KB Home
KB HOME (Form: 10-Q, Received: 04/08/2015 08:51:49)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended February 28, 2015 .
or
o
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   ý     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   ý     No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
o
Non-accelerated filer
o   (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of February 28, 2015 .
There were 91,952,207 shares of the registrant’s common stock, par value $1.00 per share, outstanding on February 28, 2015 . The registrant’s grantor stock ownership trust held an additional 10,335,461 shares of the registrant’s common stock on that date.



KB HOME
FORM 10-Q
INDEX
 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,
 
2015
 
2014
Total revenues
$
580,121

 
$
450,687

Homebuilding:
 
 
 
Revenues
$
577,888

 
$
448,267

Construction and land costs
(492,418
)
 
(369,274
)
Selling, general and administrative expenses
(71,072
)
 
(61,274
)
Operating income
14,398

 
17,719

Interest income
103

 
168

Interest expense
(5,338
)
 
(11,276
)
Equity in income (loss) of unconsolidated joint ventures
(347
)
 
2,590

Homebuilding pretax income
8,816

 
9,201

Financial services:
 
 
 
Revenues
2,233

 
2,420

Expenses
(964
)
 
(852
)
Equity in income (loss) of unconsolidated joint ventures
414

 
(6
)
Financial services pretax income
1,683

 
1,562

Total pretax income
10,499

 
10,763

Income tax expense
(2,700
)
 
(200
)
Net income
$
7,799

 
$
10,563

Earnings per share:
 
 
 
Basic
$
.08

 
$
.13

Diluted
$
.08

 
$
.12

Weighted average shares outstanding:
 
 
 
Basic
91,954

 
83,745

Diluted
101,700

 
93,946

Cash dividends declared per common share
$
.0250

 
$
.0250

See accompanying notes.

3


KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands – Unaudited)
 

 
February 28,
2015
 
November 30,
2014
Assets
 
 
 
Homebuilding:
 
 
 
Cash and cash equivalents
$
545,641

 
$
356,366

Restricted cash
27,984

 
27,235

Receivables
143,697

 
125,488

Inventories
3,246,383

 
3,218,387

Investments in unconsolidated joint ventures
73,502

 
79,441

Deferred tax assets, net
822,632

 
825,232

Other assets
119,873

 
114,915

 
4,979,712

 
4,747,064

Financial services
10,145

 
10,486

Total assets
$
4,989,857

 
$
4,757,550

 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Homebuilding:
 
 
 
Accounts payable
$
161,902

 
$
172,716

Accrued expenses and other liabilities
397,245

 
409,882

Notes payable
2,824,170

 
2,576,525

 
3,383,317

 
3,159,123

Financial services
1,970

 
2,517

Stockholders’ equity:
 
 
 
Common stock
115,387

 
115,387

Paid-in capital
672,038

 
668,857

Retained earnings
1,396,756

 
1,391,256

Accumulated other comprehensive loss
(21,008
)
 
(21,008
)
Grantor stock ownership trust, at cost
(112,106
)
 
(112,106
)
Treasury stock, at cost
(446,497
)
 
(446,476
)
Total stockholders’ equity
1,604,570

 
1,595,910

Total liabilities and stockholders’ equity
$
4,989,857

 
$
4,757,550

See accompanying notes.

4


KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands – Unaudited)
 
 
Three Months Ended February 28,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
7,799

 
$
10,563

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Equity in income of unconsolidated joint ventures
(67
)
 
(2,584
)
Amortization of discounts and issuance costs
1,920

 
1,600

Depreciation and amortization
805

 
467

Deferred income taxes
2,600

 

Stock-based compensation
3,181

 
1,779

Land option contract abandonments
448

 
433

Changes in assets and liabilities:
 
 
 
Receivables
(13,872
)
 
(10,221
)
Inventories
(20,438
)
 
(205,037
)
Accounts payable, accrued expenses and other liabilities
(28,032
)
 
(14,514
)
Other, net
(3,253
)
 
(3,549
)
Net cash used in operating activities
(48,909
)
 
(221,063
)
Cash flows from investing activities:
 
 
 
Contributions to unconsolidated joint ventures
(2,414
)
 
(8,618
)
Proceeds from sale of investment in unconsolidated joint venture

 
10,110

Purchases of property and equipment, net
(586
)
 
(1,576
)
Net cash used in investing activities
(3,000
)
 
(84
)
Cash flows from financing activities:
 
 
 
Change in restricted cash
(749
)
 
(177
)
Proceeds from issuance of debt
250,000

 

Payment of debt issuance costs
(2,989
)
 

Payments on mortgages and land contracts due to land sellers and other loans
(2,722
)
 
(2,655
)
Payments of cash dividends
(2,299
)
 
(2,094
)
Stock repurchases
(21
)
 

Net cash provided by (used in) financing activities
241,220

 
(4,926
)
Net increase (decrease) in cash and cash equivalents
189,311

 
(226,073
)
Cash and cash equivalents at beginning of period
358,768

 
532,523

Cash and cash equivalents at end of period
$
548,079

 
$
306,450

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, 2015 , the results of our consolidated operations for the three months ended February 28, 2015 and 2014 , and our consolidated cash flows for the three months ended February 28, 2015 and 2014 . The results of our consolidated operations for the three months ended February 28, 2015 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, 2014 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, 2014 , 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 informed 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 $402.3 million at February 28, 2015 and $197.7 million at November 30, 2014 . The majority of our cash and cash equivalents were invested in money market funds and interest-bearing bank deposit accounts.
Restricted Cash. Restricted cash at February 28, 2015 and November 30, 2014 consisted of cash deposited with various financial institutions that was required as collateral for our cash-collateralized letter of credit facilities (“LOC Facilities”).
Comprehensive Income. Our comprehensive income was $7.8 million for the three months ended February 28, 2015 and $10.6 million for the three months ended February 28, 2014. Our comprehensive income for the three months ended February 28, 2015 and 2014 was equal to our net income for the same periods.
Recent Accounting Pronouncements . 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”). 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. ASU 2014-09 is effective for public entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In January 2015, the FASB issued Accounting Standards Update No. 2015-01, “Income Statement — Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015-01”). ASU 2015-01 eliminates the concept of extraordinary items from GAAP but retains the presentation and disclosure guidance for items that are unusual in nature or occur infrequently and expands the guidance to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. A reporting entity may apply ASU 2015-01 prospectively. A reporting entity may also apply ASU 2015-01 retrospectively to all periods presented in the financial statements. We believe the adoption of ASU 2015-01 will not have a material effect on our consolidated financial statements.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 changes the analysis that a reporting entity must perform to

6


determine whether it should consolidate certain types of legal entities. ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We believe the adoption of ASU 2015-02 will not have a material effect on our consolidated financial statements.
Reclassifications. Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to the 2015 presentation.
2.
Segment Information
As of February 28, 2015 , we had identified five operating reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment. As of February 28, 2015 , our homebuilding reporting segments conducted ongoing operations in the following states:
West Coast: California
Southwest: Arizona and Nevada
Central: Colorado, New Mexico and Texas
Southeast: Florida, Maryland, North Carolina and Virginia
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, 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. We evaluate 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. Prior to July 21, 2014, this segment also earned revenues pursuant to the terms of a marketing services agreement with Nationstar Mortgage LLC (“Nationstar”), under which Nationstar was our preferred mortgage lender and offered mortgage banking services, including residential mortgage loan (“mortgage loan”) originations, to our homebuyers who elected to use the lender. Our homebuyers may select any lender of their choice to obtain mortgage financing for the purchase of their home. Since July 21, 2014, we have offered mortgage banking services, including mortgage loan originations, to our homebuyers indirectly through Home Community Mortgage, LLC (“HCM”), a joint venture of a subsidiary of ours and a subsidiary of Nationstar. We have a 49.9% ownership interest and Nationstar has a 50.1% ownership interest in HCM, with Nationstar providing management oversight of HCM’s operations.
Corporate and other is a non-operating segment that develops and implements company-wide strategic initiatives and provides support to our homebuilding reporting segments by centralizing certain administrative functions, such as promotional marketing, legal, purchasing administration, architecture, accounting, treasury, insurance and risk management, information technology and human resources. 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 the homebuilding reporting segments.
Our segments follow the same accounting policies used for our consolidated financial statements. The results of each 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.
The following tables present financial information relating to our segments (in thousands):






7


 
Three Months Ended February 28,
 
2015
 
2014
Revenues:
 
 
 
West Coast
$
277,255

 
$
181,721

Southwest
65,137

 
46,115

Central
159,148

 
125,162

Southeast
76,348

 
95,269

Total homebuilding revenues
577,888

 
448,267

Financial services
2,233

 
2,420

Total
$
580,121

 
$
450,687

 
 
 
 
Pretax income (loss):
 
 
 
West Coast
$
21,854

 
$
18,365

Southwest
3,443

 
1,285

Central
10,226

 
2,776

Southeast
(9,613
)
 
3,841

Corporate and other
(17,094
)
 
(17,066
)
Total homebuilding pretax income
8,816

 
9,201

Financial services
1,683

 
1,562

Total
$
10,499

 
$
10,763

Equity in income (loss) of unconsolidated joint ventures:
 
 
 
West Coast
$
(220
)
 
$
(38
)
Southwest
(127
)
 
(663
)
Central

 

Southeast

 
3,291

Total
$
(347
)
 
$
2,590

Land option contract abandonments:
 
 
 
West Coast
$

 
$

Southwest

 

Central

 
433

Southeast
448

 

Total
$
448

 
$
433

 
February 28,
2015
 
November 30,
2014
Inventories:
 
 
 
Homes under construction
 
 
 
West Coast
$
542,508

 
$
536,843

Southwest
73,923

 
65,647

Central
219,023

 
201,164

Southeast
120,974

 
124,618

Subtotal
956,428

 
928,272

 
 
 
 

8


 
February 28,
2015
 
November 30,
2014
Land under development
 
 
 
West Coast
$
735,906

 
$
765,577

Southwest
354,578

 
334,691

Central
380,992

 
363,933

Southeast
261,128

 
245,948

Subtotal
1,732,604

 
1,710,149

 
 
 
 
Land held for future development
 
 
 
West Coast
285,060

 
294,060

Southwest
126,888

 
138,367

Central
22,067

 
22,957

Southeast
123,336

 
124,582

Subtotal
557,351

 
579,966

Total
$
3,246,383

 
$
3,218,387

Investments in unconsolidated joint ventures:
 
 
 
West Coast
$
61,745

 
$
59,552

Southwest
9,256

 
17,388

Central

 

Southeast
2,501

 
2,501

Total
$
73,502

 
$
79,441

 
 
 
 
Assets:
 
 
 
West Coast
$
1,693,930

 
$
1,695,753

Southwest
594,416

 
579,201

Central
722,388

 
678,139

Southeast
539,813

 
531,011

Corporate and other
1,429,165

 
1,262,960

Total homebuilding assets
4,979,712

 
4,747,064

Financial services
10,145

 
10,486

Total
$
4,989,857

 
$
4,757,550

3.
Financial Services
The following tables present financial information relating to our financial services reporting segment (in thousands):

9


 
Three Months Ended February 28,
 
2015
 
2014
Revenues
 
 
 
Insurance commissions
$
1,434

 
$
1,262

Title services
799

 
708

Marketing services fees

 
450

Total
2,233

 
2,420

Expenses
 
 
 
General and administrative
(964
)
 
(852
)
Operating income
1,269

 
1,568

Equity in income (loss) of unconsolidated joint ventures
414

 
(6
)
Pretax income
$
1,683

 
$
1,562

 
February 28,
2015
 
November 30,
2014
Assets
 
 
 
Cash and cash equivalents
$
2,438

 
$
2,402

Receivables
1,024

 
1,738

Investments in unconsolidated joint ventures
6,563

 
6,149

Other assets
120

 
197

Total assets
$
10,145

 
$
10,486

Liabilities
 
 
 
Accounts payable and accrued expenses
$
1,970

 
$
2,517

Total liabilities
$
1,970

 
$
2,517


4.
Earnings Per Share
Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):  
 
Three Months Ended February 28,
 
2015
 
2014
Numerator:
 
 
 
Net income
$
7,799

 
$
10,563

Less: Distributed earnings allocated to nonvested restricted stock
(9
)
 
(5
)
Less: Undistributed earnings allocated to nonvested restricted stock
(20
)
 
(22
)
Numerator for basic earnings per share
7,770

 
10,536

Effect of dilutive securities:
 
 
 
Interest expense and amortization of debt issuance costs associated with convertible senior notes, net of taxes
667

 
667

Add: Undistributed earnings allocated to nonvested restricted stock
20

 
22

Less: Undistributed earnings reallocated to nonvested restricted stock
(18
)
 
(20
)
Numerator for diluted earnings per share
$
8,439

 
$
11,205

 
 
 
 

10


 
Three Months Ended February 28,
 
2015
 
2014
Denominator:
 
 
 
Weighted average shares outstanding — basic
91,954

 
83,745

Effect of dilutive securities:
 
 
 
Share-based payments
1,344

 
1,799

Convertible senior notes
8,402

 
8,402

Weighted average shares outstanding — diluted
101,700

 
93,946

Basic earnings per share
$
.08

 
$
.13

Diluted earnings per share
$
.08

 
$
.12

We compute earnings per share using the two-class method, which is an allocation of earnings 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, 2015 or 2014.
Outstanding stock options to purchase 8.2 million and 5.2 million shares of common stock were excluded from the diluted earnings per share calculations for the three-month periods ended February 28, 2015 and 2014, respectively, because the effect of their inclusion would be antidilutive. Contingently issuable shares associated with outstanding performance-based restricted stock units (each a “PSU”) were not included in the earnings per share calculations for the three months ended February 28, 2015 and 2014 as the vesting conditions had not been satisfied.
5.
Inventories
Inventories consisted of the following (in thousands):
 
 
February 28,
2015
 
November 30, 2014
Homes under construction
 
$
956,428

 
$
928,272

Land under development
 
1,732,604

 
1,710,149

Land held for future development
 
557,351

 
579,966

Total
 
$
3,246,383

 
$
3,218,387

Interest is capitalized to inventories while the related communities are being actively developed and until homes are completed. Capitalized interest is amortized to construction and land costs as the related inventories are delivered to homebuyers. Interest and real estate taxes are not capitalized on land held for future development.
Our interest costs were as follows (in thousands):
 
Three Months Ended February 28,
 
2015
 
2014
Capitalized interest at beginning of period
$
266,668

 
$
216,681

Interest incurred
45,003

 
39,280

Interest expensed
(5,338
)
 
(11,276
)
Interest amortized to construction and land costs
(22,293
)
 
(17,485
)
Capitalized interest at end of period (a)
$
284,040

 
$
227,200

(a)
Capitalized interest amounts presented in the table reflect the gross amount of capitalized interest, as inventory impairment charges recognized, if any, are not generally allocated to specific components of inventory.

11


6.
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 when indicators of potential impairment exist and the carrying value of a 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 based on the estimated future net cash flows discounted for inherent risk associated with each such asset. We evaluated 20 and 11 communities or land parcels for recoverability during the three months ended February 28, 2015 and 2014, respectively. The carrying value of the communities or land parcels evaluated during the three months ended February 28, 2015 and 2014 was $165.1 million and $61.3 million , respectively. Based on the results of our evaluations, we had no inventory impairment charges for the three months ended February 28, 2015 or 2014.
As of February 28, 2015 , the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $266.7 million , representing 30 communities and various other land parcels. As of November 30, 2014 , the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $266.6 million , representing 33 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 internal investment and marketing 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 strategy, we write off the 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 corresponding to 312 lots for the three months ended February 28, 2015, and $.4 million corresponding to 650 lots for the three months ended February 28, 2014 . We sometimes abandon land option contracts and other similar contracts when we have incurred costs of less than $100,000 ; such costs and the corresponding lots, which totaled zero lots for the three months ended February 28, 2015 and 3,380 lots for the three months ended February 28, 2014, are not included in the amounts above.
Due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, it is possible that actual results could differ substantially from those estimated.
7.
Variable Interest Entities
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 to determine whether they are VIEs and, if so, whether we are the primary beneficiary. None of our joint ventures at February 28, 2015 and November 30, 2014 were determined to be VIEs. All of our joint ventures were unconsolidated and accounted for under the equity method because we did not have a controlling financial interest.
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. Under such contracts, we typically pay a specified option 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 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, 2015 and November 30, 2014 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.
The following table presents a summary of our interests in land option contracts and other similar contracts (in thousands):
 
February 28, 2015
 
November 30, 2014
 
Cash
Deposits
 
Aggregate
Purchase Price
 
Cash
Deposits
 
Aggregate
Purchase Price
Unconsolidated VIEs
$
9,439

 
$
456,479

 
$
10,633

 
$
520,628

Other land option contracts and other similar contracts
19,030

 
372,725

 
22,426

 
437,842

Total
$
28,469

 
$
829,204

 
$
33,059

 
$
958,470


12


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 $50.2 million at February 28, 2015 and $48.0 million at November 30, 2014 . These pre-acquisition costs and cash deposits were included in inventories in our consolidated balance sheets. We also had outstanding letters of credit of $.1 million at November 30, 2014 in lieu of cash deposits under certain land option contracts and other similar contracts. There were no such outstanding letters of credit at February 28, 2015.
We also evaluate our land option contracts and other similar contracts for financing arrangements, and, as a result of our evaluations, increased inventories, with a corresponding increase to accrued expenses and other liabilities, in our consolidated balance sheets by $3.1 million at both February 28, 2015 and November 30, 2014 .
8.
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.
We share in the profits and losses of these unconsolidated joint ventures generally in accordance with our respective equity interests. In some instances, we recognize profits and losses related to our investment in an unconsolidated joint venture that differ from our equity interest in the unconsolidated joint venture. This may arise from impairments that we recognize related to our investment that differ from the impairments the unconsolidated joint venture recognizes with respect to its assets; differences between our basis in assets we have transferred to the unconsolidated joint venture and the unconsolidated joint venture’s basis in those assets; our deferral of the unconsolidated joint venture’s profits from land sales to us; or other items. There were no joint venture impairment charges for the three-month periods ended February 28, 2015 or 2014.
The following table presents combined condensed information from the statements of operations of our unconsolidated joint ventures (in thousands):
 
Three Months Ended February 28,
 
2015
 
2014
Revenues
$
3,210

 
$
6,118

Construction and land costs
(3,743
)
 
(3,523
)
Other expense, net
(696
)
 
(1,130
)
Income (loss)
$
(1,229
)
 
$
1,465

The following table presents combined condensed balance sheet information for our unconsolidated joint ventures (in thousands):
 
February 28,
2015
 
November 30,
2014
Assets
 
 
 
Cash
$
18,661

 
$
23,699

Receivables
5,427

 
5,106

Inventories
153,900

 
153,427

Total assets
$
177,988

 
$
182,232

Liabilities and equity
 
 
 
Accounts payable and other liabilities
$
14,157

 
$
10,824

Equity
163,831

 
171,408

Total liabilities and equity
$
177,988

 
$
182,232


13


The following table presents information relating to our investments in unconsolidated joint ventures (dollars in thousands):
 
February 28,
2015
 
November 30,
2014
Number of investments in unconsolidated joint ventures
6

 
6

Investments in unconsolidated joint ventures
$
73,502

 
$
79,441

Number of unconsolidated joint venture lots controlled under land option contracts and other similar contracts
484

 
618

In the first quarter of 2014, we sold our interest in an unconsolidated joint venture in Maryland for $10.1 million , which resulted in a gain of $3.2 million that was included in equity in income of unconsolidated joint ventures in our consolidated statement of operations for the three months ended February 28, 2014 . None of our unconsolidated joint ventures had outstanding debt at February 28, 2015 or November 30, 2014 .
9.
Other Assets
Other assets consisted of the following (in thousands):
 
February 28,
2015
 
November 30,
2014
Cash surrender value of insurance contracts
$
70,795

 
$
70,571

Debt issuance costs
28,929

 
27,082

Property and equipment, net
11,610

 
11,831

Prepaid expenses
8,539

 
5,431

Total
$
119,873

 
$
114,915

10.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
 
February 28,
2015
 
November 30,
2014
Self-insurance and other litigation liabilities
$
90,617

 
$
89,606

Employee compensation and related benefits
88,196

 
113,875

Accrued interest payable
72,505

 
63,275

Inventory-related obligations
49,170

 
52,009

Warranty liability
45,357

 
45,196

Customer deposits
12,622

 
15,197

Real estate and business taxes
10,378

 
13,684

Other
28,400

 
17,040

Total
$
397,245

 
$
409,882

11.
Income Taxes
Income Tax Expense. We recognized income tax expense of $2.7 million for the three months ended February 28, 2015 and $.2 million for the three months ended February 28, 2014 . Our income tax expense for the three months ended February 28, 2015 reflected the favorable net impact of $1.4 million of federal energy tax credits we earned from building energy-efficient homes, resulting in an effective tax rate of 25.7% . Our effective tax rate for the three months ended February 28, 2014 was not a meaningful item due to the effects of the full valuation allowance against our deferred tax assets at that time.
The tax credit impact recognized in the three months ended February 28, 2015 resulted from the Tax Increase Prevention Act, which was enacted into law on December 19, 2014. Among other things, the law retroactively extended the availability of a

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business tax credit for building new energy-efficient homes through December 31, 2014. Prior to this legislation, the tax credit expired on December 31, 2013.
Deferred Tax Asset Valuation Allowance. We evaluate our deferred tax assets quarterly to determine if adjustments to the 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 deferred tax assets depends primarily on the generation of future taxable income during the periods in which the related temporary differences in the financial basis and the tax basis of the assets become deductible. The value of our deferred tax assets will depend on applicable income tax rates. Based on our evaluation through August 31, 2014, we maintained a full valuation allowance against our deferred tax assets due to the uncertainty of their realization. At November 30, 2014, we evaluated the need for a valuation allowance against our deferred tax assets of $866.4 million and determined that it was more likely than not that most of our deferred tax assets would be realized. Accordingly, we reversed $825.2 million of the deferred tax asset valuation allowance in the fourth quarter of 2014. The remaining deferred tax asset valuation allowance of $41.2 million at November 30, 2014 was primarily related to foreign tax credits and certain state net operating losses (“NOL”) that had not met the “more likely than not” realization standard.
During the three months ended February 28, 2015 , we made no adjustments to our deferred tax asset valuation allowance. Therefore, at February 28, 2015 , we had deferred tax assets of $863.8 million that were partly offset by a valuation allowance of $41.2 million .
Unrecognized Tax Benefits. At both February 28, 2015 and November 30, 2014, our gross unrecognized tax benefits (including interest and penalties) totaled $.3 million , of which $.1 million , if recognized, would affect our effective tax rate. We anticipate that these gross unrecognized tax benefits will decrease by an amount ranging from zero to $.1 million during the 12 months from this reporting date due to various state tax filings associated with the resolution of a federal tax audit. Our fiscal years ending 2011 and later remain open to federal examinations, while fiscal years 2010 and later remain open to state examinations.
12.
Notes Payable
Notes payable consisted of the following (in thousands):
 
February 28,
2015
 
November 30,
2014
Mortgages and land contracts due to land sellers and other loans
$
35,528

 
$
38,250

6 1/4% Senior notes due June 15, 2015
199,898

 
199,891

9.10% Senior notes due September 15, 2017
262,909

 
262,729

7 1/4% Senior notes due June 15, 2018
299,439

 
299,402

4.75% Senior notes due May 15, 2019
400,000

 
400,000

8.00% Senior notes due March 15, 2020
346,396

 
346,253

7.00% Senior notes due December 15, 2021
450,000

 
450,000

7.50% Senior notes due September 15, 2022
350,000

 
350,000

7.625% Senior notes due May 15, 2023
250,000

 

1.375% Convertible senior notes due February 1, 2019
230,000

 
230,000

Total
$
2,824,170

 
$
2,576,525

Unsecured Revolving Credit Facility. We have a $200.0 million unsecured revolving credit facility with a syndicate of financial institutions (“Credit Facility”) that will mature on March 12, 2016 . The Credit F acility contains an uncommitted accordion feature under which its aggregate principal amount can be increased to up to $300.0 million under certain conditions and the availability of additional bank commitments, as well as a sublimit of $100.0 million for the issuance of letters of credit, which may be utilized in combination with or to replace the LOC Facilities. Interest on amounts borrowed under the Credit Facility is payable quarterly in arrears at a rate based on either the London Interbank Offered Rate or a base rate, plus a spread that depends on our debt rating and consolidated leverage ratio (“Leverage Ratio”), as defined under the Credit Facility. The Credit Facility also requires the payment of a commitment fee ranging from .50% to .75% of the unused commitment, based on our debt rating and 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

15


Ratio, and either a consolidated interest coverage ratio (“Interest Coverage Ratio”) or minimum level of liquidity, each as defined therein. As of February 28, 2015 , we had no cash borrowings or letters of credit outstanding under the Credit Facility and we had $200.0 million available for cash borrowings, with up to $100.0 million of that amount available for the issuance of letters of credit.
LOC Facilities. We maintain the LOC Facilities with various financial institutions to obtain letters of credit in the ordinary course of operating our business. As of February 28, 2015 and November 30, 2014, we had $27.2 million and $26.7 million , respectively, of letters of credit outstanding under the LOC Facilities. The LOC Facilities require us to deposit and maintain cash with the issuing financial institutions as collateral for our letters of credit outstanding. We may maintain, revise or, if necessary or desirable, enter into additional or expanded letter of credit facilities, or other similar facility arrangements, with the same or other financial institutions.
Mortgages and Land Contracts Due to Land Sellers and Other Loans. As of February 28, 2015 , inventories having a carrying value of $132.0 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 on file with the SEC that was filed on July 18, 2014 (“2014 Shelf Registration”). The 2014 Shelf Registration registers the offering of debt and equity securities that we may issue from time to time in amounts to be determined.
Senior Notes. On February 17, 2015, pursuant to the 2014 Shelf Registration, we completed the underwritten public issuance of $250.0 million in aggregate principal amount of 7.625% senior notes due 2023 (“7.625% Senior Notes due 2023”). We plan to use the net proceeds of approximately $247 million from this issuance to retire $199.9 million in aggregate principal amount of our 6 1/4% senior notes due 2015 (“6 1/4% Senior Notes due 2015”) at their maturity on June 15, 2015, unless we otherwise earlier redeem or purchase some or all of such notes, and/or for general corporate purposes, including without limitation working capital, land acquisition and land development.
All of our senior notes outstanding at February 28, 2015 and November 30, 2014 represent senior unsecured obligations and rank equally in right of payment with all of our existing and future indebtedness. Interest on each of these senior notes is payable semi-annually.
Convertible Senior Notes. The 1.375% convertible senior notes due 2019 (“1.375% Convertible Senior Notes due 2019”) will mature on February 1, 2019, unless converted earlier by the holders, at their option, or redeemed by us, or purchased by us at the option of the holders following the occurrence of a fundamental change, as defined in the instruments governing these notes. At any time prior to the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their 1.375% Convertible Senior Notes due 2019. These notes are initially convertible into shares of our common stock at a conversion rate of 36.5297 shares for each $1,000 principal amount of the notes, which represents an initial conversion price of approximately $27.37 per share. This initial conversion rate equates to 8,401,831 shares of our common stock. The conversion rate is subject to adjustment upon the occurrence of certain events, including: subdivisions and combinations of our common stock; the issuance of stock dividends, or certain rights, options or warrants, capital stock, indebtedness, assets or cash dividends to all or substantially all holders of our common stock; and certain tender or exchange offers by us. The conversion rate will not, however, be adjusted for other events, such as a third party tender or exchange offer or an issuance of common stock for cash or an acquisition, that may adversely affect the trading price of the notes or our common stock. On conversion, holders of the 1.375% Convertible Senior Notes due 2019 will not be entitled to receive cash in lieu of shares of our common stock, except for cash in lieu of fractional shares.
The indenture governing the senior notes and the 1.375% Convertible Senior Notes due 2019 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-leaseback transactions involving property or assets above a certain specified value. In addition, the 1.375% Convertible Senior Notes due 2019 and all of the senior notes (with the exception of the 6 1/4% Senior Notes due 2015 and the 7 1/4% senior notes due 2018) contain certain limitations related to mergers, consolidations, and sales of assets.
As of February 28, 2015 , we were in compliance with the applicable terms of all our covenants under the Credit Facility, the senior notes, the 1.375% Convertible Senior Notes due 2019, 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.
Principal payments on the senior notes, the 1.375% Convertible Senior Notes due 2019, the mortgages and land contracts due to land sellers and other loans are due as follows: 2015 – $218.3 million ; 2016 – $17.1 million ; 2017 – $265.0 million ; 2018 – $300.0 million ; 2019 – $630.0 million ; and thereafter – $1.40 billion .

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13.
Fair Value Disclosures
The fair values 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 and our assets measured at fair value on a nonrecurring basis for the three months ended February 28, 2015 and the year ended November 30, 2014 (in thousands):  
Description
 
Fair Value Hierarchy
 
February 28,
2015
 
November 30,
2014
Inventories (a)
 
Level 2
 
$

 
$
6,421

Inventories (a)
 
Level 3
 

 
24,174

(a)
Amounts represent the aggregate fair value for real estate assets impacted by inventory impairment charges during the period, as of the date that 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.
Inventories with a carrying value of $68.2 million were written down to their fair value of $30.6 million during the year ended November 30, 2014, resulting in inventory impairment charges of $37.6 million .
The fair values for inventories that were determined using Level 2 inputs were based on an executed contract. The fair values for inventories that were determined using Level 3 inputs were primarily based on the estimated future net cash flows discounted for inherent risk associated with each underlying asset. Additionally, the fair values for inventories determined using Level 3 inputs that involved a planned future land sale were estimated based on a broker quote.
Our financial instruments consist of cash and cash equivalents, restricted cash, senior notes, the 1.375% Convertible Senior Notes due 2019, and mortgages and land contracts due to land sellers and other loans. Fair value measurements of financial instruments are determined by various market data and other valuation techniques as appropriate. When available, we use quoted market prices in active markets to determine fair value.
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, 2015
 
November 30, 2014
 
Fair Value
Hierarchy
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Senior notes
Level 2
 
$
2,558,642

 
$
2,634,330

 
$
2,308,275

 
$
2,468,852

Convertible senior notes
Level 2
 
230,000

 
216,200

 
230,000

 
229,713

The fair values of our senior notes and the 1.375% Convertible Senior Notes due 2019 are generally estimated based on quoted market prices for these instruments. The carrying values reported for cash and cash equivalents, restricted cash, and mortgages and land contracts due to land sellers and other loans approximate fair values.


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14.
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 , 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, including claims where we could have liability under applicable state statutes or tort law for a defective condition in or damages to a 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 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,
 
2015
 
2014
Balance at beginning of period
$
45,196

 
$
48,704

Warranties issued
4,133

 
3,426

Payments
(7,595
)
 
(8,711
)
Adjustments (a)
3,623

 

Balance at end of period
$
45,357

 
$
43,419

 
(a)
As discussed below, adjustments for the three months ended February 28, 2015 were comprised of a reclassification of estimated minimum probable recoveries to receivables and had no impact on our consolidated statement of operations for the period.
Central and Southwest Florida Claims . Since 2012, we have received warranty claims from homeowners in certain of our communities in central and southwest Florida primarily involving framing, stucco, roofing and/or sealant matters on homes we delivered between 2003 and 2009, with many resulting in water intrusion-related issues. Based on the status of our ongoing investigation and repair efforts with respect to homes affected by these water intrusion-related issues, our overall warranty liability at February 28, 2015 and November 30, 2014 included $5.8 million and $9.4 million , respectively, for estimated remaining repair costs associated with (a) 231 and 324 identified affected homes, respectively, and (b) similarly affected homes that we believed at each respective date may be identified in the future. The $5.8 million at February 28, 2015 encompasses what we believe to be the probable overall cost of the repair effort remaining with respect to affected homes before insurance and other recoveries. However, our actual costs to fully resolve repairs on affected homes could differ from the overall costs we have estimated depending on the identification of additional affected homes in future periods, if any, and the nature of the work that is undertaken to complete repairs on identified affected homes. During the three months ended February 28, 2015 , we resolved repairs on 111 affected homes and identified 18 additional affected homes. We consider repairs for affected homes to be resolved when all repairs are completed and all repair costs are fully paid. During the three months ended February 28, 2015 and 2014, we paid $4.1 million and $6.0 million , respectively, to repair affected homes. As of February 28, 2015 , we had paid $67.4 million of the probable total repair costs of $73.2 million that we have estimated for the overall repair effort. We anticipate resolving repairs on affected homes by the end of 2015.

18


We believe it is probable that we will recover a portion of our repair costs associated with affected homes from various sources, including our insurers, and subcontractors involved with the original construction of the homes and their insurers. During the three months ended February 28, 2015 , we collected $5.0 million of such recoveries. As of February 28, 2015, our estimated minimum probable recoveries, net of amounts collected, totaled $21.6 million , of which $5.8 million was included as an offset to our overall warranty liability and the remainder was included in receivables. The estimated minimum probable recoveries pertaining to affected homes are included in receivables to the extent they exceed the estimated remaining repair costs in our overall warranty liability associated with such homes. During the three months ended February 28, 2015, we reclassified $3.6 million of estimated minimum probable recoveries that were in excess of the estimated remaining repair costs to a receivable. Our assessment of the water intrusion-related issues in central and southwest Florida, including the process of determining potentially responsible parties and our efforts to obtain recoveries, is ongoing, and, as a result, our estimate of minimum probable recoveries may change as additional information is obtained.
Overall Warranty Liability Assessment. In assessing our overall warranty liability at a reporting date, we evaluate the costs for warranty-related items on a combined basis for all of our previously delivered homes that are under our limited warranty program, which would include homes in central and southwest Florida that have been or may in the future be identified as affected by water intrusion-related issues. Based on this evaluation, we believe our overall warranty liability as of February 28, 2015 is adequate. As a result, we recorded no adjustments to our overall warranty liability that impacted our consolidated statement of operations for the three months ended February 28, 2015 . Depending on the number of additional homes in central and southwest Florida that are identified as affected by water intrusion-related issues, if any, and the actual costs we incur in future periods to repair such affected homes and/or homes affected by other issues, we may revise the amount of our estimated liability, which could result in an increase or decrease in our overall warranty liability. Based on our assessment of the water intrusion-related issues in central and southwest Florida, we believe that our overall warranty liability is adequate to cover the estimated probable total repair costs with respect to affected homes, though we believe it is reasonably possible that our loss in this matter could exceed the amount accrued as of February 28, 2015 by zero to $3 million .
Florida Attorney General’s Office Inquiry. In 2013, we were notified by the Florida Attorney General’s Office that it was making a preliminary inquiry into the status of our communities in Florida affected by water intrusion-related issues.  We are cooperating with the Florida Attorney General’s Office inquiry and are in discussions to resolve its concerns. While the ultimate outcome of the inquiry is uncertain, based on the status of our discussions, we established an accrual for the estimated minimum probable loss with respect to this inquiry during 2014 and increased the accrual during the three months ended February 28, 2015. At this stage of our discussions, we believe it is reasonably possible that our loss in this matter could exceed the amount accrued by zero to $5 million .
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 evidence, 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 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 self-insure a portion of our overall risk through the use of a captive insurance subsidiary. 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, where eligible subcontractors are enrolled as insureds on each project. Enrolled subcontractors contribute toward the cost of the insurance and agree to pay a contractual amount in the future in the event of 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 projects as part of our overall general liability insurance and our self-insurance through our captive insurance subsidiary. We record expenses and liabilities based on the estimated costs required to cover our self-insured retention and deductible amounts under our insurance policies, and the estimated costs of potential claims and claim adjustment expenses that are above our coverage limits or that are not covered by our insurance policies. These estimated costs are based on an analysis of our historical claims and industry data, and include an estimate of claims incurred but not yet reported.
We engage a third-party actuary that uses our historical claim and expense data, as well as industry data, to estimate our liabilities related to unpaid claims, claim adjustment expenses, third-party recoveries and incurred but not yet reported claims associated with the risks that we are assuming under our self-insurance. These estimates are subject to uncertainty due to a variety of factors, the most significant being the long period of time between the delivery of a home to a homebuyer and when a structural warranty or construction defect claim is made, and the ultimate resolution of the construction defect claim. Though state regulations vary, construction defect claims are reported and resolved over a prolonged period of time, which can extend for 10 years or longer. As a result, the majority of the estimated liability relates to incurred but not yet reported claims. Because the majority of our estimated liabilities relate to incurred but not yet reported claims, adjustments related to individual

19


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.
The changes in our self-insurance liability were as follows (in thousands):
 
Three Months Ended February 28,
 
2015
 
2014
Balance at beginning of period
$
86,574

 
$
92,214

Self-insurance expense (a)
2,435

 
2,616

Payments, net of recoveries (b)
(6,262
)
 
(4,414
)
Balance at end of period
$
82,747

 
$
90,416

(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)
Recoveries are reflected in the period we receive funds from subcontractors and/or their insurers.
The projection of losses related to these liabilities requires actuarial assumptions that are subject to variability due to uncertainties regarding construction defect claims relative to our markets and the types of product we build, insurance industry practices and legal or regulatory actions and/or interpretations, among other factors. Key assumptions used in these estimates include claim frequencies, severities and settlement patterns, which can occur over an extended period of time. In addition, changes in the frequency and severity of reported claims and the estimates to settle claims can impact the trends and assumptions used in the actuarial analysis, which could be material to our consolidated financial statements. 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.
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, 2015 , we had $550.4 million of performance bonds and $27.2 million of letters of credit outstanding. At November 30, 2014, we had $541.6 million of performance bonds and $26.7 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 obligations are 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, 2015 , we had total cash deposits of $28.5 million to purchase land having an aggregate purchase price of $829.2 million . Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance.
15.
Legal Matters
Nevada Development Contract Litigation. KB HOME Nevada Inc., a wholly owned subsidiary of ours (“KB Nevada”), is a defendant in a case in the Eighth Judicial District Court in Clark County, Nevada entitled Las Vegas Development Associates, LLC, Essex Real Estate Partners, LLC, et al. v. KB HOME Nevada Inc. In 2007, Las Vegas Development Associates, LLC (“LVDA”) agreed to purchase from KB Nevada approximately 83 acres of land located near Las Vegas, Nevada. LVDA subsequently assigned its rights to Essex Real Estate Partners, LLC (“Essex”). KB Nevada and Essex entered into a development agreement relating to certain major infrastructure improvements. LVDA’s and Essex’s complaint, initially filed in 2008, alleged that KB Nevada breached the development agreement, and also alleged that KB Nevada fraudulently induced them to enter into the purchase and development agreements. LVDA’s and Essex’s lenders subsequently filed related actions that were consolidated into the LVDA/Essex matter. The consolidated plaintiffs sought rescission of the agreements or, in the alternative, compensatory damages of $55 million plus unspecified punitive damages and other damages, and interest charges in excess of $41 million (“Claimed Damages”). KB Nevada has denied the allegations, and believes it has meritorious defenses to the consolidated plaintiffs’ claims. On March 15, 2013, the court entered orders denying the consolidated plaintiffs’

20


motions for summary judgment and granting the majority of KB Nevada’s motions for summary judgment, eliminating, among other of the consolidated plaintiffs’ claims, those for fraud, negligent misrepresentation, and punitive damages. With the court’s decisions, the only remaining claims against KB Nevada are for contract damages and rescission. In August 2013, the court granted motions that further narrowed the scope of the Claimed Damages. While the ultimate outcome is uncertain — we believe it is reasonably possible that the loss in this matter could range from zero to approximately $55 million plus prejudgment interest, which could be material to our consolidated financial statements — KB Nevada believes it will be successful in defending against the consolidated plaintiffs’ remaining claims and that the consolidated plaintiffs will not be awarded rescission or damages. The non-jury trial, originally set for September 2012, is presently scheduled for September 15, 2015.
Other Matters. In addition to the specific proceeding described above, we are involved in other 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, 2015 , it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the estimated amounts already recognized 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 have become probable and reasonably estimable at the time an evaluation is made. 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 no accrual had been made, could be material to our consolidated financial statements.
16.
Stockholders’ Equity
A summary of changes in stockholders’ equity is presented below (in thousands):
 
 
Three Months Ended February 28, 2015
 
 
Common Stock
 
Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Grantor Stock Ownership Trust
 
Treasury Stock
 
Total Stockholders’ Equity
Balance at November 30, 2014
 
$
115,387

 
$
668,857

 
$
1,391,256

 
$
(21,008
)
 
$
(112,106
)
 
$
(446,476
)
 
$
1,595,910

Net income
 

 

 
7,799

 

 

 

 
7,799

Dividends on common stock
 

 

 
(2,299
)
 

 

 

 
(2,299
)
Stock-based compensation
 

 
3,181

 

 

 

 

 
3,181

Stock repurchases
 

 

 

 

 

 
(21
)
 
(21
)
Balance at February 28, 2015
 
$
115,387

 
$
672,038

 
$
1,396,756

 
$
(21,008
)
 
$
(112,106
)
 
$
(446,497
)
 
$
1,604,570

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In connection with the issuance of the 1.375% Convertible Senior Notes due 2019, which is discussed in Note 12. Notes Payable, we established a common stock reserve account with our transfer agent to reserve the maximum number of shares of our common stock potentially deliverable upon conversion to holders of the 1.375% Convertible Senior Notes due 2019 based on the terms of the instruments governing these notes. Accordingly, the common stock reserve account had a balance of 12,602,735 shares at February 28, 2015 . The maximum number of shares would potentially be deliverable to holders only in certain limited circumstances as set forth in the instruments governing the 1.375% Convertible Senior Notes due 2019.
As of February 28, 2015 , we were authorized to repurchase 4,000,000 shares of our common stock under a board-approved share repurchase program. We did not repurchase any shares of our common stock under this program in the three months ended February 28, 2015 . We have not repurchased any shares pursuant to this common stock repurchase plan for the past several years and any resumption of such stock repurchases under this program or any other program will be at the discretion of our board of directors.
Unrelated to the common stock repurchase plan, in connection with an amendment of the Amended and Restated KB Home Non-Employee Directors Compensation Plan (“Director Plan”) effective July 17, 2014, our board of directors authorized the

21


repurchase of no more than 680,000 shares of our common stock solely as necessary for director elections in respect of outstanding stock appreciation right awards under the Director Plan. We had not repurchased any shares pursuant to this board of directors authorization as of February 28, 2015.
During the three months ended February 28, 2015 and 2014, our board of directors declared, and we paid, a cash dividend of $.0250 per share of common stock.
17.
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, 2015 :
 
Options
 
Weighted
Average Exercise
Price
Options outstanding at beginning of period
11,735,042

 
$
20.45

Granted

 

Exercised

 

Cancelled
(20,780
)
 
16.13

Options outstanding at end of period
11,714,262

 
$
20.46

Options exercisable at end of period
10,108,073

 
$
21.32

As of February 28, 2015 , the weighted average remaining contractual life of stock options outstanding and stock options exercisable was 4.9 years and 4.2 years , respectively. There was $5.1 million of total unrecognized compensation expense related to unvested stock option awards as of February 28, 2015 . For the three months ended February 28, 2015 and 2014 , stock-based compensation expense associated with stock options totaled $1.1 million and $.6 million , respectively. The aggregate intrinsic value of both stock options outstanding and stock options exercisable was $16.2 million at February 28, 2015 . (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 $2.1 million for the three months ended February 28, 2015 and $1.2 million for the three months ended February 28, 2014 related to restricted stock and PSUs.
18.
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,
 
2015
 
2014
Summary of cash and cash equivalents at end of period:
 
 
 
Homebuilding
$
545,641

 
$
303,269

Financial services
2,438

 
3,181

Total
$
548,079

 
$
306,450

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid, net of amounts capitalized
$
(3,892
)
 
$
(8,133
)
Income taxes paid
150

 
103

 
 
 
 

22


 
Three Months Ended February 28,
 
2015
 
2014
Supplemental disclosures of noncash activities:
 
 
 
Reclassification of warranty recoveries to receivables
$
3,623

 
$

Increase in consolidated inventories not owned

 
917

Increase in inventories due to distributions of land and land development from an unconsolidated joint venture
8,006

 
70,642

Inventories and inventory-related obligations associated with tax increment financing entities assessments tied to distribution of land from an unconsolidated joint venture

 
33,197

Inventories acquired through seller financing

 
27,010

19.
Supplemental Guarantor Information
Our obligations to pay principal, premium, if any, and interest on our senior notes and the 1.375% Convertible Senior Notes due 2019 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 our senior notes and the 1.375% Convertible Senior Notes due 2019, 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 (as in effect on June 1, 1996) 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 our senior notes, the 1.375% Convertible Senior Notes due 2019 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, 2015 .

23


Condensed Consolidating Statement of Operations
Three Months Ended February 28, 2015 (in thousands)
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Revenues
$

 
$
534,276

 
$
45,845

 
$

 
$
580,121

Homebuilding:
 
 
 
 
 
 
 
 
 
Revenues
$

 
$
534,276

 
$
43,612

 
$

 
$
577,888

Construction and land costs

 
(451,140
)
 
(41,278
)
 

 
(492,418
)
Selling, general and administrative expenses
(15,672
)
 
(48,504
)
 
(6,896
)
 

 
(71,072
)
Operating income (loss)
(15,672
)
 
34,632

 
(4,562
)
 

 
14,398

Interest income
101

 
1

 
1

 

 
103

Interest expense
(43,580
)
 
(1,460
)
 

 
39,702

 
(5,338
)
Intercompany interest
70,468

 
(28,406
)
 
(2,360
)
 
(39,702
)
 

Equity in loss of unconsolidated joint ventures

 
(347
)
 

 

 
(347
)
Homebuilding pretax income (loss)
11,317

 
4,420

 
(6,921
)
 

 
8,816

Financial services pretax income

 

 
1,683

 

 
1,683

Total pretax income (loss)
11,317

 
4,420

 
(5,238
)
 

 
10,499

Income tax benefit (expense)
200

 
(3,100
)
 
200

 

 
(2,700
)
Equity in net loss of subsidiaries
(3,718
)
 

 

 
3,718

 

Net income (loss)
$
7,799

 
$
1,320

 
$
(5,038
)
 
$
3,718

 
$
7,799


24


Condensed Consolidating Statement of Operations
Three Months Ended February 28, 2014 (in thousands)
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Revenues
$

 
$
392,178

 
$
58,509

 
$

 
$
450,687

Homebuilding:
 
 
 
 
 
 
 
 
 
Revenues
$

 
$
392,178

 
$
56,089

 
$

 
$
448,267

Construction and land costs

 
(321,352
)
 
(47,922
)
 

 
(369,274
)
Selling, general and administrative expenses
(15,744
)
 
(37,081
)
 
(8,449
)
 

 
(61,274
)
Operating income (loss)
(15,744
)
 
33,745

 
(282
)
 

 
17,719

Interest income
167

 
1

 

 

 
168

Interest expense
(38,008
)
 
(1,272
)
 

 
28,004

 
(11,276
)
Intercompany interest
59,722

 
(30,074
)
 
(1,644
)
 
(28,004
)
 

Equity in income (loss) of unconsolidated joint ventures

 
(703
)
 
3,293

 

 
2,590

Homebuilding pretax income
6,137

 
1,697

 
1,367

 

 
9,201

Financial services pretax income

 

 
1,562

 

 
1,562

Total pretax income
6,137

 
1,697

 
2,929

 

 
10,763

Income tax expense

 
(200
)
 

 

 
(200
)
Equity in net income of subsidiaries
4,426

 

 

 
(4,426
)
 

Net income
$
10,563

 
$
1,497

 
$
2,929

 
$
(4,426
)
 
$
10,563

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


25


Condensed Consolidating Balance Sheet
February 28, 2015 (in thousands)
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
Homebuilding:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
472,130

 
$
66,305

 
$
7,206

 
$

 
$
545,641

Restricted cash
27,984

 

 

 

 
27,984

Receivables
293

 
140,849

 
2,555

 

 
143,697

Inventories

 
2,999,424

 
246,959

 

 
3,246,383

Investments in unconsolidated joint ventures

 
73,502

 

 

 
73,502

Deferred tax assets, net
216,092

 
549,546

 
56,994

 

 
822,632

Other assets
104,420

 
13,558

 
1,895

 

 
119,873

 
820,919

 
3,843,184

 
315,609

 

 
4,979,712

Financial services

 

 
10,145

 

 
10,145

Intercompany receivables
3,660,500

 

 
109,129

 
(3,769,629
)
 

Investments in subsidiaries
37,488

 

 

 
(37,488
)
 

Total assets
$
4,518,907

 
$
3,843,184

 
$
434,883

 
$
(3,807,117
)
 
$
4,989,857

Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
Homebuilding:
 
 
 
 
 
 
 
 
 
Accounts payable, accrued expenses and other liabilities
$
131,682

 
$
327,964

 
$
99,501

 
$

 
$
559,147

Notes payable
2,763,532

 
60,638

 

 

 
2,824,170

 
2,895,214

 
388,602

 
99,501

 

 
3,383,317

Financial services

 

 
1,970

 

 
1,970

Intercompany payables
19,123

 
3,453,262

 
297,244

 
(3,769,629
)
 

Stockholders’ equity
1,604,570

 
1,320

 
36,168

 
(37,488
)
 
1,604,570

Total liabilities and stockholders’ equity
$
4,518,907

 
$
3,843,184

 
$
434,883

 
$
(3,807,117
)
 
$
4,989,857



26


Condensed Consolidating Balance Sheet
November 30, 2014 (in thousands)
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
Homebuilding:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
303,280

 
$
38,124

 
$
14,962

 
$

 
$
356,366

Restricted cash
27,235

 

 

 

 
27,235

Receivables
15

 
123,024

 
2,449

 

 
125,488

Inventories

 
2,980,056

 
238,331

 

 
3,218,387

Investments in unconsolidated joint ventures

 
79,441

 

 

 
79,441

Deferred tax assets, net
215,923

 
552,653

 
56,656

 

 
825,232

Other assets
99,099

 
13,922

 
1,894

 

 
114,915

 
645,552

 
3,787,220

 
314,292

 

 
4,747,064

Financial services

 

 
10,486

 

 
10,486

Intercompany receivables
3,582,612

 

 
112,919

 
(3,695,531
)
 

Investments in subsidiaries
39,356

 

 

 
(39,356
)
 

Total assets
$
4,267,520

 
$
3,787,220

 
$
437,697

 
$
(3,734,887
)
 
$
4,757,550

Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
Homebuilding:
 
 
 
 
 
 
 
 
 
Accounts payable, accrued expenses and other liabilities
$
138,298

 
$
331,361

 
$
112,939

 
$

 
$
582,598

Notes payable
2,513,165

 
63,360

 

 

 
2,576,525

 
2,651,463

 
394,721

 
112,939

 

 
3,159,123

Financial services

 

 
2,517

 

 
2,517

Intercompany payables
20,147

 
3,392,499

 
282,885

 
(3,695,531
)
 

Stockholders’ equity
1,595,910

 

 
39,356

 
(39,356
)
 
1,595,910

Total liabilities and stockholders’ equity
$
4,267,520

 
$
3,787,220

 
$
437,697

 
$
(3,734,887
)
 
$
4,757,550




27


Condensed Consolidating Statement of Cash Flows
Three Months Ended February 28, 2015 (in thousands)
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Net cash provided by (used in) operating activities
$
5,369

 
$
(30,016
)
 
$
(24,262
)
 
$

 
$
(48,909
)