KB Home — Q1 2015 Form 10-Q
Business context and reporting period. The quarter ended February 28, 2015; comparisons are with the three months ended February 28, 2014. KB Home builds and sells homes across four U.S. regions and provides related insurance, title and mortgage services. Results are unaudited and subject to homebuilding seasonality.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Total revenue | $580.1 million | $450.7 million | Up 29% |
| Homebuilding revenue | $577.9 million | $448.3 million | Up 29%; housing revenue rose 19% and land-sale revenue was $53.0 million versus $8.1 million |
| Homes delivered / average selling price | 1,593 / $329,500 | 1,442 / $305,200 | Deliveries up 10%; average price up 8% |
| Homebuilding pretax income | $8.8 million | $9.2 million | Down 4% |
| Total pretax income | $10.5 million | $10.8 million | Down 2% |
| Net income / diluted EPS | $7.8 million / $0.08 | $10.6 million / $0.12 | Net income down 26%; diluted EPS down 33% |
| Housing gross margin | 15.1% | 17.7% | Down 2.6 percentage points; adjusted margin was 19.5% versus 21.8% |
| SG&A as % of housing revenue | 13.5% | 13.9% | Improved 0.4 percentage points |
| Cash from operating activities | $(48.9) million | $(221.1) million | Cash use narrowed, primarily with lower inventory investment |
Liquidity and debt. At February 28, 2015, cash and cash equivalents were $545.6 million, restricted cash was $28.0 million, and total notes payable were $2.824 billion, up $247.6 million from November 30, 2014. Debt-to-capital was 63.8% versus 61.8%; net-debt-to-capital was 58.4% versus 57.9%. The company had $200 million available under its revolving credit facility, with no borrowings or letters of credit outstanding thereunder. It reported compliance with debt covenants. A $250 million issuance of 7.625% senior notes due 2023 funded the quarter’s financing cash inflow; proceeds were intended in part to retire $199.9 million of 6.25% notes due June 2015.
Material changes and management commentary
- Average community count increased 22% year over year to 231; ending community count rose 25% to 235. Net orders increased 24% to 2,189, while the cancellation rate improved to 25% from 30%.
- Backlog grew to 3,505 homes valued at $1.109 billion, up 22% in homes and 30% in value year over year.
- Margins remained under pressure from higher land and construction costs, competitive pricing, new-community start-up costs, and the close-out of some higher-margin communities. The Southeast segment recorded a $9.6 million pretax loss, versus $3.8 million pretax income a year earlier; West Coast and Central pretax results improved.
- Land and land-development investment was $201.6 million versus $354.3 million a year earlier; about 73% was directed to development. Management said the strategy emphasizes converting owned land into selling communities and generating operating cash.
- Financial services pretax income rose to $1.7 million from $1.6 million. Mortgage originations are conducted indirectly through the 49.9%-owned Home Community Mortgage joint venture; 65% of Q1 homebuyers used HCM.
Outlook, risks and unusual items
- Management projected Q2 2015 housing revenue of $580 million to $615 million; full-year housing revenue of $2.8 billion to $3.1 billion and land-sale revenue of about $100 million. It expected 2015 profitability.
- Management expected full-year average community count to grow 15%–20% from 2014, land and land-development investment of $1.1 billion–$1.4 billion, and net orders generally to grow within the community-count growth range. It projected sequential housing gross-margin improvement in each remaining 2015 quarter, including about 50 basis points in Q2, while margins were expected to remain below prior-year comparable quarters.
- Outlook depends on employment, income and consumer confidence, mortgage availability and rates, housing-market conditions, land and construction costs, labor availability, and regulatory and capital-market conditions. The filing cautions that actual results may differ materially and quarterly results may fluctuate.
- Florida water-intrusion claims remained a contingency: the company accrued $5.8 million for estimated remaining repairs, had paid $67.4 million of an estimated $73.2 million total repair cost, and stated reasonably possible additional loss could be $0–$3 million. The Florida Attorney General inquiry also remained unresolved; reasonably possible loss beyond the accrual was estimated at $0–$5 million.
- Nevada development-contract litigation had a September 15, 2015 trial scheduled. The company described a reasonably possible loss range of zero to approximately $55 million plus prejudgment interest, while stating it believed it had meritorious defenses.
- No inventory impairment charges were recorded in the quarter. Land-option abandonment charges were $0.4 million. Q1 2015 also included a $6.0 million land-sale gain; Q1 2014 included a $3.2 million gain on sale of a joint-venture interest. The 2015 tax expense included a favorable $1.4 million energy-tax-credit impact; the prior-year tax comparison was affected by the deferred-tax valuation allowance then in place.
Important facts for investors to verify
- Whether order and backlog growth converts into home deliveries and cash generation, particularly as community count expands.
- Whether housing gross margins improve as management projected, and how costs, pricing and community mix affect the Southeast and other regions.
- Debt refinancing and repayment of the $199.9 million notes due June 2015, along with leverage, covenant headroom and access to financing.
- Changes in Florida warranty, Attorney General and Nevada litigation exposures, including recoveries and any additional accruals.
- Whether stated revenue, investment, community-count and profitability outlook is achieved; management noted forecasts are conditional on housing and financing-market conditions.