Profitability eluded Los Angeles-based KB Home in the second quarter, even though its revenues increased by 73% and it delivered 39% more homes (total 1,797), the seventh quarterly jump. Meanwhile, the builder's average sale price jumped 25% year over year.
KB Home logged a $2.97-million loss. That number would have been a profit if the builder hadn’t set aside $15.9 million to repair water intrusion damage in homes it built in Central and Southwest Florida.
“We became aware in the latter part of 2012 that certain homes in these Florida communities, both attached and detached, have not been built to our standards and required repair,” CEO Jeffrey Mezger said during the company’s quarterly call with analysts, according to a transcript of the call.
“The problems involved framing, stucco, roofing, and in some instances, sealant on homes that were delivered to our customers in some instances almost 10 years ago, and which resulted in more recent water intrusion-related issues,” he said.
Mezger called the scope and scale of the problems ”quite unusual,” adding: “Our response to [the defects] reflects our commitment to customer service and taking care of our home owners.”
KB intends to get the repair money back from the subcontractors who worked on the homes. “Because we rely on our trade partners to build our homes, we also expect them to stand behind the work they do and to respond when problems arise,” Mezger said. “We fully intend to hold all responsible trade partners accountable for defective construction or materials, and we are aggressively and diligently taking action, including litigation, to recover the cost of the repairs.”
Jeff Kaminski, KB’s chief financial officer and executive vice president, said KB began assessing the defect problems late last year and the process was slower than expected. He said the $15.9 million is estimated to cover the cost of fixing the homes already identified with issues as well as houses potentially affected that they don’t know about yet.
“Repairs will continue for some time. Nonetheless, we believe this charge represents the culmination and conclusion of this issue from a financial perspective,” Kaminski said.
Teresa Burney is a senior editor at Builder.