KB Home
KB HOME (Form: 10-Q, Received: 04/08/2016 06:01:39)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended February 29, 2016 .
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from [            ] to [            ].
Commission File No. 001-09195
KB HOME
(Exact name of registrant as specified in its charter)
Delaware
95-3666267
(State of incorporation)
(IRS employer identification number)
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
(Address and telephone number of principal executive offices)  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
o
Non-accelerated filer
o   (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of February 29, 2016 .
There were 84,121,831 shares of the registrant’s common stock, par value $1.00 per share, outstanding on February 29, 2016 . The registrant’s grantor stock ownership trust held an additional 9,760,831 shares of the registrant’s common stock on that date.



KB HOME
FORM 10-Q
INDEX
 
 
Page
Number
 
 
 
 
 
 
Consolidated Statements of Operations -
Three Months Ended February 29, 2016 and February 28, 2015
 
 
Consolidated Balance Sheets -
February 29, 2016 and November 30, 2015
 
 
Consolidated Statements of Cash Flows -
Three Months Ended February 29, 2016 and February 28, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


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

 
Three Months Ended
 
February 29,
2016
 
February 28,
2015
Total revenues
$
678,371

 
$
580,121

Homebuilding:
 
 
 
Revenues
$
675,742

 
$
577,888

Construction and land costs
(568,818
)
 
(492,418
)
Selling, general and administrative expenses
(87,932
)
 
(71,072
)
Operating income
18,992

 
14,398

Interest income
152

 
103

Interest expense
(3,697
)
 
(5,338
)
Equity in loss of unconsolidated joint ventures
(603
)
 
(347
)
Homebuilding pretax income
14,844

 
8,816

Financial services:
 
 
 
Revenues
2,629

 
2,233

Expenses
(859
)
 
(964
)
Equity in income (loss) of unconsolidated joint ventures
(587
)
 
414

Financial services pretax income
1,183

 
1,683

Total pretax income
16,027

 
10,499

Income tax expense
(2,900
)
 
(2,700
)
Net income
$
13,127

 
$
7,799

Earnings per share:
 
 
 
Basic
$
.15

 
$
.08

Diluted
$
.14

 
$
.08

Weighted average shares outstanding:
 
 
 
Basic
89,239

 
91,954

Diluted
99,427

 
101,700

Cash dividends declared per common share
$
.025

 
$
.025

See accompanying notes.

3


KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands – Unaudited)
 

 
February 29,
2016
 
November 30,
2015
Assets
 
 
 
Homebuilding:
 
 
 
Cash and cash equivalents
$
323,076

 
$
559,042

Restricted cash
4,357

 
9,344

Receivables
152,089

 
152,682

Inventories
3,468,644

 
3,313,747

Investments in unconsolidated joint ventures
68,572

 
71,558

Deferred tax assets, net
779,396

 
782,196

Other assets
113,060

 
112,774

 
4,909,194

 
5,001,343

Financial services
12,862

 
14,028

Total assets
$
4,922,056

 
$
5,015,371

 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Homebuilding:
 
 
 
Accounts payable
$
167,575

 
$
183,770

Accrued expenses and other liabilities
483,286

 
513,414

Notes payable
2,652,705

 
2,625,536

 
3,303,566

 
3,322,720

Financial services
1,432

 
1,817

Stockholders’ equity:
 
 
 
Common stock
115,548

 
115,548

Paid-in capital
681,699

 
682,871

Retained earnings
1,477,570

 
1,466,713

Accumulated other comprehensive loss
(17,319
)
 
(17,319
)
Grantor stock ownership trust, at cost
(105,871
)
 
(109,936
)
Treasury stock, at cost
(534,569
)
 
(447,043
)
Total stockholders’ equity
1,617,058

 
1,690,834

Total liabilities and stockholders’ equity
$
4,922,056

 
$
5,015,371

See accompanying notes.

4


KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands – Unaudited)
 
 
Three Months Ended
 
February 29,
2016
 
February 28,
2015
Cash flows from operating activities:
 
 
 
Net income
$
13,127

 
$
7,799

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Equity in (income) loss of unconsolidated joint ventures
1,190

 
(67
)
Amortization of discounts and issuance costs
1,881

 
1,920

Depreciation and amortization
900

 
805

Deferred income taxes
2,800

 
2,600

Stock-based compensation
2,893

 
3,181

Inventory impairments and land option contract abandonments
1,966

 
448

Changes in assets and liabilities:
 
 
 
Receivables
3,395

 
(13,872
)
Inventories
(150,265
)
 
(20,438
)
Accounts payable, accrued expenses and other liabilities
(19,954
)
 
(28,032
)
Other, net
(1,246
)
 
(3,253
)
Net cash used in operating activities
(143,313
)
 
(48,909
)
Cash flows from investing activities:
 
 
 
Contributions to unconsolidated joint ventures
(291
)
 
(2,414
)
Purchases of property and equipment, net
(1,413
)
 
(586
)
Net cash used in investing activities
(1,704
)
 
(3,000
)
Cash flows from financing activities:
 
 
 
Change in restricted cash
4,987

 
(749
)
Proceeds from issuance of debt

 
250,000

Payment of debt issuance costs

 
(2,989
)
Payments on mortgages and land contracts due to land sellers and other loans
(5,659
)
 
(2,722
)
Payments of cash dividends
(2,270
)
 
(2,299
)
Stock repurchases
(87,526
)
 
(21
)
Net cash provided by (used in) financing activities
(90,468
)
 
241,220

Net increase (decrease) in cash and cash equivalents
(235,485
)
 
189,311

Cash and cash equivalents at beginning of period
560,341

 
358,768

Cash and cash equivalents at end of period
$
324,856

 
$
548,079

See accompanying notes.

5




KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted.
In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly our consolidated financial position as of February 29, 2016 , the results of our consolidated operations for the three months ended February 29, 2016 and February 28, 2015 , and our consolidated cash flows for the three months ended February 29, 2016 and February 28, 2015 . The results of our consolidated operations for the three months ended February 29, 2016 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, 2015 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, 2015 , 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 $203.7 million at February 29, 2016 and $342.3 million at November 30, 2015 . The majority of our cash and cash equivalents were invested in money market funds and interest-bearing bank deposit accounts.
Restricted Cash. Restricted cash at February 29, 2016 and November 30, 2015 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 $13.1 million for the three months ended February 29, 2016 and $7.8 million for the three months ended February 28, 2015 . Our comprehensive income for each of the three-month periods was equal to our net income for each such period.
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. For public entities, ASU 2014-09, as amended, is effective 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 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

6


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.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 will require organizations that lease assets — referred to as “lessees” — to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Lessor accounting remains substantially similar to current GAAP. In addition, disclosures of leasing activities are to be expanded to include qualitative along with specific quantitative information. For public entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 mandates a modified retrospective transition method. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance 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 February 29, 2016 , we had identified five operating reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment. As of February 29, 2016 , our homebuilding reporting segments conducted ongoing operations in the following states:
West Coast: California
Southwest: Arizona and Nevada
Central: Colorado 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. We offer mortgage banking services, including residential mortgage loan (“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 Mortgage LLC (“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. Our homebuyers may select any lender of their choice to obtain mortgage financing for the purchase of their home.

7


Corporate and other is a non-operating segment that develops and oversees the implementation of company-wide strategic initiatives and provides support to our reporting segments by centralizing certain administrative functions. Corporate and other includes general and administrative expenses related to operating our corporate headquarters. A portion of the expenses incurred by Corporate and other is allocated to our homebuilding reporting segments.
Our 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):
 
Three Months Ended
 
February 29,
2016
 
February 28,
2015
Revenues:
 
 
 
West Coast
$
283,846

 
$
277,255

Southwest
100,332

 
65,137

Central
202,161

 
159,148

Southeast
89,403

 
76,348

Total homebuilding revenues
675,742

 
577,888

Financial services
2,629

 
2,233

Total
$
678,371

 
$
580,121

 
 
 
 
Pretax income (loss):
 
 
 
West Coast
$
22,116

 
$
21,854

Southwest
12,503

 
3,443

Central
10,579

 
10,226

Southeast
(7,564
)
 
(9,613
)
Corporate and other
(22,790
)
 
(17,094
)
Total homebuilding pretax income
14,844

 
8,816

Financial services
1,183

 
1,683

Total
$
16,027

 
$
10,499

Inventory impairment charges:
 
 
 
West Coast
$

 
$

Southwest

 

Central
787

 

Southeast
559

 

Total
$
1,346

 
$

 
 
 
 
Land option contract abandonments:
 
 
 
West Coast
$
160

 
$

Southwest

 

Central
460

 

Southeast

 
448

Total
$
620

 
$
448


8


 
February 29,
2016
 
November 30,
2015
Inventories:
 
 
 
Homes under construction
 
 
 
West Coast
$
582,674

 
$
535,795

Southwest
106,733

 
112,032

Central
283,817

 
263,345

Southeast
137,602

 
120,184

Subtotal
1,110,826

 
1,031,356

 
 
 
 
Land under development
 
 
 
West Coast
873,838

 
788,607

Southwest
340,375

 
317,331

Central
435,758

 
421,783

Southeast
229,392

 
238,324

Subtotal
1,879,363

 
1,766,045

 
 
 
 
Land held for future development
 
 
 
West Coast
261,721

 
277,954

Southwest
90,322

 
104,677

Central
18,349

 
22,082

Southeast
108,063

 
111,633

Subtotal
478,455

 
516,346

Total
$
3,468,644

 
$
3,313,747

 
 
 
 
Assets:
 
 
 
West Coast
$
1,831,971

 
$
1,740,299

Southwest
579,723

 
582,030

Central
844,836

 
829,811

Southeast
507,915

 
507,844

Corporate and other
1,144,749

 
1,341,359

Total homebuilding assets
4,909,194

 
5,001,343

Financial services
12,862

 
14,028

Total
$
4,922,056

 
$
5,015,371


9


3.
Financial Services
The following tables present financial information relating to our financial services reporting segment (in thousands):
 
Three Months Ended
 
February 29,
2016
 
February 28,
2015
Revenues
 
 
 
Insurance commissions
$
1,576

 
$
1,434

Title services
1,053

 
799

Total
2,629

 
2,233

 
 
 
 
Expenses
 
 
 
General and administrative
(859
)
 
(964
)
Operating income
1,770

 
1,269

Equity in income (loss) of unconsolidated joint ventures
(587
)
 
414

Pretax income
$
1,183

 
$
1,683

 
February 29,
2016
 
November 30,
2015
Assets
 
 
 
Cash and cash equivalents
$
1,780

 
$
1,299

Receivables
1,201

 
2,245

Investments in unconsolidated joint ventures
9,853

 
10,440

Other assets
28

 
44

Total assets
$
12,862

 
$
14,028

Liabilities
 
 
 
Accounts payable and accrued expenses
$
1,432

 
$
1,817

Total liabilities
$
1,432

 
$
1,817

4.
Earnings Per Share
Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):  
 
Three Months Ended
 
February 29,
2016
 
February 28,
2015
Numerator:
 
 
 
Net income
$
13,127

 
$
7,799

Less: Distributed earnings allocated to nonvested restricted stock
(10
)
 
(9
)
Less: Undistributed earnings allocated to nonvested restricted stock
(50
)
 
(20
)
Numerator for basic earnings per share
13,067

 
7,770

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

 
667

Add: Undistributed earnings allocated to nonvested restricted stock
50

 
20

Less: Undistributed earnings reallocated to nonvested restricted stock
(45
)
 
(18
)
Numerator for diluted earnings per share
$
13,739

 
$
8,439

 
 
 
 

10


 
Three Months Ended
 
February 29,
2016
 
February 28,
2015
Denominator:
 
 
 
Weighted average shares outstanding — basic
89,239

 
91,954

Effect of dilutive securities:
 
 
 
Share-based payments
1,786

 
1,344

Convertible senior notes
8,402

 
8,402

Weighted average shares outstanding — diluted
99,427

 
101,700

Basic earnings per share
$
.15

 
$
.08

Diluted earnings per share
$
.14

 
$
.08

We compute earnings per share using the two-class method, which is an allocation of earnings between the holders of common stock and a company’s participating security holders. Our outstanding nonvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities at February 29, 2016 or February 28, 2015 .
Outstanding stock options to purchase 9.7 million and 8.2 million shares of our common stock were excluded from the diluted earnings per share calculations for the three-month periods ended February 29, 2016 and February 28, 2015 , respectively, 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 basic earnings per share calculations for the periods presented, as the applicable vesting conditions had not been satisfied.
5.
Inventories
Inventories consisted of the following (in thousands):
 
February 29,
2016
 
November 30,
2015
Homes under construction
$
1,110,826

 
$
1,031,356

Land under development
1,879,363

 
1,766,045

Land held for future development
478,455

 
516,346

Total
$
3,468,644

 
$
3,313,747

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):
 
Three Months Ended
 
February 29,
2016
 
February 28,
2015
Capitalized interest at beginning of period
$
288,442

 
$
266,668

Interest incurred
46,251

 
45,003

Interest expensed
(3,697
)
 
(5,338
)
Interest amortized to construction and land costs (a)
(30,682
)
 
(22,293
)
Capitalized interest at end of period (b)
$
300,314

 
$
284,040

(a)
Interest amortized to construction and land costs for the three months ended February 29, 2016 included $.5 million related to land sales during the period.

11


(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 20 communities or land parcels for recoverability during both the three months ended February 29, 2016 and February 28, 2015 . The carrying value of the communities or land parcels evaluated during the three months ended February 29, 2016 and February 28, 2015 was $179.4 million and $165.1 million , respectively.
Based on the results of our evaluations, we recognized inventory impairment charges of $1.3 million for the three months ended February 29, 2016 . Of these charges, $.6 million related to a property in Florida where we decided to change our operational and marketing strategy in order to monetize our investment more quickly by accelerating the overall timing for selling, building and delivering homes on land that had been held for future development. Significant quantitative unobservable inputs used in our fair value measurement with respect to this community included an average selling price of $310,000 ; one delivery per month; and a discount rate of 17% . The remainder of the impairment charges related to the planned future sales of our last remaining land parcels in the Rio Grande Valley area of Texas, where we decided to change our strategy and monetize our investment through land sales rather than build and sell homes on the parcels as previously intended. The estimated fair value of these parcels was based on executed contracts.
As of February 29, 2016 , the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $250.4 million , representing 28 communities and various other land parcels. As of November 30, 2015 , the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $254.2 million , representing 28 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 $.6 million corresponding to 180 lots for the three months ended February 29, 2016 , and $.4 million of such charges corresponding to 312 lots for the three months ended February 28, 2015 . We sometimes abandon land option contracts and other similar contracts when we have incurred costs of less than $100,000 ; the lots and costs associated with such contracts are not included in the amounts above.
Due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, it is possible that actual results could differ substantially from those estimated.
7.
Variable Interest Entities
We participate in joint ventures from time to time that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. Our investments in these joint ventures may create a variable interest in a variable interest entity (“VIE”), depending on the contractual terms of the arrangement. We analyze our joint ventures to determine whether they are VIEs and, if so, whether we are the primary beneficiary. None of our joint ventures at February 29, 2016 and November 30, 2015 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 with third parties and unconsolidated entities to acquire rights to land for the construction of homes. Under these contracts, we typically pay a specified option or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. We analyze each of our land option contracts and other similar contracts to determine whether the land seller is a VIE and, if so, whether we are the primary beneficiary. Although we do not have legal title to the underlying land, we are required to consolidate a VIE if we are the primary beneficiary. As a result of our analyses, we determined that as of February 29, 2016 and November 30, 2015 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):

12


 
February 29, 2016
 
November 30, 2015
 
Cash
Deposits
 
Aggregate
Purchase Price
 
Cash
Deposits
 
Aggregate
Purchase Price
Unconsolidated VIEs
$
24,714

 
$
465,727

 
$
32,436

 
$
611,567

Other land option contracts and other similar contracts
18,148

 
530,401

 
22,101

 
576,140

Total
$
42,862

 
$
996,128

 
$
54,537

 
$
1,187,707

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 consisted of pre-acquisition costs of $54.2 million at February 29, 2016 and $65.6 million at November 30, 2015 . These pre-acquisition costs and cash deposits were included in inventories in our consolidated balance sheets.
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 $81.4 million at February 29, 2016 and $110.0 million at November 30, 2015 .
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 earnings (losses) of these unconsolidated joint ventures generally in accordance with our respective equity interests. In some instances, we recognize earnings (losses) related to our investment in an unconsolidated joint venture that differ from our equity interest in the unconsolidated joint venture. This typically arises from our deferral of the unconsolidated joint venture’s earnings (losses) from land sales to us, or other items.
The following table presents combined condensed information from the statements of operations of our unconsolidated joint ventures (in thousands):
 
Three Months Ended
 
February 29,
2016
 
February 28,
2015
Revenues
$
3,338

 
$
3,210

Construction and land costs
(7,495
)
 
(3,743
)
Other expense, net
(1,123
)
 
(696
)
Loss
$
(5,280
)
 
$
(1,229
)
The following table presents combined condensed balance sheet information for our unconsolidated joint ventures (in thousands):


13


 
February 29,
2016
 
November 30,
2015
Assets
 
 
 
Cash
$
20,863

 
$
23,309

Receivables
1,838

 
7,546

Inventories
180,080

 
175,196

Other assets
837

 
910

Total assets
$
203,618

 
$
206,961

Liabilities and equity
 
 
 
Accounts payable and other liabilities
$
15,679

 
$
17,108

Notes payable (a)
46,044

 
39,064

Equity
141,895

 
150,789

Total liabilities and equity
$
203,618

 
$
206,961

(a)
One of our unconsolidated joint ventures has 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. Outstanding debt under the agreement is non-recourse to us and is scheduled to mature in August 2018. None of our other unconsolidated joint ventures had outstanding debt at February 29, 2016 or November 30, 2015 .
The following table presents information relating to our investments in unconsolidated joint ventures (dollars in thousands):
 
February 29,
2016
 
November 30,
2015
Number of investments in unconsolidated joint ventures
7

 
7

Investments in unconsolidated joint ventures
$
68,572

 
$
71,558

Number of unconsolidated joint venture lots controlled under land option contracts and other similar contracts
647

 
677

We and our partner in the unconsolidated joint venture that has the construction loan agreement described in note (a) to the prior table 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 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. However, various financial and non-financial covenants apply with respect to the outstanding secured debt and the related guaranty and indemnity obligations, and a failure to comply with such covenants could result in a default and cause the lender to seek to enforce such guaranty and indemnity obligations, if and as may be applicable. As of February 29, 2016 , 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 is material to our consolidated financial statements.
9.
Other Assets
Other assets consisted of the following (in thousands):

14


 
February 29,
2016
 
November 30,
2015
Cash surrender value of insurance contracts
$
64,680

 
$
67,786

Debt issuance costs
23,920

 
25,408

Property and equipment, net
13,614

 
13,100

Prepaid expenses
10,846

 
6,480

Total
$
113,060

 
$
112,774

10.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
 
February 29,
2016
 
November 30,
2015
Inventory-related obligations (a)
$
118,650

 
$
148,887

Self-insurance and other litigation liabilities
111,213

 
96,496

Employee compensation and related benefits
87,070

 
114,456

Accrued interest payable
79,337

 
62,645

Warranty liability
50,575

 
49,085

Customer deposits
16,930

 
14,563

Real estate and business taxes
10,367

 
14,255

Other
9,144

 
13,027

Total
$
483,286

 
$
513,414

(a)
Represents liabilities for inventory not owned associated with financing arrangements discussed in Note 7. Variable Interest Entities, as well as liabilities for fixed or determinable amounts associated with tax increment financing entity (“TIFE”) assessments. As homes are delivered, our obligation to pay the remaining TIFE assessments associated with each underlying lot is transferred to the homebuyer. As such, these assessment obligations will be paid by us only to the extent we do not deliver homes on applicable lots before the related TIFE obligations mature.
11.
Income Taxes
Income Tax Expense. We recognized income tax expense of $2.9 million for the three months ended February 29, 2016 and $2.7 million for the three months ended February 28, 2015 . Income tax expense for the three months ended February 29, 2016 reflected the favorable net impact of $3.3 million of federal energy tax credits we earned from building energy-efficient homes, resulting in an effective income tax rate of 18.1% . For the three months ended February 28, 2015 , our effective income tax rate of 25.7% reflected the favorable net impact of $1.4 million of federal energy tax credits.
The federal energy tax credits for the three months ended February 29, 2016 resulted from legislation enacted on December 18, 2015. Among other things, this legislation extended the availability of a business tax credit for building new energy-efficient homes through December 31, 2016. Prior to this legislation, the tax credit expired on December 31, 2014. The federal energy tax credits for the three months ended February 28, 2015 were earned from building energy-efficient homes in prior periods based on legislation enacted on December 19, 2014, which permitted retroactive application of the credits.
Deferred Tax Asset Valuation Allowance. We evaluate our deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available positive and negative evidence using a “more likely than not” standard with respect to whether our deferred tax assets will be realized. Our evaluation considers, among other factors, our historical operating results, our expectation of future profitability, the duration of the applicable statutory carryforward periods, and conditions in the housing market and the broader economy. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related temporary differences in the financial basis and the tax basis of the assets become deductible. The value of our deferred tax assets depends on applicable income tax rates.

15


Our deferred tax assets of $817.2 million as of February 29, 2016 and $820.0 million as of November 30, 2015 were partly offset by a valuation allowance in each period of $37.8 million . The deferred tax asset valuation allowances as of February 29, 2016 and November 30, 2015 were primarily related to foreign tax credits and certain state net operating losses (“NOLs”) that had not met the “more likely than not” realization standard. Based on our evaluation of our deferred tax assets as of February 29, 2016 , we determined that most of our deferred tax assets would be realized. Therefore, we made no adjustments to our deferred tax valuation allowance during the three months ended February 29, 2016 .
Unrecognized Tax Benefits. At both February 29, 2016 and November 30, 2015 , our gross unrecognized tax benefits (including interest and penalties) totaled $.1 million , all of which, 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. The fiscal years ending 2012 and later remain open to federal examinations, while fiscal years 2011 and later remain open to state examinations.
12.
Notes Payable
Notes payable consisted of the following (in thousands):
 
February 29,
2016
 
November 30,
2015
Mortgages and land contracts due to land sellers and other loans
$
62,440

 
$
35,664

9.10% Senior notes due September 15, 2017
263,673

 
263,475

7 1/4% Senior notes due June 15, 2018
299,594

 
299,554

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

 
400,000

8.00% Senior notes due March 15, 2020
346,998

 
346,843

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

 
250,000

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

 
230,000

Total
$
2,652,705

 
$
2,625,536

Unsecured Revolving Credit Facility. We have a $275.0 million unsecured revolving credit facility with a syndicate of financial institutions (“Credit Facility”) that will mature on August 7, 2019 . The 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 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 Credit Facility. The Credit Facility also requires the payment of a commitment fee ranging from .30% to .50% of the unused commitment, based on our Leverage Ratio. The terms of the Credit Facility require us, among other things, to maintain compliance with various covenants, including financial covenants relating to our consolidated tangible net worth, Leverage Ratio, and either a consolidated interest coverage ratio (“Interest Coverage Ratio”) or minimum level of liquidity, each as defined therein. The amount of the Credit Facility available for cash borrowings or the issuance of letters of credit depends on the total cash borrowings and letters of credit outstanding under the Credit Facility and the maximum available amount under the terms of the Credit Facility. As of February 29, 2016 , we had no cash borrowings and $28.2 million of letters of credit outstanding under the Credit Facility. Therefore, as of February 29, 2016 , we had $246.8 million available for cash borrowings under the Credit Facility, with up to $109.3 million of that amount available for the issuance of letters of credit.
LOC Facilities. We maintain the LOC Facilities with various financial institutions to obtain letters of credit in the ordinary course of operating our business. As of February 29, 2016 and November 30, 2015 , we had $4.3 million and $9.1 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 February 29, 2016 , inventories having a carrying value of $208.7 million were pledged to collateralize mortgages and land contracts due to land sellers and other loans.

16


Shelf Registration. We have an automatically effective universal shelf registration statement that was filed with the SEC on July 18, 2014 (“2014 Shelf Registration”). Issuances of debt and equity securities under our 2014 Shelf Registration require the filing of a prospectus supplement identifying the amount and terms of the securities to be issued. Our ability to issue equity and/or debt is subject to market conditions and other factors impacting our borrowing capacity.
Senior 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 the 1.375% convertible senior notes due 2019 (“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.
All of the senior notes outstanding at February 29, 2016 and November 30, 2015 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 February 29, 2016 , we were in compliance with the applicable terms of all our covenants and other requirements under the Credit Facility, the senior notes, the indenture, and the mortgages and land contracts due to land sellers and other loans. Our ability to access the Credit Facility for cash borrowings and letters of credit and our ability to secure future debt financing depend, in part, on our ability to remain in such compliance.
Principal payments on senior notes, mortgages and land contracts due to land sellers and other loans are due as follows: 2016 – $58.8 million ; 2017 – $268.6 million ; 2018 – $300.0 million ; 2019 – $630.0 million ; 2020 – $350.0 million ; and thereafter – $1.05 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.
Level 3
 
Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques.
Fair value measurements are used for inventories on a nonrecurring basis when events and circumstances indicate that their carrying value is not recoverable. The following table presents the fair value hierarchy and our assets measured at fair value on a nonrecurring basis for the three months ended February 29, 2016 and the year ended November 30, 2015 (in thousands):  
Description
 
Fair Value Hierarchy
 
February 29,
2016
 
November 30,
2015
Inventories (a)
 
Level 2
 
$
1,054

 
$

Inventories (a)
 
Level 3
 
810

 
11,988

(a)
Amounts represent the aggregate fair value for real estate assets impacted by inventory impairment charges during the applicable period, as of the date the fair value measurements were made. The carrying value for these real estate assets may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date.

17


Inventories with a carrying value of $3.2 million were written down to their fair value of $1.9 million during the three months ended February 29, 2016 , resulting in inventory impairment charges of $1.3 million . Inventories with a carrying value of $20.0 million were written down to their fair value of $12.0 million during the year ended November 30, 2015, resulting in inventory impairment charges of $8.0 million .
The fair values for inventories that were determined using Level 2 inputs were based on executed contracts. The fair values for inventories that were determined using Level 3 inputs were based on the estimated future net cash flows discounted for inherent risk associated with each underlying asset, as described in Note 6. Inventory Impairments and Land Option Contract Abandonments.
The following table presents the fair value hierarchy, carrying values and estimated fair values of our financial instruments, except those for which the carrying values approximate fair values (in thousands):
 
 
 
February 29, 2016
 
November 30, 2015
 
Fair Value
Hierarchy
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Senior notes
Level 2
 
$
2,360,265

 
$
2,329,187

 
$
2,359,872

 
$
2,429,850

Convertible senior notes
Level 2
 
230,000

 
202,688

 
230,000

 
211,313

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 we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience. Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our accrued warranty liability, which is included in accrued expenses and other liabilities in our consolidated balance sheets, and adjust the amount as necessary based on our assessment. Our assessment includes the review of our actual warranty costs incurred to identify trends and changes in our warranty claims experience, and considers our home construction quality and customer service initiatives and outside events. While we believe the warranty liability currently reflected in our consolidated balance sheets to be adequate, unanticipated changes or developments in the legal environment, local weather, land or environmental conditions, quality of materials or methods used in the construction of homes or customer service practices and/or our warranty claims experience could have a significant impact on our actual warranty costs in future periods and such amounts could differ significantly from our current estimates.
The changes in our warranty liability were as follows (in thousands):

18


 
Three Months Ended
 
February 29,
2016
 
February 28,
2015
Balance at beginning of period
$
49,085

 
$
45,196

Warranties issued
5,252

 
4,133

Payments (a)
(4,021
)
 
(7,595
)
Adjustments (b)
259

 
3,623

Balance at end of period
$
50,575

 
$
45,357

 
(a)
Payments for the three months ended February 28, 2015 included $4.1 million to repair homes affected by water intrusion-related issues in certain of our communities in central and southwest Florida. These issues were substantially resolved during the year ended November 30, 2015.
(b)
Adjustments for the three months ended February 29, 2016 and February 28, 2015 included the reclassification of certain estimated minimum probable recoveries to receivables. The estimated minimum probable recoveries were included in receivables to the extent they exceeded the estimated remaining repair costs in our overall warranty liability with respect to the associated homes. The adjustments for each period had no impact on our consolidated statements of operations.
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 established an accrual for the estimated minimum probable loss with respect to this inquiry during 2014 and increased the accrual during 2015. This inquiry was resolved through an agreement with the Florida Attorney General’s Office that was approved by a Florida circuit court and became effective in February 2016. We believe that the amount accrued for this matter is adequate as of February 29, 2016.
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 under a program 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 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

19


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):
 
Three Months Ended
 
February 29,
2016
 
February 28,
2015
Balance at beginning of period
$
82,175

 
$
86,574

Self-insurance expense (a)
4,016

 
2,435

Payments, net of recoveries (b)
(4,730
)
 
(6,262
)
Balance at end of period
$
81,461

 
$
82,747

(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 February 29, 2016 , we had $566.8 million of performance bonds and $32.4 million of letters of credit outstanding. At November 30, 2015, we had $565.4 million of performance bonds and $33.4 million of letters of credit outstanding. If any such performance bonds or letters of credit are called, we would be obligated to reimburse the issuer of the performance bond or letter of credit. We do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the underlying performance obligations are completed. The expiration dates of some letters of credit issued in connection with community improvements coincide with the expected completion dates of the related projects or obligations. Most letters of credit, however, are issued with an initial term of one year and are typically extended on a year-to-year basis until the related performance obligations are completed.
Land Option Contracts and Other Similar Contracts . In the ordinary course of our business, we enter into land option contracts and other similar contracts to acquire rights to land for the construction of homes. At February 29, 2016 , we had total cash deposits of $42.9 million to purchase land having an aggregate purchase price of $996.1 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 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

20


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.  The court is expected to schedule a hearing at which the court will address the setting of a new trial date in 2016 and other matters.
Wage and Hour Litigation. 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 alleged 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, and in May 2015, scheduled an initial trial involving a portion of the plaintiffs for December 2015.  In September 2013, some 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 alleged 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.  Although the case involved a putative class of individuals who were our sales representatives from September 2009 forward, the Bejenaru case was not certified as a class action.  In the second quarter of 2015, plaintiff representatives in the Edwards and the Bejenaru cases claimed $66 million  in compensatory damages, penalties and interest, as well as injunctive relief, attorneys’ fees and costs for both matters.  On November 18, 2015, we reached a tentative mediated settlement with the plaintiff representatives in both cases that remains subject to judicial approval.  In 2015, we established an accrual for these matters, which reflects the tentative settlement.
San Diego Water Board Notice of Violation . In August 2015, the California Regional Water Quality Control Board, San Diego Region (“RWQCB”) issued to us and another homebuilder a Notice of Violation (“NOV”) alleging violations of the California Water Code and waste discharge prohibitions of the water quality control plan for the San Diego Region (Basin Plan). According to the NOV, the alleged violations involved the unpermitted discharge of fill material into the waters of the United States and California during the grading of a required secondary access road for a community located in San Diego County, California, which was performed pursuant to a County-issued grading permit. In its NOV, the RWQCB requested to meet with us to discuss the alleged violations as part of its process to determine whether to bring any enforcement action. We have met with the RWQCB and are currently in discussions to resolve the matters alleged in the NOV. While the ultimate outcome is uncertain, we believe that any penalties and related corrective measures the RWQCB may impose under the NOV could exceed $100,000 (the threshold for the required disclosure of this type of environmental proceeding) but they are not expected to be material to our consolidated financial statements.
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 February 29, 2016 , 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


 
 
Three Months Ended February 29, 2016
 
 
Common Stock
 
Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Grantor Stock
Ownership Trust
 
Treasury Stock
 
Total Stockholders’ Equity
Balance at November 30, 2015
 
$
115,548

 
$
682,871

 
$
1,466,713

 
$
(17,319
)
 
$
(109,936
)
 
$
(447,043
)
 
$
1,690,834

Net income
 

 

 
13,127

 

 

 

 
13,127

Dividends on common stock
 

 

 
(2,270
)
 

 

 

 
(2,270
)
Performance share-based stock issuance
 

 
(4,065
)
 

 

 
4,065

 

 

Stock-based compensation
 

 
2,893

 

 

 

 

 
2,893

Stock repurchases
 

 

 

 

 

 
(87,526
)
 
(87,526
)
Balance at February 29, 2016
 
$
115,548

 
$
681,699

 
$
1,477,570

 
$
(17,319
)
 
$
(105,871
)
 
$
(534,569
)
 
$
1,617,058

We maintain an 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 February 29, 2016 . The maximum number of shares would potentially be deliverable to holders only in certain limited circumstances as set forth in the governing instruments.
On February 12, 2016, the management development and compensation committee of our board of directors approved the payout of PSUs that were granted to certain employees on November 8, 2012 (“2012 PSUs”). The approved total payout of 374,630 shares of our common stock to the 2012 PSU recipients under the terms of these performance share awards was based on our achieving certain levels of average return on equity performance and revenue growth performance relative to a peer group of high-production public homebuilding companies over the three-year period commencing on December 1, 2012 and ending on November 30, 2015.
On January 12, 2016, our board of directors authorized us to repurchase a total of up to 10,000,000 shares of our outstanding common stock.  This authorization reaffirmed and incorporated the then-current balance of 4,000,000 shares that remained under a prior board-approved share repurchase program. The amount and timing of shares purchased under this 10,000,000 share repurchase program are subject to market and business conditions and other factors, and purchases may be made from time to time and at any time through open market or privately negotiated transactions.  This share repurchase authorization will continue in effect until fully used or earlier terminated or suspended by the board of directors. As of February 29, 2016 , we had repurchased 8,373,000 shares of our common stock pursuant to this authorization, at a total cost of $85.9 million .
During the three months ended February 29, 2016 , we also repurchased 155,457 , or $1.6 million , of previously issued shares delivered to us by employees to satisfy withholding taxes on the vesting of restricted stock awards as well as shares forfeited by individuals upon their termination of employment. These transactions were not considered repurchases under the above-described board of directors authorization.
During each of the three months ended February 29, 2016 and February 28, 2015 , our board of directors declared, and we paid, a quarterly cash dividend of $.025 per share of common stock.
17.
Stock-Based Compensation
Stock Options. We estimate the grant-date fair value of stock options using the Black-Scholes option-pricing model. The following table summarizes stock option transactions for the three months ended February 29, 2016 :

22


 
Options
 
Weighted
Average Exercise
Price
Options outstanding at beginning of period
12,635,644

 
$
19.39

Granted

 

Exercised

 

Cancelled

 

Options outstanding at end of period
12,635,644

 
$
19.39

Options exercisable at end of period
10,389,722

 
$
20.35

As of February 29, 2016 , the weighted average remaining contractual life of stock options outstanding and stock options exercisable was 4.5 years and 3.5 years , respectively. There was $4.1 million of total unrecognized compensation expense related to unvested stock option awards as of February 29, 2016 . For the three months ended February 29, 2016 and February 28, 2015 , stock-based compensation expense associated with stock options totaled $.9 million and $1.1 million , respectively. The aggregate intrinsic value of both stock options outstanding and stock options exercisable was $10.8 million at February 29, 2016 . (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 February 29, 2016 and $2.1 million for the three months ended February 28, 2015 related to restricted stock and PSUs.
18.
Supplemental Disclosure to Consolidated Statements of Cash Flows
The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):  
 
Three Months Ended
 
February 29,
2016
 
February 28,
2015
Summary of cash and cash equivalents at end of period:
 
 
 
Homebuilding
$
323,076

 
$
545,641

Financial services
1,780

 
2,438

Total
$
324,856

 
$
548,079

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid, net of amounts capitalized
$
(12,955
)
 
$
(3,892
)
Income taxes paid
458

 
150

 
 
 
 
Supplemental disclosures of noncash activities:
 
 
 
Reclassification of warranty recoveries to receivables
$
1,758

 
$
3,623

Decrease in consolidated inventories not owned
(28,511
)
 

Increase in inventories due to distributions of land and land development from an unconsolidated joint venture
2,674

 
8,006

Inventories acquired through seller financing
32,435

 


23


19.
Supplemental Guarantor Information
Our obligations to pay principal, premium, if any, and interest on the senior notes and borrowings, if any, under the Credit Facility are guaranteed on a joint and several basis by certain of our subsidiaries (“Guarantor Subsidiaries”). The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by us. Pursuant to the terms of the indenture governing the senior notes and the terms of the Credit Facility, if any of the Guarantor Subsidiaries ceases to be a “significant subsidiary” as defined by Rule 1-02 of Regulation S-X (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 Credit Facility so long as all guarantees by such Guarantor Subsidiary of any other of our or our subsidiaries’ indebtedness are terminated at or prior to the time of such release. We have determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented.
The supplemental financial information for all periods presented below reflects the relevant subsidiaries that were Guarantor Subsidiaries as of February 29, 2016 .
Condensed Consolidating Statements of Operations (in thousands)
 
Three Months Ended February 29, 2016
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Revenues
$

 
$
601,343

 
$
77,028

 
$

 
$
678,371

Homebuilding:
 
 
 
 
 
 
 
 
 
Revenues
$

 
$
601,343

 
$
74,399

 
$

 
$
675,742

Construction and land costs

 
(501,866
)
 
(66,952
)
 

 
(568,818
)
Selling, general and administrative expenses
(24,340
)
 
(53,136
)
 
(10,456
)
 

 
(87,932
)
Operating income (loss)
(24,340
)
 
46,341

 
(3,009
)
 

 
18,992

Interest income
134

 
18

 

 

 
152

Interest expense
(44,370
)
 
(1,881
)
 

 
42,554

 
(3,697
)
Intercompany interest
74,043

 
(28,063
)
 
(3,426
)
 
(42,554
)
 

Equity in loss of unconsolidated joint ventures

 
(603
)
 

 

 
(603
)
Homebuilding pretax income (loss)
5,467

 
15,812

 
(6,435
)
 

 
14,844

Financial services pretax income

 

 
1,183

 

 
1,183

Total pretax income (loss)
5,467

 
15,812

 
(5,252
)
 

 
16,027

Income tax benefit (expense)
700

 
(3,600
)
 

 

 
(2,900
)
Equity in net income of subsidiaries
6,960

 

 

 
(6,960
)
 

Net income (loss)
$
13,127

 
$
12,212

 
$
(5,252
)
 
$
(6,960
)
 
$
13,127


24


 
Three Months Ended February 28, 2015
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Revenues
$

 
$
510,996

 
$
69,125

 
$

 
$
580,121

Homebuilding:
 
 
 
 
 
 
 
 
 
Revenues
$

 
$
510,996

 
$
66,892

 
$

 
$
577,888

Construction and land costs

 
(430,333
)
 
(62,085
)
 

 
(492,418
)
Selling, general and administrative expenses
(15,672
)
 
(45,622
)
 
(9,778
)
 

 
(71,072
)
Operating income (loss)
(15,672
)
 
35,041

 
(4,971
)
 

 
14,398

Interest income
101

 
1

 
1

 

 
103

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

 
39,702

 
(5,338
)
Intercompany interest
70,468

 
(26,638
)
 
(4,128
)
 
(39,702
)
 

Equity in loss of unconsolidated joint ventures

 
(347
)
 

 

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

 
6,597

 
(9,098
)
 

 
8,816

Financial services pretax income

 

 
1,683

 

 
1,683

Total pretax income (loss)
11,317

 
6,597

 
(7,415
)
 

 
10,499

Income tax benefit (expense)
200

 
(3,100
)
 
200

 

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

 

 
3,718

 

Net income (loss)
$
7,799

 
$
3,497

 
$
(7,215
)
 
$
3,718

 
$
7,799


25


Condensed Consolidating Balance Sheets (in thousands)
 
February 29, 2016
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
Homebuilding:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
257,361

 
$
58,798

 
$
6,917

 
$

 
$
323,076

Restricted cash
4,357

 

 

 

 
4,357

Receivables
2,829

 
144,885

 
4,375

 

 
152,089

Inventories

 
3,127,883

 
340,761

 

 
3,468,644

Investments in unconsolidated joint ventures

 
66,071

 
2,501

 

 
68,572

Deferred tax assets, net
191,744

 
497,554

 
90,098

 

 
779,396

Other assets
97,345

 
12,610

 
3,105

 

 
113,060

 
553,636

 
3,907,801

 
447,757

 

 
4,909,194

Financial services

 

 
12,862

 

 
12,862

Intercompany receivables
3,739,159

 

 
101,267

 
(3,840,426
)
 

Investments in subsidiaries
49,584

 

 

 
(49,584
)
 

Total assets
$
4,342,379

 
$
3,907,801

 
$
561,886

 
$
(3,890,010
)
 
$
4,922,056

Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
Homebuilding:
 
 
 
 
 
 
 
 
 
Accounts payable, accrued expenses and other liabilities
$
144,023

 
$
395,048

 
$
111,790

 
$

 
$
650,861

Notes payable
2,565,155

 
87,550

 

 

 
2,652,705

 
2,709,178

 
482,598

 
111,790

 

 
3,303,566

Financial services

 

 
1,432

 

 
1,432

Intercompany payables
16,143

 
3,409,390

 
414,893

 
(3,840,426
)
 

Stockholders’ equity
1,617,058

 
15,813

 
33,771

 
(49,584
)
 
1,617,058

Total liabilities and stockholders’ equity
$
4,342,379

 
$
3,907,801

 
$
561,886

 
$
(3,890,010
)
 
$
4,922,056




26


 
November 30, 2015
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
Homebuilding:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
444,850

 
$
98,281

 
$
15,911

 
$

 
$
559,042

Restricted cash
9,344

 

 

 

 
9,344

Receivables
39

 
148,338

 
4,305

 

 
152,682

Inventories

 
2,979,617

 
334,130

 

 
3,313,747

Investments in unconsolidated joint ventures

 
69,057

 
2,501

 

 
71,558

Deferred tax assets, net
190,770

 
501,454

 
89,972

 

 
782,196

Other assets
97,590

 
11,783

 
3,401

 

 
112,774

 
742,593

 
3,808,530

 
450,220

 

 
5,001,343

Financial services

 

 
14,028

 

 
14,028

Intercompany receivables
3,627,150

 

 
102,103

 
(3,729,253
)
 

Investments in subsidiaries
39,383

 

 

 
(39,383
)
 

Total assets
$
4,409,126

 
$
3,808,530

 
$
566,351

 
$
(3,768,636
)
 
$
5,015,371

Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
Homebuilding:
 
 
 
 
 
 
 
 
 
Accounts payable, accrued expenses and other liabilities
$
136,352

 
$
442,529

 
$
118,303

 
$

 
$
697,184

Notes payable
2,564,762

 
60,774

 

 

 
2,625,536

 
2,701,114

 
503,303

 
118,303

 

 
3,322,720

Financial services

 

 
1,817

 

 
1,817

Intercompany payables
17,178

 
3,305,227

 
406,848

 
(3,729,253
)
 

Stockholders’ equity
1,690,834

 

 
39,383

 
(39,383
)
 
1,690,834

Total liabilities and stockholders’ equity
$
4,409,126

 
$
3,808,530

 
$
566,351

 
$
(3,768,636
)
 
$
5,015,371




27


Condensed Consolidating Statements of Cash Flows (in thousands)
 
Three Months Ended February 29, 2016
 
KB Home
Corporate
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Total
Net cash provided by (used in) operating activities
$
13,908

 
$
(141,026
)
 
$
(16,195
)
 
$

 
$
(143,313
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Contributions to unconsolidated joint ventures

 
(291
)
 

 

 
(291
)
Purchases of property and equipment, net
(1,129
)
 
(265
)
 
(19
)
 

 
(1,413
)
Intercompany
(115,459
)
 

 

 
115,459

 

Net cash used in investing activities
(116,588
)
 
(556
)
 
(19
)
 
115,459