KB Home — Q1 2021 Form 10-Q
Business context and period: Quarter ended February 28, 2021; comparative quarter ended February 29, 2020. KB Home builds and sells homes across four U.S. homebuilding segments and provides insurance and title services. Figures below are unaudited; dollars are U.S. dollars.
Financial and operating results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $1.142 billion | $1.076 billion | +6% |
| Homebuilding revenue | $1.138 billion | $1.072 billion | +6% |
| Pretax income | $123.6 million | $68.8 million | +79% |
| Net income | $97.1 million | $59.7 million | +62% |
| Diluted EPS | $1.02 | $0.63 | +62% |
| Homebuilding operating margin | 10.0% | 5.6% | +440 bps |
| Housing gross profit margin | 20.8% | 17.4% | +340 bps |
Housing gross margin excluding inventory-related charges was 21.1%, versus 17.9%; the company’s non-GAAP adjusted housing gross margin, which also excludes amortization of previously capitalized interest, was 24.0%, versus 21.1%. Homebuilding SG&A was 10.7% of housing revenue, down from 11.8%.
- KB Home delivered 2,864 homes (+4%) at an average selling price of $397,100 (+2%). Texas weather delayed approximately 100 deliveries into Q2.
- Net orders rose 23% to 4,292; net order value rose 35% to $1.869 billion. Cancellation rate improved to 10% from 14%.
- Ending backlog grew 59% to 9,238 homes and 74% in value to $3.694 billion. Average community count declined 11% to 223; ending community count was 209, down 16% year over year.
- Financial services pretax income rose 46% to $8.5 million, primarily due to higher income from the KBHS mortgage joint venture. KBHS originated 2,072 loans with $710.9 million principal; 79% of KB Home buyers used KBHS, versus 71%.
Cash flow, balance sheet and debt
- Operating cash flow was negative $79.3 million, compared with negative $9.9 million a year earlier, chiefly reflecting a $229.1 million inventory build. Investing cash flow was negative $11.7 million and financing cash flow negative $20.6 million. Cash and cash equivalents ended at $571.0 million, down from $682.5 million at the start of the quarter.
- Inventory was $4.124 billion, up from $3.897 billion at November 30, 2020. Land and land development investments were $556 million, up 37% year over year.
- Notes payable totaled $1.747 billion, essentially unchanged. Debt-to-capital was 38.9% versus 39.6%; non-GAAP net-debt-to-capital was 30.0% versus 28.6%. The next scheduled maturity was $450 million of 7.00% senior notes in December 2021.
- Total liquidity was $1.357 billion, including $569.8 million of homebuilding cash and $787.6 million available under the $800 million revolving credit facility. There were no revolver borrowings; KB Home reported compliance with its debt covenants.
- Stockholders’ equity was $2.748 billion. The company paid a quarterly dividend of $0.15 per share, up from $0.09 a year earlier.
Material changes, outlook and management commentary
Management attributed stronger earnings and margins mainly to favorable home pricing, which more than offset higher construction costs, improved operating leverage, lower amortization of capitalized interest, and lower SG&A. The $4.3 million Employee Retention Credit also reduced payroll costs. The effective tax rate increased to 21.4% from 13.2%, partly because higher pretax income diluted the relative benefit of tax credits and stock-compensation tax benefits. Q1 included receipt of a $39.3 million AMT credit refund.
Management described housing demand as strong, citing low mortgage rates, demographic trends, and limited new and resale supply. It expected backlog and land investment to support significant growth over the rest of 2021. It planned sequential community-count growth through the remaining quarters of 2021, year-over-year growth in Q4, and at least 10% year-over-year community-count expansion in 2022.
| Management guidance | Q2 2021 | Full year 2021 |
|---|---|---|
| Housing revenue | $1.42–$1.50 billion | $5.70–$6.10 billion |
| Average selling price | Approximately $405,000 | $405,000–$415,000 |
| Homebuilding operating margin, assuming no inventory-related charges | 10.0%–10.5% | 11.0%–11.8% |
| Housing gross margin, assuming no inventory-related charges | 20.5%–21.1% | 21.0%–22.0% |
| SG&A as a percentage of housing revenue | 10.4%–10.8% | 9.9%–10.3% |
| Other | Effective tax rate approximately 24%; average community count down low-to-mid double digits year over year | Effective tax rate approximately 24%; ending community count up a single-digit percentage; return on equity above 18% |
Risks and contingencies: Management highlighted labor and supply constraints, rising and volatile material costs—particularly lumber—potential inflation, higher mortgage rates, and renewed or prolonged COVID-19 disruption. These could weaken demand, delay construction and deliveries, or pressure margins. The filing disclosed approximately 635 outstanding Florida Chapter 558 construction-defect notices, with some trials expected over the coming quarters; the company said additional loss or insurance-recovery shortfall was reasonably possible but could not be estimated. For a Northern California townhome defect matter, possible loss above the recorded accrual was estimated at $0–$3.0 million. KB Home also had $927.6 million of performance bonds and $53.4 million of letters of credit outstanding; it did not expect a material amount to be called.
Important facts for investors to verify
- Whether the $3.694 billion backlog converts to deliveries and revenue on expected timelines, especially given early-stage backlog and the Texas weather delays.
- Whether labor, materials and lumber costs erode the guided margin improvement.
- Whether planned land investment and community openings deliver the stated 2021–2022 community-count growth without undue cash-flow or balance-sheet strain.
- Whether liquidity and covenant headroom remain adequate as the $450 million December 2021 note maturity approaches.
- Developments in Florida and California construction-defect claims, related accruals, and expected insurance recoveries.
- Whether Q1 earnings benefited from one-time items: the $4.3 million retention credit, $2.7 million federal energy tax credits, and the timing of stock-based compensation tax benefits.