KB Home — FY2023 Form 10-K
Reporting period: Fiscal year ended November 30, 2023. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter figures below are included only where the filing provides them. KB Home is primarily a U.S. homebuilder, with operations in nine states; homebuilding generated 99.5% of FY2023 revenue.
Financial and operating performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Total revenue | $6.411 billion | $6.904 billion | Down 7% |
| Net income | $590.2 million | $816.7 million | Down 28% |
| Diluted EPS | $7.03 | $9.09 | Down 23% |
| Homes delivered | 13,236 | 13,738 | Down 4% |
| Average selling price | $481,300 | $500,800 | Down 4% |
| Housing gross profit margin | 21.2% | 24.3% | Down 310 basis points |
| Adjusted housing gross profit margin (non-GAAP) | 21.4% | 24.8% | Down 340 basis points |
| Homebuilding operating margin | 11.3% | 15.1% | Down 380 basis points |
| Cash from operating activities | $1.083 billion | $183.4 million | Increased |
Housing revenue was $6.370 billion, down 7%. Management attributed lower revenue and margins mainly to fewer deliveries, lower selling prices, buyer concessions, higher construction costs, and product and geographic mix. FY2023 operating income included $11.4 million of inventory-related charges, all from land-option contract abandonments; there were no inventory impairment charges, compared with $24.1 million of impairments in FY2022.
Net orders rose 2% to 11,084, while net order value fell 5% to $5.347 billion. Year-end backlog declined 28% to 5,510 homes, valued at $2.668 billion; substantially all was expected to be delivered during FY2024. The full-year cancellation rate was 26%, unchanged from FY2022. In Q4, the cancellation rate improved to 28% from 68% a year earlier; net orders increased 176% year over year from the depressed prior-year quarter, but were below management’s expectations.
Cash and cash equivalents were $727.1 million at year-end, and total liquidity was $1.810 billion, including $1.083 billion of available Credit Facility capacity. Notes payable totaled $1.690 billion; there were no Credit Facility cash borrowings, and $358.2 million was outstanding under the Term Loan. Debt to capital was 30.7%, versus 33.4% in FY2022. Operating cash flow benefited in part from a $426.8 million decrease in inventories. Land and land-development investment fell 25% to $1.80 billion.
KB Home repurchased 9.24 million shares for approximately $411.4 million during FY2023 and had $163.6 million remaining under its repurchase authorization at year-end. The quarterly dividend was increased from $0.15 to $0.20 per share during the year. Financial-services pretax income was $39.5 million, up slightly; KBHS, the mortgage joint venture, recorded $16.0 million in losses on interest-rate lock commitments, versus $20.3 million in gains in FY2022.
Material changes and management commentary
- Demand improved from the FY2022 second half and FY2023 first quarter, supported by limited resale inventory, buyer interest at KB Home’s price points, and targeted pricing and mortgage-related concessions.
- Average community count increased 10% to 245, while year-end community count was 242, down 2%. West Coast deliveries declined 20%, and West Coast revenue fell 24%; the segment’s operating income declined 49%.
- Supply-chain and construction-service constraints eased sequentially during FY2023, and construction cycle times improved from the second quarter onward, but remained longer than historical levels.
- Owned and controlled lots declined to 55,976 from 68,795. The company abandoned 9,650 previously controlled lots during the year as it adjusted land investments to market conditions.
Outlook, risks and contingencies
Management cited favorable long-term housing factors, including demographics, undersupply of new homes, and constrained resale inventory, while emphasizing uncertainty around mortgage rates, inflation, consumer confidence, and the economy. It expects to continue selective buyer concessions, increase land acquisition activity versus FY2023, and work toward historical construction times of four to five months.
FY2024 guidance: Housing revenue of $6.40–$6.80 billion; average selling price of $480,000–$490,000; homebuilding operating margin of approximately 11.0%, assuming no inventory-related charges; housing gross margin of approximately 21.0%, on the same assumption; SG&A of about 10.0% of housing revenue; effective tax rate of approximately 24%; and year-end community count of approximately 270. For Q1 FY2024, management expected housing revenue of $1.40–$1.50 billion, average selling price around $477,000, and homebuilding operating margin around 10.5%, assuming no inventory-related charges. Management reported 1,170 net orders in the first six weeks of Q1 FY2024, versus 568 in the comparable prior-year period.
- Demand and affordability: Mortgage rates, inflation, reduced affordability, competition, and buyer access to mortgage financing or homeowners insurance could weaken orders, increase cancellations, or require further price reductions and concessions.
- Costs and execution: Labor, materials, land, permitting, utility, and construction delays could pressure margins, deliveries, and customer satisfaction. Management expected inflationary pressures to persist to some extent in FY2024.
- Geographic and climate exposure: The business is concentrated in California, Florida, Nevada, and Texas. Wildfires, hurricanes, water constraints, insurance availability, and evolving energy and environmental rules could raise costs or delay development.
- Legal and warranty matters: The company reported approximately 484 outstanding Florida Chapter 558 construction-defect notices. It stated losses could exceed accruals and insurance recoveries could be lower, but it could not estimate reasonably possible excess exposure. Warranty liabilities were $98.0 million; self-insurance liabilities were $179.8 million, with $31.1 million of estimated probable recoveries.
- Government inquiry: The Department of Justice issued a civil subpoena regarding inspection, rating, marketing, and advertising of ENERGY STAR homes. KB Home is cooperating; a potential loss or penalty was considered reasonably possible but not probable or estimable.
- Tax and other unusual items: IRS guidance issued in September 2023 imposed higher Section 45L tax-credit qualifications for California homes and reduced estimated FY2023 credits; the cumulative impact was reflected in Q4 tax expense. Cyber incidents at two third-party title and escrow companies in late 2023 delayed some land and home-closing transactions. The company reported no significant cybersecurity breach with a material impact to date.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded controls were effective as of November 30, 2023. The auditor identified self-insurance liabilities and recoveries as a critical audit matter because of actuarial estimation uncertainty.
Important facts for investors to verify
- Whether FY2024 revenue, margin, average selling price, and community-count guidance is achieved, especially given planned concessions and uncertain mortgage rates.
- Whether backlog converts to deliveries as expected and whether order trends and cancellations remain favorable.
- Whether construction cycle times and supply constraints improve without higher costs or increased warranty claims.
- Whether land investment growth meets return targets and whether further option abandonments or inventory impairments arise.
- Developments in the DOJ ENERGY STAR inquiry, Florida construction-defect claims, self-insurance estimates, and Section 45L credit eligibility.
- Capital allocation, including remaining share repurchase authorization, dividends, debt maturities, and liquidity under changing market conditions.