KB Home — Q2 2023 Form 10-Q
Business context and reporting period. This quarterly report covers the three and six months ended May 31, 2023. KB Home builds and sells homes across four U.S. homebuilding regions and provides insurance and title services; mortgage banking is conducted through an unconsolidated joint venture. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial and operating results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $1.765 billion | $1.720 billion | $3.150 billion | $3.119 billion |
| Pretax income | $214.9 million | $282.9 million | $377.1 million | $460.9 million |
| Net income | $164.4 million | $210.7 million | $289.9 million | $344.9 million |
| Diluted EPS | $1.94 | $2.32 | $3.38 | $3.79 |
| Homebuilding gross margin | 21.1% | 25.3% | 21.3% | 24.0% |
| Homebuilding operating margin | 11.5% | 15.4% | 11.4% | 14.0% |
- Q2 homebuilding revenue increased 3% as deliveries rose 6% to 3,666, partly offset by a 3% decline in average selling price to $479,500. First-half homebuilding revenue was up 1%; deliveries rose 2% and average selling price was essentially flat.
- Q2 housing gross profit was $371.3 million. The gross margin fell 420 basis points, reflecting pricing and buyer concessions, higher construction costs, product and geographic mix, and inventory-related charges. Adjusted gross margin, a company-defined non-GAAP measure excluding inventory-related charges, was 21.4% for Q2 and 21.6% for the first half.
- Financial services pretax income declined 39% in Q2 and 36% in the first half, mainly because the mortgage joint venture’s results included fair-value losses on interest-rate lock commitments, versus substantial gains in 2022.
- Six-month operating cash flow was $608.7 million, versus cash use of $314.8 million in 2022. Inventory reduction contributed $413.8 million of cash, compared with a $764.2 million inventory increase in the prior-year period. Investing activities used $30.9 million; financing activities used $350.5 million, including $167.1 million of share repurchases, $150.0 million of net revolver repayments, and $25.7 million of dividends.
- At May 31, cash and cash equivalents were approximately $557 million. Total liquidity was $1.64 billion, including $1.08 billion available under the $1.09 billion revolving credit facility; no revolver cash borrowings were outstanding. Notes payable totaled $1.687 billion, down from $1.839 billion at November 30, 2022. Debt to capital was 30.9%, down from 33.4%.
- All interest incurred in the reported periods was capitalized; the company reported no interest expense for those periods. The term loan’s weighted-average rate was 6.4% at May 31.
Material changes and business trends
- Q2 net orders were 3,936, up 1% year over year and 84% sequentially; net order value decreased 11%. Average monthly net orders per community were 5.2, versus 6.2 a year earlier. The cancellation rate rose to 22% from 17%, but improved from 36% in Q1 2023.
- Backlog at May 31 was 7,286 homes valued at $3.46 billion, down 41% in homes and 44% in value year over year. Average community count rose 20% to 253.
- Land and land-development investment was $763.2 million in the first half, down 46% year over year; land acquisitions fell 79% to $130.6 million. KB Home said it was moderating and recalibrating land investment to market conditions and abandoned control of 6,179 lots during the first half.
- Share repurchases totaled $167.1 million in the first half. A March 2023 authorization permits up to $500 million of repurchases; approximately $407.9 million remained available at May 31. The quarterly dividend was $0.15 per share.
Outlook, risks and contingencies
- Q3 2023 outlook: Housing revenue of $1.35–$1.50 billion; average selling price around $470,000; homebuilding operating margin of 9.5%–10.1% and gross margin of 20.4%–21.0%, both assuming no inventory-related charges; SG&A at 10.6%–11.2% of housing revenue; net orders of 3,000–3,500. Average community count is expected to increase about 10% year over year.
- Full-year 2023 outlook: Housing revenue of $5.80–$6.20 billion; average selling price around $485,000; homebuilding operating margin about 11.0% and gross margin about 21.2%, both assuming no inventory-related charges; SG&A around 10.3% of housing revenue; effective tax rate around 23%; average community count up roughly 10% and year-end count flat year over year.
- Management cited improved demand versus the second half of 2022 and Q1 2023, supported by a more stable mortgage-rate environment and limited resale inventory. It expects seasonal sequential order declines in Q3 and Q4, lower average selling prices year over year in the remaining quarters, and continued construction-cost and supply-chain pressures, though it reported improving cycle times. These forecasts are subject to housing demand, affordability, interest rates, economic conditions, construction availability and costs, and other factors.
- Florida construction-defect matters include approximately 465 outstanding Chapter 558 noticed claims, many involving stucco or water intrusion. Some claims are scheduled for trial; some trade-partner insurers have indicated they may not continue paying related costs. The company has accrued estimated probable losses and recorded probable insurance recoveries, but says reasonably possible additional losses or recovery shortfalls cannot currently be estimated.
- At May 31, performance bonds totaled $1.34 billion and letters of credit totaled $21.2 million. The company does not expect a material amount to be called. Land-option contracts covered land with an aggregate purchase price of $994.0 million, against $36.3 million of cash deposits; the contracts generally do not require specific performance. First-half land-option abandonment charges were $9.6 million, versus $0.9 million a year earlier; no inventory impairment charges were recognized in either period.
- Management identified possible liquidity effects from financial-industry and capital-markets turmoil, including lender capacity risks affecting the company’s facilities, KBHS mortgage funding, or a joint venture. It reported covenant compliance and no material liquidity concerns as of the report date. S&P reaffirmed its BB rating in April 2023 and changed the outlook from positive to stable.
Important facts for investors to verify
- Whether order trends, cancellations and backlog convert into deliveries and revenue at the pace and prices assumed in guidance.
- Whether gross margins recover or remain pressured by incentives, construction costs, mix and production delays; compare reported and adjusted margins.
- Developments in the Florida construction-defect claims, related accruals and expected insurance recoveries.
- Availability of bank and mortgage-joint-venture funding, continued covenant compliance, and the impact of land commitments and performance obligations on liquidity.
- Execution of the 2023 outlook and capital-allocation plans, including repurchases, dividends and the pace of land investment.