KB Home — FY2019 Form 10-K
Reporting period: Fiscal year ended November 30, 2019. KB Home builds and sells residential homes across eight states and reports West Coast, Southwest, Central and Southeast homebuilding segments. Homebuilding accounted for 99.7% of FY2019 revenue; financial services accounted for the remainder.
Financial and operating performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Total revenue | $4.553 billion | $4.547 billion | Essentially flat |
| Homebuilding revenue | $4.538 billion | $4.534 billion | Essentially flat |
| Operating income | $342.1 million | $355.1 million | Down 4% |
| Pretax income | $348.2 million | $368.0 million | Down 5% |
| Net income | $268.8 million | $170.4 million | Up 58% |
| Diluted EPS | $2.85 | $1.71 | Up 67% |
| Homes delivered | 11,871 | 11,317 | Up 5% |
| Average selling price | $380,000 | $399,200 | Down 5% |
Revenue from housing was $4.511 billion, virtually unchanged: 5% more deliveries were offset by a 5% lower average selling price. The price decline chiefly reflected a West Coast mix shift toward more affordable communities and fewer deliveries from higher-priced communities. Net orders rose 17%, cancellations fell to 19% from 22%, and year-end backlog increased 24% to 5,078 homes, valued at $1.814 billion. Substantially all backlog homes were expected to deliver in FY2020.
- Margins: Housing gross margin increased to 18.3% from 17.5%; excluding inventory-related charges it was 18.7% versus 18.1%. Homebuilding operating margin declined to 7.3% from 7.6%; excluding inventory-related charges it was 7.7% versus 8.3%. SG&A rose to 11.0% of housing revenue from 9.8%.
- Cash flow: Operating activities provided $251.0 million, compared with $221.5 million in FY2018. Investing activities used $40.9 million and financing activities used $330.4 million. Year-end cash was $453.8 million in homebuilding and $1.0 million in financial services; the cash-flow statement reports total ending cash of $454.9 million.
- Liquidity and debt: Total liquidity was $1.235 billion, including $453.8 million cash and $781.1 million available under the revolving credit facility; no cash was drawn on that facility. Notes payable were $1.749 billion, down from $2.060 billion. Debt-to-capital was 42.3% versus 49.7%; net debt-to-capital, a non-GAAP measure, was 35.2% versus 41.6%.
- Other: Land and land-development investment was $1.62 billion, down from $1.89 billion. Dividends declared were $0.23 per share, versus $0.10. Deferred tax assets, net, were $364.5 million.
Material changes and unusual items
- FY2019 net income benefited from a lower tax expense. FY2018 included a $112.5 million non-cash tax charge related mainly to remeasuring deferred tax assets after the Tax Cuts and Jobs Act. Excluding that charge, FY2018 adjusted net income was $282.9 million and adjusted diluted EPS was $2.82; on that basis FY2019 earnings were lower.
- FY2019 included a $6.8 million loss on early extinguishment of debt. KB Home repaid $980 million principal of notes during the year and issued new senior notes, including $300 million of 4.80% notes due 2029. Its next large scheduled senior-note maturity was $450 million due December 2021; the maturity schedule also includes $800 million due in 2022.
- Inventory impairment and land-option abandonment charges declined to $17.3 million from $29.0 million. ASC 606 adoption increased FY2019 reported net income by approximately $1.5 million and affected the classification and timing of certain costs and financial-services commissions; FY2018 comparatives were not restated.
- Financial-services pretax income increased to $23.0 million from $16.7 million, supported by higher earnings from the KBHS mortgage-banking joint venture. Stearns’ parent filed for bankruptcy in 2019, but KBHS was not included, continued operating, and the filing reported no consolidated financial-statement impact.
Outlook, commentary and risks
Management described housing conditions in 2019 as generally healthy, citing strong employment, relatively high consumer confidence and limited homes for sale. For FY2020, it forecast housing revenue of $4.90–$5.30 billion, average selling price of $380,000–$400,000, homebuilding operating margin of 7.9%–8.5% assuming no inventory-related charges, and average community count growth in the low- to mid-single digits. It expected return on equity to improve by more than 100 basis points from 12.2% and debt-to-capital to fall below 40%. These are forward-looking estimates, not guarantees.
- Management cited labor constraints, volatile material costs and tariffs as risks to costs and growth. Other key exposures include housing affordability and mortgage availability, competition for land, subcontractor availability, and sensitivity to economic, interest-rate and regulatory conditions.
- California concentration heightens exposure to regulation, permitting, affordability, wildfire risk and related disruptions. Climate-related disasters and insurance availability may also affect operations in other markets.
- Warranty and construction-defect exposure is significant and partly self-insured. At year-end, the self-insurance liability was $177.8 million and related estimated recovery receivables were $50.6 million. In Florida, approximately 477 Chapter 558 construction-defect claims remained outstanding; the company said losses could exceed accruals but it could not estimate a reasonably possible excess amount.
- Inventory impairment estimates depend on future sales, prices, costs and development timing. The company recorded $14.0 million of inventory impairment charges in FY2019 and cautioned that further charges could be material if market conditions or strategy change.
- The company reported compliance with credit-facility and debt covenants at the report date. It also disclosed $793.9 million of performance bonds and $34.7 million of letters of credit outstanding.
Key facts for investors to verify
- Whether the FY2020 revenue and margin outlook is supported by orders, backlog conversion, community openings and selling prices.
- How much of earnings growth reflects operating performance versus FY2018’s one-time tax charge; compare reported and adjusted results consistently.
- Whether West Coast pricing and mix stabilize, given the segment’s lower FY2019 revenue and operating income.
- Debt repayment and refinancing plans, especially the $450 million 2021 notes and subsequent maturities, alongside liquidity and covenant headroom.
- Developments in Florida construction-defect claims, self-insurance estimates and recoveries, and potential inventory impairments.
- The impact of ASC 606 and the newly adopted lease standard on comparability; management expected approximately $31 million of lease assets and liabilities upon ASC 842 adoption.