KB Home — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended August 31, 2010. KB Home builds homes across four U.S. regions and provides title and insurance services, with mortgage banking through an unconsolidated joint venture.
Financial and operating results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $501.0M | $458.5M | $1,139.0M | $1,150.3M |
| Homebuilding operating income (loss) | $8.4M | ($42.1M) | ($45.1M) | ($155.0M) |
| Net loss | ($1.4M) | ($66.0M) | ($86.8M) | ($202.5M) |
| Loss per share | ($0.02) | ($0.87) | ($1.13) | ($2.64) |
- Q3 homebuilding revenue was $498.8M; 2,320 homes were delivered at an average selling price of $214,200. Housing gross margin was 17.5%, or 18.2% excluding inventory impairment and land-option abandonment charges (non-GAAP).
- Nine-month operating cash flow was negative $164.1M, versus positive $113.2M in 2009. Investing activities used $2.2M and financing activities used $88.0M. Cash and cash equivalents ended at $923.6M; cash plus restricted cash was $1.036B.
- At August 31, debt was $1.801B and stockholders’ equity was $613.5M. Debt-to-total-capital was 74.6% (72.0% at November 30, 2009); net-debt-to-total-capital was 55.5% (42.9%). Inventory was $1.721B.
- The board paid quarterly dividends of $0.0625 per share. The company reported compliance with applicable debt covenants.
Material changes versus comparable periods
- Q3 revenue increased 9% year over year, with deliveries up 4% and average selling price up 6%. Despite higher Q3 deliveries, nine-month deliveries were nearly flat at 5,428 versus 5,446.
- Net loss narrowed substantially, and homebuilding returned to operating income in Q3. Management attributed the improvement to higher gross margin, lower Q3 SG&A, and reduced impairment and abandonment charges. Q3 SG&A was $78.6M, down 6%; nine-month SG&A rose 7% to $233.8M.
- Q3 net orders fell 39% to 1,314; backlog declined 42% year over year to 2,169 homes, valued at $455.3M. Q3 cancellation rate was 33% of gross orders, versus 27% a year earlier.
- Nine-month inventory impairment and land-option abandonment charges were $16.7M, down from $91.5M in 2009; joint-venture impairment charges were zero, versus $38.0M. Interest expense, net of capitalized amounts, rose to $52.1M from $35.5M, including a $1.8M write-off tied to termination of the revolving credit facility.
Outlook, commentary, risks and unusual items
- Management expected approximately 7,600 home deliveries in fiscal 2010, versus 8,488 in 2009, and anticipated year-end cash and restricted cash at approximately the then-current level. It projected average active communities to grow about 25% year over year in 2011, subject to market conditions.
- Management described housing conditions as difficult, citing excess home supply, weak demand and employment, tight mortgage standards, low consumer confidence, and the expiration of the federal homebuyer tax credit. It cautioned that recent margin and delivery improvements might not continue.
- The company terminated its $200M revolving credit facility in March 2010 and now uses cash-collateralized letter-of-credit facilities. At quarter-end, $88.9M of letters of credit were outstanding and $91.6M was restricted as collateral.
- Joint ventures had $374.4M of aggregate debt. A specific guaranty could expose KB Home to up to $182.7M of principal if enforced; lenders’ lawsuits involving two joint ventures remained ongoing. Management said other existing guarantee exposure was not considered material, but litigation outcomes could be material.
- Warranty liabilities were $101.9M, including $14.5M related to about 330 Florida homes with allegedly defective Chinese drywall. The company had been named in nine related lawsuits and had recorded no potential recoveries. It warned actual repair costs or additional affected homes could increase the liability.
- Deferred tax assets were substantially reserved: the valuation allowance was $781.6M and net deferred tax assets were $1.1M. A $5.4M tax benefit reflected increased carryback of 2009 net operating losses. The SEC informed the company in August 2010 that it did not intend to recommend enforcement action following its investigation.
Important facts for investors to verify
- Whether net orders, cancellations, backlog and deliveries develop in line with management’s outlook, particularly after the tax credit expired.
- Whether gross-margin improvement persists as land, construction costs, pricing and impairment assumptions change.
- Cash use, restricted cash, debt maturities and refinancing access following the revolving credit facility termination.
- The potential financial exposure and resolution of joint-venture guaranty litigation, especially the stated $182.7M contingent exposure.
- Adequacy of warranty reserves and the scope, cost and possible recoveries related to defective drywall claims.