million.
- The Tax Cuts and Jobs Act was enacted after year-end. KB Home expected a one-time, non-cash tax charge of approximately $115 million in first-quarter 2018 from remeasuring deferred tax assets; it expected a 2018 effective tax rate of about 27%, excluding that charge.
Outlook, risks and contingencies
For 2018, management forecast housing revenue of $4.5–$4.9 billion, average selling price of $395,000–$405,000, housing gross margin excluding inventory-related charges of 17.2%–17.7%, and homebuilding operating margin excluding those charges of 7.2%–7.7%. It expected the average community count to remain roughly flat. Its 2019 targets include housing revenue above $5 billion, homebuilding operating margin excluding inventory charges of 8.0%–9.0%, return on invested capital above 10%, return on equity of 10%–15%, and net debt-to-capital of 40%–50%.
Management cited favorable employment, income and consumer-confidence trends, but identified risks from mortgage rates and lending availability, rising land and construction costs, skilled-trade shortages, permitting delays, housing-market weakness and concentration in California and other served markets. Tax-law changes could affect home affordability and demand, particularly in high-tax, high-price markets. Deferred tax asset realization depends on future taxable income; net deferred tax assets were $633.6 million, and the company estimated it needed approximately $1.6 billion of future pretax income before 2038 to realize them.
In the 2017 third quarter, a Northern California homeowners association alleged approximately $100 million in damages from claimed construction defects at a completed townhome community. The company had accrued an estimated probable loss and a receivable for estimated probable insurance recoveries, but said the investigation was preliminary and it could not estimate reasonably possible loss above the accrual. Self-insurance liabilities rose, including a $21.7 million estimate adjustment for claims relating to prior-year homes. The filing also disclosed $606.7 million of performance bonds and $37.6 million of letters of credit outstanding.
Important facts for investors to verify
- Whether 2018 delivery growth and the forecast margin improvement materialize, given construction-cost inflation, labor availability and community openings.
- Progress on the $300 million June 2018 note maturity and subsequent debt maturities, while maintaining covenant compliance and the targeted leverage trajectory.
- Actual performance and exposure of KBHS, and any remaining losses associated with winding down the former mortgage venture.
- Developments in the Northern California construction-defect claim, insurance recoveries, and the adequacy of warranty and self-insurance reserves.
- Deferred tax asset utilization and the effects of the tax-law change, including the expected non-cash charge and possible effects on homebuyer demand.