KB Home — FY2016 Form 10-K
Reporting period: Fiscal year ended November 30, 2016. The filing also reports quarterly results; FY2016 fourth-quarter revenue was $1.192 billion and net income was $37.5 million. KB Home builds and sells residential homes, primarily for first-time and move-up buyers, across seven states. Homebuilding generated 99.7% of FY2016 revenue.
Financial and operating performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $3.595 billion | $3.032 billion |
| Homebuilding revenue | $3.583 billion | $3.021 billion |
| Housing revenue | $3.576 billion | $2.908 billion |
| Operating income | $160.3 million | $146.0 million |
| Pretax income | $149.3 million | $127.0 million |
| Net income | $105.6 million | $84.6 million |
| Diluted earnings per share | $1.12 | $0.85 |
| Operating cash flow | $188.7 million | $181.2 million |
| Cash and cash equivalents, at year-end | $593.0 million | $560.3 million |
| Notes payable, at year-end | $2.640 billion | $2.602 billion |
| Debt-to-capital ratio | 60.5% | 60.6% |
| Net debt-to-capital ratio | 54.3% | 54.6% |
Homes delivered rose 20% to 9,829; average selling price increased 3% to $363,800. Net orders grew 11% to 10,283, while the cancellation rate improved to 25% from 27%. Year-end backlog increased 11% to 4,420 homes, with potential housing revenue of $1.519 billion, up 19%.
GAAP housing gross margin was 16.2%, down 10 basis points; adjusted housing gross margin, a non-GAAP measure excluding capitalized-interest amortization and specified inventory-related charges, was 21.1%, up 10 basis points. SG&A as a percentage of housing revenue improved to 10.9% from 11.8%. Homebuilding operating margin declined to 4.3% from 4.6%.
Operating cash flow included $98.3 million used for inventory investment. Land and land-development investment was approximately $1.36 billion. Year-end inventory was $3.403 billion. The company had $244 million available for cash borrowing under its $275 million revolving facility and reported compliance with its debt covenants.
Material changes versus FY2015
- Housing revenue rose 23%, reflecting higher deliveries and a higher average selling price. Total homebuilding revenue grew 19%, partly offset by land-sale revenue falling to $7.4 million from $112.8 million.
- Homebuilding operating income increased 10%, but total inventory-related charges rose to $52.8 million from $9.6 million. FY2016 included $49.6 million of inventory impairments and $3.2 million of land-option abandonments, chiefly tied to planned land sales and the Metro Washington, D.C. exit.
- Housing gross margin was pressured by higher construction and land costs, inventory charges, and capitalized-interest amortization. Higher delivery volume and fixed-cost leverage partly offset these effects.
- Financial-services pretax income fell to $4.5 million from $11.6 million, principally because the company recorded a $3.4 million equity loss from its mortgage joint venture, HCM, versus $4.3 million of equity income in FY2015.
- FY2014 net income of $918.3 million is not a comparable baseline: it included a substantial deferred-tax valuation-allowance reversal and an $823.4 million income-tax benefit. FY2016 and FY2015 recorded tax expenses of $43.7 million and $42.4 million, respectively.
Outlook, strategy, risks, and unusual items
For FY2017, management forecast housing revenue of $3.8–$4.2 billion, average selling price of $370,000–$385,000, housing gross margin of 16.0%–16.5%, operating margin of 5.7%–6.3%, SG&A of 10.0%–10.5% of housing revenue, and average community count approximately flat with FY2016. These are management targets, not guarantees.
Management’s returns-focused growth plan emphasizes expanding scale in existing markets, improving asset efficiency, reactivating communities, selling non-strategic land, and using deferred tax assets. FY2019 targets include housing revenue above $5 billion, operating margin of 8%–9%, return on invested capital above 10%, and net debt-to-capital of 40%–50%. The company reported $739 million of net deferred tax assets and estimated $300–$400 million of tax cash savings by the end of 2019, subject to generating taxable income and applicable tax rules.
Key risks include housing-market weakness, mortgage-rate increases or tighter lending, rising land and construction costs, skilled-trade shortages, geographic concentration—particularly in California—regulatory and environmental constraints, and the possibility that inventory values or deferred tax assets may not be realized as estimated. The company is winding down HCM and expects a new 50%-owned mortgage joint venture with Stearns Lending to begin services by the end of FY2017’s second quarter, subject to regulatory approvals.
After year-end, KB Home redeemed $100 million principal amount of its 9.10% notes due 2017 using internally generated cash; $165 million remained outstanding. It expected to record an approximately $5.4 million early-extinguishment charge in FY2017’s first quarter. The filing also identifies a Nevada development-contract case in which a loss above the accrual was considered reasonably possible, with a stated range of zero to approximately $55 million plus prejudgment interest. A Florida Attorney General inquiry was resolved in February 2016. Construction-defect loss estimates before insurance recoveries were approximately $145–$170 million; actual costs could be higher.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether FY2017 revenue, selling-price, and margin guidance is achieved, and whether backlog converts to deliveries on schedule.
- Whether the planned land sales and community reactivations generate cash and improve returns without further significant impairments.
- How construction costs, labor availability, mortgage rates, buyer financing, and California market conditions affect margins and cancellations.
- Whether the $739 million deferred tax asset is realized, including the assumptions underlying the projected tax savings and any ownership-change limitations.
- Debt maturities, covenant headroom, use of cash for investment versus debt reduction, and the post-year-end note redemption cost.
- Final outcomes and recoveries related to construction-defect claims, the Nevada litigation, HCM’s wind-down, and formation of the Stearns Lending joint venture.