KB Home — FY2018 Form 10-K
Reporting period: Fiscal year ended November 30, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included where relevant. KB Home builds homes across eight states, with homebuilding generating 99.7% of revenue.
Financial and operating performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Total revenue | $4.547 billion | $4.369 billion | +4% |
| Homebuilding revenue | $4.534 billion | $4.356 billion | +4% |
| Homebuilding operating income | $345.7 million | $283.4 million | +22% |
| Pretax income | $368.0 million | $290.0 million | +27% |
| Net income | $170.4 million | $180.6 million | -6% |
| Diluted EPS | $1.71 | $1.85 | -8% |
| Operating cash flow | $221.5 million | $513.2 million | Down |
- Delivered 11,317 homes, up 4%; average selling price was $399,200, slightly above FY2017. Housing gross margin increased to 17.5% from 16.3%; excluding inventory-related charges, it was 18.1% versus 16.9%. Adjusted housing gross margin, a company-defined non-GAAP measure that also excludes capitalized-interest amortization, was 22.5% versus 21.8%.
- Homebuilding operating margin rose to 7.6% from 6.5%; excluding inventory-related charges, it was 8.3% versus 7.1%. SG&A was 9.8% of housing revenue in both years.
- Net orders edged up 1% to 11,014, but net order value fell 4% to $4.291 billion. Year-end backlog declined 7% to 4,108 homes and 14% in value to $1.434 billion. The West Coast backlog value fell 32%; Southeast backlog value rose 24%.
- Net income included a $112.5 million non-cash tax charge related primarily to remeasuring deferred tax assets after the Tax Cuts and Jobs Act. Excluding this charge, management reported adjusted net income of $282.9 million and adjusted diluted EPS of $2.82; these are non-GAAP measures. Reported effective tax rate was 53.7%, versus 37.7%; adjusted 2018 rate was 23.1%.
- Cash and cash equivalents were $574.4 million at year-end, down from $720.6 million. Notes payable were $2.060 billion, down from $2.325 billion. Net debt to capital improved to 41.6% from 45.4%; debt to capital was 49.7% versus 54.7%.
- Total liquidity was $1.046 billion, comprising cash and $472.0 million available under the $500 million revolving credit facility; there were no cash borrowings under that facility. The company reported compliance with its debt covenants.
Changes, outlook and management commentary
- Housing demand weakened in the latter half of 2018, particularly in the fourth quarter, as years of home-price appreciation and rising mortgage rates heightened affordability concerns. Management said this tempered buyer demand and affected net-order comparisons.
- Management’s 2019 plan targets housing revenue above $5.0 billion, homebuilding operating margin of 8%–9% excluding inventory-related charges, return on invested capital above 10%, return on equity of 10%–15%, and net debt to capital of 35%–45%. FY2018 met several targets, including the specified margin, return and leverage measures, but housing revenue remained below target.
- For 2019, management expected average community count to grow 10%–15% year over year and targeted at least $200 million in debt reduction. The outlook was expressly conditional on market conditions; earlier 2019 guidance issued before year-end was withdrawn.
- Q1 2019 outlook: housing revenue of $800–$860 million; average selling price of $375,000–$385,000; housing gross margin of 16.6%–17.2% excluding inventory charges; SG&A ratio of 12.7%–13.5%; homebuilding operating margin of 3.4%–4.4% excluding inventory charges; effective tax rate of approximately 27%; and average community count up 6%–10% year over year.
- Management cited plans to adapt products to affordability concerns, including smaller homes with comparable room count and livability. It also emphasized land investment and community openings as drivers of planned growth. Land and land-development investment was $1.89 billion in FY2018.
Risks, contingencies and unusual items
- Key business risks include affordability and mortgage-rate changes, weaker demand or home prices, competition, and rising or volatile land, labor and building-material costs, including tariff effects. Management said the spring 2019 selling season would be important and warned prolonged or worsening trends could prevent achievement of plan targets.
- California concentration is significant: the West Coast segment generated about $2.085 billion of FY2018 revenue and had the company’s highest average selling price. Regulatory, water, wildfire and market conditions there could materially affect results.
- FY2018 inventory impairment charges were $26.1 million, and land-option abandonment charges were $2.9 million. Management considered year-end inventory recoverable, but noted that weaker market conditions or strategy changes could lead to further charges.
- Construction-defect and warranty exposures remain uncertain. A Northern California homeowners association alleged approximately $100 million of damages; the company had accrued its estimated probable loss but could not estimate reasonably possible losses above the accrual. Arbitration was scheduled for July 2019. In Florida, approximately 500 Chapter 558 construction-defect claims were outstanding, principally involving stucco and water intrusion; additional loss beyond accrual was possible but not estimable.
- Debt maturities were near-term: $230 million principal of 1.375% convertible notes was due February 1, 2019, and $400 million principal of 4.75% senior notes was due May 15, 2019. The filing described these as upcoming obligations as of its January 24, 2019 signature date.
- Deferred tax assets were $441.8 million net at year-end. Their realization depends on future taxable income; the company estimated it would need approximately $1.6 billion of future pretax income before 2038 to realize them. An ownership change could limit use of tax attributes.
- Land options covered $1.371 billion of aggregate purchase price, supported by $53.8 million of cash deposits; exercising all options would require substantial future payments, although the contracts generally allowed the company to forfeit deposits rather than complete purchases. Performance bonds outstanding were $689.3 million.
Important facts for investors to verify
- Whether demand, orders and backlog stabilized after the fourth-quarter affordability-driven slowdown, particularly in the West Coast segment.
- Whether 2019 community-count, revenue, margin, return and debt-reduction targets were achieved, and how actual results compare with the Q1 outlook.
- How the February and May 2019 debt maturities were repaid or refinanced and the resulting effect on liquidity and leverage.
- Whether construction-defect claims, particularly the Northern California and Florida matters, result in losses above recorded accruals or lower-than-expected insurance recoveries.
- Whether inventory impairments, land-option commitments and cost inflation affect margins or cash generation as the company expands and reactivates communities.
- How much reported earnings and cash taxes benefit from deferred tax assets, and whether future taxable income supports their realization.