KB Home 2022 Second-Quarter 10-Q Summary
Business context and reporting period
KB Home is a U.S. homebuilder operating across four homebuilding regions and a financial services segment. This unaudited Form 10-Q covers the three and six months ended May 31, 2022; comparisons are with the same periods in 2021. Management cautions that interim results may not indicate full-year results.
Financial and operating performance
| Metric | Three months ended May 31 | Six months ended May 31 |
|---|---|---|
| Total revenue | $1.720 billion, +19% | $3.119 billion, +21% |
| Net income | $210.7 million, +47% | $344.9 million, +43% |
| Diluted EPS | $2.32, versus $1.50 | $3.79, versus $2.52 |
| Homebuilding operating margin | 15.4%, versus 11.3% | 14.0%, versus 10.8% |
| Housing gross margin | 25.3%, versus 21.4% | 24.0%, versus 21.1% |
Quarterly homebuilding revenue was $1.715 billion. Homes delivered were nearly flat at 3,469, while average selling price rose 21% to $494,300. For the first half, deliveries were also nearly flat at 6,337 and average selling price rose 21% to $490,600. Margin gains primarily reflected pricing and lower relative amortization of capitalized interest, partly offset by higher building costs. SG&A was 9.8% of housing revenue for the quarter and 10.0% for the half.
Net orders fell 9% year over year in the quarter to 3,914; the cancellation rate increased to 17% from 9%. Net order value rose 4% to $2.125 billion, reflecting higher prices. Quarter-end backlog was 12,331 homes valued at $6.121 billion, up 23% in homes and 43% in value.
Operating cash flow was negative $314.8 million for the first half, compared with negative $18.1 million a year earlier, mainly due to a $764.2 million inventory increase. Investing cash outflow was $37.2 million; financing provided $306.5 million, including $400 million of net revolver borrowings. Cash and cash equivalents totaled $246.6 million, including financial services cash. Total assets were $6.579 billion and stockholders’ equity was $3.291 billion at May 31.
Notes payable totaled $2.085 billion, up from $1.685 billion at November 30, 2021; debt-to-capital was 38.8%, versus 35.8%. Total liquidity was $925.6 million, including $681.4 million available under the amended $1.09 billion revolving credit facility. KB Home reported compliance with debt covenants.
Material changes, outlook, and risks
- Management reported moderation in sales pace amid sharply rising mortgage rates, inflation, high home prices, and market volatility. Supply-chain bottlenecks, labor and construction-service constraints, and permitting delays extended construction cycles, delayed deliveries, and raised costs.
- For 2022, management forecast housing revenue of $7.30–$7.50 billion, average selling price of about $500,000, homebuilding operating margin of 16.0%–16.6%, and year-end community count of about 250. The outlook assumes no inventory-related charges. Third-quarter housing revenue guidance was $1.82–$1.92 billion, with operating margin of about 16.9%, also assuming no such charges.
- Management expects affordability pressures to weaken demand and increase cancellations in the third and fourth quarters, while supply constraints and cost pressures may persist or worsen. Key exposures include interest rates, inflation, material availability, labor, housing demand, and disruption related to COVID-19 and the Ukraine conflict.
- Financial services pretax income rose 75% in the quarter, largely due to higher equity income from KBHS and a substantial increase in the fair value of interest-rate lock commitments. Management said this accounting effect pulled some expected KBHS earnings from the second half into the first half.
- On June 22, 2022, the company issued $350 million of 7.25% senior notes due 2030 and used the proceeds plus cash to redeem $350 million of 7.50% notes due 2022 on July 7. It expected a roughly $4 million third-quarter early-extinguishment charge.
- Florida construction-defect matters included approximately 490 outstanding Chapter 558 noticed claims. The company said a loss above accruals or insurance recoveries below recorded amounts was reasonably possible, but it could not estimate the potential excess. Outstanding performance bonds were $1.24 billion; the company did not expect a material amount to be called.
Important facts for investors to verify
- Whether order trends, cancellation rates, and backlog convert into deliveries and revenue as mortgage rates and affordability conditions change.
- Whether guidance margins are achievable despite construction-cost inflation, supply constraints, and extended build times; compare reported results with guidance assumptions excluding inventory charges.
- Inventory growth, operating cash flow, revolver usage, upcoming debt maturities, and continued compliance with credit-facility covenants.
- The durability of KBHS earnings, including the fair-value contribution from rate locks and the disclosed pull-forward of expected earnings.
- Developments in Florida construction-defect claims, related accruals, and estimated insurance recoveries.
- Execution and cost of the 2022 debt refinancing, including the expected extinguishment charge.