KB Home — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended May 31, 2015. Comparisons are with the corresponding 2014 periods unless otherwise noted. KB Home builds and sells homes across four U.S. regions and also provides insurance, title and mortgage-related services.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $623.0 million | $565.0 million | $1,203.1 million | $1,015.7 million |
| Net income | $9.6 million | $26.6 million | $17.4 million | $37.2 million |
| Diluted EPS | $0.10 | $0.27 | $0.18 | $0.40 |
| Homebuilding pretax income | $9.5 million | $25.2 million | $18.3 million | $34.4 million |
| Homes delivered | 1,787 | 1,751 | 3,380 | 3,193 |
| Average selling price | $338,500 | $319,700 | $334,200 | $313,200 |
- Q2 homebuilding revenue increased 10%; six-month homebuilding revenue increased 19%. Higher deliveries and selling prices contributed, as did land-sale revenue, which was $15.9 million in Q2 and $68.9 million for the half-year, versus $2.6 million and $10.7 million, respectively.
- Housing gross margin was 16.0% in Q2, down from 18.9% a year earlier but up 90 basis points sequentially from Q1. Six-month margin was 15.6%, versus 18.4%. Adjusted housing gross margin, a company-defined non-GAAP measure excluding amortized capitalized interest and land-option abandonments, was 20.3% in Q2 and 19.9% for the half-year, versus 22.6% and 22.2%.
- Management attributed margin pressure chiefly to higher land and construction costs and pricing pressure in certain markets, as well as increased amortization of capitalized interest and start-up costs for new communities. Q2 SG&A was $78.5 million, up from $71.5 million.
- Orders and backlog strengthened: Q2 net orders rose 33% to 3,015; the cancellation rate declined to 22% from 28%. May 31 backlog increased 39% to 4,733 homes, with value up 57% to $1.61 billion. Ending community count was 261, versus 194.
- Regional performance varied. Central six-month pretax income rose to $23.4 million from $13.3 million; Southwest rose to $8.7 million from $5.1 million. West Coast pretax income declined to $40.4 million from $54.3 million. Southeast posted a $16.2 million pretax loss, versus a $1.9 million loss.
Cash, debt and liquidity
- At May 31, cash and cash equivalents were $439.9 million in homebuilding and $2.2 million in financial services; restricted cash was $27.2 million. Cash plus restricted cash totaled $467.1 million. Total notes payable were $2.82 billion, up $243.0 million from November 30, 2014, mainly following issuance of $250 million of 7.625% senior notes due 2023.
- Net cash used in operating activities was $135.9 million for the six months, compared with $554.5 million in 2014; inventory investment consumed $116.7 million. Investing activities used $14.8 million. Financing activities provided $234.1 million, primarily from the new notes. Cash and cash equivalents increased $83.3 million.
- Debt-to-capital was 63.6%, versus 61.8% at November 30; the company’s non-GAAP net-debt-to-capital ratio was 59.3%, versus 57.9%. The $200 million revolving facility had no cash borrowings and $199.8 million available, subject to its terms. KB Home reported compliance with debt covenants; it had $439.9 million of liquidity against a $200 million minimum-liquidity covenant option.
- After quarter-end, on June 15, 2015, the company repaid $199.9 million of 6.25% notes at maturity using proceeds from the 2023 notes. The quarterly dividend was $0.025 per share.
Outlook, commentary and material risks
- Management expected 2015 land and land-development investment of $1.1–$1.3 billion, average community count growth of 18–20% versus 2014, and net-order growth generally within that range. It forecast Q3 housing revenue of $770–$810 million, full-year housing revenue of $2.95–$3.10 billion, and land-sale revenue slightly above $100 million.
- Management forecast housing gross margin in the mid-16% range for Q3 and 18–18.5% for Q4, with sequential improvement expected but margins below comparable prior-year periods. It expected to be profitable for 2015. These are forward-looking estimates, not guarantees.
- Housing conditions were described as generally favorable in most served markets. Investment shifted toward land development: 72% of first-half land and development investment, compared with 36% a year earlier. Management said this was intended to convert owned land into active communities and support later-year growth.
- Legal and warranty exposures include a Nevada development-contract case with potential loss estimated at zero to approximately $55 million plus prejudgment interest; a wage-and-hour matter in which plaintiffs asserted $66 million in damages, penalties and interest, with the company unable to estimate a reasonably possible loss; and Florida water-intrusion claims, for which reasonably possible loss beyond accrual was estimated at zero to $3 million. The Florida Attorney General inquiry had a further estimated possible loss beyond accrual of zero to $5 million.
- The filing identifies severe, prolonged drought in Arizona, California and Nevada as a risk that could constrain water permits, delay development, raise costs or reduce land values. Other risks include housing and mortgage-market conditions, labor and material costs, interest rates, litigation and warranty costs, and the ability to realize deferred tax assets.
- No inventory impairment charges were recorded in either comparative period. First-half land-option abandonment charges were $1.0 million. The company held $860.7 million of deferred tax assets, partly offset by a $41.2 million valuation allowance. The prior-year comparison also included a $3.2 million gain on sale of a joint-venture interest; current financial-services earnings included income from the HCM mortgage joint venture.
Important facts for investors to verify
- Whether order and backlog growth converts into deliveries and cash generation, particularly as community count expands.
- Whether margins recover as forecast, given higher costs, pricing pressure and the Southeast segment’s continuing losses.
- Debt maturities, covenant headroom and leverage following the 2023-note issuance and repayment of the 2015 notes.
- Developments and eventual costs in the Nevada, wage-and-hour and Florida warranty/Attorney General matters.
- Effects of drought-related rules on land development, permits, costs and demand in affected markets.
- Assumptions supporting realization of the deferred tax assets and recoverability of inventory; both depend on future results and market conditions.