KB Home
KB HOME (Form: 10-Q, Received: 07/02/2015 16:53:06)

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 May 31, 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 May 31, 2015 .
There were 92,017,178 shares of the registrant’s common stock, par value $1.00 per share, outstanding on May 31, 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)
 

 
Six Months Ended May 31,
 
Three Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Total revenues
$
1,203,090

 
$
1,015,694

 
$
622,969

 
$
565,007

Homebuilding:
 
 
 
 
 
 
 
Revenues
$
1,198,692

 
$
1,010,663

 
$
620,804

 
$
562,396

Construction and land costs
(1,016,828
)
 
(825,834
)
 
(524,410
)
 
(456,560
)
Selling, general and administrative expenses
(149,604
)
 
(132,818
)
 
(78,532
)
 
(71,544
)
Operating income
32,260

 
52,011

 
17,862

 
34,292

Interest income
255

 
283

 
152

 
115

Interest expense
(13,456
)
 
(19,834
)
 
(8,118
)
 
(8,558
)
Equity in income (loss) of unconsolidated joint ventures
(758
)
 
1,912

 
(411
)
 
(678
)
Homebuilding pretax income
18,301

 
34,372

 
9,485

 
25,171

Financial services:
 
 
 
 
 
 
 
Revenues
4,398

 
5,031

 
2,165

 
2,611

Expenses
(1,892
)
 
(1,704
)
 
(928
)
 
(852
)
Equity in income (loss) of unconsolidated joint ventures
2,365

 
(12
)
 
1,951

 
(6
)
Financial services pretax income
4,871

 
3,315

 
3,188

 
1,753

Total pretax income
23,172

 
37,687

 
12,673

 
26,924

Income tax expense
(5,800
)
 
(500
)
 
(3,100
)
 
(300
)
Net income
$
17,372

 
$
37,187

 
$
9,573

 
$
26,624

Earnings per share:
 
 
 
 
 
 
 
Basic
$
.19

 
$
.43

 
$
.10

 
$
.30

Diluted
$
.18

 
$
.40

 
$
.10

 
$
.27

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
91,974

 
86,668

 
91,995

 
89,529

Diluted
101,470

 
96,759

 
101,544

 
99,508

Cash dividends declared per common share
$
.050

 
$
.050

 
$
.025

 
$
.025

See accompanying notes.

3


KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands – Unaudited)
 

 
May 31,
2015
 
November 30,
2014
Assets
 
 
 
Homebuilding:
 
 
 
Cash and cash equivalents
$
439,920

 
$
356,366

Restricted cash
27,213

 
27,235

Receivables
151,578

 
125,488

Inventories
3,393,672

 
3,218,387

Investments in unconsolidated joint ventures
77,935

 
79,441

Deferred tax assets, net
819,532

 
825,232

Other assets
117,745

 
114,915

 
5,027,595

 
4,747,064

Financial services
11,465

 
10,486

Total assets
$
5,039,060

 
$
4,757,550

 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Homebuilding:
 
 
 
Accounts payable
$
164,614

 
$
172,716

Accrued expenses and other liabilities
437,115

 
409,882

Notes payable
2,819,510

 
2,576,525

 
3,421,239

 
3,159,123

Financial services
1,985

 
2,517

Stockholders’ equity:
 
 
 
Common stock
115,469

 
115,387

Paid-in capital
676,228

 
668,857

Retained earnings
1,404,029

 
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
(446,776
)
 
(446,476
)
Total stockholders’ equity
1,615,836

 
1,595,910

Total liabilities and stockholders’ equity
$
5,039,060

 
$
4,757,550

See accompanying notes.

4


KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands – Unaudited)
 
 
Six Months Ended May 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
17,372

 
$
37,187

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Equity in income of unconsolidated joint ventures
(1,607
)
 
(1,900
)
Amortization of discounts and issuance costs
3,914

 
3,360

Depreciation and amortization
1,646

 
1,026

Deferred income taxes
5,700

 

Stock-based compensation
7,428

 
3,725

Land option contract abandonments
984

 
790

Changes in assets and liabilities:
 
 
 
Receivables
(17,999
)
 
(17,101
)
Inventories
(116,664
)
 
(579,173
)
Accounts payable, accrued expenses and other liabilities
(34,048
)
 
2,474

Other, net
(2,626
)
 
(4,917
)
Net cash used in operating activities
(135,900
)
 
(554,529
)
Cash flows from investing activities:
 
 
 
Contributions to unconsolidated joint ventures
(13,244
)
 
(16,242
)
Proceeds from sale of investment in unconsolidated joint venture

 
10,110

Purchases of property and equipment, net
(1,590
)
 
(3,012
)
Net cash used in investing activities
(14,834
)
 
(9,144
)
Cash flows from financing activities:
 
 
 
Change in restricted cash
22

 
(2,331
)
Proceeds from issuance of debt
250,000

 
400,000

Payment of debt issuance costs
(3,337
)
 
(5,448
)
Payments on mortgages and land contracts due to land sellers and other loans
(7,757
)
 
(6,476
)
Proceeds from issuance of common stock, net

 
137,045

Issuance of common stock under employee stock plans
25

 
64

Payments of cash dividends
(4,599
)
 
(4,388
)
Stock repurchases
(300
)
 
(46
)
Net cash provided by financing activities
234,054

 
518,420

Net increase (decrease) in cash and cash equivalents
83,320

 
(45,253
)
Cash and cash equivalents at beginning of period
358,768

 
532,523

Cash and cash equivalents at end of period
$
442,088

 
$
487,270

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 May 31, 2015 , the results of our consolidated operations for the three months and six months ended May 31, 2015 and 2014 , and our consolidated cash flows for the six months ended May 31, 2015 and 2014 . The results of our consolidated operations for the three months and six months ended May 31, 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 $285.3 million at May 31, 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 May 31, 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 $9.6 million for the three months ended May 31, 2015 and $26.6 million for the three months ended May 31, 2014. For the six months ended May 31, 2015 and 2014, our comprehensive income was $17.4 million and $37.2 million , respectively. Our comprehensive income for each of the three-month and six-month periods ended May 31, 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.

6


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 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.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, “Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. For public entities, ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. ASU 2015-03 is to be applied on a retrospective basis and represents a change in accounting principle. We believe the adoption of ASU 2015-03 will not have a material effect on our consolidated financial statements.
Reclassifications. Certain amounts in our consolidated financial statements for prior years have been reclassified to conform to the current period presentation.
2.
Segment Information
As of May 31, 2015 , we had identified five operating reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment. As of May 31, 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. Through these respective subsidiaries, 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.

7


The following tables present financial information relating to our segments (in thousands):
 
Six Months Ended May 31,
 
Three Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
West Coast
$
554,543

 
$
442,041

 
$
277,288

 
$
260,320

Southwest
145,318

 
94,496

 
80,181

 
48,381

Central
335,496

 
297,546

 
176,348

 
172,384

Southeast
163,335

 
176,580

 
86,987

 
81,311

Total homebuilding revenues
1,198,692

 
1,010,663

 
620,804

 
562,396

Financial services
4,398

 
5,031

 
2,165

 
2,611

Total
$
1,203,090

 
$
1,015,694

 
$
622,969

 
$
565,007

 
 
 
 
 
 
 
 
Pretax income (loss):
 
 
 
 
 
 
 
West Coast
$
40,408

 
$
54,329

 
$
18,554

 
$
35,964

Southwest
8,688

 
5,056

 
5,245

 
3,771

Central
23,351

 
13,292

 
13,125

 
10,516

Southeast
(16,214
)
 
(1,916
)
 
(6,601
)
 
(5,757
)
Corporate and other
(37,932
)
 
(36,389
)
 
(20,838
)
 
(19,323
)
Total homebuilding pretax income
18,301

 
34,372

 
9,485

 
25,171

Financial services
4,871

 
3,315

 
3,188

 
1,753

Total
$
23,172

 
$
37,687

 
$
12,673

 
$
26,924

 
 
 
 
 
 
 
 
Land option contract abandonments:
 
 
 
 
 
 
 
West Coast
$

 
$
103

 
$

 
$
103

Southwest

 

 

 

Central

 
433

 

 

Southeast
984

 
254

 
536

 
254

Total
$
984

 
$
790

 
$
536

 
$
357

 
May 31,
2015
 
November 30,
2014
Inventories:
 
 
 
Homes under construction
 
 
 
West Coast
$
639,285

 
$
536,843

Southwest
101,275

 
65,647

Central
241,858

 
201,164

Southeast
138,156

 
124,618

Subtotal
1,120,574

 
928,272

 
 
 
 

8


 
May 31,
2015
 
November 30,
2014
Land under development
 
 
 
West Coast
$
708,611

 
$
765,577

Southwest
350,726

 
334,691

Central
399,294

 
363,933

Southeast
256,159

 
245,948

Subtotal
1,714,790

 
1,710,149

 
 
 
 
Land held for future development
 
 
 
West Coast
294,536

 
294,060

Southwest
127,063

 
138,367

Central
22,043

 
22,957

Southeast
114,666

 
124,582

Subtotal
558,308

 
579,966

Total
$
3,393,672

 
$
3,218,387

Assets:
 
 
 
West Coast
$
1,773,389

 
$
1,695,753

Southwest
619,215

 
579,201

Central
761,411

 
678,139

Southeast
549,531

 
531,011

Corporate and other
1,324,049

 
1,262,960

Total homebuilding assets
5,027,595

 
4,747,064

Financial services
11,465

 
10,486

Total
$
5,039,060

 
$
4,757,550

3.
Financial Services
The following tables present financial information relating to our financial services reporting segment (in thousands):
 
Six Months Ended May 31,
 
Three Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Insurance commissions
$
2,724

 
$
2,532

 
$
1,290

 
$
1,270

Title services
1,673

 
1,599

 
874

 
891

Marketing services fees

 
900

 

 
450

Interest income
1

 

 
1

 

Total
4,398

 
5,031

 
2,165

 
2,611

Expenses
 
 
 
 
 
 
 
General and administrative
(1,892
)
 
(1,704
)
 
(928
)
 
(852
)
Operating income
2,506

 
3,327

 
1,237

 
1,759

Equity in income (loss) of unconsolidated joint ventures
2,365

 
(12
)
 
1,951

 
(6
)
Pretax income
$
4,871

 
$
3,315

 
$
3,188

 
$
1,753


9


 
May 31,
2015
 
November 30,
2014
Assets
 
 
 
Cash and cash equivalents
$
2,168

 
$
2,402

Receivables
681

 
1,738

Investments in unconsolidated joint ventures
8,514

 
6,149

Other assets
102

 
197

Total assets
$
11,465

 
$
10,486

Liabilities
 
 
 
Accounts payable and accrued expenses
$
1,985

 
$
2,517

Total liabilities
$
1,985

 
$
2,517

4.
Earnings Per Share
Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):  
 
Six Months Ended May 31,
 
Three Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net income
$
17,372

 
$
37,187

 
$
9,573

 
$
26,624

Less: Distributed earnings allocated to nonvested restricted stock
(16
)
 
(12
)
 
(8
)
 
(6
)
Less: Undistributed earnings allocated to nonvested restricted stock
(45
)
 
(88
)
 
(24
)
 
(66
)
Numerator for basic earnings per share
17,311

 
37,087

 
9,541

 
26,552

Effect of dilutive securities:
 
 
 
 
 
 
 
Interest expense and amortization of debt issuance costs associated with convertible senior notes, net of taxes
1,333

 
1,333

 
667

 
667

Add: Undistributed earnings allocated to nonvested restricted stock
45

 
88

 
24

 
66

Less: Undistributed earnings reallocated to nonvested restricted stock
(41
)
 
(80
)
 
(22
)
 
(59
)
Numerator for diluted earnings per share
$
18,648

 
$
38,428

 
$
10,210

 
$
27,226

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding — basic
91,974

 
86,668

 
91,995

 
89,529

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based payments
1,094

 
1,689

 
1,147

 
1,577

Convertible senior notes
8,402

 
8,402

 
8,402

 
8,402

Weighted average shares outstanding — diluted
101,470

 
96,759

 
101,544

 
99,508

Basic earnings per share
$
.19

 
$
.43

 
$
.10

 
$
.30

Diluted earnings per share
$
.18

 
$
.40

 
$
.10

 
$
.27

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 May 31, 2015 or 2014.

10


Outstanding stock options to purchase 6.9 million shares of our common stock were excluded from the diluted earnings per share calculations for the three-month and six-month periods ended May 31, 2015 , and outstanding stock options to purchase 5.2 million shares of our common stock were excluded from the diluted earnings per share calculations for the three-month and six-month periods ended May 31, 2014, because the effect of their inclusion in each case 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-month and six-month periods ended May 31, 2015 and 2014, as the applicable vesting conditions had not been satisfied.
5.
Inventories
Inventories consisted of the following (in thousands):
 
May 31,
2015
 
November 30, 2014
Homes under construction
$
1,120,574

 
$
928,272

Land under development
1,714,790

 
1,710,149

Land held for future development
558,308

 
579,966

Total
$
3,393,672

 
$
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):
 
Six Months Ended May 31,
 
Three Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Capitalized interest at beginning of period
$
266,668

 
$
216,681

 
$
284,040

 
$
227,200

Interest incurred
94,202

 
82,438

 
49,199

 
43,158

Interest expensed
(13,456
)
 
(19,834
)
 
(8,118
)
 
(8,558
)
Interest amortized to construction and land costs
(47,736
)
 
(37,702
)
 
(25,443
)
 
(20,217
)
Capitalized interest at end of period (a)
$
299,678

 
$
241,583

 
$
299,678

 
$
241,583

(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.
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 26 and 14 communities or land parcels for recoverability during the six months ended May 31, 2015 and 2014, respectively. The carrying value of the communities or land parcels evaluated during the six months ended May 31, 2015 and 2014 was $212.5 million and $70.5 million , respectively. Some of the communities or land parcels evaluated during the six months ended May 31, 2015 and 2014 were evaluated in more than one quarterly period. Communities or land parcels evaluated for recoverability in more than one quarterly period, if any, are counted only once for each six-month period shown. Based on the results of our evaluations, we had no inventory impairment charges for the three months and six months ended May 31, 2015 and 2014.
As of May 31, 2015 , the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $268.9 million , representing 26 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.

11


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 $.5 million corresponding to 114 lots for the three months ended May 31, 2015 , and $1.0 million of such charges corresponding to 426 lots for the six months ended May 31, 2015. We recognized land option contract abandonment charges of $.4 million corresponding to 32 lots for the three months ended May 31, 2014 , and $.8 million of such charges corresponding to 682 lots for the six months ended May 31, 2014 . We sometimes abandon land option contracts and other similar contracts when we have incurred costs of less than $100,000 ; the corresponding lots, which totaled zero and 1,987 lots for the three months ended May 31, 2015 and May 31, 2014, respectively, and zero and 5,367 lots for the six months ended May 31, 2015 and May 31, 2014 , respectively, and the related costs 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 May 31, 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 May 31, 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):
 
May 31, 2015
 
November 30, 2014
 
Cash
Deposits
 
Aggregate
Purchase Price
 
Cash
Deposits
 
Aggregate
Purchase Price
Unconsolidated VIEs
$
11,564

 
$
537,300

 
$
10,633

 
$
520,628

Other land option contracts and other similar contracts
19,714

 
370,025

 
22,426

 
437,842

Total
$
31,278

 
$
907,325

 
$
33,059

 
$
958,470

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 $52.1 million at May 31, 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 May 31, 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 $48.8 million at May 31, 2015 and $3.1 million at November 30, 2014 .

12


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 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 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 typically arises from our deferral of the unconsolidated joint venture’s profits or 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):
 
Six Months Ended May 31,
 
Three Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Revenues
$
6,420

 
$
6,118

 
$
3,210

 
$

Construction and land costs
(13,992
)
 
(3,523
)
 
(10,249
)
 

Other expense, net
(1,411
)
 
(2,038
)
 
(715
)
 
(908
)
Income (loss)
$
(8,983
)
 
$
557

 
$
(7,754
)
 
$
(908
)
The following table presents combined condensed balance sheet information for our unconsolidated joint ventures (in thousands):
 
May 31,
2015
 
November 30,
2014
Assets
 
 
 
Cash
$
14,133

 
$
23,699

Receivables
5,923

 
5,106

Inventories
161,015

 
153,427

Total assets
$
181,071

 
$
182,232

Liabilities and equity
 
 
 
Accounts payable and other liabilities
$
17,420

 
$
10,824

Equity
163,651

 
171,408

Total liabilities and equity
$
181,071

 
$
182,232

The following table presents information relating to our investments in unconsolidated joint ventures (dollars in thousands):

13


 
May 31,
2015
 
November 30,
2014
Number of investments in unconsolidated joint ventures
6

 
6

Investments in unconsolidated joint ventures
$
77,935

 
$
79,441

Number of unconsolidated joint venture lots controlled under land option contracts and other similar contracts
454

 
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 six months ended May 31, 2014 . None of our unconsolidated joint ventures had outstanding debt at May 31, 2015 or November 30, 2014 .
9.
Other Assets
Other assets consisted of the following (in thousands):
 
May 31,
2015
 
November 30,
2014
Cash surrender value of insurance contracts
$
70,675

 
$
70,571

Debt issuance costs
27,247

 
27,082

Property and equipment, net
11,775

 
11,831

Prepaid expenses
8,048

 
5,431

Total
$
117,745

 
$
114,915

10.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
 
May 31,
2015
 
November 30,
2014
Employee compensation and related benefits
$
97,117

 
$
113,875

Inventory-related obligations
93,377

 
52,009

Self-insurance and other litigation liabilities
93,277

 
89,606

Accrued interest payable
66,688

 
63,275

Warranty liability
46,472

 
45,196

Customer deposits
18,459

 
15,197

Real estate and business taxes
9,021

 
13,684

Other
12,704

 
17,040

Total
$
437,115

 
$
409,882

11.
Income Taxes
Income Tax Expense. We recognized income tax expense of $3.1 million for the three months ended May 31, 2015 and $.3 million for the three months ended May 31, 2014 . Our income tax expense for the six months ended May 31, 2015 was $5.8 million , compared to $.5 million for the six months ended May 31, 2014. Income tax expense for the three months ended May 31, 2015 reflected the favorable net impact of $1.7 million of federal energy tax credits we earned from building energy-efficient homes, resulting in an effective tax rate of 24.5% . For the six months ended May 31, 2015, our effective tax rate of 25.0% reflected the favorable net impact of $3.1 million of federal energy tax credits. Our effective tax rates for the three months and six months ended May 31, 2014 were not meaningful items due to the effects of the full valuation allowance against our deferred tax assets at that time.

14


The tax credit impact in the three months and six months ended May 31, 2015 included energy tax credits we earned from building energy-efficient homes in 2014 under 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 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. The tax credit impact in the three months and six months ended May 31, 2015 also included additional energy tax credits we earned from building energy-efficient homes in 2012 and 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 and six months ended May 31, 2015 , we made no adjustments to our deferred tax asset valuation allowance. Therefore, at May 31, 2015 , we had deferred tax assets of $860.7 million that were partly offset by a valuation allowance of $41.2 million .
Unrecognized Tax Benefits. At May 31, 2015 and November 30, 2014, our gross unrecognized tax benefits (including interest and penalties) totaled $.1 million and $.3 million , respectively, 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):
 
May 31,
2015
 
November 30,
2014
Mortgages and land contracts due to land sellers and other loans
$
30,493

 
$
38,250

6 1/4% Senior notes due June 15, 2015
199,905

 
199,891

9.10% Senior notes due September 15, 2017
263,093

 
262,729

7 1/4% Senior notes due June 15, 2018
299,477

 
299,402

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

 
400,000

8.00% Senior notes due March 15, 2020
346,542

 
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
$
2,819,510

 
$
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

15


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 Ratio, and either a consolidated interest coverage ratio (“Interest Coverage Ratio”) or minimum level of liquidity, each as defined therein. As of May 31, 2015 , we had no cash borrowings and $.2 million of letters of credit outstanding under the Credit Facility. Therefore, as of May 31, 2015, we had $199.8 million available for cash borrowings under the Credit Facility, with up to $99.8 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 May 31, 2015 and November 30, 2014, we had $26.8 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.
Mortgages and Land Contracts Due to Land Sellers and Other Loans. As of May 31, 2015 , inventories having a carrying value of $125.4 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”). As disclosed in Note 20. Subsequent Event, subsequent to the end of the second quarter of 2015, we used a portion of the net proceeds of approximately $247 million from this issuance to retire the remaining $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. We plan to use the remainder of the net proceeds for general corporate purposes, including without limitation working capital, land acquisition and land development.
All of our senior notes outstanding at May 31, 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 and is subject to adjustment upon the occurrence of certain events, as described in the instruments governing these notes.
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 May 31, 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 – $213.5 million ; 2016 – $16.9 million ; 2017 – $265.0 million ; 2018 – $300.0 million ; 2019 – $630.0 million ; and thereafter – $1.40 billion .

16


13.
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 and our assets measured at fair value on a nonrecurring basis for the six months ended May 31, 2015 and the year ended November 30, 2014 (in thousands):  
Description
 
Fair Value Hierarchy
 
May 31,
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 applicable 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.
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):
 
 
 
May 31, 2015
 
November 30, 2014
 
Fair Value
Hierarchy
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Senior notes
Level 2
 
$
2,559,017

 
$
2,709,650

 
$
2,308,275

 
$
2,468,852

Convertible senior notes
Level 2
 
230,000

 
219,938

 
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.
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

17


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):
 
Six Months Ended May 31,
 
Three Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Balance at beginning of period
$
45,196

 
$
48,704

 
$
45,357

 
$
43,419

Warranties issued
8,884

 
7,786

 
4,751

 
4,360

Payments
(14,642
)
 
(20,162
)
 
(7,047
)
 
(11,451
)
Adjustments (a)
7,034

 
4,609

 
3,411

 
4,609

Balance at end of period
$
46,472

 
$
40,937

 
$
46,472

 
$
40,937

 
(a)
As discussed below, adjustments for the three months and six months ended May 31, 2015 and 2014 were primarily comprised of a reclassification of estimated minimum probable recoveries to receivables. Adjustments for the three months and six months ended May 31, 2014 also included a reclassification of estimated minimum probable recoveries to establish a separate accrual for a water intrusion-related inquiry.
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 concerning 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 May 31, 2015 and November 30, 2014 included $2.4 million and $9.4 million , respectively, for estimated remaining repair costs associated with (a) 141 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 $2.4 million at May 31, 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 six months ended May 31, 2015 , we resolved repairs on 220 affected homes and identified 37 additional affected homes. We consider repairs for affected homes to be resolved when all repairs are completed and all repair costs are fully paid. In the three-month periods ended May 31, 2015 and 2014, we paid $3.4 million and $8.1 million , respectively, to repair affected homes. During the six months ended May 31, 2015 and 2014, we paid $7.5 million and $14.1 million , respectively, to repair affected homes. As of May 31, 2015 , we had paid $70.8 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.
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 six months ended May 31, 2015 , we collected $5.0 million of such recoveries. Based on a review of our estimated potential recoveries during the second quarter of 2015, we increased our estimate of minimum probable recoveries. As of May 31, 2015 , our estimated minimum probable recoveries, net of amounts collected, totaled $22.6 million , of which $2.4 million was included as an offset to our overall warranty liability and the remainder was included in receivables. As of November 30,

18


2014, our estimated minimum probable recoveries, net of amounts collected, was $26.6 million . 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 and six months ended May 31, 2015 , we reclassified $3.4 million and $7.0 million , respectively, of estimated minimum probable recoveries that were in excess of the estimated remaining repair costs to a receivable. During the three months and six months ended May 31, 2014, we similarly reclassified $5.6 million of then-estimated minimum probable recoveries that were in excess of the then-estimated remaining repair costs. 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 May 31, 2015 is adequate. 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 May 31, 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 and six months ended May 31, 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. Key assumptions used in 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 structural warranty or 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; insurance industry practices; 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, structural warranty or construction

19


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 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 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):
 
Six Months Ended May 31,
 
Three Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Balance at beginning of period
$
86,574

 
$
92,214

 
$
82,747

 
$
90,416

Self-insurance expense (a)
7,225

 
5,653

 
4,790

 
3,037

Payments, net of recoveries (b)
(13,663
)
 
(7,409
)
 
(7,401
)
 
(2,995
)
Balance at end of period
$
80,136

 
$
90,458

 
$
80,136

 
$
90,458

(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.
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 May 31, 2015 , we had $553.0 million of performance bonds and $27.0 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 May 31, 2015 , we had total cash deposits of $31.3 million to purchase land having an aggregate purchase price of $907.3 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’ 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

20


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.
Wage and Hour Litigation. We, together with certain of our subsidiaries, are a defendant in lawsuits that allege violations of federal and state wage and hour statutes. In May 2011, a group of current and former sales representatives filed a collective action lawsuit in the United States District Court for the Southern District of Texas, Houston Division entitled Edwards, K. v. KB Home . The lawsuit alleges that we misclassified sales representatives and failed to pay minimum and overtime wages in violation of the Fair Labor Standards Act (29 U.S.C. §§ 206-07). In September 2012, the Edwards court conditionally certified a nationwide class that, as of the date of this report, consists of 409 plaintiffs. On May 21, 2015, the Edwards court scheduled an initial trial involving a portion of the plaintiffs in that case for December 2015. A trial, or trials, involving other plaintiffs in the Edwards case is (are) expected to be scheduled to occur in 2016 or later.
In September 2013, 11 of the plaintiffs in the Edwards case filed a lawsuit in Los Angeles Superior Court entitled Andrea L. Bejenaru, et al. v. KB Home, et al. The lawsuit alleges violations of California laws relating to overtime, meal period and rest break pay, itemized wage statements, waiting time penalties and unfair business practices for a class of sales representatives. As of the date of this report, the putative class consists of 241 members, some of whom are plaintiffs in the Edwards case, who were sales representatives from September 2009 to the present. The Bejenaru court has not certified the case as a class action. Depending on the Bejenaru court’s decisions in the matter, the putative class could increase in size and include other individuals, and the case could be certified as a class action.
In the second quarter of 2015, plaintiffs in the Edwards case and the Bejenaru case claimed $66 million  in compensatory damages, penalties and interest, as well as injunctive relief, attorneys’ fees and costs for both matters. We deny the allegations in the lawsuits and intend to defend ourselves vigorously. The ultimate outcome of these matters is uncertain and we are unable to estimate the amount or the range of reasonably possible loss, if any. However, we believe we have meritorious defenses to the plaintiffs’ claims.
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 May 31, 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):

21


 
 
Six Months Ended May 31, 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
 

 

 
17,372

 

 

 

 
17,372

Dividends on common stock
 

 

 
(4,599
)
 

 

 

 
(4,599
)
Employee stock options/other
 
2

 
23

 

 

 

 

 
25

Restricted stock awards
 
80

 
(80
)
 

 

 

 

 

Stock-based compensation
 

 
7,428

 

 

 

 

 
7,428

Stock repurchases
 

 

 

 

 

 
(300
)
 
(300
)
Balance at May 31, 2015
 
$
115,469

 
$
676,228

 
$
1,404,029

 
$
(21,008
)
 
$
(112,106
)
 
$
(446,776
)
 
$
1,615,836

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 May 31, 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 May 31, 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 six months ended May 31, 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 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 May 31, 2015.
During the three months ended May 31, 2015 and 2014, our board of directors declared, and we paid, a quarterly cash dividend of $.025 per share of common stock. Quarterly cash dividends declared and paid during the six months ended May 31, 2015 and 2014 totaled $.050 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 six months ended May 31, 2015 :
 
Options
 
Weighted
Average Exercise
Price
Options outstanding at beginning of period
11,735,042

 
$
20.45

Granted

 

Exercised
(2,000
)
 
12.50

Cancelled
(63,675
)
 
15.53

Options outstanding at end of period
11,669,367

 
$
20.48

Options exercisable at end of period
10,103,406

 
$
21.32

As of May 31, 2015 , the weighted average remaining contractual life of stock options outstanding and stock options exercisable was 4.6 years and 3.9 years , respectively. There was $3.9 million of total unrecognized compensation expense related to

22


unvested stock option awards as of May 31, 2015 . For the three months ended May 31, 2015 and 2014 , stock-based compensation expense associated with stock options totaled $.9 million and $.6 million , respectively. For the six months ended May 31, 2015 and 2014 , stock-based compensation expense associated with stock options totaled $2.0 million and $1.2 million , respectively. The aggregate intrinsic value of stock options outstanding and stock options exercisable was $19.4 million and $19.2 million , respectively, at May 31, 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 $3.3 million for the three months ended May 31, 2015 and $1.3 million for the three months ended May 31, 2014 related to restricted stock and PSUs. We recognized total compensation expense of $5.4 million for the six months ended May 31, 2015 and $2.5 million for the six months ended May 31, 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):  
 
Six Months Ended May 31,
 
2015
 
2014
Summary of cash and cash equivalents at end of period:
 
 
 
Homebuilding
$
439,920

 
$
484,472

Financial services
2,168

 
2,798

Total
$
442,088

 
$
487,270

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid, net of amounts capitalized
$
10,043

 
$
(2,061
)
Income taxes paid
1,887

 
1,419

 
 
 
 
Supplemental disclosures of noncash activities:
 
 
 
Reclassification of warranty recoveries to receivables
$
7,034

 
$
5,609

Increase (decrease) in consolidated inventories not owned
45,613

 
(3,958
)
Increase in inventories due to distributions of land and land development from an unconsolidated joint venture
13,992

 
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

 
29,277

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 May 31, 2015 .

23


Condensed Consolidating Statements of Operations (in thousands)
 
Six Months Ended May 31, 2015
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Revenues
$

 
$
1,104,232

 
$
98,858

 
$

 
$
1,203,090

Homebuilding:
 
 
 
 
 
 
 
 
 
Revenues
$

 
$
1,104,232

 
$
94,460

 
$

 
$
1,198,692

Construction and land costs

 
(928,269
)
 
(88,559
)
 

 
(1,016,828
)
Selling, general and administrative expenses
(35,346
)
 
(100,269
)
 
(13,989
)
 

 
(149,604
)
Operating income (loss)
(35,346
)
 
75,694

 
(8,088
)
 

 
32,260

Interest income
251

 
4

 

 

 
255

Interest expense
(91,253
)
 
(2,949
)
 

 
80,746

 
(13,456
)
Intercompany interest
144,184

 
(58,577
)
 
(4,861
)
 
(80,746
)
 

Equity in loss of unconsolidated joint ventures

 
(758
)
 

 

 
(758
)
Homebuilding pretax income (loss)
17,836

 
13,414

 
(12,949
)
 

 
18,301

Financial services pretax income

 

 
4,871

 

 
4,871

Total pretax income (loss)
17,836

 
13,414

 
(8,078
)
 

 
23,172

Income tax benefit (expense)
(3,400
)
 
(3,600
)
 
1,200

 

 
(5,800
)
Equity in net income of subsidiaries
2,936

 

 

 
(2,936
)
 

Net income (loss)
$
17,372

 
$
9,814

 
$
(6,878
)
 
$
(2,936
)
 
$
17,372


 
Six Months Ended May 31, 2014
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Revenues
$

 
$
907,223

 
$
108,471

 
$

 
$
1,015,694

Homebuilding:
 
 
 
 
 
 
 
 
 
Revenues
$

 
$
907,223

 
$
103,440

 
$

 
$
1,010,663

Construction and land costs

 
(737,764
)
 
(88,070
)
 

 
(825,834
)
Selling, general and administrative expenses
(31,495
)
 
(83,790
)
 
(17,533
)
 

 
(132,818
)
Operating income (loss)
(31,495
)
 
85,669

 
(2,163
)
 

 
52,011

Interest income
276

 
6

 
1

 

 
283

Interest expense
(79,679
)
 
(2,760
)
 

 
62,605

 
(19,834
)
Intercompany interest
130,431

 
(63,349
)
 
(4,477
)
 
(62,605
)
 

Equity in income (loss) of unconsolidated joint ventures

 
(1,381
)
 
3,293

 

 
1,912

Homebuilding pretax income (loss)
19,533

 
18,185

 
(3,346
)
 

 
34,372

Financial services pretax income

 

 
3,315

 

 
3,315

Total pretax income (loss)
19,533

 
18,185

 
(31
)
 

 
37,687

Income tax expense
(50
)
 
(400
)
 
(50
)
 

 
(500
)
Equity in net income of subsidiaries
17,704

 

 

 
(17,704
)
 

Net income (loss)
$
37,187

 
$
17,785

 
$
(81
)
 
$
(17,704
)
 
$
37,187


24


 
Three Months Ended May 31, 2015
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Revenues
$

 
$
569,956

 
$
53,013

 
$

 
$
622,969

Homebuilding:
 
 
 
 
 
 
 
 
 
Revenues
$

 
$
569,956

 
$
50,848

 
$

 
$
620,804

Construction and land costs

 
(477,129
)
 
(47,281
)
 

 
(524,410
)
Selling, general and administrative expenses
(19,674
)
 
(51,764
)
 
(7,094
)
 

 
(78,532
)