KB Home: Q1 2014 Form 10-Q
Reporting period: Three months ended February 28, 2014; comparisons are with the three months ended February 28, 2013 unless otherwise noted. KB Home builds and sells homes across four U.S. homebuilding regions and provides related insurance, title and mortgage-marketing services.
Financial and operating performance
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $450.7 million | $405.2 million; up 11% |
| Homebuilding revenue | $448.3 million | $402.8 million; up 11% |
| Net income (loss) | $10.6 million | $(12.5) million |
| Diluted EPS | $0.12 | $(0.16) |
| Homebuilding operating income | $17.7 million; 4.0% of homebuilding revenue | $0.5 million; 0.1% |
| Housing gross profit margin | 17.7%; adjusted non-GAAP margin 17.8% | 14.8%; adjusted non-GAAP margin 15.2% |
| Homes delivered / average selling price | 1,442 / $305,200 | 1,485 / $271,300; deliveries down 3%, price up 12% |
| Net orders / ending backlog | 1,765 orders; backlog 2,880 homes valued at $851.6 million | Orders up 6%; backlog value up 21% year over year |
| Operating cash flow | $(221.1) million | $(211.0) million |
| Cash, cash equivalents and restricted cash | $345.4 million, including $303.3 million unrestricted | $572.0 million total at November 30, 2013 |
| Debt / stockholders’ equity | $2.18 billion / $546.3 million | Debt $2.15 billion / equity $536.1 million at November 30, 2013 |
Revenue growth reflected higher selling prices and $8.1 million of land-sale revenue, partly offset by fewer home deliveries. The 30% cancellation rate improved from 32%. Interest expense fell to $11.3 million from $15.2 million, primarily because more interest was capitalized; interest incurred increased to $39.3 million from $33.4 million. Financial-services pretax income declined to $1.6 million from $2.7 million, including a prior-year gain from the wind-down of a mortgage joint venture.
Liquidity, debt and balance sheet
- Operating cash use chiefly reflected investment in land and development; the company invested $354.3 million in land and land development during the quarter. Inventory rose 15% from November 30, 2013 to $2.63 billion.
- Debt-to-total-capital was 79.9%, versus 80.0% at November 30; net-debt-to-total-capital increased to 77.0% from 74.6% as cash declined.
- The $200 million unsecured revolving credit facility had no borrowings or letters of credit outstanding, leaving $200 million available for cash borrowing. KB Home reported compliance with debt covenants and met both the facility’s coverage-ratio and minimum-liquidity tests at quarter-end.
- Cash dividends declared were $0.025 per share. No shares were repurchased during the quarter.
Management outlook, risks and unusual items
- Management expected to be profitable for fiscal 2014 and anticipated year-over-year growth in homes delivered, average selling prices and revenue across all four homebuilding segments. It expected average selling-price growth in the high-single-digit to low-double-digit range and community-count growth of 15%–20% by year-end.
- Management expected served markets to improve, but demand growth to be more moderate than in the first half of 2013. Its outlook depends on economic and job growth, consumer confidence, mortgage availability and rates, and continued favorable housing conditions. Planned land investment and community expansion remain subject to market conditions and investment opportunities.
- Q1 pretax income included a $3.2 million gain from selling an interest in a Maryland joint venture. There were no inventory impairment charges; land-option abandonment charges were $0.4 million. The prior-year quarter included a $1.7 million water-intrusion warranty charge.
- The Florida water-intrusion repair liability was $22.9 million at February 28, 2014. Repairs had been resolved on 1,125 of 1,477 identified affected homes; management expected to complete repairs by year-end. The company considered the accrual adequate but said losses could reasonably exceed it by up to $6 million.
- A Nevada development-contract lawsuit had remaining claims for contract damages or rescission. The company assessed a reasonably possible loss range of zero to approximately $55 million plus prejudgment interest; a non-jury trial was scheduled for May 20, 2014.
- The company maintained a full valuation allowance against deferred tax assets of $855.0 million and had no net deferred tax assets. Management said sustained profitability and continued positive trends could support reducing a large portion of the allowance during 2014; realization is uncertain.
- After quarter-end, KB Home completed an offering of $400 million of 4.75% senior notes due 2019 and 6,944,445 shares at $18 per share. Underwriters later exercised an option for 1,041,666 additional shares. Proceeds were intended for general corporate purposes, including land acquisition and development.
Important facts for investors to verify
- Whether sales, backlog conversion and community openings support management’s 2014 delivery, revenue and profitability outlook, particularly in the West Coast segment.
- Whether higher land investment can be converted into profitable deliveries without weakening cash, leverage or covenant headroom.
- Changes in home prices, construction labor and material costs, mortgage rates, buyer cancellations and housing demand.
- Final costs and recoveries for Florida water-intrusion repairs, and the outcome and exposure in the Nevada litigation.
- Whether sustained earnings support a deferred-tax valuation-allowance release, and the effects of the post-quarter debt and equity offerings on dilution and leverage.