UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
or
Commission File No. 001-09195
KB HOME
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
95-3666267
(I.R.S. Employer
Identification No.)
10990 Wilshire Boulevard, Los Angeles, California 90024
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (310) 231-4000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common Stock (par value $1.00 per share)
Rights to Purchase Series A Participating Cumulative Preferred Stock
Trading Symbol(s)
KBH
Name of each exchange
on which registered
New York Stock Exchange
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report.☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting common stock held by non-affiliates of the registrant on May 31, 2020 was $3,236,693,083, including 7,317,336 shares
held by the registrant’s grantor stock ownership trust and excluding 24,525,786 shares held in treasury.
There were 91,637,771 shares of the registrant’s common stock, par value $1.00 per share, outstanding on December 31, 2020. The registrant’s grantor stock
ownership trust held an additional 7,124,317 shares of the registrant’s common stock on that date.
Portions of the registrant’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders (incorporated into Part III).
Documents Incorporated by Reference
KB HOME
FORM 10-K
FOR THE YEAR ENDED NOVEMBER 30, 2020
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Information about our Executive Officers
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Signatures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART III
Exhibits, Financial Statement Schedules
Form 10-K Summary
PART IV
Page
Number
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14
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99
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100
100
100
103
104
Item 1.
BUSINESS
General
PART I
KB Home is one of the largest and most recognized homebuilding companies in the U.S. We have been building homes for over 60 years, with nearly 645,000
homes delivered since our founding in 1957. We build a variety of new homes designed primarily for first-time and first move-up, as well as second move-up and
active adult homebuyers, including attached and detached single-family residential homes, townhomes and condominiums. We offer homes in development
communities, at urban in-fill locations and as part of mixed-use projects. Our homebuilding operations represent the majority of our business, accounting for 99.6%
of our total revenues in 2020. Our financial services operations, which accounted for the remaining .4% of our total revenues in 2020, offer various insurance
products to our homebuyers in the markets where we build homes and provide title services in certain of those markets. Our financial services operations also
provide mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers indirectly through KBHS
Home Loans, LLC (“KBHS”), an unconsolidated joint venture we formed with Stearns Ventures, LLC (“Stearns”).
Unless the context indicates otherwise, the terms “we,” “our” and “us” used in this report refer to KB Home, a Delaware corporation, and its predecessors and
subsidiaries. We also use the following terms in our business with the corresponding meanings: “home” is a single-family residence, whether it is a single-family
home or other type of residential property; “homes delivered” are homes for which the sale has closed and title has passed to a customer; “community” is a single
development in which new homes are constructed as part of an integrated plan; and “community count” is the number of communities we have open for sales with
at least five homes/lots left to sell.
The following charts present homes delivered, homebuilding revenues, net income and diluted earnings per share for the years ended November 30, 2016,
2018 and 2020:
1
Markets
Reflecting the geographic reach of our homebuilding business, we have ongoing operations in the eight states and 45 major markets presented below. We also
operate in various submarkets within these major markets. We may refer to these markets and submarkets collectively as our “served markets.” For reporting
purposes, we organize our homebuilding operations into four segments — West Coast, Southwest, Central and Southeast.
Segment
West Coast
States
California
Southwest
Central
Southeast
Washington
Arizona
Nevada
Colorado
Texas
Florida
North Carolina
Major Market(s)
Contra Costa County, Elk Grove, Fresno, Los Angeles, Hollister, Madera, Modesto, Oakland, Orange County,
Riverside, Sacramento, Salinas, San Bernardino, San Diego, San Francisco, San Jose, Santa Rosa-Petaluma,
Stockton, Vallejo, Ventura and Yuba City
Olympia and Seattle
Phoenix and Tucson
Las Vegas
Denver, Erie, Firestone and Loveland
Austin, Dallas, Fort Worth, Houston and San Antonio
Fort Myers, Jacksonville, Lakeland, Melbourne, Orlando, Palm Coast, Sarasota and Tampa
Charlotte and Raleigh
Segment Operating Information. The following table presents certain operating information for our homebuilding reporting segments for the years ended
November 30, 2020, 2019 and 2018 (dollars in millions, except average selling price):
2
West Coast:
Homes delivered
Percentage of total homes delivered
Average selling price
Homebuilding revenues (a)
Southwest:
Homes delivered
Percentage of total homes delivered
Average selling price
Homebuilding revenues (a)
Central:
Homes delivered
Percentage of total homes delivered
Average selling price
Homebuilding revenues (a)
Southeast:
Homes delivered
Percentage of total homes delivered
Average selling price
Homebuilding revenues (a)
Total:
Homes delivered
Average selling price
Homebuilding revenues (a)
Years Ended November 30,
2020
2019
2018
2,869
27 %
609,400
1,748.6
2,385
22 %
327,300
796.8
3,932
37 %
303,400
1,192.9
1,486
14 %
288,600
429.4
10,672
388,900
4,167.7
$
$
$
$
$
$
$
$
$
$
3,214
27 %
592,300
1,912.2
2,346
20 %
322,000
764.8
4,291
36 %
293,500
1,267.9
2,020
17 %
293,200
592.8
11,871
380,000
4,537.7
$
$
$
$
$
$
$
$
$
$
3,152
28 %
661,500
2,085.3
2,301
20 %
307,300
707.1
4,113
36 %
297,400
1,239.3
1,751
16 %
286,600
502.1
11,317
399,200
4,533.8
$
$
$
$
$
$
$
$
$
$
(a) Homebuilding revenues include revenues from housing and, if applicable, land sales.
The above table does not include homes delivered or revenues from unconsolidated joint ventures in which we participate. These unconsolidated joint ventures
acquire and develop land in various markets where our homebuilding operations are located and, in some cases, build and deliver homes on the land developed.
Additional financial and operational information related to our homebuilding reporting segments, including revenues, operating income (loss), pretax income
(loss), inventories and assets, is provided below under Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and in
Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report.
Business Strategy
Overview. Our core business strategy, which we refer to as KB Edge, is to expand our scale primarily within our current geographic footprint to achieve a top-
five position in each of our served markets (based on homes delivered). KB Edge is a systematic, fact-based and process-driven approach to homebuilding that is
grounded in gaining a detailed understanding of consumers’ location and product preferences and product price-to-value perceptions. In our business, we use the
term “product” to mean and encompass a home’s floor plan design and interior/exterior style, amenities, functions and features.
KB Edge consists of the following key principles with respect to customers, land, products and operations:
•
Customers. With our Built-to-Order® homebuying process, we provide each of our homebuyers with a highly personalized experience where they can
make a wide range of structural and design choices for their future new home, as discussed further below under “Customer Obsession.” We believe this
highly interactive, “customer-first” experience that puts our homebuyers firmly in control of designing the home they want based on how they live and
3
what they value, at an affordable price, gives us a meaningful and distinct competitive advantage over other homebuilders and resale and rental homes.
•
•
•
Land. We seek to manage our working capital and reduce our operating risks by primarily acquiring entitled land parcels within attractive submarkets
identified by our market research activities. We typically focus on metropolitan areas with favorable long-term economic and population growth prospects
that we believe have the potential to sustain a minimum of 800 homes delivered per year, and target land parcels that meet our investment return
standards. Identified consumer preferences and home sales activity largely direct where our land acquisition teams search for available land. We focus on
investments that provide a one- to two-year supply of land or lots per product line, per community, and individual assets that are generally between 50 to
200 lots in size. Our primary focus continues to be our existing geographic footprint, encompassing markets we identified for their long-term economic
and demographic growth potential. We leverage the relationships we have with land owners, developers and brokers to find and acquire land parcels, and
use our experience in working with municipalities to efficiently obtain development approvals.
Products. We offer our customers a base product with a standardized set of functions and features that is generally priced to be affordable for those with
household incomes near the local area’s median level. With our Built-to-Order approach, our customers have the opportunity to select their lot location
within a community, floor plan, elevation and structural options, and to personalize their homes with numerous interior design options and upgrades in
our design studios. Our design studios, generally centrally located within our served markets, are a key component of our Built-to-Order process, and the
mix of design options and upgrades they offer are primarily based on the preferences identified by our market survey and purchase frequency data, as
discussed further below under “Customer Obsession.” We utilize a centralized internal architectural group that designs homes to meet or exceed
customers’ price-to-value expectations while being as efficient as possible to construct. To enhance the simplicity and efficiency of our products and
processes, our architectural group has developed a core series of high-frequency, flexible floor plans and elevations that we can offer across many of our
served markets. Our standardized plans allow us to more effectively shift with local demand and developable land attributes, help us to better understand
the cost to build our products and enable us to compare and implement best practices across divisions and communities. We also incorporate energy-
efficient features into our product designs to help lower our homebuyers’ total cost of homeownership and reduce our homes’ impact on the environment,
as further discussed below under “Sustainability.”
Operations. In addition to differentiating us from other high-production homebuilders, our Built-to-Order process helps drive low-cost production. We
generally commence construction of a home only after we have a signed purchase contract with a homebuyer and have obtained preliminary credit
approval or other evidence of the homebuyer’s financial ability to purchase the home, and seek to build a backlog of sold homes. By maintaining a
substantial backlog, along with centralized scheduling and standardized reporting processes, we have established a disciplined and scalable operational
platform that helps us sustain an even-flow production of pre-sold homes. This reduces our inventory risk, promotes construction efficiencies, enhances
our relationships with independent subcontractors and other business partners, and provides us with greater visibility and predictability on future
deliveries as we grow.
There may be market-driven circumstances where we believe it is necessary or appropriate to temporarily deviate from certain of the above principles. These
deviations may include starting construction on a small number of homes in a community before corresponding purchase contracts are signed with homebuyers to
more quickly meet customer delivery expectations and generate revenues; or acquiring land parcels in peripheral neighborhoods of a core metropolitan area that
otherwise fit our growth strategy and meet our investment return standards. In addition, other circumstances could arise in the future that may lead us to make
specific short-term shifts from these principles.
An underlying tenet of our business approach is to continue to improve our asset efficiency by, among other things:
•
•
•
•
•
•
Calibrating home sales rates and selling prices at each of our communities to enhance profitability;
Further controlling our direct construction costs within our communities;
Accelerating inventory turns;
Structuring land acquisitions to minimize upfront costs where possible, as further discussed below under “Community Development and Land Inventory
Management”;
Reactivating communities that have been held for future development; and
Deploying excess cash flow from operations to help fuel additional revenue growth and/or reduce debt.
4
The anticipated associated revenue and pretax income growth from this strategic approach should help drive the utilization of our deferred tax assets and allow
us to realize substantial tax cash savings that can be productively deployed in our business and/or to enhance our capital structure.
Customer Obsession. Based on more than 60 years of experience, we believe the best homes start with the people who live in them. Our customer-centric
approach comes from a deep-rooted operational philosophy and company culture animated by a paramount objective: to be the most customer-obsessed
homebuilder in the world. Driven by this ambitious guidepost, our team seeks to provide a compelling, simple and personalized homebuying process distinguished
by phenomenal customer service. We want our customers to know they have a real partner when buying a home with us, and to feel that once their home is built,
they can see themselves in their new home. Our team members, supported through our training and development programs, are encouraged to make decisions
intended to produce the best results for our customers and our organization. Our customer obsession mindset is built around the following key principles:
•
•
•
Find out what customers want and offer them choice to attain it. Design plays an important role in the homes we build for our customers. We ascertain
homebuyer product design and location preferences through surveys we conduct of recent buyers of both new and resale homes across our served
markets. We also obtain data from our own homebuyers’ selections and post-sale feedback. We use this information on what matters most to homebuyers
when making purchase and trade-off decisions to develop and refine our products, as well as our land acquisition targets.
We also cultivate and leverage close supplier and business partner relationships to integrate into or offer with our products architectural elements (such as
flex spaces that can serve multiple purposes, quiet zones or home offices), building materials, construction techniques, and structural and non-structural
systems, components and devices that are aligned with the preferences identified in our surveys and other data sources, including with the design options
and upgrades we offer. With our focus on affordability, we seek out innovative techniques, materials and items to help meet homebuyers’ priorities at
attainable price points.
From our synthesis of the foregoing consumer research and related activities, we give our homebuyers a wide array of choice to craft the new home that
fits their particular lifestyle and priorities, including their homesite, floor plan, elevation and structural options. Our homebuyers can visit our KB Home
Design Studios, where they get both advice and the opportunity to select from a broad range of included features, design upgrades and options that will
help personalize their home.
Create collaborative customer relationships. In our view, we are not just selling a house. We are in the business of delivering an exceptional, personalized
experience that enables our customers to achieve perhaps the most meaningful purchase they will ever make and an important landmark in their life’s
journey — their own home. From this perspective, we strive to form close relationships with our homebuyers. We endeavor to learn key details about
what they want, their top priorities today and where they see themselves in the future, so we can co-create a home for their day-to-day lives. We support
each person or family, whether it is their first time or they have already been homeowners, with a dedicated community team of construction supervisors,
sales representatives, design consultants and other personnel. This team is available to guide each homebuyer through each major step of the design,
construction and closing of their KB home and aims to make the process as easy and straightforward as possible.
Continue to listen to customers after the sale is done. To help learn and improve our customer experience, we schedule follow up visits with our
customers 30 days after they move in, as well as three, six, 10 and 18 months later, to hear about their experience in their new home and to address any
concerns they may have, including warranty claims. Information about our KB Home 10-year Limited Warranty program is provided in Note 17 –
Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report.
We believe our approach differentiates us in the homebuilding industry and, along with our company culture that sustains it, enhances customer satisfaction.
We are proud of the high levels of satisfaction our homebuyers have reported to us and on outside surveys. In 2020, even with the challenges we faced associated
with the outbreak of the 2019 coronavirus disease (“COVID-19”), we achieved the top rank for customer satisfaction among homebuilders in third-party surveys,
which we believe reflects the effective dedication we have to our homebuyers.
Promotional Marketing Strategy. To emphasize the distinct combination of innovative designs, personalization, affordability and partnership we offer to our
homebuyers and the importance we place on customer satisfaction, we have centered our external brand identity and messaging around Built on Relationships®.
Built on Relationships also encapsulates the importance of customer, as discussed above, and other key relationships – with suppliers, trade contractors, land sellers
and municipalities – to the success of our business. The key components we highlight as part of our brand identity include:
5
•
•
•
•
Offering Innovative Designs. We believe we offer our homebuyers product designs that distinctively blend consumer-preferred elements, such as open
floor plans, flexible living spaces and extra storage, as discussed above under “Customer Obsession;” quality construction standards; and superior energy
efficiency, compared to other new homes and resale homes with which we compete.
A Personalized Home. We give our homebuyers considerable ability to personalize their new home from floor plans to design features to where they live
in the community. At our KB Home Design Studio, our homebuyers are able to get both advice and the opportunity to select from a broad range of
included features, design upgrades and options that will help personalize their home.
Affordable Today and a Lower Cost of Homeownership Tomorrow. We offer a variety of homes generally priced to be affordable for those with
household incomes near the local area’s median level. Our ENERGY STAR® certified homes can provide long-term significant savings on utility bills
compared to typical resale homes and to competitive new homes that are not ENERGY STAR certified.
A Partner Every Step of the Way. Our dedicated team of sales counselors, design studio consultants, construction superintendents and customer service
representatives, as well as KBHS loan officers, work closely with our homebuyers throughout the homebuying process.
We typically sell our homes through our commissioned sales associate employees from sales offices located in or adjacent to furnished model homes in each
community. With the outbreak of COVID-19 and the related responses by public health and governmental authorities to contain and combat its outbreak and
spread (“COVID-19 control responses”), we adapted and progressively enhanced our electronic sales capabilities during 2020 to give our customers a variety of
convenient ways to shop for and purchase a new KB home, including, among other things:
•
•
•
•
•
•
•
•
Offering virtual home tours for prospective homebuyers;
Providing access to interactive floor plans available at their desired community;
Enabling live chats with sales counselors;
Conducting virtual appointments and tours of the design studios with our studio professionals;
Continuing to have KBHS qualify homebuyers for mortgages who may be or are purchasing a home, and utilizing online tools and/or contactless methods
to serve homebuyers where possible;
Organizing virtual events with the broker community to introduce new communities;
Presenting homebuyers with the ability to virtually see and walk through their home at various points during its construction and prior to closing; and/or
Arranging virtual or drive-through closings, where permitted.
In addition, as part of our commitment to sustainability, which is discussed further below, and providing our customers a simple path to homeownership, we
continue to work towards the goal of paperless homebuying. Over the past few years, we have eliminated a significant amount of paper from our home purchase
contract by reducing the number of forms required to complete the process and digitizing as many of the remaining forms as possible. We plan to make additional
investments in our digital sales and marketing tools in 2021.
To the extent permitted in 2020, our communities have been open to walk-in traffic, following appropriate safety protocols and applicable public health
guidelines.
We market our homes to prospective homebuyers and real estate brokers through a variety of media, and use data analytics to target our advertising and
measure its effectiveness and efficiency in terms of generating leads and net orders. In recent years and in response to the growing number of millennial and
Generation Z homebuyers, we have increased our emphasis on digital marketing, through search engine marketing, interactive Internet-based applications, email,
social media outlets, our website and other evolving communication technologies. We also use print media, billboards, radio, magazine and newspaper advertising
in our served markets, as necessary.
Homebuyer Profile. We focus on bracketing within a range around the median household income in a submarket in order to position our product and pricing to
be attainable for the largest demand segments of that submarket. Across our portfolio, we offer an array of products, from smaller, higher density homes, with
average selling prices typically suited for first-time homebuyers, to larger homes in premium locations with additional amenities, with higher average selling prices
that generally
6
attract a first or second move-up homebuyer. We also offer a variety of single-story floorplans that typically appeal to an active adult homebuyer age 55 and over,
as well as multi-story floorplans that attract a wide range of homebuyers. For more than a decade, approximately 75% of our annual deliveries have been to first-
time and first move-up homebuyers; in 2020, it was 78% of our deliveries, as shown in the following chart:
Operational Structure. We operate our homebuilding business through divisions with experienced management teams who have in-depth local knowledge of
their particular served markets, which helps us acquire land in preferred locations; develop communities with products that meet local demand; and understand
local regulatory environments. Our division management teams exercise considerable autonomy in identifying land acquisition opportunities; developing land and
communities; implementing product, marketing and sales strategies; and controlling costs. To help maintain consistent execution within the organization, our
division management teams and other employees are continuously trained on KB Edge principles and are evaluated, in part, based on their achievement of relevant
operational objectives.
Our corporate management and support personnel develop and oversee the implementation of company-wide strategic initiatives, our overall operational
policies and internal control standards, and perform various centralized functions, including architecture; purchasing and national contracts; treasury and cash
management; land acquisition approval; risk and litigation management; accounting and financial reporting; internal audit and compliance activities; information
technology systems; marketing; and investor and media relations.
Community Development and Land Inventory Management
Developable land for the production of homes is a core resource for our business. Based on our current strategic plans, we seek to own or control land
sufficient to meet our forecasted production goals for the next three to five years. In 2021, we intend to continue to invest in and develop land positions within
attractive submarkets and selectively acquire or control additional land that meets our investment return standards. However, we may periodically sell certain land
interests or monetize land previously held for future development.
Our community development process generally consists of four phases: land acquisition, land development into finished lots for a community (if necessary),
home construction and delivery of completed homes to homebuyers. Historically, our community development process has typically ranged from 12 to 18 months
in our West Coast homebuilding reporting segment, with a somewhat shorter duration in our other homebuilding reporting segments. The development process in
our West Coast homebuilding reporting segment is typically longer than in our other segments due to the municipal and regulatory requirements that are generally
more stringent in California. Our community development process varies based on, among other things, the extent and speed of required government approvals and
utility service activations, the overall size of a particular community, the scope of necessary site preparation activities, the type of product(s) that will be offered,
weather conditions, time of year, promotional marketing results, the availability of construction resources, consumer demand, local and general economic and
housing market conditions, and other factors.
Although they vary significantly in size and complexity, our single-family residential home communities typically consist of 50 to 200 lots per product line,
with lots ranging in size from 1,900 to 9,000 square feet. In our communities, we typically offer three to 15 home design choices. We also generally build one to
three model homes at each community so that prospective homebuyers can preview the various products available. Depending on the community, we may offer
premium lots
7
containing more square footage, better views and/or location benefits. Some of our communities consist of multiple-story structures that encompass several
attached condominium-style units.
Land Acquisition and Land Development. We continuously evaluate land acquisition opportunities against our investment return standards, while balancing
competing needs for financial strength, liquidity and land inventory for future growth. When we acquire land, we generally focus on parcels with lots that are
entitled for residential construction and are either physically developed to start home construction (referred to as “finished lots”) or partially finished. However,
depending on market conditions and available opportunities, we may acquire undeveloped and/or unentitled land. We may also invest in land that requires us to
repurpose and re-entitle the property for residential use, such as urban in-fill developments. We expect that the overall balance of undeveloped, unentitled, entitled,
partially finished and finished lots in our inventory will vary over time, and in implementing our strategic growth initiatives, we may acquire a greater proportion
of undeveloped or unentitled land in the future if and as the availability of reasonably priced land with finished or partially finished lots diminishes.
We generally structure our land acquisition and land development activities to minimize, or defer the timing of, expenditures in order to reduce both the
market risks associated with holding land and our working capital and financial commitments, including interest and other carrying costs. We typically use
contracts that, in exchange for a small initial option payment or earnest money deposit, give us an option or similar right to acquire land at a future date, usually at
a pre-determined price and pending our satisfaction with the feasibility of developing and selling homes on the land and/or an underlying land seller’s completion
of certain obligations, such as securing entitlements, developing infrastructure or finishing lots. We refer to land subject to such option or similar contractual rights
as being “controlled.” Our decision to exercise a particular land option or similar right is based on the results of our due diligence and continued market viability
analysis after entering into such a contract. Information related to our land option contracts and other similar contracts is provided in Note 7 – Inventory
Impairments and Land Option Contract Abandonments and Note 8 – Variable Interest Entities (“VIEs”) in the Notes to Consolidated Financial Statements in this
report.
The following table presents the number of inventory lots we owned, in various stages of development, or controlled under land option contracts or other
similar contracts by homebuilding reporting segment as of November 30, 2020 and 2019:
Homes Under Construction
Land Under Development
Land Under Option (a)
Total Land
Owned or Under Option
2020
2019
2020
2019
2020
2019
2020
2019
2,128
1,265
2,363
976
6,732
1,615
1,186
2,058
788
5,647
8,467
6,975
11,947
5,926
33,315
7,889
6,039
12,738
5,726
32,392
6,395
4,050
9,389
7,157
26,991
5,682
3,966
11,075
6,148
26,871
16,990
12,290
23,699
14,059
67,038
15,186
11,191
25,871
12,662
64,910
West Coast
Southwest
Central
Southeast
Total
(a) Land under option as of November 30, 2020 and 2019 includes 10,254 and 9,212 lots, respectively, under land option contracts or other similar contracts
where the associated deposits were refundable at our discretion.
The following charts present the percentage of inventory lots we owned or had under land option contracts or other similar contracts by homebuilding
reporting segment and the percentage of total lots we owned and had under option as of November 30, 2020:
8
Home Construction and Deliveries. Following the acquisition of land and, if necessary, the development of the land into finished lots, we typically begin
constructing model homes and marketing homes for sale. To minimize the costs and risks of unsold homes in production, we generally commence construction of a
home only after we have a signed purchase contract with a homebuyer and have obtained preliminary credit approval or other evidence of the homebuyer’s
financial ability to purchase the home. Other than model homes, our inventories typically do not consist of a significant number of completed unsold homes.
However, cancellations of home purchase contracts prior to the delivery of the underlying homes, the construction of attached products with some unsold units, or
specific marketing or other strategic considerations will result in our having some unsold completed or partially completed homes in our inventory. Our cycle time
from home sale to delivery is typically six to seven months.
We act as the general contractor for the majority of our communities, and engage outside general contractors in all other instances. We, or the outside general
contractors we engage, contract with a variety of independent subcontractors, who are typically locally based, to perform all land development and home
construction work through their own employees or subcontractors. We do not self-perform any land development or home construction work. These independent
subcontractors also supply some of the building materials required for such production activities. Our contracts with these independent subcontractors require that
they comply with all laws applicable to their work, including wage and safety laws, meet performance standards, follow local building codes and permits, and
abide by our Ethics Policy referenced under Item 10 – Directors, Executive Officers and Corporate Governance in this report.
Raw Materials. Outside of land, the principal raw materials used in our production process are concrete and forest products. Other primary materials used in
home construction include drywall, and plumbing and electrical items. We source all of our building materials from third parties. We attempt to enhance the
efficiency of our operations by using, where practical, standardized materials that are commercially available on competitive terms from a variety of outside
sources. In addition, we have national and regional purchasing programs for certain building materials, appliances, fixtures and other items that allow us to benefit
from large-quantity purchase discounts and, where available, participate in outside manufacturer or supplier rebate programs. When possible, we arrange for bulk
purchases of these products at favorable prices from such manufacturers and suppliers.
Backlog
Our “backlog” consists of homes that are under a purchase contract but have not yet been delivered to a homebuyer. Ending backlog represents the number of
homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) generated during the current period minus the
number of homes delivered during the current period. Our backlog at any given time will be affected by cancellations, homes delivered and our community count.
Backlog value represents potential future housing revenues from homes in backlog. Our cancellation rates and the factors affecting such rates are further discussed
below under both Item 1A – Risk Factors and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report.
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The following charts present our ending backlog (number of homes and value) by homebuilding reporting segment as of November 30, 2019 and 2020:
Human Capital Resources
At December 31, 2020 and 2019, we had approximately 1,776 and 2,140 full-time employees, respectively. None of our employees are represented by a
collective bargaining agreement.
To help drive consistent execution of our business strategy, including our customer obsession philosophy, and support their development, we provide training
opportunities to our employees that align with their responsibilities over the arc of their career with us. We maintain a dedicated Internet-based learning platform
with a broad portfolio of written, audio-visual and interactive enterprise-wide and discipline-specific policy and training materials. This platform includes a library
of nearly 300 self-directed courses and virtual, instructor-led programs for employees at all levels of our organization. New employee orientations, functional role
training and ethics training and certification, which is required annually for all employees, take place on this platform. During 2020, our team members completed
more than 17,000 courses in total, an average of more than eight courses per employee. Included in this total were numerous courses and certifications associated
with pandemic-related challenges such as virtual selling processes and protocols for safe business operations. Managers and supervisors are provided training to
help their reports progress in their professional development.
We are committed to maintaining a work culture that treats all employees fairly and with respect, promotes inclusivity, provides equal opportunities for the
professional growth of the diverse individuals who join us, and advancement based on merit. At December 31, 2020, females constituted approximately 42% of our
workforce and 33% of our managerial employees. Also at December 31, 2020, ethnic and racial minorities constituted approximately 33% of our workforce and
21% of our managerial employees. We intend to continue using a combination of targeted recruiting, talent development and internal promotion strategies to
expand the diversity of our employee base across all roles and functions.
In order to achieve our strategic goals, it is essential for us to attract, promote and retain qualified personnel, particularly the leaders who manage our
autonomous, local divisions in our served markets and are responsible for partnering with all constituents. Our top division and regional leaders average nearly 11
years of tenure with us, and the local leaders responsible for land acquisition, entitlement, and development average approximately 10 years with us. In addition,
our named executive officers who are responsible for setting our overall strategy average approximately 16 years with us and average more than two decades in
homebuilding.
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To attract and retain top talent in our highly competitive industry, we have designed our compensation and benefits programs to provide a balanced and
effective reward structure. Our short- and long-term incentive programs are aligned with key business objectives and are intended to motivate strong performance.
Our employees are eligible for medical, dental and vision insurance, a savings/retirement plan, life and disability insurance, various wellness programs and tuition
reimbursement, along with an array of voluntary benefits designed to meet individual needs. We engage nationally recognized outside compensation and benefits
consulting firms to objectively evaluate our programs and benchmark them against peers and other similarly situated organizations.
To recognize and promote outstanding employees, we conduct a comprehensive talent and succession planning review process on an annual basis, focused on
identifying top-performing, high-potential, and diverse team members for advancement to key field and corporate leadership roles. This review process is overseen
by the management development and compensation committee of our board of directors, which also guides updates and refinements to our human capital growth
strategies.
During 2020, to address the safety and health of our workforce due to the COVID-19 pandemic, we implemented the following, among other steps:
•
Temporarily closing our offices and establishing new safety protocols and procedures;
• Maintaining regular communication regarding the impacts of the pandemic on our team members and operations;
•
•
•
•
•
Developing and distributing a playbook to guide the safe return to offices, communities, and work sites;
Providing paid time-off for those directly impacted by COVID-19, and instructing those who are infected to stay home;
Increasing cleaning protocols across all locations;
Establishing physical distancing procedures, modifying workspaces, and providing personal protective equipment and cleaning supplies for employees
who need to be onsite; and
Creating and refining protocols to address actual and suspected COVID-19 cases and potential exposure of our team members, customers, and trade
partners.
Competition, Seasonality, Delivery Mix and Other Factors
Competition. The homebuilding industry and housing market are highly competitive with respect to selling homes; contracting for construction services, such
as carpentry, roofing, electrical and plumbing; and acquiring attractive developable land, though the intensity of competition can vary and fluctuate between and
within individual markets and submarkets. We compete for homebuyers, construction resources and desirable land against numerous homebuilders, ranging from
regional and national firms to small local enterprises. As to homebuyers, we primarily compete with other homebuilders on the basis of selling price, community
location and amenities, availability of financing options, home designs, reputation, home construction cycle time, and the design options and upgrades that can be
included in a home. In some cases, this competition occurs within larger residential development projects containing separate sections other homebuilders design,
plan and develop. We also compete for homebuyers against housing alternatives to new homes, including resale homes, apartments, single-family rentals and other
rental housing.
In markets experiencing extensive construction activity, including areas recovering from earthquakes, wildfires, hurricanes, flooding or other natural disasters,
there can be severe craft and skilled trade shortages that limit independent subcontractors’ ability to supply construction services to us, which in turn tends to drive
up our costs and/or extend our production schedules. Elevated construction activity, and reallocations of staff for public safety priorities after natural disasters or
otherwise, has also contributed to measurable increases in the amount of time needed to obtain governmental approvals or utility service activations and, combined
with tariffs imposed or increased by the U.S. and other governments, the cost of certain raw building materials, such as steel, Canadian lumber, drywall and
concrete, or finished products. In 2020, we experienced building material cost pressures, particularly for lumber, and production capacity issues with some of our
main product suppliers, reflecting increases in homebuilding and renovation activity and supply chain constraints over the course of the year largely associated
with COVID-19 control responses. Since 2013, we also have seen higher prices for desirable land amid heightened competition with homebuilders and other
developers and investors (both domestic and international), particularly in the land-constrained areas where we operate. We expect these upward cost trends to
continue in 2021, if and as housing market activity grows and there is greater competition for these resources.
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Seasonality. Our performance is affected by seasonal demand trends for housing. Traditionally, there has been more consumer demand for home purchases
and we tend to generate more net orders in the spring and early summer months (corresponding to most of our second quarter and part of our third quarter) than at
other times of the year. This “selling season” demand results in our typically delivering more homes and generating higher revenues from late summer through the
fall months (corresponding to part of our third quarter and all of our fourth quarter). However, as illustrated in the table below, the outbreak of COVID-19 and the
related COVID-19 control responses beginning in mid-March disrupted our usual seasonal patterns in 2020, with our second quarter net order activity measurably
constrained followed by a significant rebound in our third and fourth quarters, resulting in a higher percentage of net orders in those quarters, compared to
corresponding quarters in previous years. The pattern of our homes delivered and housing revenues in 2020 was affected by the above-mentioned impact on our net
orders in the second quarter as well as a slowdown in our housing starts in that quarter.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Net Orders
2020
2019
2018
Homes Delivered
2020
2019
2018
Housing Revenues
2020
2019
2018
26 %
21 %
25 %
26 %
18 %
20 %
26 %
18 %
19 %
13 %
32 %
32 %
23 %
23 %
24 %
22 %
23 %
24 %
32 %
26 %
25 %
24 %
26 %
26 %
23 %
25 %
27 %
29 %
21 %
18 %
27 %
33 %
30 %
29 %
34 %
30 %
Delivery Mix and Other Factors. In addition to the overall volume of homes we sell and deliver, our results in a given period are significantly affected by the
geographic mix of markets and submarkets in which we operate; the number and characteristics of the communities we have open for sales in those markets and
submarkets; and the products we sell from those communities during the period. While there are some similarities, there are differences within and between our
served markets in terms of the number, size and nature of the communities we operate and the products we offer to consumers. These differences reflect, among
other things, local homebuyer preferences; household demographics (e.g., large families or working professionals; income levels); geographic context (e.g., urban
or suburban; availability of reasonably priced finished lots; development constraints; residential density); and the shifts that can occur in these factors over time.
These factors in each of our served markets will affect the costs we incur and the time it takes to locate, acquire rights to and develop land, open communities for
sales, and market and build homes; the size of our homes; our selling prices (including the contribution from homebuyers’ purchases of design options and
upgrades); the pace at which we sell and deliver homes and close out communities; and our housing gross profits and housing gross profit margins. Therefore, our
results in any given period will fluctuate compared to other periods based on the proportion of homes delivered from areas with higher or lower selling prices and
on the corresponding land and overhead costs incurred to generate those deliveries, as well as from our overall community count.
Sustainability
We have made a dedicated effort to further differentiate ourselves from other homebuilders and resale homes through our ongoing commitment to become a
leading national company in sustainability. We seek out innovative technologies and systems to further improve the energy and water efficiency of our homes. We
also engage in campaigns and other educational efforts, sometimes together with other companies, organizations and groups, to increase consumer awareness of the
importance and impact of sustainability in selecting a home and the products within a home. Under our commitment to sustainability, we, among other things:
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•
•
•
•
•
•
Build energy- and water-efficient new homes to achieve a 20% improvement on average compared to homes built to code and even more compared to
resale homes. We also seek to contribute to the reduction of greenhouse gas emissions over the long term. Overall, we have built nearly 150,000
ENERGY STAR certified new homes since 2000, more than any other homebuilder. These ENERGY STAR certified homes are estimated to have
cumulatively saved our homeowners approximately $780 million in utility bills and reduced carbon emissions by approximately 5 billion pounds;
Provide a KB Home Energy Savings Comparison™, or ESC, that gives home shoppers an estimate of both monthly energy costs and monthly savings of
our homes over a typical resale home;
Include in our product offerings advanced home automation technologies, components (e.g., smart appliances and smart power lighting) and systems that
can increase convenience for our homebuyers;
Built more than 16,000 WaterSense® labeled and WaterSmart homes;
Installed 700,000 WaterSense labeled fixtures, saving homeowners roughly 1.5 billion gallons of water each year; and
Delivered more than 11,000 homes with solar-paneled power systems, producing an estimated total of 428 million kilowatt hours of electrical power and
reducing carbon dioxide emissions by approximately 668 million pounds.
We have been building homes with solar-paneled power systems for nearly 15 years. We were one of the first national homebuilders to offer solar to new-
home buyers. In 2011, we introduced our first all-solar community in California. In June 2020, we were the first national homebuilder to offer a complete roof-
integrated solar-paneled system. Our solar-paneled systems can be financed with the home purchase or leased from a third-party provider.
For several years, we have been recognized by the U.S. Environmental Protection Agency for our sustainability achievements, and have earned awards under
all of the agency’s programs aimed at homebuilders: ENERGY STAR, which sets energy efficiency standards; WaterSense, which establishes water efficiency
standards; and Indoor airPLUS®, which focuses on indoor air quality. In 2020, we received the ENERGY STAR Partner of the Year — Sustained Excellence
Award for the 10th consecutive year, and the WaterSense Sustained Excellence Award for water efficiency for the sixth consecutive year. We strive to utilize the
latest building science and upgraded air filtration systems in the homes we deliver, making the impact of indoor environments on one’s health a key area of our
sustainable building commitment.
More information about our sustainability commitment can be found in our annual sustainability reports, which we have published on our website since 2008.
We intend to continue to research, evaluate and utilize new or improved products and construction and business practices consistent with our commitment and
believe our sustainability initiatives can help put us in a better position, compared to resale homes and homebuilders with less-developed programs, to comply with
evolving local, state and federal rules and regulations intended to protect natural resources and to address climate change and similar environmental concerns.
Government Regulations and Environmental Matters
Our operations are subject to myriad legal and regulatory requirements concerning land development (including governmental permits, taxes, assessments and
fees), the homebuilding process, employment conditions and worksite health and safety. These requirements often provide broad discretion to government
authorities, and they could be interpreted or revised in ways that delay or prohibit project development or home sales, and/or make these activities more costly. The
costs to comply, or associated with any noncompliance, are, or can be, significant and variable from period to period.
Under applicable environmental laws (including those aimed at protecting against climate change impacts), we may be responsible for, among other things,
removing or remediating hazardous or toxic substances even where we were not aware of their presence or on land we previously owned. In addition to incurring
clean-up costs, the presence of harmful substances on or near our properties may prevent us from performing land development or selling homes. Also, we are
subject to federal, state and local rules that can require us to undertake extensive measures to prevent or minimize discharges of stormwater and other materials
from our communities, and to protect wetlands and other designated areas.
As part of our due diligence process for land acquisitions, we often use third-party environmental consultants to investigate potential environmental risks, and
we require disclosures, representations and warranties from land sellers regarding environmental risks. We also take steps prior to our acquisition of the land to
gain reasonable assurance as to the precise scope of any remediation work required and the costs associated with removal, site restoration and/or monitoring. To
the extent contamination or other environmental issues have occurred in the past, we will attempt to recover restoration costs from third parties, such as the
generators of hazardous waste, land sellers or others in the prior chain of title and/or their insurers.
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However, despite these efforts, there can be no assurance that we will avoid material liabilities relating to the existence or removal of toxic wastes, site restoration,
monitoring or other environmental matters affecting properties currently or previously owned or controlled by us, and no estimate of any potential liabilities can be
made.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, beneficial ownership reports on Forms 3, 4 and 5 and proxy
statements, as well as all amendments to those reports are available free of charge through our investor relations website at investor.kbhome.com, as soon as
reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). They can also be found at
the SEC’s website at www.sec.gov. We will also provide these reports in electronic or paper format free of charge upon request made to our investor relations
department at investorrelations@kbhome.com or at our principal executive offices. We intend for our investor relations website to be the primary location where
investors and the general public can obtain announcements regarding, and can learn more about, our financial and operational performance, business plans and
prospects, our board of directors, our senior executive management team, and our corporate governance policies, including our articles of incorporation, by-laws,
corporate governance principles, board committee charters, and ethics policy. We may from time to time choose to disclose or post important information about
our business on or through our investor relations website, and/or through other electronic channels, including social media outlets, such as Facebook®
(Facebook.com/KBHome) and Twitter® (Twitter.com/KBHome), and other evolving communication technologies. The content available on or through our
primary website at www.kbhome.com, our investor relations website, including our sustainability reports, or social media outlets and other evolving
communication technologies is not incorporated by reference in this report or in any other filing we make with the SEC, and our references to such content are
intended to be inactive textual or oral references only.
Item 1A. RISK FACTORS
Although we have operated through a number of varying economic cycles, there are several risks that could affect our ability to conduct our business, which
we discuss below. If any of these risks materialize, they could, among other things, (a) materially and adversely impact our results of operations and consolidated
financial statements; and (b) cause our results to differ materially from the forward-looking and other statements we make in our SEC filings; in our news releases
and other public reports and communications, including those we post on or make available through our websites or other electronic channels; or orally through our
personnel and representatives. These risks, and other factors outside of our control, could also create or increase volatility in our common stock’s market price.
Consumer Demand Risks. The following could negatively affect consumer demand for our products, thereby unfavorably impacting our net orders, homes
delivered, average selling prices, revenues and/or profitability:
•
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•
•
Soft or negative economic or housing market conditions. Adverse conditions in our served markets or nationally could be caused or worsened by factors
outside of our control, including, for example, due to the imposition and/or continuation of federal, state and/or local orders (e.g., quarantines, “stay-at-
home” and similar mandates) for individuals to substantially restrict daily activities and for businesses to significantly curtail or cease normal operations
to address COVID-19 or other disease outbreaks or civil unrest, or a federal government shutdown or failure to approve additional COVID-19-related
relief or stimulus measures, and financial markets’ and businesses’ reactions thereto. Among other impacts, a severe economic contraction may also
trigger a rise in home purchase cancellations, as we experienced in our 2020 second quarter when we undertook proactive efforts to assure a backlog of
qualified homebuyers amid the COVID-19 pandemic-induced economic downturn.
Reduced employment levels and job and wage growth. While employment levels have improved since the 2020 second quarter, these trends may weaken
or reverse in 2021, particularly if there are sustained COVID-19 outbreaks. If they do, our core first-time and first move-up homebuyer segments could be
particularly affected, impacting us more severely than homebuilders that target a different buyer demographic.
Lower population growth, household formations or other unfavorable demographic changes. These may be driven by, among other things, birth rate
changes, economic factors or U.S. immigration policies.
Diminished consumer confidence, whether generally or as to purchasing a home. Consumers may be reluctant to purchase a home compared to housing
alternatives (such as renting apartments or homes, or remaining in their existing home) due to location or lifestyle preferences, affordability perceptions
(particularly in markets experiencing rapid home price appreciation), employment instability or otherwise. Consumers may also decide not to search for a
new home when there are significant public health risks in doing so in their area, which we saw across our served markets in the 2020 second quarter with
the outbreak of COVID-19.
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•
•
•
•
•
•
Rising home selling prices. Steady demand for housing since 2013 combined with declining home inventories, in part reflecting a low supply of new
homes compared to historical levels, has helped drive above-average home price appreciation across most markets for the past several years. If home
selling prices, including our homes’ selling prices, increase at a faster rate than consumer incomes, consumers, including and perhaps particularly those in
our core first-time and first move-up homebuyer segments, may not be able to afford to purchase a home, including our homes.
Tightened availability or affordability of mortgage loans and homeowner insurance coverage. Most of our buyers need a mortgage loan to purchase their
home. Their ability to obtain a mortgage loan is largely subject to prevailing interest rates, lenders’ credit standards and appraisals, and the availability of
government-supported programs, such as those from the Federal Housing Administration, the Veterans Administration, Federal National Mortgage
Association (also known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (also known as Freddie Mac). If mortgage interest rates
increase, credit standards are tightened, appraisals for our homes are lowered, or mortgage loan programs are curtailed, potential buyers of our homes may
not be able to obtain necessary mortgage financing.
Insurance companies are increasingly drawing back from issuing, or are measurably raising premiums for, homeowner insurance policies in areas that
have experienced, or are thought to be at risk of experiencing, significant wildfires, hurricanes, flooding or other natural disasters. If potential homebuyers
are unable to obtain affordable homeowner insurance coverage, they may decide not to pursue purchasing a home or may cancel a home purchase contract
with us.
Poor lender performance. We depend on third-party lenders, including our KBHS partner Stearns, to provide mortgage loans to our homebuyers, unlike
homebuilders with a wholly-owned mortgage lender. These lenders may be unable or unwilling to complete, timely or at all, the loan originations they
start for our homebuyers. Poorly performing lenders can significantly delay home closings, disrupting our production schedules and delivery forecasts, or
cause home purchase contract cancellations. If KBHS performs poorly and our customers use another lender, the income from and value of our KBHS
equity interest would decline.
On January 5, 2021, Guaranteed Rate, Inc. (“Guaranteed Rate”) announced that it had reached an agreement to acquire Stearns’ parent company and
expected to close the transaction in the first calendar quarter of 2021. While the announcement indicated that Guaranteed Rate plans to use the acquisition
to further scale its joint venture platform, we can offer no assurance that KBHS’ operations will continue in their current form, or at all, after Guaranteed
Rate closes its acquisition of Stearns. Even if KBHS’ operations are maintained, its performance may be negatively affected by acquisition or post-
acquisition integration activities and/or related management or other personnel changes, which, in turn, could result in one or more of the impacts
described in the foregoing paragraph.
Adverse tax law changes. If federal or state laws are changed to eliminate or reduce the income tax benefits associated with homeownership, such as
personal tax deductions for mortgage loan interest costs and real estate taxes, the after-tax cost of homeownership could measurably increase and diminish
consumer interest in buying a home, as could increases in personal income tax rates, which the incoming presidential administration may consider.
Competition. We face significant competition for customers from other homebuilders, sellers of resale homes and other housing industry participants,
including rental-housing operators. This competitive environment may, among other things, cause us to lower our home selling prices or offer incentives
to attract or retain buyers.
Seasonality. As discussed under Item 1 – Business in this report, we historically have experienced fluctuations in our quarterly operating results with
measurably more homes delivered and revenues generated in our third and fourth fiscal quarters. However, as was the case in 2020, this pattern may not
continue in the future at all or to the same degree as in the past.
Supply Risks. The following could negatively affect our ability to increase our owned and controlled lot inventory, community count, operational scale and
market share, and to grow our business, if at all:
•
•
Lack of available land. Securing sufficient developable land that meets our investment return standards is critical for us to meet our strategic goals and
profitably expand our business’ scale. Land availability depends on several factors, including geographical/topographical/governmental constraints,
sellers’ business relationships and reputation within the residential real estate community, and competition from other parties, some of which can bid
more for land. We expect to continue to face fierce competition for desirable land in our served markets in 2021, pressuring its availability and increasing
its cost.
Insufficient financial resources. Our business needs considerable cash to, among other things, acquire and develop land, build homes and provide
customer service. We expect to meet our needs with existing cash, future operational cash flow, our unsecured revolving credit facility with various banks
(“Credit Facility”) and unsecured letter of credit
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facility with certain financial institutions (“LOC Facility”), or outside sources, including loans that are specifically obtained for, or secured by, particular
communities or other inventory assets, which we refer to as project financing. However, outside financing may be unavailable, costly and/or considerably
dilute stockholders. For instance:
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◦
◦
◦
Tight capital or financial market conditions may hinder our ability to obtain external financing, or use or expand our Credit Facility and LOC
Facility, on favorable terms or at all. Also, if a rating agency downgrades our credit rating or outlook, external financing may be difficult and costly
for us to obtain.
Noncompliance with our Credit Facility and senior notes’ covenants may restrict our ability to borrow; accelerate repayment of our debt, which may
not be feasible for us; or cause our lenders to impose significant fees or cease lending to us.
As described in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report, if a change of control or fundamental
change occurs before our senior notes mature, we may need to offer to purchase certain of them. This may require us to refinance or restructure our
debt, which we may be unable to do at all or on favorable terms.
Our debt and debt-to-capital levels could require us to dedicate substantial cash flow to debt service; inhibit our ability to respond to business changes
or adjust our debt maturity schedule; curb execution on our current strategies; and/or make us more vulnerable in a downturn than our less-leveraged
competitors. Our next senior note maturity is our $450.0 million in aggregate principal amount of 7.00% senior notes due December 15, 2021
(“7.00% Senior Notes due 2021”).
•
•
•
•
Decreased land inventory value. Our land inventory’s value depends on market conditions, including our estimates of applicable future demand and
revenue generation. If conditions deteriorate during the typically significant amount of time between our acquiring ownership/control of land and
delivering homes on that land; if we cannot sell land held for sale at its estimated fair value; or if we make strategic changes, we may need to record
inventory-related charges. We may also record charges if we decide to sell land at a loss or activate or sell land held for future development.
In addition, our business could be negatively affected if our net orders, homes delivered or backlog-to-homes delivered conversion rate fall; if often-
volatile building materials prices or subcontractor rates increase, which has been the trend over the past few years and was particularly the case with
lumber in 2020; or if our community openings are delayed due to, among other things, prolonged development, our strategic adjustments, or protracted
government approvals or utility service activations from staff or resource cuts or reallocations for public safety priorities (e.g., earthquakes, wildfires,
flooding, hurricanes or other natural disasters).
Trade disputes and defective materials. The federal government has imposed new or increased import tariffs, and other countries have implemented
retaliatory measures, raising the cost and reducing the supply of several home construction items. In addition, shortages or rising prices of building
materials may ensue from manufacturing defects, resulting in recalls of materials. If such disputes continue or recalls occur, our costs and supply chain
disruptions could increase further.
Poor subcontractor availability and performance. Independent subcontractors perform essentially all of our land development and home construction
work. Though we schedule and oversee such activities at our community sites, we have no control over our subcontractors’ availability or work methods.
If qualified subcontractors are not available (due to general shortages in a tight labor market, competition from other builders or otherwise), or do not
timely perform, we may incur production delays and other inefficiencies, or higher costs for substitute services. Also, if our subcontractors’ work or
materials quality does not meet our standards, we could face more home warranty and construction defect claims, and they or their insurers may not be
able to cover the associated repair costs.
Responsibility for duties owed to subcontractors’ employees. Governmental agencies have at times sought to hold contractors like us responsible for
subcontractors’ employment-related obligations to their workforces. For instance, under California law, regulators or others could assert that we are
responsible for wages and benefits that our subcontractors fail to pay to their employees, or, in certain circumstances, it could be alleged that employees
of our subcontractors should be deemed to be our employees. Further efforts to impose such external labor-related obligations on us could create
substantial exposure for us in situations beyond our control.
Strategy Risks. Our strategies, and any related initiatives or actions, and any changes thereto, may not be successful in achieving our goals or generate any
growth, earnings or returns, particularly in a highly volatile business environment precipitated by a health or economic crisis, akin to our experience in the 2020
second quarter with the outbreak of COVID-19, or by social instability or distress, such as the civil unrest that arose at the end of May 2020 related to efforts to
institute law
16
enforcement and other social and political reforms. We may not achieve positive operational or financial results, or results equal to or better than we did in any
prior period or in comparison to other homebuilders. We may also incur higher costs to build our homes than other homebuilders due to our commitment to
sustainability, as discussed above under “Sustainability.” Among other strategic risks, our business is presently concentrated in California, Florida, Nevada and
Texas. Poor conditions in any of those markets could have a measurable negative impact on our results, and the impact could be larger for us than for other less-
concentrated homebuilders. In addition, we may not be successful in generating positive results from our recent expansion into the Seattle, Washington market, our
re-entry into the Charlotte, North Carolina market, or if we choose to enter into any other new markets, based on our relative inexperience with the local
homebuilding and economic environment and the need to make a significant investment to achieve effective scale and profitable returns, which we may not be able
to accomplish.
Adverse conditions in California would have particular significance to our business. We generate the highest proportion of our revenues from and make
significant inventory investments in our California operations. However, we may be constrained or delayed in entitling land and selling and delivering homes in
California, and incur higher development or construction costs, from water conservation or wildfire protection measures (including precautionary and event-
induced electricity blackouts, temporary or extended local or regional evacuations, development moratoriums in high-risk areas, and community resiliency design
requirements) that are intended to address severe drought and climatic conditions that have arisen in recent years. In addition, as large-scale wildfires and flooding
due to such conditions in California, as well as hurricanes, heavy rains and other climate change-driven natural disasters in other of our served markets, become
more frequent and intense, we may experience greater disruption to our land development and homebuilding activities, delaying orders and home deliveries, among
other impacts.
Also, California’s highly regulated and litigious business environment has made the state an increasingly challenging and uncertain place for us to operate.
This includes implementing regulations under the state’s Global Warming Solutions Act of 2006 (AB32) intended to lower greenhouse gas emissions. For instance,
we have and will continue to incur higher construction costs because of a state law requirement that effectively requires that all new homes permitted to build in
2020 and beyond have solar power systems, and we may be unable to offset (through customer leases) or cover such costs through selling price increases due to
competition and consumer affordability concerns. In addition, California and certain of its local governments are considering or have implemented restrictions on
or disincentives with respect to the creation or size of new suburban and exurban residential communities generally in favor of higher-density, urban developments
that can be attractive to some buyers, but in many cases are on smaller parcels with higher building costs and more complicated entitlement requirements and may
be subject to affordable housing mandates, prevailing wage requirements, greater local opposition and/or additional site remediation work. State and local
municipalities have also considered banning natural gas use in new homes, among other possible steps, as part of their approaches to reduce greenhouse gases.
Depending on their scope, these efforts could significantly increase our land acquisition and development costs and, along with increasing competition from other
homebuilders and investors for available developable land, limit our California operations’ growth, while making new homes less affordable to potential buyers in
the state. Partially offsetting these trends, California’s governor and certain legislators have taken positions to promote new housing construction, including the
adoption of the Housing Crisis Act of 2019 (SB 330) intended to expedite the approval process for housing development in order to address the housing shortage in
California.
Warranty Risks. Our homebuilding business is subject to warranty and construction defect claims. Though we have insurance coverage to partially reduce our
exposure, it is limited and costly, in part due to a shrinking provider market, and we have high self-insured retentions that are expected to increase. We self-insure
some of our risk through a wholly-owned insurance subsidiary.
Due to our dependence on independent subcontractors to perform our homebuilding activities and inherent uncertainties, including obtaining recoveries from
responsible subcontractors and/or their or our insurers, our recorded warranty and other liabilities may be inadequate to address future claims, which, among other
things, could require us to record charges to increase such liabilities. We may also record charges to reflect our then-current claims experience, including the actual
costs incurred. Home warranty and other construction defect issues may also generate negative publicity, including on social media and the Internet, that detracts
from our reputation and efforts to sell homes.
Deferred Tax Asset Recovery and Tax Position Risks. Our realization of our deferred tax assets depends on our generating sufficient future taxable income,
which may not occur. Also, our deferred tax assets’ value can increase or decrease with: (a) changes in the federal corporate income tax rate; (b) our undergoing a
“change of ownership” under federal tax rules, which would significantly reduce and possibly eliminate their value; and (c) adjustments in statutory or taxing
authority treatment of such assets. We have filed our tax returns based on certain positions we believe are appropriate, and we may owe additional taxes if taxing
authorities disagree with those positions.
17
Human Capital Risks. Our directors, officers and employees are important resources. If we cannot attract, retain and develop talent at reasonable pay and
benefits levels or, alternatively, if we need to implement personnel or compensation reductions, our performance, profitability and ability to achieve our strategic
goals could be significantly impaired. In addition, in many of our served markets, we need to have personnel with certain professional licenses, including building
contractor and real estate brokerage licenses. Our home selling and construction activities may be severely disrupted or delayed if we do not have sufficient
licensed individuals in our workforce.
Information Technology and Information Security Risks. We use information technology (“IT”) resources to carry out important operational activities and
maintain our business records. Third parties maintain many of our IT resources, including disaster recovery and business continuity services, under agreements
with evolving security and service level standards.
Our systems have faced a variety of phishing, denial-of-service and other attacks. We have administrative, physical and technical controls and processes in
place to address and mitigate cybersecurity risks and help protect our IT resources, including employee education and training, as well as third-party assessments.
We also rely on our service providers, Stearns and other mortgage lenders with whom we share some personal identifying and confidential information to secure
our information and the homebuyer information they collect from us. Our IT security costs, including cybersecurity insurance, are significant and will likely rise in
tandem with the sophistication and frequency of system attacks.
However, our, Stearns’ and our service providers’ measures may be inadequate and possibly have operational or security vulnerabilities that could go
undetected for some period of time. If our IT resources are compromised by an intentional attack, natural or man-made disaster, electricity blackout, IT failure or
systems misconfiguration, service provider error, mis-managed user access protocols, personnel action, or otherwise, we may be severely limited in conducting our
business and achieving our strategic goals for an extended period, experience internal control failures or lose access to operational assets or funds. A substantial
disruption, or security breach suffered by Stearns/KBHS or a service provider, could damage our reputation and result in the loss of customers or revenues, in
sensitive personal information being publicly disclosed or misused and/or legal proceedings against us. We may incur significant expenses to resolve such issues.
For example, in December 2020, we were notified by SolarWinds Worldwide, LLC, which provides us with network management software, that a recent
update to one of its products contained data collection malware that had also been distributed to thousands of its other clients, including federal, state and local
government agencies, educational institutions and several private companies and governments around the world. We promptly removed and replaced the affected
software product and have not identified any instance of internal data being communicated outside of our organization through the malware, or any other
compromise of our IT systems. We are continuing to work with our cybersecurity vendors to monitor any impact or activity related to the malware and are tracking
governmental notifications and directives as they are issued. While we believe we were not negatively affected by the malware, we have invested additional
management time and resources in response to this outside vendor incident.
We have invested significant resources over the past few years to develop and implement a new custom enterprise resource planning system designed to
improve the efficiency of our internal operational and administrative activities. There are inherent risks in undertaking this type of broad-based IT project and we
have experienced complications and delays during the implementation process. We expect these will continue as we progress and expand the scope of the system
in 2021 and that we will incur appreciable additional costs in doing so. In addition, the testing and use of the new system during this rollout could increase our
exposure to the security risks and consequences discussed in the foregoing paragraph.
Legal and Compliance Risks. As discussed under Item 1 – Business, our operations are subject to myriad legal and regulatory requirements, which can delay
our operational activities, raise our costs and/or prohibit or restrict homebuilding in some areas. For example, certain of our Texas operations are subject to rules
mandating enhanced flood management practices stemming from recent large hurricanes and rainstorms. These requirements often provide broad discretion to
government authorities, and they could be interpreted or revised in ways unfavorable to us. The costs to comply, or associated with any noncompliance, are, or can
be, significant and variable from period to period. With respect to environmental laws, in addition to the risks and potential operational costs discussed above, we
have been, and we may in the future be, involved in federal, state and local air and water quality agency investigations or proceedings for potential noncompliance
with their rules, including rules governing discharges of materials into the air and waterways; stormwater discharges from community sites; and wetlands and listed
species habitat protection. We could incur penalties and/or be restricted from developing or building at certain community locations during or as a result of such
agencies’ investigations or findings.
Additionally, we are involved in legal, arbitral or regulatory proceedings or investigations incidental to our business, the outcome or settlement of which could
result in material claims, losses, monetary damage awards, penalties, or other direct or indirect payments recorded against our earnings, or injunctions, consent
decrees or other voluntary or involuntary restrictions or adjustments to our business operations or practices. Any adverse results could be beyond our expectations,
insurance coverages
18
and/or accruals at particular points in time. Unfavorable outcomes, as well as unfavorable investor, analyst or news reports related to our industry, company,
personnel or operations, may also generate negative publicity, including on social media and the Internet, damaging our reputation and resulting in the loss of
customers or revenues.
To reduce the risks and expected significant costs of defending intra-corporate proceedings in multiple venues and to help ensure that such matters are
considered within a well-established body of law, our By-laws provide that, subject to certain exceptions, Delaware state courts are the exclusive forum for
specified internal corporate affairs actions. This may limit a stockholder’s ability to bring a claim in their favored forum. At the same time, if a court were to allow
for an alternative forum, or we waive the provision’s application, for a particular matter, we may incur additional costs associated with resolving an otherwise
relevant action in another jurisdiction(s).
The European Union and state governments, notably California and Nevada, have enacted or enhanced data privacy regulations, and other governments are
considering establishing similar or stronger protections. These regulations impose certain obligations for securing, and potentially removing, specified personal
information in our systems, and for apprising individuals of the information we have collected about them. We have incurred costs in an effort to comply with
these data privacy risks and requirements, and our costs may increase significantly as risks become increasingly complex or if new or changing requirements are
enacted, and based on how individuals exercise their rights. For example, in November 2020, California voters approved Proposition 24 (Consumer Personal
Information Law and Agency Initiative), which will increase data privacy requirements for our business when its provisions take effect in 2023. Despite our
efforts, any noncompliance could result in our incurring substantial penalties and reputational damage.
KBHS’ operations are heavily regulated. If Stearns, which oversees KBHS’ operations, or KBHS is found to have violated regulations, or mortgage investors
demand KBHS repurchase mortgage loans it has sold to them, or cover their losses, for claimed contract breaches, KBHS could face significant liabilities, which, if
they exceed its reserves, could result in our recognizing losses on our KBHS equity interest.
Our financial results may be materially affected by the adoption of new or amended financial accounting standards, including those relating to revenue
recognition and lease accounting, and regulatory or outside auditor guidance or interpretations.
Pandemic Risks. An epidemic, pandemic or similar serious public health issue, and the measures undertaken by governmental authorities to address it, could
significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, and/or along with any associated
economic and/or social instability or distress, have a material adverse impact on our consolidated financial statements. We experienced significant impacts to our
business during 2020, beginning in mid-March, due to the outbreak of COVID-19 and the COVID-19 control responses by international, federal, state and local
public health and governmental authorities, including quarantines, “stay-at-home” orders and similar mandates.
In response to the initial COVID-19 control responses in our served markets, we temporarily closed our sales centers, model homes and design studios to the
general public, shifted to an appointment-only personalized home sales process and prioritized our warranty service activities to respond to emergency repair
requests, and otherwise on a by-exception basis, in each case as and where permitted and following recommended distancing and other health and safety protocols
when meeting in person with a customer. We also leveraged our virtual sales tools to give customers the ability to shop for a new KB home from their mobile
device or personal computer. In addition, we shifted our corporate and division office functions to work remotely. We limited our construction operations largely to
authorized activities with increased safety measures and experienced a reduction in the availability, capacity and efficiency of municipal and private services
necessary to the progress of developing land, building homes, completing mortgage loans and delivering homes to varying degrees depending on the scope of the
restrictions local authorities established.
Although we gradually resumed nearly all of our operations with the relaxing of the early COVID-19 control responses beginning late in our 2020 second
quarter and for the remainder of the fiscal year, the magnitude and duration of the business and economic impacts from the unprecedented public health effort to
contain and combat the spread of COVID-19 have produced ongoing uncertainty about the overall operating environment going forward and made it more
challenging for our management to estimate the future performance of our business and to develop strategies to generate growth. Moreover, we can provide no
assurance as to whether the COVID-19 public health effort will be intensified to such an extent, particularly in response to any resurgence in infections, whether
due to the spread of any variants of the virus or otherwise, combined with the seasonal flu, that we will not be able to conduct any business operations in certain of
our served markets or at all for an indefinite period. Certain of our served markets have recently seen a dramatic increase in COVID-19 cases, and more stringent
COVID-19 control responses have been re-instituted. Therefore, we could again experience in 2021 material disruptions in our operating environment, impairing
our ability to sell and build homes in a typical manner, as occurred in our 2020 second
19
quarter, or at all, due to, among other things, increased costs or decreased supply of building materials; reduced availability of subcontractors, employees and other
talent, including as a result of infections or medically necessary or recommended self-quarantining, which we have experienced in a few locations; or governmental
mandates to direct production activities to support public health efforts. This could result in our recognizing charges in future periods, which may be material, for
inventory impairments or land option contract abandonments, or both, related to our inventory assets.
Should the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we would expect to experience,
among other things, decreases in our net orders, homes delivered, average selling prices, revenues and profitability, as we did during our 2020 second quarter, and
such impacts could be material to our consolidated financial statements in 2021 and beyond. In addition, should the COVID-19 public health effort intensify to
such an extent that we cannot operate in most or all of our served markets, we could generate few or no orders and deliver few, if any homes during the applicable
period, which could be prolonged. Along with an increase in cancellations of home purchase contracts, if there are prolonged government restrictions on our
business and our customers, and/or an extended economic recession, we could be unable to produce revenues and cash flows sufficient to conduct our business;
meet the terms of our covenants and other requirements under the Credit Facility, our senior notes and the related indenture, and/or mortgages and land contracts
due to land sellers and other loans; service our outstanding debt; or pay any dividends to our stockholders. Such a circumstance could, among other things, exhaust
our available liquidity (and ability to access liquidity sources) and/or trigger an acceleration to pay a significant portion or all of our then-outstanding debt
obligations, which we may be unable to do.
Other Risks. The risk factors described above are not our only salient risks. Political events, war, terrorism, weather or other natural/environmental disasters,
and other risks that are currently unknown or seen as immaterial, could also have a material adverse impact on our business, consolidated financial statements
and/or common stock’s market price.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
None.
Item 3.
LEGAL PROCEEDINGS
Our legal proceedings are discussed in Note 18 – Legal Matters in the Notes to Consolidated Financial Statements in this report.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Information about our Executive Officers
The following table presents certain information regarding our executive officers as of December 31, 2020:
Name
Age
Present Position
Year
Assumed
Present
Position
Years
at
KB
Home
Jeffrey T. Mezger
Jeff J. Kaminski
Matthew W. Mandino
Albert Z. Praw
Brian J. Woram
65
59
56
72
60
Chairman, President and Chief Executive
Officer (a)
Executive Vice President and Chief Financial
Officer
Executive Vice President and Chief
Operating Officer
Executive Vice President, Real Estate and
Business Development
Executive Vice President and General
Counsel
2016
2010
2018
2011
2010
27
10
9
24
10
Other Positions and Other
Business Experience within the
Last Five Years
President and Chief Executive Officer (a)
Regional President, Southwest
Division President, Colorado
From – To
2006-2016
2016-2018
2011-2016
(a) Mr. Mezger has served as a director since 2006. He was elected Chairman of our board of directors in August 2016.
There is no family relationship between any of our executive officers or between any of our executive officers and any of our directors.
20
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our common stock is traded on the New York Stock Exchange under the ticker symbol “KBH.” As of December 31, 2020, there were 562 holders of record of
our common stock.
Information regarding the shares of our common stock that may be issued under our equity compensation plans is provided below under Item 12 – Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters in this report.
The following table summarizes our purchases of our own equity securities during the three months ended November 30, 2020:
Period
September 1-30
October 1-31
November 1-30
Total
Total Number of Shares
Purchased
Average Price Paid per
Share
Total Number of Shares Purchased
as Part of Publicly Announced
Plans or Programs
Maximum Number of Shares That
May Yet be Purchased Under the
Plans or Programs
— $
—
87,284
87,284 $
—
—
37.62
37.62
—
—
—
—
2,193,947
2,193,947
2,193,947
In May 2018, our board of directors authorized us to repurchase a total of up to 4,000,000 shares of our outstanding common stock. This authorization
reaffirmed and incorporated the then-current balance of 1,627,000 shares that remained under a prior board-approved share repurchase program. In 2018, we
repurchased 1,806,053 shares of our common stock pursuant to this authorization, at a total cost of $35.0 million. As of November 30, 2020, we had 2,193,947
shares authorized for repurchase.
The shares purchased during the three months ended November 30, 2020 were previously issued shares delivered to us by employees to satisfy withholding
taxes on the vesting of restricted stock awards. These transactions are not considered repurchases under the board of directors’ authorization.
21
Stock Performance Graph
The following graph compares the five-year cumulative total return of KB Home common stock, the S&P 500 Index and the Dow Jones US Home
Construction Index for the periods ended November 30:
Comparison of Five-Year Cumulative Total Return
Among KB Home, S&P 500 Index and
Dow Jones US Home Construction Index
KB Home
S&P 500 Index
Dow Jones US Home Construction Index
2015
2016
2017
2018
2019
2020
$
100 $
100
100
113 $
108
88
225 $
133
158
152 $
141
113
254 $
164
164
262
192
201
The above graph is based on the KB Home common stock and index prices calculated as of the last trading day before December 1 of the year-end periods
presented. The closing price of KB Home common stock on the New York Stock Exchange was $35.20 per share on November 30, 2020 and $34.58 per share on
November 30, 2019. The performance of our common stock as presented above reflects past performance only and is not indicative of future performance. Total
return assumes $100 invested at market close on November 30, 2015 in KB Home common stock, the S&P 500 Index and the Dow Jones US Home Construction
Index, including reinvestment of dividends.
22
Item 6.
SELECTED FINANCIAL DATA
The data in this table should be read in conjunction with Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
and Item 8 – Financial Statements and Supplementary Data in this report.
KB HOME
SELECTED FINANCIAL DATA
(Dollars In Thousands, Except Per Share Amounts and Average Selling Price)
2020
2019
Years Ended November 30,
2018
2017
2016
Statement of Operations Data:
Revenues:
Homebuilding
Financial services
Total
Operating income:
Homebuilding
Financial services
Total
Pretax income
Net income (a)
Earnings per share:
Basic
Diluted
Cash dividends declared per share
Balance Sheet Data:
Assets:
Homebuilding
Financial services
Total
Notes payable
Stockholders’ equity
Stockholders’ equity per share
Homebuilding Data:
Homes delivered
Average selling price
Net orders
Ending backlog — homes
Average community count
$
$
$
$
$
$
$
$
$
$
4,167,702 $
15,472
4,183,174 $
4,537,658 $
15,089
4,552,747 $
4,533,795 $
13,207
4,547,002 $
4,356,265 $
12,264
4,368,529 $
3,582,943
11,703
3,594,646
316,472 $
11,389
327,861 $
364,043 $
296,243
3.26 $
3.13
.42
5,320,240 $
36,202
5,356,442 $
1,747,175 $
2,665,769
29.09
10,672
388,900 $
13,404
7,810
243
331,380 $
10,756
342,136 $
348,175 $
268,775
3.04 $
2.85
.23
4,977,086 $
38,396
5,015,482 $
1,748,747 $
2,383,122
26.60
11,871
380,000 $
12,841
5,078
250
345,721 $
9,363
355,084 $
367,965 $
170,365
1.93 $
1.71
.10
5,061,191 $
12,380
5,073,571 $
2,060,263 $
2,087,500
24.01
11,317
399,200 $
11,014
4,108
223
283,403 $
8,834
292,237 $
289,995 $
180,595
2.09 $
1.85
.10
5,029,158 $
12,357
5,041,515 $
2,324,845 $
1,926,311
22.13
10,909
397,400 $
10,900
4,411
233
152,401
7,886
160,287
149,315
105,615
1.23
1.12
.10
5,121,125
10,499
5,131,624
2,640,149
1,723,145
20.25
9,829
363,800
10,283
4,420
238
(a) Net income for the year ended November 30, 2018 included a non-cash charge of $112.5 million to income tax expense related to the 2019 Tax Cuts and Jobs
Act (“TCJA”).
23
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our discussion and analysis below is focused on our 2020 and 2019 financial results, including comparisons of our year-over-year performance between these
years. Discussion and analysis of our 2018 fiscal year specifically, as well as the year-over-year comparison of our 2019 financial performance to 2018, are located
under Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal
year ended November 30, 2019, filed with the SEC on January 24, 2020, which is available on our investor relations website at investor.kbhome.com and the
SEC’s website at www.sec.gov.
RESULTS OF OPERATIONS
Overview. Revenues are generated from our homebuilding and financial services operations. The following table presents a summary of our consolidated
results of operations (dollars in thousands, except per share amounts):
Revenues:
Homebuilding
Financial services
Total
Pretax income:
Homebuilding
Financial services
Total
Income tax expense
Net income
Earnings per share:
Basic
Diluted
2020
Years Ended November 30,
2019
2018
2020 vs 2019
2019 vs 2018
Variance
$
$
$
$
$
$
4,167,702 $
15,472
4,183,174 $
4,537,658 $
15,089
4,552,747 $
331,500 $
32,543
364,043
(67,800)
296,243 $
3.26 $
3.13 $
325,189 $
22,986
348,175
(79,400)
268,775 $
3.04 $
2.85 $
4,533,795
13,207
4,547,002
351,301
16,664
367,965
(197,600)
170,365
1.93
1.71
(8)%
3
(8)%
2 %
42
5
15
10 %
7 %
10 %
— %
14
— %
(7)%
38
(5)
60
58 %
58 %
67 %
During 2020, we, like many companies worldwide, experienced dramatic variability in market conditions that produced stark differences in our quarterly
results over the course of the year. In part, our results reflect several strategic adjustments we made in response to the extreme fluctuations we experienced in our
2020 operating environment, both quarter-to-quarter and within quarters. These adjustments were precipitated by rapid changes in public health requirements and
guidelines and reflected our efforts to address the significant challenges they presented while also striving to protect the safety of our employees, customers and
business partners; meeting a strong and sustained upswing in consumer demand for our homes; managing our capital requirements; and aligning our workforce for
our short- and long-term business needs. Although we continue to navigate an uncertain economic landscape, based on the substantial net orders we generated in
the 2020 second half and our robust backlog at the end of the year, we are confident about our growth prospects in 2021 and beyond.
Following a particularly strong 2020 first quarter, in which we had the highest revenues, net orders, ending backlog and ending backlog value for any first
quarter since 2007 and increased our net income by 99% year over year, the onset of the COVID-19 pandemic and the institution of COVID-19 control responses
in our served markets, including quarantines, “stay-at-home” orders and similar mandates, during the second quarter severely impacted global and national
economies (with the U.S. entering a recession), the housing market and our business. Amid extraordinary economic disruptions; a sudden rise in unemployment;
significant stock market and secondary mortgage market volatility; uncertainty about how to effectively contain COVID-19’s spread; weakened consumer
confidence; and our swift closing of our sales centers, model homes and design studios to the public and shift to virtual sales tools and appointment-only
personalized home sales processes, where permitted, we saw a drastic decrease in demand for new homes (including homes ordered in the first quarter) and our
order pace slowed significantly. Along with a considerable increase in home purchase cancellations, largely reflecting our proactive efforts to
24
assure a backlog of qualified homebuyers amid the pandemic-induced economic downturn, we experienced a sizable reduction in our 2020 second quarter net
orders. Due to this reduction in net orders, we entered the third quarter with 14% fewer homes in backlog as compared to the previous year. Further, our
construction activities were restricted in many jurisdictions, and completely shut down in some of them, and together with the reduced availability or capacity of
some municipal and private services necessary to build and deliver homes, and supply chain disruptions, our cycle times became extended. This caused home
delivery delays during most of the second quarter, which tempered our revenues for the period.
With the easing of restrictive public health orders to varying degrees in our served markets beginning in May 2020 and the associated ability to open our
communities to walk-in traffic, following appropriate safety protocols and applicable public health guidelines, complemented by our enhanced virtual selling
capabilities, as discussed under Item 1 – Business, our net orders began to rebound significantly. This positive momentum continued through the 2020 second half,
largely fueled by the combination of historically low mortgage interest rates, a limited supply of resale inventory, an underproduction of new homes over the past
decade, favorable demographic trends and consumers’ increasing desire to own a home. Reflecting this strong demand, our 2020 third and fourth quarter net orders
rose to their respective highest levels since 2005. Though this sharp rise in net orders in the second half generated a substantial expansion in our backlog, as
discussed below, our deliveries and revenues for our third and fourth quarters were moderated primarily by the negative effects of the COVID-19 pandemic in our
2020 second quarter.
During the 2020 second quarter and most of the third quarter, in prioritizing cash preservation and liquidity in light of lingering uncertainty surrounding the
COVID-19 pandemic, we limited our investments in land and land development, resulting in a 24% decrease in those quarters combined as compared to the
corresponding year-earlier periods. With the sustained strong housing demand over the 2020 second half, we intensified our investments, resulting in a 63% year-
over-year increase in the fourth quarter, to measurably expand our lot pipeline and support community growth in the future. For 2020, we invested a total of
$1.69 billion in land and land development, compared to $1.62 billion in 2019.
Although the trajectory and strength of the current housing recovery remains uncertain, and could be slowed or reversed by a number of factors, including a
widespread resurgence in COVID-19 infections, whether due to the spread of any variants of the virus or otherwise, combined with the seasonal flu and others
discussed above under Item 1A – Risk Factors, and our business, including our margins, could be negatively affected by labor and supply constraints and rising and
volatile raw material prices, particularly for lumber, as was the case during 2020, we believe we are well-positioned to operate effectively and generate profitable
growth in 2021.
Financial and Operational Highlights. Reflecting the above-described impact from the COVID-19 pandemic and related COVID-19 control responses, within
our homebuilding operations, housing revenues of $4.15 billion for 2020 were down 8% from the prior year due to a 10% decrease in homes delivered, partly
offset by a 2% increase in the overall average selling price of those homes. In 2020, homebuilding operating income decreased 4% year over year to
$316.5 million, which included total inventory-related charges of $28.7 million and severance charges of $6.7 million. The severance charges were associated with
workforce reductions made during the second quarter in light of the sharp reduction in business activity and highly uncertain outlook at the time, as discussed
above. In 2019, homebuilding operating income included $17.3 million of inventory-related charges. As a percentage of homebuilding revenues, our homebuilding
operating income for 2020 improved 30 basis points year over year to 7.6%. Excluding inventory-related charges for both periods and the above-mentioned
severance charges in the 2020 period, our homebuilding operating income margin improved 70 basis points to 8.4% from 2019. Our housing gross profits for 2020
decreased 5% from 2019 mainly due to lower housing revenues, partly offset by a 60 basis point improvement in our housing gross profit margin to 18.9%.
The year-over-year increase in our housing gross profit margin in 2020 primarily reflected a mix shift of homes delivered, a favorable pricing environment
that enabled us to increase selling prices in many of our communities, lower relative amortization of previously capitalized interest, and a slight decrease in sales
incentives, partly offset by an increase in inventory-related charges.
Our selling, general and administrative expenses as a percentage of housing revenues increased 30 basis points from the prior year to 11.3%, primarily due to
the above-mentioned severance charges and reduced operating leverage from lower housing revenues, partly offset by our targeted actions, including workforce
reductions in the 2020 second quarter, to reduce overhead costs. Excluding the severance charges in 2020, our selling, general and administrative expenses as a
percentage of housing revenues were 11.2%.
Our net income and diluted earnings per share for 2020 each rose 10% year over year. In 2019, our net income and diluted earnings per share included a $6.8
million loss on the early extinguishment of debt.
25
Net Orders, Backlog and Community Count. The following table presents information about our net orders, cancellation rate, ending backlog, and community
count for the years ended November 30, 2020 and 2019 (dollars in thousands):
Net orders
Net order value (a)
Cancellation rate (b)
Ending backlog — homes
Ending backlog — value
Ending community count
Average community count
$
$
Years Ended November 30,
2020
13,404
5,299,489
20 %
7,810
2,962,403
236
243
$
$
2019
12,841
4,890,153
19 %
5,078
1,813,707
251
250
(a) Net order value represents the potential future housing revenues associated with net orders generated during a period, as well as homebuyer selections of lot
and product premiums and design studio options and upgrades for homes in backlog during the same period.
(b) Cancellation rate represents the total number of contracts for new homes cancelled during a period divided by the total (gross) orders for new homes generated
during the same period.
Net Orders. In 2020, net orders from our homebuilding operations grew 4% from 2019, reflecting strong year-over-year increases of 31%, 27% and 42% in the
first, third and fourth quarters, respectively, partly offset by a decrease of 57% in the second quarter due to the negative impact from the COVID-19 pandemic and
related control responses. The year-over-year net order growth in the 2020 first, third and fourth quarters was largely driven by the factors described above with
respect to our second half performance. We also believe our Built-to-Order model, which, as described above under Item 1 – Business, provides personalization
and choice, was a key factor that contributed to our strong net orders during these periods. In 2020, the growth in our overall net orders compared to 2019 reflected
a 7% increase in monthly net orders per community to 4.6, partly offset by a 3% decrease in our overall average community count, which is discussed below under
“Community Count.”
The value of our 2020 net orders rose 8% from 2019 as a result of the growth in net orders and a 4% increase in the overall average selling price of those
orders, with these factors driving net order value expansion in three of our four homebuilding reporting segments, ranging from 9% in our Southwest segment to
13% in our Central segment. Net order value in our Southeast segment declined 8% year over year due to a decrease in net orders, as the average selling price of
those orders remained relatively flat.
Backlog. The number of homes in our backlog at November 30, 2020 increased 54% from the previous year, mainly due to the substantial increase in our net
orders during the 2020 third and fourth quarters. The potential future housing revenues in our backlog at November 30, 2020 grew 63% year over year, reflecting
the higher number of homes in our backlog and a 6% increase in the average selling price of those homes. The increases in the number of homes in backlog and
our backlog value reflected strong growth in each of our four homebuilding reporting segments, with increases in backlog value ranging from 34% in our
Southwest segment to 93% in our West Coast segment. Substantially all of the homes in our backlog at November 30, 2020 are expected to be delivered during the
year ending November 30, 2021.
Community Count. Our average community count for 2020 declined 3% from the previous year, reflecting decreases of 12% in our Southwest and Southeast
homebuilding reporting segments and 3% in our Central segment, partly offset by a 10% increase in our West Coast segment. Our ending community count for
2020 was down 6% from the prior year. The year-over-year decreases in both our average and ending community counts primarily reflected the close-out of
communities earlier than planned due to our accelerated, demand-driven net order pace, our reduced investments in land and land development in the 2020 second
and third quarters, and delays in community openings due in part to the negative impacts from the COVID-19 pandemic.
26
HOMEBUILDING
The following table presents a summary of certain financial and operational data for our homebuilding operations (dollars in thousands, except average selling
price):
Revenues:
Housing
Land
Total
Costs and expenses:
Construction and land costs
Housing
Land
Total
Selling, general and administrative expenses
Total
Operating income
Homes delivered
Average selling price
Housing gross profit margin as a percentage of housing revenues
Housing gross profit margin excluding inventory-related charges as a percentage of housing
revenues
Adjusted housing gross profit margin as a percentage of housing revenues
Selling, general and administrative expense as a percentage of housing revenues
Operating income as a percentage of homebuilding revenues
$
$
$
2020
4,150,793
16,909
4,167,702
(3,365,509)
(14,942)
(3,380,451)
(470,779)
(3,851,230)
316,472
10,672
388,900
18.9 %
19.6 %
22.7 %
11.3 %
7.6 %
Years Ended November 30,
2019
$
$
$
4,510,814
26,844
4,537,658
(3,683,174)
(25,754)
(3,708,928)
(497,350)
(4,206,278)
331,380
11,871
380,000
$
$
$
18.3 %
18.7 %
22.2 %
11.0 %
7.3 %
2018
4,517,244
16,551
4,533,795
(3,728,917)
(15,003)
(3,743,920)
(444,154)
(4,188,074)
345,721
11,317
399,200
17.5 %
18.1 %
22.5 %
9.8 %
7.6 %
The following tables present information about our homes delivered, net orders, cancellation rates as a percentage of gross orders, net order value, average
community count, and ending backlog (number of homes and value) by homebuilding reporting segment (dollars in thousands):
Segment
West Coast
Southwest
Central
Southeast
Total
Homes Delivered
Years Ended November 30,
Net Orders
Cancellation Rates
2020
2019
2020
2019
2020
2019
2,869
2,385
3,932
1,486
10,672
3,214
2,346
4,291
2,020
11,871
3,850
2,668
4,981
1,905
13,404
3,542
2,658
4,565
2,076
12,841
17 %
19
21
25
20 %
19 %
13
21
23
19 %
27
Segment
West Coast
Southwest
Central
Southeast
Total
Segment
West Coast
Southwest
Central
Southeast
Total
2020
2,302,785 $
914,770
1,534,747
547,187
5,299,489 $
Net Order Value
2019
2,087,293
842,335
1,362,580
597,945
4,890,153
$
$
Years Ended November 30,
Variance
2020
2019
Variance
Average Community Count
74
36
89
44
243
67
41
92
50
250
10 %
(12)
(3)
(12)
(3) %
10 %
9
13
(8)
8 %
November 30,
Backlog – Homes
Backlog – Value
2020
2019
Variance
2020
2019
Variance
2,024
1,521
3,037
1,228
7,810
1,043
1,238
1,988
809
5,078
94 % $
23
53
52
54 % $
1,152,609 $
523,705
932,814
353,275
2,962,403 $
598,299
389,597
590,936
234,875
1,813,707
93 %
34
58
50
63 %
As discussed above under Item 1 – Business, the composition of our homes delivered, net orders and backlog shifts with the mix of our active communities
and the corresponding average selling prices of the homes ordered and/or delivered at these communities in any particular period, and it changes as new
communities open and existing communities wind down or close out. In addition, with our Built-to-Order model, the selling prices of individual homes within a
community may vary due to differing lot sizes and locations, home square footage, and option and upgrade selections. These intrinsic variations in our business
limit the effective comparability of our homes delivered, net orders and backlog as well as their corresponding values between sequential and year-over-year
periods, in addition to the effect of prevailing economic or housing market conditions in or across any particular periods.
Revenues. Homebuilding revenues of $4.17 billion in 2020 decreased from 2019, reflecting declines in both housing and land sale revenues largely caused by
the negative impacts from the COVID-19 pandemic discussed above under “Overview.”
Housing revenues in 2020 decreased 8% from the previous year, as a 10% decrease in homes delivered was partly offset by a 2% increase in the overall
average selling price of those homes. In 2020, homes delivered were tempered primarily by the negative impact of the COVID-19 pandemic and related COVID-
19 control responses, including the substantial year-over-year decline in our 2020 second quarter net orders. The overall average selling price of our homes
delivered rose in 2020 as compared to 2019, largely due to the favorable pricing environment in the 2020 second half that enabled us to increase prices in many of
our communities.
Land sale revenues for 2020 decreased 37% from 2019. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership
position in certain markets based upon the volume of our holdings, our business strategy, the strength and number of developers and other land buyers in particular
markets at given points in time, the availability of opportunities to sell land at acceptable prices and prevailing market conditions.
Operating Income. Our homebuilding operating income decreased 4% in 2020, as compared to the previous year, due to a decline in housing gross profits,
partly offset by a decrease in selling, general and administrative expenses. In 2020, homebuilding operating income included total inventory-related charges of
$28.7 million, as discussed in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this
report, and severance charges of $6.7 million. The severance charges were associated with workforce reductions made during the 2020 second quarter and were
estimated at implementation to yield annualized savings of approximately $40 million allocated between construction and land costs and selling, general and
administrative expenses. In 2019, homebuilding operating income included $17.3 million of inventory-related charges. As a percentage of homebuilding revenues,
our homebuilding operating income for 2020 improved 30 basis points year over year to 7.6%. Excluding inventory-related charges for both periods and the above-
mentioned severance charges in 2020, our homebuilding operating income margin improved 70 basis points to 8.4% in 2020 from 7.7% in 2019.
28
In 2020, housing gross profits decreased by $42.4 million, or 5%, to $785.3 million from $827.6 million in 2019. The year-over-year decrease in 2020
reflected the lower volume of homes delivered, partly offset by an increase in the housing gross profit margin. Housing gross profits for 2020 and 2019 included
the respective inventory-related charges described above.
Our housing gross profit margin for 2020 increased 60 basis points from the previous year, mainly as a result of a shift in the mix of homes delivered and a
favorable pricing environment (approximately 40 basis points); lower amortization of previously capitalized interest as a percentage of housing revenues
(approximately 40 basis points); and a decrease in sales incentives, reflecting strong housing demand (approximately 10 basis points). These items were partly
offset by an increase in inventory-related charges (approximately 30 basis points).
We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs.
The amount of interest incurred generally fluctuates based on the average amount of debt outstanding for the period and/or the interest rate on that debt. In 2020,
interest incurred totaled $124.1 million, down 13% from $143.4 million in 2019, mainly due to our lower average debt level. All interest incurred during 2020 and
2019 was capitalized as the average amount of our inventory qualifying for interest capitalization was higher than our average debt level for each period. As a
result, we had no interest expense for 2020 or 2019.
Interest amortized to construction and land costs associated with housing operations totaled $129.3 million in 2020 and $156.1 million in 2019. The year-over-
year decrease in interest amortized in 2020 mainly reflected fewer homes delivered and the reduction in our interest incurred. As a percentage of housing revenues,
the amortization of previously capitalized interest associated with housing operations was 3.1% for 2020 and 3.5% for 2019. Interest amortized to construction and
land costs in 2020 and 2019 included $.4 million and $.7 million, respectively, of amortization of previously capitalized interest related to land sales that occurred
during those years.
Excluding the amortization of previously capitalized interest associated with housing operations and the above-mentioned inventory-related charges in the
applicable periods, our adjusted housing gross profit margin increased 50 basis points to 22.7% in 2020 from 22.2% in 2019. The calculation of adjusted housing
gross profit margin, which we believe provides a clearer measure of the performance of our business, is described below under “Non-GAAP Financial Measures.”
Selling, general and administrative expenses for 2020 decreased 5% from the prior year, primarily reflecting the lower number of homes delivered and our
targeted actions to reduce overhead costs, partly offset by the above-mentioned severance charges of $6.7 million we recorded in the 2020 second quarter. As a
percentage of housing revenues, our selling, general and administrative expenses rose 30 basis points in 2020 as compared to 2019 primarily due to decreased
operating leverage from lower housing revenues, partly offset by the lower expenses. Excluding the severance charges recorded in 2020, our selling, general and
administrative expenses as a percentage of revenues rose 20 basis points year over year to 11.2%.
The following table presents the components of our selling, general and administrative expenses (dollars in thousands):
Marketing expenses (a)
Commission expenses (b)
General and administrative expenses
Total
2020
% of Housing
Revenues
Years Ended November 30,
2019
% of Housing
Revenues
2018
% of Housing
Revenues
$
$
116,590
164,507
189,682
470,779
2.8 % $
3.9
4.6
11.3 % $
129,733
174,338
193,279
497,350
2.9 % $
3.8
4.3
11.0 % $
91,027
168,162
184,965
444,154
2.0 %
3.7
4.1
9.8 %
(a) Marketing expenses in 2020 and 2019 reflect our adoption of Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers”
(“ASC 606”) effective December 1, 2018, as described in Note 1 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial
Statements in this report.
(b) Commission expenses include sales commissions on homes delivered paid to internal sales counselors and/or external real estate brokers.
Interest Income. Interest income, which is generated from short-term investments, totaled $2.6 million in 2020 and $2.2 million in 2019. Generally, increases
and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and fluctuations in interest rates.
29
Equity in Income (Loss) of Unconsolidated Joint Ventures. Our equity in income of unconsolidated joint ventures totaled $12.5 million in 2020, compared to
equity in loss of unconsolidated joint ventures of $1.5 million in 2019. The improved results primarily reflected 99 homes delivered from an unconsolidated joint
venture in California in 2020, compared to no homes delivered from unconsolidated joint ventures in 2019. Further information regarding our investments in
unconsolidated joint ventures is provided in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this
report.
Loss on Early Extinguishment of Debt. Our $6.8 million loss on early extinguishment of debt in 2019 was associated with our optional redemption of $350.0
million in aggregate principal amount of our 8.00% senior notes due 2020 (“8.00% Senior Notes due 2020”) prior to their maturity date.
Non-GAAP Financial Measures
This report contains information about our adjusted housing gross profit margin, adjusted income tax expense, adjusted net income, adjusted diluted earnings
per share, adjusted effective tax rate, and ratio of net debt to capital, none of which are calculated in accordance with generally accepted accounting principles
(“GAAP”). We believe these non-GAAP financial measures are relevant and useful to investors in understanding our operations and the leverage employed in our
operations, and may be helpful in comparing us with other companies in the homebuilding industry to the extent they provide similar information. However,
because they are not calculated in accordance with GAAP, these non-GAAP financial measures may not be completely comparable to other companies in the
homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by
GAAP. Rather, these non-GAAP financial measures should be used to supplement their respective most directly comparable GAAP financial measures in order to
provide a greater understanding of the factors and trends affecting our operations.
Adjusted Housing Gross Profit Margin. The following table reconciles our housing gross profit margin calculated in accordance with GAAP to the non-GAAP
financial measure of our adjusted housing gross profit margin (dollars in thousands):
Housing revenues
Housing construction and land costs
Housing gross profits
Add: Inventory-related charges (a)
Housing gross profits excluding inventory-related charges
Add: Amortization of previously capitalized interest (b)
Adjusted housing gross profits
Housing gross profit margin as a percentage of housing revenues
Housing gross profit margin excluding inventory-related charges as a percentage of housing
revenues
Adjusted housing gross profit margin as a percentage of housing revenues
$
$
2020
4,150,793
(3,365,509)
785,284
28,669
813,953
129,330
943,283
18.9 %
19.6 %
22.7 %
$
Years Ended November 30,
2019
4,510,814
(3,683,174)
827,640
17,291
844,931
156,114
1,001,045
$
18.3 %
18.7 %
22.2 %
$
$
2018
4,517,244
(3,728,917)
788,327
28,994
817,321
197,936
1,015,257
17.5 %
18.1 %
22.5 %
(a) Represents inventory impairment and land option contract abandonment charges associated with housing operations.
(b) Represents the amortization of previously capitalized interest associated with housing operations.
Adjusted housing gross profit margin is a non-GAAP financial measure, which we calculate by dividing housing revenues less housing construction and land
costs excluding (1) housing inventory impairment and land option contract abandonment charges (as applicable) recorded during a given period and (2)
amortization of previously capitalized interest associated with housing operations, by housing revenues. The most directly comparable GAAP financial measure is
housing gross profit margin. We believe adjusted housing gross profit margin is a relevant and useful financial measure to investors in evaluating our performance
as it measures the gross profits we generated specifically on the homes delivered during a given period. This non-GAAP financial measure isolates the impact that
the housing inventory impairment and land option contract abandonment charges, and the amortization of previously capitalized interest associated with housing
operations, have on housing gross profit margins, and allows investors to make comparisons with our competitors that adjust housing gross profit margins in a
similar
30
manner. We also believe investors will find adjusted housing gross profit margin relevant and useful because it represents a profitability measure that may be
compared to a prior period without regard to variability of housing inventory impairment and land option contract abandonment charges, and amortization of
previously capitalized interest associated with housing operations. This financial measure assists us in making strategic decisions regarding community location
and product mix, product pricing and construction pace.
Adjusted Income Tax Expense, Adjusted Net Income, Adjusted Diluted Earnings Per Share and Adjusted Effective Tax Rate. The following table reconciles our
income tax expense, net income, diluted earnings per share and effective tax rate calculated in accordance with GAAP to the non-GAAP financial measures of
adjusted income tax expense, adjusted net income, adjusted diluted earnings per share and adjusted effective tax rate, respectively (in thousands, except per share
amounts):
Total pretax income
Income tax expense (a)
Net income
Diluted earnings per share
Weighted average shares outstanding — diluted
Effective tax rate (a)
2020
As Reported
2019
As Reported
As Reported
2018
TCJA Adjustment
As Adjusted
Years ended November 30,
$
$
$
364,043
(67,800)
296,243
3.13
94,086
$
$
$
348,175
(79,400)
268,775
2.85
93,838
$
$
$
$
$
367,965
(197,600)
170,365
1.71
101,059
18.6 %
22.8 %
53.7 %
— $
112,500
112,500 $
$
367,965
(85,100)
282,865
2.82
101,059
23.1 %
(a) For the year ended November 30, 2020, income tax expense and the related effective tax rate reflected the favorable impacts of $18.7 million of federal energy
tax credits we earned from building energy-efficient homes, $12.0 million of excess tax benefits related to stock-based compensation, partly offset by $5.7
million of non-deductible executive compensation expense under Internal Revenue Code 162(m). For the year ended November 30, 2019, income tax expense
and the related effective tax rate reflected the favorable impacts of $5.3 million of excess tax benefits related to stock-based compensation, a $4.4 million
deferred tax asset valuation allowance reversal and $4.3 million of federal energy tax credits we earned from building energy-efficient homes, partly offset by
$5.3 million of non-deductible executive compensation expense and a $1.9 million non-cash charge due to the re-measurement of deferred tax assets based on
a reduction in certain state income tax rates. For the year ended November 30, 2018, income tax expense and adjusted income tax expense, as well as the
related effective tax rate and adjusted effective tax rate, included the favorable impacts of the reduction in the federal corporate income tax rate from 35% to
21%, effective January 1, 2018, $10.7 million of federal energy tax credits we earned from building energy-efficient homes, a $2.1 million net benefit from a
reduction in our deferred tax asset valuation allowance, and $1.0 million of excess tax benefits from stock-based compensation as a result of our adoption of
Accounting Standards Update No. 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting” (“ASU 2016-09”), effective December 1, 2017.
Our adjusted income tax expense, adjusted net income, adjusted diluted earnings per share and adjusted effective tax rate are non-GAAP financial measures,
which we calculate by excluding a non-cash charge of $112.5 million recorded in 2018 from our reported income tax expense, net income, diluted earnings per
share and effective tax rate, respectively. This charge was primarily due to our accounting re-measurement of our deferred tax assets based on the above-noted
reduction in the federal corporate income tax rate under the TCJA. The most directly comparable GAAP financial measures are our income tax expense, net
income, diluted earnings per share and effective tax rate. We believe that these non-GAAP measures are meaningful to investors as they allow for an evaluation of
our operating results without the impact of the TCJA-related charge.
31
Ratio of Net Debt to Capital. The following table reconciles our ratio of debt to capital calculated in accordance with GAAP to the non-GAAP financial
measure of our ratio of net debt to capital (dollars in thousands):
Notes payable
Stockholders’ equity
Total capital
Ratio of debt to capital
Notes payable
Less: Cash and cash equivalents
Net debt
Stockholders’ equity
Total capital
Ratio of net debt to capital
$
$
$
$
November 30,
2020
1,747,175
2,665,769
4,412,944
39.6 %
1,747,175
(681,190)
1,065,985
2,665,769
3,731,754
$
$
$
$
2019
1,748,747
2,383,122
4,131,869
42.3 %
1,748,747
(453,814)
1,294,933
2,383,122
3,678,055
28.6 %
35.2 %
The ratio of net debt to capital is a non-GAAP financial measure, which we calculate by dividing notes payable, net of homebuilding cash and cash
equivalents, by capital (notes payable, net of homebuilding cash and cash equivalents, plus stockholders’ equity). The most directly comparable GAAP financial
measure is the ratio of debt to capital. We believe the ratio of net debt to capital is a relevant and useful financial measure to investors in understanding the degree
of leverage employed in our operations.
HOMEBUILDING REPORTING SEGMENTS
Below is a discussion of the financial results of each of our homebuilding reporting segments. Further information regarding these segments, including their
pretax income (loss), is included in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report. The difference between each
homebuilding reporting segment’s operating income (loss) and pretax income (loss) is generally due to the equity in income (loss) of unconsolidated joint ventures,
which is also presented in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report, and/or interest income and expense.
The financial results for each of our homebuilding reporting segments for the year ended November 30, 2020 were negatively affected by the impacts from the
COVID-19 pandemic, as discussed above under “Overview.” In three of our four homebuilding reporting segments, we delivered fewer homes in 2020 compared
to the previous year largely as a result of the significant decrease in our net orders in the 2020 second quarter.
West Coast. The following table presents financial information related to our West Coast homebuilding reporting segment for the years indicated (dollars in
thousands, except average selling price):
Revenues
Construction and land costs
Selling, general and administrative expenses
Operating income
Homes delivered
Average selling price
Housing gross profit margin
$
$
$
2020
1,748,582
(1,480,775)
(129,744)
138,063
$
Years Ended November 30,
2019
1,912,146
(1,591,896)
(141,324)
178,926
$
$
$
2018
2,085,328
(1,720,776)
(123,254)
241,298
2,869
609,400
$
15.3 %
3,214
592,300
$
16.8 %
3,152
661,500
17.5 %
32
Variance
2020 vs 2019
2019 vs 2018
(9) %
7
8
(23) %
(11) %
3 %
(150)bps
(8) %
7
(15)
(26) %
2 %
(10) %
(70)bps
This segment’s revenues in 2020 and 2019 were generated from both housing operations and land sales. Housing revenues of $1.75 billion in 2020 declined
8% from $1.90 billion in 2019, reflecting a lower number of homes delivered, partly offset by an increase in the average selling price of those homes. The year-
over-year increase in the average selling price of homes delivered in 2020 was primarily due to product and geographic mix shifts of homes delivered and the
favorable pricing environment in this segment. Land sale revenues were nominal in 2020 and totaled $8.6 million in 2019.
This segment’s operating income in 2020 decreased from the previous year, mainly reflecting lower housing gross profits, partly offset by lower selling,
general and administrative expenses. Housing gross profits declined due to decreases in both housing revenues and the housing gross profit margin. The decrease
in the housing gross profit margin was primarily due to a mix shift of homes delivered and an increase in inventory-related charges. Inventory-related charges
impacting the housing gross profit margin totaled $21.9 million in 2020, compared to $15.6 million in 2019. Selling, general and administrative expenses as a
percentage of housing revenues for 2020 were flat with the previous year as the favorable impacts of overhead cost reductions and lower legal fees were offset by
reduced operating leverage as a result of lower housing revenues.
Southwest. The following table presents financial information related to our Southwest homebuilding reporting segment for the years indicated (dollars in
thousands, except average selling price):
Revenues
Construction and land costs
Selling, general and administrative expenses
Operating income
Homes delivered
Average selling price
Housing gross profit margin
$
$
$
2020
796,810
(596,512)
(66,415)
133,883
2,385
327,300
25.4 %
Years Ended November 30,
2019
$
$
$
764,816
(585,880)
(67,223)
111,713
2,346
322,000
23.8 %
$
$
$
2018
707,075
(568,194)
(50,897)
87,984
2,301
307,300
19.6 %
Variance
2020 vs 2019
2019 vs 2018
4 %
(2)
1
20 %
2 %
2 %
160 bps
8 %
(3)
(32)
27 %
2 %
5 %
420 bps
In 2020 and 2019, this segment’s revenues were generated from both housing operations and land sales. Housing revenues for 2020 grew 3% year over year to
$780.7 million, reflecting increases in both the number of homes delivered and the average selling price of those homes. The growth in the number of homes
delivered was attributable to our Nevada operations. The higher average selling price was mainly due to shifts in the product and geographic mix of homes
delivered, and the favorable pricing environment in this segment. Land sale revenues totaled $16.1 million in 2020 and $9.5 million in 2019.
This segment’s operating income increased $22.2 million from 2019 primarily due to higher housing and land sale gross profits. The year-over-year increase
in housing gross profits reflected growth in housing revenues and an increase in the housing gross profit margin. The improvement in the housing gross profit
margin was largely due to lower relative amortization of previously capitalized interest, a mix shift of homes delivered, a favorable pricing environment, and
increased operating leverage due to higher housing revenues. Land sales generated profits of $2.0 million in 2020, compared to a loss of $.5 million in 2019.
Selling, general and administrative expenses as a percentage of housing revenues for 2020 improved from 2019 mainly as a result of increased operating leverage
due to higher housing revenues and overhead cost reductions.
Central. The following table presents financial information related to our Central homebuilding reporting segment for the years indicated (dollars in
thousands, except average selling price):
Revenues
Construction and land costs
Selling, general and administrative expenses
Operating income
2020
1,192,869 $
(941,381)
(122,712)
128,776 $
Years Ended November 30,
2019
1,267,892 $
(1,015,415)
(126,176)
126,301 $
$
$
2018
1,239,305
(1,010,674)
(111,028)
117,603
Variance
2020 vs 2019
2019 vs 2018
(6) %
7
3
2 %
2 %
—
(14)
7 %
33
2020
Years Ended November 30,
2019
2018
2020 vs 2019
2019 vs 2018
Variance
Homes delivered
Average selling price
Housing gross profit margin
$
3,932
303,400
$
21.1 %
4,291
293,500
$
19.9 %
4,113
297,400
18.6 %
(8) %
3 %
120 bps
4 %
(1) %
130 bps
In 2020, revenues for this segment were generated solely from housing operations. In 2019, revenues for this segment were generated from both housing
operations and land sales. Housing revenues in 2020 declined 5% from $1.26 billion in 2019 due to a decrease in the number of homes delivered, partly offset by
an increase in the average selling price of those homes. The increase in the average selling price reflected shifts in product and geographic mix of homes delivered,
and the favorable pricing environment in this segment. Land sale revenues totaled $8.3 million in 2019.
This segment’s operating income for 2020 increased $2.5 million from 2019, mainly due to a decrease in selling, general and administrative expenses, partly
offset by the absence of land sale profits in the current year. Housing gross profits for 2020 were essentially flat year over year as the impact of a higher gross
profit margin was offset by a decrease in housing revenues. The housing gross profit margin rose from the previous year primarily due to a shift in the mix of
homes delivered, a favorable pricing environment and lower relative amortization of previously capitalized interest, partly offset by an increase in inventory-
related charges. Inventory-related charges impacting the housing gross profit margin for 2020 and 2019 were $5.5 million and $.8 million, respectively. Land sales
generated profits of $1.6 million in 2019. Selling, general and administrative expenses as a percentage of housing revenues for 2020 increased from the prior year,
reflecting reduced operating leverage due to lower housing revenues.
Southeast. The following table presents financial information related to our Southeast homebuilding reporting segment for the years indicated (dollars in
thousands, except average selling price):
Revenues
Construction and land costs
Selling, general and administrative expenses
Operating income
Homes delivered
Average selling price
Housing gross profit margin
$
$
$
2020
429,441
(355,242)
(51,248)
22,951
1,486
288,600
17.3 %
Years Ended November 30,
2019
$
$
$
592,804
(508,351)
(65,902)
18,551
2,020
293,200
14.3 %
$
$
$
2018
502,087
(437,522)
(56,940)
7,625
1,751
286,600
12.9 %
Variance
2020 vs 2019
2019 vs 2018
(28) %
30
22
24 %
(26) %
(2) %
300 bps
18 %
(16)
(16)
143 %
15 %
2 %
140 bps
This segment’s revenues in 2020 and 2019 were generated from both housing operations and land sales. Housing revenues in 2020 decreased 28% to $428.8
million from $592.3 million in 2019 as a result of decreases in both the number of homes delivered and the average selling price of those homes. The year-over-
year decrease in the average selling price in 2020 was mainly due to shifts in the product and geographic mix of homes delivered, with a lower proportion of homes
delivered from higher-priced communities.
In 2020, this segment’s operating income increased by $4.4 million from 2019 due to a decrease in selling, general and administrative expenses, partly offset
by lower housing gross profits. The year-over-year decrease in housing gross profits reflected a decline in housing revenues, partially offset by an increase in the
housing gross profit margin. The housing gross profit margin improved primarily due to a shift in the mix of homes delivered and lower relative amortization of
previously capitalized interest, partly offset by reduced operating leverage due to lower housing revenues. Selling, general and administrative expenses as a
percentage of housing revenues for 2020 increased from the previous year, primarily due to decreased operating leverage as a result of lower housing revenues,
partly offset by our overhead reduction efforts and favorable legal settlements and recoveries.
34
FINANCIAL SERVICES REPORTING SEGMENT
The following table presents a summary of selected financial and operational data for our financial services reporting segment (dollars in thousands):
Revenues
Expenses
Equity in income of unconsolidated joint ventures
Pretax income
Total originations (a):
Loans
Principal
Percentage of homebuyers using KBHS
Average FICO score
Loans sold (a):
Loans sold to Stearns
Principal
Loans sold to other third parties
Principal
Mortgage loan origination mix (a):
Conventional/non-conventional loans
FHA loans
Other government loans
Loan type (a):
Fixed
ARM
(a) Loan originations and sales occurred within KBHS.
$
$
$
$
$
2020
Years Ended November 30,
2019
2018
15,472
(4,083)
21,154
32,543
7,410
2,457,522
77 %
723
7,900
2,536,689
310
102,363
$
$
$
$
$
56 %
28 %
16 %
99 %
1 %
15,089
(4,333)
12,230
22,986
7,436
2,190,823
70 %
719
6,224
1,827,917
772
202,349
$
$
$
$
$
58 %
26 %
16 %
98 %
2 %
13,207
(3,844)
7,301
16,664
5,659
1,578,037
56 %
718
5,028
1,419,140
490
120,815
56 %
27 %
17 %
99 %
1 %
Revenues. Our financial services reporting segment generates revenues primarily from insurance commissions and title services. The year-over-year growth in
our financial services revenues for 2020 reflected an increase in title services revenues, partly offset by a slight decrease in insurance commissions.
Pretax income. Our financial services pretax income for 2020 grew 42% from the previous year mainly due to an increase in the equity in income of
unconsolidated joint ventures. In 2020, our equity in income of our unconsolidated joint venture, KBHS, increased 73% year over year as a result of a substantial
increase in the principal amount of loan originations and improved margins. The higher principal amount of loan originations in 2020 primarily reflected an
increase in the percentage of homebuyers using KBHS and an increase in the average selling price of homes we delivered, partly offset by a 10% decrease in the
number of homes we delivered.
35
INCOME TAXES
Our income tax expense and effective income tax rate were as follows (dollars in thousands):
Income tax expense
Effective income tax rate
$
2020
Years Ended November 30,
2019
67,800
$
18.6 %
79,400
$
22.8 %
2018
197,600
53.7 %
Our effective tax rate for 2020 decreased from the previous year, mainly due to a $14.4 million increase in federal energy tax credits we earned from building
energy-efficient homes and a $6.7 million increase in excess tax benefits related to stock-based compensation, partly offset by a $2.5 million decrease in deferred
tax asset valuation allowance reversals.
The federal energy tax credits for the year ended November 30, 2020 resulted from legislation enacted in December 2019 that, among other things, extended
the availability of a business tax credit for building new energy-efficient homes through December 31, 2020. The federal energy tax credits for the year ended
November 30, 2019 primarily resulted from legislation enacted on February 9, 2018 that, among other things, extended the availability of a business tax credit for
building new energy-efficient homes through December 31, 2017. Prior to this legislation, the tax credit expired on December 31, 2016. In December 2020, federal
legislation was enacted that, among other things, extended the availability of federal energy tax credits through December 31, 2021. This extension is expected to
benefit our income tax provision in future periods.
In June 2020, California enacted tax legislation that approved the suspension of California net operating loss (“NOL”) deductions for tax years 2020, 2021 and
2022. The suspension of California NOL deductions did not have an impact on our income tax expense for the year ended November 30, 2020.
Under current accounting standards, we expect volatility in our income tax expense in future periods, the magnitude of which will depend on, among other
factors, the price of our common stock and the timing and volume of stock-based compensation award activity, such as employee exercises of stock options and the
vesting of restricted stock awards and performance-based restricted stock units (each, a “PSU”).
For each of the years ended November 30, 2020 and 2019, the amount of income taxes we paid was substantially less than our income tax expense primarily
due to the utilization of our deferred tax assets to reduce taxable income. We anticipate the amount of income taxes we pay will be less than our income tax
expense for the next several years.
Further information regarding our income taxes is provided in Note 14 – Income Taxes in the Notes to Consolidated Financial Statements in this report.
LIQUIDITY AND CAPITAL RESOURCES
Overview. We have funded our homebuilding and financial services activities over the last several years with:
•
•
•
•
•
•
internally generated cash flows;
public issuances of debt securities;
borrowings under the Credit Facility;
land option contracts and other similar contracts and seller notes;
public issuances of our common stock; and
letters of credit and performance bonds.
We manage our use of cash in the operation of our business to support the execution of our primary strategic goals. Over the past several years, we have
primarily used cash for:
•
•
•
•
•
land acquisitions and land development;
home construction;
operating expenses;
principal and interest payments on notes payable; and
repayments of borrowings under the Credit Facility.
Cash flows for each of our communities depend on their stage of development and can differ significantly from reported earnings. Early stages of development
or expansion require significant cash outflows for land acquisition, zoning plat and other approvals, land development, and construction of model homes, roads,
utilities, landscape and other items. Because these costs
36
are a component of our inventory and are not recognized in our income statement until a home is delivered, we incur significant cash outflows prior to the
recognition of earnings. In the later stages of a community as homes are delivered, cash inflows may significantly exceed earnings reported for financial statement
purposes, as the cash outflows associated with the land and home construction were previously incurred.
Though our revenues in 2020 were tempered primarily due to the negative impacts from the COVID-19 pandemic, our net cash provided by operating
activities increased to $310.7 million in 2020, compared to $251.0 million in the previous year. In addition, our total liquidity improved to $1.47 billion at
November 30, 2020 from $1.23 billion at November 30, 2019. Based on our positive 2021 business forecast as discussed below under “Outlook,” we have no
material concerns related to our liquidity. While the ongoing COVID-19 pandemic creates potential liquidity risks, as discussed further below, we believe that our
existing cash and cash equivalents, our anticipated cash flows from operations and amounts available under our Credit Facility will be sufficient to fund our
anticipated operating and land-related investment needs for at least the next twelve months. We have no significant notes payable maturities until December 2021.
We limited our investments in land and land development in the second and most of the third quarter in prioritizing cash preservation and liquidity in light of
lingering uncertainty surrounding the COVID-19 pandemic. With the sustained strong housing demand over the 2020 second half, we intensified our investments
in the fourth quarter, resulting in a 63% year-over-year increase. As a result, our investments in land and land development increased to $1.69 billion in 2020,
compared to $1.62 billion in 2019. Approximately 50% of our total investments in 2020 related to land acquisitions, compared to approximately 39% in 2019.
While we made strategic investments in land and land development in each of our homebuilding reporting segments during 2020 and 2019, approximately 55%
and 53%, respectively, of these investments for each year were made in our West Coast homebuilding reporting segment. Our investments in land and land
development in the future will depend significantly on market conditions and available opportunities that meet our investment return standards to support home
delivery and revenue growth in 2021 and beyond.
The following table presents the number of lots we owned or controlled under land option contracts and other similar contracts and the carrying value of
inventory by homebuilding reporting segment (dollars in thousands):
Segment
West Coast
Southwest
Central
Southeast
Total
November 30, 2020
November 30, 2019
Lots
16,990 $
12,290
23,699
14,059
67,038 $
$
1,928,500
688,807
867,170
413,005
3,897,482
Lots
15,186 $
11,191
25,871
12,662
64,910 $
$
1,795,088
629,811
889,179
390,524
3,704,602
Variance
Lots
$
1,804 $
1,099
(2,172)
1,397
2,128 $
133,412
58,996
(22,009)
22,481
192,880
The number and carrying value of lots we owned or controlled under land option contracts and other similar contracts at November 30, 2020 increased from
November 30, 2019, primarily due to our investments in land and land development in 2020 and an increase in the number of homes under construction. The
number of lots in inventory as of November 30, 2020 included 10,254 lots under contract where the associated deposits were refundable at our discretion,
compared to 9,212 of such lots at November 30, 2019, reflecting ordinary course fluctuations in the number of such contracts. Our lots controlled under land under
contracts and other similar contracts as a percentage of total lots was 40% at November 30, 2020 and 41% at November 30, 2019. Generally, this percentage
fluctuates with our decisions to control (or abandon) lots under land option contracts and other similar contracts or to purchase (or sell owned) lots based on
available opportunities and our investment return standards.
37
Liquidity. The table below summarizes our total cash and cash equivalents, and total liquidity (in thousands):
Total cash and cash equivalents
Credit Facility commitment
Borrowings outstanding under the Credit Facility
Letters of credit outstanding under the Credit Facility
Credit Facility availability
Total liquidity
November 30,
2020
2019
681,190 $
800,000
—
(12,429)
787,571
1,468,761 $
453,814
800,000
—
(18,884)
781,116
1,234,930
$
$
The majority of our cash equivalents at November 30, 2020 and 2019 were invested in interest-bearing bank deposit accounts.
Capital Resources. Our notes payable consisted of the following (in thousands):
Mortgages and land contracts due to land sellers and other loans
Senior notes
Total
November 30,
2020
2019
Variance
$
$
4,667 $
1,742,508
1,747,175 $
7,889 $
1,740,858
1,748,747 $
(3,222)
1,650
(1,572)
Our financial leverage, as measured by the ratio of debt to capital, was 39.6% at November 30, 2020, compared to 42.3% at November 30, 2019. Our ratio of
net debt to capital (a calculation that is described above under “Non-GAAP Financial Measures”) at November 30, 2020 improved to 28.6%, compared to 35.2% at
November 30, 2019. Our next scheduled debt maturity is on December 15, 2021, when $450.0 million in aggregate principal amount of our 7.00% Senior Notes
due 2021 become due.
LOC Facility. We had $29.7 million and $15.8 million of letters of credit outstanding under the LOC Facility at November 30, 2020 and 2019, respectively.
Further information regarding our LOC Facility is provided in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report.
Unsecured Revolving Credit Facility. We have an $800.0 million Credit Facility that will mature on October 7, 2023. The amount of the Credit Facility
available for cash borrowings and 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 November 30, 2020, we had no cash borrowings and $12.4 million of letters of
credit outstanding under the Credit Facility. We did not borrow under the Credit Facility during 2020. The Credit Facility is further described in Note 15 – Notes
Payable in the Notes to Consolidated Financial Statements in this report.
Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants
regarding our consolidated tangible net worth, consolidated leverage ratio (“Leverage Ratio”), and either a consolidated interest coverage ratio (“Interest Coverage
Ratio”) or minimum liquidity level, each as defined therein. Our compliance with these financial covenants is measured by calculations and metrics that are
specifically defined or described by the terms of the Credit Facility and can differ in certain respects from comparable GAAP or other commonly used terms. The
financial covenant requirements under the Credit Facility are set forth below:
•
Consolidated Tangible Net Worth – We must maintain a consolidated tangible net worth at the end of any fiscal quarter greater than or equal to the sum of
(a) $1.54 billion, plus (b) an amount equal to 50% of the aggregate of the cumulative consolidated net income for each fiscal quarter commencing after
May 31, 2019 and ending as of the last day of such fiscal quarter (though there is no reduction if there is a consolidated net loss in any fiscal quarter), plus
(c) an amount equal to 50% of the cumulative net proceeds we receive from the issuance of our capital stock after May 31, 2019.
38
•
•
Leverage Ratio – We must also maintain a Leverage Ratio of less than or equal to .65 at the end of each fiscal quarter. The Leverage Ratio is calculated as
the ratio of our consolidated total indebtedness to the sum of consolidated total indebtedness and consolidated tangible net worth, all as defined under the
Credit Facility.
Interest Coverage Ratio or Liquidity – We are also required to maintain either (a) an Interest Coverage Ratio of greater than or equal to 1.50 at the end of
each fiscal quarter; or (b) a minimum level of liquidity, but not both. The Interest Coverage Ratio is the ratio of our consolidated adjusted EBITDA to
consolidated interest incurred, each as defined under the Credit Facility, in each case for the previous 12 months. Our minimum liquidity is required to be
greater than or equal to consolidated interest incurred, as defined under the Credit Facility, for the four most recently ended fiscal quarters in the
aggregate.
In addition, under the Credit Facility, our investments in joint ventures and non-guarantor subsidiaries (which are shown, respectively, in Note 9 – Investments
in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report and under Supplemental Guarantor Financial Information below)
as of the end of each fiscal quarter cannot exceed the sum of (a) $104.8 million and (b) 20% of consolidated tangible net worth. Further, the Credit Facility does
not permit our borrowing base indebtedness, which is the aggregate principal amount of our outstanding indebtedness for borrowed money and non-collateralized
financial letters of credit, to be greater than our borrowing base (a measure relating to our inventory and unrestricted cash assets).
The covenants and other requirements under the Credit Facility represent the most restrictive provisions that we are subject to with respect to our notes
payable. The following table summarizes the financial covenants and other requirements under the Credit Facility, and our actual levels or ratios (as applicable)
with respect to those covenants and other requirements, in each case as of November 30, 2020:
Financial Covenants and Other Requirements
Consolidated tangible net worth
Leverage Ratio
Interest Coverage Ratio (a)
Minimum liquidity (a)
Investments in joint ventures and non-guarantor subsidiaries
Borrowing base in excess of borrowing base indebtedness (as defined)
Covenant Requirement
Actual
> $
<
>
> $
< $
1.80 billion $
.650
1.500
121.6 million $
638.0 million $
$
n/a
2.67 billion
.396
4.481
681.2 million
200.3 million
1.72 billion
(a) Under the terms of the Credit Facility, we are required to maintain either a minimum Interest Coverage Ratio or a minimum level of liquidity, but not both. As
of November 30, 2020, we met both the Interest Coverage Ratio and the minimum liquidity requirements.
The indenture governing our senior notes does not contain any financial covenants. Subject to specified exceptions, the indenture contains certain restrictive
covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale-leaseback transactions involving property above a certain
specified value. In addition, our senior notes contain certain limitations related to mergers, consolidations, and sales of assets.
As of the date of this report, 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. There are no agreements that restrict our
payment of dividends other than the Credit Facility, which would restrict our payment of cash and certain other dividends, such as cash dividends on our common
stock, if a default under the Credit Facility exists at the time of any such payment, or if any such payment would result in such a default (other than dividends paid
within 60 days after declaration, if there was no default at the time of declaration).
Depending on available terms, we finance certain land acquisitions with purchase-money financing from land sellers or with other forms of financing from
third parties. At November 30, 2020, we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such
financing of $4.7 million, secured primarily by the underlying property, which had an aggregate carrying value of $27.1 million.
Credit Ratings. Our credit ratings are periodically reviewed by rating agencies. In January 2020, Standard and Poor’s Financial Services upgraded our credit
rating to BB from BB-, and changed the rating outlook to stable from positive.
39
Consolidated Cash Flows. The following table presents a summary of net cash provided by (used in) our operating, investing and financing activities (in
thousands):
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
2020
Years Ended November 30,
2019
2018
$
$
310,678 $
(26,563)
(56,444)
227,671 $
251,042 $
(40,944)
(330,359)
(120,261) $
221,512
(20,107)
(347,147)
(145,742)
Operating Activities. Operating activities provided net cash of $310.7 million in 2020, compared to $251.0 million in 2019. Generally, our net operating cash
flows fluctuate primarily based on changes in our inventories and our profitability.
Net cash provided by operating activities in 2020 primarily reflected net income of $296.2 million, a net decrease in receivables of $59.3 million, largely
reflecting an income tax refund received, and a net increase in accounts payable, accrued expenses and other liabilities of $4.1 million, partly offset by a net
increase in inventories of $183.2 million. Net cash provided by operating activities in 2019 mainly reflected net income of $268.8 million and a net decrease in
receivables of $44.4 million, partially offset by a net increase in inventories of $165.3 million and a net decrease in accounts payable, accrued expenses and other
liabilities of $40.6 million.
Investing Activities. Investing activities used net cash of $26.6 million in 2020 and $40.9 million in 2019. Our uses of cash in 2020 included $28.8 million for
net purchases of property and equipment and $10.4 million for contributions to unconsolidated joint ventures. These uses of cash were partially offset by a $12.7
million return of investments in unconsolidated joint ventures. In 2019, the net cash used in investing activities included $40.5 million for net purchases of property
and equipment and $11.3 million for contributions to unconsolidated joint ventures. These uses of cash were partly offset by $5.8 million of proceeds from the sale
of a building and a $5.0 million return of investments in unconsolidated joint ventures.
Financing Activities. Financing activities used net cash of $56.4 million in 2020 and $330.4 million in 2019. The year-over-year change in net cash used in
financing activities was mainly due to the financing transactions we completed in 2019. In 2020, net cash was used for dividend payments on our common stock of
$38.1 million, payments on mortgages and land contracts due to land sellers and other loans of $24.9 million and tax payments associated with stock-based
compensation awards of $9.5 million. The cash used was partially offset by cash provided by $16.1 million of issuances of common stock under employee stock
plans.
In 2019, net cash was used for our total repayment of $980.0 million in aggregate principal amount of our 8.00% Senior Notes due 2020, 1.375% convertible
senior notes due 2019 (“1.375% Convertible Senior Notes due 2019”) and 4.75% senior notes due 2019 (“4.75% Senior Notes due 2019”), payments on mortgages
and land contracts due to land sellers and other loans of $41.1 million, dividend payments on our common stock of $20.4 million and tax payments associated with
stock-based compensation awards of $7.3 million. The cash used was partly offset by cash provided by our public offering of $300.0 million in aggregate principal
amount of 4.80% senior notes due 2029 (“4.80% Senior Notes due 2029”), concurrent public offerings of $300.0 million in aggregate principal amount of 6.875%
senior notes due 2027 (“6.875% Senior Notes due 2027”) and an additional $100.0 million in aggregate principal amount of our existing series of 7.625% senior
notes due 2023 (“7.625% Senior Notes due 2023”), and $30.5 million of issuances of common stock under employee stock plans.
Dividends. Our board of directors declared quarterly cash dividends of $.09 per share of common stock in the 2020 first, second and third quarters. In the 2020
fourth quarter, our board of directors approved an increase in the quarterly cash dividend on our common stock to $.15 per share and declared a quarterly cash
dividend at the new higher rate. Our board of directors declared quarterly cash dividends of $.025 per share of common stock in both the 2019 first and second
quarters. In the 2019 third quarter, our board of directors approved an increase in the quarterly cash dividend on our common stock to $.09 per share, and declared
quarterly cash dividends at the new rate in the 2019 third and fourth quarters. Cash dividends declared and paid during the years ended November 30, 2020 and
2019 totaled $.42 and $.23 per share of common stock, respectively. The declaration and payment of future cash dividends on our common stock, whether at
current levels or at all, are at the discretion of our board of directors, and depend upon, among other things, our expected future earnings, cash flows, capital
requirements, access to external financing, debt structure and any adjustments thereto, operational and financial investment strategy and general financial
condition, as well as general business conditions.
40
Shelf Registration Statement. On July 9, 2020, we filed an automatically effective universal shelf registration statement (“2020 Shelf Registration”) with the
SEC. The 2020 Shelf Registration registers the offering of securities that we may issue from time to time in amounts to be determined. Our ability to issue
securities is subject to market conditions. The 2020 Shelf Registration replaced our previously effective universal shelf registration statement filed with the SEC on
July 14, 2017. We have not made any offerings of securities under the 2020 Shelf Registration.
Share Repurchase Program. In May 2018, our board of directors authorized us to repurchase a total of up to 4,000,000 shares of our outstanding common
stock. This authorization reaffirmed and incorporated the then-current balance of 1,627,000 shares that remained under a prior board-approved share repurchase
program. In 2018, we repurchased 1,806,053 shares of our common stock pursuant to this authorization, at a total cost of $35.0 million. We did not repurchase any
of our common stock under this authorization in 2020 or 2019. The amount and timing of shares purchased under the remaining share repurchase authorization 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. The remaining share repurchase authorization will continue in effect until fully used or earlier terminated or suspended by our board of
directors.
Unrelated to the common stock repurchase program, as further discussed in Note 19 – Stockholders’ Equity in the Notes to Consolidated Financial Statements
in this report, our board of directors authorized in 2014 the repurchase of no more than 680,000 shares of our outstanding common stock solely as necessary for
director compensation elections with respect to settling outstanding stock appreciation rights awards (“Director Plan SARs”) granted under our Non-Employee
Directors Compensation Plan (“Director Plan”). As of November 30, 2020, we have not repurchased any shares pursuant to the board of directors authorization.
While the unprecedented public health and governmental efforts to contain the spread of COVID-19 have created uncertainty as to general economic
conditions for 2021 and beyond, as of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to
satisfy our short-term and reasonably anticipated long-term requirements for funds to conduct our operations and meet other needs in the ordinary course of our
business. In 2021, we expect to use or redeploy our cash resources or cash borrowings under the Credit Facility to support our business within the context of
prevailing market conditions. During this time, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the
repurchase of debt or equity securities or potential new issuances of debt or equity securities to support our business needs. The amounts involved in these
transactions, if any, may be material. In addition, as necessary or desirable, we may adjust or amend the terms of and/or expand the capacity of the Credit Facility
or the LOC Facility, or enter into additional letter of credit facilities, or other similar facility arrangements, in each case with the same or other financial
institutions, or allow any such facilities to mature or expire. However, with the uncertainty surrounding the COVID-19 pandemic, which could materially and
negatively affect our business and the housing market, our ability to engage in such transactions may be constrained by volatile or tight economic, capital, credit
and/or financial market conditions, as well as moderated investor and/or lender interest or capacity and/or our liquidity, leverage and net worth, and we can provide
no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions. Further discussion of the
potential impacts from the COVID-19 pandemic on our capital resources and liquidity is provided above under Item 1A – Risk Factors.
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
As of November 30, 2020, we had $1.75 billion in aggregate principal amount of outstanding senior notes and no borrowings outstanding under the Credit
Facility. 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”), which are listed on Exhibit 22. Our other subsidiaries, including all of our
subsidiaries associated with our financial services operations, do not guarantee any such indebtedness (collectively, “Non-Guarantor Subsidiaries”), although we
may cause a Non-Guarantor Subsidiary to become a Guarantor Subsidiary if we believe it to be in our or the relevant subsidiary’s best interest. See Note 15 –
Notes Payable in the Notes to Consolidated Financial Statements in this report for additional information regarding the terms of our senior notes and the Credit
Facility.
The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by us. The guarantees are senior unsecured obligations of each of
the Guarantor Subsidiaries and rank equally in right of payment with all unsecured and unsubordinated indebtedness and guarantees of such Guarantor
Subsidiaries. The guarantees are effectively subordinated to any secured indebtedness of such Guarantor Subsidiaries to the extent the value of the assets securing
such indebtedness, and structurally subordinated to indebtedness and other liabilities of Non-Guarantor Subsidiaries.
Pursuant to the terms of the indenture governing the senior notes and the terms of the Credit Facility, if any of the Guarantor Subsidiaries ceases to be a
“significant subsidiary” as defined by Rule 1-02 of Regulation S-X using a 5% rather than a 10% threshold (provided that the assets of our non-guarantor
subsidiaries do not in the aggregate exceed 10% of an adjusted
41
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.
The following tables present summarized financial information for KB Home and the Guarantor Subsidiaries on a combined basis, excluding unconsolidated
joint ventures and after the elimination of (a) intercompany transactions and balances between KB Home and the Guarantor Subsidiaries and (b) equity in earnings
from and investments in the Non-Guarantor Subsidiaries. See Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial
Statements in this report for additional information regarding our unconsolidated joint ventures.
Summarized Balance Sheet Data (in thousands)
Assets
Cash
Inventories
Amounts due from Non-Guarantor Subsidiaries
Total assets
Liabilities and Stockholders’ Equity
Notes payable
Amounts due to Non-Guarantor Subsidiaries
Total liabilities
Stockholders’ equity
Summarized Statement of Operations Data (in thousands)
Revenues
Construction and land costs
Selling, general and administrative expenses
Interest income from non-guarantor subsidiary
Pretax income
Net income
OFF-BALANCE SHEET ARRANGEMENTS
$
$
November 30, 2020
644,157
3,464,674
394,226
5,102,197
1,743,508
221,330
2,589,971
2,512,226
Year Ended
November 30, 2020
3,767,283
(3,038,658)
(444,700)
24,734
311,136
251,536
Unconsolidated Joint Ventures. As discussed in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in
this report, we have investments in unconsolidated joint ventures in various markets where our homebuilding operations are located. None of our unconsolidated
joint ventures had outstanding debt at November 30, 2020.
Land Option Contracts and Other Similar Contracts. As discussed in Note 8 – Variable Interest Entities in the Notes to Consolidated Financial Statements in
this report, 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. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific
performance. Our decision to exercise a particular land option contract or other similar contract depends on the results of our due diligence reviews and ongoing
market and project feasibility analysis that we conduct after entering into such a contract. In some cases, our decision to exercise a land option contract or other
similar contract may be conditioned on the land seller obtaining necessary entitlements, such as zoning rights and environmental and development approvals,
and/or physically developing the underlying land by a pre-determined date. We typically have the ability not to exercise our rights to the underlying land for any
reason and forfeit our deposits without further penalty or obligation to the sellers. If we were to acquire all of the land we had under land option contracts and other
similar contracts at November 30, 2020, we estimate the remaining purchase price to be paid would be as follows: 2021 – $883.4 million; 2022 – $256.7 million;
2023 – $109.8 million; 2024 – $53.8 million; 2025 – $57.8 million; and thereafter – $2.3 million.
42
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table presents our future cash requirements under contractual obligations as of November 30, 2020 (in millions):
Contractual obligations:
Long-term debt
Interest
Operating lease obligations
Inventory-related obligations (a)
Total
Total
Fiscal Year
2021
Payments due by Period
Fiscal Years
2022-2023
Fiscal Years
2024-2025
Thereafter
$
$
1,754.7 $
431.5
42.8
32.1
2,261.1 $
2.1 $
120.8
11.2
18.3
152.4 $
1,151.9 $
152.1
18.2
3.0
1,325.2 $
.7 $
70.0
10.3
1.3
82.3 $
600.0
88.6
3.1
9.5
701.2
(a) Represents liabilities for inventory not owned associated with financing arrangements as discussed in Note 8 – Variable Interest Entities in the Notes to
Consolidated Financial Statements in this report, as well as liabilities for fixed or determinable amounts associated with tax increment financing entity
(“TIFE”) assessments. As homes are delivered, the 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.
As discussed in Note 17 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report, we had $897.6 million of
performance bonds and $42.1 million of letters of credit outstanding at November 30, 2020. At November 30, 2019, we had $793.9 million of performance bonds
and $34.7 million of letters of credit outstanding.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying consolidated financial statements were prepared in conformity with GAAP. The preparation of these financial statements requires the use
of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. See Note 1 – Summary of Significant
Accounting Policies in the Notes to Consolidated Financial Statements in this report for a discussion of our significant accounting policies. The following are
accounting policies that we believe are critical because of the significance of the activity to which they relate or because they require the use of significant
estimates, judgments and/or other assumptions in their application.
Homebuilding Revenue Recognition. We recognize homebuilding revenue in accordance with ASC 606 by applying the following steps in determining the
timing and amount of revenue to recognize: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the
transaction price; (4) allocate the transaction price to the performance obligations in the contract, if applicable; and (5) recognize revenue when (or as) we satisfy a
performance obligation.
Our home sale transactions are made pursuant to contracts under which we typically have a single performance obligation to deliver a completed home to the
homebuyer when closing conditions are met. Revenues from home sales are recognized when we have satisfied the performance obligation within the sales
contract, which is generally when title to and possession of the home and the risks and rewards of ownership are transferred to the homebuyer on the closing date.
Little to no estimation is involved in recognizing such revenues.
Land sale transactions are made pursuant to contracts under which we typically have a performance obligation(s) to deliver specified land parcels to the buyer
when closing conditions are met. We evaluate each land sale contract to determine our performance obligation(s) under the contract, including whether we have a
distinct promise to perform post-closing land development work that is material within the context of the contract, and use objective criteria to determine our
completion of the applicable performance obligation(s), whether at a point in time or over time. Revenues from land sales are recognized when we have satisfied
the performance obligation(s) within the sales contract, which is generally when title to and possession of the land and the risks and rewards of ownership are
transferred to the land buyer on the closing date. In instances where we have a distinct and material performance obligation(s) within the context of a land sale
contract to perform land development work after the closing date, a portion of the transaction price under the contract is allocated to such performance
obligation(s) and is recognized as revenue over time based upon our estimated progress toward the satisfaction of the performance obligation(s). We generally
measure our progress based on our costs incurred relative to the total costs expected to satisfy the
43
performance obligation(s). Certain land sale contracts may require management judgment in determining the appropriate revenue recognition, but the impact of
such transactions is generally immaterial.
Inventories and Cost of Sales. Housing and land inventories are stated at cost, unless the carrying value is determined not to be recoverable, in which case the
affected inventories are written down to fair value or fair value less associated costs to sell. Fair value is determined based on estimated future net cash flows
discounted for inherent risks associated with the real estate assets, or other valuation techniques. Due to uncertainties in the estimation process and other factors
beyond our control, it is possible that actual results could differ from those estimated. Other than model homes, our inventories typically do not consist of
completed unsold homes. However, as discussed above under Item 1 – Business, we may have unsold completed or partially completed homes in our inventory.
We rely on certain estimates to determine our construction and land costs and resulting housing gross profit margins associated with revenues recognized.
Construction and land costs are comprised of direct and allocated costs, including estimated future costs for the limited warranty we provide on our homes, and
certain amenities within a community. Land acquisition, land development and other common costs are generally allocated on a relative fair value basis to the
homes or lots within the applicable community or land parcel. Land acquisition and land development costs include related interest and real estate taxes.
In determining a portion of the construction and land costs recognized for each period, we rely on project budgets that are based on a variety of assumptions,
including future construction schedules and costs to be incurred. It is possible that actual results could differ from budgeted amounts for various reasons, including
construction delays, construction resource shortages, increases in costs that have not yet been committed, changes in governmental requirements, unforeseen
environmental hazards or other unanticipated issues encountered during construction and other factors beyond our control. While the actual results for a particular
construction project are accurately reported over time, variances between the budgeted and actual costs of a project could result in the understatement or
overstatement of construction and land costs and homebuilding gross profits in a particular reporting period. To reduce the potential for such distortion, we have set
forth procedures that collectively comprise a critical accounting policy. These procedures, which we have applied on a consistent basis, include assessing, updating
and revising project budgets on a monthly basis, obtaining commitments to the extent possible from independent subcontractors and vendors for future costs to be
incurred, reviewing the adequacy of warranty accruals and historical warranty claims experience, and utilizing the most current information available to estimate
construction and land costs to be charged to expense. Variances to the budgeted costs after an estimate has been charged to expense that are related to project costs
are generally allocated on a relative fair value basis to the remaining homes to be delivered within the community or land parcel, while such variances related to
direct construction costs are generally expensed as incurred. The variances between budgeted and actual costs have historically not been material to our
consolidated financial statements. We believe that our policies provide for reasonably dependable estimates to be used in the calculation and reporting of
construction and land costs.
Inventory Impairments and Land Option Contract Abandonments. Each community or land parcel in our owned inventory is assessed to determine if
indicators of potential impairment exist. Impairment indicators are assessed separately for each community or land parcel on a quarterly basis and include, but are
not limited to, the following: significant decreases in net orders, average selling prices, volume of homes delivered, gross profit margins on homes delivered or
projected gross profit margins on homes in backlog or future deliveries; significant increases in budgeted land development and home construction costs or
cancellation rates; or projected losses on expected future land sales. If indicators of potential impairment exist for a community or land parcel, the identified asset
is evaluated for recoverability.
The following table presents information regarding inventory impairment and land option contract abandonment charges included in construction and land
costs in our consolidated statements of operations (dollars in thousands):
44
Inventory impairments:
Number of communities or land parcels evaluated for recoverability (a)
Carrying value of communities or land parcels evaluated for recoverability (a)
Number of communities or land parcels written down to fair value
Pre-impairment carrying value of communities or land parcels written down to fair value
Inventory impairment charges
Post-impairment fair value
Land option contract abandonments charges
2020
Years Ended November 30,
2019
2018
$
$
$
$
24
228,063 $
10
69,211 $
(22,723)
46,488 $
5,946 $
40
326,255 $
8
41,160 $
(14,031)
27,129 $
3,260 $
57
356,100
13
70,156
(26,104)
44,052
2,890
(a) As impairment indicators are assessed on a quarterly basis, some of the communities or land parcels evaluated during the years ended November 30, 2020,
2019 and 2018 were evaluated in more than one quarterly period. Communities or land parcels evaluated for recoverability in more than one quarterly period
are counted only once for each applicable year. In addition, we evaluated land held for future development for recoverability during 2020, 2019 and 2018. The
inventory impairment charges in each of those years reflected our decisions to make changes in our operational strategies aimed at more quickly monetizing
our investment in certain communities by accelerating the overall pace for selling, building and delivering homes therein, including communities on land
previously held for future development.
When an indicator of potential impairment is identified for a community or land parcel, we test the asset for recoverability by comparing the carrying value of
the asset to the undiscounted future net cash flows expected to be generated by the asset. The undiscounted future net cash flows are impacted by then-current
conditions and trends in the market in which the asset is located as well as factors known to us at the time the cash flows are calculated. These factors may include
recent trends in our orders, backlog, cancellation rates and volume of homes delivered, as well as our expectations related to the following: product offerings;
market supply and demand, including estimated average selling prices and related price appreciation; and land development, home construction and overhead costs
to be incurred and related cost inflation.
As further described in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this
report, given the inherent challenges and uncertainties in forecasting future results, our inventory assessments at the time they are made take into consideration
whether a community or land parcel is active, meaning whether it is open for sales and/or undergoing development, or whether it is being held for future
development or held for sale.
We record an inventory impairment charge on a community or land parcel that is active or held for future development when indicators of potential
impairment exist and the carrying value of the real estate asset is greater than the undiscounted future net cash flows the asset is expected to generate. These real
estate assets are written down to fair value, which is primarily determined based on the estimated future net cash flows discounted for inherent risk associated with
each such asset, or other valuation techniques. Inputs used in our calculation of estimated discounted future net cash flows are specific to each affected real estate
asset and are based on our expectations for each such asset as of the applicable measurement date, including, among others, expectations related to average selling
prices and volume of homes delivered. The discount rates used in our estimated discounted cash flows ranged from 17% - 18% in 2020, 17% in 2019, and 17% -
19% during 2018. The discount rates we used were impacted by one or more of the following at the time the calculation was made: the risk-free rate of return;
expected risk premium based on estimated land development, home construction and delivery timelines; market risk from potential future price erosion; cost
uncertainty due to land development or home construction cost increases; and other risks specific to the asset or conditions in the market in which the asset is
located.
We record an inventory impairment charge on land held for sale when the carrying value of the real estate asset is greater than its fair value. These real estate
assets are written down to fair value, less associated costs to sell. The fair value of such real estate assets is generally based on bona fide letters of intent from
outside parties, executed sales contracts, broker quotes or similar information.
As of November 30, 2020, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $113.1 million,
representing 16 communities and various other land parcels. As of November 30, 2019, the aggregate carrying value of our inventory that had been impacted by
inventory impairment charges was $115.6 million, representing 19 communities and various other land parcels.
45
Our inventory controlled under land option contracts and other similar contracts is assessed to determine whether it continues to meet our investment return
standards. Assessments are made separately for each optioned land parcel on a quarterly basis and are affected by the following factors relative to the market in
which the asset is located, among others: current and/or anticipated net orders, average selling prices and volume of homes delivered; estimated land development
and home construction costs; and projected profitability on expected future housing or land sales. When a decision is made not to exercise certain land option
contracts and other similar contracts due to market conditions and/or changes in our marketing strategy, we write off the related inventory costs, including non-
refundable deposits and unrecoverable pre-acquisition costs.
The estimated remaining life of each community or land parcel in our inventory depends on various factors, such as the total number of lots remaining; the
expected timeline to acquire and entitle land and develop lots to build homes; the anticipated future net order and cancellation rates; and the expected timeline to
build and deliver homes sold. While it is difficult to determine a precise timeframe for any particular inventory asset, based on current market conditions and
expected delivery timelines, we estimate our inventory assets’ remaining operating lives to range generally from one year to in excess of 10 years and expect to
realize, on an overall basis, the majority of our inventory balance as of November 30, 2020 within five years. The following table presents as of November 30,
2020 and 2019, respectively, the estimated timeframe of delivery for the last home in an applicable community or land parcel and the corresponding percentage of
total inventories such categories represent within our inventory balance (dollars in millions):
0-2 years
3-5 years
6-10 years
Greater than
10 years
2020
2019
$
$
1,893.9
1,918.1
%
49 % $
52
$
1,843.8
1,555.3
%
47 % $
42
$
140.7
210.7
%
$
%
Total
4 % $
5
19.1
20.5
— % $
1
3,897.5
3,704.6
The inventory balances in the 0-2 years and 3-5 years categories were located throughout all of our homebuilding reporting segments, though mostly in our
West Coast and Central segments. These categories collectively represented 96% of our total inventories as of November 30, 2020, compared to 94% as of
November 30, 2019. The inventory balances in the 6-10 years and greater than 10 years categories were primarily located in our West Coast, Southwest and
Central segments, and together totaled $159.8 million at November 30, 2020, compared to $231.2 million at November 30, 2019. The year-over-year decrease was
primarily related to our decisions to accelerate the overall timing for selling, building and delivering homes through community reactivations, and generally
favorable market conditions. The inventories in the 6-10 years and greater than 10 years categories were generally comprised of land held for future development
and active, multi-phase communities with large remaining land positions.
Due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, and in our estimations
of the remaining operating lives of our inventory assets and the realization of our inventory balances, particularly as to land held for future development, it is
possible that actual results could differ substantially from those estimated.
Deterioration in the supply and demand factors in the overall housing market or in an individual market or submarket, or changes to our operational or selling
strategy at certain communities may lead to additional inventory impairment charges, future charges associated with land sales or the abandonment of land option
contracts or other similar contracts related to certain assets. Due to the nature or location of the projects, land held for future development that we activate as part
of our strategic growth initiatives or to accelerate sales and/or our return on investment, or that we otherwise monetize to help improve our asset efficiency, may
have a somewhat greater likelihood of being impaired than other of our active inventory.
We believe that the carrying value of our inventory balance as of November 30, 2020 is recoverable. Our considerations in making this determination include
the factors and trends incorporated into our impairment analyses, and as applicable, the prevailing regulatory environment, competition from other homebuilders,
inventory levels and sales activity of resale homes, and the local economic conditions where an asset is located. In addition, we consider the financial and
operational status and expectations of our inventories as well as unique attributes of each community or land parcel that could be viewed as indicators for potential
future impairments. However, if conditions in the overall housing market or in a specific market or submarket worsen in the future beyond our current
expectations, including, among other things, from ongoing negative effects of the COVID-19 pandemic and related COVID-19 control responses, if future changes
in our business strategy significantly affect any key assumptions used in our projections of future cash flows, or if there are material changes in any of the other
items we consider in assessing recoverability, we may recognize charges in future periods for inventory impairments or land option contract abandonments, or
both, related to our current inventory assets. Any such charges could be material to our consolidated financial statements.
46
Warranty Costs. 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 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. 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.
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. Based on this
assessment, we may from time to time adjust our warranty accrual rates, which would be applied on a prospective basis to homes delivered. Although adjustments
to the accrual rates are infrequent, they may be necessary when actual warranty expenditures have increased or decreased on a sustained basis. Our warranty
liability is presented on a gross basis for all years without consideration of recoveries and amounts we have paid on behalf of and expect to recover from other
parties, if any. Estimates of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any, are recorded as receivables when
such recoveries are considered probable.
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. A 10% change in the historical warranty rates used to estimate our warranty accrual would not result in a material change in our
accrual.
Self-Insurance. We maintain, and require the majority of our independent subcontractors to maintain, general liability insurance (including construction defect
and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to
our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. We self-insure a portion of our overall risk through the
use of a captive insurance subsidiary. In Arizona, California, Colorado and Nevada, our subcontractors’ general liability insurance primarily takes the form of a
wrap-up policy under a program where eligible independent subcontractors are enrolled as insureds on each community. Enrolled subcontractors contribute toward
the cost of the insurance and agree to pay a contractual amount in the future if there is a claim related to their work.
We record liabilities based on the estimated costs required to cover reported claims, claims incurred but not yet reported, and claim adjustment expenses.
These estimated costs are based on an actuarial analysis of our historical claims and expense data, as well as industry data. Our self-insurance liabilities are
presented on a gross basis without consideration of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any.
The amount of our self-insurance liability is based on an analysis performed by a third-party actuary that uses our historical claim and expense data, as well as
industry data to estimate these overall costs. These estimates are subject to uncertainty due to a variety of factors, the most significant being the long period of time
between the delivery of a home to a homebuyer and when a structural warranty or construction defect claim may be made, and the ultimate resolution of any such
construction defect claim. Though state regulations vary, construction defect claims are reported and resolved over a long period of time, which can extend for 10
years or more. As a result, the majority of the estimated self-insurance liability based on the actuarial analysis relates to claims incurred but not yet reported.
Therefore, adjustments related to individual existing claims generally do not significantly impact the overall estimated liability. Adjustments to our liabilities
related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs.
The projection of losses related to these liabilities requires the use of actuarial assumptions. Key assumptions used in developing these estimates include claim
frequencies, severities and resolution patterns, which can occur over an extended period of time. These estimates are subject to variability due to the length of time
between the delivery of a home to a homebuyer and when a construction defect claim is made, and the ultimate resolution of such claim; uncertainties regarding
such claims relative to our markets and the types of product we build; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree
of judgment involved and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated. In addition,
changes in the frequency and severity of reported claims and the estimates to resolve claims can impact the trends and assumptions used in the actuarial analysis,
which could be material to our consolidated financial statements. A 10% increase in the claim frequency and the average cost per claim used to estimate the self-
insurance liability would result in increases of approximately $10.4 million in our liability and approximately
47
$2.5 million in our receivable as of November 30, 2020, and additional expense of approximately $7.9 million for 2020. A 10% decrease in the claim frequency
and the average cost per claim used to estimate the self-insurance liability would result in decreases of approximately $10.5 million in our liability and
approximately $2.5 million in our receivable as of November 30, 2020, and a reduction to expense of approximately $8.0 million for 2020.
Estimates of insurance recoveries and amounts we have paid on behalf of other parties, if any, are recorded as receivables when such recoveries are considered
probable. These estimated recoveries are principally based on actuarially determined amounts and depend on various factors, including, among other things, the
above-described claim cost estimates, our insurance policy coverage limits for the applicable policy year(s), historical third-party recovery rates, insurance industry
practices, the regulatory environment, and legal precedent, and are subject to a high degree of variability from year to year. Because of the inherent uncertainty and
variability in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated.
Legal Matters Accruals. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is
reasonably estimable. Assessing the probability of losses and estimating probable losses requires analysis of multiple factors, including in some cases judgments
about the potential actions of third-party claimants, regulatory agencies, mediators, arbitrators, responsible third parties and/or courts, as the case may be. Recorded
contingent liabilities are based on the most recent information available and actual losses in any future period are inherently uncertain. If future adjustments to
estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the
actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a
reasonable possibility the ultimate loss will materially exceed the recorded liability. While we cannot predict the outcome of pending legal matters with certainty,
we do not believe any currently identified claim or proceeding, either individually or in aggregate, will have a material impact on our results of operations,
financial position or cash flows.
Stock-Based Compensation. We measure and recognize compensation expense associated with our grants of equity-based awards at an amount equal to the fair
value of such share-based payments over their applicable vesting period. We have provided compensation benefits to certain of our employees in the form of stock
options, restricted stock and PSUs, and to our non-employee directors in the form of unrestricted shares of common stock, deferred common stock awards and
Director Plan SARs. Determining the fair value of share-based awards requires judgment to identify the appropriate valuation model and develop the assumptions
to be used in the calculation, including the expected term of the stock options or Director Plan SARs, expected stock-price volatility and dividend yield. We
estimate the fair value of stock options and Director Plan SARs granted using the Black-Scholes option-pricing model with assumptions based primarily on
historical data. The expected volatility factor is based on a combination of the historical volatility of our common stock and the implied volatility of publicly traded
options on our common stock. We believe this blended approach balances the forward-looking nature of implied volatility with the relative stability over time of
historical volatility to arrive at a reasonable estimate of expected volatility. Additionally, judgment is required in estimating the percentage of share-based awards
that are expected to vest, and in the case of PSUs, the level of performance that will be achieved and the number of shares that will be earned. If actual results
differ significantly from these estimates, stock-based compensation expense could be higher and have a material impact on our consolidated financial statements.
Income Taxes. As discussed in Note 14 – Income Taxes in the Notes to the Consolidated Financial Statements in this report, we evaluate our deferred tax
assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available positive and negative evidence using
a “more likely than not” standard with respect to whether deferred tax assets will be realized. This evaluation considers, among other factors, our historical
operating results, our expectation of future profitability, the duration of the applicable statutory carryforward periods, and conditions in the housing market and the
broader economy. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which
the related deferred tax assets become deductible. The value of our deferred tax assets in our consolidated balance sheets depends on applicable income tax rates.
We base our estimate of deferred tax assets and liabilities on current tax laws and rates. In certain cases, we also base this estimate on business plan forecasts and
other expectations about future outcomes. Changes in positive and negative evidence, including differences between our future operating results and estimates,
could result in the establishment of an additional valuation allowance against our deferred tax assets. Accounting for deferred taxes is based upon estimates of
future results. Judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or
tax returns. Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated financial statements.
Also, changes in existing federal and state tax laws and corporate income tax rates could affect future tax results and the realization of deferred tax assets over
time.
We recognize accrued interest and penalties related to unrecognized tax benefits in our consolidated financial statements as a component of the provision for
income taxes. Our liability for unrecognized tax benefits, combined with accrued interest and
48
penalties, is reflected as a component of accrued expenses and other liabilities in our consolidated balance sheets. Judgment is required in evaluating uncertain tax
positions. We evaluate our uncertain tax positions quarterly based on various factors, including changes in facts or circumstances, tax laws or the status of audits by
tax authorities. Changes in the recognition or measurement of uncertain tax positions could have a material impact on our consolidated financial statements in the
period in which we make the change.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements are discussed in Note 1 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements
in this report.
OUTLOOK
Given the strong demand we and the homebuilding industry experienced in the 2020 second half, we believe long-term housing market fundamentals are
positive. Subsequent to the end of our 2020 fiscal year, demand remained strong, with our net orders for the first seven weeks of the 2021 first quarter up 39% from
the corresponding period of 2020. However, we anticipate this year-over-year net order growth will moderate by the end of the quarter due to tougher weekly
comparisons for the remainder of the quarter and an anticipated decline in our average community count for the period. We believe our highly customer-centric,
personalized approach to homebuilding and operational capabilities will enable us to effectively adapt to evolving buyer preferences and needs and, together with
an expected year-over-year increase in community count beginning in the second half of the year, help drive our business in 2021, subject to business conditions.
Our present 2021 outlook is as follows:
2021 First Quarter –
• We expect to generate housing revenues in the range of $1.14 billion to $1.22 billion, an increase from $1.07 billion in the corresponding period of 2020,
and anticipate our average selling price to be approximately $390,000, flat as compared to the year-earlier period.
• We expect our homebuilding operating income margin to be in the range of 9.0% to 9.3%, assuming no inventory-related charges, up from 6.1% for the
year-earlier quarter.
◦ We expect our housing gross profit margin to be in the range of 20.0% to 20.3%, assuming no inventory-related charges, compared to 17.9% for the
corresponding 2020 quarter.
◦ We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of 10.8% to 11.2%, an
improvement from the 2020 first quarter ratio of 11.8%.
• We expect the effective tax rate will be approximately 24%, including an expected favorable impact from federal energy tax credits for building energy-
efficient homes. The effective tax rate for the prior year quarter was approximately 13%.
• We expect a sequential decrease in our ending community count to a low point for the year, and expect our average community count to decline by a low
double-digit percentage range from the 2020 first quarter.
2021 Full Year –
• We expect our housing revenues to be in the range of $5.5 billion to $6.0 billion, an increase of 39% at the mid-point of the range, from $4.15 billion in
2020, and anticipate our average selling price to be in the range of $400,000 to $410,000, an increase of between 3% and 5% from 2020.
• We expect our homebuilding operating income margin to be in the range of 10.4% to 11.0%, assuming no inventory-related charges, compared to 8.4%,
which excludes both inventory-related charges and severance charges, for 2020.
◦ We expect our housing gross profit margin to be in the range of 20.5% to 21.1%, with each quarter at or above 20%, assuming no inventory-related
charges, compared to 19.6% for 2020.
◦ We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of 9.9% to 10.3%, compared to
11.2%, excluding severance charges, in the prior year.
• We expect the effective tax rate will be approximately 24%, including an expected favorable impact from federal energy tax credits. The effective tax rate
for 2020 was approximately 19%.
49
• We expect our ending community count to be up in the mid to high single-digit percentage range from 2020.
• We expect our return on equity will be above 17%, an improvement of more than 500 basis points compared to 11.8% for 2020.
We believe we are well positioned for 2021 due to, among other things, our strong backlog, planned new home community openings, investments in land and
land development and current positive economic and demographic trends, to varying degrees, in many of our served markets. However, our industry continues to
experience labor and supply constraints and rising and volatile raw material prices, particularly for lumber. Demand for our products could also be substantially
diminished if the public health effort to contain the virulence and spread of COVID-19 continues for a prolonged period during 2021. If these issues worsen in
2021, our business and ability to generate positive growth could be negatively impacted.
Our future performance and the strategies we implement (and adjust or refine as necessary or appropriate) will depend significantly on prevailing economic
and capital, credit and financial market conditions and on a fairly stable and constructive political and regulatory environment (particularly in regards to housing
and mortgage loan financing policies), among other factors.
FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this report, as well as some statements by us in periodic press releases and other public disclosures
and some oral statements by us to securities analysts, stockholders and others during presentations, are “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 (the “Act”). Statements that are predictive in nature, that depend upon or refer to future events or conditions, or
that include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “hope,” and similar expressions constitute forward-looking statements. In
addition, any statements that we may make or provide concerning future financial or operating performance (including without limitation future revenues,
community count, homes delivered, net orders, selling prices, sales pace per new community, expenses, expense ratios, housing gross profits, housing gross profit
margins, earnings or earnings per share, or growth or growth rates), future market conditions, future interest rates, and other economic conditions, ongoing business
strategies or prospects, future dividends and changes in dividend levels, the value of our backlog (including amounts that we expect to realize upon delivery of
homes included in our backlog and the timing of those deliveries), the value of our net orders, potential future asset acquisitions and the impact of completed
acquisitions, future share issuances or repurchases, future debt issuances, repurchases or redemptions and other possible future actions are also forward-looking
statements as defined by the Act. Forward-looking statements are based on our current expectations and projections about future events and are subject to risks,
uncertainties, and assumptions about our operations, economic and market factors, and the homebuilding industry, among other things. These statements are not
guarantees of future performance, and we have no specific policy or intention to update these statements. In addition, forward-looking and other statements in this
report and in other public or oral disclosures that express or contain opinions, views or assumptions about market or economic conditions; the success,
performance, effectiveness and/or relative positioning of our strategies, initiatives or operational activities; and other matters, may be based in whole or in part on
general observations of our management, limited or anecdotal evidence and/or business or industry experience without in-depth or any particular empirical
investigation, inquiry or analysis.
Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The most
important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but
are not limited to, the following:
•
•
•
•
•
general economic, employment and business conditions;
population growth, household formations and demographic trends;
conditions in the capital, credit and financial markets;
our ability to access external financing sources and raise capital through the issuance of common stock, debt or other securities, and/or project financing,
on favorable terms;
the execution of any share repurchases pursuant to our board of directors’ authorization;
• material and trade costs and availability, particularly lumber;
•
•
changes in interest rates;
our debt level, including our ratio of debt to capital, and our ability to adjust our debt level and maturity schedule;
50
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our compliance with the terms of the Credit Facility;
volatility in the market price of our common stock;
weak or declining consumer confidence, either generally or specifically with respect to purchasing homes;
home selling prices, including our homes’ selling prices, increasing at a faster rate than consumer incomes;
competition from other sellers of new and resale homes;
weather events, significant natural disasters and other climate and environmental factors;
any failure of lawmakers to agree on a budget or appropriation legislation to fund the federal government’s operations, or to approve additional COVID-
19-related relief or stimulus measures, and financial markets’ and businesses’ reactions to any such failure;
government actions, policies, programs and regulations directed at or affecting the housing market (including the Coronavirus Aid, Relief, and Economic
Security Act (“CARES Act”) relief provisions for outstanding mortgage loans and any extensions or broadening thereof, the tax benefits associated with
purchasing and owning a home, and the standards, fees and size limits applicable to the purchase or insuring of mortgage loans by government-sponsored
enterprises and government agencies), the homebuilding industry, or construction activities;
changes in existing tax laws or enacted corporate income tax rates, including those resulting from regulatory guidance and interpretations issued with
respect thereto;
changes in U.S. trade policies, including the imposition of tariffs and duties on homebuilding materials and products, and related trade disputes with and
retaliatory measures taken by other countries;
the adoption of new or amended financial accounting standards and the guidance and/or interpretations with respect thereto;
the availability and cost of land in desirable areas and our ability to timely develop acquired land parcels and open new home communities;
our warranty claims experience with respect to homes previously delivered and actual warranty costs incurred;
costs and/or charges arising from regulatory compliance requirements or from legal, arbitral or regulatory proceedings, investigations, claims or
settlements, including unfavorable outcomes in any such matters resulting in actual or potential monetary damage awards, penalties, fines or other direct
or indirect payments, or injunctions, consent decrees or other voluntary or involuntary restrictions or adjustments to our business operations or practices
that are beyond our current expectations and/or accruals;
our ability to use/realize the net deferred tax assets we have generated;
our ability to successfully implement our current and planned strategies and initiatives related to our product, geographic and market positioning, gaining
share and scale in our served markets and in entering into new markets;
our operational and investment concentration in markets in California;
consumer interest in our new home communities and products, particularly from first-time homebuyers and higher-income consumers;
our ability to generate orders and convert our backlog of orders to home deliveries and revenues, particularly in key markets in California;
our ability to successfully implement our business strategies and achieve any associated financial and operational targets and objectives, including those
discussed in this report or in other public filings, presentations or disclosures;
income tax expense volatility associated with stock-based compensation;
the ability of our homebuyers to obtain residential mortgage loans and mortgage banking services;
the performance of mortgage lenders to our homebuyers;
51
•
•
•
•
•
the performance of KBHS;
information technology failures and data security breaches;
an epidemic or pandemic (such as the outbreak and worldwide spread of COVID-19), and the control response measures that international, federal, state
and local governments, agencies, law enforcement and/or health authorities implement to address it, which may (as with COVID-19) precipitate or
exacerbate one or more of the above-mentioned and/or other risks, and significantly disrupt or prevent us from operating our business in the ordinary
course for an extended period;
widespread protests and civil unrest, whether due to political events, efforts to institute law enforcement and other social and political reforms, and the
impacts of implementing or failing to implement any such reforms, or otherwise; and
other events outside of our control.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We enter into debt obligations primarily to support general corporate purposes, including the operations of our subsidiaries. We are subject to interest rate risk
on our senior notes. For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows. We
generally have no obligation to prepay our debt before maturity, and, as a result, interest rate risk and changes in fair market value should not have a significant
impact on our fixed rate debt until we are required or elect to refinance or repurchase such debt. Under our current policies, we do not use interest rate derivative
instruments to manage our exposure to changes in interest rates.
The following tables present principal cash flows by scheduled maturity, weighted average effective interest rates and the estimated fair value of our long-term
fixed rate debt obligations as of November 30, 2020 and 2019 (dollars in thousands):
Long-term debt
Fixed Rate
Weighted Average
Effective Interest Rate
Long-term debt
Fixed Rate
Weighted Average
Effective Interest Rate
2021
2022
2023
2024
2025
Thereafter
Total
As of November 30, 2020 and for the Years Ending November 30,
Fair Value at
November 30,
2020
$
—
$
800,000
$
350,000
$
—
$
—
$
600,000
$
1,750,000
$
1,924,250
— %
7.4 %
7.5 %
— %
— %
6.0 %
7.0 %
2020
2021
2022
2023
2024
Thereafter
Total
As of November 30, 2019 and for the Years Ending November 30,
Fair Value at
November 30,
2019
$
—
$
—
$
800,000
$
350,000
$
—
$
600,000
$
1,750,000
$
1,921,563
— %
— %
7.4 %
7.5 %
— %
6.0 %
7.0 %
52
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KB HOME
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations for the Years Ended November 30, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the Years Ended November 30, 2020, 2019 and 2018
Consolidated Balance Sheets as of November 30, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the Years Ended November 30, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended November 30, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Page
Number
54
55
56
57
58
59
94
Separate combined financial statements of our unconsolidated joint venture activities have been omitted because, if considered in the aggregate, they would
not constitute a significant subsidiary as defined by Rule 3-09 of Regulation S-X.
53
KB HOME
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Total revenues
Homebuilding:
Revenues
Construction and land costs
Selling, general and administrative expenses
Operating income
Interest income
Equity in income (loss) of unconsolidated joint ventures
Loss on early extinguishment of debt
Homebuilding pretax income
Financial services:
Revenues
Expenses
Equity in income of unconsolidated joint ventures
Financial services pretax income
Total pretax income
Income tax expense
Net income
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
See accompanying notes.
$
$
$
$
$
2020
Years Ended November 30,
2019
2018
4,183,174 $
4,552,747 $
4,547,002
4,167,702 $
(3,380,451)
(470,779)
316,472
2,554
12,474
—
331,500
4,537,658 $
(3,708,928)
(497,350)
331,380
2,158
(1,549)
(6,800)
325,189
15,472
(4,083)
21,154
32,543
364,043
(67,800)
296,243 $
3.26 $
3.13 $
90,464
94,086
15,089
(4,333)
12,230
22,986
348,175
(79,400)
268,775 $
3.04 $
2.85 $
87,996
93,838
4,533,795
(3,743,920)
(444,154)
345,721
3,514
2,066
—
351,301
13,207
(3,844)
7,301
16,664
367,965
(197,600)
170,365
1.93
1.71
87,773
101,059
54
KB HOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Net income
Other comprehensive income (loss):
Postretirement benefit plan adjustments:
Net actuarial gain (loss) arising during the period
Amortization of net actuarial loss
Amortization of prior service cost
Settlement loss
Other comprehensive income (loss) before tax
Income tax benefit (expense) related to items of other comprehensive income (loss)
Other comprehensive income (loss), net of tax
Comprehensive income
See accompanying notes.
55
2020
Years Ended November 30,
2019
2018
$
296,243 $
268,775 $
170,365
(8,412)
963
425
—
(7,024)
1,897
(5,127)
291,116 $
(10,268)
218
1,556
356
(8,138)
2,197
(5,941)
262,834 $
8,216
336
1,556
—
10,108
(2,749)
7,359
177,724
$
KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares)
Assets
Homebuilding:
Cash and cash equivalents
Receivables
Inventories
Investments in unconsolidated joint ventures
Property and equipment, net
Deferred tax assets, net
Other assets
Financial services
Total assets
Liabilities and stockholders’ equity
Homebuilding:
Accounts payable
Accrued expenses and other liabilities
Notes payable
Financial services
Stockholders’ equity:
Preferred stock — $1.00 par value; 10,000,000 shares authorized; none issued
Common stock —$1.00 par value; 290,000,000 shares authorized at November 30, 2020 and 2019; 99,868,625 and
121,592,978 shares issued at November 30, 2020 and 2019, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Grantor stock ownership trust, at cost: 7,124,317 and 7,630,582 shares at November 30, 2020 and 2019, respectively
Treasury stock, at cost: 1,106,537 and 24,355,845 shares at November 30, 2020 and 2019, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes.
56
November 30,
2020
2019
681,190 $
272,659
3,897,482
46,785
65,547
231,067
125,510
5,320,240
36,202
5,356,442 $
273,368 $
667,501
1,747,175
2,688,044
2,629
453,814
249,055
3,704,602
57,038
65,043
364,493
83,041
4,977,086
38,396
5,015,482
262,772
618,783
1,748,747
2,630,302
2,058
—
—
99,869
824,306
1,868,896
(22,276)
(77,265)
(27,761)
2,665,769
5,356,442 $
121,593
793,954
2,157,183
(15,506)
(82,758)
(591,344)
2,383,122
5,015,482
$
$
$
$
KB HOME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)
Years Ended November 30, 2020, 2019 and 2018
Number of Shares
Grantor
Stock
Ownership
Trust
Common
Stock
Treasury
Stock
Common
Stock
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Grantor
Stock
Ownership
Trust
Treasury
Stock
Total
Stockholders’
Equity
Balance at November 30, 2017
Net income
Other comprehensive income, net of tax
Dividends on common stock
Employee stock options/other
Stock awards
Stock-based compensation
Stock repurchases
Tax payments associated with stock-
based compensation awards
Balance at November 30, 2018
Cumulative effect of adoption of ASC
606
Net income
Other comprehensive loss, net of tax
Dividends on common stock
Employee stock options/other
Stock awards
Stock-based compensation
Tax payments associated with stock-
based compensation awards
Balance at November 30, 2019
Cumulative effect of adoption of ASC
842
Reclassification of stranded tax effects
Net income
Other comprehensive loss, net of tax
Dividends on common stock
Employee stock options/other
Stock awards
Stock-based compensation
Tax payments associated with stock-
based compensation awards
Retirement of treasury stock
Balance at November 30, 2020
See accompanying notes.
117,946
—
—
—
1,196
54
—
—
—
119,196
—
—
—
—
2,341
56
—
—
121,593
—
—
—
—
—
1,696
68
—
—
(23,488)
99,869
(8,898)
—
—
—
—
741
—
—
—
(8,157)
—
—
—
—
—
526
—
—
(7,631)
—
—
—
—
—
—
507
—
—
—
(22,021)
—
—
—
—
48
—
(1,806)
(334)
(24,113)
—
—
—
—
—
27
—
(270)
(24,356)
—
—
—
—
—
17
(15)
—
$
$
$
117,946
—
—
—
1,196
54
—
—
$
727,483
—
—
—
18,815
(8,589)
15,861
—
1,735,695
170,365
—
(8,892)
—
—
—
—
—
—
—
119,196
753,570
1,897,168
—
—
—
—
2,341
56
—
—
—
—
—
—
28,183
(6,111)
18,312
—
11,610
268,775
—
(20,370)
—
—
—
—
121,593
793,954
2,157,183
—
—
—
—
—
1,696
68
—
—
—
—
—
—
13,941
(5,120)
21,531
1,510
1,643
296,243
—
(38,065)
—
—
—
(241)
23,488
—
(23,488)
—
—
—
(549,618)
(16,924)
—
7,359
—
—
—
—
—
—
(9,565)
—
—
(5,941)
—
—
—
—
$
(96,509)
—
—
—
—
8,037
—
—
$
$
(541,380)
—
—
—
—
498
—
(35,039)
—
(8,476)
(88,472)
(584,397)
—
—
—
—
—
5,714
—
—
—
—
—
—
341
—
1,926,311
170,365
7,359
(8,892)
20,011
—
15,861
(35,039)
(8,476)
2,087,500
11,610
268,775
(5,941)
(20,370)
30,524
—
18,312
—
(15,506)
—
(7,288)
(82,758)
(591,344)
(7,288)
2,383,122
—
(1,643)
—
(5,127)
—
—
—
—
—
—
—
—
—
—
—
—
5,493
—
—
—
—
—
—
—
—
421
(441)
—
(9,503)
573,106
1,510
—
296,243
(5,127)
(38,065)
16,058
—
21,531
(9,503)
—
(7,124)
(1,107)
$
99,869
$
824,306
$
1,868,896
$
(22,276)
$
(77,265)
$
(27,761)
$
2,665,769
57
KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2020
Years Ended November 30,
2019
2018
$
296,243 $
268,775 $
170,365
Equity in income of unconsolidated joint ventures
Distributions of earnings from unconsolidated joint ventures
Amortization of discounts, premiums and issuance costs
Depreciation and amortization
Deferred income taxes
Loss on early extinguishment of debt
Stock-based compensation
Inventory impairments and land option contract abandonments
Changes in assets and liabilities:
Receivables
Inventories
Accounts payable, accrued expenses and other liabilities
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Contributions to unconsolidated joint ventures
Return of investments in unconsolidated joint ventures
Proceeds from sale of building
Purchases of property and equipment, net
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of debt
Repayment of senior notes
Payment of issuance costs
Borrowings under revolving credit facility
Repayments under revolving credit facility
Payments on mortgages and land contracts due to land sellers and other loans
Issuance of common stock under employee stock plans
Stock repurchases
Tax payments associated with stock-based compensation awards
Payments of cash dividends
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
See accompanying notes.
$
58
(33,628)
35,649
2,498
28,396
50,304
—
21,531
28,669
59,257
(183,233)
4,091
901
310,678
(10,373)
12,651
—
(28,841)
(26,563)
—
—
—
—
—
(24,934)
16,058
—
(9,503)
(38,065)
(56,444)
227,671
454,858
682,529 $
(10,681)
6,450
4,426
27,158
73,303
6,800
18,312
17,291
44,428
(165,347)
(40,583)
710
251,042
(11,290)
5,001
5,804
(40,459)
(40,944)
705,250
(986,231)
(11,128)
610,000
(610,000)
(41,116)
30,524
—
(7,288)
(20,370)
(330,359)
(120,261)
575,119
454,858 $
(9,367)
9,047
6,232
2,530
191,817
—
15,861
28,994
(49,778)
(270,126)
126,710
(773)
221,512
(22,671)
9,934
—
(7,370)
(20,107)
—
(300,000)
—
70,000
(70,000)
(14,751)
20,011
(35,039)
(8,476)
(8,892)
(347,147)
(145,742)
720,861
575,119
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Operations. KB Home is a builder of attached and detached single-family residential homes, townhomes and condominiums. As of November 30, 2020, we
conducted ongoing operations in Arizona, California, Colorado, Florida, Nevada, North Carolina, Texas and Washington. We also offer various insurance products
to our homebuyers in the same markets where we build homes, and provide title services in the majority of our markets located within our Southwest, Central and
Southeast homebuilding reporting segments. We provide mortgage banking services, including mortgage loan originations, to our homebuyers indirectly through
KBHS, an unconsolidated joint venture we formed with Stearns.
Basis of Presentation. Our consolidated financial statements have been prepared in accordance with GAAP and include our accounts and those of the
consolidated subsidiaries in which we have a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.
Investments in unconsolidated joint ventures in which we have less than a controlling financial interest are accounted for using the equity method.
Impact of COVID-19 Pandemic on Consolidated Financial Statements. The outbreak of COVID-19, which was declared a global pandemic by the World
Health Organization on March 11, 2020, and the related COVID-19 control responses severely impacted the global and national economies (with the U.S. entering
a recession), the housing market and our business during our second quarter. Amid extraordinary economic disruptions; a sudden rise in unemployment; significant
stock market and secondary market volatility; uncertainty about how to effectively contain COVID-19’s spread; weakened consumer confidence; and our swift
closing of our sales centers, model homes and design studios to the public and shift to virtual sales tools and appointment-only personalized home sales processes,
where permitted, we saw a drastic decrease in demand for new homes (including homes ordered in the first quarter) and our order pace slowed significantly. Along
with a considerable increase in home purchase cancellations, largely reflecting our proactive efforts to assure a backlog of qualified homebuyers amid the
pandemic-induced economic downturn, we experienced a sizable reduction in our 2020 second quarter net orders. Due to this reduction in net orders, we entered
the third quarter with 14% fewer homes in backlog as compared to the previous year. Further, our construction activities were restricted in many jurisdictions, and
completely shut down in some of them, and together with the reduced availability or capacity of some municipal and private services necessary to build and deliver
homes, and supply chain disruptions, our cycle times became extended. This caused home delivery delays during most of the second quarter, which tempered our
revenues for the period.
With the easing of public health orders to varying degrees in our served markets beginning in May 2020 and the associated ability to open our communities to
walk-in traffic, following appropriate safety protocols and applicable health guidelines, complemented by our enhanced virtual selling capabilities, our net orders
began to rebound significantly. This positive momentum continued through the 2020 second half, largely fueled by the combination of historically low mortgage
rates, a limited supply of resale inventory, an underproduction of new homes over the past decade, favorable demographic trends and consumers’ increasing desire
to own a home. Reflecting this strong demand, our 2020 third and fourth quarter net orders rose to their respective highest levels since 2005. Though this sharp rise
in net orders in the second half generated substantial expansion in our backlog, our deliveries and revenues for the third and fourth quarters were moderated
primarily by the negative effects of the COVID-19 pandemic in our 2020 second quarter.
During the 2020 second quarter and most of the 2020 third quarter, in prioritizing cash preservation and liquidity in light of lingering uncertainty surrounding
the COVID-19 pandemic, we limited our investments in land and land development. With the sustained strong housing demand over the 2020 second half, we
intensified our investments in the fourth quarter to measurably expand our lot pipeline and support community count growth in the future. In the 2020 second
quarter, we also curtailed our overhead expenditures, partly through workforce realignment and reductions. As a result, our selling, general and administrative
expenses for the year ended November 30, 2020 include severance charges of $6.7 million that we recorded in the 2020 second quarter. Our consolidated financial
statements and the notes thereto in this report reflect the foregoing course of unprecedented events and the actions we took in 2020 in response to the pandemic.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the
amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents. We consider all highly liquid short-term investments purchased with an original maturity of three months or less to be cash
equivalents. Our cash equivalents totaled $508.5 million at November 30, 2020 and $302.5 million at November 30, 2019. At November 30, 2020 and 2019, the
majority of our cash and cash equivalents was invested in interest-bearing bank deposit accounts.
59
Receivables. Receivables are evaluated for collectibility at least quarterly, and allowances for potential losses are established or maintained on applicable
receivables when collection is considered doubtful, taking into account historical experience, prevailing economic conditions and other relevant information.
Property and Equipment and Depreciation. Property and equipment are recorded at cost and are depreciated using the straight-line method over their
estimated useful lives as follows: computer software and equipment – two to five years; model furnishings and sales office improvements – two to three years;
office furniture and equipment – three to 10 years; and leasehold improvements – life of the lease. Repair and maintenance costs are expensed as incurred.
Depreciation expense totaled $28.4 million in 2020, $27.2 million in 2019 and $2.5 million in 2018.
Homebuilding Operations. We recognize homebuilding revenue in accordance with ASC 606 by applying the following steps in determining the timing and
amount of revenue to recognize: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction
price; (4) allocate the transaction price to the performance obligations in the contract, if applicable; and (5) recognize revenue when (or as) we satisfy a
performance obligation.
Our home sale transactions are made pursuant to contracts under which we typically have a single performance obligation to deliver a completed home to the
homebuyer when closing conditions are met. Revenues from home sales are recognized when we have satisfied the performance obligation within the sales
contract, which is generally when title to and possession of the home and the risks and rewards of ownership are transferred to the homebuyer on the closing date.
Under our home sale contracts, we typically receive an initial cash deposit from the homebuyer at the time the sales contract is executed and receive the remaining
consideration to which we are entitled, through a third-party escrow agent, at closing. Customer deposits related to sold but undelivered homes are included in
accrued expenses and other liabilities.
Concurrent with the recognition of revenues in our consolidated statements of operations, sales incentives in the form of price concessions on the selling price
of a home are recorded as a reduction of revenues. The costs of sales incentives in the form of free or discounted products or services provided to homebuyers,
including option upgrades and closing cost allowances, are reflected as construction and land costs because such incentives are identified in our home sale
contracts with homebuyers as an intrinsic part of our single performance obligation to deliver and transfer title to their home for the transaction price stated in the
contracts. Sales incentives that we may provide in the form of closing cost allowances are immaterial to the related revenues. Cash proceeds from home sale
closings held by third-party escrow agents for our benefit, typically for less than five days, are considered deposits in-transit and classified as cash.
Land sale transactions are made pursuant to contracts under which we typically have a performance obligation(s) to deliver specified land parcels to the buyer
when closing conditions are met. We evaluate each land sale contract to determine our performance obligation(s) under the contract, including whether we have a
distinct promise to perform post-closing land development work that is material within the context of the contract, and use objective criteria to determine our
completion of the applicable performance obligation(s), whether at a point in time or over time. Revenues from land sales are recognized when we have satisfied
the performance obligation(s) within the sales contract, which is generally when title to and possession of the land and the risks and rewards of ownership are
transferred to the land buyer on the closing date. Under our land sale contracts, we typically receive an initial cash deposit from the buyer at the time the contract is
executed and receive the remaining consideration to which we are entitled, through a third-party escrow agent, at closing. In the limited circumstances where we
provide financing to the land buyer, we determine that collectibility of the receivable is reasonably assured before we recognize revenue.
In instances where we have a distinct and material performance obligation(s) within the context of a land sale contract to perform land development work after
the closing date, a portion of the transaction price under the contract is allocated to such performance obligation(s) and is recognized as revenue over time based
upon our estimated progress toward the satisfaction of the performance obligation(s). We generally measure our progress based on our costs incurred relative to the
total costs expected to satisfy the performance obligation(s). While the payment terms for such a performance obligation(s) vary, we generally receive the final
payment when we have completed our land development work to the specifications detailed in the applicable land sale contract and it has been accepted by the land
buyer.
Homebuilding revenues include forfeited deposits, which occur when home sale or land sale contracts that include a nonrefundable deposit are cancelled.
Revenues from forfeited deposits are immaterial.
Within our homebuilding operations, substantially all of our contracts with customers and the related performance obligations have an original expected
duration of one year or less.
Construction and land costs are comprised of direct and allocated costs, including estimated future costs for the limited warranty we provide on our homes,
and certain amenities within a community. Land acquisition, land development and other
60
common costs are generally allocated on a relative fair value basis to the homes or lots within the applicable community or land parcel. Land acquisition and land
development costs include related interest and real estate taxes.
Disaggregation of Revenues. Our homebuilding operations accounted for 99.6% and 99.7% of our total revenues for the years ended November 30, 2020 and
2019, with most of those revenues generated from home sale contracts with customers. Due to the nature of our revenue-generating activities, we believe the
disaggregation of revenues as reported in our consolidated statement of operations, and as disclosed by homebuilding reporting segment in Note 2 – Segment
Information and for our financial services reporting segment in Note 3 – Financial Services, fairly depicts how the nature, amount, timing and uncertainty of cash
flows are affected by economic factors.
Inventories. Housing and land inventories are stated at cost, unless the carrying value is determined not to be recoverable, in which case the affected
inventories are written down to fair value or fair value less associated costs to sell. Real estate assets, such as our housing and land inventories, are tested for
recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Recoverability is measured by comparing the
carrying value of an asset to the undiscounted future net cash flows expected to be generated by the asset. These impairment evaluations are significantly impacted
by estimates for the amounts and timing of future revenues, costs and expenses, and other factors. If the carrying value of a real estate asset is determined not to be
recoverable, the impairment charge to be recognized is measured by the amount by which the carrying value of the affected asset exceeds its estimated fair value.
For land held for sale, if the fair value less associated costs to sell exceeds the asset’s carrying value, no impairment charge is recognized.
Capitalized Interest. Interest is capitalized to inventories while the related communities or land parcels are being actively developed and until homes are
completed or the land is available for immediate sale. Capitalized interest is amortized to construction and land costs as the related inventories are delivered to
homebuyers or land buyers (as applicable). In the case of land held for future development and land held for sale, applicable interest is expensed as incurred.
Fair Value Measurements. Fair value measurements are used for inventories on a nonrecurring basis when events and circumstances indicate that their
carrying value is not recoverable. For these real estate assets, fair value is determined based on the estimated future net cash flows discounted for inherent risk
associated with each such asset, or other valuation techniques.
Our financial instruments consist of cash and cash equivalents, senior notes, and mortgages and land contracts due to land sellers and other loans. Fair value
measurements of financial instruments are determined by various market data and other valuation techniques as appropriate. When available, we use quoted market
prices in active markets to determine fair value.
Financial Services Operations. Our financial services reporting segment generates revenues primarily from insurance commissions and title services.
Revenues from title services are recognized when policies are issued, which generally occurs at the time each applicable home sale is closed. We receive
commissions from various third-party insurance carriers for arranging for the carriers to provide homeowner and other insurance policies for our homebuyers that
elect to obtain such coverage. In addition, each time a homebuyer renews their insurance policy with the insurance carrier, we receive a renewal commission.
Revenues from insurance commissions are recognized when the insurance carrier issues an initial insurance policy to our homebuyer, which generally occurs at the
time each applicable home sale is closed. As our performance obligations for policy renewal commissions are satisfied upon issuance of the initial insurance
policy, insurance commissions for renewals are considered variable consideration under ASC 606. Accordingly, we estimate the probable future renewal
commissions when an initial policy is issued and record a corresponding contract asset and insurance commission revenues. We estimate the amount of variable
consideration based on historical renewal trends and constrain the estimate such that it is probable that a significant reversal of cumulative recognized revenue will
not occur. We also consider the likelihood and magnitude of a potential future reversal of revenue and update our assessment at the end of each reporting period.
The contract assets for estimated future renewal commissions are included in other assets within our financial services reporting segment.
Warranty Costs. We provide a limited warranty on all of our homes. 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 and adjust the amount as necessary based on our assessment. Our warranty liability is presented on a gross basis for all years without
consideration of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any. Estimates of recoveries and amounts we have
paid on behalf of and expect to recover from other parties, if any, are recorded as receivables when such recoveries are considered probable.
Self-Insurance. We self-insure a portion of our overall risk through the use of a captive insurance subsidiary. We record liabilities based on the estimated costs
required to cover reported claims, claims incurred but not yet reported, and claim adjustment expenses. These estimated costs are based on an actuarial analysis of
our historical claims and expense data, as well
61
as industry data. Our self-insurance liability is presented on a gross basis for all years without consideration of insurance recoveries and amounts we have paid on
behalf of and expect to recover from other parties, if any. Estimates of insurance recoveries and amounts we have paid on behalf of and expect to recover from
other parties, if any, are recorded as receivables when such recoveries are considered probable.
Community Sales Office and Other Marketing- and Model Home-Related Costs. Community sales office and other marketing- and model home-related costs
are either recorded as inventories, capitalized as property and equipment, or expensed to selling, general and administrative expenses as incurred. Costs related to
the construction of a model home, inclusive of upgrades that will be sold as part of the home, are recorded as inventories and recognized as construction and land
costs when the model home is delivered to a homebuyer. Costs to furnish and ready a model home or on-site community sales facility that will not be sold as part
of the model home, such as costs for model furnishings, community sales office and model complex grounds, sales office construction and sales office furniture
and equipment, are capitalized as property and equipment under “model furnishings and sales office improvements.” Model furnishings and sales office
improvements are depreciated to selling, general and administrative expenses over their estimated useful lives. Other costs related to the marketing of a
community, removing the on-site community sales facility and readying a completed (model) home for sale are expensed to selling, general and administrative
expenses as incurred.
Advertising Costs. We expense advertising costs as incurred. We incurred advertising costs of $29.3 million in 2020, $43.6 million in 2019 and $37.3 million
in 2018.
Legal Fees. Legal fees associated with litigation and similar proceedings that are not expected to provide a benefit in future periods are generally expensed as
incurred. Legal fees associated with land acquisition and development and other activities that are expected to provide a benefit in future periods are capitalized to
inventories in our consolidated balance sheets as incurred. We expensed legal fees of $11.6 million in 2020, $16.7 million in 2019 and $12.4 million in 2018.
Stock-Based Compensation. We measure and recognize compensation expense associated with our grant of equity-based awards at an amount equal to the fair
value of share-based payments granted under compensation arrangements over the vesting period. We estimate the fair value of stock options and Director Plan
SARs granted using the Black-Scholes option-pricing model with assumptions based primarily on historical data. We estimate the fair value of other equity-based
awards using the closing price of our common stock on the grant date. For PSUs, we recognize compensation expense ratably over the vesting period when it is
probable that stated performance targets will be achieved and record cumulative adjustments in the period in which estimates change.
Income Taxes. The provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and
liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Deferred tax assets are evaluated on a quarterly basis to determine if adjustments to the valuation allowance are
required. This evaluation is 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. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income
during the periods in which the related deferred tax assets become deductible. The value of our deferred tax assets in our consolidated balance sheets depends on
applicable income tax rates.
Accumulated Other Comprehensive Loss. The accumulated balances of other comprehensive loss in the consolidated balance sheets as of November 30, 2020
and 2019 were comprised solely of adjustments recorded directly to accumulated other comprehensive loss related to our benefit plan obligations. Such
adjustments are made annually as of November 30, when our benefit plan obligations are remeasured.
Earnings Per Share. 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
November 30, 2020, 2019 or 2018.
Adoption of New 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”), which supersedes the revenue guidance in Accounting Standards Codification
Topic 605, “Revenue Recognition,” and most industry-specific revenue and cost guidance in the accounting standards codification, including some cost guidance
related to construction-type and production-type contracts. ASU 2014-09 and its related amendments collectively resulted in ASC 606. The core principle of ASC
606 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.
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On December 1, 2018, we adopted ASC 606, using the modified retrospective method applied to contracts that were not completed as of the adoption date.
Results for reporting periods beginning December 1, 2018 and after are presented under ASC 606, while results for prior reporting periods have not been adjusted
and continue to be presented under the accounting guidance in effect for those periods. Upon the adoption of ASC 606, we recorded a cumulative effect adjustment
to increase beginning retained earnings by $11.6 million as of December 1, 2018.
Within our homebuilding operations, ASC 606 impacted the classification and timing of recognition in our consolidated financial statements of certain
community sales office and other marketing- and model home-related costs, which we previously capitalized to inventories and amortized through construction and
land costs with each home delivered in a community. With our adoption of ASC 606, these costs are capitalized to property and equipment and depreciated to
selling, general and administrative expenses, or expensed to selling, general and administrative expenses as incurred. Upon adopting ASC 606, we reclassified
these community sales office and other marketing- and model home-related costs and related accumulated amortization from inventories to either property and
equipment, net or retained earnings in our consolidated balance sheet. As a result of the change in the classification of certain community sales office and other
marketing- and model home-related costs from inventories to property and equipment, net, these costs are presented as a cash outflow from investing activities in
our consolidated statements of cash flows under ASC 606. Previously, such costs were classified as a cash outflow from operating activities. Forfeited deposits
related to cancelled home sale and land sale contracts, which were previously reflected as other income within selling, general and administrative expenses, are
included in homebuilding revenues under ASC 606.
Within our financial services operations, ASC 606 impacted the timing of recognition in our consolidated financial statements of insurance commissions for
insurance policy renewals. We previously recognized such insurance commissions as revenue when policies were renewed. With our adoption of ASC 606,
insurance commissions for future policy renewals are estimated and recognized as revenue when the insurance carrier issues an initial insurance policy to our
homebuyer, which generally occurs at the time each applicable home sale is closed. Upon adopting ASC 606, we recognized contract assets for the estimated
future renewal commissions related to existing insurance policies as of December 1, 2018.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires leases with original
lease terms of more than 12 months to be recorded on the balance sheet. On December 1, 2019, we adopted ASU 2016-02 and its related amendments (collectively,
“ASC 842”) using the modified retrospective method. Results for reporting periods beginning December 1, 2019 and after are presented under ASC 842, while
results for prior reporting periods have not been adjusted and continue to be presented under the accounting guidance in effect for those periods. We elected the
package of practical expedients permitted under the transition guidance, which allowed us to carry forward our original assessment of (1) whether contracts are or
contain leases, (2) lease classification and (3) initial direct costs. We also elected the practical expedient that allows lessees the option to account for lease and non-
lease components together as a single component for all classes of underlying assets. The adoption of ASC 842 resulted in our recording lease right-of-use assets
and lease liabilities of $31.2 million on our consolidated balance sheet as of December 1, 2019. Lease right-of-use assets are classified within other assets on our
consolidated balance sheet, and lease liabilities are classified within accrued expenses and other liabilities. At the December 1, 2019 adoption date, we also
recorded a cumulative effect adjustment to increase beginning retained earnings by $1.5 million, net of tax, to recognize a previously deferred gain on our sale and
leaseback of an office building in 2019. The adoption of ASC 842 did not materially impact our consolidated statements of operations or consolidated cash flows.
Further information regarding our leases is provided in Note 13 – Leases.
In February 2018, the FASB issued Accounting Standards Update No. 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows a reclassification from accumulated
other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the TCJA, and requires certain disclosures about stranded tax effects.
We adopted ASU 2018-02 effective December 1, 2019 and elected to reclassify the income tax effects of the TCJA from accumulated other comprehensive loss to
retained earnings, which resulted in an increase of $1.6 million to both retained earnings and accumulated other comprehensive loss, with no impact on total
stockholders’ equity. Amounts for prior reporting periods have not been adjusted and continue to be presented under the accounting guidance in effect for those
periods.
In March 2020, the SEC issued Final Rule Release No. 33-10762, “Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates
Whose Securities Collateralize a Registrant’s Securities” (“SEC Release No. 33-10762”), which amends Rule 3-10 of Regulation S-X regarding financial
disclosure requirements for registered debt offerings involving subsidiaries as either issuers or guarantors and affiliates whose securities are pledged as collateral.
This new guidance narrows the circumstances that require separate financial statements of subsidiary issuers and guarantors and streamlines the alternative
disclosures required in lieu of those statements. In October 2020, the FASB issued Accounting Standards Update No. 2020-09, “Debt (Topic 470): Amendments to
SEC Paragraphs Pursuant to SEC Release No. 33-10762,” which amends and updates the FASB Codification to reflect SEC Release No. 33-10762. The new SEC
and FASB guidance is effective January 4, 2021 with earlier adoption permitted. We adopted this new guidance effective November 30, 2020. Accordingly,
summarized financial
63
information has been presented for the issuer and guarantors of our registered debt securities, and the required disclosures have been moved from the Notes to
Consolidated Financial Statements to Item 7 – Management’s Discussion and Analysis of Results of Operations and Financial Condition in this report.
Recent Accounting Pronouncements Not Yet Adopted. In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments —
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes the impairment model for most financial
assets and certain other instruments from an incurred loss approach to a new expected credit loss methodology. ASU 2016-13 is effective for us beginning
December 1, 2020. While we have not completed our evaluation, based on our procedures to date, we do not expect the adoption of ASU 2016-13 to have a
material impact on our consolidated financial statements.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”
(“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification Topic 740, “Income
Taxes” (“ASC 740”), and clarifies certain aspects of ASC 740 to promote consistency among reporting entities. ASU 2019-12 is effective for us beginning
December 1, 2021, with early adoption permitted. Most amendments within ASU 2019-12 are required to be applied on a prospective basis, while certain
amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the potential impact of adopting this guidance on our
consolidated financial statements.
Reclassifications. Certain amounts in our consolidated financial statements of prior years have been reclassified to conform to the current period presentation.
Note 2. Segment Information
An operating segment is defined as a component of an enterprise for which separate financial information is available and for which segment results are
evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. We have identified each of our
homebuilding divisions as an operating segment. Our homebuilding operating segments have been aggregated into four homebuilding reporting segments 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 also have one financial services reporting segment. Management evaluates segment performance primarily based on segment pretax
results.
As of November 30, 2020, our homebuilding reporting segments conducted ongoing operations in the following states to the extent permitted by applicable
public health orders as part of their respective COVID-19 control responses:
West Coast:
Southwest:
Central:
Southeast:
California and Washington
Arizona and Nevada
Colorado and Texas
Florida and North Carolina
Our homebuilding reporting segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of
homes that are designed to appeal to first-time, first move-up and active adult homebuyers. Our homebuilding operations generate most of their revenues from the
delivery of completed homes to homebuyers. They also earn revenues from the sale of land.
Our 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
Southwest, Central and Southeast homebuilding reporting segments. In 2019, we expanded our title services business to include Arizona, Colorado and Nevada.
Our financial services segment earns revenues primarily from insurance commissions and from the provision of title services.
We offer mortgage banking services, including mortgage loan originations, to our homebuyers indirectly through KBHS, an unconsolidated joint venture we
formed with Stearns. We and Stearns each have a 50.0% ownership interest, with Stearns providing management oversight of KBHS’ operations. Our homebuyers
may select any lender of their choice to obtain mortgage financing for the purchase of their home. The financial services reporting segment is separately reported in
our consolidated financial statements.
Corporate and other is a non-operating segment that develops and oversees the implementation of company-wide strategic initiatives and provides support to
our reporting segments by centralizing certain administrative functions. Corporate management is responsible for, among other things, evaluating and selecting the
geographic markets in which we operate,
64
consistent with our overall business strategy; allocating capital resources to markets for land acquisition and development activities; making major personnel
decisions related to employee compensation and benefits; and monitoring the financial and operational performance of our divisions. Corporate and other includes
general and administrative expenses related to operating our corporate headquarters. A portion of the expenses incurred by Corporate and other is allocated to our
homebuilding reporting segments.
Our reporting segments follow the same accounting policies used for our consolidated financial statements as described in Note 1 – Summary of Significant
Accounting Policies. The results of each reporting segment are not necessarily indicative of the results that would have occurred had the segment been an
independent, stand-alone entity during the periods presented, nor are they indicative of the results to be expected in future periods.
The following tables present financial information relating to our homebuilding reporting segments (in thousands):
Revenues:
West Coast
Southwest
Central
Southeast
Total
Pretax income (loss):
West Coast
Southwest
Central
Southeast
Corporate and other
Total
Equity in income (loss) of unconsolidated joint ventures:
West Coast
Southwest
Central
Southeast
Total
Inventory impairment and land option contract abandonment charges:
West Coast
Southwest
Central
Southeast
Total
Inventories:
West Coast
Southwest
Central
Southeast
Total
65
2020
Years Ended November 30,
2019
2018
$
$
$
$
$
$
$
$
1,748,582 $
796,810
1,192,869
429,441
4,167,702 $
151,039 $
133,386
128,802
22,950
(104,677)
331,500 $
12,972 $
(497)
—
(1)
12,474 $
21,941 $
570
5,520
638
28,669 $
1,912,146 $
764,816
1,267,892
592,804
4,537,658 $
178,078 $
111,016
126,304
18,550
(108,759)
325,189 $
(851) $
(697)
—
(1)
(1,549) $
15,567 $
408
848
468
17,291 $
2,085,328
707,075
1,239,305
502,087
4,533,795
240,337
91,017
117,609
7,624
(105,286)
351,301
(966)
3,033
—
(1)
2,066
20,381
432
2,558
5,623
28,994
November 30,
2020
2019
$
$
1,928,500 $
688,807
867,170
413,005
3,897,482 $
1,795,088
629,811
889,179
390,524
3,704,602
Investments in unconsolidated joint ventures:
West Coast
Southwest
Central
Southeast
Total
Assets:
West Coast
Southwest
Central
Southeast
Corporate and other
Total
Note 3. Financial Services
November 30,
2020
2019
42,762 $
1,516
—
2,507
46,785 $
2,057,362 $
738,765
998,612
448,388
1,077,113
5,320,240 $
51,740
2,792
—
2,506
57,038
1,925,192
674,310
1,035,563
441,451
900,570
4,977,086
$
$
$
$
The following tables present financial information relating to our financial services reporting segment (in thousands):
Revenues
Insurance commissions
Title services
Interest income
Total
Expenses
General and administrative
Operating income
Equity in income of unconsolidated joint ventures
Pretax income
Assets
Cash and cash equivalents
Receivables
Investments in unconsolidated joint ventures
Other assets (a)
Total assets
Liabilities
Accounts payable and accrued expenses
Total liabilities
2020
Years Ended November 30,
2019
2018
$
$
8,589 $
6,883
—
15,472
(4,083)
11,389
21,154
32,543 $
8,662 $
6,421
6
15,089
(4,333)
10,756
12,230
22,986 $
November 30,
2020
2019
$
$
$
$
1,339 $
1,988
10,978
21,897
36,202 $
2,629 $
2,629 $
7,535
5,672
—
13,207
(3,844)
9,363
7,301
16,664
1,044
2,232
14,374
20,746
38,396
2,058
2,058
(a) Other assets at November 30, 2020 and 2019 included $21.5 million and $20.6 million, respectively, of contract assets for estimated future renewal
commissions.
66
Note 4. Earnings Per Share
Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):
Numerator:
Net income
Less: Distributed earnings allocated to nonvested restricted stock
Less: Undistributed earnings allocated to nonvested restricted stock
Numerator for basic earnings per share
Effect of dilutive securities:
Interest expense and amortization of debt issuance costs associated with convertible senior
notes, net of taxes
Add: Undistributed earnings allocated to nonvested restricted stock
Less: Undistributed earnings reallocated to nonvested restricted stock
Numerator for diluted earnings per share
Denominator:
Weighted average shares outstanding — basic
Effect of dilutive securities:
Share-based payments
Convertible senior notes
Weighted average shares outstanding — diluted
Basic earnings per share
Diluted earnings per share
2020
Years Ended November 30,
2019
2018
$
$
$
$
296,243 $
(197)
(1,329)
294,717
—
1,329
(1,278)
294,768 $
90,464
3,622
—
94,086
3.26 $
3.13 $
268,775 $
(123)
(1,505)
267,147
541
1,505
(1,412)
267,781 $
87,996
4,415
1,427
93,838
3.04 $
2.85 $
170,365
(51)
(927)
169,387
3,190
927
(805)
172,699
87,773
4,884
8,402
101,059
1.93
1.71
In 2020, no outstanding stock options were excluded from the diluted earnings per share calculation. In 2019 and 2018, outstanding stock options to purchase
a nominal amount and .8 million shares of common stock, respectively, were excluded from the diluted earnings per share calculations because the effect of their
inclusion would be antidilutive. The diluted earnings per share calculations for the years ended November 30, 2019 and 2018 included the dilutive effect of our
1.375% Convertible Senior Notes due 2019 based on the number of days they were outstanding during each period. We repaid these notes at their February 1, 2019
maturity.
Contingently issuable shares associated with outstanding PSUs were not included in the basic earnings per share calculations for the periods presented, as the
applicable vesting conditions had not been satisfied.
67
Note 5. Receivables
Receivables consisted of the following (in thousands):
Due from utility companies, improvement districts and municipalities (a)
Recoveries related to self-insurance and other legal claims
Income taxes receivable
Refundable deposits and bonds
Other
Subtotal
Allowance for doubtful accounts
Total
November 30,
2020
2019
105,700 $
82,018
41,323
10,897
40,020
279,958
(7,299)
272,659 $
128,047
80,729
—
10,925
37,846
257,547
(8,492)
249,055
$
$
(a) These receivables typically relate to infrastructure improvements we make with respect to our communities. We are generally reimbursed for the cost of such
improvements when they are accepted by the utility company, improvement district or municipality, or after certain events occur, depending on the terms of
the applicable agreements. These events may include, but are not limited to, the connection of utilities or the issuance of bonds by the respective improvement
districts or municipalities.
Note 6. Inventories
Inventories consisted of the following (in thousands):
Homes under construction
Land under development
Total
November 30,
2020
2019
$
$
1,437,911 $
2,459,571
3,897,482 $
1,340,412
2,364,190
3,704,602
Homes under construction is comprised of costs associated with homes completed or in various stages of construction and includes direct construction and
related land acquisition and land development costs. Land under development primarily consists of land acquisition and land development costs. Land development
costs also include capitalized interest and real estate taxes. When home construction begins, the associated land acquisition and land development costs are
included in homes under construction.
Land under development at November 30, 2020 and 2019 included land held for future development of $74.0 million and $131.2 million, respectively. Land
held for future development principally relates to land where development activity has been suspended or has not yet begun but is expected to occur in the future.
These assets are located in various submarkets where conditions do not presently support further investment or development, or are subject to a building permit
moratorium or regulatory restrictions, or are portions of larger land parcels that we plan to build out over several years and/or that have not yet been entitled. We
may also suspend development activity if we believe it will result in greater returns and/or maximize the economic performance of a particular community by
delaying improvements for a period of time to, for instance, allow earlier phases of a long-term, multi-phase community or a neighboring community to generate or
extend sales momentum, or for market conditions to improve. In some instances, we may activate or resume development activity for such inventory to accelerate
sales and/or our return on investment. During 2020 and 2019, we changed our strategy related to certain land parcels located in improving housing markets where
we determined the incremental investment in development to be justified and decided to build and sell homes on these parcels. As part of this strategy change, we
activated assets previously held for future development in certain markets in 2020 and 2019.
Land under development also included land held for sale of $1.3 million at November 30, 2020 and $19.3 million at November 30, 2019. Land is generally
considered held for sale when management commits to a plan to sell the land; the land is available for immediate sale in its present condition; an active program to
locate a buyer and other actions required to complete the plan to sell have been initiated; the sale of the land is expected to be completed within one year; the land
is being
68
actively marketed for sale at a price that is reasonable in relation to its current fair value; and it is unlikely that the plan to sell will be withdrawn or that significant
changes to the plan will be made. Interest and real estate taxes are not capitalized on land held for future development or land held for sale. Land held for sale as of
November 30, 2020 consisted of land parcels that either have been contracted to sell or that we are continuing to actively market and/or intend to sell within one
year.
Our interest costs were as follows (in thousands):
Capitalized interest at beginning of year
Interest incurred
Interest amortized to construction and land costs (a)
Capitalized interest at end of year (b)
2020
Years Ended November 30,
2019
2018
$
$
195,738 $
124,147
(129,772)
190,113 $
209,129 $
143,412
(156,803)
195,738 $
262,191
149,698
(202,760)
209,129
(a)
Interest amortized to construction and land costs for the years ended November 30, 2020, 2019 and 2018 included $.4 million, $.7 million and $4.8 million,
respectively, related to land sales during the periods.
(b) Capitalized interest amounts reflect the gross amount of capitalized interest, as inventory impairment charges recognized, if any, are not generally allocated to
specific components of inventory.
Note 7. Inventory Impairments and Land Option Contract Abandonments
Each community or land parcel in our owned inventory is assessed to determine if indicators of potential impairment exist. Impairment indicators are assessed
separately for each community or land parcel on a quarterly basis and include, but are not limited to, the following: significant decreases in net orders, average
selling prices, volume of homes delivered, gross profit margins on homes delivered or projected gross profit margins on homes in backlog or future deliveries;
significant increases in budgeted land development and home construction costs or cancellation rates; or projected losses on expected future land sales. If
indicators of potential impairment exist for a community or land parcel, the identified asset is evaluated for recoverability. We evaluated 24, 40 and 57
communities or land parcels for recoverability during the years ended November 30, 2020, 2019 and 2018, respectively. The carrying values of those communities
or land parcels evaluated during the years ended November 30, 2020, 2019 and 2018 were $228.1 million, $326.3 million and $356.1 million, respectively. The
communities or land parcels evaluated during 2020, 2019 and 2018 included certain communities or land parcels previously held for future development that were
reactivated as part of our efforts to improve our asset efficiency. As impairment indicators are assessed on a quarterly basis, some of the communities or land
parcels evaluated during these years were evaluated in more than one quarterly period. Communities or land parcels evaluated for recoverability in more than one
quarterly period are counted only once for each applicable year. In addition, we evaluated land held for future development for recoverability during 2020, 2019
and 2018. In some cases, we have recognized inventory impairment charges for particular communities or land parcels in multiple years. Inventory impairment
charges are included in construction and land costs in our consolidated statements of operations.
When an indicator of potential impairment is identified for a community or land parcel, we test the asset for recoverability by comparing the carrying value of
the asset to the undiscounted future net cash flows expected to be generated by the asset. The undiscounted future net cash flows are impacted by then-current
conditions and trends in the market in which the asset is located as well as factors known to us at the time the cash flows are calculated. These factors may include
recent trends in our orders, backlog, cancellation rates and volume of homes delivered, as well as our expectations related to the following: product offerings;
market supply and demand, including estimated average selling prices and related price appreciation; and land development, home construction and overhead costs
to be incurred and related cost inflation. With respect to the year ended November 30, 2020, these expectations considered that our net orders, ending backlog and
cancellation rates for the 2020 third and fourth quarters improved from both the corresponding year-earlier quarters as well as the 2020 second quarter, when the
early stages of the COVID-19 pandemic and related COVID-19 control responses in our served markets caused a significant contraction in economic activity and
adversely affected our ability to conduct normal operations, as described in Note 1 – Summary of Significant Accounting Policies. Our impairment assessments
also considered that while the number of homes delivered in the 2020 third and fourth quarters decreased from the corresponding year-earlier quarters, reflecting
the negative COVID-19-related impacts earlier in the year, the average selling price of those homes increased and our housing gross profit margins improved
significantly over the same periods. Moreover, the average selling price of our net orders generated during the 2020 third and fourth quarters increased from the
corresponding year-earlier periods.
69
Taken together, and notwithstanding the significant disruptions associated with the COVID-19 pandemic during the 2020 second quarter, our inventory
assessments as of November 30, 2020 determined that market conditions for each of our assets in inventory where impairment indicators were identified were
expected to be sufficiently stable, with a solid net order pace and a steady average selling price for 2021 and beyond relative to the pace and performance in recent
quarters, to support such assets’ recoverability. Our inventory is assessed for potential impairment on a quarterly basis, and the assumptions used are reviewed and
adjusted, as necessary, to reflect the market conditions and trends and our expectations at the time each assessment is performed.
With respect to the year ended November 30, 2019, our expectations reflected our experience that, notwithstanding fluctuations in our company-wide net
orders, backlog levels, homes delivered and housing gross profit margin during the period, on a year-over-year basis, conditions in the markets where assessed
assets were located were generally stable or improved, with no significant deterioration identified or projected, as to revenue and cost drivers that would prevent or
otherwise impact recoverability.
Given the inherent challenges and uncertainties in forecasting future results, our inventory assessments at the time they are made take into consideration
whether a community or land parcel is active, meaning whether it is open for sales and/or undergoing development, or whether it is being held for future
development or held for sale. Due to the short-term nature of active communities and land held for sale, as compared to land held for future development, our
inventory assessments generally assume the continuation of then-current market conditions, subject to identifying information suggesting significant sustained
changes in such conditions. Our assessments of active communities, at the time made, generally anticipate net orders, average selling prices, volume of homes
delivered and costs for land development and home construction to continue at or near then-current levels through the particular asset’s estimated remaining life.
Inventory assessments for our land held for future development consider then-current market conditions as well as subjective forecasts regarding the timing and
costs of land development and home construction and related cost inflation; the product(s) to be offered; and the net orders, volume of homes delivered, and selling
prices and related price appreciation of the offered product(s) when an associated community is anticipated to open for sales. We evaluate various factors to
develop these forecasts, including the availability of and demand for homes and finished lots within the relevant marketplace; historical, current and expected
future sales trends for the marketplace; and third-party data, if available. The estimates, expectations and assumptions used in each of our inventory assessments
are specific to each community or land parcel based on what we believe are reasonable forecasts for their particular performance, and may vary among
communities or land parcels and may vary over time.
We record an inventory impairment charge on a community or land parcel that is active or held for future development when indicators of potential
impairment exist and the carrying value of the real estate asset is greater than the undiscounted future net cash flows the asset is expected to generate. These real
estate assets are written down to fair value, which is primarily determined based on the estimated future net cash flows discounted for inherent risk associated with
each such asset, or other valuation techniques. Inputs used in our calculation of estimated discounted future net cash flows are specific to each affected real estate
asset and are based on our expectations for each such asset as of the applicable measurement date, including, among others, expectations related to average selling
prices and volume of homes delivered. The discount rates we used were impacted by one or more of the following at the time the calculation was made: the risk-
free rate of return; expected risk premium based on estimated land development, home construction and delivery timelines; market risk from potential future price
erosion; cost uncertainty due to land development or home construction cost increases; and other risks specific to the asset or conditions in the market in which the
asset is located.
We record an inventory impairment charge on land held for sale when the carrying value of a land parcel is greater than its fair value. These real estate assets
are written down to fair value, less associated costs to sell. The estimated fair values of such assets are generally based on bona fide letters of intent from outside
parties, executed sales contracts, broker quotes or similar information.
The following table summarizes ranges for significant quantitative unobservable inputs we utilized in our fair value measurements with respect to impaired
communities, other than land held for sale, written down to fair value during the years presented:
Unobservable Input (a)
Average selling price
Deliveries per month
Discount rate
2020
$301,600 -$1,127,100
1 - 4
17% - 18%
Years Ended November 30,
2019
$315,000 - $1,045,400
1 - 4
17%
2018
$291,300 - $774,100
2 - 6
17% - 19%
(a) The ranges of inputs used in each period primarily reflect differences between the housing markets where each impacted community is located, rather than
fluctuations in prevailing market conditions.
70
Based on the results of our evaluations, we recognized inventory impairment charges of $22.7 million in 2020 related to 10 communities with a post-
impairment fair value of $46.5 million. In 2019, we recognized inventory impairment charges of $14.0 million related to eight communities with a post-impairment
fair value of $27.1 million. In 2018, we recognized inventory impairment charges of $26.1 million related to 13 communities with a post-impairment fair value of
$44.1 million. The impairment charges in 2020, 2019 and 2018 reflected our decisions to make changes in our operational strategies aimed at more quickly
monetizing our investment in certain communities by accelerating the overall pace for selling, building and delivering homes therein, including communities on
land previously held for future development. If we change our strategy or if there are changes in market conditions for any given asset, it is possible that we may
recognize additional inventory impairment charges.
As of November 30, 2020, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $113.1 million,
representing 16 communities and various other land parcels. As of November 30, 2019, the aggregate carrying value of our inventory that had been impacted by
inventory impairment charges was $115.6 million, representing 19 communities and various other land parcels.
Our inventory controlled under land option contracts and other similar contracts is assessed to determine whether it continues to meet our investment return
standards. Assessments are made separately for each optioned land parcel on a quarterly basis and are affected by the following factors relative to the market in
which the asset is located, among others: current and/or anticipated net orders, average selling prices and volume of homes delivered; estimated land development
and home construction costs; and projected profitability on expected future housing or land sales. When a decision is made not to exercise certain land option
contracts and other similar contracts due to market conditions and/or changes in our marketing strategy, we write off the related inventory costs, including non-
refundable deposits and unrecoverable pre-acquisition costs. Based on the results of our assessments, we recognized land option contract abandonment charges of
$5.9 million in 2020, $3.3 million in 2019 and $2.9 million in 2018. Land option contract abandonment charges are included in construction and land costs in our
consolidated statements of operations.
The estimated remaining life of each community or land parcel in our inventory depends on various factors, such as the total number of lots remaining; the
expected timeline to acquire and entitle land and develop lots to build homes; the anticipated future net order and cancellation rates; and the expected timeline to
build and deliver homes sold. While it is difficult to determine a precise timeframe for any particular inventory asset, based on current market conditions and
expected delivery timelines, we estimate our inventory assets’ remaining operating lives to range generally from one year to in excess of 10 years, and expect to
realize, on an overall basis, the majority of our inventory balance as of November 30, 2020 within five years.
Due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, and in our estimations
of the remaining operating lives of our inventory assets and the realization of our inventory balances, particularly as to land held for future development, it is
possible that actual results could differ substantially from those estimated.
Note 8. Variable Interest Entities
Unconsolidated Joint Ventures. We participate in joint ventures from time to time that conduct land acquisition, land development and/or other homebuilding
activities in various markets where our homebuilding operations are located. Our investments in these joint ventures may create a variable interest in a VIE,
depending on the contractual terms of the arrangement. We analyze our joint ventures under the variable interest model to determine whether they are VIEs and, if
so, whether we are the primary beneficiary. Based on our analyses, we determined that one of our joint ventures at November 30, 2020 and 2019 was a VIE, but we
were not the primary beneficiary of the VIE. Therefore, all of our joint ventures at November 30, 2020 and 2019 were unconsolidated and accounted for under the
equity method because we did not have a controlling financial interest.
Land Option Contracts and Other Similar Contracts. In the ordinary course of our business, we enter into land option contracts and other similar contracts
with third parties and unconsolidated entities to acquire rights to land for the construction of homes. The use of these contracts generally allows us to reduce the
market risks associated with direct land ownership and development, and reduce our capital and financial commitments, including interest and other carrying costs.
Under these contracts, we typically make a specified option payment or earnest money deposit in consideration for the right to purchase land in the future, usually
at a predetermined price.
We analyze each of our land option contracts and other similar contracts under the variable interest model to determine whether the land seller is a VIE and, if
so, whether we are the primary beneficiary. Although we do not have legal title to the underlying land, we are required to consolidate a VIE if we are the primary
beneficiary. In determining whether we are the primary beneficiary, we consider, among other things, whether we have the power to direct the activities of the VIE
that most
71
significantly impact the VIE’s economic performance. Such activities would include, among other things, determining or limiting the scope or purpose of the VIE,
selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. As a result of our analyses, we determined that as of
November 30, 2020 and 2019, we were not the primary beneficiary of any VIEs from which we have acquired rights to land under land option contracts and other
similar contracts. We perform ongoing reassessments of whether we are the primary beneficiary of a VIE.
The following table presents a summary of our interests in land option contracts and other similar contracts (in thousands):
Unconsolidated VIEs
Other land option contracts and other similar contracts
Total
November 30, 2020
November 30, 2019
Cash
Deposits
Aggregate
Purchase Price
Cash
Deposits
Aggregate
Purchase Price
$
$
20,962 $
33,672
54,634 $
910,495 $
507,934
1,418,429 $
34,595 $
40,591
75,186 $
823,427
600,092
1,423,519
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 $31.1 million at November 30, 2020 and $32.8 million at November 30, 2019. These pre-
acquisition costs and cash deposits were included in inventories in our consolidated balance sheets.
For land option contracts and other similar contracts where the land seller entity is not required to be consolidated under the variable interest model, we
consider whether such contracts should be accounted for as financing arrangements. Land option contracts and other similar contracts that may be considered
financing arrangements include those we enter into with third-party land financiers or developers in conjunction with such third parties acquiring a specific land
parcel(s) on our behalf, at our direction, and those with other landowners where we or our designee make improvements to the optioned land parcel(s) during the
applicable option period. For these land option contracts and other similar contracts, we record the remaining purchase price of the associated land parcel(s) in
inventories in our consolidated balance sheets with a corresponding financing obligation if we determine that we are effectively compelled to exercise the option to
purchase the land parcel(s). In making this determination with respect to a land option contract, we consider the non-refundable deposit(s) we have made and any
non-reimbursable expenditures we have incurred for land improvement activities or other items up to the assessment date; additional costs associated with
abandoning the contract; and our commitments, if any, to incur non-reimbursable costs associated with the contract. As a result of our evaluations of land option
contracts and other similar contracts for financing arrangements, we recorded inventories in our consolidated balance sheets, with a corresponding increase to
accrued expenses and other liabilities, of $19.4 million at November 30, 2020 and $12.2 million at November 30, 2019.
Note 9. Investments in Unconsolidated Joint Ventures
We have investments in unconsolidated joint ventures that conduct land acquisition, land development and/or other homebuilding activities in various markets
where our homebuilding operations are located. We and our unconsolidated joint venture partners make initial and/or ongoing capital contributions to these
unconsolidated joint ventures, typically on a pro rata basis, according to our respective equity interests. The obligations to make capital contributions are governed
by each such unconsolidated joint venture’s respective operating agreement and related governing documents. Our partners in these unconsolidated joint ventures
are unrelated homebuilders, and/or land developers and other real estate entities, or commercial enterprises. These investments are designed primarily to reduce
market and development risks and to increase the number of lots we own or control. In some instances, participating in unconsolidated joint ventures has enabled
us to acquire and develop land that we might not otherwise have had access to due to a project’s size, financing needs, duration of development or other
circumstances. While we consider our participation in unconsolidated joint ventures as potentially beneficial to our homebuilding activities, we do not view such
participation as essential.
For distributions we receive from these unconsolidated joint ventures, we have elected to use the cumulative earnings approach for our consolidated
statements of cash flows. Under the cumulative earnings approach, distributions up to the amount of cumulative equity in earnings recognized are treated as returns
on investment within operating cash flows and those in excess of that amount are treated as returns of investment within investing cash flows.
We typically have obtained rights to acquire portions of the land held by the unconsolidated joint ventures in which we currently participate. When an
unconsolidated joint venture sells land to our homebuilding operations, we defer recognition of our share of such unconsolidated joint venture’s earnings (losses)
until we recognize revenues on the corresponding home sale, which is generally when title to and possession of the home and the risks and rewards of ownership
are transferred to the homebuyer on the closing date. At that time, we account for the earnings (losses) as a reduction (increase) to the cost of
72
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):
Revenues
Construction and land costs
Other expenses, net
Income (loss)
2020
Years Ended November 30,
2019
2018
$
$
127,270 $
(93,162)
(8,850)
25,258 $
23,676 $
(23,659)
(2,644)
(2,627) $
59,418
(46,288)
(2,674)
10,456
For the year ended November 30, 2020, combined revenues and construction and land costs mainly related to homes delivered from an unconsolidated joint
venture in California. For the years ended November 30, 2019 and 2018, combined revenues and construction and land costs were generated primarily from land
sales. The higher combined revenues and income for 2018 as compared to 2019, mainly reflected the sale of land by an unconsolidated joint venture in Arizona,
and contingent consideration (profit participation revenues) earned by an unconsolidated joint venture in California.
The following table presents combined condensed balance sheet information for our unconsolidated joint ventures (in thousands):
Assets
Cash
Receivables
Inventories
Other assets
Total assets
Liabilities and equity
Accounts payable and other liabilities
Notes payable (a)
Equity
Total liabilities and equity
November 30,
2020
2019
38,837 $
96
65,233
593
104,759 $
14,037 $
—
90,722
104,759 $
23,965
12
139,536
780
164,293
13,282
40,672
110,339
164,293
$
$
$
$
(a) At both November 30, 2020 and 2019, we had investments in five unconsolidated joint ventures. At November 30, 2019, one of our unconsolidated joint
ventures had a construction loan agreement with a third-party lender to finance its land development activities. The outstanding debt was secured by the
underlying property and related project assets and was non-recourse to us. All of the outstanding secured debt was repaid in April 2020. None of our
unconsolidated joint ventures had outstanding debt at November 30, 2020.
73
Note 10. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
Computer software and equipment
Model furnishings and sales office improvements
Leasehold improvements, office furniture and equipment
Subtotal
Less accumulated depreciation
Total
Note 11. Other Assets
Other assets consisted of the following (in thousands):
Cash surrender value and benefit receivable from corporate-owned life insurance contracts
Lease right-of-use assets
Prepaid expenses
Debt issuance costs associated with unsecured revolving credit facility, net
Total
Note 12. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
Self-insurance and other legal liabilities
Employee compensation and related benefits
Warranty liability
Lease liabilities
Accrued interest payable
Inventory-related obligations (a)
Customer deposits
Real estate and business taxes
Other
Total
November 30,
2020
2019
32,902 $
83,882
17,245
134,029
(68,482)
65,547 $
27,091
82,117
16,173
125,381
(60,338)
65,043
November 30,
2020
2019
73,227 $
35,967
13,916
2,400
125,510 $
73,849
—
5,944
3,248
83,041
November 30,
2020
2019
232,556 $
165,342
91,646
37,668
31,641
31,094
26,243
14,249
37,062
667,501 $
229,483
163,646
88,839
—
32,507
26,264
22,382
14,872
40,790
618,783
$
$
$
$
$
$
(a) Represents liabilities for financing arrangements discussed in Note 8 – Variable Interest Entities, as well as liabilities for fixed or determinable amounts
associated with 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.
74
Note 13. Leases
We lease certain property and equipment for use in our operations. We recognize lease expense for these leases generally on a straight-line basis over the lease
term and combine lease and non-lease components for all leases. Lease right-of-use assets and lease liabilities are recorded on our consolidated balance sheets for
leases with an expected term at the commencement date of more than 12 months. Some of our leases include one or more renewal options, the exercise of which is
generally at our discretion. Such options are excluded from the expected term of the lease unless we determine it is reasonably certain the option will be exercised.
Lease liabilities are equal to the present value of the remaining lease payments while the amount of lease right-of-use assets is based on the lease liabilities, subject
to adjustment, such as for lease incentives. Our leases do not provide a readily determinable implicit interest rate; therefore, we estimate our incremental borrowing
rate to calculate the present value of remaining lease payments. In determining our incremental borrowing rate, we considered the lease term, market interest rates,
current interest rates on our senior notes and the effects of collateralization. Our lease population at November 30, 2020 was comprised of operating leases where
we are the lessee, primarily real estate leases for our corporate office, division offices and design studios, as well as certain equipment leases. Our lease agreements
do not contain any residual value guarantees or material restrictive covenants.
Lease expense is included in selling, general and administrative expenses in our consolidated statements of operations and includes costs for leases with terms
of more than 12 months as well as short-term leases with terms of 12 months or less. For the year ended November 30, 2020, our total lease expense was
$17.7 million, which included short-term lease costs of $6.0 million. Variable lease costs and external sublease income for the year ended November 30, 2020 were
immaterial.
The following table presents our lease right-of-use assets, lease liabilities and the weighted-average remaining lease term and weighted-average discount rate
(incremental borrowing rate) used in calculating the lease liabilities (dollars in thousands):
Lease right-of-use assets (a)
Lease liabilities (b)
Weighted-average remaining lease term
Weighted-average discount rate (incremental borrowing rate)
$
November 30, 2020
36,270
38,000
4.5 years
5.1 %
(a) Represents lease right-of-use assets of $36.0 million within our homebuilding operations and $.3 million within our financial services operations.
(b) Represents lease liabilities of $37.7 million within our homebuilding operations and $.3 million within our financial services operations.
The following table presents additional information about our leases (in thousands):
Lease right-of-use assets obtained in exchange for new lease liabilities
Cash payments on lease liabilities
75
Year Ended
November 30, 2020
$
14,229
11,243
As of November 30, 2020, the future minimum lease payments required under our leases are as follows (in thousands):
Years Ending November 30,
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
Note 14. Income Taxes
$
$
11,189
10,232
7,927
5,834
4,494
3,111
42,787
(4,787)
38,000
Income Tax Expense. The components of the income tax expense in our consolidated statements of operations are as follows (in thousands):
2020
Current
Deferred
Income tax expense
2019
Current
Deferred
Income tax expense
2018
Current
Deferred
Income tax expense
Federal
State
Total
$
$
$
$
$
$
(12,100) $
(36,200)
(48,300) $
(200) $
(53,800)
(54,000) $
(3,600) $
(170,700)
(174,300) $
(3,500) $
(16,000)
(19,500) $
(3,700) $
(21,700)
(25,400) $
(4,800) $
(18,500)
(23,300) $
(15,600)
(52,200)
(67,800)
(3,900)
(75,500)
(79,400)
(8,400)
(189,200)
(197,600)
Our effective tax rates were 18.6% for 2020, 22.8% for 2019 and 53.7% for 2018.
In 2020, our income tax expense and effective tax rate reflected the favorable impacts of $18.7 million of federal energy tax credits we earned from building
energy-efficient homes, $12.0 million of excess tax benefits related to stock-based compensation, partly offset by $5.7 million of non-deductible executive
compensation expense under Internal Revenue Code Section 162(m). In 2019, our income tax expense and effective tax rate reflected the favorable impacts of
$5.3 million of excess tax benefits related to stock-based compensation, a $4.4 million deferred tax asset valuation allowance reversal related to refundable
alternative minimum tax (“AMT”) and $4.3 million of federal energy tax credits we earned from building energy-efficient homes, partly offset by $5.3 million of
non-deductible executive compensation expense and a $1.9 million non-cash charge due to the re-measurement of deferred tax assets based on a reduction in
certain state income tax rates.
Our income tax expense and effective tax rate for 2018 included a charge of $112.5 million for TCJA-related impacts, as described below; the favorable effect
of the reduction in the federal corporate income tax rate under the TCJA; the favorable net impact of federal energy tax credits of $10.7 million we earned from
building energy-efficient homes; a $2.1 million net tax benefit from a reduction in our deferred tax asset valuation allowance; and excess tax benefits of $1.0
million related to stock-based compensation. The TCJA required us to use a blended federal tax rate for our 2018 fiscal year by applying a prorated percentage of
days before and after the January 1, 2018 effective date. As a result, our 2018 annual federal statutory tax rate was reduced to approximately 22%.
76
The federal energy tax credits for the year ended November 30, 2020 resulted from legislation enacted in December 2019 that, among other things, extended
the availability of a business tax credit for building new energy-efficient homes through December 31, 2020. The federal energy tax credits for the years ended
November 30, 2019 and 2018 resulted from legislation enacted on February 9, 2018 that, among other things, extended the availability of a business tax credit for
building new energy-efficient homes through December 31, 2017. Prior to this legislation, the tax credit expired on December 31, 2016.
On March 27, 2020, the CARES Act was enacted to provide economic and other relief from the COVID-19 pandemic. Among other things, the CARES Act
provides various income and payroll tax provisions that we do not expect to have a material impact on our income tax expense or effective tax rate for 2020. The
CARES Act also accelerated the timetable for AMT credit refunds. As a result, in the 2020 second quarter, we filed a superseding 2019 federal income tax return
claiming an additional refund of $39.3 million of AMT credits and reclassified this amount from deferred tax assets to receivables. In the fourth quarter, an
amended 2019 federal income tax return was filed to expedite our additional refund and to recognize federal energy tax credits we earned from building energy-
efficient homes in 2019. These credits were in addition to the $43.3 million of AMT tax credits that we reclassified from deferred tax assets to receivables in the
2020 first quarter when we filed a preliminary 2019 federal income tax return. We received the $43.3 million AMT credit refund in the 2020 third quarter. Our
accounting policy regarding the balance sheet presentation of AMT credits is to maintain the balance in deferred tax assets until a tax return is filed claiming a
refund of a portion of the credit, at which time such amount will be presented in receivables.
In June 2020, California enacted tax legislation that approved the suspension of California NOL deductions for tax years 2020, 2021 and 2022. The suspension
of California NOL deductions did not have an impact on our income tax expense for the year ended November 30, 2020.
TCJA. The TCJA, enacted in December 2017, among other things: (a) reduced the federal corporate income tax rate from 35% to 21%, effective January 1,
2018; (b) eliminated the federal corporate AMT and changed how existing AMT credits can be realized; and (c) eliminated several business deductions and credits,
including deductions for certain executive compensation in excess of $1 million. In 2018, based on our analysis of the TCJA’s income tax effects, we recorded a
total non-cash charge of $112.5 million to income tax expense, comprised of a provisional estimate of $111.2 million recorded in the 2018 first quarter and an
additional $1.3 million charge in the 2018 fourth quarter. The following TCJA-related impacts were reflected in our consolidated financial statements for the year
ended November 30, 2018:
• We recorded a non-cash charge of $106.7 million in income tax expense due to the accounting re-measurement of our deferred tax assets based on the
lower federal corporate income tax rate under the TCJA.
• We established a federal deferred tax valuation allowance of $3.3 million for 2018 to reflect a sequestration reduction rate of approximately 6.6% on our
then-estimated refundable AMT credit carryforwards of approximately $50.0 million.
• We recorded a non-cash charge of $2.5 million in income tax expense for disallowed executive compensation due to the TCJA’s eliminating the
deductibility of certain performance-based compensation.
Deferred Tax Assets, Net. Deferred income taxes result from temporary differences in the financial and tax basis of assets and liabilities. Significant
components of our deferred tax liabilities and assets are as follows (in thousands):
Deferred tax liabilities:
Capitalized expenses
State taxes
Depreciation and amortization
Other
Total
77
November 30,
2020
2019
$
43,439 $
22,562
2,714
2,884
71,599
43,818
26,290
—
4,132
74,240
Deferred tax assets:
NOLs from 2006 through 2020
Tax credits
Employee benefits
Warranty, legal and other accruals
Inventory impairment and land option contract abandonment charges
Capitalized expenses
Partnerships and joint ventures
Depreciation and amortization
Other
Total
Valuation allowance
Total
Deferred tax assets, net
November 30,
2020
2019
79,987 $
75,108
52,713
41,319
40,998
19,903
8,733
—
1,905
320,666
(18,000)
302,666
231,067 $
95,562
180,737
53,294
40,954
48,862
25,116
9,990
479
2,939
457,933
(19,200)
438,733
364,493
$
$
Reconciliation of Expected Income Tax Expense. The income tax expense computed at the statutory U.S. federal income tax rate and the income tax expense
provided in our consolidated statements of operations differ as follows (dollars in thousands):
Income tax expense computed at statutory rate
Tax credits
Depreciation and amortization
Valuation allowance for deferred tax assets
Non-deductible compensation
State taxes, net of federal income tax benefit
NOL reconciliation
TCJA adjustment
Other, net
Income tax expense
2020
Years Ended November 30,
2019
2018
$
(76,449)
18,734
9,910
1,200
(4,812)
(16,395)
—
—
12
(67,800)
$
$
%
(21.0)% $
5.1
2.7
.3
(1.3)
(4.4)
—
—
—
(18.6)% $
$
(73,117)
6,595
4,276
4,400
(4,653)
(20,927)
3,111
—
915
(79,400)
%
(21.0)% $
1.9
1.2
1.3
(1.3)
(6.0)
.9
—
.2
(22.8)% $
$
(81,689)
14,177
1,223
2,000
—
(20,155)
—
(112,458)
(698)
(197,600)
%
(22.2)%
3.9
.3
.5
—
(5.5)
—
(30.5)
(.2)
(53.7)%
Deferred Tax Asset Valuation Allowance. We evaluate our deferred tax assets quarterly to determine if adjustments to our valuation allowance are required
based on the consideration of all available positive and negative evidence using a “more likely than not” standard with respect to whether deferred tax assets will
be realized. Our evaluation considers, among other factors, our historical operating results, our expectation of future profitability, the duration of the applicable
statutory carryforward periods, and conditions in the housing market and the broader economy. In our evaluation, we give more significant weight to evidence that
is objective in nature as compared to subjective evidence. Also, more significant weight is given to evidence that directly relates to our then-current financial
performance as compared to indirect or less current evidence. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future
taxable income during the periods in which the related deferred tax assets become deductible. The value of our deferred tax assets depends on applicable income
tax rates.
Our deferred tax assets of $249.1 million at November 30, 2020 and $383.7 million at November 30, 2019 were partially offset in each year by valuation
allowances of $18.0 million and $19.2 million, respectively. Our deferred tax assets as of November 30, 2020 reflected the above-mentioned AMT credit
reclassifications totaling $82.6 million from deferred tax assets
78
to receivables in 2020. The deferred tax asset valuation allowances at November 30, 2020 and 2019 were primarily related to certain state NOLs that had not met
the “more likely than not” realization standard at those dates. As of November 30, 2020, we would need to generate approximately $900 million of pretax income
in future periods before 2040 to realize our deferred tax assets. As a result of an expiration and the remeasurement of certain state NOLs, we decreased both our
deferred tax assets and the related deferred tax asset valuation allowance for these NOLs by $1.2 million in 2020. Based on the evaluation of our deferred tax assets
as of November 30, 2020, we determined that most of our deferred tax assets would be realized. The decrease in the valuation allowance during 2019 primarily
reflected our reversal of the above-mentioned $4.4 million deferred tax asset valuation allowance, partly due to the Internal Revenue Service’s announcement in
January 2019 that refundable AMT credits will not be subject to sequestration for taxable years beginning after December 31, 2017. As noted above, in 2018, we
established a federal deferred tax asset valuation allowance of $3.3 million due to the sequestration of refundable AMT credits, which was offset by a reduction of
$3.3 million in our state deferred tax asset valuation allowance primarily to account for state NOLs that met the “more likely than not” standard or had expired. In
2018, the net tax benefit related to the reduction in the state deferred tax asset valuation allowance was $2.1 million.
We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to our
deferred tax assets. The accounting for deferred tax assets is based upon estimates of future results. Changes in positive and negative evidence, including
differences between estimated and actual results, could result in changes in the valuation of our deferred tax assets that could have a material impact on our
consolidated financial statements. Changes in existing federal and state tax laws and corporate income tax rates could also affect actual tax results and the
realization of deferred tax assets over time.
The majority of the tax benefits associated with our NOLs can be carried forward for 20 years and applied to offset future taxable income. Depending on their
applicable statutory period, the state NOL carryforwards of $80.0 million, if not utilized, will begin to expire between 2021 and 2040. State NOL carryforwards of
$.4 million and $1.2 million expired in 2020 and 2018, respectively.
In addition, $70.8 million of our tax credits, if not utilized, will begin to expire in 2034 through 2040.
Unrecognized Tax Benefits. Gross unrecognized tax benefits are the differences between a tax position taken or expected to be taken in a tax return, and the
benefit recognized for accounting purposes. A reconciliation of the beginning and ending balances of gross unrecognized tax benefits, excluding interest and
penalties, is as follows (in thousands):
Balance at beginning of year
Reductions due to lapse of statute of limitations
Balance at end of year
2020
Years Ended November 30,
2019
2018
$
$
— $
—
— $
— $
—
— $
56
(56)
—
We recognize accrued interest and penalties related to unrecognized tax benefits in our consolidated financial statements as a component of the provision for
income taxes. As of November 30, 2020, 2019 and 2018, we had no gross unrecognized tax benefits.
As of November 30, 2020 and 2019, there were no tax positions for which the ultimate deductibility is highly certain but the timing of such deductibility is
uncertain. Our total accrued interest and penalties related to unrecognized income tax benefits was zero at both November 30, 2020 and 2019. Because of the
impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect our annual effective tax
rate, but would accelerate the payment of cash to a tax authority to an earlier period. The fiscal years ending 2017 and later remain open to federal examinations,
while 2016 and later remain open to state examinations.
The benefits of our deferred tax assets, including our NOLs, built-in losses and tax credits would be reduced or potentially eliminated if we experienced an
“ownership change” under Section 382. Based on our analysis performed as of November 30, 2020, we do not believe that we have experienced an ownership
change as defined by Section 382, and, therefore, the NOLs, built-in losses and tax credits we have generated should not be subject to a Section 382 limitation as of
this reporting date.
79
Note 15. Notes Payable
Notes payable consisted of the following (in thousands):
Mortgages and land contracts due to land sellers and other loans (at interest rates of 4.5% to 6.0% at November 30,
2020 and 7.0% at November 30, 2019)
7.00% Senior notes due December 15, 2021
7.50% Senior notes due September 15, 2022
7.625% Senior notes due May 15, 2023
6.875% Senior notes due June 15, 2027
4.80% Senior notes due November 15, 2029
Total
November 30,
2020
2019
$
$
4,667 $
449,029
348,846
351,281
296,757
296,595
1,747,175 $
7,889
448,164
348,267
351,748
296,379
296,300
1,748,747
The carrying amounts of our senior notes listed above are net of debt issuance costs, premiums and discounts, which totaled $7.5 million at November 30,
2020 and $9.1 million at November 30, 2019.
Unsecured Revolving Credit Facility. We have an $800.0 million Credit Facility that will mature on October 7, 2023. The Credit Facility contains an
uncommitted accordion feature under which its aggregate principal amount of available loans can be increased to a maximum of $1.00 billion under certain
conditions, including obtaining additional bank commitments. The Credit Facility also contains a sublimit of $250.0 million for the issuance of letters of credit.
Interest on amounts borrowed under the Credit Facility is payable at least quarterly in arrears at a rate based on either a Eurodollar or a base rate, plus a spread that
depends on our Leverage Ratio, as defined under the Credit Facility. The Credit Facility also requires the payment of a commitment fee at a per annum rate ranging
from .20% to .35% of the unused commitment, based on our Leverage Ratio. Under the terms of the Credit Facility, we are required, among other things, to
maintain compliance with various covenants, including financial covenants relating to our consolidated tangible net worth, Leverage Ratio, and either an Interest
Coverage Ratio or a minimum level of liquidity, each as defined therein. The amount of the Credit Facility available for cash borrowings and 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 November 30, 2020, we had no cash borrowings and $12.4 million of letters of credit outstanding under the Credit Facility. Therefore, as of
November 30, 2020, we had $787.6 million available for cash borrowings under the Credit Facility, with up to $237.6 million of that amount available for the
issuance of letters of credit.
LOC Facility. We maintain an LOC Facility to obtain letters of credit from time to time in the ordinary course of operating our business. Under the LOC
Facility, which expires on February 13, 2022, we may issue up to $50.0 million of letters of credit. As of November 30, 2020 and 2019, we had letters of credit
outstanding under the LOC Facility of $29.7 million and $15.8 million, respectively.
Mortgages and Land Contracts Due to Land Sellers and Other Loans. As of November 30, 2020, inventories having a carrying value of $27.1 million were
pledged to collateralize mortgages and land contracts due to land sellers and other loans.
Shelf Registration. On July 9, 2020, we filed the 2020 Shelf Registration with the SEC. The 2020 Shelf Registration registers the offering of securities that we
may issue from time to time in amounts to be determined. Our ability to issue securities is subject to market conditions. The 2020 Shelf Registration replaced our
previously effective universal shelf registration statement filed with the SEC on July 14, 2017. We have not made any offerings of securities under the 2020 Shelf
Registration.
Senior Notes. All of the senior notes outstanding at November 30, 2020 and 2019 represent senior unsecured obligations and rank equally in right of payment
with all of our existing and future indebtedness. All of our outstanding senior notes were issued in underwritten public offerings.
80
The key terms of each of our senior notes outstanding as of November 30, 2020 were as follows (dollars in thousands):
$
Notes Payable
7.00% Senior notes
7.50% Senior notes
7.625% Senior notes
6.875% Senior notes
4.80% Senior notes
Principal
Issuance Date
October 29, 2013
July 31, 2012
450,000
350,000
350,000 February 17, 2015/February 20,
300,000
300,000
2019
February 20, 2019
November 4, 2019
Maturity Date
December 15, 2021
September 15, 2022
May 15, 2023
June 15, 2027
November 15, 2029
Redeemable Prior to
Maturity
Yes (a)
Yes (b)
Yes (a)
Yes (a)
Yes (a)
Effective Interest
Rate
7.2 %
7.7
7.5
7.1
5.0
(a) At our option, these notes may be redeemed, in whole at any time or from time to time in part, at a redemption price equal to the greater of (i) 100% of the
principal amount of the notes being redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the notes
being redeemed (exclusive of interest accrued to the applicable redemption date), discounted to the redemption date at a defined rate, plus, in each case,
accrued and unpaid interest on the notes being redeemed to, but excluding, the applicable redemption date, except that three months prior to the stated maturity
dates for the 7.00% Senior Notes due 2021 and until their respective maturity, and six months prior to the stated maturity date for the 7.625% Senior Notes
due 2023, 6.875% Senior Notes due 2027 and 4.80% Senior Notes due 2029 and until their maturity, the redemption price will be equal to 100% of the
principal amount of the notes being redeemed, plus, in each case, accrued and unpaid interest on the notes being redeemed to, but excluding, the applicable
redemption date.
(b) At our option, these notes may be redeemed, in whole at any time or from time to time in part, at a redemption price equal to the greater of (i) 100% of the
principal amount of the notes being redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the notes
being redeemed (exclusive of interest accrued to the applicable redemption date), discounted to the redemption date at a defined rate, plus, in each case,
accrued and unpaid interest on the notes being redeemed to the applicable redemption date.
If a change in control occurs as defined in the instruments governing our senior notes, we would be required to offer to purchase all of our outstanding senior
notes at 101% of their principal amount, together with all accrued and unpaid interest, if any.
On February 1, 2019, we repaid the entire $230.0 million in aggregate principal amount of our 1.375% Convertible Senior Notes due 2019 at their maturity.
On February 20, 2019, we completed concurrent public offerings of $300.0 million in aggregate principal amount of 6.875% Senior Notes due 2027 at
100.000% of their aggregate principal amount, and an additional $100.0 million in aggregate principal amount of our existing series of 7.625% Senior Notes due
2023 at 105.250% of their aggregate principal amount plus accrued interest from November 15, 2018 (the last date on which interest was paid on the existing 2023
senior notes) to the date of delivery. Net proceeds from these offerings totaled $400.0 million, after deducting the underwriting discount and our expenses relating
to the offerings.
On March 8, 2019, we applied the net proceeds from the concurrent public offerings toward the optional redemption of the entire $400.0 million in aggregate
principal amount of our 4.75% Senior Notes due 2019 before their May 15, 2019 maturity date.
On November 4, 2019, we completed a public offering of $300.0 million in aggregate principal amount of 4.80% Senior Notes due 2029 at 100.000% of their
aggregate principal amount. Net proceeds from this offering totaled $296.3 million, after deducting the underwriting discount and our expenses relating to the
offering.
On November 22, 2019, at our option, we redeemed the entire $350.0 million in aggregate principal amount of our 8.00% Senior Notes due 2020 before their
March 15, 2020 maturity date. We used the net proceeds from the 4.80% Senior Notes due 2029 and internally generated cash to fund this redemption. We paid
$356.2 million to redeem the notes and recorded a charge of $6.8 million for the early extinguishment of debt.
The indenture governing our senior notes does not contain any financial covenants. Subject to specified exceptions, the indenture contains certain restrictive
covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale-leaseback transactions involving property above a certain
specified value. In addition, our senior notes contain certain limitations related to mergers, consolidations, and sales of assets.
81
As of the date of this report, 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. There are no agreements that restrict our
payment of dividends other than the Credit Facility, which would restrict our payment of cash and certain other dividends, such as cash dividends on our common
stock, if a default under the Credit Facility exists at the time of any such payment, or if any such payment would result in such a default (other than dividends paid
within 60 days after declaration, if there was no default at the time of declaration).
Principal payments on senior notes, mortgages and land contracts due to land sellers and other loans are due during each year ending November 30 as follows:
2021 — $2.1 million; 2022 — $800.7 million; 2023 — $351.2 million; 2024 — $.7 million; 2025 — $0; and thereafter — $600.0 million.
Note 16. 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 (in thousands):
Description
Inventories (a)
Fair Value Hierarchy
Level 3
$
Pre-Impairment
Value
November 30, 2020
Inventory
Impairment
Charges
Fair Value (a)
Pre-Impairment
Value
November 30, 2019
Inventory
Impairment
Charges
Fair Value (a)
69,211 $
(22,723) $
46,488 $
41,160 $
(14,031) $
27,129
(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.
The fair values for inventories that were determined using Level 3 inputs were based on the estimated future net cash flows discounted for inherent risk
associated with each underlying asset.
The following table presents the fair value hierarchy, carrying values and estimated fair values of our financial instruments, except those for which the
carrying values approximate fair values (in thousands):
Description
Financial Liabilities:
Senior notes
November 30,
2020
2019
Fair Value
Hierarchy
Carrying
Value (a)
Estimated
Fair Value
Carrying
Value (a)
Estimated
Fair Value
Level 2
$
1,742,508 $
1,924,250 $
1,740,858 $
1,921,563
(a) The carrying value for the senior notes, as presented, includes unamortized debt issuance costs. Debt issuance costs are not factored into the estimated fair
values of these notes.
The fair values of our senior notes are generally estimated based on quoted market prices for these instruments. The carrying values reported for cash and cash
equivalents, and mortgages and land contracts due to land sellers and other loans
82
approximate fair values. The carrying value of corporate-owned life insurance is based on the cash surrender value of the policies and, accordingly, approximates
fair value.
Note 17. 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 of certain conditions or
defects, including claims where we could have liability under applicable state statutes or tort law for a defective condition in or damages to a home. Our warranty
liability covers our costs of repairs associated with homeowner claims made under our limited warranty program. These claims are generally made directly by a
homeowner and involve their individual home.
We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated
with the sale of each home is recognized. Our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a
strong indicator of future claims experience. Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of
warranty claims, and cost per claim. We periodically assess the adequacy of our accrued warranty liability, which is included in accrued expenses and other
liabilities in our consolidated balance sheets, and adjust the amount as necessary based on our assessment. Our assessment includes the review of our actual
warranty costs incurred to identify trends and changes in our warranty claims experience, and considers our home construction quality and customer service
initiatives and outside events. While we believe the warranty liability currently reflected in our consolidated balance sheets to be adequate, unanticipated changes
or developments in the legal environment, local weather, land or environmental conditions, quality of materials or methods used in the construction of homes or
customer service practices and/or our warranty claims experience could have a significant impact on our actual warranty costs in future periods and such amounts
could differ significantly from our current estimates.
The changes in our warranty liability were as follows (in thousands):
Balance at beginning of year
Warranties issued
Payments
Adjustments
Balance at end of year
2020
Years Ended November 30,
2019
2018
88,839 $
29,505
(23,098)
(3,600)
91,646 $
82,490 $
35,480
(23,531)
(5,600)
88,839 $
69,798
37,792
(23,300)
(1,800)
82,490
$
$
Guarantees. In the normal course of our business, we issue certain representations, warranties and guarantees related to our home sales and land sales. Based
on historical experience, we do not believe any potential liability with respect to these representations, warranties or guarantees would be material to our
consolidated financial statements.
Self-Insurance. We maintain, and require the majority of our independent subcontractors to maintain, general liability insurance (including construction defect
and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to
our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. We also maintain certain other insurance policies.
Costs associated with our self-insurance programs are included in selling, general and administrative expenses. In Arizona, California, Colorado and Nevada, our
subcontractors’ general liability insurance primarily takes the form of a wrap-up policy under a program where eligible independent subcontractors are enrolled as
insureds on each community. Enrolled subcontractors contribute toward the cost of the insurance and agree to pay a contractual amount in the future if there is a
claim related to their work. To the extent provided under the wrap-up program, we absorb the enrolled subcontractors’ general liability associated with the work
performed on our homes within the applicable community as part of our overall general liability insurance and our self-insurance.
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We self-insure a portion of our overall risk through the use of a captive insurance subsidiary, which provides coverage for our exposure to certain construction
defect, bodily injury and property damage claims and related litigation or regulatory actions, up to certain limits. Our self-insurance liability generally covers the
costs of settlements and/or repairs, if any, as well as our costs to defend and resolve the following types of claims:
•
Construction defect: Construction defect claims, which represent the largest component of our self-insurance liability, typically originate through a legal
or regulatory process rather than directly by a homeowner and involve the alleged occurrence of a condition affecting two or more homes within the same
community, or they involve a common area or homeowners’ association property within a community. These claims typically involve higher costs to
resolve than individual homeowner warranty claims, and the rate of claims is highly variable.
• Bodily injury: Bodily injury claims typically involve individuals (other than our employees) who claim they were injured while on our property or as a
result of our operations.
• Property damage: Property damage claims generally involve claims by third parties for alleged damage to real or personal property as a result of our
operations. Such claims may occasionally include those made against us by owners of property located near our communities.
Our self-insurance liability at each reporting date represents the estimated costs of reported claims, claims incurred but not yet reported, and claim adjustment
expenses. The amount of our self-insurance liability is based on an analysis performed by a third-party actuary that uses our historical claim and expense data, as
well as industry data to estimate these overall costs. Key assumptions used in developing these estimates include claim frequencies, severities and resolution
patterns, which can occur over an extended period of time. These estimates are subject to variability due to the length of time between the delivery of a home to a
homebuyer and when a construction defect claim is made, and the ultimate resolution of such claim; uncertainties regarding such claims relative to our markets and
the types of product we build; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree of judgment involved and the potential
for variability in these underlying assumptions, our actual future costs could differ from those estimated. In addition, changes in the frequency and severity of
reported claims and the estimates to resolve claims can impact the trends and assumptions used in the actuarial analysis, which could be material to our
consolidated financial statements. Though state regulations vary, construction defect claims are reported and resolved over a long period of time, which can extend
for 10 years or more. As a result, the majority of the estimated self-insurance liability based on the actuarial analysis relates to claims incurred but not yet reported.
Therefore, adjustments related to individual existing claims generally do not significantly impact the overall estimated liability. Adjustments to our liabilities
related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs.
Our self-insurance liability is presented on a gross basis for all years without consideration of insurance recoveries and amounts we have paid on behalf of and
expect to recover from other parties, if any. Estimated probable recoveries related to self-insurance of $60.0 million and $50.6 million are included in receivables
in our consolidated balance sheets at November 30, 2020 and 2019, respectively. These self-insurance recoveries are principally based on actuarially determined
amounts and depend on various factors, including, among other things, the above-described claim cost estimates, our insurance policy coverage limits for the
applicable policy year(s), historical third-party recovery rates, insurance industry practices, the regulatory environment, and legal precedent, and are subject to a
high degree of variability from year to year. Because of the inherent uncertainty and variability in these assumptions, our actual insurance recoveries could differ
significantly from amounts currently estimated.
The changes in our self-insurance liability were as follows (in thousands):
Balance at beginning of year
Self-insurance provided
Payments
Adjustments (a)
Balance at end of year
2020
Years Ended November 30,
2019
2018
$
$
177,765 $
15,399
(4,375)
5,391
194,180 $
176,841 $
19,185
(9,398)
(8,863)
177,765 $
177,695
20,436
(6,969)
(14,321)
176,841
(a)
Includes net changes in estimated probable recoveries related to self-insurance, which are recorded in receivables, to present our self-insurance liability on a
gross basis, and adjustments to reduce our previously recorded liability by $4.0 million in 2020 and $2.5 million in 2019.
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For most of our claims, there is no interaction between our warranty liability and self-insurance liability. Typically, if a matter is identified at its outset as
either a warranty or self-insurance claim, it remains as such through its resolution. However, there can be instances of interaction between the liabilities, such as
where individual homeowners in a community separately request warranty repairs to their homes to address a similar condition or issue and subsequently join
together to initiate, or potentially initiate, a legal process with respect to that condition or issue and/or the repair work we have undertaken. In these instances, the
claims and related repair work generally are initially covered by our warranty liability, and the costs associated with resolving the legal matter (including any
additional repair work) are covered by our self-insurance liability.
The payments we make in connection with claims and related repair work, whether covered within our warranty liability and/or our self-insurance liability,
may be recovered from our insurers to the extent such payments exceed the self-insured retentions or deductibles under our general liability insurance policies.
Also, in certain instances, in the course of resolving a claim, we pay amounts in advance of and/or on behalf of a subcontractor(s) or their insurer(s) and believe we
will be reimbursed for such payments. Estimates of all such amounts, if any, are recorded as receivables in our consolidated balance sheets when any such recovery
is considered probable.
Florida Chapter 558 Actions. We and certain of our subcontractors have received a growing number of claims from attorneys on behalf of individual owners
of our homes and/or homeowners’ associations that allege, pursuant to Chapter 558 of the Florida Statutes, various construction defects, with most relating to
stucco and water-intrusion issues. The claims primarily involve homes in our Jacksonville, Orlando, and Tampa operations. Under Chapter 558, homeowners must
serve written notice of a construction defect(s) and provide the served construction and/or design contractor(s) with an opportunity to respond to the noticed
issue(s) before they can file a lawsuit. Although we have resolved many of these claims without litigation, and a number of others have been resolved with
applicable subcontractors or their insurers covering the related costs, as of November 30, 2020, we had approximately 600 outstanding noticed claims, and some
are scheduled for trial over the next few quarters and beyond. In addition, some of our subcontractors’ insurers in some of these cases have informed us of their
inability to continue to pay claims-related costs. At November 30, 2020, we had an accrual for our estimated probable loss for these matters and a receivable for
estimated probable insurance recoveries. While it is reasonably possible that our loss could exceed the amount accrued and our recoveries could be less than the
amount recorded, at this time, we are unable to estimate the total amount of the loss in excess of the accrued amount and/or associated with a shortfall in the
recoveries that is reasonably possible.
Townhome Community Construction Defect Claims. In the 2016 fourth quarter, we received claims from a homeowners association alleging there were
construction defects, primarily involving roofing and stucco issues, at a completed townhome community in Northern California totaling approximately
$25.0 million. We, along with our outside consultants, have continued to investigate these allegations and we currently expect it may take additional quarters to
fully evaluate them. At November 30, 2020, we had an accrual for our estimated probable loss in this matter and a receivable for estimated probable insurance
recoveries that reflected the status of our investigation to such date. At this stage of our investigation into these allegations, it is reasonably possible that our loss
could exceed the amount accrued by an estimated range of $0 to $3.0 million. Our investigation will also involve identifying potentially responsible parties,
including insurers, to pay for or perform any necessary repairs. We are in discussions with the homeowners association regarding the claims and their resolution.
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 November 30, 2020, we had $897.6
million of performance bonds and $42.1 million of letters of credit outstanding. At November 30, 2019, we had $793.9 million of performance bonds and $34.7
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 is completed. The
expiration dates of some letters of credit issued in connection with community improvements coincide with the expected completion dates of the related projects or
obligations. Most letters of credit, however, are issued with an initial term of one year and are typically extended on a year-to-year basis until the related
performance obligations are completed.
Land Option Contracts and Other Similar Contracts. In the ordinary course of business, we enter into land option contracts and other similar contracts to
acquire rights to land for the construction of homes. At November 30, 2020, we had total cash deposits of $54.6 million to purchase land having an aggregate
purchase price of $1.42 billion. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance.
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Note 18. Legal Matters
We are involved in litigation and regulatory proceedings incidental to our business that are in various procedural stages. We believe that the accruals we have
recorded for probable and reasonably estimable losses with respect to these proceedings are adequate and that, as of November 30, 2020, it was not reasonably
possible that an additional material loss had been incurred in an amount in excess of the estimated amounts already recognized or disclosed in our consolidated
financial statements. We evaluate our accruals for litigation and regulatory proceedings at least quarterly and, as appropriate, adjust them to reflect (a) the facts and
circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments; (b) the
advice and analyses of counsel; and (c) the assumptions and judgment of management. Similar factors and considerations are used in establishing new accruals for
proceedings as to which losses have become probable and reasonably estimable at the time an evaluation is made. Our accruals for litigation and regulatory
proceedings are presented on a gross basis without consideration of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if
any. Estimates of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any, are recorded as receivables when such
recoveries are considered probable. Based on our experience, we believe that the amounts that may be claimed or alleged against us in these proceedings are not a
meaningful indicator of our potential liability. The outcome of any of these proceedings, including the defense and other litigation-related costs and expenses we
may incur, however, is inherently uncertain and could differ significantly from the estimate reflected in a related accrual, if made. Therefore, it is possible that the
ultimate outcome of any proceeding, if in excess of a related accrual or if an accrual had not been made, could be material to our consolidated financial statements.
Pursuant to SEC rules, we will disclose any proceeding in which a governmental authority is a party and that arises under any federal, state or local provisions
enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment only where we believe that
such proceeding will result in monetary sanctions on us, exclusive of interest and costs, above $1.0 million or is otherwise material to our consolidated financial
statements.
Note 19. Stockholders’ Equity
Preferred Stock. To help protect the benefits of our NOLs and other deferred tax assets from an ownership change under Section 382, on January 22, 2009, we
adopted a Rights Agreement (“Prior Rights Agreement”), and we declared a dividend distribution of one preferred share purchase right for each outstanding share
of common stock that was payable to stockholders of record as of the close of business on March 5, 2009. On April 12, 2018, we entered into an Amended and
Restated Rights Agreement with Computershare Inc., as rights agent, (“2018 Rights Agreement”) following its approval by our stockholders at our 2018 Annual
Meeting held on April 12, 2018. The 2018 Rights Agreement amended and restated the Prior Rights Agreement and extended the latest possible expiration date of
the rights issued pursuant to the Prior Rights Agreement to the close of business on April 30, 2021, and made certain other related changes. Otherwise, the 2018
Rights Agreement’s terms are substantively the same as those of the Prior Rights Agreement.
Subject to the terms, provisions and conditions of the 2018 Rights Agreement, if these rights become exercisable, each right would initially represent the right
to purchase from us 1/100th of a share of our Series A Participating Cumulative Preferred Stock for a purchase price of $85.00 (“Purchase Price”). If issued, each
fractional share of preferred stock would generally give a stockholder approximately the same dividend, voting and liquidation rights as does one share of our
common stock. However, prior to exercise, a right does not give its holder any rights as a stockholder, including without limitation any dividend, voting or
liquidation rights. The rights will not be exercisable until the earlier of (a) 10 calendar days after a public announcement by us that a person or group has become
an Acquiring Person (as defined under the Prior Rights Agreement) and (b) 10 business days after the commencement of a tender or exchange offer by a person or
group if upon consummation of the offer the person or group would beneficially own 4.9% or more of our outstanding common stock.
Until these rights become exercisable (“Distribution Date”), common stock certificates and/or book-entry shares will evidence the rights and may contain a
notation to that effect. Any transfer of shares of our common stock prior to the Distribution Date will constitute a transfer of the associated rights. After the
Distribution Date, the rights may be transferred other than in connection with the transfer of the underlying shares of our common stock. If there is an Acquiring
Person on the Distribution Date or a person or group becomes an Acquiring Person after the Distribution Date, each holder of a right, other than rights that are or
were beneficially owned by an Acquiring Person, which will be void, will thereafter have the right to receive upon exercise of a right and payment of the Purchase
Price, that number of shares of our common stock having a market value of two times the Purchase Price. After the later of the Distribution Date and the time we
publicly announce that an Acquiring Person has become such, our board of directors may exchange the rights, other than rights that are or were beneficially owned
by an Acquiring Person, which will be void, in whole or in part, at an exchange ratio of one share of common stock per right, subject to adjustment.
At any time prior to the later of the Distribution Date and the time we publicly announce that an Acquiring Person becomes such, our board of directors may
redeem all of the then-outstanding rights in whole, but not in part, at a price of $.001 per right,
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subject to adjustment (“Redemption Price”). The redemption will be effective immediately upon the board of directors’ action, unless the action provides that such
redemption will be effective at a subsequent time or upon the occurrence or nonoccurrence of one or more specified events, in which case the redemption will be
effective in accordance with the provisions of the action. Immediately upon the effectiveness of the redemption of the rights, the right to exercise the rights will
terminate and the only right of the holders of rights will be to receive the Redemption Price, with interest thereon. The rights issued pursuant to the 2018 Rights
Agreement will expire on the earliest of (a) the close of business on April 30, 2021 (b) the time at which the rights are redeemed, (c) the time at which the rights
are exchanged, (d) the time at which our board of directors determines that a related provision in our Restated Certificate of Incorporation is no longer necessary,
and (e) the close of business on the first day of a taxable year of ours to which our board of directors determines that no tax benefits may be carried forward.
Common Stock. On May 14, 2018, our board of directors authorized us to repurchase a total of up to 4,000,000 shares of our outstanding common stock. This
authorization reaffirmed and incorporated the then-current balance of 1,627,000 shares that remained under a prior board-approved share repurchase program. In
2018, we repurchased 1,806,053 shares of our common stock pursuant to this authorization, at a total cost of $35.0 million. The amount and timing of shares
remaining to be purchased under this share repurchase authorization 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.
Unrelated to the share repurchase program, our board of directors authorized the repurchase of not more than 680,000 shares of our outstanding common
stock, and also authorized potential future grants of up to 680,000 stock payment awards under the KB Home 2014 Equity Incentive Plan (“2014 Plan”), in each
case solely as necessary for director elections in respect of outstanding Director Plan SARs. The 2014 Plan, which was amended in April 2016, is discussed in Note
21 – Employee Benefit and Stock Plans. As of November 30, 2020, we have not repurchased any shares and no stock payment awards have been granted under the
2014 Plan, as amended, pursuant to the respective board of directors’ authorizations.
Our board of directors declared quarterly cash dividends of $.09 per share of common stock in the 2020 first, second and third quarters. In the 2020 fourth
quarter, our board of directors approved an increase in the quarterly cash dividend on our common stock to $.15 per share and declared a quarterly cash dividend at
the new higher rate. Our board of directors declared quarterly cash dividends of $.025 per share of common stock in the 2019 first and second quarters. In the 2019
third quarter, our board of directors approved an increase in the quarterly cash dividend on our common stock to $.09 per share, and declared quarterly cash
dividends at the new higher rate in the 2019 third and fourth quarters. Our board of directors declared four quarterly cash dividends of $.025 per share of common
stock in 2018. All dividends declared during 2020, 2019 and 2018 were also paid during those years.
Treasury Stock. In addition to the shares purchased in 2018 pursuant to our share repurchase program, we acquired $9.5 million, $7.3 million and $8.5 million
of our common stock in 2020, 2019 and 2018, respectively. All of the common stock acquired in 2020 and 2019 and a portion of the common stock acquired in
2018 consisted of previously issued shares delivered to us by employees to satisfy their withholding tax obligations on the vesting of PSUs and restricted stock
awards or of forfeitures of previous restricted stock awards. Treasury stock is recorded at cost. Differences between the cost of treasury stock and the reissuance
proceeds are recorded to paid-in capital. These transactions are not considered repurchases under the 4,000,000 share repurchase program described above. During
2020, we retired 23,487,966 shares of our treasury stock. Upon the retirement of the treasury stock, we deducted the par value from common stock and reflected
the excess of cost over par value as a reduction to retained earnings.
Note 20. Accumulated Other Comprehensive Loss
The following table presents the changes in the balances of each component of accumulated other comprehensive loss (in thousands):
Postretirement Benefit Plan Adjustments
Balance at November 30, 2018
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Income tax benefit related to items of other comprehensive loss
Other comprehensive loss, net of tax
87
Total Accumulated
Other Comprehensive
Loss
$
(9,565)
(10,268)
2,130
2,197
(5,941)
Postretirement Benefit Plan Adjustments
Balance at November 30, 2019
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Income tax benefit related to items of other comprehensive loss
Other comprehensive loss, net of tax
Reclassification of stranded tax effects to retained earnings
Balance at November 30, 2020
Total Accumulated
Other Comprehensive
Loss
$
$
(15,506)
(8,412)
1,388
1,897
(5,127)
(1,643)
(22,276)
The amounts reclassified from accumulated other comprehensive loss consisted of the following (in thousands):
Details About Accumulated Other Comprehensive Loss Components
Postretirement benefit plan adjustments
Amortization of net actuarial loss
Amortization of prior service cost
Settlement loss
Total reclassifications (a)
2020
Years Ended November 30,
2019
2018
$
$
963 $
425
—
1,388 $
218 $
1,556
356
2,130 $
336
1,556
—
1,892
(a) The accumulated other comprehensive loss components are included in the computation of net periodic benefit costs as further discussed in Note 22 –
Postretirement Benefits.
The estimated prior service cost expected to be amortized from accumulated other comprehensive loss into net periodic benefit cost during 2021 is $.1 million.
Note 21. Employee Benefit and Stock Plans
Most of our employees are eligible to participate in the KB Home 401(k) Savings Plan (“401(k) Plan”) under which we partially match employee
contributions. The aggregate cost of the 401(k) Plan to us was $6.5 million in 2020, $6.9 million in 2019 and $6.0 million in 2018. The assets of the 401(k) Plan
are held by a third-party trustee. The 401(k) Plan participants may direct the investment of their funds among one or more of the several fund options offered by
the 401(k) Plan. As of November 30, 2020, 2019 and 2018, approximately 4%, 5% and 5%, respectively, of the 401(k) Plan’s net assets at each period were
invested in our common stock.
Amended KB Home 2014 Plan. At our Annual Meeting of Stockholders held on April 7, 2016, our stockholders approved the Amended KB Home 2014 Equity
Incentive Plan (“Amended 2014 Plan”), authorizing, among other things, the issuance for grants of stock-based awards to our employees, non-employee directors
and consultants of up to 7,500,000 additional shares above the original 4,800,000 shares our stockholders approved under the plan (or an aggregate issuance of
12,300,000 shares), plus any shares that were available for grant as of April 7, 2014 under our 2010 Equity Incentive Plan (“2010 Plan”), and any shares subject to
then-outstanding awards under the 2010 Plan that subsequently expire or are cancelled, forfeited, tendered or withheld to satisfy tax withholding obligations with
respect to full value awards, or settled for cash. No new awards may be made under the 2010 Plan. Therefore, the Amended 2014 Plan is our only active equity
compensation plan. Under the Amended 2014 Plan, grants of stock options and other similar awards reduce the Amended 2014 Plan’s share capacity on a 1-for-1
basis, and grants of restricted stock and other similar “full value” awards reduce the Amended 2014 Plan’s share capacity on a 1.78-for-1 basis. In addition, subject
to the Amended 2014 Plan’s terms and conditions, a stock-based award may also be granted under the Amended 2014 Plan to replace an outstanding award granted
under another plan of ours (subject to the terms of such other plan) with terms substantially identical to those of the award being replaced.
The Amended 2014 Plan provides that stock options and SARs may be awarded for periods of up to 10 years. The Amended 2014 Plan also enables us to grant
cash bonuses and other stock-based awards.
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Stock-Based Compensation. With the approval of the management development and compensation committee, consisting entirely of independent members of
our board of directors, we have provided compensation benefits to certain of our employees in the form of stock options, restricted stock and PSUs. Certain stock-
based compensation benefits are also provided to our non-employee directors pursuant to the Director Plan. Compensation expense related to equity-based awards
is included in selling, general and administrative expenses in our consolidated statements of operations.
The following table presents our stock-based compensation expense (in thousands):
Stock options
Restricted stock
PSUs
Director awards
Total
2020
Years Ended November 30,
2019
2018
$
$
— $
6,993
13,069
1,469
21,531 $
189 $
6,080
10,742
1,301
18,312 $
917
4,600
8,790
1,554
15,861
Stock Options. Stock option transactions are summarized as follows:
Options outstanding at beginning of year
Granted
Exercised
Cancelled
Options outstanding at end of year
Options exercisable at end of year
Options available for grant at end of
year
2020
Years Ended November 30,
2019
2018
Weighted
Average
Exercise
Price
13.00
—
9.52
45.16
15.32
15.32
Options
4,163,481 $
—
(1,694,767)
(6,000)
2,462,714 $
2,462,714 $
4,888,526
Weighted
Average
Exercise
Price
16.02
—
13.27
40.43
13.00
13.00
Options
7,237,544 $
—
(2,300,004)
(774,059)
4,163,481 $
4,163,481 $
5,567,467
Weighted
Average
Exercise
Price
17.64
—
16.73
33.05
16.02
16.01
Options
9,265,240 $
—
(1,195,926)
(831,770)
7,237,544 $
6,948,670 $
6,418,197
There were no stock options granted in 2020, 2019 or 2018. We have not granted any stock option awards since 2016. The total intrinsic value of stock options
exercised was $48.2 million for the year ended November 30, 2020, $37.1 million for the year ended November 30, 2019 and $11.8 million for the year ended
November 30, 2018. The aggregate intrinsic value of stock options outstanding was $48.9 million, $89.9 million and $51.9 million at November 30, 2020, 2019
and 2018, respectively. The intrinsic value of stock options exercisable was $48.9 million at November 30, 2020, $89.9 million at November 30, 2019, and $50.5
million at November 30, 2018. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the price of the
option.
89
Stock options outstanding and stock options exercisable at November 30, 2020 are summarized as follows:
Options Outstanding
Options Exercisable
Range of Exercise Price
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
$6.32 to $14.62
$14.63 to $14.92
$14.93 to $16.21
$16.22 to $29.51
$6.32 to $29.51
808,187 $
723,000
644,527
287,000
2,462,714 $
14.52
14.92
16.21
16.63
15.32
3.8
4.9
5.8
2.9
4.5
Options
808,187 $
723,000
644,527
287,000
2,462,714 $
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
14.52
14.92
16.21
16.63
15.32
4.5
At November 30, 2020, there was no unrecognized stock-based compensation expense related to stock option awards as all of these awards were fully vested.
Restricted Stock. From time to time, we grant restricted stock to various employees as a compensation benefit. During the restriction periods, these employees
are entitled to vote and to receive cash dividends on such shares. The restrictions imposed with respect to the shares granted lapse in installments within, or in full
at the end of, three years after their grant date if certain conditions are met.
Restricted stock transactions are summarized as follows:
2020
Years Ended November 30,
2019
2018
Weighted
Average
per Share
Grant Date
Fair Value
20.66
35.57
34.25
28.18
19.56
Shares
500,066 $
265,187
(304,095)
(37,943)
423,215 $
Weighted
Average
per Share
Grant Date
Fair Value
23.19
31.67
34.66
22.81
20.66
Shares
555,457 $
282,523
(319,687)
(18,227)
500,066 $
Weighted
Average
per Share
Grant Date
Fair Value
21.69
23.05
19.79
21.76
23.19
Shares
503,926 $
303,030
(221,951)
(29,548)
555,457 $
Outstanding at beginning of
year
Granted
Vested
Cancelled
Outstanding at end of year
As of November 30, 2020, we had $12.8 million of total unrecognized compensation cost related to restricted stock awards that will be recognized over a
weighted average period of approximately three years.
Performance-Based Restricted Stock Units. On October 8, 2020, we granted PSUs to certain employees. Each PSU grant corresponds to a target amount of our
common stock (“Award Shares”). Each PSU entitles the recipient to receive a grant of between 0% and 200% of the recipient’s Award Shares, and will vest based
on our achieving, over a three-year period commencing on December 1, 2020 and ending on November 30, 2023, specified levels of (a) cumulative adjusted
earnings per share; (b) average adjusted return on invested capital; and (c) revenue growth performance relative to a peer group of high-production public
homebuilding companies. The grant date fair value of each such PSU was $40.06. On October 3, 2019, we granted PSUs to certain employees with similar terms as
the 2020 PSU grants, except that the applicable performance period commenced on December 1, 2019 and ends on November 30, 2022. The grant date fair value
of each such PSU was $33.10. On October 5, 2018, we granted PSUs to certain employees with similar terms as the 2020 PSU grants, except that the applicable
performance period commenced on December 1, 2018 and ends on November 30, 2021. The grant date fair value of each such PSU was $23.05.
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PSU transactions are summarized as follows:
2020
Years Ended November 30,
2019
2018
Weighted
Average
per Share
Grant Date
Fair Value
22.13
40.05
40.04
—
23.25
Shares
1,262,664 $
397,452
(313,246)
—
1,346,870 $
Weighted
Average
per Share
Grant Date
Fair Value
18.70
30.45
22.67
—
22.13
Shares
1,090,967 $
468,957
(297,260)
—
1,262,664 $
Weighted
Average
per Share
Grant Date
Fair Value
20.09
25.70
31.28
—
18.70
Shares
925,232 $
603,424
(437,689)
—
1,090,967 $
Outstanding at beginning of
year
Granted
Vested
Cancelled
Outstanding at end of year
The number of shares of our common stock actually granted to a recipient, if any, when a PSU vests will depend on the degree of achievement of the
applicable performance measures during the applicable three-year period. The shares of our common stock that were granted under the terms of PSUs that vested
in 2020 included an aggregate of 108,511 additional shares above the target amount awarded to the eligible recipients based on our achieving certain levels of the
three above-described metrics over the three-year period from December 1, 2016 through November 30, 2019. The shares of our common stock that were granted
under the terms of PSUs that vested in 2019 included an aggregate of 119,260 additional shares above the target amount awarded to the eligible recipients based on
our achieving certain levels of the three above-described metrics over the three-year period from December 1, 2015 through November 30, 2018. The shares of our
common stock that were granted under the terms of PSUs that vested in 2018 included an aggregate of 194,529 additional shares above the target amount awarded
to the eligible recipients based on our achieving certain levels of average return on equity performance and revenue growth performance relative to a peer group of
high-production homebuilding companies over the three-year period from December 1, 2014 through November 30, 2017. The PSUs do not have dividend or
voting rights during the performance period. Compensation cost for PSUs is initially estimated based on target performance achievement and adjusted as
appropriate throughout the performance period. Accordingly, future compensation costs associated with outstanding PSUs may increase or decrease based on the
probability and extent of achievement with respect to the applicable performance measures. At November 30, 2020, we had $34.3 million of total unrecognized
compensation cost related to unvested PSUs, which is expected to be recognized over a weighted-average period of approximately three years.
Director Awards. We have granted Director Plan SARs and deferred common stock awards to our non-employee directors pursuant to the terms of the
Director Plan and elections made by each director. All of these awards were fully vested as of November 30, 2016. Director Plan SARs, which have not been
granted since April 2014 as they ceased being a component of non-employee director compensation after that date, are stock settled, have terms of up to 15 years
and may be exercised when a respective director leaves the board or earlier if applicable stock ownership requirements have been met. Deferred common stock
awards will be paid out at the earlier of a change in control or the date a respective director leaves the board. All Director Plan SARs were granted at an exercise
price equal to the closing price of our common stock on the date of grant. At November 30, 2020, 2019 and 2018, the aggregate outstanding Director Plan SARs
were 155,569, 224,674 and 308,880, respectively, and the aggregate outstanding deferred common stock awards granted under the Director Plan were 548,952,
519,160 and 490,240, respectively. In addition, we have granted common stock on an unrestricted basis to our non-employee directors on the grant date pursuant to
the Director Plan and elections made by each director.
Grantor Stock Ownership Trust. We have a grantor stock ownership trust (“Trust”), administered by a third-party trustee, that holds and distributes the shares
of common stock acquired to support certain employee compensation and employee benefit obligations under our existing stock option plan, the 401(k) Plan and
other employee benefit plans. The existence of the Trust does not impact the amount of benefits or compensation that is paid under these plans.
For financial reporting purposes, the Trust is consolidated with us, and therefore any dividend transactions between us and the Trust are eliminated. Acquired
shares held by the Trust remain valued at the market price on the date of purchase and are shown as a reduction to stockholders’ equity in the consolidated balance
sheets. The difference between the Trust share value and the market value on the date shares are released from the Trust is included in paid-in capital. Common
stock held in the Trust is not considered outstanding in the computations of earnings per share. The Trust held 7,124,317 and 7,630,582 shares of common stock at
November 30, 2020 and 2019, respectively. The trustee votes shares held by the Trust in accordance with voting directions from eligible employees, as specified in
a trust agreement with the trustee.
91
Note 22. Postretirement Benefits
We have a supplemental non-qualified, unfunded retirement plan, the KB Home Retirement Plan (“Retirement Plan”), effective as of July 11, 2002, pursuant
to which we have offered to pay supplemental pension benefits to certain designated individuals (consisting of current and former employees) in connection with
their retirement. The Retirement Plan was closed to new participants in 2004. We also have an unfunded death benefit plan, the KB Home Death Benefit Only Plan
(“DBO Plan”), implemented on November 1, 2001, for certain designated individuals (consisting of current and former employees). The DBO Plan was closed to
new participants in 2006.
In connection with these plans and two other minor benefit programs, we have purchased cost recovery life insurance contracts on the lives of the designated
individuals. The insurance contracts associated with the Retirement Plan and DBO Plan are held by a trust. The trust is the owner and beneficiary of such insurance
contracts. The amount of the insurance coverage under the contracts is designed to provide sufficient funds to cover all costs of the plans if assumptions made as to
employment term, mortality experience, policy earnings and other factors, as applicable, are realized. The cash surrender value of the Retirement Plan life
insurance contracts was $43.5 million at November 30, 2020 and $44.7 million at November 30, 2019. We recognized investment gains on the cash surrender
value of the Retirement Plan life insurance contracts of $.7 million in 2020 and $2.1 million in 2019, and an investment loss of $.9 million in 2018. In 2020, 2019
and 2018, we paid $1.9 million, $1.8 million and $1.6 million, respectively, in benefits under the Retirement Plan to eligible former employees. The cash surrender
value of the DBO Plan life insurance contracts was $18.8 million at November 30, 2020 and $18.4 million at November 30, 2019. We recognized investment gains
on the cash surrender value of the DBO Plan life insurance contracts of $.3 million in 2020 and $.9 million in 2019, and an investment loss of $.3 million in 2018.
In 2019, we paid $1.7 million in benefits under the DBO Plan. We did not pay out any benefits under the DBO Plan in 2020 or 2018.
The net periodic benefit cost of our Retirement Plan and DBO Plan consisted of the following (in thousands):
Interest cost
Amortization of prior service cost
Service cost
Amortization of net actuarial loss
Settlement loss
Total
2020
Years Ended November 30,
2019
2018
1,950 $
425
1,077
912
—
4,364 $
2,478 $
1,556
958
218
356
5,566 $
2,252
1,556
1,085
336
—
5,229
$
$
The liabilities related to these plans were $77.7 million at November 30, 2020 and $69.3 million at November 30, 2019, and are included in accrued expenses
and other liabilities in the consolidated balance sheets. For the years ended November 30, 2020 and 2019, the discount rates we used for the plans were 1.8% and
2.7%, respectively.
Benefit payments under our Retirement Plan and DBO Plan are expected to be paid during each year ending November 30 as follows: 2021 — $2.5 million;
2022 — $2.6 million; 2023 — $2.9 million; 2024 — $3.1 million; 2025 — $3.5 million; and for the five years ended November 30, 2030 — $21.8 million in the
aggregate.
Note 23. Supplemental Disclosure to Consolidated Statements of Cash Flows
The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):
Summary of cash and cash equivalents at the end of the year:
Homebuilding
Financial services
Total
2020
Years Ended November 30,
2019
2018
$
$
681,190 $
1,339
682,529 $
453,814 $
1,044
454,858 $
574,359
760
575,119
92
Supplemental disclosure of cash flow information:
Interest paid, net of amounts capitalized
Income taxes paid
Income taxes refunded
Supplemental disclosure of non-cash activities:
Reclassification of federal tax refund from deferred tax assets to receivables
Increase in operating lease right-of-use assets and lease liabilities due to adoption of ASC 842
Decrease in inventories due to adoption of ASC 606
Increase in property and equipment, net due to adoption of ASC 606
Increase (decrease) in consolidated inventories not owned
Increase in inventories due to distributions of land and land development from an
unconsolidated joint venture
Inventories acquired through seller financing
Note 24. Quarterly Results (unaudited)
2020
Years Ended November 30,
2019
2018
$
866 $
17,253
44,336
82,617
31,199
—
—
7,254
9,350
21,712
(1,327) $
4,479
221
—
—
(35,288)
31,194
(9,634)
9,662
8,967
8,338
11,949
220
—
—
—
—
16,098
17,637
44,586
The following tables present our consolidated quarterly results for the years ended November 30, 2020 and 2019 (in thousands, except per share amounts):
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2020
Revenues
Gross profits
Inventory impairment and land option contract abandonment charges
Pretax income (a)
Net income
Earnings per share:
Basic
Diluted
2019
Revenues
Gross profits
Inventory impairment and land option contract abandonment charges
Pretax income (b)
Net income
Earnings per share:
Basic
Diluted
$
$
1,075,935 $
188,920
5,672
68,848
59,748
.66
.63
811,483 $
139,604
3,555
34,511
30,011
.34
.31
913,970 $
168,634
4,379
67,789
51,989
.57
.55
999,013 $
199,462
6,888
101,315
78,415
.86
.83
1,021,803 $
177,019
4,337
56,761
47,461
1,160,786 $
216,029
5,251
91,936
68,136
.54
.51
.77
.73
1,194,256
241,624
11,730
126,091
106,091
1.16
1.12
1,558,675
306,834
4,148
164,967
123,167
1.37
1.31
(a) Pretax income for the second quarter included $6.7 million of severance charges.
(b) Pretax income for the fourth quarter included a $6.8 million loss on the early extinguishment of debt.
Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree
with per share amounts for the year.
93
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of KB Home:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of KB Home (the Company) as of November 30, 2020 and 2019, the related consolidated
statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended November 30, 2020, and the
related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at November 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the
period ended November 30, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s
internal control over financial reporting as of November 30, 2020, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated January 22, 2021 expressed an unqualified opinion
thereon.
Adoption of ASU No. 2014-09
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue recognition, and real estate
inventories and cost of sales effective December 1, 2018 due to the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” and its
related amendments.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters
or on the accounts or disclosures to which they relate.
94
Description of the Matter
How We Addressed the Matter in Our Audit
Evaluation of Inventories for Impairment
As of November 30, 2020, the Company’s real estate inventories were $3.90 billion. As more
fully described in Note 7 to the consolidated financial statements, the Company assesses each
community or land parcel to identify indicators of potential impairment. When an indicator
of potential impairment is identified, the Company evaluates the recoverability of the asset
based on its projected undiscounted future cash flows. When the carrying value of the asset is
greater than its projected undiscounted future cash flows, the Company estimates the fair
value of the asset based on its projected discounted cash flows and records an impairment
charge. Inputs used in the Company’s impairment assessments consider then-current market
conditions and trends in the market in which the asset is located as well as factors known at
the time the cash flows are calculated. These factors may include recent trends in orders,
backlog, cancellation rates and volume of homes delivered, as well as expectations related to:
future product offerings; market supply and demand, including estimated average selling
prices and related price appreciation; land development and home construction costs to be
incurred; and discount rates reflecting the inherent risk associated with the asset.
Auditing the Company’s impairment assessment for real estate inventories involves a high
degree of auditor judgment in evaluating management’s estimates of future cash flows and
fair values used to evaluate recoverability or measure impairment for projects with identified
impairment indicators. Management’s estimates that support the projected future cash flows
and fair values are based on subjective assumptions about expected future sales activity, risk
specific to the asset and conditions in the market in which the asset is located.
We obtained an understanding, evaluated the design, and tested the operating effectiveness of
controls over the Company’s real estate inventory impairment assessment process. For
example, we tested controls over the Company’s review of significant data and assumptions
used in the Company’s estimation of cash flows and fair value analysis for projects with
identified impairment indicators.
To test the Company’s real estate inventory impairment assessment, our audit procedures
included, among others, evaluating the significant judgments, data and assumptions used to
estimate future cash flows and fair values for assets with identified indicators of impairment.
These procedures included comparison of such data and assumptions to the Company’s
accounting records and market data, recalculation of the Company’s estimates and searching
for evidence contrary to such judgments and assumptions. We also involved our real estate
valuation specialists to assist in evaluating the key assumptions and methodologies used in
the impairment assessments for certain projects, including assumptions related to average
selling prices, expected home construction costs, and discount rate assumptions used to
estimate fair values.
95
Description of the Matter
Self-insurance Liabilities and Recoveries
At November 30, 2020, the Company’s self-insurance liability was $194.2 million and
receivables for estimated probable insurance and other recoveries related to self-insurance
claims totaled $60.0 million. As disclosed in Note 17 to the consolidated financial
statements, the Company’s self-insurance liability for construction defects is based on an
analysis prepared by a third-party actuary that uses historical claim and expense data as well
as industry data to estimate the cost of all unpaid losses, including estimates related to claims
incurred but not yet reported. Key assumptions used in developing these estimates include
claim frequencies, severities and resolution patterns, which can occur over an extended
period of time. Self-insurance recoveries are principally based on actuarially determined
amounts and consider the claim cost estimates described above, applicable insurance policy
coverage limits, historical recovery rates, and other factors.
Auditing the Company’s self-insurance liability and related recoveries is complex and highly
judgmental due to the complexity of the actuarial methods used to estimate the losses and
related recoveries and degree of subjective judgment required to assess the underlying
assumptions, which required us to involve our actuarial specialists. These estimates are
subject to variability due to the length of time between the delivery of a home to a
homebuyer and when a construction defect claim is made and ultimately resolved;
uncertainties regarding such claims relative to the markets and types of products built; and
legal or regulatory actions and interpretations, among other factors.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of
controls over the Company’s self-insurance liability and recoveries estimation process
including controls over the data and assumptions used in the analysis.
To test the Company’s self-insurance liability and related recoveries, our audit procedures
included, among others, testing the completeness and accuracy of the underlying claims and
recovery data utilized by the Company’s third-party actuary, testing the existence and terms
of third-party insurance policies, and involving our actuarial specialist to assist in our
evaluation of the methodologies and assumptions applied by management’s third-party
actuary. Additionally, we compared the Company’s recorded self-insurance liability and
related recoveries to estimated ranges which our actuarial specialist developed based on
independently selected assumptions.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1991.
Los Angeles, California
January 22, 2021
96
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that information we are required to disclose in the reports we file or submit under the
Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms, and accumulated and communicated to management, including our Chief Executive Officer (“Principal Executive Officer”) and Chief Financial
Officer (“Principal Financial Officer”), as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of
senior management, including our Principal Executive Officer and Principal Financial Officer, we evaluated our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures were effective as of November 30, 2020.
Internal Control Over Financial Reporting
(a) Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. Our management recognizes that there are inherent
limitations in the effectiveness of any internal control and that effective internal control over financial reporting may not prevent or detect misstatements. In
addition, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. Under the supervision and with the
participation of senior management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of our internal
control over financial reporting based on the Internal Control — Integrated Framework (2013) established by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on the evaluation under that framework and applicable SEC rules, our management concluded that our internal control over
financial reporting was effective as of November 30, 2020.
Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this annual report, has
issued its report on the effectiveness of our internal control over financial reporting as of November 30, 2020, which is presented below.
(b) Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of KB Home:
Opinion on Internal Control over Financial Reporting
We have audited KB Home’s internal control over financial reporting as of November 30, 2020, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, KB Home
(the Company) maintained, in all material respects, effective internal control over financial reporting as of November 30, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2020 consolidated
financial statements of the Company and our report dated January 22, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are
97
required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Los Angeles, California
January 22, 2021
(c) Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended November 30, 2020 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information for this item for executive officers is provided above in the Executive Officers of the Registrant section in this report. Except as stated below,
the other information for this item will be provided to the extent applicable in the “Corporate Governance and Board Matters,” “Election of Directors,” “Ownership
of KB Home Securities” and “Annual Meeting, Voting and Other Information” sections in our Proxy Statement for our 2021 Annual Meeting of Stockholders
(“2021 Proxy Statement”) and is incorporated herein by this reference.
98
Ethics Policy
We have adopted an ethics policy for our directors, officers (including our principal executive officer, principal financial officer and principal accounting
officer) and employees. The ethics policy is available on our investor relations website at investor.kbhome.com. Stockholders may request a free copy of the ethics
policy from:
KB Home
Attention: Investor Relations
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
investorrelations@kbhome.com
Within the time period required by the SEC and the New York Stock Exchange, we will post on our investor relations website any amendment to our ethics
policy and any waiver applicable to our principal executive officer, principal financial officer or principal accounting officer, or persons performing similar
functions, and our other executive officers or directors.
Corporate Governance Principles
We have adopted corporate governance principles, which are available on our investor relations website. Stockholders may request a free copy of the corporate
governance principles from the address, phone number and e-mail address stated above under “Ethics Policy.”
Item 11. EXECUTIVE COMPENSATION
The information for this item will be provided in the “Corporate Governance and Board Matters” and “Compensation Discussion and Analysis” sections in our
2021 Proxy Statement and is incorporated herein by this reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except as provided below, the information for this item will be provided in the “Ownership of KB Home Securities” section in our 2021 Proxy Statement and
is incorporated herein by this reference.
The following table presents information as of November 30, 2020 with respect to shares of our common stock that may be issued under our existing equity
compensation plans:
Plan category
Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
Total
Equity Compensation Plan Information
Number of
common shares to
be issued upon
exercise of
outstanding options,
warrants and
rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of common
shares remaining
available for future
issuance under equity
compensation plans
(excluding common
shares reflected in
column(a))
(c)
2,462,714
—
2,462,714
$
$
15.32
—
15.32
4,888,526
—
(1)
4,888,526
(1) Represents a prior non-employee directors compensation plan under which our non-employee directors received Director Plan SARs, which were initially
granted as cash-settled instruments. As discussed in Note 19 – Stockholders’ Equity in the Notes to Consolidated Financial Statements in this report, all non-
employee directors serving on our board of directors have elected to receive shares of our common stock in settlement of their Director Plan SARs under the
terms of the plan. We consider this non-employee director compensation plan as having no available capacity to issue shares of our common stock.
99
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information for this item will be provided in the “Corporate Governance and Board Matters” section in our 2021 Proxy Statement and is incorporated
herein by this reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information for this item will be provided in the “Independent Auditor Fees and Services” section in our 2021 Proxy Statement and is incorporated herein
by this reference.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
Reference is made to the index set forth on page 53 of this Annual Report on Form 10-K.
2. Financial Statement Schedules
Financial statement schedules have been omitted because they are not applicable or the required information is provided in the consolidated financial
statements or notes thereto.
3. Exhibits
Exhibit
Number
3.1
3.2†
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Description
Restated Certificate of Incorporation, as amended, filed as an exhibit to our Current Report on Form 8-K dated April 7, 2009 (File No. 001-
09195), is incorporated by reference herein.
Amended and Restated By-Laws of KB Home, as amended.
Indenture relating to our Senior Notes among us, the Guarantors party thereto and Sun Trust Bank, Atlanta, dated January 28, 2004, filed as
an exhibit to our Registration Statement No. 333-114761 on Form S-4, is incorporated by reference herein.
Fifth Supplemental Indenture, dated August 17, 2007, relating to our Senior Notes by and between us, the Guarantors named therein, and
the Trustee, filed as an exhibit to our Current Report on Form 8-K dated August 22, 2007 (File No. 001-09195), is incorporated by
reference herein.
Sixth Supplemental Indenture, dated as of January 30, 2012, relating to our Senior Notes by and between us, the Guarantors named therein,
and the Trustee, filed as an exhibit to our Current Report on Form 8-K dated February 2, 2012 (File No. 001-09195), is incorporated by
reference herein.
Seventh Supplemental Indenture, dated as of January 11, 2013, relating to our Senior Notes by and among us, the Guarantors named
therein, and the Trustee, filed as an exhibit to our Current Report on Form 8-K dated January 11, 2013 (File No. 001-09195), is
incorporated by reference herein.
Specimen of 7.50% Senior Notes due 2022, filed as an exhibit to our Current Report on Form 8-K dated July 31, 2012 (File No. 001-
09195), is incorporated by reference herein.
Form of officers’ certificates and guarantors’ certificates establishing the terms of the 7.50% Senior Notes due 2022, filed as an exhibit to
our Current Report on Form 8-K dated July 31, 2012 (File No. 001-09195), is incorporated by reference herein.
Eighth Supplemental Indenture, dated as of March 12, 2013, by and among us, the Guarantors party thereto, the Additional Guarantors
named therein and U.S. Bank National Association, as Trustee, filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter
ended May 31, 2013 (File No. 001-09195), is incorporated by reference herein.
Specimen of 7.00% Senior Notes due 2021, filed as an exhibit to our Current Report on Form 8-K dated October 29, 2013 (File No. 001-
09195), is incorporated by reference herein.
100
Exhibit
Number
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
10.1
10.2
10.3*
10.4*
Description
Form of officers’ certificates and guarantors’ certificates establishing the terms of the 7.00% Senior Notes due 2021, filed as an exhibit to
our Current Report on Form 8-K dated October 29, 2013 (File No. 001-09195), is incorporated by reference herein.
Ninth Supplemental Indenture, dated as of February 28, 2014, by and among us, the Guarantors party thereto, the Additional Guarantors
named therein and U.S. Bank National Association, as Trustee, filed as an exhibit to our Post-Effective Amendment No. 4 to Form S-3
Registration Statement (No. 333-176930), is incorporated by reference herein.
Form of 7.625% Senior Notes due 2023, filed as an exhibit to our Current Report on Form 8-K dated February 17, 2015 (File No. 001-
09195), is incorporated by reference herein.
Form of officers’ certificates and guarantors’ certificates establishing the terms of the 7.625% Senior Notes due 2023, filed as an exhibit to
our Current Report on Form 8-K dated February 17, 2015 (File No. 001-09195), is incorporated by reference herein.
Amended and Restated Rights Agreement, dated effective as of April 12, 2018, by and between KB Home and Computershare, Inc., as
Rights Agent, filed as Exhibit 4.1 to our Amended Registration Statement on Form 8-A/A dated April 13, 2018 (File No. 001-09195), is
incorporated by reference herein.
Tenth Supplemental Indenture, dated as of January 22, 2019, by and among us, the Guarantors party thereto, the Additional Guarantors
named therein and U.S. Bank National Association, as Trustee, filed as an exhibit to our 2018 Annual Report on Form 10-K (File No. 001-
09195), is incorporated by reference herein.
Form of 6.875% Senior Notes due 2027, filed as an exhibit to our Current Report on Form 8-K dated February 20, 2019 (File No. 001-
09195), is incorporated by reference herein.
Form of officers’ certificates and guarantors’ certificates establishing the form and terms of the 6.875% Senior Notes due 2027, filed as an
exhibit to our Current Report on Form 8-K dated February 20, 2019 (File No. 001-09195), is incorporated by reference herein.
Form of 7.625% Senior Notes due 2023, filed as an exhibit to our Current Report on Form 8-K dated February 20, 2019 (File No. 001-
09195), is incorporated by reference herein.
Form of officers’ certificates and guarantors’ certificates establishing the form and terms of the 7.625% Senior Notes due 2023, filed as an
exhibit to our Current Report on Form 8-K dated February 20, 2019 (File No. 001-09195), is incorporated by reference herein.
Form of 4.800% Senior Notes due 2029, filed as an exhibit to our Current Report on Form 8-K dated November 4, 2019 (File No. 001-
09195), is incorporated by reference herein.
Form of officers’ certificates and guarantors’ certificates establishing the form and terms of the 4.800% Senior Notes due 2029, filed as an
exhibit to our Current Report on Form 8-K dated November 4, 2019 (File No. 001-09195), is incorporated by reference herein.
Description of KB Home Common Stock Registered Under Section 12 of the Securities Exchange Act of 1934, filed as an exhibit to our
2019 Annual Report on Form 10-K (File No. 001-09195), is incorporated by reference herein..
KB Home Directors’ Legacy Program, as amended January 1, 1999, filed as an exhibit to our 1998 Annual Report on Form 10-K (File No.
001-09195), is incorporated by reference herein.
Trust Agreement between Kaufman and Broad Home Corporation and Wachovia Bank, N.A. as Trustee, dated as of August 27, 1999, filed
as an exhibit to our 1999 Annual Report on Form 10-K (File No. 001-09195), is incorporated by reference herein.
KB Home Nonqualified Deferred Compensation Plan with respect to deferrals prior to January 1, 2005, effective March 1, 2001, filed as an
exhibit to our 2001 Annual Report on Form 10-K (File No. 001-09195), is incorporated by reference herein.
KB Home Nonqualified Deferred Compensation Plan with respect to deferrals on and after January 1, 2005, effective January 1, 2009 (File
No. 001-09195), filed as an exhibit to our 2008 Annual Report on Form 10-K, is incorporated by reference herein.
101
Exhibit
Number
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13
10.14
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
Description
KB Home Change in Control Severance Plan, as amended and restated effective January 1, 2009, filed as an exhibit to our 2008 Annual
Report on Form 10-K (File No. 001-09195), is incorporated by reference herein.
KB Home Death Benefit Only Plan, filed as an exhibit to our 2001 Annual Report on Form 10-K (File No. 001-09195), is incorporated by
reference herein.
Amendment No. 1 to the KB Home Death Benefit Only Plan, effective as of January 1, 2009, filed as an exhibit to our 2008 Annual Report
on Form 10-K (File No. 001-09195), is incorporated by reference herein.
KB Home Retirement Plan, as amended and restated effective January 1, 2009, filed as an exhibit to our 2008 Annual Report on Form 10-K
(File No. 001-09195), is incorporated by reference herein.
Employment Agreement of Jeffrey T. Mezger, dated February 28, 2007, filed as an exhibit to our Current Report on Form 8-K dated
March 6, 2007 (File No. 001-09195), is incorporated by reference herein.
Amendment to the Employment Agreement of Jeffrey T. Mezger, dated December 24, 2008, filed as an exhibit to our 2008 Annual Report
on Form 10-K (File No. 001-09195), is incorporated by reference herein.
Policy Regarding Stockholder Approval of Certain Severance Payments, adopted July 10, 2008, filed as an exhibit to our Current Report on
Form 8-K dated July 15, 2008 (File No. 001-09195), is incorporated by reference herein.
KB Home Executive Severance Plan, filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended August 31, 2008 (File
No. 001-09195), is incorporated by reference herein.
Amendment to Trust Agreement by and between KB Home and Wachovia Bank, N.A., dated August 24, 2009, filed as an exhibit to our
Quarterly Report on Form 10-Q for the quarter ended August 31, 2009 (File No. 001-09195), is incorporated by reference herein.
Form of Indemnification Agreement, filed as an exhibit to our Current Report on Form 8-K dated April 2, 2010 (File No. 001-09195), is
incorporated by reference herein.
KB Home 2010 Equity Incentive Plan, filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended February 28, 2010
(File No. 001-09195), is incorporated by reference herein.
Form of Stock Option Award Agreement under the KB Home 2010 Equity Incentive Plan, filed as an exhibit to our Current Report on Form
8-K dated July 20, 2010 (File No. 001-09195), is incorporated by reference herein.
Amendment to the KB Home 2010 Equity Incentive Plan, filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended
February 28, 2011 (File No. 001-09195), is incorporated by reference herein.
Executive Severance Benefit Decisions, filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended February 28, 2011
(File No. 001-09195), is incorporated by reference herein.
KB Home 2010 Equity Incentive Plan Stock Option Agreement for performance stock option grant to Jeffrey T. Mezger, filed as an exhibit
to our 2011 Annual Report on Form 10-K (File No. 001-09195), is incorporated by reference herein.
KB Home 2014 Equity Incentive Plan, filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended February 28, 2014
(File No. 001-09195), is incorporated by reference herein.
Form of Stock Option Agreement under the KB Home 2014 Equity Incentive Plan, filed as an exhibit to our Current Report on Form 8-K
dated October 14, 2014 (File No. 001-09195), is incorporated by reference herein.
Form of Performance Cash Award Agreement under the KB Home 2014 Equity Incentive Plan, filed as an exhibit to our Current Report on
Form 8-K dated October 14, 2014 (File No. 001-09195), is incorporated by reference herein.
Form of Restricted Cash Award Agreement under the KB Home 2014 Equity Incentive Plan, filed as an exhibit to our Current Report on
Form 8-K dated October 14, 2014 (File No. 001-09195), is incorporated by reference herein.
102
Exhibit
Number
10.24*
10.25*
10.26*
10.27
10.28
10.29*
10.30†
10.31†
21†
22†
23†
31.1†
31.2†
32.1†
32.2†
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104†
Description
Amended KB Home 2014 Equity Incentive Plan, effective April 7, 2016, filed as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended May 31, 2016 (File No. 001-09195), is incorporated by reference herein.
Amended KB Home 2010 Equity Incentive Plan, as amended on April 13, 2017, filed as an exhibit to our Quarterly Report on Form 10-Q
for the quarter ended May 31, 2017 (File No. 001-09195), is incorporated by reference herein.
Form of Restricted Stock Agreement under the Amended KB Home 2014 Equity Incentive Plan, filed as an exhibit to our 2018 Annual
Report on Form 10-K (File No. 001-09195), is incorporated by reference herein.
Fifth Amended and Restated KB Home Non-Employee Directors Compensation Plan, effective as of July 11, 2019, filed as an exhibit to
our Quarterly Report on Form 10-Q for the quarter ended August 31, 2019 (File No. 001-09195), is incorporated by reference herein.
Third Amended and Restated Revolving Loan Agreement, dated as of October 7, 2019, among us, the banks party thereto, and Citibank,
N.A., as Administrative Agent.
Form of Performance-Based Restricted Stock Unit Award Agreement under the Amended KB Home 2014 Equity Incentive Plan, filed as
an exhibit to our Current Report on Form 8-K dated October 13, 2020 (File No. 001-09195), is incorporated by reference herein.
Second Amendment to the KB Home Nonqualified Deferred Compensation Plan, effective December 1, 2020.
Third Amendment to Trust Agreement by and between KB Home and Wells Fargo Bank, N.A., as Trustee, dated January 1, 2021.
Subsidiaries of the Registrant.
List of Guarantor Subsidiaries.
Consent of Independent Registered Public Accounting Firm.
Certification of Jeffrey T. Mezger, Chairman, President and Chief Executive Officer of KB Home Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Jeff J. Kaminski, Executive Vice President and Chief Financial Officer of KB Home Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Jeffrey T. Mezger, Chairman, President and Chief Executive Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Jeff J. Kaminski, Executive Vice President and Chief Financial Officer of KB Home Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded
within the Inline XBRL document.
Inline XBRL Taxonomy Extension Schema Document.
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
Inline XBRL Taxonomy Extension Definition Linkbase Document.
Inline XBRL Taxonomy Extension Label Linkbase Document.
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101).
* Management contract or compensatory plan or arrangement in which executive officers are eligible to participate.
† Document filed with this Form 10-K.
Item 16. FORM 10-K SUMMARY
None.
103
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
KB Home
By:
/S/ JEFF J. KAMINSKI
Jeff J. Kaminski
Executive Vice President and Chief Financial Officer
Date:
January 22, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
Signature
/S/ JEFFREY T. MEZGER
Jeffrey T. Mezger
/S/ JEFF J. KAMINSKI
Jeff J. Kaminski
/S/ WILLIAM R. HOLLINGER
William R. Hollinger
/S/ ARTHUR R. COLLINS
Arthur R. Collins
/S/ DORENE C. DOMINGUEZ
Dorene C. Dominguez
/S/ KEVIN P. ELTIFE
Kevin P. Eltife
/S/ TIMOTHY W. FINCHEM
Timothy W. Finchem
/S/ STUART A. GABRIEL
Stuart A. Gabriel
/S/ THOMAS W. GILLIGAN
Thomas W. Gilligan
/S/ ROBERT L. JOHNSON
Robert L. Johnson
/S/ MELISSA LORA
Melissa Lora
/S/ JAMES C. WEAVER
James C. Weaver
/S/ MICHAEL M. WOOD
Michael M. Wood
Title
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
104
Date
January 22, 2021
January 22, 2021
January 22, 2021
January 22, 2021
January 22, 2021
January 22, 2021
January 22, 2021
January 22, 2021
January 22, 2021
January 22, 2021
January 22, 2021
January 22, 2021
January 22, 2021
Exhibit 3.2
AMENDED AND RESTATED BY-LAWS
OF
KB HOME
(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
Section 1.1 Registered Office. The registered office of KB Home (the “Corporation”) shall be as set forth in the Corporation’s
Amended and Restated Certificate of Incorporation (as it may be amended from time to time, the “Certificate of Incorporation”).
Section 1.2 Other Offices. The Corporation may also have an office or offices, and keep the books and records of the Corporation,
except as may otherwise be required by applicable law, at such other place or places, either within or outside of the State of Delaware, as the
Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1 Annual Meeting. Annual meetings of stockholders, for the election of persons to the Board of Directors and for the
transaction of such other business as may properly be considered at any such meeting, shall be held at such place, if any, on such date and at
such time as may be designated by the Board of Directors.
Section 2.2 Special Meeting. Subject to the rights of holders of any outstanding preferred stock or any other class or series of capital
stock of the Corporation that may have a preference over the common stock of the Corporation as to dividends or upon liquidation
(“Preferred Stock”), special meetings of stockholders may be called at any time only by the Board of Directors or the Chairman of the Board
of Directors, and shall be held at such place, if any, on such date and at such time as may be designated by the Board of Directors. Business
transacted at any special meeting of stockholders shall be confined to the purpose or purposes stated in the notice thereof.
Section 2.3 Notice of Meetings.
(a) For each meeting of stockholders, notice of the place, if any, date and time of the meeting, the record date for
determining the stockholders entitled to vote at the meeting (if such date is different from the record date for determining the stockholders
entitled to notice of the meeting), the means of remote communications, if any, by which stockholders and proxy holders may be deemed
to be present in person and vote at the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is
called, shall be given to each stockholder entitled to vote at the meeting as of the record date for determining the stockholders entitled to
notice of the meeting, except as otherwise provided in these By-laws or required by applicable law. Any such notice shall be given not
less than ten (10) nor more than sixty (60) days before the date on which the relevant meeting is to be held.
(b) Notice of any stockholders meeting may be given personally, by mail or by electronic transmission in accordance
with the General Corporation Law of the State of Delaware (the “DGCL”). Notice delivered personally shall include notice by recognized
overnight courier service and shall be deemed given when delivered. If mailed, such notice shall be deemed given when deposited in the
United States mail, postage prepaid directed to each stockholder at such stockholder’s address appearing on the books of the Corporation
or given by the stockholder for such purpose. Notice by electronic transmission shall be deemed given as provided in the DGCL. An
affidavit of the Secretary, Assistant Secretary or any transfer agent or other agent of the Corporation
that notice of any stockholders meeting has been given shall be prima facie evidence of the giving of such notice and of the facts stated in
such affidavit. Notice shall be deemed to have been given to all stockholders of record who share an address if notice is given in
accordance with Rule 14a-3(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as provided in the
DGCL.
(c) When a meeting is adjourned to another time or place, if any, notice need not be given of the adjourned meeting if the
place, if any, date and time thereof, and the means of remote communications, if any, by which stockholders and proxy holders may be
deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was
originally called, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. If after the
adjournment a new record date for stockholders entitled to vote is fixed for the adjourned meeting, the Board of Directors shall fix a new
record date for notice of such adjourned meeting in accordance with Section 6.7(a) below, and shall give notice of the adjourned meeting
to each stockholder of record entitled to vote at such adjourned meeting as of the record date fixed for notice of such adjourned meeting.
(d) Notice of any stockholders meeting may be waived in writing or by electronic transmission, either before or after the
meeting, and to the extent permitted by applicable law, will be waived by any stockholder by attendance thereat, in person or by proxy,
except when the person so attends for the express purpose of objecting at the beginning of the meeting to the transaction of any business
on the ground that the meeting is not lawfully called or convened and the person so objects.
Section 2.4 Organization.
(a) The Chairman of the Board of Directors, if any, or in his or her absence a person designated as Chair of the meeting
by the Board of Directors, shall preside over meetings of stockholders. The Secretary of the Corporation, or in his or her absence, an
Assistant Secretary, or in the absence of the Secretary and all Assistant Secretaries, a person whom the Chair of the meeting shall appoint,
shall act as Secretary of the meeting and keep a record of the proceedings thereof.
(b) The Board of Directors shall be entitled to make or adopt such rules or regulations for or related to the conduct of
meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of
Directors, if any, the Chair of the meeting shall have the right and authority to prescribe or adopt such rules, regulations and procedures
and to do all such acts as, in the judgment of such Chair, are necessary, appropriate or convenient for the proper conduct of the meeting,
including, without limitation, establishing (i) an agenda or order of business for the meeting, (ii) rules and procedures for maintaining
order at the meeting and the safety of those present, (iii) limitations on participation in the meeting to stockholders of record of the
Corporation, their validly authorized and constituted proxies and such other persons as the Chair shall permit, (iv) limitations on or
procedures governing the admission of permitted participants to the meeting location, if any, (v) restrictions on entry to the meeting after
the time fixed for the commencement thereof, (vi) limitations on the time allotted to and the subject of questions or comments by
participants, (vii) regulations for the opening and closing of the polls for balloting and matters which are to be voted on by ballot and
(viii) policies and procedures with respect to the adjournment of the meeting.
Section 2.5 List of Stockholders. A complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order and
showing the address of each stockholder and the number of shares registered in the name of each stockholder shall be open to the
examination of any stockholder, for any purpose germane to the meeting, at least ten (10) days prior to the meeting and during the meeting, in
each case in the manner provided by law. Except as otherwise provided by applicable law, the stock
2
ledger shall be the only evidence as to who are the stockholders entitled to examine the list of stockholders required by this Section 2.5 or to
vote in person or by proxy at any meeting of stockholders.
Section 2.6 Quorum. The holders of a majority of the shares of the capital stock of the Corporation entitled to vote at a meeting of
stockholders, present in person or represented by proxy, shall constitute a quorum for the consideration and transaction of business thereat,
unless otherwise provided in the Certificate of Incorporation, these By-laws or the DGCL. If a quorum is not present or represented at any
meeting of stockholders, then the Chair of the meeting or the holders of a majority of the shares of the capital stock of the Corporation
entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time in accordance
with Section 2.7 below, without notice other than an announcement at the meeting (subject to Section 2.3(c) above), until a quorum is present
or represented. If a quorum initially is present at any meeting of stockholders, the stockholders may continue to transact business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, but if a quorum is not present at least
initially, no business other than adjournment may be transacted.
Section 2.7 Adjourned Meeting. Any meeting of stockholders, whether or not a quorum is present, may be adjourned for any reason
from time to time by either the Chair of the meeting or the holders of a majority of the shares of the capital stock of the Corporation entitled
to vote thereat, present in person or represented by proxy. At any such adjourned meeting at which a quorum may be present, any business
may be considered and transacted that might have been considered and transacted at the meeting as originally called.
Section 2.8 Voting.
(a) Except as otherwise provided by applicable law, the Certificate of Incorporation or resolutions of the Board of
Directors in establishing a class or series of capital stock of the Corporation, each holder of shares of the capital stock of the Corporation
entitled to vote at any meeting of stockholders shall be entitled to one (1) vote for each such share held of record by such holder on each
matter submitted to a vote of the stockholders of the Corporation.
(b) Except as otherwise provided by applicable law, the listing standards of the New York Stock Exchange or any other
exchange or quotation system on which the shares of any capital stock of the Corporation are traded or quoted, the Certificate of
Incorporation or these By-laws, at each meeting of stockholders at which a quorum is established, for each item of business presented for
consideration at a stockholder meeting, the affirmative vote of the majority of shares of the capital stock of the Corporation present in
person or represented by proxy at the meeting and entitled to vote on the item shall be the act of the stockholders as to such item, and
where a separate vote by class or series of the capital stock of the Corporation is required on an item of business, if a quorum of such
class or series is established (in accordance with Section 2.6 above), the affirmative vote of the majority of shares of the applicable class
or series present in person or represented by proxy at the meeting and entitled to vote on the item shall be the act of such class or series as
to such item; provided, however, that if any item of business that is a matter or possible action for the Board of Directors to take under
advisement receives the affirmative vote of the majority of shares of the capital stock of the Corporation (or of the applicable class or
series, as the case may be) present in person or represented by proxy at the meeting and entitled to vote on the item, the Board of
Directors may take such matter or possible action under advisement, but shall not be obligated to undertake (or refrain from undertaking)
any particular action in respect thereof and such a vote will not be deemed an act of the stockholders (or of the applicable class or series,
as the case may be) as to such item.
(c) A nominee for director shall be elected to the Board of Directors if the votes cast for such nominee’s election exceed
the votes cast against such nominee’s election; provided, however, that directors shall be elected by a plurality of the votes cast at any
meeting of stockholders for which (i) the Secretary of the Corporation receives a notice that a stockholder has nominated a
3
person for election to the Board of Directors in compliance with the procedures set forth in Section 2.10 below and (ii) such nomination
has not been withdrawn by such nominating stockholder on or prior to the day next preceding the date the Corporation first delivers its
notice of meeting for such meeting to stockholders. If directors are to be elected by a plurality of the votes cast, stockholders shall not be
permitted to vote against any nominee for director.
Section 2.9 Proxies. Every stockholder entitled to vote on a matter shall have the right to do so in person or may be represented and
vote by a proxy or proxies appointed by such stockholder for such purpose. A stockholder may make this appointment by any means
specifically authorized by the DGCL, including, without limitation, by telegram, cablegram or other means of electronic transmission, and by
any other means the Secretary of the Corporation may permit, but no such proxy shall be voted or acted upon after three (3) years from its
date, unless the proxy provides for a longer period not to exceed seven (7) years. A properly made proxy appointment shall be irrevocable if it
states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. After its
creation and prior to any vote at a stockholders meeting, a properly made proxy appointment that is not irrevocable may be revoked by a
stockholder (a) by attending the meeting and voting in person, (b) by filing with the Secretary of the Corporation an instrument in writing
revoking it, or (c) by making another proper proxy appointment bearing a later date. A proxy is not revoked by the death or incapacity of the
maker unless, before the vote is counted, written notice of such death or incapacity is received by the Corporation.
Section 2.10 Nomination of Directors. Subject to the rights of holders of any outstanding Preferred Stock, nominations of persons for
election to the Board of Directors may be made at an annual meeting of stockholders or at a special meeting of stockholders at which
directors are to be elected only (a) pursuant to the Corporation’s notice of the meeting (or any supplement by the Corporation thereto), (b) by
or at the direction of the Board of Directors (or a duly authorized committee thereof) or (c) by any stockholder of the Corporation (i) who is a
stockholder of record both on the date the notice provided for in this Section 2.10 is given by the stockholder and on the record date for the
determination of stockholders entitled to vote at such meeting, (ii) who is entitled to vote for the election of directors at such meeting and (iii)
who complies with the procedures set forth in this Section 2.10.
(a) Stockholder Notice Requirements. In addition to any other applicable requirements for a stockholder to nominate any
person or persons for election to the Board of Directors, the stockholder must give to the Secretary of the Corporation timely notice
thereof that is in proper written form (as set forth in clauses (b) and (c) below of this Section 2.10). To be timely, a stockholder’s notice to
the Secretary of the Corporation must be delivered to or received at the principal executive offices of the Corporation (i) with respect to
an election to be held at an annual meeting of stockholders, not later than the close of business on the ninetieth (90 ) day nor earlier than
the close of business on the one hundred and twentieth (120 ) day prior to the first (1 ) anniversary of the preceding year’s annual
meeting; provided, however, that in the event that the date of an annual meeting is more than thirty (30) days before or more than seventy
(70) days after such anniversary date or if no annual meeting was held in the previous year, for a stockholder’s notice to be timely, it must
be so delivered or received not earlier than the close of business on the one hundred and twentieth (120 ) day prior to such annual
meeting date and not later than the close of business on the later of the ninetieth (90 ) day prior to such annual meeting date and the tenth
(10 ) day following the date on which the public announcement (as defined below) of the date of such annual meeting is first made by the
Corporation. In no event shall the public announcement of an adjournment or postponement of an annual meeting of stockholders
commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described in this clause (i); and (ii)
with respect to an election to be held at a special meeting of stockholders, not earlier than the close of business on the one hundred and
twentieth (120 ) day prior to the special meeting and not later than the close of business on the later of the ninetieth (90 ) day prior to the
special meeting or the tenth (10 ) day
th
th
th
th
th
th
th
th
st
4
following the day on which the public announcement of the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment or
postponement of a special meeting of stockholders commence a new time period (or extend any time period) for the giving of a
stockholder’s notice as described in this clause (ii).
(b) Proposed Nominee Information. To be in proper written form for purposes of this Section 2.10, a stockholder’s notice
to the Secretary of the Corporation must include as to each person whom the stockholder proposes to nominate for election to the Board
of Directors (i) the person’s name, age, business address and residence address, (ii) the person’s principal occupation or employment, (iii)
the class or series and number of shares of the capital stock of the Corporation owned beneficially or of record by the person, (iv) a
description of all compensatory and other material monetary agreements, arrangements or understandings during the past three (3) years,
and any other material relationships, between or among the person and the stockholder and any Stockholder Associated Person (as
defined below), or others acting in concert with any of them, including, without limitation, a description of the terms of any
compensatory arrangements relating to the person’s nomination and, if successful, the person’s election to the Board of Directors or
service as a director and (v) all other information relating to the person that would be required to be disclosed in a proxy statement or
other filings required to be made in connection with solicitations of proxies in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Exchange Act and the rules and regulations promulgated thereunder. Such stockholder’s notice
must also include each proposed nominee’s written consent to being named in the proxy statement as a nominee and to serving as a
director if elected, and each proposed nominee’s agreement that, if elected, and in accordance with the Corporation’s Corporate
Governance Principles, such person will tender promptly following such person’s election an irrevocable resignation in the form then set
forth in the Corporation’s Corporate Governance Principles effective upon such person’s failure to receive the required vote for election
at any subsequent meeting at which such person faces election and upon acceptance of such resignation by the Board of Directors. The
Board of Directors or the Corporation may require any stockholder-proposed nominee to furnish such other information as may
reasonably be required to determine the eligibility of such proposed nominee to serve as an independent director of the Corporation or
that could be material to a reasonable stockholder’s understanding of the independence, or lack of independence, of such nominee.
(c) Additional Stockholder Information. To be in proper written form for purposes of this Section 2.10, a stockholder’s
notice to the Secretary of the Corporation must also include as to the stockholder giving the notice, (i) the name and record address of the
stockholder, as they appear in the books and records of the Corporation, and of the beneficial owner, if any, on whose behalf the
nomination is being made and of any other Stockholder Associated Person, (ii) the class or series and number of shares of the capital
stock of the Corporation owned beneficially or of record by the stockholder and any Stockholder Associated Person, (iii) a description of
all agreements, arrangements or understandings between or among the stockholder, any Stockholder Associated Person, each proposed
nominee and any other person or persons (including their names) pursuant to which the proposed nomination(s) are being or are to be
made by the stockholder, (iv) a description of any Derivative Instrument (as defined below) directly or indirectly owned beneficially by
the stockholder or any Stockholder Associated Person and any other direct or indirect opportunity to profit or share in any profit derived
from any increase or decrease in the value of any class or series of shares of the capital stock of the Corporation, (v) a description of any
proxy, contract, arrangement, understanding, or relationship pursuant to which the stockholder or any Stockholder Associated Person has
a right to vote any class or series of shares of any security of the Corporation or the effect or intent of which is to increase or decrease the
voting power of the stockholder or any Stockholder Associated Person with respect to any class or series of shares of any security of the
Corporation, (vi) a description of any short interest (as defined below) of the stockholder or any Stockholder
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Associated Person in any class or series of any security of the Corporation, (vii) a description of any rights to dividends on any class or
series of shares of the capital stock of the Corporation owned beneficially by the stockholder or any Stockholder Associated Person that
are separated or separable from the underlying class or series of shares of the capital stock of the Corporation (and the identity of the
person or entity having such rights), (viii) a description of any proportionate interest in any class or series of shares of the capital stock of
the Corporation or Derivative Instruments held, directly or indirectly, by a general or limited partnership in which the stockholder or any
Stockholder Associated Person is a general partner or, directly or indirectly, beneficially owns an interest in a general partner, (ix) a
description of any performance-related fees (other than an asset-based fee) to which the stockholder or any Stockholder Associated
Person is entitled based on any increase or decrease in the value of any class or series of shares of the capital stock of the Corporation or
Derivative Instruments, if any, as of the date of such notice (which information shall be supplemented by the stockholder in writing to the
Secretary of the Corporation not later than ten (10) days after the record date for the meeting to disclose such ownership as of the record
date), (x) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate each proposed nominee
named in the stockholder’s notice and (xi) any other information relating to the stockholder or Stockholder Associated Person that would
be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies in an
election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act and the rules and regulations
promulgated thereunder.
(d) Definitions. For purposes of these By-laws, the terms set forth below have the following respective meanings:
“public announcement” means, with respect to an annual or special meeting of stockholders, disclosure of the date of such meeting in a
press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
“Stockholder Associated Person” means, with respect to any stockholder of the Corporation, (A) any beneficial owner of shares of stock
of the Corporation owned of record or beneficially by such stockholder, (B) any affiliate or associate of such stockholder or any
beneficial owner referred to in clause (A) above, (C) in the case of the stockholder or any other person referred to in clause (A) or (B)
above that is natural person, any member of the immediate family of such stockholder or other person sharing the same household or (D)
any person acting in concert with such stockholder or any other person referred to in clause (A), (B) or (C) above.
“Derivative Instrument” means any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or
conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation’s capital
stock or with a value derived in whole or in part from the value of any class or series of shares of the Corporation’s capital stock, whether
or not such instrument or right shall be subject to settlement in the underlying class or series of the Corporation’s capital stock or
otherwise.
“short interest” of any person in a security means that such person directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has the opportunity to profit or share in any profit derived from any decrease in the value of the
subject security.
(e) Defective Nominations. No person shall be eligible for election to the Board of Directors by the stockholders of the
Corporation unless nominated in accordance with the provisions and procedures of this Section 2.10. The Chair of any meeting of
stockholders shall have the power to determine whether any nomination was made in accordance with the provisions and procedures of
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this Section 2.10. If the Chair determines that a nomination was not so made, the Chair shall declare to the meeting that the nomination
was defective and shall be disregarded.
Section 2.11 Consideration of Items of Business. Subject to the rights of holders of any outstanding Preferred Stock, no item of
business may be brought for consideration at an annual meeting of stockholders or at a special meeting of stockholders other than business
that is (a) specified in the Corporation’s notice of the meeting (or any supplement by the Corporation thereto), (b) otherwise brought for
consideration by or at the direction of the Board of Directors (or a duly authorized committee thereof) or (c) otherwise properly brought by
any stockholder of the Corporation (i) who is a stockholder of record both on the date the notice provided for in this Section 2.11 is given by
the stockholder and on the record date for the determination of stockholders entitled to vote at such meeting, (ii) who is entitled to vote on
such business at such meeting and (iii) who complies with the procedures set forth in this Section 2.11.
(a) Stockholder Notice Requirements. In addition to any other applicable requirements for a stockholder to properly
bring any item of business for consideration at a stockholder meeting, the stockholder must give to the Secretary of the Corporation
timely notice thereof that is in proper written form (as set forth in clauses (b) and (c) below of this Section 2.11) and such business must
be a proper subject for stockholder action. To be timely, a stockholder’s notice to the Secretary of the Corporation must be delivered to or
received at the principal executive offices of the Corporation within the time frames for stockholder nominations of persons for election
to the Board of Directors as set forth in Section 2.10(a)(i) or (ii) above (depending on the applicable meeting type).
(b) Proposed Item of Business Information. To be in proper written form for purposes of this Section 2.11, a
stockholder’s notice to the Secretary of the Corporation must include as to each item of business proposed to be brought by the
stockholder for consideration at the stockholder meeting to which the notice pertains, a brief description of the business and the reasons
for proposing that such business be considered.
(c) Additional Stockholder Information. To be in proper written form for purposes of this Section 2.11, a stockholder’s
notice to the Secretary of the Corporation must also include as to the stockholder giving the notice, (i) each of the items set forth in
clauses (i), (ii), (iv), (v), (vi), (vii), (viii) and (ix) of Section 2.10(c) above, (ii) a description of all agreements, arrangements or
understandings between or among the stockholder or any Stockholder Associated Person (as defined in Section 2.10 above) relating to
each item of business proposed to be brought by the stockholder for consideration at the stockholder meeting to which the notice pertains
and any material interest of the stockholder or any Stockholder Associated Person in such business, and (iii) a representation that the
stockholder intends to appear in person or by proxy at the meeting to which the stockholder’s notice pertains to bring such business for
consideration at such meeting.
(d) Stockholder Discussion of Proposed Business. No item of business shall be considered at a stockholder meeting
except business that is brought in accordance with the provisions and procedures set forth in this Section 2.11; provided, however, that,
once an item of business has been brought for consideration in accordance with such provisions and procedures, nothing in this Section
2.11 shall be deemed, subject to the provisions of Section 2.4(b) above, to preclude discussion by any stockholder of any such item of
business. The Chair of any meeting of stockholders shall have the power to determine whether any item of business was properly brought
for consideration at the meeting in accordance with the provisions and procedures set forth in this Section 2.11. If the Chair determines
that an item of business was not properly brought, the Chair shall declare to the meeting that the item of business was not properly
brought and shall be disregarded.
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Section 2.12 Additional Requirements Relating to Nominations to the Board of Directors and Stockholder Proposals. Notwithstanding
anything to the contrary in this Article II, a stockholder who wishes to nominate a person for election to the Board of Directors or to bring
any other business for consideration at a meeting of stockholders shall, in addition to the requirements set forth in Sections 2.10 and 2.11
above, comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder; provided, however, that any
references in these By-laws to the Exchange Act and the rules and regulations thereunder shall not be construed to limit the application of
such requirements to nominations or proposals that are made in accordance with any provision of the Exchange Act and the rules and
regulations thereunder, including, but not limited to, Rule 14a-8 under the Exchange Act. Nothing contained in this Article II shall be deemed
to affect any rights of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the
Exchange Act and any inclusion in the Corporation’s proxy statement thereby. The provisions of Sections 2.10 and 2.11 above govern what
constitutes timely notice for purposes of Rule 14a-4(c) of the Exchange Act.
Section 2.13 Inspectors of Election. Before any meeting of stockholders, the Board of Directors shall appoint one or more inspectors of
election to act at the meeting or its adjournment, and may designate one or more persons as alternate inspectors to replace any inspector who
fails to appear or fails to act. If any person appointed as inspector or as an alternate inspector fails to appear or fails to act, then the Chair of
the meeting may appoint a person to fill that vacancy. Inspectors need not be stockholders. Such inspectors shall perform their duties in
accordance with the DGCL. Any report or certificate made by the inspectors of election shall be prima facie evidence of the facts stated
therein.
Section 2.14 Meetings by Remote Communications. The Board of Directors may, in its sole discretion, determine that a meeting of
stockholders shall not be held at any place, but may instead be held solely by means of remote communication in accordance with the DGCL.
If authorized by the Board of Directors in its sole discretion, and subject to such guidelines and procedures as the Board of Directors may
adopt, stockholders and proxy holders not physically present at a meeting of stockholders may, by means of remote communication (a)
participate in a meeting of stockholders and (b) be deemed present in person and vote at a meeting of stockholders whether such meeting is to
be held at a designated place or solely by means of remote communication, provided, that (i) the Corporation shall implement reasonable
measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder
or proxy holder; (ii) the Corporation shall implement reasonable measures to provide such stockholders and proxy holders a reasonable
opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the
proceedings of the meeting substantially concurrently with such proceedings; and (iii) if any stockholder or proxy holder votes or takes other
action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the Corporation.
ARTICLE III
DIRECTORS
Section 3.1 Powers. The business and affairs of the Corporation shall be managed and exercised by or under the direction of the Board
of Directors, except as may be otherwise provided in the DGCL or the Certificate of Incorporation. In addition, the Board of Directors may
exercise all such powers of the Corporation and do all such lawful acts and things as are not by applicable law, the Certificate of
Incorporation or these By-laws required to be exercised or done by the stockholders.
Section 3.2 Number, Eligibility and Term of Office. The Board of Directors shall consist of the number of directors as determined from
time to time by resolution of the Board of Directors. Directors need not be stockholders unless so required by the Certificate of Incorporation
or these By-laws. Except as provided in Section 3.3 below, directors shall be elected to the Board of Directors at each annual meeting of
stockholders in accordance with the Certificate of Incorporation and these By-laws. Each
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director elected to the Board of Directors shall hold office until such director’s successor is duly elected and qualified or until such director’s
earlier death, resignation, retirement, disqualification or removal.
Section 3.3 Vacancies. Subject to the rights of holders of any outstanding Preferred Stock, newly created directorships resulting from
any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause shall, unless otherwise provided by applicable law or by resolution of the Board of
Directors, be filled solely by the affirmative vote of a majority of the remaining directors then in office, though less than a quorum, or by the
sole remaining director, and any directors so elected shall hold office until the expiration of the term of office of the director whom he or she
has replaced or until his or her successor shall be duly elected and qualified. Unless otherwise provided in the Certificate of Incorporation,
when one (1) or more directors resign from the Board of Directors effective at a future date, a majority of directors then in office, including
those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold office as provided in this Section 3.3. No decrease in the
authorized number of directors shall shorten the term of any incumbent director.
Section 3.4 Resignations. Any director may resign at any time upon notice given in writing or by electronic transmission to the Board
of Directors, the Chairman of the Board of Directors or the Secretary of the Corporation. Such resignation shall take effect at the time
specified in such notice or, if the time is not specified, upon receipt thereof by the Board of Directors, the Chairman of the Board of Directors
or the Secretary of the Corporation, as the case may be. Unless otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 3.5 Regular Meetings. Except as otherwise set forth in these By-laws, regular meetings of the Board of Directors may be held
within or outside of the State of Delaware and shall be held at such place or places, if any, on such date or dates and at such time or times, as
shall have been established by the Board of Directors. A notice of each regular meeting shall not be required.
Section 3.6 Special Meetings. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the
Chairman of the Board of Directors or the Chief Executive Officer, and shall be called by the Chairman of the Board of Directors or the Chief
Executive Officer on the written request of any three (3) directors. The person or persons authorized to call special meetings of the Board of
Directors may fix the place, if any, date and time of such meetings. Notice of each such meeting shall be given to each director personally, in
writing or by telecopy, telegraph, electronic transmission or other form of communication, in each case at least twenty-four (24) hours prior
to the time set for such meeting. Notice of any meeting need not be given to director who shall, either before or after the meeting, submit a
waiver of such notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice to such
director. A notice of special meeting need not state the purpose of such meeting, and any and all business may be transacted at a special
meeting.
Section 3.7 Remote Participation in Meeting. Directors may participate in a meeting of the Board of Directors or any committee thereof
by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear
each other, and such participation shall constitute presence in person at such meeting.
Section 3.8 Quorum. Except as may be otherwise provided by applicable law, the Certificate of Incorporation or these By-laws, at all
meetings of the Board of Directors or any committee thereof, a majority of the members of the Board of Directors then in office or then
constituting the applicable committee, as the case may be, shall constitute a quorum for all purposes. The affirmative vote of a majority of the
members of the Board of Directors or of the applicable committee present at any such meeting at which a quorum is present shall be regarded
as the act of the Board of Directors or of the applicable committee, as the case may be. If a quorum shall not be present at any meeting of the
Board of Directors or of an applicable committee, the members of the Board of Directors or of the applicable
9
committee present thereat may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a
quorum shall be present. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been
transacted at the meeting as originally called. If a quorum initially is present at any meeting of the Board of Directors or any committee
thereof, the directors or applicable committee members, as the case may be, may continue to transact business, notwithstanding the
withdrawal of enough directors or committee members, as the case may be, to leave less than a quorum, upon resolution of at least a majority
of the required quorum for that meeting prior to the loss of such quorum.
Section 3.9 Action by Written Consent Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting, provided that all members of the Board of Directors or of such
committee consent in writing or by electronic transmission to such action, and the writing or writings or electronic transmission or
transmissions setting forth the action so taken are filed with the minutes or proceedings of the Board of Directors or of such committee, and
such consent shall have the same force and effect as a unanimous vote at a duly called and constituted meeting of the Board of Directors or
such committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes
are maintained in electronic form.
Section 3.10 Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at meetings of the Board of
Directors, and shall perform such other duties as the Board of Directors may from time to time determine and as set forth in Section 5.5
below. If the Chairman of the Board of Directors is not present at a meeting of the Board of Directors, another director chosen by the Board
of Directors shall preside.
Section 3.11 Rules and Regulations. The Board of Directors shall adopt such rules and regulations not inconsistent with the provisions
of applicable law, the Certificate of Incorporation or these By-laws for the conduct of its meetings and management of the affairs of the
Corporation as the Board of Directors shall deem necessary, appropriate or convenient.
Section 3.12 Fees and Compensation of Directors. Directors and members of committees of the Board of Directors who are not also
employees of the Corporation may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed
or determined from time to time by resolution of the Board of Directors.
Section 3.13 Emergency Bylaws. In the event of any emergency, disaster or catastrophe, as referred to in Section 110 of the DGCL, or
other similar emergency condition, as a result of which a quorum of the Board of Directors or a committee of the Board of Directors cannot
readily be convened for action, then the director or directors present at the meeting shall constitute a quorum. Such director or directors may
further take action to appoint one or more of themselves or other directors to membership on any committees of the Board of Directors as
they shall deem necessary and appropriate.
Section 3.14 Directors Emeritus. The Board may appoint one or more directors to the position of Director Emerita or Director Emeritus
(hereafter, “Director Emeritus”). Director Emeritus appointments, if any, shall be at the Board’s sole discretion, and there shall be no more
than two Directors Emeritus at any one time unless the Board determines that it is necessary or appropriate to have three or more Director
Emeritus for a particular period. Upon such appointment, any such director shall simultaneously resign from the Board and cease being
considered a “director” or “officer” under the DGCL, the Corporation’s Certificate of Incorporation and By-Laws, and for any federal or state
legal or regulatory purpose. A Director Emeritus shall not be an employee of the Corporation. Further, a Director Emeritus shall have no
power or authority to manage the Corporation’s business or affairs. Accordingly, a Director Emeritus shall not have any of the responsibilities
or liabilities of a “director” or “officer,” nor any of a “director’s” or “officer’s” rights, powers or privileges. Only directors with a service
tenure of at
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least five years, or having expertise or knowledge the Board deems to be especially important, are eligible to be appointed as a Director
Emeritus. Each such appointment shall be for a one-year term, subject to re-appointment by the Board for one or more additional one-year
terms (provided that the Board may set a shorter term for any Director Emeritus appointment or re-appointment if it deems it appropriate), or
until such Director Emeritus’ earlier death, resignation, retirement, removal (for any reason or no reason by the Board), or reaching the
retirement age the Board establishes for directors. Directors Emeritus shall provide such advisory services to the Board and its committees as
deemed appropriate, including, without limitation, attending and participating in meetings and executive sessions, but they shall not be
entitled to vote or be counted for quorum purposes at any such meetings or executive sessions. Directors Emeritus shall be entitled to receive
fees for their service in such form and amount as the Board approves, and shall be reimbursed for expenses incurred in connection with their
service as a Director Emeritus. Directors Emeritus shall remain subject to all of the Corporation’s policies applicable to directors, including
without limitation, any ethics and confidentiality obligations, and requirements applicable to transactions in the Corporation’s securities.
Directors Emeritus shall be entitled throughout their service to the same indemnification and insurance coverage benefits and protections
accorded to directors under the DGCL, the Corporation’s Certificate of Incorporation and By-Laws, and to the undiminished continuation of
any contractual indemnification, defense, advancement of expenses and like personal liability protection terms they have with the
Corporation at the time of their appointment as a Director Emeritus.
ARTICLE IV
COMMITTEES
Section 4.1 Committees of the Board of Directors. The Board of Directors may, by resolution, designate one or more committees, with
each such committee to consist of one or more members of the Board of Directors. The Board of Directors may designate one (1) or more
directors as alternate members of any committee to replace any absent or disqualified member at any meeting of the committee. In the
absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting,
whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting
in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of
Directors establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management
and exercise of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all instruments and
documents that may require it; provided that, in accordance with DGCL Section 141(c)(2), no such committee shall have the power or
authority in reference to the following matters: (a) approving or adopting, or recommending to the stockholders, any action or matter (other
than the election or removal of directors) expressly required by the DGCL to be submitted to stockholders for approval or (b) adopting,
amending or repealing any By-law of the Corporation. In addition, unless otherwise provided in the Certificate of Incorporation, these By-
laws or the resolution of the Board of Directors designating the committee, a committee of the Board of Directors may create one (1) or more
subcommittees, each subcommittee to consist of one (1) or more members of such committee, and delegate to such subcommittee any and all
of the powers and authority of such committee. All committees of the Board of Directors shall keep minutes of their meetings and shall report
their proceedings to the Board of Directors when requested or required by the Board of Directors.
Section 4.2 Meetings and Action of Committees. Any committee of the Board of Directors may adopt such rules and regulations not
inconsistent with the provisions of applicable law, the Certificate of Incorporation or these By-laws for the conduct of its meetings as such
committee may deem proper.
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ARTICLE V
OFFICERS
Section 5.1 Principal Officers. The principal officers of the Corporation shall consist of a Chairman of the Board of Directors (who
need not be an employee of the Corporation), a Chief Executive Officer, a President, one or more Vice Presidents (one or more of whom may
be designated Executive Vice President or Senior Vice President), a Secretary and a Treasurer, each of whom shall be elected by and serve at
the pleasure of the Board of Directors. Any two of such offices may be held by the same person, except that one person shall not hold the
offices of Chairman of the Board of Directors and Secretary, Chief Executive Officer and Secretary or President and Secretary, and no officer
shall execute, acknowledge or verify any instrument for and on behalf of the Corporation in more than one capacity if such instrument is
required by applicable law, the Certificate of Incorporation or these By-laws to be executed, acknowledged or verified by two (2) or more
officers.
Section 5.2 Election or Appointment of Officers. The Board of Directors, at its meeting to be held on the same day as and promptly
after each annual meeting of stockholders, shall elect a Chairman of the Board of Directors, a Chief Executive Officer, a President, one or
more Vice Presidents (one or more of whom may be designated Executive Vice President or Senior Vice President), a Secretary and a
Treasurer. The Board of Directors (or a duly authorized committee thereof) may from time to time elect or appoint such other officers of the
Corporation as the Board of Directors (or a duly authorized committee thereof) may deem necessary or desirable. Each such officer shall have
such authority, functions or duties as set forth in these By-laws or as determined by or in accordance with the direction of the Board of
Directors (or a duly authorized committee thereof), and shall hold office for such term as may be prescribed by the Board of Directors (or a
duly authorized committee thereof), if any, and until such person’s successor shall have been duly elected or appointed and qualified, or until
such person’s earlier death, resignation, retirement or removal. Subject to the foregoing authority of the Board of Directors (or a duly
authorized committee thereof) to elect or appoint officers of the Corporation, the Chief Executive Officer shall have the authority (a) to elect,
appoint or remove any officers, employees or agents of the Corporation or its subsidiaries who are not elected or appointed as officers of the
Corporation by the Board of Directors (or a duly authorized committee thereof) under these By-laws, (b) to determine each such person’s
authority, functions and duties and (c) to delegate such authority as set forth in the foregoing clauses (a) and (b), in each case as the Chief
Executive Officer may deem necessary or desirable; provided, however, that the persons upon whom any offices or titles are so conferred
shall not be deemed officers of the Corporation unless elected or appointed by the Board of Directors (or a duly authorized committee
thereof).
Section 5.3 Compensation. The salaries and other compensation of all officers of the Corporation shall be fixed by the Board of
Directors (or a duly authorized committee thereof) or, in the case of officers and employees other than the Chairman of the Board of
Directors, the Chief Executive Officer or the President, by an officer to whom the Board of Directors (or a duly authorized committee
thereof) has delegated or otherwise granted its authority to fix salaries and other compensation, subject to the rights, if any, of such officers or
employees under any contract of employment.
Section 5.4 Removal, Resignation and Vacancies. Any officer of the Corporation may be removed, with or without cause, by the Board
of Directors, without prejudice to the rights, if any, of such officer under any contract to which it is a party. Any officer may resign at any
time upon written notice to the Corporation, without prejudice to the rights, if any, of the Corporation under any contract to which such
officer is a party. Such resignation shall take effect at the time specified in such notice or, if the time is not specified, upon receipt thereof by
the Corporation. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. If any
vacancy occurs in any office of the Corporation by death, resignation, removal or otherwise, the Board of Directors (or a duly authorized
committee thereof) may elect or appoint a successor to fill such vacancy in such manner as the Board of Directors (or a duly authorized
committee thereof) shall determine.
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Section 5.5 Chairman of the Board of Directors. The Chairman of the Board of Directors shall be selected from the members of the
Board of Directors, and may be removed as Chairman on the vote of a majority of the Board of Directors. The Chairman of the Board of
Directors shall preside at meetings of stockholders (unless another person is designated to be the Chair of any such meeting in accordance
with Section 2.4 above) and the Board of Directors and be responsible for coordinating the activities of the Board of Directors. The Chairman
of the Board of Directors shall have authority, without additional authorization from the Board of Directors, to execute and deliver for and on
behalf of the Corporation all bonds, deeds, mortgages, contracts and other instruments and documents (and if any such instrument or
document requires the seal of the Corporation, then under such seal) relating to the usual and ordinary business of the Corporation, except
where required by applicable law to be otherwise executed or delivered, and except where the execution or delivery thereof shall be expressly
delegated by the Board of Directors (or a duly authorized committee thereof) to some other officer or agent of the Corporation.
Section 5.6 Chief Executive Officer. The Chief Executive Officer shall have general supervision and direction of the business and
affairs of the Corporation, shall be responsible for corporate policy and strategy, and shall report directly to the Board of Directors. Unless
otherwise provided in these By-laws or by the Board of Directors (or a duly authorized committee thereof), all other officers of the
Corporation shall report directly to the Chief Executive Officer or as otherwise determined by the Chief Executive Officer, and the Chief
Executive Officer shall have the same authority as the Chairman of the Board of Directors to execute and deliver for and on behalf of the
Corporation bonds, deeds, mortgages, contracts and other instruments and documents, and the authority to delegate such authority to execute
and deliver such instruments and documents to some other officer or agent of the Corporation as the Chief Executive Officer may deem
necessary or desirable. Notwithstanding the foregoing, the Board of Directors may designate the same or separate individuals to have the
offices of Chief Executive Officer and President, and may designate his, her or their respective authority, functions or duties in accordance
with such offices, which may include any authority, function or duty established in these By-laws for any other office described herein other
than the Secretary of the Corporation.
Section 5.7 President. Subject to Section 5.6 above, the President shall assist the Chief Executive Officer in the general and active
management of the operations of the Corporation, and shall have such additional authority, functions or duties as may be assigned to him or
her from time to time by the Board of Directors (or a duly authorized committee thereof) or the Chief Executive Officer. The President shall
have the same authority as the Chief Executive Officer to execute and deliver for and on behalf of the Corporation bonds, deeds, mortgages,
contracts and other instruments and documents. During any absence or disability of the Chief Executive Officer, the President shall perform
the duties of the Chief Executive Officer.
Section 5.8 Vice Presidents. The Vice Presidents, in the order of their seniority, unless otherwise determined by the Board of Directors
(or a duly authorized committee thereof), shall, have such authority, functions and duties as shall be prescribed or delegated from time to time
by the Board of Directors (or a duly authorized committee thereof), the Chief Executive Officer or his or her superior officer. Each of the
Vice Presidents shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other functions or
duties as such officer may agree with the Chief Executive Officer or as the Board of Directors (or a duly authorized committee thereof) may
from time to time determine.
Section 5.9 Secretary and Assistant Secretaries. The powers and duties of the Secretary are (a) to act as Secretary at all meetings of the
Board of Directors, of the committees of the Board of Directors and of the stockholders and to record the proceedings of such meetings in a
book or books to be kept for that purpose; (b) to see that all notices required to be given by the Corporation are duly given and served; (c) to
act as custodian of the seal of the Corporation and affix the seal or cause it to be affixed to all certificates of the Corporation’s capital stock
and to all instruments and documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance
with the provisions of
13
these By-laws; (d) to have charge of the books, records and papers of the Corporation and see that the reports, statements and other
documents required by applicable law to be kept and filed are properly kept and filed; and (e) to perform all of the duties incident to the office
of Secretary. The Secretary shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other
functions or duties as such officer may agree with the Chief Executive Officer or as the Board of Directors (or a duly authorized committee
thereof) may from time to time determine. Assistant Secretaries in the order of their seniority, unless otherwise determined by the Board of
Directors (or a duly authorized committee thereof), shall, in the absence or disability of the Secretary, perform the functions and duties and
exercise the powers of the Secretary. They shall perform such other functions or duties and have such other powers as the Board of Directors
(or a duly authorized committee thereof), the Chief Executive Officer or the Secretary may from time to time prescribe.
Section 5.10 Treasurer and Assistant Treasurers. The Treasurer shall supervise and be responsible for all the funds and securities of the
Corporation, the deposit of all moneys and other valuables to the credit of the Corporation in depositories of the Corporation, borrowings and
compliance with the provisions of all indentures, agreements and instruments governing such borrowings to which the Corporation is a party,
the disbursement of funds of the Corporation and the investment of its funds and shall perform all of the duties incident to the office of the
Treasurer. The Treasurer shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other
functions or duties as such officer may agree with the Chief Executive Officer or as the Board of Directors (or a duly authorized committee
thereof) may from time to time determine. Assistant Treasurers in the order of their seniority, unless otherwise determined by the Board of
Directors (or a duly authorized committee thereof), shall, in the absence or disability of the Treasurer, perform the functions and duties and
exercise the powers of the Treasurer. They shall perform such other functions or duties and have such other powers as the Board of Directors
(or a duly authorized committee thereof), the Chief Executive Officer or the Treasurer may from time to time prescribe.
Section 5.11 Checks; Drafts; Evidences of Indebtedness. From time to time, the Board of Directors (or a duly authorized committee
thereof) shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money,
notes, bonds, debentures or other evidences of indebtedness that are issued in the name of or payable by the Corporation, and only the persons
so authorized shall sign or endorse such instruments.
Section 5.12 Corporate Contracts and Instruments; How Executed. Except as otherwise provided in these By-laws, the Board of
Directors (or a duly authorized committee thereof) may authorize any officer or officers, or agent or agents, to enter into any contract or
execute or deliver any instrument or document in the name of and for and on behalf of the Corporation, and any such contract, instrument or
document may be signed on behalf of any such authorized officer or agent by a duly appointed attorney-in-fact. Such authority may be
general or confined to specific instances. Unless so authorized or ratified by the Board of Directors (or a duly authorized committee thereof)
or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the Corporation by any
contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.
Section 5.13 Action with Respect to Securities of Other Corporations. The Chief Executive Officer or any other officer of the
Corporation authorized by the Board of Directors (or a duly authorized committee thereof) or the Chief Executive Officer is authorized to
vote, represent, and exercise on behalf of the Corporation all rights incident to any and all shares or other interests of any other corporation or
corporations or other enterprise or enterprises standing in the name of the Corporation. The authority herein granted may be exercised either
by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by the person having such
authority.
14
ARTICLE VI
CAPITAL STOCK
Section 6.1 Certificates of Stock. The shares of the Corporation’s capital stock shall be represented by certificates, provided that the
Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the Corporation’s capital stock
shall be uncertificated shares. Any such resolution, whether adopted before or after the adoption of these By-laws, shall not apply to shares of
the Corporation’s capital stock represented by a certificate until such certificate is surrendered to the Corporation. Every holder of the
Corporation’s capital stock represented by certificates shall be entitled to have a certificate signed by or in the name of the Corporation by the
Chairman of the Board of Directors, if any, or the Chief Executive Officer or a Vice President, and by the Treasurer or an Assistant Treasurer,
or the Secretary or an Assistant Secretary, of the Corporation certifying the number of shares of the Corporation’s capital stock owned by
such holder in the Corporation. Any or all such signatures may be facsimiles. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of
issue.
Section 6.2 Special Designation on Certificates. If the Corporation is authorized to issue more than one class of its capital stock or more
than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights
of each class of its capital stock or series thereof and the qualifications, limitations or restrictions of such powers, designations, preferences
and/or rights shall be set forth in full or summarized on the face or back of the certificate that the Corporation shall issue to represent such
class or series of its capital stock; provided, however, that, except as otherwise provided in Section 202 of the DGCL, in lieu of the foregoing
requirements there may be set forth on the face or back of the certificate that the Corporation shall issue to represent such class or series of its
capital stock a statement that the Corporation will furnish such information without charge to each stockholder who so requests it. Within a
reasonable time after the issuance or transfer of its uncertificated capital stock, the Corporation shall send to the registered holder thereof a
written notice containing the information required to be set forth or stated on certificates pursuant to this Section 6.2 or Section 156, 202(a) or
218(a) of the DGCL or with respect to this Section 6.2, a statement that the Corporation will furnish such information without charge to each
stockholder who so requests it. Except as otherwise expressly provided by applicable law, the rights and obligations of the holders of the
Corporation’s uncertificated capital stock and the rights and obligations of the holders of certificates representing the Corporation’s capital
stock of the same class and series shall be identical.
Section 6.3 Transfers of Stock. Subject to the Certificate of Incorporation or resolutions of the Board of Directors, transfers of shares of
the Corporation’s capital stock shall be made only on the books of the Corporation upon authorization by the registered holder thereof or by
such holder’s attorney thereunto authorized by a power of attorney duly executed and filed with the Secretary of the Corporation or a transfer
agent for such stock, and if such shares are represented by a certificate, upon surrender of the certificate or certificates for such shares
properly endorsed or accompanied by a duly executed stock transfer power and the payment of any taxes thereon; provided, however, that the
Corporation shall be entitled to establish, recognize and enforce any lawful restriction on transfer.
Section 6.4 Lost Certificates. The Corporation may issue a new share certificate or new certificate for any other security in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost,
stolen or destroyed certificate or the owner’s legal representative to give the Corporation a bond (or other adequate security) sufficient to
indemnify the Corporation against any claim that may be made against it (including any expense or liability) on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new certificate. The Board of Directors may adopt such other provisions
and restrictions with reference
15
to lost, stolen or destroyed certificates, not inconsistent with applicable law, as it shall deem necessary, appropriate or convenient.
Section 6.5 Addresses of Stockholders. Each stockholder shall designate to the Secretary of the Corporation an address at which notices
of meetings and all other corporate notices may be served or mailed to such stockholder and, if any stockholder shall fail to so designate such
an address, corporate notices may be served upon such stockholder by mail directed to the mailing address, if any, as the same appears in the
stock ledger of the Corporation or at the last known mailing address of such stockholder.
Section 6.6 Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its
books as the owner of shares of the Corporation’s capital stock to receive dividends, and to vote as such owner, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by applicable law.
Section 6.7 Record Date for Determining Stockholders.
(a) In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record date shall, unless otherwise required by applicable law, not
be more than sixty (60) nor less than ten (10) days before the date of such meeting. If the Board of Directors so fixes a date, such date
shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board of Directors determines, at
the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If
no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of and to vote at a
meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that
the Board of Directors may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such
case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed
for determination of stockholders entitled to vote in accordance herewith at the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of its capital
stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted, and which shall not be more than sixty (60) days prior to any such
action. If no such record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating thereto.
Section 6.8 Regulations. The Board of Directors may make such additional rules and regulations as it may deem necessary, appropriate
or convenient concerning the issue, transfer and registration of shares of the Corporation’s capital stock.
16
ARTICLE VII
GENERAL MATTERS
Section 7.1 Fiscal Year. The fiscal year of the Corporation shall commence on December 1 and end on November 30 of the same year,
or such other twelve (12) consecutive month period as the Board of Directors may designate.
Section 7.2 Corporate Seal. The Board of Directors may provide for a suitable seal, containing the name of the Corporation, which seal
shall be in the charge of the Secretary of the Corporation. If and when so directed by the Board of Directors or a committee thereof,
duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer of the Corporation.
Section 7.3 Reliance Upon Books, Reports and Records. Each member of the Board of Directors and of any committee thereof shall, in
the performance of his or her duties, be fully protected in relying in good faith upon the records of the Corporation and upon such
information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of
Directors or by any other person as to matters the member reasonably believes are within such other person’s professional or expert
competence and who has been selected with reasonable care by or on behalf of the Corporation.
Section 7.4 Subject to Certificate of Incorporation and Applicable Law. All powers, duties and responsibilities provided for in these By-
laws, whether or not explicitly so qualified, are qualified by the Certificate of Incorporation and applicable law.
Section 7.5 Dividends. Subject to (a) limitations contained in the DGCL and the Certificate of Incorporation and (b) the rights of any
holders of Preferred Stock, the Board of Directors may declare and the Corporation may pay dividends on its outstanding shares of capital
stock in cash, property or its own shares of capital stock.
Section 7.6 Exclusive Forum. Unless the Corporation consents in writing to the selection of an alternative forum, to the fullest extent
permitted by applicable law, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (a) any derivative
action or proceeding brought on behalf of the Corporation; (b) any action asserting a claim of breach of a fiduciary duty owed by any current
or former director, officer, other employee or stockholder of the Corporation to the Corporation or the Corporation’s stockholders, or any
action asserting a claim for aiding and abetting any such breach of fiduciary duty; (c) any action asserting a claim arising pursuant to, or
seeking to enforce any right, obligation or remedy under, any provision of the General Corporation Law of the State of Delaware, the
Corporation’s Certificate of Incorporation or these By-laws (as each may be amended from time to time); (d) any action asserting a claim
governed by the internal affairs doctrine, or (e) any action asserting an “internal corporate claim” as that term is defined in Section 115 of the
General Corporation Law of the State of Delaware; except, as to each of (a) through (e) above, if the federal courts have exclusive
jurisdiction or the Court of Chancery of the State of Delaware does not have jurisdiction, then the sole and exclusive forum shall be the
federal district court for the District of Delaware. Any person or entity purchasing or otherwise acquiring or holding any interest in any of the
capital stock of the Corporation will be deemed to have notice of and to have consented to the provisions of this Section 7.6. If any action
the subject matter of which is within the scope of this Section 7.6 is filed in a court other than the Delaware Court of Chancery (or the federal
district court for the District of Delaware, as applicable) (a “Foreign Action”) by or in the name of any stockholder, such stockholder shall be
deemed to have consented to (i) the personal jurisdiction of the Delaware Court of Chancery (or the federal district court for the District of
Delaware, as applicable) in connection with any action brought in any such court to enforce this Section 7.6 and (ii) having service of process
made upon such stockholder in any such action by service upon such stockholder’s counsel in the Foreign Action as agent for such
stockholder. The existence of any prior consent to an alternative forum shall not act as a waiver of the Corporation’s
17
ongoing consent right as set forth above in this Section 7.6 with respect to any current or future actions or proceedings.
ARTICLE VIII
AMENDMENTS
Section 8.1 Amendments. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board
of Directors is expressly authorized to adopt, amend or repeal these By-laws.
The foregoing By-laws were adopted by the Board of Directors on January 21, 2021, and are effective as of such date.
18
Exhibit 10.30
Second Amendment To The
KB Home
Section 409A Nonqualified Deferred Compensation Plan
This second amendment to the KB Home Section 409A Nonqualified Deferred Compensation Plan is adopted effective as of
December 1, 2020:
WHEREAS, KB Home (the “Company”) adopted the 409A Nonqualified Deferred Compensation Plan effective January 1, 2009
(the “Plan”) for the purpose of providing participants an opportunity to defer compensation that would otherwise be currently payable to such
participants; and
WHEREAS, pursuant to the authority reserved to the Company under the Plan, the Company desires to amend the Plan as set forth
herein, effective December 1, 2020.
NOW, THEREFORE, The Plan is hereby amended as follows:
AMENDMENT
1. Section 17.17 (Deduction Limitation on Benefit Payments) is hereby deleted in its entirety.
IN WITNESS WHEREOF, the Company has adopted this second amendment to the Plan as of December 1, 2020.
/S/ KB Home
Exhibit 10.31
THIRD AMENDMENT TO TRUST AGREEMENT
This THIRD AMENDMENT (the “Amendment”) to that certain TRUST AGREEMENT dated August 27, 1999 (as previously
amended, the “Original Trust Agreement”), by and between Kaufman and Broad Home Corporation, a corporation organized under the laws
of the State of Delaware and now known as KB HOME (the “Company”), and Wells Fargo Bank, N.A., a national banking association
organized under the laws of the United States of America, and successor to Wachovia Bank, N.A. (the “Trustee”), is made by the Company
as of January 1, 2021 (the “Effective Date”). Any capitalized term not defined herein shall have the meaning given to it in the Original Trust
Agreement, and all Section references shall be to those Sections in the Original Trust Agreement.
WITNESSETH:
WHEREAS, the Company desires to enter into this Amendment to bring current the Plans to which the Trust Assets may be allocated
and to extend the term of the Trust.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Trustee hereby declare and
agree as follows:
1. Section 13.2. Section 13.2(a) shall be amended to the following: “(a) August 26, 2029.”
2. Full Force and Effect. Except as expressly amended by this Amendment, the Original Trust Agreement remains unaltered and in
full force and effect. The parties acknowledge and agree that the Original Trust Agreement has remained in full force and effect since the date
of the Original Trust Agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed by the parties hereto as of the Effective Date.
KB HOME
Wells Fargo Bank, N.A. as Trustee
By:/s/ WILLIAM R. HOLLINGER
William R. Hollinger
By:/s/ ANDREW J. FRANK
Andrew J. Frank
Its: Senior Vice President and Chief Accounting Officer
Its: Vice President
The following subsidiaries* of KB Home were included in the November 30, 2020 consolidated financial statements:
KB HOME AND CONSOLIDATED SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Name of Company/Jurisdiction of Incorporation or Formation
EXHIBIT 21
Percentage of
Voting Securities
Owned by
the Registrant
or a
Subsidiary of
the Registrant
Arizona
KB HOME Phoenix Inc.
KB HOME Sales - Phoenix Inc.
KB HOME Sales - Tucson Inc.
KB HOME Tucson Inc.
California
KB HOME Central Valley Inc.
KB HOME Coastal Inc.
KB HOME Greater Los Angeles Inc.
KB HOME Insurance Agency Inc.
KB HOME Sacramento Inc.
KB HOME South Bay Inc.
Colorado
KB HOME Colorado Inc.
Delaware
KB HOME California LLC
KB HOME Florida LLC
KB HOME Fort Myers LLC
KB HOME Inspirada LLC
KB HOME Jacksonville LLC
KB HOME North Bay LLC
KB HOME Orlando LLC
KB HOME Tampa LLC
KB HOME Treasure Coast LLC
KBHPNW LLC
KBHPNW Sales LLC
KB Urban Inc.
Florida
KB HOME Title Services Inc.
Illinois
KB HOME Mortgage Company
Nevada
KB HOME Las Vegas Inc.
KB HOME Reno Inc.
Texas
KB HOME Lone Star Inc.
KBSA, Inc.
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
* Certain subsidiaries have been omitted from this list. These subsidiaries, when considered in the aggregate as a single subsidiary, do not constitute a
significant subsidiary as defined in Rule 1-02(w) of Regulation S-X.
The following subsidiaries of KB Home were, as of November 30, 2020, guarantors of its outstanding senior notes:
LIST OF GUARANTOR SUBSIDIARIES
Name of Guarantor Subsidiary
State of Incorporation or Organization
EXHIBIT 22
KB HOME Coastal Inc.
KB HOME Colorado Inc.
KB HOME Florida LLC
KB HOME Fort Myers LLC
KB HOME Greater Los Angeles Inc.
KB HOME Jacksonville LLC
KB HOME Las Vegas Inc.
KB HOME Lone Star Inc.
KB HOME Phoenix Inc.
KB HOME Reno Inc.
KB HOME Sacramento Inc.
KB HOME South Bay Inc.
KB HOME Treasure Coast LLC
KBSA, Inc.
California
Colorado
Delaware
Delaware
California
Delaware
Nevada
Texas
Arizona
Nevada
California
California
Delaware
Texas
EXHIBIT 23
We consent to the incorporation by reference in the following Registration Statements:
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(1)
(2)
(3)
(4)
(5)
(6)
Registration Statement (Form S-3 No. 333-239778) of KB Home,
Registration Statement (Form S-8 No. 333-129273) pertaining to the KB Home 1988 Employee Stock Plan, the KB Home 1998 Stock Incentive
Plan, the KB Home Performance-Based Incentive Plan for Senior Management, the KB Home Non-Employee Directors Stock Plan, the KB Home
401(k) Savings Plan, the KB Home 1999 Incentive Plan, the KB Home 2001 Stock Incentive Plan, certain stock grants and the resale of certain
shares by officers of KB Home,
Registration Statement (Form S-8 No. 333-168179) pertaining to the KB Home 401(k) Savings Plan,
Registration Statements (Form S-8 No. 333-168181 and Form S-8 No. 333-175601) pertaining to the KB Home 2010 Equity Incentive Plan,
Registration Statement (Form S-8 No. 333-197521) pertaining to the KB Home 2014 Equity Incentive Plan, the Third Amended and Restated KB
Home Non-Employee Directors Compensation Plan, and the KB Home 401(k) Savings Plan, and
Registration Statement (Form S-8 No. 333-212521) pertaining to the Amended KB Home 2014 Equity Incentive Plan and the KB Home 401(k)
Savings Plan;
of our reports dated January 22, 2021 with respect to the consolidated financial statements of KB Home, and the effectiveness of internal control over financial
reporting of KB Home, included in this Annual Report (Form 10-K) of KB Home for the year ended November 30, 2020.
/s/ Ernst & Young LLP
Los Angeles, California
January 22, 2021
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Jeffrey T. Mezger, certify that:
1.
I have reviewed this annual report on Form 10-K of KB Home;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated
January 22, 2021
/s/ JEFFREY T. MEZGER
Jeffrey T. Mezger
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Jeff J. Kaminski, certify that:
1.
I have reviewed this annual report on Form 10-K of KB Home;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated
January 22, 2021
/s/ JEFF J. KAMINSKI
Jeff J. Kaminski
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of KB Home (the “Company”) on Form 10-K for the period ended November 30, 2020 (the “Report”), I, Jeffrey T. Mezger,
Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
EXHIBIT 32.1
Dated
January 22, 2021
/s/ JEFFREY T. MEZGER
Jeffrey T. Mezger
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of KB Home (the “Company”) on Form 10-K for the period ended November 30, 2020 (the “Report”), I, Jeff J. Kaminski,
Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
EXHIBIT 32.2
Dated
January 22, 2021
/s/ JEFF J. KAMINSKI
Jeff J. Kaminski
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)