KB Home — FY2013 Form 10-K
Reporting period: Fiscal year ended November 30, 2013; comparisons are primarily with FY2012. The filing also reports fourth-quarter results. KB Home builds and sells homes across four U.S. homebuilding segments; homebuilding generated 99.4% of FY2013 revenue.
Financial and operating performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $2.097 billion | $1.560 billion |
| Net income (loss) | $40.0 million | ($59.0 million) |
| Diluted EPS | $0.46 | ($0.76) |
| Homes delivered | 7,145 | 6,282 |
| Average selling price | $291,700 | $246,500 |
| Housing gross profit margin | 16.7% | 14.0% |
| Adjusted housing gross profit margin, non-GAAP | 18.4% | 13.5% |
| Operating cash flow | ($443.5 million) | $34.6 million |
| Cash and restricted cash | $572.0 million | $567.1 million |
| Debt | $2.150 billion | $1.723 billion |
| Stockholders’ equity | $536.1 million | $376.8 million |
Revenue rose 34%, principally on 14% more deliveries and an 18% higher average selling price. Homebuilding operating income improved to $92.1 million from a $20.3 million loss. SG&A was $255.8 million, or 12.3% of housing revenue, versus 15.3% a year earlier. Interest expense was $62.7 million, including a $10.4 million loss on early debt extinguishment.
Operating cash use reflected a $563.2 million increase in inventories as the company invested approximately $1.14 billion in land and development. Ending inventory was $2.299 billion, and owned or controlled lots increased 37% to 61,095. Unrestricted cash was $530.1 million. Debt to total capital was 80.0% (74.6% net debt to total capital, a non-GAAP measure). The $200 million revolving credit facility was undrawn; the company reported compliance with its covenants.
Net orders increased 6% to 7,125, while the cancellation rate rose to 32% from 31%. Year-end backlog was 2,557 homes, nearly flat year over year, but its value increased 10% to $682.5 million. The West Coast generated $1.020 billion of segment revenue and improved materially; the Southeast recorded a $46.0 million pretax loss, principally reflecting Florida water-intrusion repair charges.
Material changes and unusual items
- FY2013 included a $32.0 million net charge for water-intrusion repairs in central and southwest Florida, $3.6 million of inventory impairment and land-option abandonment charges, a $10.4 million debt-extinguishment loss, and an $8.2 million reversal of a previously accrued legal charge.
- FY2012 included $26.5 million of insurance recoveries, $8.6 million of favorable warranty adjustments, $28.5 million of inventory impairment and land-option charges, and an $8.8 million legal charge. These items affect year-over-year comparability.
- In 2013 KB Home issued $230 million of 1.375% convertible notes due 2019 and $450 million of 7.00% notes due 2021, alongside a common-stock offering. It used proceeds in part to retire $215.1 million principal amount of notes due 2014–2015, extending near-term maturities; the next scheduled debt maturity was in 2015.
- The company formed Home Community Mortgage with Nationstar, in which KB Home holds 49.9%; operations were expected to begin in Q1 2014. Approximately 59% of FY2013 buyers used Nationstar financing.
Outlook, commentary and risks
Management expected housing markets to continue improving in 2014, though at a more measured pace, and expected KB Home to be profitable. It projected year-over-year growth in deliveries, average selling prices and revenue across all four homebuilding segments; average selling-price growth in the mid- to high-single digits; and a 10%–20% increase in year-end community count, with most growth in the second half. Land investment, margin improvement and balancing sales pace with pricing were priorities. These are forward-looking expectations, not guarantees.
Key risks include higher mortgage rates and restrictive mortgage underwriting, uneven or reversing housing recovery, rising land, materials and skilled-labor costs, homebuyer cancellations, permitting delays, and substantial leverage and refinancing needs. California is a major exposure, contributing nearly half of revenue in both 2013 and 2012. The company also reported increased competition for desirable land and skilled trades.
Water-intrusion claims remained under investigation: 1,464 affected homes requiring more than minor repairs had been identified, 754 repairs resolved, and management expected to complete repairs by the end of 2014. The company estimated that related losses could exceed the accrued amount by up to $6 million. Separately, construction-defect self-insurance losses were estimated at $80 million–$105 million. In Nevada litigation, potential loss was described as reasonably possible in a range from zero to approximately $55 million plus prejudgment interest; trial was scheduled for May 2014. The company also maintained a full valuation allowance against $859.4 million of net deferred tax assets, dependent on sustained future profitability for realization.
Important facts for investors to verify
- Whether FY2014 profitability, segment growth, mid- to high-single-digit selling-price growth and 10%–20% community-count growth were achieved.
- Whether land investment converts into deliveries and cash generation, given FY2013 operating cash use and the 37% increase in lots.
- Progress and final costs of Florida water-intrusion repairs, insurance or subcontractor recoveries, and the stated potential $6 million exposure beyond accruals.
- Debt maturities, interest burden, covenant headroom and access to financing; reported debt was $2.150 billion against $530.1 million unrestricted cash.
- Cancellation trends, mortgage availability and the performance of Nationstar/Home Community Mortgage, alongside the outcome of the Nevada litigation.