KB Home
KB HOME (Form: 10-Q, Received: 10/09/2015 06:05:24)

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 August 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 August 31, 2015 .
There were 92,071,598 shares of the registrant’s common stock, par value $1.00 per share, outstanding on August 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
 
 
 
 
 
 
Consolidated Statements of Operations -
Nine Months and Three Months Ended August 31, 2015 and 2014
 
 
Consolidated Balance Sheets -
August 31, 2015 and November 30, 2014
 
 
Consolidated Statements of Cash Flows -
Nine Months Ended August 31, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I.    FINANCIAL INFORMATION
Item 1.
Financial Statements
KB HOME
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts – Unaudited)
 

 
Nine Months Ended August 31,
 
Three Months Ended August 31,
 
2015
 
2014
 
2015
 
2014
Total revenues
$
2,046,247

 
$
1,604,908

 
$
843,157

 
$
589,214

Homebuilding:
 
 
 
 
 
 
 
Revenues
$
2,038,896

 
$
1,596,894

 
$
840,204

 
$
586,231

Construction and land costs
(1,725,976
)
 
(1,305,258
)
 
(709,148
)
 
(479,424
)
Selling, general and administrative expenses
(244,678
)
 
(205,715
)
 
(95,074
)
 
(72,897
)
Operating income
68,242

 
85,921

 
35,982

 
33,910

Interest income
342

 
393

 
87

 
110

Interest expense
(17,850
)
 
(26,289
)
 
(4,394
)
 
(6,455
)
Equity in income (loss) of unconsolidated joint ventures
(1,180
)
 
1,161

 
(422
)
 
(751
)
Homebuilding pretax income
49,554

 
61,186

 
31,253

 
26,814

Financial services:
 
 
 
 
 
 
 
Revenues
7,351

 
8,014

 
2,953

 
2,983

Expenses
(2,802
)
 
(2,563
)
 
(910
)
 
(859
)
Equity in income (loss) of unconsolidated joint ventures
3,023

 
(289
)
 
658

 
(277
)
Financial services pretax income
7,572

 
5,162

 
2,701

 
1,847

Total pretax income
57,126

 
66,348

 
33,954

 
28,661

Income tax expense
(16,500
)
 
(800
)
 
(10,700
)
 
(300
)
Net income
$
40,626

 
$
65,548

 
$
23,254

 
$
28,361

Earnings per share:
 
 
 
 
 
 
 
Basic
$
.44

 
$
.74

 
$
.25

 
$
.31

Diluted
$
.42

 
$
.68

 
$
.23

 
$
.28

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
92,005

 
88,389

 
92,065

 
91,793

Diluted
101,605

 
98,614

 
101,874

 
102,070

Cash dividends declared per common share
$
.075

 
$
.075

 
$
.025

 
$
.025

See accompanying notes.

3


KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands – Unaudited)
 

 
August 31,
2015
 
November 30,
2014
Assets
 
 
 
Homebuilding:
 
 
 
Cash and cash equivalents
$
352,952

 
$
356,366

Restricted cash
25,028

 
27,235

Receivables
159,576

 
125,488

Inventories
3,401,737

 
3,218,387

Investments in unconsolidated joint ventures
72,800

 
79,441

Deferred tax assets, net
810,016

 
825,232

Other assets
114,352

 
114,915

 
4,936,461

 
4,747,064

Financial services
12,035

 
10,486

Total assets
$
4,948,496

 
$
4,757,550

 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Homebuilding:
 
 
 
Accounts payable
$
178,604

 
$
172,716

Accrued expenses and other liabilities
497,158

 
409,882

Notes payable
2,630,732

 
2,576,525

 
3,306,494

 
3,159,123

Financial services
1,776

 
2,517

Stockholders’ equity:
 
 
 
Common stock
115,524

 
115,387

Paid-in capital
679,600

 
668,857

Retained earnings
1,424,992

 
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
1,640,226

 
1,595,910

Total liabilities and stockholders’ equity
$
4,948,496

 
$
4,757,550

See accompanying notes.

4


KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands – Unaudited)
 
 
Nine Months Ended August 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
40,626

 
$
65,548

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Equity in income of unconsolidated joint ventures
(1,843
)
 
(872
)
Amortization of discounts and issuance costs
5,866

 
5,246

Depreciation and amortization
2,547

 
1,677

Deferred income taxes
15,216

 

Stock-based compensation
10,444

 
5,959

Inventory impairments and land option contract abandonments
4,516

 
5,211

Changes in assets and liabilities:
 
 
 
Receivables
(25,032
)
 
(27,754
)
Inventories
(72,509
)
 
(784,457
)
Accounts payable, accrued expenses and other liabilities
(1,952
)
 
20,388

Other, net
37

 
(7,608
)
Net cash used in operating activities
(22,084
)
 
(716,662
)
Cash flows from investing activities:
 
 
 
Contributions to unconsolidated joint ventures
(20,955
)
 
(34,034
)
Return of investments in unconsolidated joint ventures
14,000

 

Proceeds from sale of investment in unconsolidated joint venture

 
10,110

Purchases of property and equipment, net
(2,100
)
 
(4,158
)
Net cash used in investing activities
(9,055
)
 
(28,082
)
Cash flows from financing activities:
 
 
 
Change in restricted cash
2,207

 
9,450

Proceeds from issuance of debt
250,000

 
400,000

Payment of debt issuance costs
(4,561
)
 
(5,448
)
Repayment of senior notes
(199,906
)
 

Payments on mortgages and land contracts due to land sellers and other loans
(13,736
)
 
(23,292
)
Proceeds from issuance of common stock, net

 
137,045

Issuance of common stock under employee stock plans
436

 
202

Payments of cash dividends
(6,890
)
 
(6,682
)
Stock repurchases
(300
)
 
(46
)
Net cash provided by financing activities
27,250

 
511,229

Net decrease in cash and cash equivalents
(3,889
)
 
(233,515
)
Cash and cash equivalents at beginning of period
358,768

 
532,523

Cash and cash equivalents at end of period
$
354,879

 
$
299,008

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 August 31, 2015 , the results of our consolidated operations for the three months and nine months ended August 31, 2015 and 2014 , and our consolidated cash flows for the nine months ended August 31, 2015 and 2014 . The results of our consolidated operations for the three months and nine months ended August 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 $231.0 million at August 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 August 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 $23.3 million for the three months ended August 31, 2015 and $28.4 million for the three months ended August 31, 2014. For the nine months ended August 31, 2015 and 2014, our comprehensive income was $40.6 million and $65.5 million , respectively. Our comprehensive income for each of the three-month and nine-month periods ended August 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. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which delayed the effective date of ASU 2014-09 by one year. ASU 2014-09, as amended, is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. 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

6


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 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.
In August 2015, the FASB issued Accounting Standards Update No. 2015-15, “Interest — Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting” (“ASU 2015-15”), which clarifies the treatment of debt issuance costs from line-of-credit arrangements after the adoption of ASU 2015-03. In particular, ASU 2015-15 clarifies that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of such arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We believe the adoption of ASU 2015-15 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 August 31, 2015 , we had identified five operating reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment. As of August 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

7


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.
The following tables present financial information relating to our segments (in thousands):
 
Nine Months Ended August 31,
 
Three Months Ended August 31,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
West Coast
$
932,905

 
$
707,532

 
$
378,362

 
$
265,491

Southwest
273,339

 
144,597

 
128,021

 
50,101

Central
545,913

 
477,518

 
210,417

 
179,972

Southeast
286,739

 
267,247

 
123,404

 
90,667

Total homebuilding revenues
2,038,896

 
1,596,894

 
840,204

 
586,231

Financial services
7,351

 
8,014

 
2,953

 
2,983

Total
$
2,046,247

 
$
1,604,908

 
$
843,157

 
$
589,214

 
 
 
 
 
 
 
 
Pretax income (loss):
 
 
 
 
 
 
 
West Coast
$
76,177

 
$
93,599

 
$
35,769

 
$
39,270

Southwest
20,420

 
7,599

 
11,732

 
2,543

Central
42,000

 
24,806

 
18,649

 
11,514

Southeast
(20,965
)
 
(9,881
)
 
(4,751
)
 
(7,965
)
Corporate and other
(68,078
)
 
(54,937
)
 
(30,146
)
 
(18,548
)
Total homebuilding pretax income
49,554

 
61,186

 
31,253

 
26,814

Financial services
7,572

 
5,162

 
2,701

 
1,847

Total
$
57,126

 
$
66,348

 
$
33,954

 
$
28,661

Inventory impairment charges:
 
 
 
 
 
 
 
West Coast
$

 
$

 
$

 
$

Southwest

 

 

 

Central

 

 

 

Southeast
3,173

 
3,408

 
3,173

 
3,408

Total
$
3,173

 
$
3,408

 
$
3,173

 
$
3,408

 
 
 
 
 
 
 
 
Land option contract abandonments:
 
 
 
 
 
 
 
West Coast
$
134

 
$
554

 
$
134

 
$
451

Southwest

 

 

 

Central
225

 
995

 
225

 
562

Southeast
984

 
254

 

 

Total
$
1,343

 
$
1,803

 
$
359

 
$
1,013


8


 
August 31,
2015
 
November 30,
2014
Inventories:
 
 
 
Homes under construction
 
 
 
West Coast
$
649,874

 
$
536,843

Southwest
117,705

 
65,647

Central
280,330

 
201,164

Southeast
139,667

 
124,618

Subtotal
1,187,576

 
928,272

 
 
 
 
Land under development
 
 
 
West Coast
719,557

 
765,577

Southwest
322,676

 
334,691

Central
396,115

 
363,933

Southeast
248,326

 
245,948

Subtotal
1,686,674

 
1,710,149

 
 
 
 
Land held for future development
 
 
 
West Coast
287,365

 
294,060

Southwest
113,661

 
138,367

Central
22,063

 
22,957

Southeast
104,398

 
124,582

Subtotal
527,487

 
579,966

Total
$
3,401,737

 
$
3,218,387

 
 
 
 
Assets:
 
 
 
West Coast
$
1,775,422

 
$
1,695,753

Southwest
598,260

 
579,201

Central
810,123

 
678,139

Southeast
528,270

 
531,011

Corporate and other
1,224,386

 
1,262,960

Total homebuilding assets
4,936,461

 
4,747,064

Financial services
12,035

 
10,486

Total
$
4,948,496

 
$
4,757,550

3.
Financial Services
The following tables present financial information relating to our financial services reporting segment (in thousands):
 
Nine Months Ended August 31,
 
Three Months Ended August 31,
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Insurance commissions
$
4,581

 
$
4,364

 
$
1,857

 
$
1,832

Title services
2,769

 
2,503

 
1,096

 
904

Marketing services fees

 
1,147

 

 
247

Interest income
1

 

 

 

Total
7,351

 
8,014

 
2,953

 
2,983

 
 
 
 
 
 
 
 

9


 
Nine Months Ended August 31,
 
Three Months Ended August 31,
 
2015
 
2014
 
2015
 
2014
Expenses
 
 
 
 
 
 
 
General and administrative
$
(2,802
)
 
$
(2,563
)
 
$
(910
)
 
$
(859
)
Operating income
4,549

 
5,451

 
2,043

 
2,124

Equity in income (loss) of unconsolidated joint ventures
3,023

 
(289
)
 
658

 
(277
)
Pretax income
$
7,572

 
$
5,162

 
$
2,701

 
$
1,847

 
August 31,
2015
 
November 30,
2014
Assets
 
 
 
Cash and cash equivalents
$
1,927

 
$
2,402

Receivables
846

 
1,738

Investments in unconsolidated joint ventures
9,171

 
6,149

Other assets
91

 
197

Total assets
$
12,035

 
$
10,486

Liabilities
 
 
 
Accounts payable and accrued expenses
$
1,776

 
$
2,517

Total liabilities
$
1,776

 
$
2,517

4.
Earnings Per Share
Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):  
 
Nine Months Ended August 31,
 
Three Months Ended August 31,
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net income
$
40,626

 
$
65,548

 
$
23,254

 
$
28,361

Less: Distributed earnings allocated to nonvested restricted stock
(24
)
 
(18
)
 
(7
)
 
(6
)
Less: Undistributed earnings allocated to nonvested restricted stock
(115
)
 
(159
)
 
(63
)
 
(73
)
Numerator for basic earnings per share
40,487

 
65,371

 
23,184

 
28,282

Effect of dilutive securities:
 
 
 
 
 
 
 
Interest expense and amortization of debt issuance costs associated with convertible senior notes, net of taxes
2,000

 
2,000

 
667

 
667

Add: Undistributed earnings allocated to nonvested restricted stock
115

 
159

 
63

 
73

Less: Undistributed earnings reallocated to nonvested restricted stock
(104
)
 
(142
)
 
(57
)
 
(66
)
Numerator for diluted earnings per share
$
42,498

 
$
67,388

 
$
23,857

 
$
28,956

 
 
 
 
 
 
 
 

10


 
Nine Months Ended August 31,
 
Three Months Ended August 31,
 
2015
 
2014
 
2015
 
2014
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding — basic
92,005

 
88,389

 
92,065

 
91,793

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based payments
1,198

 
1,823

 
1,407

 
1,875

Convertible senior notes
8,402

 
8,402

 
8,402

 
8,402

Weighted average shares outstanding — diluted
101,605

 
98,614

 
101,874

 
102,070

Basic earnings per share
$
.44

 
$
.74

 
$
.25

 
$
.31

Diluted earnings per share
$
.42

 
$
.68

 
$
.23

 
$
.28

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 August 31, 2015 or 2014.
Outstanding stock options to purchase 5.7 million shares of our common stock were excluded from the diluted earnings per share calculations for the three-month and nine-month periods ended August 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 nine-month periods ended August 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 nine-month periods ended August 31, 2015 and 2014, as the applicable vesting conditions had not been satisfied.
5.
Inventories
Inventories consisted of the following (in thousands):
 
August 31,
2015
 
November 30,
2014
Homes under construction
$
1,187,576

 
$
928,272

Land under development
1,686,674

 
1,710,149

Land held for future development
527,487

 
579,966

Total
$
3,401,737

 
$
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 or land buyers (as applicable). Interest and real estate taxes are not capitalized on land held for future development.
Our interest costs were as follows (in thousands):
 
Nine Months Ended August 31,
 
Three Months Ended August 31,
 
2015
 
2014
 
2015
 
2014
Capitalized interest at beginning of period
$
266,668

 
$
216,681

 
$
299,678

 
$
241,583

Interest incurred
140,789

 
127,041

 
46,587

 
44,603

Interest expensed
(17,850
)
 
(26,289
)
 
(4,394
)
 
(6,455
)
Interest amortized to construction and land costs (a)
(99,488
)
 
(59,471
)
 
(51,752
)
 
(21,769
)
Capitalized interest at end of period (b)
$
290,119

 
$
257,962

 
$
290,119

 
$
257,962


11


(a)
Interest amortized to construction and land costs for the three months and nine months ended August 31, 2015 included $16.4 million related to land sales during those periods.
(b)
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 29 and 25 communities or land parcels for recoverability during the nine months ended August 31, 2015 and 2014, respectively. The carrying value of the communities or land parcels evaluated during the nine months ended August 31, 2015 and 2014 was $232.8 million and $207.4 million , respectively. Some of the communities or land parcels evaluated during the nine months ended August 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 nine-month period shown.
Based on the results of our evaluations, we recognized an inventory impairment charge of $3.2 million for the three months and nine months ended August 31, 2015 associated with a community located in Florida. We decided to change our operational and marketing strategy for this community in order to monetize our investment more quickly by accelerating the overall pace for selling, building and delivering homes primarily through lowering the average selling price of these homes. Significant quantitative unobservable inputs used in our fair value measurement with respect to this community included an average selling price of $178,100 ; four deliveries per month; and a discount rate of 20% .
For the three months and nine months ended August 31, 2014, we recognized a $3.4 million inventory impairment charge associated with the then-planned sale of our last remaining land parcel in Atlanta, Georgia, a former market where we do not have ongoing operations. The land sale closed in the 2014 fourth quarter.
As of August 31, 2015 , the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $248.3 million , representing 25 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 740 lots for the three months ended August 31, 2015 , and $1.0 million of such charges corresponding to 624 lots for the three months ended August 31, 2014 . We recognized land option contract abandonment charges of $1.3 million corresponding to 1,166 lots for the nine months ended August 31, 2015 , and $1.8 million of such charges corresponding to 1,306 lots for the nine months ended August 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 1,651 lots for the three months ended August 31, 2015 and 2014, respectively, and zero and 7,018 lots for the nine months ended August 31, 2015 and 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 August 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.

12


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 August 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):
 
August 31, 2015
 
November 30, 2014
 
Cash
Deposits
 
Aggregate
Purchase Price
 
Cash
Deposits
 
Aggregate
Purchase Price
Unconsolidated VIEs
$
21,907

 
$
472,169

 
$
10,633

 
$
520,628

Other land option contracts and other similar contracts
20,864

 
469,427

 
22,426

 
437,842

Total
$
42,771

 
$
941,596

 
$
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 $60.0 million at August 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 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 August 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 $89.4 million at August 31, 2015 and $3.1 million at 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 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):

13



 
Nine Months Ended August 31,
 
Three Months Ended August 31,
 
2015
 
2014
 
2015
 
2014
Revenues
$
9,758

 
$
6,118

 
$
3,338

 
$

Construction and land costs
(17,373
)
 
(3,523
)
 
(3,381
)
 

Other expense, net
(2,164
)
 
(3,088
)
 
(753
)
 
(1,050
)
Loss
$
(9,779
)
 
$
(493
)
 
$
(796
)
 
$
(1,050
)
The following table presents combined condensed balance sheet information for our unconsolidated joint ventures (in thousands):
 
August 31,
2015
 
November 30,
2014
Assets
 
 
 
Cash
$
23,454

 
$
23,699

Receivables
7,631

 
5,106

Inventories
169,471

 
153,427

Other assets
658

 

Total assets
$
201,214

 
$
182,232

Liabilities and equity
 
 
 
Accounts payable and other liabilities
$
16,832

 
$
10,824

Notes payable (a)
31,963

 

Equity
152,419

 
171,408

Total liabilities and equity
$
201,214

 
$
182,232

(a)
On August 28, 2015, one of our unconsolidated joint ventures entered into a construction loan agreement with a third-party lender to finance its land development activities that is secured by the underlying property and related project assets. The unconsolidated joint venture’s outstanding secured debt is non-recourse to us and is scheduled to mature in August 2018. None of our other unconsolidated joint ventures had outstanding debt at August 31, 2015. None of our unconsolidated joint ventures had outstanding debt at November 30, 2014 .
The following table presents information relating to our investments in unconsolidated joint ventures (dollars in thousands):
 
August 31,
2015
 
November 30,
2014
Number of investments in unconsolidated joint ventures
7

 
6

Investments in unconsolidated joint ventures
$
72,800

 
$
79,441

Number of unconsolidated joint venture lots controlled under land option contracts and other similar contracts
538

 
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 nine months ended August 31, 2014 .
We and our partner in the unconsolidated joint venture that entered into the construction loan agreement described above provided certain guarantees and indemnities to the lender, including a guaranty to complete the construction of improvements for the project; a guaranty against losses the lender suffers due to certain bad acts or failures to act by the unconsolidated joint venture or its partners; a guaranty of interest payments on the outstanding balance of the secured debt under the construction loan agreement; and an indemnity of the lender from environmental issues. In each case, our actual responsibility under the foregoing guaranty and indemnity obligations is limited to our pro rata interest in the unconsolidated joint venture. We do

14


not have a guaranty or any other obligation to repay or to support the value of the collateral underlying the unconsolidated joint venture’s outstanding secured debt under the construction loan agreement. However, various financial and non-financial covenants apply with respect to the outstanding secured debt under the construction loan agreement and the related guaranty and indemnity obligations, and a failure to comply with such covenants could result in a default and cause the lender to seek to enforce such guaranty and indemnity obligations, if and as may be applicable. As of August 31, 2015 , we were in compliance with the applicable terms of our relevant covenants with respect to the construction loan agreement. We do not believe that our existing exposure under our guaranty and indemnity obligations related to the unconsolidated joint venture’s outstanding secured debt under the construction loan agreement is material to our consolidated financial statements.
9.
Other Assets
Other assets consisted of the following (in thousands):
 
August 31,
2015
 
November 30,
2014
Cash surrender value of insurance contracts
$
67,357

 
$
70,571

Debt issuance costs
26,896

 
27,082

Property and equipment, net
12,425

 
11,831

Prepaid expenses
7,674

 
5,431

Total
$
114,352

 
$
114,915

10.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
 
August 31,
2015
 
November 30,
2014
Inventory-related obligations
$
129,874

 
$
52,009

Employee compensation and related benefits
110,061

 
113,875

Self-insurance and other litigation liabilities
94,303

 
89,606

Accrued interest payable
76,108

 
63,275

Warranty liability
48,642

 
45,196

Customer deposits
18,436

 
15,197

Real estate and business taxes
11,935

 
13,684

Other
7,799

 
17,040

Total
$
497,158

 
$
409,882

11.
Income Taxes
Income Tax Expense. We recognized income tax expense of $10.7 million for the three months ended August 31, 2015 and $.3 million for the three months ended August 31, 2014 . Our income tax expense for the nine months ended August 31, 2015 was $16.5 million , compared to $.8 million for the nine months ended August 31, 2014. Income tax expense for the three months ended August 31, 2015 reflected the favorable net impact of $2.5 million of federal energy tax credits we earned from building energy-efficient homes, resulting in an effective income tax rate of 31.5% . For the nine months ended August 31, 2015, our effective income tax rate of 28.9% reflected the favorable net impact of $5.6 million of federal energy tax credits. Our effective income tax rates for the three months and nine months ended August 31, 2014 were not meaningful items due to the effects of the full valuation allowance against our deferred tax assets for those periods.
The tax credit impact in the three months ended August 31, 2015 included energy tax credits we earned from building energy-efficient homes in 2011. The tax credit impact in the nine months ended August 31, 2015 included energy tax credits we earned from building energy-efficient homes in 2011, 2012 and 2013, as well as from building energy-efficient homes in 2014 pursuant to 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.

15


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.
We made no adjustments to our deferred tax asset valuation allowance during the three months and nine months ended August 31, 2015 . Therefore, at August 31, 2015 , we had deferred tax assets of $851.2 million that were partly offset by a valuation allowance of $41.2 million .
Unrecognized Tax Benefits. At August 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 income 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. Our fiscal years ending 2012 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):
 
August 31,
2015
 
November 30,
2014
Mortgages and land contracts due to land sellers and other loans
$
41,244

 
$
38,250

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

 
199,891

9.10% Senior notes due September 15, 2017
263,282

 
262,729

7 1/4% Senior notes due June 15, 2018
299,515

 
299,402

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

 
400,000

8.00% Senior notes due March 15, 2020
346,691

 
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
$
2,630,732

 
$
2,576,525

Unsecured Revolving Credit Facility. On August 7, 2015, we entered into an amended and restated revolving loan agreement with a syndicate of financial institutions that increased the commitment under our unsecured credit facility (as amended, “Amended Credit Facility”) from $200.0 million to $275.0 million and extended its maturity from March 12, 2016 to August 7, 2019 . The Amended Credit F acility contains an uncommitted accordion feature under which the aggregate principal amount of available loans can be increased to a maximum of $450.0 million under certain conditions, including obtaining additional bank commitments, as well as a sublimit of $137.5 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 Amended Credit Facility is payable quarterly in arrears at a rate based on either a Eurodollar or a base rate, plus a spread that depends on our consolidated leverage ratio (“Leverage Ratio”), as defined under the Amended Credit Facility. The Amended Credit Facility also requires the payment of a commitment fee ranging from .30% to .50% of the unused commitment, based on our Leverage Ratio. Under the terms of the Amended 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 August 31, 2015 ,

16


we had no cash borrowings and $1.7 million of letters of credit outstanding under the Amended Credit Facility. Therefore, as of August 31, 2015 , we had $273.3 million available for cash borrowings under the Amended Credit Facility, with up to $135.8 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 August 31, 2015 and November 30, 2014, we had $24.7 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 August 31, 2015 , inventories having a carrying value of $145.0 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 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. The remainder of the net proceeds was used for general corporate purposes, including working capital, land acquisition and land development.
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 these notes. 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.
All of the senior notes outstanding at August 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.
The indenture governing the senior notes does not contain any financial covenants. Subject to specified exceptions, the indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale-leaseback transactions involving property or assets above a certain specified value. In addition, the senior notes (with the exception of the 7 1/4% senior notes due 2018) contain certain limitations related to mergers, consolidations, and sales of assets.
As of August 31, 2015 , we were in compliance with the applicable terms of all our covenants under the Amended Credit Facility, the senior notes, the indenture, and the mortgages and land contracts due to land sellers and other loans. Our ability to access the Amended 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 mortgages and land contracts due to land sellers and other loans are due as follows: 2015 – $15.8 million ; 2016 – $25.4 million ; 2017 – $265.0 million ; 2018 – $300.0 million ; 2019 – $630.0 million ; and thereafter – $1.40 billion .
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.

17


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 nine months ended August 31, 2015 and the year ended November 30, 2014 (in thousands):  
Description
 
Fair Value Hierarchy
 
August 31,
2015
 
November 30,
2014
Inventories (a)
 
Level 2
 
$

 
$
6,421

Inventories (a)
 
Level 3
 
3,356

 
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 $6.6 million were written down to their fair value of $3.4 million during the nine months ended August 31, 2015, resulting in an inventory impairment charge of $3.2 million . 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):
 
 
 
August 31, 2015
 
November 30, 2014
 
Fair Value
Hierarchy
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Senior notes
Level 2
 
$
2,359,488

 
$
2,452,825

 
$
2,308,275

 
$
2,468,852

Convertible senior notes
Level 2
 
230,000

 
217,063

 
230,000

 
229,713

The fair values of the senior notes and convertible senior notes are generally estimated based on quoted market prices for these instruments. The carrying values reported for cash and cash equivalents, 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 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

18


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

 
$
48,704

 
$
46,472

 
$
40,937

Warranties issued
15,209

 
12,332

 
6,325

 
4,546

Payments
(19,927
)
 
(30,795
)
 
(5,285
)
 
(10,633
)
Adjustments (a)
8,164

 
12,155

 
1,130

 
7,546

Balance at end of period
$
48,642

 
$
42,396

 
$
48,642

 
$
42,396

 
(a)
As discussed below, adjustments for the three months and nine months ended August 31, 2015 and 2014 were primarily comprised of the reclassification of estimated minimum probable recoveries to receivables. Adjustments for the nine months ended August 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 August 31, 2015 and November 30, 2014 included $1.3 million and $9.4 million , respectively, for estimated remaining repair costs associated with (a) 52 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 $1.3 million at August 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 nine months ended August 31, 2015 , we resolved repairs on 346 affected homes and identified 74 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 August 31, 2015 and 2014, we paid $1.1 million and $7.2 million , respectively, to repair affected homes. During the nine months ended August 31, 2015 and 2014, we paid $8.6 million and $21.3 million , respectively, to repair affected homes. As of August 31, 2015 , we had paid $71.9 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 nine months ended August 31, 2015 and 2014, we collected $5.0 million and $.5 million , respectively, 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. During the third quarter of 2015, we did not change our estimate of minimum probable recoveries. As of August 31, 2015 , our estimated minimum probable recoveries, net of amounts collected, totaled $22.6 million , of which $1.3 million was included as an offset to our overall warranty liability and the remainder was included in receivables. During the three months and nine months ended August 31, 2014, we recorded adjustments to increase our warranty liability mainly to reflect additional affected homes identified at one attached home community and our updated estimate of repair costs on identified affected homes. We also recorded adjustments to increase our estimated minimum probable recoveries during these periods based on our updated estimate of repair costs on identified affected homes. Together these items did not have an impact on our consolidated statements of operations for the three months and nine months ended

19


August 31, 2014. As of November 30, 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 nine months ended August 31, 2015 , we reclassified $1.1 million and $8.2 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 nine months ended August 31, 2014, we similarly reclassified $7.2 million and $12.8 million , respectively, 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 August 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 August 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 nine months ended August 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

20


could be material to our consolidated financial statements. Though state regulations vary, structural warranty or construction defect claims are reported and resolved over a long period of time, which can extend for 10 years or more. As a result, the majority of the estimated 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):
 
Nine Months Ended August 31,
 
Three Months Ended August 31,
 
2015
 
2014
 
2015
 
2014
Balance at beginning of period
$
86,574

 
$
92,214

 
$
80,136

 
$
90,458

Self-insurance expense (a)
11,919

 
8,761

 
4,694

 
3,108

Payments, net of recoveries (b)
(17,892
)
 
(12,666
)
 
(4,229
)
 
(5,257
)
Balance at end of period
$
80,601

 
$
88,309

 
$
80,601

 
$
88,309

(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 August 31, 2015 , we had $542.9 million of performance bonds and $26.4 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 August 31, 2015 , we had total cash deposits of $42.8 million to purchase land having an aggregate purchase price of $941.6 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 exceed the amount accrued by a range of zero to

21


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 was originally set for September 2012 and extended multiple times by the court.  In September 2015, the court scheduled a hearing for October 28, 2015 at which the court will address the setting of a new trial date and other matters.
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, Galveston 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. One or more additional trials involving other plaintiffs in the Edwards case 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. While the ultimate outcome of these matters is uncertain, we had an accrual for the estimated minimum probable loss with respect to these matters at August 31, 2015 . We believe it is reasonably possible that our loss in these matters could exceed the amount accrued by zero to $6 million . However, we believe we have meritorious defenses to the plaintiffs’ claims.
Other Matters. In addition to the specific proceedings 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 August 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):

22


 
 
Nine Months Ended August 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
 

 

 
40,626

 

 

 

 
40,626

Dividends on common stock
 

 

 
(6,890
)
 

 

 

 
(6,890
)
Employee stock options/other
 
52

 
384

 

 

 

 

 
436

Restricted stock awards
 
85

 
(85
)
 

 

 

 

 

Stock-based compensation
 

 
10,444

 

 

 

 

 
10,444

Stock repurchases
 

 

 

 

 

 
(300
)
 
(300
)
Balance at August 31, 2015
 
$
115,524

 
$
679,600

 
$
1,424,992

 
$
(21,008
)
 
$
(112,106
)
 
$
(446,776
)
 
$
1,640,226

We maintain 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 their governing instruments. Accordingly, the common stock reserve account had a balance of 12,602,735 shares at August 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 these notes.
As of August 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 nine months ended August 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 August 31, 2015 .
During the three months ended August 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 nine months ended August 31, 2015 and 2014 totaled $.075 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 nine months ended August 31, 2015 :
 
Options
 
Weighted
Average Exercise
Price
Options outstanding at beginning of period
11,735,042

 
$
20.45

Granted

 

Exercised
(52,000
)
 
8.38

Cancelled
(130,384
)
 
23.26

Options outstanding at end of period
11,552,658

 
$
20.47

Options exercisable at end of period
9,992,609

 
$
21.32

As of August 31, 2015 , the weighted average remaining contractual life of stock options outstanding and stock options exercisable was 4.4 years and 3.7 years , respectively. There was $2.8 million of total unrecognized compensation expense related to unvested stock option awards as of August 31, 2015 . For the three months ended August 31, 2015 and 2014 , stock-

23


based compensation expense associated with stock options totaled $1.1 million and $.6 million , respectively. For the nine months ended August 31, 2015 and 2014 , stock-based compensation expense associated with stock options totaled $3.1 million and $1.8 million , respectively. The aggregate intrinsic value of both stock options outstanding and stock options exercisable was $18.4 million at August 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 $1.9 million for the three months ended August 31, 2015 and $1.7 million for the three months ended August 31, 2014 related to restricted stock and PSUs. We recognized total compensation expense of $7.3 million for the nine months ended August 31, 2015 and $4.2 million for the nine months ended August 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):  
 
Nine Months Ended August 31,
 
2015
 
2014
Summary of cash and cash equivalents at end of period:
 
 
 
Homebuilding
$
352,952

 
$
297,058

Financial services
1,927

 
1,950

Total
$
354,879

 
$
299,008

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid, net of amounts capitalized
$
5,017

 
$
312

Income taxes paid
2,915

 
1,537

 
 
 
 
Supplemental disclosures of noncash activities:
 
 
 
Reclassification of warranty recoveries to receivables
$
8,164

 
$
12,794

Increase (decrease) in consolidated inventories not owned
86,211

 
(4,931
)
Increase in inventories due to distributions of land and land development from an unconsolidated joint venture
12,416

 
81,670

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
16,730

 
52,561

Conversion of liability awards to equity awards

 
6,455

19.
Supplemental Guarantor Information
Our obligations to pay principal, premium, if any, and interest on the senior notes and borrowings, if any, under the Amended Credit Facility are guaranteed on a joint and several basis by certain of our subsidiaries (“Guarantor Subsidiaries”). The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by us. Pursuant to the terms of the indenture governing the senior notes and the terms of the Amended 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 the senior notes and the Amended 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 August 31, 2015 .

24


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

 
$
1,866,015

 
$
180,232

 
$

 
$
2,046,247

Homebuilding:
 
 
 
 
 
 
 
 
 
Revenues
$

 
$
1,866,015

 
$
172,881

 
$

 
$
2,038,896

Construction and land costs

 
(1,566,720
)
 
(159,256
)
 

 
(1,725,976
)
Selling, general and administrative expenses
(63,886
)
 
(158,403
)
 
(22,389
)
 

 
(244,678
)
Operating income (loss)
(63,886
)
 
140,892

 
(8,764
)
 

 
68,242

Interest income
337

 
3

 
2

 

 
342

Interest expense
(136,292
)
 
(4,497
)
 

 
122,939

 
(17,850
)
Intercompany interest
218,684

 
(88,780
)
 
(6,965
)
 
(122,939
)
 

Equity in loss of unconsolidated joint ventures

 
(1,180
)
 

 

 
(1,180
)
Homebuilding pretax income (loss)
18,843

 
46,438

 
(15,727
)
 

 
49,554

Financial services pretax income

 

 
7,572

 

 
7,572

Total pretax income (loss)
18,843

 
46,438

 
(8,155
)
 

 
57,126

Income tax benefit (expense)
2,900

 
(18,700
)
 
(700
)
 

 
(16,500
)
Equity in net income of subsidiaries
18,883

 

 

 
(18,883
)
 

Net income (loss)
$
40,626

 
$
27,738

 
$
(8,855
)
 
$
(18,883
)
 
$
40,626


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

 
$
1,436,822

 
$
168,086

 
$

 
$
1,604,908

Homebuilding:
 
 
 
 
 
 
 
 
 
Revenues
$

 
$
1,436,822

 
$
160,072

 
$

 
$
1,596,894

Construction and land costs

 
(1,167,762
)
 
(137,496
)
 

 
(1,305,258
)
Selling, general and administrative expenses
(47,489
)
 
(131,443
)
 
(26,783
)
 

 
(205,715
)
Operating income (loss)
(47,489
)
 
137,617

 
(4,207
)
 

 
85,921

Interest income
385

 
7

 
1

 

 
393

Interest expense
(122,634
)
 
(4,408
)
 

 
100,753

 
(26,289
)
Intercompany interest
206,943

 
(99,077
)
 
(7,113
)
 
(100,753
)
 

Equity in income (loss) of unconsolidated joint ventures

 
(2,132
)
 
3,293

 

 
1,161

Homebuilding pretax income (loss)
37,205

 
32,007

 
(8,026
)