Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended February 28, 2019.
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from [            ] to [            ].
Commission File No. 001-09195
KB HOME
(Exact name of registrant as specified in its charter)
Delaware
95-3666267
(State of incorporation)
(IRS employer identification number)
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
(Address and telephone number of principal executive offices) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
  
Smaller reporting company
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No   
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of February 28, 2019.
There were 87,134,108 shares of the registrant’s common stock, par value $1.00 per share, outstanding on February 28, 2019. The registrant’s grantor stock ownership trust held an additional 7,859,975 shares of the registrant’s common stock on that date.




KB HOME
FORM 10-Q
INDEX
 
 
Page
Number
 
 
 
 
 
 
Consolidated Statements of Operations -
Three Months Ended February 28, 2019 and 2018
 
 
Consolidated Balance Sheets -
February 28, 2019 and November 30, 2018
 
 
Consolidated Statements of Cash Flows -
Three Months Ended February 28, 2019 and 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I.    FINANCIAL INFORMATION
Item 1.
Financial Statements

KB HOME
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts – Unaudited)
 

 
 
Three Months Ended February 28,
 
 
2019
 
2018
Total revenues
 
$
811,483

 
$
871,623

Homebuilding:
 
 
 
 
Revenues
 
$
808,788

 
$
869,205

Construction and land costs
 
(670,855
)
 
(729,478
)
Selling, general and administrative expenses
 
(106,594
)
 
(95,724
)
Operating income
 
31,339

 
44,003

Interest income
 
1,105

 
1,003

Equity in loss of unconsolidated joint ventures
 
(406
)
 
(845
)
Homebuilding pretax income
 
32,038

 
44,161

Financial services:
 
 
 
 
Revenues
 
2,695

 
2,418

Expenses
 
(1,024
)
 
(953
)
Equity in income of unconsolidated joint ventures
 
802

 
419

Financial services pretax income
 
2,473

 
1,884

Total pretax income
 
34,511

 
46,045

Income tax expense
 
(4,500
)
 
(117,300
)
Net income (loss)
 
$
30,011

 
$
(71,255
)
Earnings (loss) per share:
 
 
 
 
Basic
 
$
.34

 
$
(.82
)
Diluted
 
$
.31

 
$
(.82
)
Weighted average shares outstanding:
 
 
 
 
Basic
 
86,972

 
87,155

Diluted
 
96,962

 
87,155

Cash dividends declared per common share
 
$
.025

 
$
.025

See accompanying notes.

3


KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands – Unaudited)
 

 
February 28,
2019
 
November 30,
2018
Assets
 
 
 
Homebuilding:
 
 
 
Cash and cash equivalents
$
511,690

 
$
574,359

Receivables
313,609

 
292,830

Inventories
3,683,763

 
3,582,839

Investments in unconsolidated joint ventures
57,134

 
61,960

Property and equipment, net
55,330

 
24,283

Deferred tax assets, net
433,295

 
441,820

Other assets
89,560

 
83,100

 
5,144,381

 
5,061,191

Financial services
29,275

 
12,380

Total assets
$
5,173,656

 
$
5,073,571

 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Homebuilding:
 
 
 
Accounts payable
$
209,015

 
$
258,045

Accrued expenses and other liabilities
631,381

 
666,268

Notes payable
2,203,589

 
2,060,263

 
3,043,985

 
2,984,576

Financial services
1,174

 
1,495

Stockholders’ equity:
 
 
 
Common stock
119,258

 
119,196

Paid-in capital
755,341

 
753,570

Retained earnings
1,936,523

 
1,897,168

Accumulated other comprehensive loss
(9,565
)
 
(9,565
)
Grantor stock ownership trust, at cost
(85,246
)
 
(88,472
)
Treasury stock, at cost
(587,814
)
 
(584,397
)
Total stockholders’ equity
2,128,497

 
2,087,500

Total liabilities and stockholders’ equity
$
5,173,656

 
$
5,073,571

See accompanying notes.

4


KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands – Unaudited)
 
 
Three Months Ended February 28,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
30,011

 
$
(71,255
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Equity in (income) loss of unconsolidated joint ventures
(396
)
 
426

Distributions of earnings from unconsolidated joint ventures
2,400

 
1,300

Amortization of discounts, premiums and issuance costs
1,468

 
1,552

Depreciation and amortization
6,446

 
628

Deferred income taxes
4,501

 
117,068

Stock-based compensation
4,152

 
3,829

Inventory impairments and land option contract abandonments
3,555

 
4,985

Changes in assets and liabilities:
 
 
 
Receivables
(19,495
)
 
(6,024
)
Inventories
(154,083
)
 
(135,311
)
Accounts payable, accrued expenses and other liabilities
(70,057
)
 
(54,016
)
Other, net
(6,712
)
 
(4,862
)
Net cash used in operating activities
(198,210
)
 
(141,680
)
Cash flows from investing activities:
 
 
 
Contributions to unconsolidated joint ventures
(2,527
)
 
(8,025
)
Return of investments in unconsolidated joint ventures
5,001

 
1,099

Proceeds from sale of building
5,804

 

Purchases of property and equipment, net
(10,025
)
 
(1,924
)
Net cash used in investing activities
(1,747
)
 
(8,850
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt
405,250

 

Payment of debt issuance costs
(5,209
)
 

Repayment of senior notes
(230,000
)
 

Borrowings under revolving credit facility
140,000

 

Repayments under revolving credit facility
(140,000
)
 

Payments on mortgages and land contracts due to land sellers and other loans
(28,020
)
 
(3,362
)
Issuance of common stock under employee stock plans
832

 
2,946

Tax payments associated with stock-based compensation awards
(3,342
)
 
(6,787
)
Payments of cash dividends
(2,266
)
 
(2,322
)
Net cash provided by (used in) financing activities
137,245

 
(9,525
)
Net decrease in cash and cash equivalents
(62,712
)
 
(160,055
)
Cash and cash equivalents at beginning of period
575,119

 
720,861

Cash and cash equivalents at end of period
$
512,407

 
$
560,806

See accompanying notes.

5




KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted.
In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly our consolidated financial position as of February 28, 2019, the results of our consolidated operations for the three months ended February 28, 2019 and 2018, and our consolidated cash flows for the three months ended February 28, 2019 and 2018. The results of our consolidated operations for the three months ended February 28, 2019 are not necessarily indicative of the results to be expected for the full year due to seasonal variations in operating results and other factors. The consolidated balance sheet at November 30, 2018 has been taken from the audited consolidated financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended November 30, 2018, which are contained in our Annual Report on Form 10-K for that period.
Unless the context indicates otherwise, the terms “we,” “our,” and “us” used in this report refer to KB Home, a Delaware corporation, and its subsidiaries.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents. We consider all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents. Our cash equivalents totaled $367.3 million at February 28, 2019 and $385.2 million at November 30, 2018. At February 28, 2019 and November 30, 2018, the majority of our cash and cash equivalents was invested in interest-bearing bank deposit accounts.
Comprehensive Income (Loss). Our comprehensive income was $30.0 million for the three months ended February 28, 2019. For the three months ended February 28, 2018, our comprehensive loss was $71.3 million. Our comprehensive income (loss) for each of the three-month periods ended February 28, 2019 and 2018 was equal to our net income (loss) for the respective periods.
Adoption of New Accounting Pronouncement. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue guidance in Accounting Standards Codification Topic 605, “Revenue Recognition,” and most industry-specific revenue and cost guidance in the accounting standards codification, including some cost guidance related to construction-type and production-type contracts. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
On December 1, 2018, we adopted ASU 2014-09 and its related amendments (collectively, “ASC 606”), using the modified retrospective method applied to contracts that were not completed as of the adoption date. Results for reporting periods beginning December 1, 2018 and after are presented under ASC 606, while results for prior reporting periods have not been adjusted and continue to be presented under the accounting guidance in effect for those periods. We recorded the following cumulative effect adjustment to increase beginning retained earnings as of December 1, 2018 (in thousands):

6


Balance Sheet
 
Balance at November 30, 2018
 
Adjustments due to ASC 606
 
Balance at December 1, 2018
Assets
 
 
 
 
 
 
Homebuilding:
 
 
 
 
 
 
Inventories
 
$
3,582,839

 
$
(35,288
)
 
$
3,547,551

Deferred tax assets, net
 
441,820

 
(4,024
)
 
437,796

Property and equipment, net
 
24,283

 
31,194

 
55,477

Financial services
 
12,380

 
19,728

 
32,108

Stockholders’ equity:
 
 
 
 
 
 
Retained earnings
 
1,897,168

 
11,610

 
1,908,778

Within our homebuilding operations, ASC 606 impacts the classification and timing of recognition in our consolidated financial statements of certain community sales office and other marketing- and model home-related costs, which we previously capitalized to inventories and amortized through construction and land costs with each home delivered in a community. With our adoption of ASC 606, these costs are capitalized to property and equipment and depreciated to selling, general and administrative expenses, or expensed to selling, general and administrative expenses as incurred. Upon adopting ASC 606, we reclassified these community sales office and other marketing- and model home-related costs and related accumulated amortization from inventories to either property and equipment, net or retained earnings in our consolidated balance sheet. Forfeited deposits related to cancelled home sale and land sale contracts, which were previously reflected as other income within selling, general and administrative expenses, are included in homebuilding revenues under ASC 606.
Within our financial services operations, ASC 606 impacts the timing of recognition in our consolidated financial statements of insurance commissions for insurance policy renewals. We previously recognized such insurance commissions as revenue when policies were renewed. With our adoption of ASC 606, insurance commissions for future policy renewals are estimated and recognized as revenue when the insurance carrier issues an initial insurance policy to our homebuyer, which generally occurs at the time each applicable home sale is closed. Upon adopting ASC 606, we recognized contract assets for the estimated future renewal commissions related to existing insurance policies as of December 1, 2018.
There were no significant changes to our business processes or internal control over financial reporting as a result of adopting ASC 606.
The impacts of adopting ASC 606 on our consolidated statement of operations for the three months ended February 28, 2019 and consolidated balance sheet as of February 28, 2019 were as follows (in thousands, except per share amounts):
 
 
Three Months Ended February 28, 2019
Statement of Operations
 
As Reported
 
Amounts without the Adoption of ASC 606
 
Effect of Change
Higher/(Lower)
Homebuilding:
 
 
 
 
 
 
Revenues
 
$
808,788

 
$
808,155

 
$
633

Construction and land costs
 
(670,855
)
 
(676,115
)
 
(5,260
)
Selling, general and administrative expenses
 
(106,594
)
 
(99,281
)
 
7,313

Operating income
 
31,339

 
32,759

 
(1,420
)
Financial services:
 
 
 
 
 
 
Revenues
 
2,695

 
2,590

 
105

Total pretax income
 
34,511

 
35,826

 
(1,315
)
Income tax expense
 
(4,500
)
 
(4,800
)
 
(300
)
Net income
 
30,011

 
31,026

 
(1,015
)
Diluted earnings per share
 
.31

 
.32

 
(.01
)

7


 
 
As of February 28, 2019
Balance Sheet
 
As Reported
 
Amounts without the Adoption of ASC 606
 
Effect of Change
Higher/(Lower)
Assets
 
 
 
 
 
 
Homebuilding:
 
 
 
 
 
 
Inventories
 
$
3,683,763

 
$
3,722,475

 
$
(38,712
)
Deferred tax assets, net
 
433,295

 
437,019

 
(3,724
)
Property and equipment, net
 
55,330

 
22,132

 
33,198

Financial services
 
29,275

 
9,442

 
19,833

Stockholders’ equity:
 
 
 
 
 
 
Retained earnings
 
1,936,523

 
1,925,928

 
10,595

As a result of our adoption of ASC 606, we updated our significant accounting policies as follows:
Homebuilding Revenues. We apply the following steps in determining the timing and amount of revenue to recognize: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, if applicable; and (5) recognize revenue when (or as) we satisfy a performance obligation.
Our home sale transactions are made pursuant to contracts under which we typically have a single performance obligation to deliver a completed home to the homebuyer when closing conditions are met. Revenues from home sales are recognized when we have satisfied the performance obligation within the sales contract, which is generally when title to and possession of the home and the risks and rewards of ownership are transferred to the homebuyer on the closing date. Under our home sale contracts, we typically receive an initial cash deposit from the homebuyer at the time the sales contract is executed and receive the remaining consideration to which we are entitled, through a third-party escrow agent, at closing. Customer deposits related to sold but undelivered homes, totaled $20.1 million and $19.5 million at February 28, 2019 and November 30, 2018, respectively, and are included in accrued expenses and other liabilities.
Concurrent with the recognition of revenues in our consolidated statements of operations, sales incentives in the form of price concessions on the selling price of a home are recorded as a reduction of revenues, while the costs of sales incentives in the form of free or discounted products or services to homebuyers, including option upgrades and closing cost allowances used to cover a portion of the fees and costs charged to a homebuyer, are reflected as construction and land costs. Cash proceeds from home sale closings held by third-party escrow agents for our benefit, typically for less than five days, are considered deposits in-transit and classified as cash.
Land sale transactions are made pursuant to contracts under which we typically have a performance obligation(s) to deliver specified land parcels to the buyer when closing conditions are met. Revenues from land sales are recognized when we have satisfied the performance obligation(s) within the sales contract, which is generally when title to and possession of the land and the risks and rewards of ownership are transferred to the land buyer on the closing date. Under our land sale contracts, we typically receive an initial cash deposit from the buyer at the time the contract is executed and receive the remaining consideration to which we are entitled, through a third-party escrow agent, at closing. In limited circumstances where we provide financing to the land buyer, we determine that collectibility of the receivable is reasonably assured before we recognize revenue.
In instances where we have a material performance obligation(s) under a land sale contract to perform land development work after the closing date, a portion of the transaction price is allocated to such performance obligation(s) and is recognized as revenue when and as such obligation(s) is (are) completed. While the payment terms for such a performance obligation(s) vary, the final payment is generally received when we have completed our land development work and it has been accepted by the land buyer.
Homebuilding revenues include forfeited deposits, which occur when home sale or land sale contracts that include a nonrefundable deposit are cancelled. Revenues from forfeited deposits are immaterial.
Within our homebuilding operations, substantially all of our contracts with customers and the related performance obligations have an original expected duration of one year or less.

8


Community Sales Office and Other Marketing- and Model Home-Related Costs. Community sales office and other marketing- and model home-related costs are either recorded as inventories, capitalized as property and equipment, or expensed to selling, general and administrative expenses as incurred. Costs related to the construction of a model home, inclusive of upgrades that will be sold as part of the home, are recorded as inventories and recognized as construction and land costs when the model home is delivered to a homebuyer. Costs to furnish and ready a model home or on-site community sales facility that will not be sold as part of the model home, such as model furnishings, community sales office and model complex grounds, sales office construction and sales office furniture and equipment, are capitalized as property and equipment under “model furnishings and sales office improvements.” Model furnishings and sales office improvements are depreciated to selling, general and administrative expenses over their estimated useful lives. Other costs incurred related to the marketing of a community, removing the on-site community sales facility and readying a completed (model) home for sale are expensed to selling, general and administrative expenses as incurred.
Financial Services Revenues. Our financial services reporting segment generates revenues primarily from title services and insurance commissions. Revenues from title services are recognized when policies are issued, which generally occurs at the time each applicable home sale is closed. We receive insurance commissions from various third-party insurance carriers for arranging for the carriers to provide homeowner and other insurance policies for our homebuyers that elect to obtain such coverage. In addition, each time a homebuyer renews their insurance policy with the insurance carrier, we receive a renewal commission. Revenues from insurance commissions are recognized when the insurance carrier issues an initial insurance policy to our homebuyer, which generally occurs at the time each applicable home sale is closed. As our performance obligations for policy renewal commissions are satisfied upon issuance of the initial insurance policy, insurance commissions for renewals are considered variable consideration under ASC 606. Accordingly, we estimate the probable future renewal commissions when an initial policy is issued and record a corresponding contract asset and insurance commission revenues. We estimate the amount of variable consideration based on historical renewal trends and constrain the estimate such that it is probable that a significant reversal of cumulative recognized revenue will not occur. We also consider the likelihood and magnitude of a potential future reversal of revenue and update our assessment at the end of each reporting period. The contract assets for estimated future renewal commissions are included in other assets within financial services and totaled $19.8 million at February 28, 2019. Contract assets totaling $19.7 million were recognized on December 1, 2018 in connection with the adoption of ASC 606.
Disaggregation of Revenues. Our homebuilding operations accounted for 99.7% of our total revenues for the year ended November 30, 2018, with most of those revenues generated from home sale contracts with customers. Our financial services operations accounted for the remaining .3% of total revenues for the year ended November 30, 2018. Due to the nature of our revenue-generating activities, we believe the disaggregation of revenues as reported in our consolidated statement of operations, and as disclosed by homebuilding reporting segment in Note 2 – Segment Information and for our financial services reporting segment in Note 3 – Financial Services, fairly depict how the nature, amount, timing and uncertainty of cash flows are affected by economic factors.
Recent Accounting Pronouncements Not Yet Adopted. In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under this guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Lessor accounting remains substantially similar to current GAAP. In addition, disclosures of leasing activities are to be expanded to include qualitative along with specific quantitative information. ASU 2016-02 is effective for us beginning December 1, 2019 (with early adoption permitted). Originally, entities were required to adopt ASU 2016-02 using a modified retrospective transition method. However, in July 2018, the FASB issued Accounting Standards Update No. 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), which provides entities with an additional transition method. Under ASU 2018-11, entities have the option of recognizing the cumulative effect of applying the new standard as an adjustment to beginning retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. In July 2018, the FASB also issued Accounting Standards Update No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”), which clarifies how to apply certain aspects of ASU 2016-02. We expect to adopt ASU 2016-02, ASU 2018-10 and ASU 2018-11 beginning December 1, 2019. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In February 2018, the FASB issued Accounting Standards Update No. 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“TCJA”), and requires certain disclosures about stranded tax effects. ASU 2018-02 is effective for us beginning December 1, 2019 (with early adoption permitted), and shall be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the corporate

9


income tax rate in the TCJA is recognized. We expect to adopt ASU 2018-02 beginning December 1, 2019. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
Reclassifications. Certain amounts in our consolidated financial statements of prior periods have been reclassified to conform to the current period presentation.
2.
Segment Information
We have identified five operating reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment. As of February 28, 2019, our homebuilding reporting segments conducted ongoing operations in the following states:
West Coast: California and Washington
Southwest: Arizona and Nevada
Central: Colorado and Texas
Southeast: Florida and North Carolina
Our homebuilding reporting segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to first-time, first move-up and active adult homebuyers. Our homebuilding operations generate most of their revenues from the delivery of completed homes to homebuyers. They also earn revenues from the sale of land.
Our homebuilding reporting segments were identified based primarily on similarities in economic and geographic characteristics, product types, regulatory environments, methods used to sell and construct homes and land acquisition characteristics. Management evaluates segment performance primarily based on segment pretax results.
Our financial services reporting segment offers property and casualty insurance and, in certain instances, earthquake, flood and personal property insurance to our homebuyers in the same markets as our homebuilding reporting segments, and provides title services in the majority of our markets located within our Central and Southeast homebuilding reporting segments. This segment earns revenues primarily from insurance commissions and from the provision of title services.
We offer mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers indirectly through KBHS Home Loans, LLC (“KBHS”), an unconsolidated joint venture we formed with Stearns Lending, LLC (“Stearns”). We and Stearns each have a 50.0% ownership interest, with Stearns providing management oversight of KBHS’ operations. The financial services reporting segment is separately reported in our consolidated financial statements.
Corporate and other is a non-operating segment that develops and oversees the implementation of company-wide strategic initiatives and provides support to our reporting segments by centralizing certain administrative functions. Corporate management is responsible for, among other things, evaluating and selecting the geographic markets in which we operate, consistent with our overall business strategy; allocating capital resources to markets for land acquisition and development activities; making major personnel decisions related to employee compensation and benefits; and monitoring the financial and operational performance of our divisions. Corporate and other includes general and administrative expenses related to operating our corporate headquarters. A portion of the expenses incurred by Corporate and other is allocated to our homebuilding reporting segments.
Our reporting segments follow the same accounting policies used for our consolidated financial statements. The results of each reporting segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented, nor are they indicative of the results to be expected in future periods.

10


The following tables present financial information relating to our homebuilding reporting segments (in thousands):
 
 
Three Months Ended February 28,
 
 
2019
 
2018
Revenues:
 
 
 
 
West Coast
 
$
305,810

 
$
386,652

Southwest
 
157,656

 
151,899

Central
 
241,592

 
244,181

Southeast
 
103,730

 
86,473

Total
 
$
808,788

 
$
869,205

 
 
 
 
 
Pretax income (loss):
 
 
 
 
West Coast
 
$
17,916

 
$
31,593

Southwest
 
22,072

 
14,977

Central
 
18,583

 
19,095

Southeast
 
(545
)
 
1,320

Corporate and other
 
(25,988
)
 
(22,824
)
Total
 
$
32,038

 
$
44,161

Inventory impairment charges:
 
 
 
 
West Coast
 
$
3,196

 
$
4,699

Southwest
 

 

Central
 

 

Southeast
 

 

Total
 
$
3,196

 
$
4,699

 
Land option contract abandonment charges:
 
 
 
 
West Coast
 
$
55

 
$
208

Southwest
 
59

 

Central
 
245

 
78

Southeast
 

 

Total
 
$
359

 
$
286

 
February 28,
2019
 
November 30,
2018
Inventories:
 
 
 
Homes under construction
 
 
 
West Coast
$
560,514

 
$
514,099

Southwest
170,760

 
173,036

Central
319,931

 
312,366

Southeast
138,705

 
125,651

Subtotal
1,189,910

 
1,125,152

 
 
 
 

11


 
February 28,
2019
 
November 30,
2018
Land under development
 
 
 
West Coast
1,053,533

 
1,059,432

Southwest
426,106

 
404,201

Central
561,979

 
543,472

Southeast
209,351

 
212,831

Subtotal
2,250,969

 
2,219,936

 
 
 
 
Land held for future development or sale
 
 
 
West Coast
159,644

 
154,462

Southwest
30,761

 
21,137

Central
7,835

 
9,346

Southeast
44,644

 
52,806

Subtotal
242,884

 
237,751

Total
$
3,683,763

 
$
3,582,839

Assets:
 
 
 
West Coast
$
1,983,539

 
$
1,880,516

Southwest
672,264

 
631,509

Central
1,021,616

 
1,017,490

Southeast
442,982

 
463,224

Corporate and other
1,023,980

 
1,068,452

Total
$
5,144,381

 
$
5,061,191

3.
Financial Services
The following tables present financial information relating to our financial services reporting segment (in thousands):
 
 
Three Months Ended February 28,
 
 
2019
 
2018
Revenues
 
 
 
 
Insurance commissions
 
$
1,472

 
$
1,352

Title services
 
1,217

 
1,066

Interest income
 
6

 

Total
 
2,695

 
2,418

 
 
 
 
 
Expenses
 
 
 
 
General and administrative
 
(1,024
)
 
(953
)
Operating income
 
1,671

 
1,465

Equity in income of unconsolidated joint ventures
 
802

 
419

Pretax income
 
$
2,473

 
$
1,884


12


 
February 28,
2019
 
November 30,
2018
Assets
 
 
 
Cash and cash equivalents
$
717

 
$
760

Receivables
1,602

 
2,885

Investments in unconsolidated joint ventures
6,995

 
8,594

Other assets (a)
19,961

 
141

Total assets
$
29,275

 
$
12,380

Liabilities
 
 
 
Accounts payable and accrued expenses
$
1,174

 
$
1,495

Total liabilities
$
1,174

 
$
1,495

(a)
Other assets at February 28, 2019 included $19.8 million of contract assets for estimated future renewal commissions due to our adoption of ASC 606 effective December 1, 2018, as described in Note 1 – Basis of Presentation and Significant Accounting Policies.
4.
Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share were calculated as follows (in thousands, except per share amounts):
 
 
Three Months Ended February 28,
 
 
2019
 
2018
Numerator:
 
 
 
 
Net income (loss)
 
$
30,011

 
$
(71,255
)
Less: Distributed earnings allocated to nonvested restricted stock
 
(14
)
 

Less: Undistributed earnings allocated to nonvested restricted stock
 
(176
)
 

Numerator for basic earnings (loss) per share
 
29,821

 
(71,255
)
Effect of dilutive securities:
 
 
 
 
Interest expense and amortization of debt issuance costs associated with convertible senior notes, net of taxes
 
541

 

Add: Undistributed earnings allocated to nonvested restricted stock
 
176

 

Less: Undistributed earnings reallocated to nonvested restricted stock
 
(158
)
 

Numerator for diluted earnings (loss) per share
 
$
30,380

 
$
(71,255
)
 
 
 
 
 
Denominator:
 
 
 
 
Weighted average shares outstanding — basic
 
86,972

 
87,155

Effect of dilutive securities:
 
 
 
 
Share-based payments
 
4,202

 

Convertible senior notes
 
5,788

 

Weighted average shares outstanding — diluted
 
96,962

 
87,155

Basic earnings (loss) per share
 
$
.34

 
$
(.82
)
Diluted earnings (loss) per share
 
$
.31

 
$
(.82
)
We compute earnings (loss) per share using the two-class method, which is an allocation of earnings (losses) between the holders of common stock and a company’s participating security holders. Our outstanding nonvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities at February 28, 2019 or 2018.

13


For the three-month period ended February 28, 2019, outstanding stock options to purchase .8 million shares of our common stock were excluded from the diluted earnings per share calculation because the effect of their inclusion would be antidilutive. The diluted earnings per share calculation for the three months ended February 28, 2019 included the dilutive effect of the $230.0 million in aggregate principal amount of our 1.375% convertible senior notes due 2019 (“1.375% Convertible Senior Notes due 2019”) based on the number of days they were outstanding during the period. We repaid the notes at their February 1, 2019 maturity.
For the three months ended February 28, 2018, all outstanding stock options, contingently issuable shares associated with outstanding performance-based restricted stock units (each, a “PSU”), and the impact of our 1.375% Convertible Senior Notes due 2019 were excluded from the diluted loss per share calculation because the effect of their inclusion would have been antidilutive. Contingently issuable shares associated with outstanding PSUs were not included in the basic earnings per share calculations for the periods presented as the applicable vesting conditions had not been satisfied.
5.
Receivables
Receivables consisted of the following (in thousands):
 
February 28,
2019
 
November 30,
2018
Recoveries related to self-insurance and other legal claims
$
149,719

 
$
138,261

Due from utility companies, improvement districts and municipalities
115,250

 
113,434

Refundable deposits and bonds
13,734

 
14,115

Recoveries related to warranty and other claims
4,111

 
4,750

Other
42,086

 
33,775

Subtotal
324,900

 
304,335

Allowance for doubtful accounts
(11,291
)
 
(11,505
)
Total
$
313,609

 
$
292,830

6.
Inventories
Inventories consisted of the following (in thousands):
 
February 28,
2019
 
November 30,
2018
Homes under construction
$
1,189,910

 
$
1,125,152

Land under development
2,250,969

 
2,219,936

Land held for future development or sale (a)
242,884

 
237,751

Total
$
3,683,763

 
$
3,582,839

(a)    Land held for sale totaled $27.8 million at February 28, 2019 and $9.8 million at November 30, 2018.
Interest is capitalized to inventories while the related communities or land parcels are being actively developed and until homes are completed or the land is available for immediate sale. Capitalized interest is amortized to construction and land costs as the related inventories are delivered to homebuyers or land buyers (as applicable). For land held for future development or sale, applicable interest is expensed as incurred.

14


Our interest costs were as follows (in thousands):
 
 
Three Months Ended February 28,
 
 
2019
 
2018
Capitalized interest at beginning of period
 
$
209,129

 
$
262,191

Interest incurred
 
34,788

 
39,944

Interest amortized to construction and land costs (a)
 
(30,547
)
 
(42,350
)
Capitalized interest at end of period (b)
 
$
213,370

 
$
259,785

(a)
Interest amortized to construction and land costs for the three months ended February 28, 2019 and 2018 included $.6 million and $1.0 million, respectively, related to land sales during the periods.
(b)
Capitalized interest amounts reflect the gross amount of capitalized interest, as inventory impairment charges recognized, if any, are not generally allocated to specific components of inventory.
7.
Inventory Impairments and Land Option Contract Abandonments
Each community or land parcel in our owned inventory is assessed on a quarterly basis to determine if indicators of potential impairment exist. We record an inventory impairment charge on a community or land parcel that is active or held for future development when indicators of potential impairment exist and the carrying value of the real estate asset is greater than the undiscounted future net cash flows the asset is expected to generate. These real estate assets are written down to fair value, which is primarily determined based on the estimated future net cash flows discounted for inherent risk associated with each such asset, or other valuation techniques. We record an inventory impairment charge on land held for sale when the carrying value of a land parcel is greater than its fair value. These real estate assets are written down to fair value, less associated costs to sell. The estimated fair values of such assets are generally based on bona fide letters of intent from outside parties, executed sales contracts, broker quotes or similar information.
We evaluated 18 and 29 communities or land parcels for recoverability during the three months ended February 28, 2019 and 2018, respectively. The carrying value of those communities or land parcels evaluated during the three months ended February 28, 2019 and 2018 was $96.2 million and $200.1 million, respectively. The communities or land parcels evaluated during the three months ended February 28, 2019 and 2018 included certain communities or land parcels previously held for future development that were reactivated as part of our efforts to improve our asset efficiency under our Returns-Focused Growth Plan.
Based on the results of our evaluations, we recognized inventory impairment charges of $3.2 million for the three months ended February 28, 2019 and $4.7 million for the three months ended February 28, 2018. The impairment charges for the three-month periods ended February 28, 2019 and 2018 reflected our decisions to make changes in our operational strategies aimed at more quickly monetizing our investment in certain communities by accelerating the overall pace for selling, building and delivering homes on land previously held for future development.
The following table summarizes significant quantitative unobservable inputs we utilized in our fair value measurements with respect to the impaired communities written down to fair value during the periods presented:
 
 
Three Months Ended February 28,
Unobservable Input
 
2019
 
2018
Average selling price
 
$1,045,400
 
$774,100
Deliveries per month
 
1
 
3
Discount rate
 
17%
 
18%
As of February 28, 2019, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $159.1 million, representing 22 communities and various other land parcels. As of November 30, 2018, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $156.1 million, representing 22 communities and various other land parcels.
Our inventory controlled under land option contracts and other similar contracts is assessed on a quarterly basis to determine whether it continues to meet our investment return standards. When a decision is made not to exercise certain land option contracts and other similar contracts due to market conditions and/or changes in our marketing strategy, we write off the

15


related inventory costs, including non-refundable deposits and unrecoverable pre-acquisition costs. Based on the results of our assessments, we recognized land option contract abandonment charges of $.4 million and $.3 million for the three-month periods ended February 28, 2019 and 2018, respectively.
Due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, particularly as to land held for future development, it is possible that actual results could differ substantially from those estimated.
8.
Variable Interest Entities
Unconsolidated Joint Ventures. We participate in joint ventures from time to time that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. Our investments in these joint ventures may create a variable interest in a variable interest entity (“VIE”), depending on the contractual terms of the arrangement. We analyze our joint ventures under the variable interest model to determine whether they are VIEs and, if so, whether we are the primary beneficiary. Based on our analyses, we determined that one of our joint ventures at February 28, 2019 and November 30, 2018 was a VIE, but we were not the primary beneficiary of the VIE. All of our joint ventures at February 28, 2019 and November 30, 2018 were unconsolidated and accounted for under the equity method because we did not have a controlling financial interest.
Land Option Contracts and Other Similar Contracts. In the ordinary course of our business, we enter into land option contracts and other similar contracts with third parties and unconsolidated entities to acquire rights to land for the construction of homes. Under these contracts, we typically make a specified option payment or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. We analyze each of our land option contracts and other similar contracts under the variable interest model to determine whether the land seller is a VIE and, if so, whether we are the primary beneficiary. Although we do not have legal title to the underlying land, we are required to consolidate a VIE if we are the primary beneficiary. As a result of our analyses, we determined that as of February 28, 2019 and November 30, 2018, we were not the primary beneficiary of any VIEs from which we have acquired rights to land under land option contracts and other similar contracts. We perform ongoing reassessments of whether we are the primary beneficiary of a VIE.
The following table presents a summary of our interests in land option contracts and other similar contracts (in thousands):
 
February 28, 2019
 
November 30, 2018
 
Cash
Deposits
 
Aggregate
Purchase Price
 
Cash
Deposits
 
Aggregate
Purchase Price
Unconsolidated VIEs
$
22,733

 
$
758,458

 
$
26,542

 
$
784,334

Other land option contracts and other similar contracts
27,069

 
475,740

 
27,288

 
586,904

Total
$
49,802

 
$
1,234,198

 
$
53,830

 
$
1,371,238

In addition to the cash deposits presented in the table above, our exposure to loss related to our land option contracts and other similar contracts with third parties and unconsolidated entities consisted of pre-acquisition costs of $43.6 million at February 28, 2019 and $46.9 million at November 30, 2018. These pre-acquisition costs and cash deposits were included in inventories in our consolidated balance sheets.
For land option contracts and other similar contracts where the land seller entity is not required to be consolidated under the variable interest model, we consider whether such contracts should be accounted for as financing arrangements. Land option contracts and other similar contracts that may be considered financing arrangements include those we enter into with third-party land financiers or developers in conjunction with such third parties acquiring a specific land parcel(s) on our behalf, at our direction, and those with other landowners where we or our designee make improvements to the optioned land parcel(s) during the applicable option period. For these land option contracts and other similar contracts, we record the remaining purchase price of the associated land parcel(s) in inventories in our consolidated balance sheets with a corresponding financing obligation if we determine that we are effectively compelled to exercise the option to purchase the land parcel(s). In making this determination with respect to a land option contract or other similar contract, we consider the non-refundable deposit(s) we have made and any non-reimbursable expenditures we have incurred for land improvement activities or other items up to the assessment date; additional costs associated with abandoning the contract; and our commitments, if any, to incur non-reimbursable costs associated with the contract. As a result of our evaluations of land option contracts and other similar contracts for financing arrangements, we recorded inventories in our consolidated balance sheets, with a corresponding increase to accrued expenses and other liabilities, of $5.5 million at February 28, 2019 and $21.8 million at November 30, 2018.

16


9.
Investments in Unconsolidated Joint Ventures
We have investments in unconsolidated joint ventures that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. We and our unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis, according to our respective equity interests. The obligations to make capital contributions are governed by each such unconsolidated joint venture’s respective operating agreement and related governing documents. For distributions we receive from these unconsolidated joint ventures, we have elected to use the cumulative earnings approach for our consolidated statements of cash flows. Under the cumulative earnings approach, distributions up to the amount of cumulative equity in earnings recognized are treated as returns on investment within operating cash flows and those in excess of that amount are treated as returns of investment within investing cash flows.
We typically have obtained rights to acquire portions of the land held by the unconsolidated joint ventures in which we currently participate. When an unconsolidated joint venture sells land to our homebuilding operations, we defer recognition of our share of such unconsolidated joint venture’s earnings (losses) until a home sale is closed and title passes to a homebuyer, at which time we account for those earnings (losses) as a reduction (increase) to the cost of purchasing the land from the unconsolidated joint venture. We defer recognition of our share of such unconsolidated joint venture losses only to the extent profits are to be generated from the sale of the home to a homebuyer.
We share in the earnings (losses) of these unconsolidated joint ventures generally in accordance with our respective equity interests. In some instances, we recognize earnings (losses) related to our investment in an unconsolidated joint venture that differ from our equity interest in the unconsolidated joint venture. This typically arises from our deferral of the unconsolidated joint venture’s earnings (losses) from land sales to us, or other items.
The following table presents combined condensed information from the statements of operations of our unconsolidated joint ventures (in thousands):
 
 
Three Months Ended February 28,
 
 
2019
 
2018
Revenues
 
$
12,192

 
$
8,797

Construction and land costs
 
(12,220
)
 
(8,816
)
Other expense, net
 
(628
)
 
(1,372
)
Loss
 
$
(656
)
 
$
(1,391
)
The following table presents combined condensed balance sheet information for our unconsolidated joint ventures (in thousands):
 
February 28,
2019
 
November 30,
2018
Assets
 
 
 
Cash
$
16,598

 
$
18,567

Inventories
127,377

 
131,074

Other assets
446

 
530

Total assets
$
144,421

 
$
150,171

Liabilities and equity
 
 
 
Accounts payable and other liabilities
$
11,254

 
$
11,374

Notes payable (a)
22,045

 
17,956

Equity
111,122

 
120,841

Total liabilities and equity
$
144,421

 
$
150,171

(a)
As of February 28, 2019 and November 30, 2018, one of our unconsolidated joint ventures had a construction loan agreement with a third-party lender to finance its land development activities, with the outstanding debt secured by the underlying property and related project assets and non-recourse to us. All of the outstanding secured debt at February 28,

17


2019 is scheduled to mature in February 2020. None of our other unconsolidated joint ventures had outstanding debt at February 28, 2019 or November 30, 2018.
The following table presents additional information relating to our investments in unconsolidated joint ventures (dollars in thousands):
 
 
February 28,
2019
 
November 30,
2018
Number of investments in unconsolidated joint ventures
 
6

 
6

Investments in unconsolidated joint ventures
 
$
57,134

 
$
61,960

Number of unconsolidated joint venture lots controlled under land option contracts and other similar contracts
 
25

 
36

We and our partner in the unconsolidated joint venture that has the above-noted outstanding construction loan agreement at February 28, 2019 provide certain guarantees and indemnities to the lender, including a guaranty to complete the construction of improvements for the project; a guaranty against losses the lender suffers due to certain bad acts or failures to act by the unconsolidated joint venture or its partners; and an indemnity of the lender from environmental issues. Our actual responsibility under the foregoing guaranty and indemnity obligations is limited to our pro rata interest in the unconsolidated joint venture. We do not have a guaranty or any other obligation to repay or to support the value of the collateral underlying the outstanding secured debt. However, various financial and non-financial covenants apply with respect to the outstanding secured debt and the related guaranty and indemnity obligations, and a failure to comply with such covenants could result in a default and cause the lender to seek to enforce such guaranty and indemnity obligations, if and as may be applicable. As of February 28, 2019, we were in compliance with the applicable terms of our relevant covenants with respect to the construction loan agreement. We do not believe that our existing exposure under our guaranty and indemnity obligations related to the outstanding secured debt is material to our consolidated financial statements.
We are committed to purchase all 25 unconsolidated joint venture lots controlled under land option and other similar contracts at February 28, 2019 from one of our unconsolidated joint ventures. The purchase will be made in quarterly takedowns over the next year for an aggregate purchase price of $11.8 million under agreements that we entered into with the unconsolidated joint venture in 2016.
10.
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 
 
February 28,
2019
 
November 30,
2018
Computer software and equipment
 
$
22,953

 
$
20,940

Model furnishings and sales office improvements (a)
 
61,747

 

Leasehold improvements, office furniture and equipment (b)
 
15,385

 
23,491

Subtotal
 
100,085

 
44,431

Less accumulated depreciation (a)
 
(44,755
)
 
(20,148
)
Total
 
$
55,330

 
$
24,283


(a)
The balance at February 28, 2019 reflects a change in the classification of certain community sales office and marketing- and model home-related costs and related accumulated amortization from inventories to property and equipment, net due to our adoption of ASC 606 effective December 1, 2018, as described in Note 1 – Basis of Presentation and Significant Accounting Policies.

(b)
In January 2019, we completed the sale and leaseback of our office building in San Antonio, Texas. The sale generated net cash proceeds of $5.8 million and a gain of $2.2 million, which will be recognized on a straight-line basis over a 10-year lease term until our adoption of ASU 2016-02, when the remaining gain will be recognized as a transition adjustment to retained earnings.

18


11.
Other Assets
Other assets consisted of the following (in thousands):
 
February 28,
2019
 
November 30,
2018
Cash surrender value of corporate-owned life insurance contracts
$
74,649

 
$
73,721

Prepaid expenses and other
14,911

 
9,379

Total
$
89,560

 
$
83,100

12.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
 
February 28,
2019
 
November 30,
2018
Self-insurance and other litigation liabilities
$
297,361

 
$
283,651

Employee compensation and related benefits
101,444

 
148,549

Warranty liability
84,191

 
82,490

Accrued interest payable
46,498

 
31,180

Inventory-related obligations (a)
23,319

 
40,892

Customer deposits
20,122

 
19,491

Real estate and business taxes
9,529

 
16,639

Other
48,917

 
43,376

Total
$
631,381

 
$
666,268

(a)
Represents liabilities for financing arrangements discussed in Note 8 – Variable Interest Entities, as well as liabilities for fixed or determinable amounts associated with tax increment financing entity (“TIFE”) assessments. As homes are delivered, our obligation to pay the remaining TIFE assessments associated with each underlying lot is transferred to the homebuyer. As such, these assessment obligations will be paid by us only to the extent we do not deliver homes on applicable lots before the related TIFE obligations mature.
13.
Income Taxes
Income Tax Expense. Our income tax expense and effective tax rates were as follows (dollars in thousands):
 
Three Months Ended February 28,
 
2019
 
2018
Income tax expense
$
4,500

 
$
117,300

Effective tax rate
13.0
%
 
254.8
%
Our income tax expense and effective tax rate for the three months ended February 28, 2019 included the favorable effects of a $3.3 million reversal of a deferred tax asset valuation allowance and $2.0 million of excess tax benefits related to stock-based compensation, which were partly offset by $.8 million of other items.
Our income tax expense and effective tax rate for the three months ended February 28, 2018 included a non-cash charge of $111.2 million for the estimated impacts of the TCJA, which was enacted into law on December 22, 2017. Of the total charge, $107.9 million related to the accounting re-measurement of our deferred tax assets based on the reduction in the federal corporate income tax rate from 35% to 21%, effective January 1, 2018, under the TCJA. The remaining $3.3 million was due to our establishing a federal deferred tax asset valuation allowance for the sequestration of refundable alternative minimum tax (“AMT”) credits. Our income tax expense and effective tax rate for the three months ended February 28, 2018 also reflected the favorable net impacts of federal energy tax credits of $4.0 million and excess tax benefits of $2.2 million related to stock-based compensation. The federal energy tax credits for the three-month period ended February 28, 2018 resulted from legislation enacted on February 9, 2018, which among other things, extended the availability of a business tax credit for

19


building new energy efficient homes through December 31, 2017. Prior to this legislation, the tax credit expired on December 31, 2016.
Deferred Tax Asset Valuation Allowance. We evaluate our deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available positive and negative evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, our historical operating results, our expectation of future profitability, the duration of the applicable statutory carryforward periods, and conditions in the housing market and the broader economy. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible. The value of our deferred tax assets depends on applicable income tax rates.
Our deferred tax assets of $453.6 million as of February 28, 2019 and $465.4 million as of November 30, 2018 were partly offset by valuation allowances of $20.3 million and $23.6 million, respectively. During the three-month period ended February 28, 2019, we reversed the above-mentioned $3.3 million federal deferred tax asset valuation allowance due to the Internal Revenue Service’s announcement in January 2019 that refundable AMT credits will not be subject to sequestration for taxable years beginning after December 31, 2017. The deferred tax asset valuation allowances as of February 28, 2019 and November 30, 2018 were primarily related to certain state net operating losses (“NOLs”) that had not met the “more likely than not” realization standard at those dates. Based on our evaluation of our deferred tax assets as of February 28, 2019, we determined that most of our deferred tax assets would be realized. Therefore, other than the $3.3 million reversal discussed above, no adjustments to our deferred tax valuation allowance were needed for the three months ended February 28, 2019.
We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to our deferred tax assets. The accounting for deferred tax assets is based upon estimates of future results. Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated financial statements. Changes in existing federal and state tax laws and corporate income tax rates could also affect actual tax results and the realization of deferred tax assets over time.
Unrecognized Tax Benefits. As of February 28, 2019 and November 30, 2018, we had no gross unrecognized tax benefits (including interest and penalties). The fiscal years ending 2015 and later remain open to federal examinations, while 2014 and later remain open to state examinations.
14.
Notes Payable
Notes payable consisted of the following (in thousands):
 
February 28,
2019
 
November 30,
2018
Mortgages and land contracts due to land sellers and other loans
$
12,018

 
$
40,038

4.75% Senior notes due May 15, 2019
399,764

 
399,483

8.00% Senior notes due March 15, 2020
348,199

 
347,790

7.00% Senior notes due December 15, 2021
447,554

 
447,359

7.50% Senior notes due September 15, 2022
347,861

 
347,731

7.625% Senior notes due May 15, 2023
352,081

 
248,074

6.875% Senior notes due June 15, 2027
296,112

 

1.375% Convertible senior notes due February 1, 2019

 
229,788

Total
$
2,203,589

 
$
2,060,263

The carrying amounts of our senior notes listed above are net of unamortized debt issuance costs, premiums and discounts, which totaled $8.4 million at February 28, 2019 and $9.8 million at November 30, 2018.
Unsecured Revolving Credit Facility. We have a $500.0 million unsecured revolving credit facility with various banks (“Credit Facility”) that will mature on July 27, 2021. The Credit Facility contains an uncommitted accordion feature under which the aggregate principal amount of available loans can be increased to a maximum of $600.0 million under certain conditions, including obtaining additional bank commitments. The Credit Facility also contains a sublimit of $250.0 million for the issuance of letters of credit. Interest on amounts borrowed under the Credit Facility is payable at least quarterly in arrears at

20


a rate based on either a Eurodollar or a base rate, plus a spread that depends on our consolidated leverage ratio (“Leverage Ratio”), as defined under the Credit Facility. The Credit Facility also requires the payment of a commitment fee at a per annum rate ranging from .30% to .45% of the unused commitment, based on our Leverage Ratio. Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants relating to our consolidated tangible net worth, Leverage Ratio, and either a consolidated interest coverage ratio (“Interest Coverage Ratio”) or minimum level of liquidity, each as defined therein. The amount of the Credit Facility available for cash borrowings or the issuance of letters of credit depends on the total cash borrowings and letters of credit outstanding under the Credit Facility and the maximum available amount under the terms of the Credit Facility. As of February 28, 2019, we had no cash borrowings and $33.1 million of letters of credit outstanding under the Credit Facility. Therefore, as of February 28, 2019, we had $466.9 million available for cash borrowings under the Credit Facility, with up to $216.9 million of that amount available for the issuance of letters of credit.
Letter of Credit Facilities. On February 13, 2019, we entered into a new unsecured letter of credit agreement with a financial institution (“New LOC Facility”). Under the New LOC Facility, which expires on February 13, 2022, we may issue up to $50.0 million of letters of credit. We maintain the New LOC Facility and a cash-collateralized letter of credit facility (together, the “LOC Facilities”) to obtain letters of credit from time to time in the ordinary course of operating our business. As of February 28, 2019, we had $.3 million letters of credit outstanding under the LOC Facilities. We had no letters of credit outstanding under the LOC Facilities at November 30, 2018.
Mortgages and Land Contracts Due to Land Sellers and Other Loans. As of February 28, 2019, inventories having a carrying value of $138.2 million were pledged to collateralize mortgages and land contracts due to land sellers and other loans.
Shelf Registration. We have an automatically effective universal shelf registration statement that was filed with the SEC on July 14, 2017 (“2017 Shelf Registration”). Issuances of securities under our 2017 Shelf Registration require the filing of a prospectus supplement identifying the amount and terms of the securities to be issued. Our ability to issue securities is subject to market conditions and other factors impacting our borrowing capacity.
Senior Notes. On February 1, 2019, we repaid the entire $230.0 million in aggregate principal amount of our 1.375% Convertible Senior Notes due 2019 at their maturity.
On February 20, 2019, pursuant to the 2017 Shelf Registration, we completed concurrent public offerings of $300.0 million in aggregate principal amount of 6.875% senior notes due 2027 (“6.875% Senior Notes due 2027”) at 100.000% of their aggregate principal amount, and an additional $100.0 million in aggregate principal amount of our existing series of 7.625% senior notes due 2023 (“7.625% Senior Notes due 2023”) at 105.250% of their aggregate principal amount plus accrued interest from November 15, 2018 (the last date on which interest was paid on the existing 2023 senior notes) to the date of delivery. Net proceeds from these offerings totaled $400.0 million, after deducting the underwriting discount and our expenses relating to the offerings, and were applied towards the optional redemption of the entire $400.0 million in aggregate principal amount of our 4.75% senior notes due 2019 (“4.75% Senior Notes due 2019”) before their May 15, 2019 maturity date, which redemption we announced on February 5, 2019 and completed on March 8, 2019.
All of our senior notes outstanding at February 28, 2019 and November 30, 2018 represent senior unsecured obligations that are guaranteed on an unsecured basis by certain of our subsidiaries that guarantee our obligations under the Credit Facility and rank equally in right of payment with all of our other unsecured and unsubordinated indebtedness. Interest on each of these senior notes is payable semi-annually.
The indenture governing our senior notes does not contain any financial covenants. Subject to specified exceptions, the indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale and leaseback transactions involving property above a certain specified value. In addition, the indenture contains certain limitations related to mergers, consolidations, and sales of assets.
As of February 28, 2019, we were in compliance with the applicable terms of all our covenants and other requirements under the Credit Facility, the senior notes, the indenture, and the mortgages and land contracts due to land sellers and other loans. Our ability to access the Credit Facility for cash borrowings and letters of credit and our ability to secure future debt financing depend, in part, on our ability to remain in such compliance.
As of February 28, 2019, principal payments on senior notes, mortgages and land contracts due to land sellers and other loans are due as follows: 2019 – $412.0 million; 2020 – $350.0 million; 2021 – $0; 2022 – $800.0 million; 2023 – $350.0 million; and thereafter – $300.0 million.

21


15.
Fair Value Disclosures
Fair value measurements of assets and liabilities are categorized based on the following hierarchy:
Level 1
 
Fair value determined based on quoted prices in active markets for identical assets or liabilities.
Level 2
 
Fair value determined using significant observable inputs, such as quoted prices for similar assets or liabilities or quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data, by correlation or other means.
Level 3
 
Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques.
Fair value measurements are used for inventories on a nonrecurring basis when events and circumstances indicate that their carrying value is not recoverable. The following table presents the fair value hierarchy, pre-impairment value, inventory impairment charges and fair value for our assets measured at fair value on a nonrecurring basis for the three months ended February 28, 2019 and the year ended November 30, 2018 (in thousands): 
 
 
 
 
February 28, 2019
 
November 30, 2018
Description
 
Fair Value Hierarchy
 
Pre-Impairment Value
 
Inventory Impairment Charges
 
Fair Value (a)
 
Pre-Impairment Value
 
Inventory Impairment Charges
 
Fair Value (a)
Inventories
 
Level 3
 
$
9,917

 
$
(3,196
)
 
$
6,721

 
$
70,156

 
$
(26,104
)
 
$
44,052

(a)
Amounts represent the aggregate fair value for real estate assets impacted by inventory impairment charges during the applicable period as of the date the fair value measurements were made. The carrying value for these real estate assets may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date.
The fair values for inventories that were determined using Level 3 inputs were based on the estimated future net cash flows discounted for inherent risk associated with each underlying asset.
The following table presents the fair value hierarchy, carrying values and estimated fair values of our financial instruments, except those for which the carrying values approximate fair values (in thousands):
 
 
 
February 28, 2019
 
November 30, 2018
 
Fair Value
Hierarchy
 
Carrying
Value (a)
 
Estimated
Fair Value
 
Carrying
Value (a)
 
Estimated
Fair Value
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Senior notes
Level 2
 
$
2,191,571

 
$
2,298,750

 
$
1,790,437

 
$
1,853,438

Convertible senior notes
Level 2
 

 

 
229,788

 
229,425

(a)
The carrying values for the senior notes and convertible senior notes, as presented, include unamortized debt issuance costs. Debt issuance costs are not factored into the estimated fair values of these notes.
The fair values of our senior notes and convertible senior notes are generally estimated based on quoted market prices for these instruments. The carrying values reported for cash and cash equivalents, and mortgages and land contracts due to land sellers and other loans approximate fair values. The carrying value of corporate-owned life insurance is based on the cash surrender value of the policies and, accordingly, approximates fair value.
16.
Commitments and Contingencies
Commitments and contingencies include typical obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business.
Warranty. We provide a limited warranty on all of our homes. The specific terms and conditions of our limited warranty program vary depending upon the markets in which we do business. We generally provide a structural warranty of 10 years,

22


a warranty on electrical, heating, cooling, plumbing and certain other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home. Our limited warranty program is ordinarily how we respond to and account for homeowners’ requests to local division offices seeking repairs of certain conditions or defects, including claims where we could have liability under applicable state statutes or tort law for a defective condition in or damages to a home. Our warranty liability covers our costs of repairs associated with homeowner claims made under our limited warranty program. These claims are generally made directly by a homeowner and involve their individual home.
We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience. Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our accrued warranty liability, which is included in accrued expenses and other liabilities in our consolidated balance sheets, and adjust the amount as necessary based on our assessment. Our assessment includes the review of our actual warranty costs incurred to identify trends and changes in our warranty claims experience, and considers our home construction quality and customer service initiatives and outside events. While we believe the warranty liability currently reflected in our consolidated balance sheets to be adequate, unanticipated changes or developments in the legal environment, local weather, land or environmental conditions, quality of materials or methods used in the construction of homes or customer service practices and/or our warranty claims experience could have a significant impact on our actual warranty costs in future periods and such amounts could differ significantly from our current estimates.
The changes in our warranty liability were as follows (in thousands):
 
 
Three Months Ended February 28,
 
 
2019
 
2018
Balance at beginning of period
 
$
82,490

 
$
69,798

Warranties issued
 
6,294

 
7,764

Payments
 
(4,593
)
 
(5,717
)
Balance at end of period
 
$
84,191

 
$
71,845

Guarantees. In the normal course of our business, we issue certain representations, warranties and guarantees related to our home sales and land sales. Based on historical experience, we do not believe any potential liability with respect to these representations, warranties or guarantees would be material to our consolidated financial statements.
Self-Insurance. We maintain, and require the majority of our independent subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. We also maintain certain other insurance policies. In Arizona, California, Colorado and Nevada, our subcontractors’ general liability insurance primarily takes the form of a wrap-up policy under a program where eligible independent subcontractors are enrolled as insureds on each community. Enrolled subcontractors contribute toward the cost of the insurance and agree to pay a contractual amount in the future if there is a claim related to their work. To the extent provided under the wrap-up program, we absorb the enrolled subcontractors’ general liability associated with the work performed on our homes within the applicable community as part of our overall general liability insurance and our self-insurance.
We self-insure a portion of our overall risk through the use of a captive insurance subsidiary, which provides coverage for our exposure to construction defect, bodily injury and property damage claims and related litigation or regulatory actions, up to certain limits. Our self-insurance liability generally covers the costs of settlements and/or repairs, if any, as well as our costs to defend and resolve the following types of claims:
Construction defect: Construction defect claims, which represent the largest component of our self-insurance liability, typically originate through a legal or regulatory process rather than directly by a homeowner and involve the alleged occurrence of a condition affecting two or more homes within the same community, or they involve a common area or homeowners association property within a community. These claims typically involve higher costs to resolve than individual homeowner warranty claims, and the rate of claims is highly variable.
Bodily injury: Bodily injury claims typically involve individuals (other than our employees) who claim they were injured while on our property or as a result of our operations.

23


Property damage: Property damage claims generally involve claims by third parties for alleged damage to real or personal property as a result of our operations. Such claims may occasionally include those made against us by owners of property located near our communities.
Our self-insurance liability at each reporting date represents the estimated costs of reported claims, claims incurred but not yet reported, and claim adjustment expenses. The amount of our self-insurance liability is based on an analysis performed by a third-party actuary that uses our historical claim and expense data, as well as industry data to estimate these overall costs. Key assumptions used in developing these estimates include claim frequencies, severities and resolution patterns, which can occur over an extended period of time. These estimates are subject to variability due to the length of time between the delivery of a home to a homebuyer and when a construction defect claim is made, and the ultimate resolution of such claim; uncertainties regarding such claims relative to our markets and the types of product we build; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree of judgment involved and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated. In addition, changes in the frequency and severity of reported claims and the estimates to resolve claims can impact the trends and assumptions used in the actuarial analysis, which could be material to our consolidated financial statements. Though state regulations vary, construction defect claims are reported and resolved over a long period of time, which can extend for 10 years or more. As a result, the majority of the estimated self-insurance liability based on the actuarial analysis relates to claims incurred but not yet reported. Therefore, adjustments related to individual existing claims generally do not significantly impact the overall estimated liability. Adjustments to our liabilities related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs.
Our self-insurance liability is presented on a gross basis without consideration of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any. Estimated probable insurance and other recoveries of $57.2 million and $56.9 million are included in receivables in our consolidated balance sheets at February 28, 2019 and November 30, 2018, respectively. These self-insurance recoveries are principally based on actuarially determined amounts and depend on various factors, including, among other things, the above-described claim cost estimates, our insurance policy coverage limits for the applicable policy year(s), historical third-party recovery rates, insurance industry practices, the regulatory environment, and legal precedent, and are subject to a high degree of variability from period to period. Because of the inherent uncertainty and variability in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated.
The changes in our self-insurance liability were as follows (in thousands):
 
 
Three Months Ended February 28,
 
 
2019
 
2018
Balance at beginning of period
 
$
176,841

 
$
177,695

Self-insurance expense (a)
 
3,747

 
4,401

Payments (b)
 
(2,726
)
 
(1,401
)
Balance at end of period
 
$
177,862

 
$
180,695

(a)
These expenses are included in selling, general and administrative expenses and are largely offset by contributions from subcontractors participating in the wrap-up policy.
(b)
Includes net changes in estimated probable insurance and other recoveries, which are recorded in receivables, to present our self-insurance liability on a gross basis.
For most of our claims, there is no interaction between our warranty liability and self-insurance liability. Typically, if a matter is identified at its outset as either a warranty or self-insurance claim, it remains as such through its resolution. However, there can be instances of interaction between the liabilities, such as where individual homeowners in a community separately request warranty repairs to their homes to address a similar condition or issue and subsequently join together to initiate, or potentially initiate, a legal process with respect to that condition or issue and/or the repair work we have undertaken. In these instances, the claims and related repair work generally are initially covered by our warranty liability, and the costs associated with resolving the legal matter (including any additional repair work) are covered by our self-insurance liability.
The payments we make in connection with claims and related repair work, whether covered within our warranty liability and/or our self-insurance liability, may be recovered from our insurers to the extent such payments exceed the self-insured retentions or deductibles under our general liability insurance policies. Also, in certain instances, in the course of resolving a claim, we pay amounts in advance of and/or on behalf of a subcontractor(s) or their insurer(s) and believe we will be reimbursed for

24


such payments. Estimates of all such amounts, if any, are recorded as receivables in our consolidated balance sheets when any such recovery is considered probable. Such receivables associated with our warranty and other claims totaled $4.1 million at February 28, 2019 and $4.8 million at November 30, 2018. We believe the collection of these receivables is probable based on our history of collections for similar claims.
Northern California Claims. In the 2017 third quarter, we received claims from a homeowners association alleging approximately $100.0 million of damages from purported construction defects at a completed townhome community in Northern California. We continue to investigate these allegations, and to exchange information with the association, whose claims for damages have increased to $142.0 million in December 2018. Arbitral discovery begins in the second quarter of 2019 and we will be evaluating information revealed in discovery in the second and third quarters of 2019. At February 28, 2019, we had an accrual for our estimated probable loss in this matter and a receivable for estimated probable insurance recoveries. While it is reasonably possible that our loss could exceed the amount accrued and our recoveries could be less than the amount recorded, at this stage of our investigation into these allegations, we are unable to estimate the total amount of the loss in excess of the accrued amount and/or associated with a shortfall in the recoveries that is reasonably possible. Our investigation has involved identifying potentially responsible parties, including insurers, to pay for or perform any necessary repairs. In September 2018, a binding arbitration proceeding on this matter was scheduled to begin on July 1, 2019.
Florida Chapter 558 Actions (Individual and Homeowner Association Claims). We and certain of our subcontractors have received a growing number of claims from attorneys on behalf of individual owners of our homes and/or homeowners’ associations that allege, pursuant to Chapter 558 of the Florida Statutes, various construction defects, with most relating to stucco and water-intrusion issues. The claims primarily involve homes in our Jacksonville, Orlando, and Tampa operations. Under Chapter 558, homeowners must serve written notice of a construction defect(s) and provide the served construction and/or design contractor(s) with an opportunity to respond to the noticed issue(s) before they can file a lawsuit. Although we have resolved many of these claims without litigation, and a number of others have been resolved with applicable subcontractors or their insurers covering the related costs, as of February 28, 2019, we had approximately 560 outstanding noticed claims, and some are scheduled for trial over the next few quarters and beyond. In addition, some of our subcontractors’ insurers in some of these cases have informed us of their inability to continue to pay claims-related costs. At February 28, 2019, we had an accrual for our estimated probable loss for these matters and a receivable for estimated probable insurance recoveries. While it is reasonably possible that our loss could exceed the amount accrued and our recoveries could be less than the amount recorded, at this time, we are unable to estimate the total amount of the loss in excess of the accrued amount and/or associated with a shortfall in the recoveries that is reasonably possible.
Performance Bonds and Letters of Credit. We are often required to provide to various municipalities and other government agencies performance bonds and/or letters of credit to secure the completion of our projects and/or in support of obligations to build community improvements such as roads, sewers, water systems and other utilities, and to support similar development activities by certain of our unconsolidated joint ventures. At February 28, 2019, we had $707.6 million of performance bonds and $33.4 million of letters of credit outstanding. At November 30, 2018, we had $689.3 million of performance bonds and $28.0 million of letters of credit outstanding. If any such performance bonds or letters of credit are called, we would be obligated to reimburse the issuer of the performance bond or letter of credit. We do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the underlying performance is completed. The expiration dates of some letters of credit issued in connection with community improvements coincide with the expected completion dates of the related projects or obligations. Most letters of credit, however, are issued with an initial term of one year and are typically extended on a year-to-year basis until the related performance obligations are completed.
Land Option Contracts and Other Similar Contracts. In the ordinary course of our business, we enter into land option contracts and other similar contracts to acquire rights to land for the construction of homes. At February 28, 2019, we had total cash deposits of $49.8 million to purchase land having an aggregate purchase price of $1.23 billion. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance.
17.
Legal Matters
We are involved in litigation and regulatory proceedings incidental to our business that are in various procedural stages. We believe that the accruals we have recorded for probable and reasonably estimable losses with respect to these proceedings are adequate and that, as of February 28, 2019, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the estimated amounts already recognized or disclosed in our consolidated financial statements. We evaluate our accruals for litigation and regulatory proceedings at least quarterly and, as appropriate, adjust them to reflect (a) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments; (b) the advice and analyses of counsel; and (c) the assumptions and judgment of management. Similar factors and considerations are used in establishing new accruals for proceedings as to which losses

25


have become probable and reasonably estimable at the time an evaluation is made. Our accruals for litigation and regulatory proceedings are presented on a gross basis without consideration of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any. Estimates of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any, are recorded as receivables when such recoveries are considered probable. Based on our experience, we believe that the amounts that may be claimed or alleged against us in these proceedings are not a meaningful indicator of our potential liability. The outcome of any of these proceedings, including the defense and other litigation-related costs and expenses we may incur, however, is inherently uncertain and could differ significantly from the estimate reflected in a related accrual, if made. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a related accrual or if an accrual had not been made, could be material to our consolidated financial statements.
18.
Stockholders’ Equity
A summary of changes in stockholders’ equity is presented below (in thousands):
 
Three Months Ended February 28, 2019
 
Number of Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Grantor
Stock
Ownership
Trust
 
Treasury
Stock
 
Common Stock
 
Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Grantor Stock
Ownership Trust
 
Treasury Stock
 
Total Stockholders’ Equity
Balance at November 30, 2018
119,196

 
(8,157
)
 
(24,113
)
 
$
119,196

 
$
753,570

 
$
1,897,168

 
$
(9,565
)
 
$
(88,472
)
 
$
(584,397
)
 
$
2,087,500

Cumulative effect of adoption of ASC 606

 

 

 

 

 
11,610

 

 

 

 
11,610

Net income

 

 

 

 

 
30,011

 

 

 

 
30,011

Dividends on common stock

 

 

 

 

 
(2,266
)
 

 

 

 
(2,266
)
Employee stock options/other
62

 

 

 
62

 
770

 

 

 

 

 
832

Stock awards

 
297

 
(151
)
 

 
(3,151
)
 

 

 
3,226

 
(75
)
 

Stock-based compensation

 

 

 

 
4,152

 

 

 

 

 
4,152

Tax payments associated with stock-based compensation awards

 

 

 

 

 

 

 

 
(3,342
)
 
(3,342
)
Balance at February 28, 2019
119,258

 
(7,860
)
 
(24,264
)
 
$
119,258

 
$
755,341

 
$
1,936,523

 
$
(9,565
)
 
$
(85,246
)
 
$
(587,814
)
 
$
2,128,497

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended February 28, 2018
 
Number of Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Grantor
Stock
Ownership
Trust
 
Treasury
Stock
 
Common Stock
 
Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Grantor Stock
Ownership Trust
 
Treasury Stock
 
Total Stockholders’ Equity
Balance at November 30, 2017
117,946

 
(8,898
)
 
(22,021
)
 
$
117,946

 
$
727,483

 
$
1,735,695

 
$
(16,924
)
 
$
(96,509
)
 
$
(541,380
)
 
$
1,926,311

Net loss

 

 

 

 

 
(71,255
)
 

 

 

 
(71,255
)
Dividends on common stock

 

 

 

 

 
(2,322
)
 

 

 

 
(2,322
)
Employee stock options/other
268

 

 

 
268

 
2,678

 

 

 

 

 
2,946

Stock awards

 
438

 
(10
)
 

 
(4,551
)
 

 

 
4,749

 
(198
)
 

Stock-based compensation

 

 

 

 
3,829

 

 

 

 

 
3,829

Tax payments associated with stock-based compensation awards

 

 
(217
)
 

 

 

 

 

 
(6,787
)
 
(6,787
)
Balance at February 28, 2018
118,214

 
(8,460
)
 
(22,248
)
 
$
118,214

 
$
729,439

 
$
1,662,118

 
$
(16,924
)
 
$
(91,760
)
 
$
(548,365
)
 
$
1,852,722

On February 15, 2019, the management development and compensation committee of our board of directors approved the payout of 297,260 shares of our common stock in connection with the vesting of PSUs that were granted to certain employees on October 8, 2015. The shares paid out under the PSUs reflected our achievement of certain performance measures that were based on average return on invested capital and cumulative earnings per share, and revenue growth relative to a peer group of high-production public homebuilding companies over the three-year period from December 1, 2015 through November 30, 2018. Of the shares of common stock paid out, 147,382 shares or $3.3 million, were purchased by us in the 2019 first quarter to satisfy the recipients’ withholding taxes on the vesting of the PSUs. The shares purchased were not considered repurchases under the authorizations described below.
As of February 28, 2019, we were authorized to repurchase 2,193,947 shares of our common stock under a board of directors approved share repurchase program. We did not repurchase any of our common stock under this program in the three months ended February 28, 2019.

26


Unrelated to the share repurchase program, our board of directors authorized in 2014 the repurchase of not more than 680,000 shares of our outstanding common stock, and also authorized potential future grants of up to 680,000 stock payment awards under the KB Home 2014 Equity Incentive Plan (“2014 Plan”), in each case solely as necessary to settle outstanding stock appreciation rights awards granted under our Non-Employee Directors Compensation Plan. As of February 28, 2019, we have not repurchased any shares and no stock payment awards have been granted under the 2014 Plan pursuant to the board of directors authorization.
During each of the three-month periods ended February 28, 2019 and 2018, our board of directors declared, and we paid, a quarterly cash dividend of $.025 per share of common stock.
19.
Stock-Based Compensation
Stock Options. We estimate the grant-date fair value of stock options using the Black-Scholes option-pricing model. The following table summarizes stock option transactions for the three months ended February 28, 2019:
 
Options
 
Weighted
Average Exercise
Price
Options outstanding at beginning of period
7,237,544

 
$
16.02

Granted

 

Exercised
(62,292
)
 
13.36

Cancelled

 

Options outstanding at end of period
7,175,252

 
$
16.04

Options exercisable at end of period
6,886,378

 
$
16.04

As of February 28, 2019, the weighted average remaining contractual life of stock options outstanding and stock options exercisable was 3.8 years and 3.6 years, respectively. There was $.1 million of total unrecognized compensation expense related to unvested stock option awards as of February 28, 2019 that is expected to be recognized over a weighted average period of 0.6 years. For the three months ended February 28, 2019, stock-based compensation expense was nominal compared to $.2 million for the three months ended February 28, 2018. The aggregate intrinsic values of stock options outstanding and stock options exercisable were $62.3 million and $60.4 million, respectively, at February 28, 2019. (The intrinsic value of a stock option is the amount by which the market value of a share of the underlying common stock exceeds the exercise price of the stock option.)
Other Stock-Based Awards. From time to time, we grant restricted stock and PSUs to various employees as a compensation benefit. We recognized total compensation expense of $4.1 million and $3.7 million for the three months ended February 28, 2019 and 2018, respectively, related to restricted stock and PSUs.
20.
Supplemental Disclosure to Consolidated Statements of Cash Flows
The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):
 
Three Months Ended February 28,
 
2019
 
2018
Summary of cash and cash equivalents at end of period:
 
 
 
Homebuilding
$
511,690

 
$
560,255

Financial services
717

 
551

Total
$
512,407

 
$
560,806

Supplemental disclosures of cash flow information:
 
 
 
Interest paid, net of amounts capitalized
$
(15,318
)
 
$
(9,696
)
Income taxes paid
113

 
1,639


27


 
Three Months Ended February 28,
 
2019
 
2018
Supplemental disclosures of non-cash activities:
 
 
 
Decrease in inventories due to adoption of ASC 606
$
(35,288
)
 
$

Increase in property and equipment, net due to adoption of ASC 606
31,194

 

Increase (decrease) in consolidated inventories not owned
(16,262
)
 
8,466

Increase in inventories due to distributions of land and land development from an unconsolidated joint venture
1,946

 
2,699

Inventories acquired through seller financing

 
36,697

21.
Supplemental Guarantor Information
Our obligations to pay principal, premium, if any, and interest on the senior notes and borrowings, if any, under the Credit Facility are guaranteed on a joint and several basis by certain of our subsidiaries (“Guarantor Subsidiaries”). The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by us. Pursuant to the terms of the indenture governing the senior notes and the terms of the Credit Facility, if any of the Guarantor Subsidiaries ceases to be a “significant subsidiary” as defined by Rule 1-02 of Regulation S-X using a 5% rather than a 10% threshold (provided that the assets of our non-guarantor subsidiaries do not in the aggregate exceed 10% of an adjusted measure of our consolidated total assets), it will be automatically and unconditionally released and discharged from its guaranty of the senior notes and the Credit Facility so long as all guarantees by such Guarantor Subsidiary of any other of our or our subsidiaries’ indebtedness are terminated at or prior to the time of such release. We have determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented.
The supplemental financial information for all periods presented below reflects the relevant subsidiaries that were Guarantor Subsidiaries as of February 28, 2019.

Condensed Consolidating Statements of Operations (in thousands)
 
Three Months Ended February 28, 2019
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Total revenues
$

 
$
744,453

 
$
67,030

 
$

 
$
811,483

Homebuilding:
 
 
 
 
 
 
 
 
 
Revenues
$

 
$
744,453

 
$
64,335

 
$

 
$
808,788

Construction and land costs

 
(611,041
)
 
(59,814
)
 

 
(670,855
)
Selling, general and administrative expenses
(25,382
)
 
(75,540
)
 
(5,672
)
 

 
(106,594
)
Operating income (loss)
(25,382
)
 
57,872

 
(1,151
)
 

 
31,339

Interest income
1,014

 

 
91

 

 
1,105

Interest expense
(33,195
)
 
(321
)
 
(1,272
)
 
34,788

 

Intercompany interest
77,972

 
(41,738
)
 
(1,446
)
 
(34,788
)
 

Equity in loss of unconsolidated joint ventures

 
(406
)
 

 

 
(406
)
Homebuilding pretax income (loss)
20,409

 
15,407

 
(3,778
)
 

 
32,038

Financial services pretax income

 

 
2,473

 

 
2,473

Total pretax income (loss)
20,409

 
15,407

 
(1,305
)
 

 
34,511

Income tax expense
(700
)
 
(3,400
)
 
(400
)
 

 
(4,500
)
Equity in net income of subsidiaries
10,302

 

 

 
(10,302
)
 

Net income (loss)
$
30,011

 
$
12,007

 
$
(1,705
)
 
$
(10,302
)
 
$
30,011

 
 
 
 
 
 
 
 
 
 

28


 
Three Months Ended February 28, 2018
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Total revenues
$

 
$
794,689

 
$
76,934

 
$

 
$
871,623

Homebuilding:
 
 
 
 
 
 
 
 
 
Revenues
$

 
$
794,689

 
$
74,516

 
$

 
$
869,205

Construction and land costs

 
(664,096
)
 
(65,382
)
 

 
(729,478
)
Selling, general and administrative expenses
(22,166
)
 
(67,117
)
 
(6,441
)
 

 
(95,724
)
Operating income (loss)
(22,166
)
 
63,476

 
2,693

 

 
44,003

Interest income
998

 
5

 

 

 
1,003

Interest expense
(37,972
)
 
(689
)
 
(1,283
)
 
39,944

 

Intercompany interest
72,846

 
(30,954
)
 
(1,948
)
 
(39,944
)
 

Equity in loss of unconsolidated joint ventures

 
(845
)
 

 

 
(845
)
Homebuilding pretax income (loss)
13,706

 
30,993

 
(538
)
 

 
44,161