KB Home — FY2020 Form 10-K
Reporting period: Fiscal year ended November 30, 2020. KB Home primarily builds and sells single-family homes across eight states; homebuilding generated 99.6% of annual revenue. The filing is an annual report, with fourth-quarter figures also noted below.
Financial and operating performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | $4.183 billion | $4.553 billion | Down 8% |
| Homebuilding revenue | $4.168 billion | $4.538 billion | Down 8% |
| Pretax income | $364.0 million | $348.2 million | Up 5% |
| Net income | $296.2 million | $268.8 million | Up 10% |
| Diluted EPS | $3.13 | $2.85 | Up 10% |
| Operating cash flow | $310.7 million | $251.0 million | Up |
- Homebuilding operating income was $316.5 million, down 4%; operating margin was 7.6%, versus 7.3%. Excluding inventory-related and severance charges, management reported a non-GAAP margin of 8.4%, versus 7.7%.
- Housing gross margin rose to 18.9% from 18.3%; the company’s non-GAAP adjusted housing gross margin was 22.7% versus 22.2%.
- Homes delivered fell 10% to 10,672, while average selling price rose 2% to $388,900. Net orders increased 4% to 13,404; year-end backlog grew 54% to 7,810 homes and 63% in value to $2.962 billion. Substantially all year-end backlog was expected to deliver in FY2021.
- Q4 consolidated revenue was $1.194 billion, compared with $1.559 billion a year earlier; net income was $106.1 million versus $123.2 million.
- Cash and cash equivalents were $681.2 million. Total liquidity was $1.469 billion, including $787.6 million available under the revolving credit facility. Notes payable totaled $1.747 billion; debt-to-capital was 39.6% and net-debt-to-capital was 28.6%.
- The next senior-note maturity was $450 million due December 15, 2021. The company reported no revolver borrowings and compliance with its covenants at year-end.
Material changes and management commentary
- COVID-19 restrictions and uncertainty sharply reduced orders and delayed construction and deliveries in Q2. Net orders rebounded strongly in the second half, with Q3 and Q4 orders at their highest levels since 2005, but the Q2 disruption reduced full-year deliveries and revenue.
- Homebuilding revenue declined mainly because deliveries fell; higher average selling prices partly offset the decline. Profit increased despite lower revenue, aided by improved housing margins and a rise in financial-services pretax income, including higher KBHS joint-venture earnings.
- Inventory-related charges were $28.7 million in FY2020, versus $17.3 million in FY2019. FY2020 also included $6.7 million in severance charges; the workforce reductions were estimated to produce about $40 million in annualized savings.
- Operating cash flow increased despite higher inventory investment. Land and land-development investment was $1.69 billion, compared with $1.62 billion in FY2019; investment was curtailed during much of Q2 and Q3 to preserve liquidity, then increased in Q4.
- Management attributed strong second-half demand to low mortgage rates, limited resale inventory, favorable demographics and increased consumer interest in homeownership. It cited labor and supply constraints and rising, volatile material costs—particularly lumber—as potential constraints on growth and margins.
Outlook, risks and contingencies
- FY2021 outlook: Housing revenue of $5.5–$6.0 billion; average selling price of $400,000–$410,000; homebuilding operating margin of 10.4%–11.0%, assuming no inventory-related charges; housing gross margin of 20.5%–21.1%, on the same assumption; and return on equity above 17%. Management expected year-end community count to increase in the mid-to-high single digits versus FY2020.
- Q1 FY2021 outlook: Housing revenue of $1.14–$1.22 billion, average selling price around $390,000 and homebuilding operating margin of 9.0%–9.3%, assuming no inventory-related charges. Management noted that community count was expected to decline sequentially to a yearly low.
- Management said first-seven-week FY2021 net orders were up 39% year over year, but expected that growth rate to moderate during the quarter. Outlook is subject to demand, community openings, COVID-19 conditions, construction capacity, costs and broader economic and regulatory conditions.
- Principal risks include renewed pandemic restrictions or recession, affordability and mortgage availability, land competition, subcontractor and material shortages, cost inflation, natural disasters and regulatory burdens. The company is particularly exposed to California, where it generates a large share of revenue and faces wildfire, water, entitlement and construction-cost risks.
- Warranty and self-insurance estimates are significant and uncertain. Self-insurance liabilities were $194.2 million, with $60.0 million of estimated probable recoveries. Florida operations had approximately 600 outstanding construction-defect notices; management said losses could exceed accruals and recoveries could fall short, but could not estimate a reasonably possible excess amount. A Northern California townhome matter had an estimated reasonably possible loss above accrual of $0–$3.0 million.
- Other notable items: the company recorded $22.7 million of inventory impairments and $5.9 million of land-option abandonment charges. It said further charges could arise if market conditions or strategy change. Its auditor issued unqualified opinions on the financial statements and internal controls; inventory impairment and self-insurance estimates were critical audit matters.
Important facts for investors to verify
- Whether FY2021 revenue, margin, community-count and return-on-equity guidance is achieved, including the assumption of no inventory-related charges.
- How backlog converts into deliveries and cash, and whether community openings and lot investment can keep pace with orders.
- Whether lumber, labor, subcontractor and other supply costs pressure gross margins or delay construction.
- Capacity to refinance or repay the $450 million senior notes due December 2021, while maintaining liquidity and covenant compliance.
- Developments in Florida construction-defect claims, the Northern California matter, self-insurance recoveries and inventory impairment estimates.
- Potential effects of the announced Stearns parent-company acquisition on KBHS, the mortgage joint venture, and homebuyer financing and closings.