KB Home — Q2 2021 Form 10-Q Summary
Reporting period: Three and six months ended May 31, 2021; comparisons are with the corresponding 2020 periods unless noted. KB Home is a U.S. homebuilder operating across four regions, with a separate financial services segment. The company notes that interim results are seasonal and are not necessarily indicative of full-year results.
Financial results and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $1.441 billion | $914.0 million | $2.583 billion | $1.990 billion |
| Pretax income | $173.7 million | $67.8 million | $297.2 million | $136.6 million |
| Net income | $143.4 million | $52.0 million | $240.4 million | $111.7 million |
| Diluted EPS | $1.50 | $0.55 | $2.52 | $1.19 |
| Homes delivered | 3,504 | 2,499 | 6,368 | 5,251 |
| Average selling price | $409,800 | $364,100 | $404,100 | $377,400 |
- Q2 homebuilding: Revenue increased 58%; operating income was $162.9 million and operating margin was 11.3%, versus 5.7%. Housing gross margin was 21.4%, versus 18.2%; the company’s non-GAAP adjusted housing gross margin was 24.2%, versus 21.9%.
- First-half homebuilding: Revenue rose 30%; operating margin was 10.8%, versus 5.6%. Housing gross margin was 21.1%, versus 17.8%; adjusted housing gross margin was 24.1%, versus 21.5%.
- Orders and backlog: Q2 net orders rose 145% to 4,300 homes, while net order value rose 196% to $2.04 billion. Cancellation rate was 9%, compared with 43%. Ending backlog increased 98% to 10,034 homes, valued at $4.295 billion, up 126% year over year.
- Cash flow: First-half operating cash flow was negative $18.1 million, compared with positive $154.7 million in 2020, primarily because inventories absorbed $379.9 million of cash. Cash and cash equivalents for homebuilding were $608.1 million at May 31, down from $681.2 million at November 30, 2020.
- Debt and liquidity: Notes payable were $1.747 billion. The debt-to-capital ratio was 37.7%, down from 39.6% at November 30; net debt-to-capital was 28.3%, versus 28.6%. The company reported $1.396 billion in total liquidity, including $787.6 million available under its $800 million revolving credit facility, with no cash borrowings under the facility.
- Margins and taxes: Q2 pretax margin was 12.1%, up 470 basis points year over year. The effective tax rate was 17.4% for Q2 and 19.1% for the first half; energy-efficient-home tax credits benefited the provision.
Material changes and management commentary
- Results improved substantially amid strong housing demand, low mortgage rates, limited housing inventory, and demographic demand from first-time buyers. First-time buyers represented 64% of Q2 deliveries. Management cautions that Q2 2020 comparisons were depressed by early-pandemic disruption, elevated cancellations, and delayed deliveries.
- Pricing and higher delivery volume supported revenue and margins. Management also reported rising building-material and labor costs, especially lumber, as well as supply-chain shortages and permitting, inspection, utility, and municipal delays that lengthened construction cycles and deferred some deliveries and community openings.
- Average and ending community counts declined year over year, partly because strong sales accelerated community close-outs and delays held back new openings. The company increased land and land-development investment; it expects double-digit community-count growth in full-year 2022.
- First-half land and land-development investment rose 79% to $1.13 billion. Inventory increased to $4.273 billion from $3.897 billion at November 30, 2020. Operating cash flow turned negative as investment in inventory accelerated.
- Financial services pretax income rose 40% in Q2 and 43% in the first half, mainly from improved earnings at KBHS, the company’s unconsolidated mortgage-banking joint venture. Guaranteed Rate acquired the parent of KBHS partner Stearns on March 1, 2021; KB Home reported no significant operational changes following the transaction as of the filing date.
Outlook, risks, contingencies, and unusual items
- Q3 2021 outlook: Housing revenue of $1.50–$1.58 billion; average selling price around $420,000; homebuilding operating margin of 11.7%–12.1%, assuming no inventory-related charges; housing gross margin around 21.7%, assuming no such charges; SG&A around 9.8% of housing revenue; and sequential ending-community-count growth of about 5%. Management expects an approximately $5 million debt-extinguishment charge.
- Full-year 2021 outlook: 14,000–14,500 deliveries; housing revenue of $5.90–$6.10 billion; average selling price of $415,000–$425,000; homebuilding operating margin of 11.5%–12.0% and housing gross margin of 21.5%–22.0%, both assuming no inventory-related charges; SG&A of 9.8%–10.2% of housing revenue; effective tax rate around 20%; and return on equity around 20%.
- Management said it believed liquidity was sufficient for anticipated operating and land-investment needs for at least 12 months, but identified COVID-19 developments, inflation, rising material and trade costs, labor availability, supply constraints, and construction and municipal delays as risks to growth, margins, and delivery timing. Demand could weaken if pandemic disruption persists or inflation materially rises.
- Debt transaction after quarter-end: On June 9, 2021, KB Home issued $390 million of 4.00% senior notes due 2031 and tendered for $269.8 million of its 7.00% notes due 2021. It intended to redeem the remaining $180.2 million at par on September 15, 2021, using remaining proceeds and cash. The company expected an approximately $5 million Q3 early-extinguishment charge and said the transactions would extend average note maturities by more than two years and reduce the weighted-average borrowing rate by about 70 basis points.
- Other notable items: The first-half results included a $4.3 million Employee Retention Credit benefit to SG&A; Q2 2020 SG&A included $6.7 million of severance charges. The quarterly dividend was $0.15 per share, up from $0.09 a year earlier. A July 8, 2021 authorization allowed repurchases of up to 5 million shares, but does not obligate the company to buy shares.
- Contingencies: KB Home disclosed approximately 686 outstanding Florida Chapter 558 construction-defect notices, primarily involving stucco and water intrusion. It had accrued estimated probable losses and recorded estimated probable insurance recoveries, but could not estimate reasonably possible losses beyond the accrual or any recovery shortfall. For a Northern California townhome construction-defect matter, the company said a loss could reasonably exceed the accrual by $0–$3 million. It reported $960.1 million in performance bonds and $54.8 million in letters of credit outstanding, and did not expect a material amount to be called.
- The company reported compliance with applicable debt covenants as of May 31, 2021. It also said there were no material changes to previously disclosed risk factors or market risk, and disclosure controls were effective.
Investor verification priorities
- Compare actual Q3 and full-year deliveries, pricing, margins, and community counts with management’s outlook, including the effects of delivery delays and community openings.
- Track construction-cost inflation, labor availability, supply-chain constraints, permitting delays, and whether pricing continues to offset cost increases.
- Assess whether backlog converts to deliveries and revenue as expected, while monitoring cancellations and the pace of inventory and land investment against operating cash flow.
- Verify completion and financing effects of the 2021 notes refinancing and planned redemption, including the expected extinguishment charge and resulting debt costs.
- Monitor the Florida and California construction-defect matters, insurance recoverability, warranty and self-insurance estimates, and potential calls on performance bonds or letters of credit.