KB Home — Q1 2013 Form 10-Q
Reporting period: Three months ended February 28, 2013; comparisons are with the three months ended February 29, 2012 unless noted. KB Home is a U.S. homebuilder with four homebuilding segments and a financial services segment. Interim results are unaudited and may not indicate full-year performance.
Financial and operating results
| Metric | Q1 2013 | Prior period |
|---|---|---|
| Total revenue | $405.2 million | $254.6 million; up 59% |
| Homebuilding revenue | $402.8 million | $251.9 million; up 60% |
| Homebuilding operating income (loss) | $0.5 million | $(31.1) million |
| Housing gross margin | 14.8% | 8.0%; 10.6% excluding prior-year impairments |
| Net loss / diluted loss per share | $(12.5) million / $(0.16) | $(45.8) million / $(0.59) |
| Operating cash flow | $(211.0) million | $(109.6) million |
| Mortgages and notes payable | $1.964 billion | $1.723 billion at Nov. 30, 2012 |
| Stockholders’ equity | $473.1 million | $376.8 million at Nov. 30, 2012 |
- Home deliveries rose 29% to 1,485; average selling price increased 24% to $271,300.
- Net orders rose 40% to 1,671 despite an 11% decline in average community count. Cancellation rate improved to 32% from 36%.
- Quarter-end backlog was 2,763 homes, valued at $703.9 million, up 25% in units and 53% in value year over year.
- SG&A increased 15% to $59.1 million, but fell to 14.7% of housing revenue from 20.4%. The filing reclassified homebuyer closing-cost allowances from SG&A to construction and land costs; the reclassification did not affect operating income or net loss.
- No inventory impairment charges were recorded, compared with $6.6 million in the prior-year quarter.
- Cash and cash equivalents were $625.6 million on the cash-flow statement; restricted cash was $44.6 million. Management’s homebuilding liquidity measure (cash plus restricted cash) was $668.7 million, including $624.0 million unrestricted.
- Net debt to total capital was 73.2%, versus 75.4% at November 30, 2012; debt to total capital was 80.6%, versus 82.1%.
- Financing activities provided $311.6 million, mainly from a $230 million convertible-note issuance and a common-stock offering yielding $109.8 million net. The notes carry 1.375% interest, mature in 2019, and are initially convertible at about $27.37 per share; conversion could involve approximately 8.4 million shares.
Management outlook and notable developments
- Management expects fiscal 2013 average selling price to exceed $280,000, at least 14% above 2012, and expects sequential improvement in quarterly housing gross margin. It anticipates improved year-over-year results in many metrics in Q2 and expects to be profitable in 2013 if housing markets continue to improve.
- KB Home plans to invest more than $1 billion in land acquisition and development during 2013, subject to market conditions and opportunities meeting its investment criteria. Q1 investment was $344.9 million.
- Management described housing demand and prices as improving, with low available-home supply, but noted market conditions vary by location and the recovery remains early. Rising labor and material costs may pressure margins.
- After quarter-end, KB Home entered into a $200 million unsecured revolving credit facility, with an accordion feature up to $300 million; no borrowings had been made as of the report date. It includes financial covenants and borrowing-base and investment restrictions. Its stated maturity may accelerate to September 2014 under specified conditions.
- Florida water-intrusion claims remain a material estimate risk: the company reported 969 identified homes requiring more than minor repairs, 207 completed, and $15.9 million of estimated remaining repair costs for identified homes. Estimated probable recoveries of $9.4 million were reflected; investigations and repair work continue, with repairs anticipated by mid-2014.
- A Nevada development-contract case remains unresolved. Fraud and punitive-damages claims were dismissed, but contract-damages and rescission claims remain; the company said a loss could range from zero to claimed damages plus prejudgment interest and could be material. Trial was scheduled for October 15, 2013.
- The company recorded a $0.6 million Q1 charge for post-judgment interest in a separate California project case and reported an approximately $12.3 million accrual while appealing the judgment. A separate drywall settlement required a $0.3 million payment after quarter-end.
Key facts for investors to verify
- Whether stronger orders, backlog conversion, pricing and margins persist, particularly in California and the Southeast.
- How much of the planned 2013 land investment is completed and its effect on operating cash flow, inventory and future impairment exposure.
- Actual costs and recoveries for Florida water-intrusion repairs, and any changes to warranty reserves.
- Compliance with the new revolving-credit facility’s covenants and the company’s ability to manage debt maturities and refinancing needs.
- Outcomes and reserve adequacy for the Nevada and California litigation matters.
- Potential dilution from the convertible notes and the impact of the common-stock issuance.