KB Home — Q1 2023 Form 10-Q
Business context and period: Quarter ended February 28, 2023. KB Home builds homes across four U.S. regions and provides insurance and title services; mortgage lending is conducted through its 50%-owned, unconsolidated KBHS joint venture. Results are unaudited and may not indicate full-year performance.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $1.384 billion | $1.399 billion | Down 1% |
| Pretax income | $162.2 million | $178.1 million | Down 9% |
| Net income | $125.5 million | $134.3 million | Down 7% |
| Diluted EPS | $1.45 | $1.47 | Down 1% |
| Homes delivered / average selling price | 2,788 / $494,500 | 2,868 / $486,100 | Deliveries down 3%; price up 2% |
| Housing gross margin | 21.5% | 22.4% | Down 90 basis points |
| Homebuilding operating margin | 11.4% | 12.2% | Down 80 basis points |
Homebuilding revenue was nearly flat, but lower gross margin and higher inventory-related charges reduced operating income. Adjusted housing gross margin, a non-GAAP measure excluding inventory-related charges, was 21.8%, versus 22.4%. Stock repurchases helped keep diluted EPS close to the prior-year level despite lower net income.
Net orders fell 49% to 2,142 and net order value fell 53% to $1.002 billion. The cancellation rate rose to 36% from 11%, while backlog value decreased 42% year over year to $3.315 billion. Management reported sequential order improvement in January and February and strong orders in March, but cautioned that demand remained exposed to affordability and economic pressures.
Regional results diverged: West Coast pretax income fell to $59.6 million from $110.0 million, while Central rose to $58.8 million from $38.1 million. Southwest and Southeast pretax income was $44.0 million and $23.5 million, respectively.
Cash flow, debt and liquidity
- Operating cash flow was positive $93.9 million, versus negative $251.0 million a year earlier. The current quarter benefited from a $101.3 million inventory reduction; cash outflows included a $131.7 million decrease in accounts payable, accrued expenses and other liabilities.
- Investing cash outflow was $17.0 million. Financing cash outflow was $146.3 million, including $75.0 million of share repurchases, $50.0 million of net repayments on the revolving facility, and $12.5 million of dividends.
- Cash and cash equivalents were $260.1 million on the homebuilding balance sheet. Total liquidity was $1.243 billion, including $983.4 million available under the $1.09 billion revolving credit facility.
- Notes payable totaled $1.789 billion, down from $1.839 billion at November 30, 2022. Debt to capital was 32.6%, versus 33.4%. The company reported compliance with its debt covenants.
- All interest incurred in the quarter was capitalized; the company reported no interest expense for the period. Outstanding revolving credit and term loan borrowings carried weighted average rates of 5.9% and 6.1%, respectively.
Outlook, commentary and risks
Management expects continued consumer caution, affordability constraints and construction challenges during 2023. It plans to use selective price adjustments and buyer concessions, moderate land investment, and pursue lower construction costs and cycle times. Management cited positive long-term housing fundamentals but emphasized uncertainty around rates, the economy and demand.
- Q2 2023 outlook: Housing revenue of $1.35–$1.50 billion; average selling price about $480,000; homebuilding operating margin of 9.5%–10.5% and housing gross margin of 20.0%–21.0%, both assuming no inventory-related charges. Expected net orders are 3,000–3,700. Management expects average community count up 15%–20% year over year.
- FY 2023 outlook: Housing revenue of $5.20–$5.90 billion; average selling price of $480,000–$490,000; homebuilding operating margin of 10.0%–11.0% and housing gross margin of 20.5%–21.5%, assuming no inventory-related charges. Expected average community count growth is in the low double digits; expected return on equity is in the low double-digit range.
- Supply-chain disruptions, construction labor and service availability, permitting, inspection and utility delays, and material cost pressures may persist or worsen. Higher mortgage rates, inflation, affordability, economic uncertainty and weaker consumer confidence could further pressure orders, cancellations, prices and margins.
- Q1 land option abandonment charges were $5.3 million, versus $0.2 million a year earlier; no inventory impairment charges were recognized in either quarter. Management reduced land acquisitions and abandoned 3,799 controlled lots during the quarter.
- Florida construction-defect matters included approximately 480 outstanding Chapter 558 noticed claims, primarily involving stucco and water intrusion. The company accrued estimated probable losses and recorded estimated probable insurance recoveries, but could not estimate reasonably possible losses beyond accruals or any recovery shortfall.
- After quarter-end, the board authorized up to $500 million in share repurchases, replacing an authorization with $75 million remaining. No shares had been repurchased under the new authorization as of the report date.
- The filing identifies financial-industry turmoil following two U.S. bank closures in early March as a potential liquidity risk affecting deposits, credit facilities, letters of credit, KBHS mortgage funding and a joint venture credit line. The company stated it believed access to funds and facilities remained available as of the report date.
Important facts for investors to verify
- Whether the reported improvement in orders and cancellations continues, and how backlog converts to deliveries and revenue.
- Whether concessions, lower selling prices, construction costs and inventory charges cause margins to track below prior-year levels or management’s outlook.
- Progress in reducing construction cycle times and resolving supply, labor, permitting and utility delays.
- Developments in the Florida construction-defect claims, related insurance recoveries, and the adequacy of self-insurance and warranty reserves.
- Liquidity and lender access amid financial-market uncertainty, and the effect of planned repurchases and land investment on cash and leverage.