KB HOME quarterly report, Q1 FY2024

KB Home — 2024 First-Quarter 10-Q

Business context and reporting period. KB Home is a U.S. homebuilder with four homebuilding regions—West Coast, Southwest, Central and Southeast—and a financial services segment. This unaudited report covers the three months ended February 29, 2024; comparisons are with the three months ended February 28, 2023. Results may be affected by seasonality and are not necessarily indicative of the full year.

Financial and operating results

Revenue and earnings: Total revenue rose 6% to $1.468 billion. Net income increased 10% to $138.7 million; diluted EPS rose 21% to $1.76, helped by share repurchases and a lower diluted share count.
Homebuilding: Revenue increased 6% to $1.462 billion. Deliveries grew 9% to 3,037 homes, while average selling price fell 3% to $480,100. Housing gross profit margin was 21.5%, unchanged year over year; adjusted housing gross profit margin was 21.6% versus 21.8%. Homebuilding operating income margin declined to 10.8% from 11.4%, mainly as SG&A rose to 10.8% of housing revenue from 10.1% amid planned growth investments.
Orders and backlog: Net orders increased 55% to 3,323, and the cancellation rate improved to 14% from 36%. Ending backlog value was $2.792 billion, down 16% year over year but up 5% sequentially. Average community count fell 4% year over year to 240.
Regional mix: Southwest and Southeast homebuilding revenue rose 35% and 24%, respectively; West Coast revenue increased 3%. Central revenue declined 18%, and its operating income fell 34%, reflecting fewer deliveries, lower average selling prices and margin pressure.
Financial services: Pretax income increased 93% to $11.6 million, primarily due to higher income from the KBHS mortgage joint venture, including a favorable change in mortgage rate-lock valuation. KBHS originated $840.6 million of loans; 85% of KB Home buyers used KBHS, versus 79% a year earlier.
Cash flow: Operating cash flow was $28.5 million, down from $93.9 million. Higher inventories used $107.5 million of cash, partly offset by net income and lower receivables. Investing activities used $12.6 million; financing activities used $75.0 million, including $50.0 million of share repurchases and $16.4 million of dividends. Cash and cash equivalents ended the quarter at $668.3 million.
Debt and liquidity: Notes payable totaled $1.693 billion, including approximately $358 million under the term loan and $1.328 billion of senior notes. No cash was drawn on the $1.09 billion revolving credit facility; $1.083 billion remained available. Total liquidity was $1.751 billion. Debt to capital was 30.4%, down from 30.7% at November 30, 2023. The company reported covenant compliance.
Capital returns and investment: KB Home repurchased 826,663 shares under its authorization for $50.0 million and paid a quarterly dividend of $0.20 per share. Land and land development investment was $587.1 million, up 60%; land acquisition spending was $214.4 million.

Material changes versus the prior comparable period

Revenue, net income, diluted EPS, deliveries and net orders increased; cancellations declined substantially.
Average selling price decreased, and homebuilding operating margin narrowed as SG&A costs grew faster than revenue. Gross housing margin was flat on a reported basis.
Operating cash flow decreased, with the quarter’s inventory investment contrasting with an inventory-related cash source in the prior-year quarter.
Financial services pretax income rose sharply, principally due to improved KBHS joint-venture results and the change in mortgage rate-lock valuation.
Inventory-related charges were $1.3 million, compared with $5.3 million a year earlier. The filing reports no inventory impairment charges in either period; current-quarter charges were land-option contract abandonments.

Guidance, outlook and management commentary

Management said first-quarter housing demand improved alongside lower mortgage rates compared with the 2023 fourth quarter, constrained resale inventory and other favorable demographic and supply conditions. Net-order momentum continued into the second quarter to date.
Second-quarter 2024 outlook: Housing revenue of $1.60–$1.70 billion; average selling price about $483,000; homebuilding operating margin of 10.1%–10.5% and housing gross margin of 20.5%–21.0%, both assuming no inventory-related charges; SG&A about 10.5% of housing revenue; effective tax rate about 24%; ending community count around 250.
Full-year 2024 outlook: Housing revenue of $6.50–$6.90 billion; average selling price of $480,000–$490,000; homebuilding operating margin of 10.9%–11.3% and housing gross margin of 21.0%–21.4%, both assuming no inventory-related charges; SG&A about 10.2% of housing revenue; effective tax rate about 23%; ending community count about 260.
Management expects concessions and pricing adjustments to weigh on average selling prices for the remainder of 2024. Land acquisition activity is expected to increase year over year in the remaining quarters, subject to market conditions and investment returns. The company expects existing cash, operating cash flows and credit availability to meet anticipated needs for at least 12 months.
Key uncertainties include mortgage rates, inflation, affordability, consumer confidence, economic conditions, construction costs and availability, permitting and utility delays, and possible continuing or worsening supply-chain challenges. Management cautioned that first-quarter performance is not necessarily indicative of future results.

Risks, contingencies and unusual items

The company disclosed approximately 483 outstanding Florida Chapter 558 construction-defect notices, primarily involving stucco and water intrusion. Some claims are scheduled for trial; certain trade partners’ insurers have said they may be unable to continue paying related costs. KB Home accrued estimated probable losses and recorded estimated probable recoveries, but cannot estimate reasonably possible losses above accruals or any recovery shortfall.
A U.S. Department of Justice Civil Division subpoena seeks information about inspection, rating, marketing and advertising of ENERGY STAR homes. KB Home is cooperating; any loss or penalty was described as reasonably possible but not probable or estimable.
Warranty and self-insurance estimates are subject to uncertainty, including long-tail construction-defect claims. The reported warranty liability was $95.9 million; self-insurance liability was $177.3 million, presented gross of estimated recoveries.
Outstanding performance bonds were $1.30 billion and letters of credit totaled $32.2 million. The company said it did not expect a material amount of outstanding instruments to be called.
On March 1, 2024, an investee company sold substantially all its assets. KB Home received about $1.7 million in cash and equity interests; it was still evaluating the equity interests’ fair value and expected to record a gain in the second quarter. The amount of that gain is not provided.
In March 2024, S&P upgraded KB Home’s corporate credit rating to BB+ from BB and maintained a stable outlook. Management reported disclosure controls were effective; implementation of a new ERP system was nearly complete, with old and new systems still both used for financial reporting.

Important facts for investors to verify

Whether order growth converts into deliveries and revenue, particularly given the 16% year-over-year decline in backlog value and the planned community-count expansion.
Whether projected revenue and margin ranges are achieved, and how mortgage rates, affordability and concessions affect selling prices and profitability.
Whether higher land and development investment supports future growth without weakening operating cash flow or liquidity.
Developments in the Florida construction-defect claims and DOJ subpoena, including any change in accruals, recoveries or ability to estimate exposure.
The actual second-quarter accounting gain, if any, from the investee-company asset sale and the fair value of the equity interests received.