KB Home — Form 10-Q Summary
Business context and period. KB Home is a U.S. homebuilder with four regional homebuilding segments and a financial services segment. This unaudited filing covers the quarter and six months ended May 31, 2013; comparisons are with the same periods in 2012. The company attributed improving results to stronger housing markets, higher deliveries and selling prices, and its focus on selected markets and profitability.
Financial and operating performance
| Metric | Three months ended May 31, 2013 | Six months ended May 31, 2013 |
|---|---|---|
| Total revenue | $524.4 million, up 73% | $929.6 million, up 67% |
| Net loss | $3.0 million; $0.04 per share | $15.4 million; $0.19 per share |
| Homebuilding operating income | $8.7 million, versus a $15.5 million loss | $9.1 million, versus a $46.7 million loss |
| Homes delivered / average selling price | 1,797 / $290,400 | 3,282 / $281,700 |
| Housing gross margin | 15.1%; adjusted non-GAAP margin 18.2% | 15.0%; adjusted non-GAAP margin 16.9% |
Quarterly net orders rose 6% to 2,162; order value rose 27% to $639.6 million. At quarter-end, backlog was 3,128 homes valued at $826.6 million, up 6% and 19%, respectively, year over year. The cancellation rate was 27%, versus 26%.
For the six months, operating cash flow was negative $267.6 million, compared with negative $89.9 million a year earlier, primarily reflecting increased investment in inventory. Investing activities used $6.4 million; financing activities provided $289.5 million. Cash and cash equivalents were $541.2 million and restricted cash was $42.3 million at May 31.
At May 31, inventory was $2.03 billion, up 19% from November 30, 2012. Mortgages and notes payable totaled $1.94 billion, versus $1.72 billion; stockholders’ equity was $470.8 million. Debt to total capital was 80.5%, down from 82.1%; net debt to total capital, a non-GAAP measure, was 74.3%, down from 75.4%.
Material changes and notable items
- Revenue growth reflected 39% more homes delivered and a 25% higher average selling price in the second quarter. Management cited product and geographic mix, higher prices, and pricing discipline.
- Adjusted housing gross margin improved year over year, but reported quarterly margin was lower than the prior-year 15.8%. The 2013 quarter included a $15.9 million net charge for Florida water-intrusion repairs; the 2012 quarter included favorable warranty adjustments and insurance recoveries, partly offset by inventory impairments and a court-related charge.
- The Southeast segment recorded a $16.8 million pretax loss in the quarter, primarily reflecting the Florida repair charge. West Coast, Southwest, and Central segments reported pretax income.
- KB Home issued $230 million of 1.375% convertible senior notes and common stock, raising total net proceeds of $332.2 million. It also established a $200 million unsecured revolving credit facility; none was drawn at quarter-end.
- Land and land development investment was $574.7 million in the first half. Lots owned or controlled increased to 52,725 from 44,752 at November 30, 2012.
Outlook, risks, and contingencies
Management expected 2013 revenue of $2.1–$2.2 billion and a full-year average selling price of $285,000–$290,000, versus $246,500 in 2012. It expected land and land development investment of $1.1–$1.2 billion for the year and community count to increase about 15% in the fourth quarter year over year. Management expected full-year profitability, profits in each of the final two quarters, and sequential and year-over-year improvement in several operating measures. It anticipated moderating year-over-year net-order growth as it prioritized pricing and margins. These are forward-looking expectations, not guarantees.
Housing-market conditions, mortgage availability and rates, construction labor and material costs, land availability, cancellations, and the company’s ability to execute its growth strategy could affect results. The company noted a recent rise in mortgage rates and that the housing recovery remained early-stage. It maintained a full valuation allowance against deferred tax assets and reported no net deferred tax assets.
The warranty liability was $53.5 million, including $27.8 million for estimated remaining and anticipated Florida water-intrusion repairs. The company had identified 1,140 affected homes requiring more than minor repairs and resolved repairs on 297; it estimated total repair costs of $43.2 million before insurance and other recoveries and expected repairs to be completed by mid-2014. Estimates and recoveries remain subject to change. A Nevada development-contract case had a potential loss range from zero to claimed damages plus prejudgment interest, which could be material; trial was scheduled for October 2013. The company also had an appeal pending in a separate California project case and reported a related accrual of approximately $9.5 million.
At quarter-end, KB Home reported compliance with debt and credit-facility covenants. The facility includes minimum tangible-net-worth and liquidity or interest-coverage tests, leverage limits, and investment restrictions; failure to comply could restrict borrowing or accelerate debt. The company also had $289.7 million of performance bonds and $41.9 million of letters of credit outstanding and did not expect a material amount to be called.
Key investor verification points
- Assess whether deliveries, selling prices, backlog conversion, and margins support the company’s 2013 revenue and profitability outlook.
- Review the Florida water-intrusion repair scope, reserve adequacy, progress, and expected third-party recoveries.
- Track inventory growth and land investment against demand, cash generation, and future impairment risk.
- Monitor debt maturities, liquidity, covenant headroom, and the effects of the convertible notes and share issuance.
- Follow the Nevada litigation and California appeal, including any changes to estimated exposure or accruals.