UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended May 31, ~~2019.~~2020.


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from [ ] to [ ].

Commission File No. 001-09195

KB HOME

(Exact name of registrant as specified in its charter)



Delaware	95-3666267
(State of incorporation)	(IRS employer identification number)

10990 Wilshire Boulevard

Los Angeles, California90024

~~(310)~~ (310) 231-4000

(Address and telephone number of principal executive offices)

Securities registered pursuant to section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock (par value $1.00 per share)	KBH	New York Stock Exchange
Rights to Purchase Series A Participating Cumulative Preferred Stock		New York Stock Exchange

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, 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~~Accelerated Filer	☒	Accelerated filer	☐
Non-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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were ~~88,226,142~~90,527,074 shares of the registrant’s common stock, par value $1.00 per share, outstanding on May 31, ~~2019.~~2020. The registrant’s grantor stock ownership trust held an additional ~~7,859,975~~7,317,336 shares of the registrant’s common stock on that date.

KB HOME

FORM 10-Q

INDEX



	Page Number
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Operations - Three Months and Six Months Ended May 31, ~~2019~~2020 and ~~2018~~2019	3

Consolidated Balance Sheets - May 31, ~~2019~~2020 and November 30, ~~2018~~2019	4

Consolidated Statements of Cash Flows - Three Months and Six Months Ended May 31, ~~2019~~2020 and ~~2018~~2019	5

Notes to Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3633

Item 3. Quantitative and Qualitative Disclosures About Market Risk	5853

Item 4. Controls and Procedures	5853

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	5953

Item 1A. Risk Factors	5954

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5955

Item 6. Exhibits	5955

SIGNATURES	6056

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

KB HOME

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts – Unaudited)


		Three Months Ended May 31,						Six Months Ended May 31,						Three Months Ended May 31,						Six Months Ended May 31,
		2019			2018			2019			2018			2020			2019			2020			2019
Total revenues		$	1,021,803		$	1,101,423		$	1,833,286		$	1,973,046		$	913,970		$	1,021,803		$	1,989,905		$	1,833,286
Homebuilding:
Revenues		$	1,018,671		$	1,098,673		$	1,827,459		$	1,967,878		$	910,280		$	1,018,671		$	1,982,662		$	1,827,459
Construction and land costs		(843,744		)	(911,244		)	(1,514,599		)	(1,640,722		)	(744,453		)	(843,744		)	(1,630,506		)	(1,514,599		)
Selling, general and administrative expenses		(122,828		)	(113,231		)	(229,422		)	(208,955		)	(114,238		)	(122,828		)	(240,372		)	(229,422		)
Operating income		52,099			74,198			83,438			118,201			51,589			52,099			111,784			83,438
Interest income		439			1,278			1,544			2,281			442			439			1,377			1,544
Equity in loss of unconsolidated joint ventures		(369		)	(322		)	(775		)	(1,167		)
Equity in income (loss) of unconsolidated joint ventures														8,154			(369		)	10,059			(775		)
Homebuilding pretax income		52,169			75,154			84,207			119,315			60,185			52,169			123,220			84,207
Financial services:
Revenues		3,132			2,750			5,827			5,168			3,690			3,132			7,243			5,827
Expenses		(1,040		)	(957		)	(2,064		)	(1,910		)	(883		)	(1,040		)	(1,845		)	(2,064		)
Equity in income of unconsolidated joint ventures		2,500			1,361			3,302			1,780			4,797			2,500			8,019			3,302
Financial services pretax income		4,592			3,154			7,065			5,038			7,604			4,592			13,417			7,065
Total pretax income		56,761			78,308			91,272			124,353			67,789			56,761			136,637			91,272
Income tax expense		(9,300		)	(21,000		)	(13,800		)	(138,300		)	(15,800		)	(9,300		)	(24,900		)	(13,800		)
Net income (loss)	��	$	47,461		$	57,308		$	77,472		$	(13,947	)
Earnings (loss) per share:
Net income														$	51,989		$	47,461		$	111,737		$	77,472
Earnings per share:
Basic		$	.54		$	.65		$	.88		$	(.16	)	$	.57		$	.54		$	1.23		$	.88
Diluted		$	.51		$	.57		$	.82		$	(.16	)	$	.55		$	.51		$	1.19		$	.82
Weighted average shares outstanding:
Basic		87,641			87,581			87,310			87,370			90,493			87,641			90,169			87,310
Diluted		92,366			101,159			94,635			87,370			93,472			92,366			93,628			94,635

See accompanying notes.

KB HOME

CONSOLIDATED BALANCE SHEETS

(In Thousands – Unaudited)


	May 31, 2019			November 30, 2018			May 31, 2020			November 30, 2019
Assets
Homebuilding:
Cash and cash equivalents	$	178,876		$	574,359		$	575,006		$	453,814
Receivables	299,708			292,830			312,928			249,055
Inventories	3,780,853			3,582,839			3,607,465			3,704,602
Investments in unconsolidated joint ventures	56,446			61,960			57,823			57,038
Property and equipment, net	61,221			24,283			65,764			65,043
Deferred tax assets, net	424,395			441,820			257,571			364,493
Other assets	87,734			83,100			126,588			83,041
	4,889,233			5,061,191			5,003,145			4,977,086
Financial services	30,720			12,380			38,857			38,396
Total assets	$	4,919,953		$	5,073,571		$	5,042,002		$	5,015,482

Liabilities and stockholders’ equity
Homebuilding:
Accounts payable	$	262,920		$	258,045		$	180,868		$	262,772
Accrued expenses and other liabilities	605,816			666,268			602,393			618,783
Notes payable	1,854,556			2,060,263			1,766,539			1,748,747
	2,723,292			2,984,576			2,549,800			2,630,302
Financial services	1,451			1,495			1,848			2,058
Stockholders’ equity:
Common stock	120,350			119,196			122,370			121,593
Paid-in capital	775,693			753,570			806,700			793,954
Retained earnings	1,981,795			1,897,168			2,255,742			2,157,183
Accumulated other comprehensive loss	(9,565		)	(9,565		)	(17,149		)	(15,506		)
Grantor stock ownership trust, at cost	(85,246		)	(88,472		)	(79,359		)	(82,758		)
Treasury stock, at cost	(587,817		)	(584,397		)	(597,950		)	(591,344		)
Total stockholders’ equity	2,195,210			2,087,500			2,490,354			2,383,122
Total liabilities and stockholders’ equity	$	4,919,953		$	5,073,571		$	5,042,002		$	5,015,482

See accompanying notes.

KB HOME

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands – Unaudited)


	Six Months Ended May 31,						Six Months Ended May 31,
	2019			2018			2020			2019
Cash flows from operating activities:
Net income (loss)	$	77,472		$	(13,947	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Net income							$	111,737		$	77,472
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in income of unconsolidated joint ventures	(2,527		)	(613		)	(18,078		)	(2,527		)
Distributions of earnings from unconsolidated joint ventures	3,550			5,147			15,150			3,550
Amortization of discounts, premiums and issuance costs	2,597			3,125			1,234			2,597
Depreciation and amortization	12,780			1,251			14,510			12,780
Deferred income taxes	13,401			137,668			23,800			13,401
Stock-based compensation	9,966			8,795			8,131			9,966
Inventory impairments and land option contract abandonments	7,892			11,511			10,051			7,892
Changes in assets and liabilities:
Receivables	(5,408		)	(31,218		)	19,286			(5,408		)
Inventories	(253,473		)	(152,799		)	100,077			(253,473		)
Accounts payable, accrued expenses and other liabilities	(41,440		)	18,369			(117,274		)	(41,440		)
Other, net	(5,144		)	(6,658		)	(13,930		)	(5,144		)
Net cash used in operating activities	(180,334		)	(19,369		)
Net cash provided by (used in) operating activities							154,694			(180,334		)
Cash flows from investing activities:
Contributions to unconsolidated joint ventures	(4,245		)	(11,600		)	(3,586		)	(4,245		)
Return of investments in unconsolidated joint ventures	5,001			1,099			500			5,001
Proceeds from sale of building	5,804			—			—			5,804
Purchases of property and equipment, net	(22,264		)	(3,427		)	(15,224		)	(22,264		)
Net cash used in investing activities	(15,704		)	(13,928		)	(18,310		)	(15,704		)
Cash flows from financing activities:
Proceeds from issuance of debt	405,250			—			—			405,250
Payment of debt issuance costs	(5,209		)	—			—			(5,209		)
Repayment of senior notes	(630,000		)	—			—			(630,000		)
Borrowings under revolving credit facility	330,000			—			—			330,000
Repayments under revolving credit facility	(280,000		)	—			—			(280,000		)
Payments on mortgages and land contracts due to land sellers and other loans	(28,020		)	(10,494		)	(1,063		)	(28,020		)
Issuance of common stock under employee stock plans	16,462			4,771			8,404			16,462
Tax payments associated with stock-based compensation awards	(3,345		)	(6,787		)	(6,219		)	(3,345		)
Payments of cash dividends	(4,455		)	(4,500		)	(16,331		)	(4,455		)
Net cash used in financing activities	(199,317		)	(17,010		)	(15,209		)	(199,317		)
Net decrease in cash and cash equivalents	(395,355		)	(50,307		)
Net increase (decrease) in cash and cash equivalents							121,175			(395,355		)
Cash and cash equivalents at beginning of period	575,119			720,861			454,858			575,119
Cash and cash equivalents at end of period	$	179,764		$	670,554		$	576,033		$	179,764

See accompanying notes.

KB HOME

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	Basis of Presentation and Significant Accounting Policies

Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted.

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly our consolidated financial position as of May 31, ~~2019,~~2020, the results of our consolidated operations for the three months and six months ended May 31, ~~2019~~2020 and ~~2018,~~2019, and our consolidated cash flows for the six months ended May 31, ~~2019~~2020 and ~~2018.~~2019. The results of our consolidated operations for the three months and six months ended May 31, ~~2019~~2020 are not necessarily indicative of the results to be expected for the full year due to seasonal variations in operating results and other factors. The consolidated balance sheet at November 30, ~~2018~~2019 has been taken from the audited consolidated financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended November 30, ~~2018,~~2019, which are contained in our Annual Report on Form 10-K for that period.

Unless the context indicates otherwise, the terms “we,” “our,” and “us” used in this report refer to KB Home, a Delaware corporation, and its subsidiaries.

Impact of COVID-19 Pandemic on Consolidated Financial Statements. The outbreak of the 2019 coronavirus disease (“COVID-19”), which was declared a global pandemic by the World Health Organization on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread (“COVID-19 control responses”) severely impacted the global and national economies, the housing market and our business during the 2020 second quarter. With the health and well-being of our employees, customers and business partners, and their families, being a high priority, we temporarily closed our sales centers, model homes and design studios to the public in mid-March and shifted to virtual sales tools and then an appointment-only personalized home sales process in April, where permitted. Our construction operations were also restricted in many jurisdictions, and together with the reduced availability or capacity of some municipal and private services necessary to build and deliver homes, we experienced home delivery delays during most of the quarter. In addition, our order pace moderated significantly and home purchase cancellations increased considerably. In the latter part of May, conditions started to improve in conjunction with state and local governments relaxing their COVID-19 control responses, and we began the process of more broadly opening our communities to the public while also expanding construction and warranty service activities to the extent permitted by local authorities. Following a low point in April 2020, we experienced steady and significant improvements in our order trends and cancellation rate beginning in May, which have extended through the date of this report. Given the prolonged, and ongoing, COVID-19-related impacts, we focused on generating cash inflows from our business and preserving cash and liquidity by proceeding in a carefully targeted manner with land acquisition and land development and curtailing overhead expenditures, partly through workforce realignment and reductions. As a result, we recorded severance charges of $6.7 million within our selling, general and administrative expenses for 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 during the 2020 second quarter.

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.~~these estimates, particularly given the significant social and economic disruptions and uncertainties associated with the ongoing COVID-19 pandemic and the COVID-19 control responses, and such differences may be material.

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 ~~$27.4~~$404.5 million at May 31, ~~2019~~2020 and ~~$385.2~~$302.5 million at November 30, ~~2018~~2019. At May 31, ~~2019~~2020 and November 30, ~~2018,~~2019, the majority of our cash and cash equivalents ~~were~~was invested in interest-bearing bank deposit accounts.

Comprehensive ~~Income (Loss).~~ Income. Our comprehensive income was ~~$47.5~~$52.0 million for the three months ended May 31, ~~2019~~2020 and ~~$57.3~~$47.5 million for the three ~~months ended May 31, 2018. Our comprehensive income was $77.5 million for the six~~ months ended May 31, 2019. For the six months ended May 31, ~~2018,~~2020 and 2019, our comprehensive ~~loss~~income was ~~$13.9 million.~~$111.7 million and $77.5 million, respectively. Our comprehensive income ~~(loss)~~ for each of the three-month and six-month periods ended May 31, ~~2019~~2020 and ~~2018~~2019 was equal to our net income ~~(loss)~~ for the respective periods.

Adoption of New Accounting Pronouncements. In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. ~~2014-09, “Revenue from Contracts with Customers~~2016-02, “Leases (Topic ~~606)~~842)” (“ASU ~~2014-09”~~2016-02”). ASU 2014-09 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. The core principle, which requires leases with original lease terms of ~~ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects~~more than 12 months to be ~~entitled in exchange for those goods or services.~~

recorded on the balance sheet. On December 1, ~~2018,~~2019, we adopted ASU ~~2014-09~~2016-02 and its related amendments (collectively, “ASC ~~606”~~842”), using the modified retrospective ~~method applied to contracts that were not completed as of the adoption date.~~method. Results for reporting periods beginning December 1, ~~2018~~2019 and after are presented under ASC ~~606,~~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 ~~the following~~a cumulative effect adjustment to increase beginning retained earnings asby $1.5 million, net of ~~December 1, 2018 (in thousands):~~

Balance Sheet Balance at November 30, 2018 Adjustments due to ASC 606 Balance at December 1, 2018
Assets
Homebuilding:
Inventories $ 3,582,839
$ (35,288 ) $ 3,547,551
Deferred tax assets, net 441,820
(4,024 ) 437,796
Property and equipment, net 24,283
31,194
55,477
Financial services 12,380
19,728
32,108
Stockholders’ equity:
Retained earnings 1,897,168
11,610
1,908,778

~~Within~~tax, to recognize a previously deferred gain on our ~~homebuilding operations, ASC 606 impacts the classification~~sale and ~~timing~~leaseback of ~~recognition~~an office building 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 our2019. The 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. 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 impacts 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.

~~There were no significant changes to our business processes or internal control over financial reporting as a result of adopting ASC 606.~~

~~The impacts of adopting ASC 606 on~~842 did not materially impact our consolidated statements of operations ~~for the three months and six months ended May 31, 2019 and~~or consolidated ~~balance sheet as of May 31, 2019 were as follows (in thousands, except per share amounts):~~

Three Months Ended May 31, 2019 Six Months Ended May 31, 2019
Statement of Operations As Reported Amounts without the Adoption of ASC 606
Effect of Change
Higher/(Lower)
As Reported Amounts without the Adoption of ASC 606
Effect of Change
Higher/(Lower)
Homebuilding:
Revenues $ 1,018,671
$ 1,017,934
$ 737
$ 1,827,459
$ 1,826,089
$ 1,370
Construction and land costs (843,744 ) (850,855 ) (7,111 ) (1,514,599 ) (1,526,970 ) (12,371 )
Selling, general and administrative expenses (122,828 ) (114,638 ) 8,190
(229,422 ) (213,919 ) 15,503
Operating income 52,099
52,441
(342 ) 83,438
85,200
(1,762 )
Financial services:
Revenues 3,132
3,025
107
5,827
5,615
212
Total pretax income 56,761
56,996
(235 ) 91,272
92,822
(1,550 )
Income tax expense (9,300 ) (9,400 ) (100 ) (13,800 ) (14,200 ) (400 )
Net income 47,461
47,596
(135 ) 77,472
78,622
(1,150 )
Diluted earnings per share .51
.52
(.01 ) .82
.83
(.01 )

As of May 31, 2019
Balance Sheet As Reported Amounts without the Adoption of ASC 606
Effect of Change
Higher/(Lower)
Assets
Homebuilding:
Inventories $ 3,780,853
$ 3,824,765
$ (43,912 )
Deferred tax assets, net 424,395
428,019
(3,624 )
Property and equipment, net 61,221
23,165
38,056
Financial services 30,720
10,780
19,940
Stockholders’ equity:
Retained earnings 1,981,795
1,971,335
10,460

~~As a result of~~cash flows. Further information regarding our ~~adoption of ASC 606, we updated our significant accounting policies as follows:~~

~~Homebuilding Revenues~~. We apply 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, whichleases 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, totaled $24.1 million and $19.5 million at May 31, 2019 and November 30, 2018, respectively, and 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.~~

~~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 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.

~~Financial Services Revenues~~. Our financial services reporting segment generates revenues primarily from title services and insurance commissions. Revenues from title services are recognized when policies are issued, which generally occurs at the time each applicable home sale is closed. We receive insurance 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 and totaled $19.9 million at May 31, 2019. Contract assets totaling $19.7 million were recognized on December 1, 2018 in connection with the adoption of ASC 606.

~~Disaggregation of Revenues~~. Our homebuilding operations accounted for 99.7% of our total revenues for the year ended November 30, 2018, with most of those revenues generated from home sale contracts with customers. Our financial services operations accounted for the remaining .3% of total revenues for the year ended November 30, 2018. 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 213 – Segment Information and for our financial services reporting segment in Note 3 – Financial Services, fairly depict how the nature, amount, timing and uncertainty of cash flows are affected by economic factors.

~~SEC Disclosure Update and Simplification~~. In August 2018, the SEC issued Final Rule Release No. 33-10532, “Disclosure Update and Simplification,” which makes a number of changes meant to simplify interim disclosures. In complying with the relevant aspects of the rule within this quarterly report, we have removed the presentation of cash dividends declared per common share from our consolidated statements of operations and expanded our analysis of stockholders’ ~~equity in Note 18 – Stockholders’ Equity.~~

~~Recent Accounting Pronouncements Not Yet Adopted~~. In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under this guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Lessor accounting remains substantially similar to previous lease accounting guidance. In addition, disclosures of leasing activities are to be expanded to include qualitative along with specific quantitative information. ASU 2016-02 is effective for us beginning December 1, 2019 (with early adoption permitted). Originally, entities were required to adopt ASU 2016-02 using a modified retrospective transition method. However, in July 2018, the FASB issued Accounting Standards Update No. 2018-11, “Leases (Topic 842): Targeted

Improvements” (“ASU 2018-11”), which provides entities with an additional transition method. Under ASU 2018-11, entities have the option of recognizing the cumulative effect of applying the new standard as an adjustment to beginning retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. In July 2018, the FASB also issued Accounting Standards Update No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”), which clarifies how to apply certain aspects of ASU 2016-02. In March 2019, the FASB issued Accounting Standards Update No. 2019-01, “Leases (Topic 842): Codification Improvements” (“ASU 2019-01”), which makes targeted changes to lessor accounting and clarifies interim disclosure requirements. We expect to adopt ASU 2016-02, ASU 2018-10, ASU 2018-11 and ASU 2019-01 beginning December 1, 2019. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.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 2017 Tax Cuts and Jobs Act (“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.

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, ~~2019 (with~~2020, with early adoption ~~permitted)~~permitted. We are currently evaluating the potential impact of adopting this guidance 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 ~~shall be applied either in the period~~clarifies certain aspects of ~~adoption or retrospectively~~ASC 740 to ~~each period (or periods) in which the effect of the change in the corporate income tax rate in the TCJA~~promote consistency among reporting entities. ASU 2019-12 is ~~recognized. We expect to adopt ASU 2018-02~~effective for us beginning December 1, ~~2019.~~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 periods have been reclassified to conform to the current period presentation.~~


2.	Segment Information

We have identified ~~five~~5 operating reporting segments, comprised of ~~four~~4 homebuilding reporting segments and ~~one~~1 financial services reporting segment. As of May 31, ~~2019~~2020, our homebuilding reporting segments conducted ongoing operations in the following ~~states:~~states to the extent permitted by applicable public health orders as part of their respective COVID-19 control responses:

West Coast: California and Washington

Southwest: Arizona and Nevada

Central: Colorado and Texas

Southeast: 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 homebuilding reporting segments were identified based primarily on similarities in economic and geographic characteristics, product types, regulatory environments, methods used to sell and construct homes and land acquisition characteristics. Management evaluates segment performance primarily based on segment pretax results.

~~Our~~ financial services reporting segment offers property and casualty insurance and, in certain instances, earthquake, flood and personal property insurance to our homebuyers in the same markets as our homebuilding reporting segments, and provides title services in the majority of our markets located within our Southwest, Central and Southeast homebuilding reporting segments. ~~This~~Our financial services reporting segment earns revenues primarily from insurance commissions and from the provision of title services.

We offer 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”). We and Stearns each have a 50.0% ownership interest, with Stearns providing management oversight of KBHS’ operations. 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, 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. 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):



	Three Months Ended May 31,						Six Months Ended May 31,
	2020			2019			2020			2019
Revenues:
West Coast	$	331,882		$	391,264		$	816,379		$	697,074
Southwest	175,251			184,827			366,569			342,483
Central	284,193			307,080			567,706			548,672
Southeast	118,954			135,500			232,008			239,230
Total	$	910,280		$	1,018,671		$	1,982,662		$	1,827,459

Pretax income (loss):
West Coast	$	27,820		$	24,789		$	61,849		$	42,705
Southwest	24,891			27,995			57,003			50,067
Central	26,896			27,199			49,574			45,782
Southeast	6,629			589			9,259			44
Corporate and other	(26,051		)	(28,403		)	(54,465		)	(54,391		)
Total	$	60,185		$	52,169		$	123,220		$	84,207

Three Months Ended May 31, Six Months Ended May 31,
2019 2018 2019 2018
Revenues:
West Coast $ 391,264
$ 496,740
$ 697,074
$ 883,392
Southwest 184,827
180,917
342,483
332,816
Central 307,080
313,806
548,672
557,987
Southeast 135,500
107,210
239,230
193,683
Total $ 1,018,671
$ 1,098,673
$ 1,827,459
$ 1,967,878

Pretax income (loss):
West Coast $ 24,789
$ 51,883
$ 42,705
$ 83,476
Southwest 27,995
20,577
50,067
35,554
Central 27,199
29,075
45,782
48,170
Southeast 589
787
44
2,107
Corporate and other (28,403 ) (27,168 ) (54,391 ) (49,992 )
Total $ 52,169
$ 75,154
$ 84,207
$ 119,315

Inventory impairment charges:
West Coast $ 3,441
$ 5,993
$ 6,637
$ 10,692
Southwest —
—
—
—
Central —
—
—
—
Southeast —
—
—
—
Total $ 3,441
$ 5,993
$ 6,637
$ 10,692

Land option contract abandonment charges:
West Coast $ 391
$ 388
$ 446
$ 596
Southwest 223
—
282
—
Central 121
145
366
223
Southeast 161
—
161
—
Total $ 896
$ 533
$ 1,255
$ 819

May 31,
2019 November 30,
2018
Inventories:
Homes under construction
West Coast $ 690,525
$ 514,099
Southwest 184,154
173,036
Central 313,181
312,366
Southeast 152,523
125,651
Subtotal 1,340,383
1,125,152



	Three Months Ended May 31,				Six Months Ended May 31,
	2020		2019		2020		2019
Inventory impairment and land option contract abandonment charges:
West Coast	$	672	$	3,832	$	5,064	$	7,083
Southwest	—		223		171		282
Central	3,452		121		4,436		366
Southeast	255		161		380		161
Total	$	4,379	$	4,337	$	10,051	$	7,892

May 31,
2019 November 30,
2018
Land under development
West Coast 1,029,843
1,059,432
Southwest 422,507
404,201
Central 576,014
543,472
Southeast 214,370
212,831
Subtotal 2,242,734
2,219,936

Land held for future development or sale
West Coast 118,455
154,462
Southwest 30,141
21,137
Central 7,857
9,346
Southeast 41,283
52,806
Subtotal 197,736
237,751
Total $ 3,780,853
$ 3,582,839



	May 31, 2020		November 30, 2019
Assets:
West Coast	$	1,854,154	$	1,925,192
Southwest	714,672		674,310
Central	994,038		1,035,563
Southeast	421,385		441,451
Corporate and other	1,018,896		900,570
Total	$	5,003,145	$	4,977,086

Assets:
West Coast $ 2,045,818
$ 1,880,516
Southwest 678,270
631,509
Central 1,030,839
1,017,490
Southeast 448,302
463,224
Corporate and other 686,004
1,068,452
Total $ 4,889,233
$ 5,061,191


3.	Financial Services

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



	Three Months Ended May 31,						Six Months Ended May 31,
	2020			2019			2020			2019
Revenues
Insurance commissions	$	2,030		$	1,646		$	3,983		$	3,118
Title services	1,660			1,486			3,260			2,703
Interest income	—			—			—			6
Total	3,690			3,132			7,243			5,827
Expenses
General and administrative	(883		)	(1,040		)	(1,845		)	(2,064		)
Operating income	2,807			2,092			5,398			3,763
Equity in income of unconsolidated joint ventures	4,797			2,500			8,019			3,302
Pretax income	$	7,604		$	4,592		$	13,417		$	7,065

Three Months Ended May 31, Six Months Ended May 31,
2019 2018 2019 2018
Revenues
Insurance commissions $ 1,646
$ 1,463
$ 3,118
$ 2,815
Title services 1,486
1,287
2,703
2,353
Interest income —
—
6
—
Total 3,132
2,750
5,827
5,168

Expenses
General and administrative (1,040 ) (957 ) (2,064 ) (1,910 )
Operating income 2,092
1,793
3,763
3,258
Equity in income of unconsolidated joint ventures 2,500
1,361
3,302
1,780
Pretax income $ 4,592
$ 3,154
$ 7,065
$ 5,038



	May 31, 2020		November 30, 2019
Assets
Cash and cash equivalents	$	1,027	$	1,044
Receivables	1,690		2,232
Investments in unconsolidated joint ventures	14,243		14,374
Other assets (a)	21,897		20,746
Total assets	$	38,857	$	38,396
Liabilities
Accounts payable and accrued expenses	$	1,848	$	2,058
Total liabilities	$	1,848	$	2,058

May 31,
2019 November 30,
2018
Assets
Cash and cash equivalents $ 888
$ 760
Receivables 1,415
2,885
Investments in unconsolidated joint ventures 8,346
8,594
Other assets (a) 20,071
141
Total assets $ 30,720
$ 12,380
Liabilities
Accounts payable and accrued expenses $ 1,451
$ 1,495
Total liabilities $ 1,451
$ 1,495


(a)	Other assets at May 31, 2020 and November 30, 2019 included ~~$19.9~~$21.5 million and $20.6 million, respectively, of contract assets for estimated future renewal commissions ~~due~~related to ~~our adoption of ASC 606 effective December 1, 2018, as described in Note 1 – Basis of Presentation and Significant Accounting Policies.~~then-existing insurance policies.


4.	Earnings ~~(Loss)~~ Per Share

Basic and diluted earnings ~~(loss)~~ per share were calculated as follows (in thousands, except per share amounts):



	Three Months Ended May 31,						Six Months Ended May 31,
	2020			2019			2020			2019
Numerator:
Net income	$	51,989		$	47,461		$	111,737		$	77,472
Less: Distributed earnings allocated to nonvested restricted stock	(43		)	(14		)	(87		)	(27		)
Less: Undistributed earnings allocated to nonvested restricted stock	(231		)	(280		)	(511		)	(456		)
Numerator for basic earnings per share	51,715			47,167			111,139			76,989
Effect of dilutive securities:
Interest expense and amortization of debt issuance costs associated with convertible senior notes, net of taxes	—			—			—			541
Add: Undistributed earnings allocated to nonvested restricted stock	231			280			511			456
Less: Undistributed earnings reallocated to nonvested restricted stock	(223		)	(265		)	(492		)	(421		)
Numerator for diluted earnings per share	$	51,723		$	47,182		$	111,158		$	77,565

Denominator:
Weighted average shares outstanding — basic	90,493			87,641			90,169			87,310
Effect of dilutive securities:
Share-based payments	2,979			4,725			3,459			4,463
Convertible senior notes	—			—			—			2,862
Weighted average shares outstanding — diluted	93,472			92,366			93,628			94,635
Basic earnings per share	$	.57		$	.54		$	1.23		$	.88
Diluted earnings per share	$	.55		$	.51		$	1.19		$	.82

Three Months Ended May 31, Six Months Ended May 31,
2019 2018 2019 2018
Numerator:
Net income (loss) $ 47,461
$ 57,308
$ 77,472
$ (13,947 )
Less: Distributed earnings allocated to nonvested restricted stock (14 ) (12 ) (27 ) —
Less: Undistributed earnings allocated to nonvested restricted stock (280 ) (310 ) (456 ) —
Numerator for basic earnings (loss) per share 47,167
56,986
76,989
(13,947 )
Effect of dilutive securities:
Interest expense and amortization of debt issuance costs associated with convertible senior notes, net of taxes —
796
541
—
Add: Undistributed earnings allocated to nonvested restricted stock 280
310
456
—
Less: Undistributed earnings reallocated to nonvested restricted stock (265 ) (269 ) (421 ) —
Numerator for diluted earnings (loss) per share $ 47,182
$ 57,823
$ 77,565
$ (13,947 )

Denominator:
Weighted average shares outstanding — basic 87,641
87,581
87,310
87,370
Effect of dilutive securities:
Share-based payments 4,725
5,176
4,463
—
Convertible senior notes —
8,402
2,862
—
Weighted average shares outstanding — diluted 92,366
101,159
94,635
87,370
Basic earnings (loss) per share $ .54
$ .65
$ .88
$ (.16 )
Diluted earnings (loss) per share $ .51
$ .57
$ .82
$ (.16 )

We compute earnings ~~(loss)~~ per share using the two-class method, which is an allocation of earnings ~~(losses)~~ between the holders of common stock and a company’s participating security holders. Our outstanding nonvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities at May 31, ~~2019~~2020 or ~~2018.~~2019.

For the three-month and six-month periods ended May 31, 2020, 0 outstanding stock options were excluded from the diluted earnings per share calculation. For the three-month and six-month periods ended May 31, 2019, outstanding stock options to purchase .8 million shares of our common stock were excluded from the diluted earnings per share calculation because the effect of their inclusion would be antidilutive. The diluted earnings per share calculation for the six months ended May 31, 2019 included the dilutive effect of the $230.0 million in aggregate principal amount of our 1.375% convertible senior notes due 2019 (“1.375% Convertible Senior Notes due 2019”) based on the number of days they were outstanding during the period. We repaid ~~the~~these notes at their February 1, 2019 maturity.

For the three-month period ended May 31, 2018, outstanding stock options to purchase 1.6 million shares of our common stock were excluded from the diluted earnings per share calculation because the effect of their inclusion would be antidilutive. For the six-month period ended May 31, 2018, all outstanding stock options, contingentlyContingently issuable shares associated with outstanding performance-based restricted stock units (each, a “PSU”), and the impact of our 1.375% Convertible Senior Notes due 2019 were excluded from the diluted loss per share calculation because the effect of their inclusion would be antidilutive. 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.


5.	Receivables

Receivables consisted of the following (in thousands):



	May 31, 2020			November 30, 2019
Due from utility companies, improvement districts and municipalities	$	122,633		$	128,047
Income taxes receivable	83,599			—
Recoveries related to self-insurance and other legal claims	67,142			80,729
Refundable deposits and bonds	10,665			10,925
Other	36,608			37,846
Subtotal	320,647			257,547
Allowance for doubtful accounts	(7,719		)	(8,492		)
Total	$	312,928		$	249,055

May 31,
2019 November 30,
2018
Recoveries related to self-insurance and other legal claims $ 124,990
$ 138,261
Due from utility companies, improvement districts and municipalities 124,433
113,434
Refundable deposits and bonds 12,480
14,115
Recoveries related to warranty and other claims 4,111
4,750
Other 43,031
33,775
Subtotal 309,045
304,335
Allowance for doubtful accounts (9,337 ) (11,505 )
Total $ 299,708
$ 292,830


6.	Inventories

Inventories consisted of the following (in thousands):



	May 31, 2020		November 30, 2019
Homes completed or under construction	$	1,199,381	$	1,340,412
Land under development	2,255,342		2,213,713
Land held for future development or sale (a)	152,742		150,477
Total	$	3,607,465	$	3,704,602

May 31,
2019 November 30,
2018
Homes under construction $ 1,340,383
$ 1,125,152
Land under development 2,242,734
2,219,936
Land held for future development or sale (a) 197,736
237,751
Total $ 3,780,853
$ 3,582,839

(a) Land held for sale totaled ~~$31.6~~$21.4 million at May 31, ~~2019~~2020 and ~~$9.8~~$19.3 million at November 30, ~~2018.~~2019.

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). For land held for future development or sale, applicable interest is expensed as incurred.

Our interest costs were as follows (in thousands):



	Three Months Ended May 31,						Six Months Ended May 31,
	2020			2019			2020			2019
Capitalized interest at beginning of period	$	192,125		$	213,370		$	195,738		$	209,129
Interest incurred	31,055			36,544			62,017			71,332
Interest amortized to construction and land costs (a)	(28,746		)	(37,754		)	(63,321		)	(68,301		)
Capitalized interest at end of period (b)	$	194,434		$	212,160		$	194,434		$	212,160

Three Months Ended May 31, Six Months Ended May 31,
2019 2018 2019 2018
Capitalized interest at beginning of period $ 213,370
$ 259,785
$ 209,129
$ 262,191
Interest incurred 36,544
39,924
71,332
79,868
Interest amortized to construction and land costs (a) (37,754 ) (52,433 ) (68,301 ) (94,783 )
Capitalized interest at end of period (b) $ 212,160
$ 247,276
$ 212,160
$ 247,276

(a)

Interest amortized to construction and land costs for the three months and six months ended May 31, 2019 ~~and 2018~~ included a nominal amount and ~~$3.1~~$.6 million, respectively, related to land sales during the periods. ~~Interest~~There was no such interest amortized ~~to construction and land costs~~ for the three months and six months ended May 31, ~~2019 and 2018 included $.6 million and $4.1 million, respectively, related to land sales during the periods.~~2020.


(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.


7.	Inventory Impairments and Land Option Contract Abandonments

Each community or land parcel in our owned inventory is assessed on a quarterly basis to determine if indicators of potential impairment exist. We record an inventory impairment charge 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. 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.

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 three months ended May 31, 2020, these expectations considered that beginning in mid-March and throughout the remainder of the 2020 second quarter, 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 – Basis of Presentation and Significant Accounting Policies, as well as reductions in our net orders, backlog levels and homes delivered in the quarter. Our impairment assessments also considered that our average selling price of homes delivered in the 2020 second quarter was nearly even with the year-earlier quarter, and our housing gross profit margin for the period improved significantly, with sales incentives as a percentage of housing revenues remaining flat year over year. Moreover, the average selling price of our net orders generated during the 2020 second quarter increased modestly from the year-earlier period, and in conjunction with our ability to begin to effectively resume nearly all of our operations, our net orders rose steadily in May from the low levels in April, although below year-earlier levels. Taken together, and notwithstanding the significant disruptions associated with the COVID-19 pandemic during the 2020 second quarter, our inventory assessments as of May 31, 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 tempered overall net order pace and a steady average selling price for the remainder of 2020 and into 2021 relative to the 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.

We evaluated 2418 and 4224 communities or land parcels for recoverability during the six months ended May 31, 2020 and 2019, ~~and 2018, respectively.~~respectively, including certain communities or land parcels previously held for future development that were reactivated as part of our ongoing efforts to improve asset efficiency. The carrying ~~value~~values of ~~those~~the communities or land parcels evaluated ~~during the six months ended~~were $148.3 million at May 31, ~~2019~~2020 and ~~2018 was~~ $164.0 million ~~and $284.1 million, respectively.~~at May 31, 2019. Some of the communities or land parcels evaluated

during the six months ended May 31, ~~2019~~2020 and ~~2018~~2019 were evaluated in more than one quarterly period. Communities or land parcels evaluated for recoverability in more than one quarterly period were counted only once for each six-month period. In addition, the communities or land parcels evaluated during the six months ended May 31, 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 under our Returns-Focused Growth Plan.

Based on the results of our evaluations, we recognized 0 inventory impairment charges ~~of $3.4 million~~ for the three months ended May 31, ~~2019~~2020 and ~~$6.6~~$5.1 million of inventory impairment charges for the six months ended May 31, ~~2019.~~2020. For the three months and six months ended May 31, ~~2018,~~2019, we recognized inventory impairment charges of ~~$6.0~~$3.4 million and ~~$10.7~~$6.6 million, respectively. The impairment charges for the six-month period ended May 31, 2020 and the three-month and six-month periods ended May 31, 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.

The following table summarizes significant quantitative unobservable inputs we utilized in our fair value measurements with respect to the impaired communities written down to fair value during the periods presented:



	Three Months Ended May 31,		Six Months Ended May 31,
Unobservable Input (a)	2020	2019	2020	2019
Average selling price	$-	$315,000 - $398,500	$302,700 - $915,500	$315,000 - $1,045,400
Deliveries per month	-	4	1 - 4	1 - 4
Discount rate	-	17%	17% - 18%	17%

Three Months Ended May 31, Six Months Ended May 31,
Unobservable Input (a) 2019 2018 2019 2018
Average selling price $315,000 - $398,500 $339,400 - $460,500 $315,000 - $1,045,400 $339,400 - $774,100
Deliveries per month 4 4 - 5 1 - 4 3 - 5
Discount rate 17% 17% 17% 17% - 18%


(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.

As of May 31, 2020, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $89.7 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 ~~$144.5~~$115.6 million, representing 22 communities and various other land parcels. As of November 30, 2018, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $156.1 million, representing 2219 communities and various other land parcels.

Our inventory controlled under land option contracts and other similar contracts is assessed on a quarterly basis to determine whether it continues to meet our investment return standards. When a decision is made not to exercise certain land option contracts and other similar contracts due to market conditions and/or changes in our 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 ~~$.9~~$4.4 million for the three months ended May 31, ~~2019~~2020 and ~~$1.3~~$4.9 million for the six months ended May 31, ~~2019.~~2020. For the three-month and six-month periods ended May 31, ~~2018,~~2019, we recognized land option contract abandonment charges of ~~$.5~~$.9 million and ~~$.8~~$1.3 million, respectively.

~~Due~~If conditions in our served markets are or are expected to be adversely affected for a prolonged period due to the COVID-19 control responses or otherwise, we may determine through our community and land parcel evaluations in future quarters that we need to take impairment charges, and such charges could be material. In addition, due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, particularly as to land held for future development, it is possible that actual results could differ substantially from those estimated.


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 variable interest entity (“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~~1 of our joint ventures at May 31, ~~2019~~2020 and November 30, ~~2018~~2019 was a VIE, but we were not the primary beneficiary of the VIE. ~~All~~Therefore, all of our joint ventures at May 31, ~~2019~~2020 and November 30, ~~2018~~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. 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. As a result of our analyses, we determined that as of May 31, ~~2019~~2020 and November 30, ~~2018~~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):



	May 31, 2020				November 30, 2019
	Cash Deposits		Aggregate Purchase Price		Cash Deposits		Aggregate Purchase Price
Unconsolidated VIEs	$	29,467	$	761,329	$	34,595	$	823,427
Other land option contracts and other similar contracts	29,772		503,739		40,591		600,092
Total	$	59,239	$	1,265,068	$	75,186	$	1,423,519

May 31, 2019 November 30, 2018

Cash
Deposits

Aggregate
Purchase Price

Cash
Deposits

Aggregate
Purchase Price
Unconsolidated VIEs $ 22,820
$ 859,141
$ 26,542
$ 784,334
Other land option contracts and other similar contracts 25,829
518,042
27,288
586,904
Total $ 48,649
$ 1,377,183
$ 53,830
$ 1,371,238

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 $~~46.6~~33.3 million at May 31, ~~2019~~2020 and $~~46.9~~32.8 million at November 30, ~~2018~~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 or other similar 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 $~~5.5~~1.8 million at May 31, ~~2019~~2020 and ~~$21.8~~$12.2 million at November 30, ~~2018~~2019.


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. 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 a home sale is closed and title passes to a homebuyer, at which time we account for those earnings (losses) as a reduction (increase) to the cost of purchasing the land from the unconsolidated joint venture. We defer recognition of our share of such unconsolidated joint venture losses only to the extent profits are to be generated from the sale of the home to a homebuyer.

We share in the earnings (losses) of these unconsolidated joint ventures generally in accordance with our respective equity interests. In some instances, we recognize earnings (losses) related to our investment in an unconsolidated joint venture that differ from our equity interest in the unconsolidated joint venture. This typically arises from our deferral of the unconsolidated joint venture’s earnings (losses) from land sales to us, or other items.

The following table presents combined condensed information from the statements of operations of our unconsolidated joint ventures (in thousands):



	Three Months Ended May 31,						Six Months Ended May 31,
	2020			2019			2020			2019
Revenues	$	66,873		$	3,786		$	94,420		$	15,978
Construction and land costs	(46,725		)	(3,798		)	(68,268		)	(16,018		)
Other expense, net	(3,742		)	(610		)	(5,849		)	(1,238		)
Income (loss)	$	16,406		$	(622	)	$	20,303		$	(1,278	)

Three Months Ended May 31, Six Months Ended May 31,
2019 2018 2019 2018
Revenues $ 3,786
$ 7,827
$ 15,978
$ 16,624
Construction and land costs (3,798 ) (7,839 ) (16,018 ) (16,655 )
Other expense, net (610 ) (611 ) (1,238 ) (1,983 )
Loss $ (622 ) $ (623 ) $ (1,278 ) $ (2,014 )
The higher combined revenues and income for the three months and six months ended May 31, 2020, as compared to the year-earlier periods, mainly reflected homes delivered from an unconsolidated joint venture in California. In the three months and six months ended May 31, 2019, our unconsolidated joint ventures did not deliver any homes.

The following table presents combined condensed balance sheet information for our unconsolidated joint ventures (in thousands):



	May 31, 2020		November 30, 2019
Assets
Cash	$	41,932	$	23,965
Inventories	85,830		139,536
Other assets	658		792
Total assets	$	128,420	$	164,293

Liabilities and equity
Accounts payable and other liabilities	$	13,817	$	13,282
Notes payable (a)	—		40,672
Equity	114,603		110,339
Total liabilities and equity	$	128,420	$	164,293

May 31,
2019 November 30,
2018
Assets
Cash $ 18,644
$ 18,567
Inventories 130,064
131,074
Other assets 404
530
Total assets $ 149,112
$ 150,171

May 31,
2019 November 30,
2018
Liabilities and equity
Accounts payable and other liabilities $ 10,916
$ 11,374
Notes payable (a) 27,970
17,956
Equity 110,226
120,841
Total liabilities and equity $ 149,112
$ 150,171

(a)

As of both May 31, ~~2019~~2020 and November 30, ~~2018, one~~2019, we had investments in 5 unconsolidated joint ventures. At November 30, 2019, 1 of our unconsolidated joint ventures had a construction loan agreement with a third-party lender to finance its land development ~~activities, with the~~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 ~~at May 31, 2019 is scheduled to mature~~was repaid in ~~February~~April 2020. None of our ~~other~~ unconsolidated joint ventures had outstanding debt at May 31, ~~2019 or November 30, 2018.~~2020.

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

May 31,
2019 November 30,
2018
Number of investments in unconsolidated joint ventures 6
6
Investments in unconsolidated joint ventures $ 56,446
$ 61,960
Number of unconsolidated joint venture lots controlled under land option contracts and other similar contracts 17
36

We and our partner in the unconsolidated joint venture that has the above-noted outstanding construction loan agreement at May 31, 2019 provide certain guarantees and indemnities to the lender, including a guaranty to complete the construction of improvements for the project; a guaranty against losses the lender suffers due to certain bad acts or failures to act by the unconsolidated joint venture or its partners; and an indemnity of the lender from environmental issues. Our actual responsibility under the foregoing guaranty and indemnity obligations is limited to our pro rata interest in the unconsolidated joint venture. We do not have a guaranty or any other obligation to repay or to support the value of the collateral underlying the outstanding secured debt. However, various financial and non-financial covenants apply with respect to the outstanding secured debt and the related guaranty and indemnity obligations, and a failure to comply with such covenants could result in a default and cause the lender to seek to enforce such guaranty and indemnity obligations, if and as may be applicable. As of May 31, 2019, we were in compliance with the applicable terms of our relevant covenants with respect to the construction loan agreement. We do not believe that our existing exposure under our guaranty and indemnity obligations related to the outstanding secured debt is material to our consolidated financial statements.

We are committed to purchase all 17 unconsolidated joint venture lots controlled under land option and other similar contracts at May 31, 2019 from one of our unconsolidated joint ventures. The purchase will be made in quarterly takedowns over the next year for an aggregate purchase price of $8.0 million under agreements that we entered into with the unconsolidated joint venture in 2016.


10.	Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):



	May 31, 2020			November 30, 2019
Computer software and equipment	$	30,137		$	27,091
Model furnishings and sales office improvements	82,401			82,117
Leasehold improvements, office furniture and equipment	17,366			16,173
Subtotal	129,904			125,381
Less accumulated depreciation	(64,140		)	(60,338		)
Total	$	65,764		$	65,043

May 31,
2019 November 30,
2018
Computer software and equipment $ 24,223
$ 20,940
Model furnishings and sales office improvements (a) 70,347
—
Leasehold improvements, office furniture and equipment (b) 15,605
23,491
Subtotal 110,175
44,431
Less accumulated depreciation (a) (48,954 ) (20,148 )
Total $ 61,221
$ 24,283


~~(a)~~	The balance at May 31, 2019 reflects a change in the classification of certain community sales office and other marketing- and model home-related costs and related accumulated amortization from inventories to property and equipment, net due to our adoption of ASC 606 effective December 1, 2018, as described in Note 1 – Basis of Presentation and Significant Accounting Policies.


~~(b)~~	In January 2019, we completed the sale and leaseback of our office building in San Antonio, Texas. The sale generated net cash proceeds of $5.8 million and a gain of $2.2 million, which will be recognized on a straight-line basis over a 10-year lease term until our adoption of ASU 2016-02, when the remaining gain will be recognized as a transition adjustment to retained earnings.


11.	Other Assets

Other assets consisted of the following (in thousands):



	May 31, 2020		November 30, 2019
Cash surrender value and benefit receivable from corporate-owned life insurance contracts	$	73,458	$	73,849
Lease right-of-use assets	32,087		—
Prepaid expenses	18,219		5,944
Debt issuance costs associated with unsecured revolving credit facility, net	2,824		3,248
Total	$	126,588	$	83,041

May 31,
2019 November 30,
2018
Cash surrender value of corporate-owned life insurance contracts $ 75,010
$ 73,721
Prepaid expenses and other 12,724
9,379
Total $ 87,734
$ 83,100


12.	Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following (in thousands):



	May 31, 2020		November 30, 2019
Self-insurance and other legal liabilities	$	224,784	$	229,483
Employee compensation and related benefits	122,426		163,646
Warranty liability	92,844		88,839
Lease liabilities	33,549		—
Accrued interest payable	32,258		32,507
Customer deposits	30,283		22,382
Inventory-related obligations (a)	15,231		26,264
Real estate and business taxes	10,004		14,872
Other	41,014		40,790
Total	$	602,393	$	618,783

May 31,
2019 November 30,
2018
Self-insurance and other litigation liabilities $ 272,851
$ 283,651
Employee compensation and related benefits 116,882
148,549
Warranty liability 83,030
82,490
Accrued interest payable 33,989
31,180
Customer deposits 24,088
19,491
Inventory-related obligations (a) 21,840
40,892
Real estate and business taxes 8,212
16,639
Other 44,924
43,376
Total $ 605,816
$ 666,268

(a)

Represents liabilities for financing arrangements discussed in Note 8 – Variable Interest Entities, as well as liabilities for fixed or determinable amounts associated with tax increment financing entity (“TIFE”) assessments. As homes are delivered, our obligation to pay the remaining TIFE assessments associated with each underlying lot is transferred to the homebuyer. As such, these assessment obligations will be paid by us only to the extent we do not deliver homes on applicable lots before the related TIFE obligations mature.

~~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.~~


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 May 31, 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 three months ended May 31, 2020, our total lease expense was $4.4 million, which included short-term lease costs of $1.4 million. For the six months ended May 31, 2020, our total lease expense was $9.4 million, which included short-term lease costs of $3.5 million. Variable lease costs and external sublease income for the three-month and six-month periods ended May 31, 2020 were immaterial.

The following table presents our lease right-of-use assets and lease liabilities (in thousands):



	May 31, 2020
Lease right-of-use assets (a)	$	32,413
Lease liabilities (b)	33,905


(a)	Represents lease right-of-use assets of $32.1 million within our homebuilding operations and $.3 million within our financial services operations.


(b)	Represents lease liabilities of $33.5 million within our homebuilding operations and $.4 million within our financial services operations.

The following table presents additional information about our leases (dollars in thousands):



	Three Months Ended May 31, 2020			Six Months Ended May 31, 2020
Lease right-of-use assets obtained in exchange for new lease liabilities	$	2,428		$	6,068
Non-cash operating lease expense	—			—
Cash payments on lease liabilities	2,894			5,637
Weighted-average remaining lease term	4.8 years			4.8 years
Weighted-average discount rate (incremental borrowing rate)	5.1		%	5.1		%

As of May 31, 2020, the future minimum lease payments required under our leases are as follows (in thousands):



Years Ending November 30,
2020	$	5,272
2021	9,070
2022	7,787
2023	5,789
2024	4,502
Thereafter	6,035
Total lease payments	38,455
Less: Interest	(4,550		)
Present value of lease liabilities	$	33,905


14.	Income Taxes

Income Tax Expense. Our income tax expense and effective tax rates were as follows (dollars in thousands):



	Three Months Ended May 31,						Six Months Ended May 31,
	2020			2019			2020			2019
Income tax expense	$	15,800		$	9,300		$	24,900		$	13,800
Effective tax rate	23.3		%	16.4		%	18.2		%	15.1		%

Three Months Ended May 31, Six Months Ended May 31,
2019 2018 2019 2018
Income tax expense $ 9,300
$ 21,000
$ 13,800
$ 138,300
Effective tax rate 16.4 % 26.8 % 15.1 % 111.2 %

Our income tax expense and effective tax rate for the three months ended May 31, ~~2019~~2020 included the favorable ~~impacts~~effect of ~~$4.3~~$3.0 million of federal energy tax credits that we earned from building energy-efficient homes, partially offset by $1.0 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). For the three months ended May 31, 2019, our income tax expense and effective tax rate included the favorable effects of $4.3 million of federal energy tax credits and $.9 million of excess tax benefits related to stock-based ~~compensation.~~ compensation, partly offset by $.8 million of non-deductible executive compensation expense.

Our income tax expense and effective tax rate for the six months ended May 31, ~~2019~~2020 included the favorable ~~impacts~~effects of $7.0 million of federal energy tax credits that we earned from building energy-efficient homes and $5.6 million of excess tax benefits related to stock-based compensation, partially offset by $2.0 million of non-deductible executive compensation expense. For the six months ended May 31, 2019, our income tax expense and effective tax rate included the favorable effects of $4.3 million of federal energy tax credits, a $3.3 million reversal of a deferred tax asset valuation allowance related to refundable alternative minimum tax (“AMT”) credits and $2.9 million of excess tax benefits related to stock-based ~~compensation.~~

For the three months ended May 31, 2018, our income tax expense and effective tax rate included the favorable net impact of federal energy tax credits of $.2 million that we earned from building energy-efficient homes and $.2compensation, partly offset by $1.2 million of excess tax benefits related to stock-based compensation. Our income tax expense and effective tax rate for the six months ended May 31, 2018 included a non-cash charge of $111.2 million for the estimated impacts of the TCJA, which was enacted into law on December 22, 2017. Of the total charge, $107.9 million related to the accounting re-measurement of our deferred tax assets based on the reduction in the federal corporate income tax rate from 35% to 21%, effective January 1, 2018, under the TCJA. The remaining $3.3 million was due to our establishing a federal deferred tax asset valuation allowance for the sequestration of refundable alternative minimum tax (“AMT”) credits. Our income tax expense and effective tax rate for the six months ended May 31, 2018 also reflected the favorable net impacts of federal energy tax credits of $4.2 million and excess tax benefits of $2.4 million related to stock-based compensation. non-deductible executive compensation expense.

The federal energy tax credits for the ~~three-month~~three months and ~~six-month periods~~six months ended May 31, ~~2018~~2020 resulted from legislation enacted ~~on February 9, 2018,~~in December 2019, which among other things, extended the availability of a business tax credit for building new energy-efficient homes through December 31, ~~2017.~~2020. Prior to this legislation, the tax credit expired on December 31, ~~2016.~~2017. This extension is expected to benefit our income tax provision in future periods.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to provide economic and other relief as a result of 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. These credits were in addition to the $43.3 million of AMT tax credits we reclassified from deferred tax assets to receivables in the 2020 first quarter when we filed a preliminary 2019 federal income tax return.

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. 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 ~~$444.7~~$276.8 million as of May 31, ~~2019~~2020 and ~~$465.4~~$383.7 million as of November 30, ~~2018~~2019 were both partly offset by valuation allowances of ~~$20.3 million and $23.6 million, respectively. During the six months ended~~$19.2 million. Our deferred tax assets as of May 31, ~~2019, we reversed~~2020 reflected the above-mentioned ~~$3.3~~AMT credit reclassifications totaling $82.6 million ~~federal~~from deferred tax ~~asset valuation allowance due~~assets to receivables in 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.~~2020 first and second quarters. The deferred tax asset valuation allowances as of May 31, ~~2019~~2020 and November 30, ~~2018~~2019 were primarily related to certain state net operating losses ~~(“NOLs”)~~ that had not met the “more likely than not” realization standard at those dates. Based on ~~our~~the evaluation of our deferred tax assets as of May 31, ~~2019,~~2020, we determined that most of our deferred tax assets would be realized. Therefore, ~~other than the $3.3 million reversal discussed above, no~~0 adjustments to our deferred tax valuation allowance were needed for the six months ended May 31, ~~2019.~~2020.

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.

Unrecognized Tax Benefits. As of May 31, ~~2019~~2020 and November 30, ~~2018,~~2019, we had no0 gross unrecognized tax ~~benefits (including interest and penalties).~~benefits. The fiscal years ending ~~2015~~2016 and later remain open to federal examinations, while ~~2014~~2015 and later remain open to state examinations.


~~14.~~15.	Notes Payable

Notes payable consisted of the following (in thousands):



	May 31, 2020		November 30, 2019
Mortgages and land contracts due to land sellers and other loans	$	24,871	$	7,889
7.00% Senior notes due December 15, 2021	448,589		448,164
7.50% Senior notes due September 15, 2022	348,551		348,267
7.625% Senior notes due May 15, 2023	351,517		351,748
6.875% Senior notes due June 15, 2027	296,565		296,379
4.80% Senior notes due November 15, 2029	296,446		296,300
Total	$	1,766,539	$	1,748,747

May 31,
2019 November 30,
2018
Unsecured revolving credit facility $ 50,000
$ —
Mortgages and land contracts due to land sellers and other loans 12,018
40,038
4.75% Senior notes due May 15, 2019 —
399,483
8.00% Senior notes due March 15, 2020 348,617
347,790
7.00% Senior notes due December 15, 2021 447,754
447,359
7.50% Senior notes due September 15, 2022 347,994
347,731
7.625% Senior notes due May 15, 2023 351,973
248,074
6.875% Senior notes due June 15, 2027 296,200
—
1.375% Convertible senior notes due February 1, 2019 —
229,788
Total $ 1,854,556
$ 2,060,263

The carrying amounts of our senior notes listed above are net of unamortized debt issuance costs, premiums and discounts, which totaled ~~$7.5~~$8.3 million at May 31, ~~2019~~2020 and ~~$9.8~~$9.1 million at November 30, ~~2018.~~2019.

Unsecured Revolving Credit Facility. We have ~~a $500.0~~an $800.0 million unsecured revolving credit facility with various banks (“Credit Facility”) that will mature on ~~July 27, 2021.~~October 7, 2023. The Credit Facility contains an uncommitted accordion feature under which ~~the~~its aggregate principal amount of available loans can be increased to a maximum of ~~$600.0 million~~$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 consolidated leverage ratio (“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 ~~.30%~~.20% to ~~.45%~~.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 a consolidated interest coverage ratio (“Interest Coverage Ratio”) or minimum level of liquidity, each as defined therein. The amount of the Credit Facility available for cash borrowings or the issuance of letters of credit depends on the total cash borrowings and letters of credit outstanding under the Credit Facility and the maximum available amount under the terms of the Credit Facility. As of May 31, ~~2019,~~2020, we had ~~$50.0 million of~~0 cash borrowings and ~~$31.5~~$12.4 million of letters of credit outstanding under the Credit Facility. Therefore, as of May 31, ~~2019,~~2020, we had ~~$418.5~~$787.6 million available for cash borrowings under the Credit Facility, with up to ~~$218.5~~$237.6 million of that amount available for the issuance of letters of credit.

Letter of Credit ~~Facilities.~~ ~~On February 13, 2019,we entered into a new~~Facility. We have an unsecured letter of credit agreement with a financial institution (“~~New~~ LOC Facility”). Under the ~~New~~ LOC Facility, which expires on February 13, 2022, we may issue up to $50.0 million of letters of credit. We maintain the ~~New~~ LOC Facility ~~and a cash-collateralized letter of credit facility (together, the “LOC Facilities”)~~ to obtain letters of credit from time to time in the ordinary course of operating our business. As of May 31, ~~2019~~2020, we had ~~$2.1~~$33.5 million of letters of credit outstanding under the LOC ~~Facilities, all of which were under the New LOC~~ Facility. We had no$15.8 million letters of credit outstanding under the LOC ~~Facilities at~~Facility as of November 30, ~~2018.~~2019.

Mortgages and Land Contracts Due to Land Sellers and Other Loans. As of May 31, ~~2019~~2020, inventories having a carrying value of ~~$138.2~~$52.1 million were pledged to collateralize mortgages and land contracts due to land sellers and other loans.

~~Shelf Registration.~~ We have an automatically effective universal shelf registration statement that was filed with the SEC on July 14, 2017 (“2017 Shelf Registration”). Issuances of securities under our 2017 Shelf Registration require the filing of a prospectus supplement identifying the amount and termsSenior Notes. All of the ~~securities to be issued. Our ability to issue securities is subject to market conditions and other factors impacting our borrowing capacity.~~

~~Senior Notes.~~ ~~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, pursuant to the 2017 Shelf Registration, we completed concurrent public offerings of $300.0 million in aggregate principal amount of 6.875% senior notes due 2027 (“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 (“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 (“4.75% Senior Notes due 2019”) before their May 15, 2019 maturity date.

~~All of our~~ senior notes outstanding at May 31, ~~2019~~2020 and November 30, ~~2018~~2019 represent senior unsecured obligations that are guaranteed by certain of our subsidiaries ~~that guarantee our obligations under the Credit Facility~~ and rank equally in right of payment with all of our ~~other~~and our guarantor subsidiaries’ existing unsecured and unsubordinated indebtedness. Interest on each of these senior notes is payable semi-annually.

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 and leaseback transactions involving property above a certain specified value. In addition, the indenture contains certain limitations related to mergers, consolidations, and sales of assets.

As of May 31, ~~2019~~2020, 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.

As of May 31, ~~2019,~~2020, 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: ~~2019 – $12.0 million;~~ 2020 – ~~$350.0~~$6.8 million; 2021 – ~~$0;~~$18.0 million; 2022 – $800.0 million; 2023 – $350.0 million; 2024 – $0; and thereafter – ~~$300.0~~$600.0 million.


~~15.~~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 ~~pre-impairment value, inventory impairment charges~~ and ~~fair value for~~ our assets measured at fair value on a nonrecurring basis for the six months ended May 31, ~~2019~~2020 and the year ended November 30, ~~2018~~2019 (in thousands):


		May 31, 2019							November 30, 2018								May 31, 2020							November 30, 2019
Description	Fair Value Hierarchy	Pre-Impairment Value		Inventory Impairment Charges			Fair Value (a)		Pre-Impairment Value		Inventory Impairment Charges			Fair Value (a)		Fair Value Hierarchy	Pre-Impairment Value		Inventory Impairment Charges			Fair Value (a)		Pre-Impairment Value		Inventory Impairment Charges			Fair Value (a)
Inventories	Level 3	$	19,924	$	(6,637	)	$	13,287	$	70,156	$	(26,104	)	$	44,052	Level 3	$	14,394	$	(5,105	)	$	9,289	$	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~~value and estimated fair ~~values~~value of our financial instruments, except those for which the carrying values approximate fair values (in thousands):



		May 31, 2020				November 30, 2019
Description	Fair Value Hierarchy	Carrying Value (a)		Estimated Fair Value		Carrying Value (a)		Estimated Fair Value
Financial Liabilities:
Senior notes	Level 2	$	1,741,668	$	1,862,750	$	1,740,858	$	1,921,563

May 31, 2019 November 30, 2018

Fair Value
Hierarchy

Carrying
Value (a)

Estimated
Fair Value

Carrying
Value (a)

Estimated
Fair Value
Financial Liabilities:
Senior notes Level 2 $ 1,792,538
$ 1,908,625
$ 1,790,437
$ 1,853,438
Convertible senior notes Level 2 —
—
229,788
229,425


(a)	The carrying values for the senior notes ~~and convertible senior notes, as presented,~~ include 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 ~~and convertible 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 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.


~~16.~~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 years 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):



	Three Months Ended May 31,						Six Months Ended May 31,
	2020			2019			2020			2019
Balance at beginning of period	$	90,213		$	84,191		$	88,839		$	82,490
Warranties issued	7,271			8,139			15,634			14,433
Payments	(4,640		)	(6,500		)	(11,629		)	(11,093		)
Adjustments	—			(2,800		)	—			(2,800		)
Balance at end of period	$	92,844		$	83,030		$	92,844		$	83,030

Three Months Ended May 31, Six Months Ended May 31,
2019 2018 2019 2018
Balance at beginning of period $ 84,191
$ 71,845
$ 82,490
$ 69,798
Warranties issued 8,139
9,889
14,433
17,653
Payments (6,500 ) (5,330 ) (11,093 ) (11,047 )
Adjustments (2,800 ) —
(2,800 ) —
Balance at end of period $ 83,030
$ 76,404
$ 83,030
$ 76,404

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. 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.

We self-insure a portion of our overall risk through the use of a captive insurance subsidiary, which provides coverage for our exposure to 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.

•

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 2 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 periods without consideration of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any. Estimated probable insurance and other recoveries of ~~$49.0~~$47.9 million and ~~$56.9~~$50.6 million are included in receivables in our consolidated balance sheets at May 31, ~~2019~~2020 and November 30, ~~2018,~~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 period to period. 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):


	Three Months Ended May 31,						Six Months Ended May 31,						Three Months Ended May 31,						Six Months Ended May 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Balance at beginning of period	$	177,862		$	180,695		$	176,841		$	177,695		$	181,481		$	177,862		$	177,765		$	176,841
Self-insurance expense (a)	4,295			4,309			8,042			8,710			1,343			4,295			5,977			8,042
Payments (b)	(11,179		)	(8,289		)	(13,905		)	(9,690		)	(4,743		)	(11,179		)	(5,661		)	(13,905		)
Balance at end of period	$	170,978		$	176,715		$	170,978		$	176,715		$	178,081		$	170,978		$	178,081		$	170,978


(a)	These expenses are included in selling, general and administrative expenses and are largely offset by contributions from subcontractors participating in the wrap-up policy.


(b)	Includes net changes in estimated probable insurance and other recoveries, which are recorded in receivables, to present our self-insurance liability on a gross basis.

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. Such receivables associated with our warranty and other claims totaled $4.1 million at May 31, 2019 and $4.8 million at November 30, 2018. We believe the collection of these receivables is probable based on our history of collections for similar claims.

~~Northern California Claims.~~ In the 2017 third quarter, we received claims from a homeowners association alleging approximately $100.0 million of damages from purported construction defects at a completed townhome community in Northern California, which claims increased to $142.0 million in December 2018. In September 2018, a binding arbitration proceeding on this matter was scheduled to begin on July 1, 2019. On May 24, 2019, we reached a settlement with the homeowners association on their claims. At May 31, 2019, we had an accrual for the amount we have agreed to pay under the settlement, which payment is expected to be made in the 2019 third quarter and is within our previous accrual for this matter. We continue to pursue an additional responsible party for potential recoveries related to this matter.

Florida Chapter 558 Actions (Individual and Homeowner Association Claims). 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 May 31, ~~2019,~~2020, we had approximately ~~580~~503 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 May 31, ~~2019,~~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 May 31, 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 $8.0 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 May 31, ~~2019~~2020, we had ~~$737.5~~$789.6 million of performance bonds and ~~$33.6~~$45.9 million of letters of credit outstanding. At November 30, ~~2018,~~2019, we had $~~689.3~~793.9 million of performance bonds and ~~$28.0~~$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 our business, we enter into land option contracts and other similar contracts to acquire rights to land for the construction of homes. At May 31, ~~2019~~2020, we had total cash deposits of ~~$48.6~~$59.2 million to purchase land having an aggregate purchase price of ~~$1.38~~$1.27 billion. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance.


~~17.~~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 May 31, ~~2019,~~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.


~~18.~~19.	Stockholders’ Equity

A summary of changes in stockholders’ equity is presented below (in thousands):



	Three Months Ended May 31, 2020 and 2019
	Number of Shares
	Common Stock	Grantor Stock Ownership Trust		Treasury Stock		Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Grantor Stock Ownership Trust			Treasury Stock			Total Stockholders’ Equity
Balance at February 29, 2020	122,291	(7,317	)	(24,526	)	$	122,291	$	803,420		$	2,211,851		$	(17,149	)	$	(79,359	)	$	(597,950	)	$	2,443,104
Net income	—	—		—		—		—			51,989			—			—			—			51,989
Dividends on common stock	—	—		—		—		—			(8,098		)	—			—			—			(8,098		)
Employee stock options/other	11	—		—		11		167			—			—			—			—			178
Stock awards	68	—		—		68		(68		)	—			—			—			—			—
Stock-based compensation	—	—		—		—		3,181			—			—			—			—			3,181
Balance at May 31, 2020	122,370	(7,317	)	(24,526	)	$	122,370	$	806,700		$	2,255,742		$	(17,149	)	$	(79,359	)	$	(597,950	)	$	2,490,354

Balance at February 28, 2019	119,258	(7,860	)	(24,264	)	$	119,258	$	755,341		$	1,936,523		$	(9,565	)	$	(85,246	)	$	(587,814	)	$	2,128,497
Net income	—	—		—		—		—			47,461			—			—			—			47,461
Dividends on common stock	—	—		—		—		—			(2,189		)	—			—			—			(2,189		)
Employee stock options/other	1,036	—		—		1,036		14,594			—			—			—			—			15,630
Stock awards	56	—		—		56		(56		)	—			—			—			—			—
Stock-based compensation	—	—		—		—		5,814			—			—			—			—			5,814
Tax payments associated with stock-based compensation awards	—	—		—		—		—			—			—			—			(3		)	(3		)
Balance at May 31, 2019	120,350	(7,860	)	(24,264	)	$	120,350	$	775,693		$	1,981,795		$	(9,565	)	$	(85,246	)	$	(587,817	)	$	2,195,210

	Six Months Ended May 31, 2020 and 2019
	Number of Shares
	Common Stock	Grantor Stock Ownership Trust		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, 2019	121,593	(7,631	)	(24,356	)	$	121,593	$	793,954		$	2,157,183		$	(15,506	)	$	(82,758	)	$	(591,344	)	$	2,383,122
Cumulative effect of adoption of ASC 842	—	—		—		—		—			1,510			—			—			—			1,510
Reclassification of stranded tax effects (ASU 2018-02)	—	—		—		—		—			1,643			(1,643		)	—			—			—
Net income	—	—		—		—		—			111,737			—			—			—			111,737
Dividends on common stock	—	—		—		—		—			(16,331		)	—			—			—			(16,331		)
Employee stock options/other	709	—		—		709		7,695			—			—			—			—			8,404
Stock awards	68	314		(15	)	68		(3,080		)	—			—			3,399			(387		)	—
Stock-based compensation	—	—		—		—		8,131			—			—			—			—			8,131
Tax payments associated with stock-based compensation awards	—	—		(155	)	—		—			—			—			—			(6,219		)	(6,219		)
Balance at May 31, 2020	122,370	(7,317	)	(24,526	)	$	122,370	$	806,700		$	2,255,742		$	(17,149	)	$	(79,359	)	$	(597,950	)	$	2,490,354

Balance at November 30, 2018	119,196	(8,157	)	(24,113	)	$	119,196	$	753,570		$	1,897,168		$	(9,565	)	$	(88,472	)	$	(584,397	)	$	2,087,500
Cumulative effect of adoption of ASC 606	—	—		—		—		—			11,610			—			—			—			11,610
Net income	—	—		—		—		—			77,472			—			—			—			77,472
Dividends on common stock	—	—		—		—		—			(4,455		)	—			—			—			(4,455		)
Employee stock options/other	1,098	—		—		1,098		15,364			—			—			—			—			16,462
Stock awards	56	297		(4	)	56		(3,207		)	—			—			3,226			(75		)	—
Stock-based compensation	—	—		—		—		9,966			—			—			—			—			9,966
Tax payments associated with stock-based compensation awards	—	—		(147	)	—		—			—			—			—			(3,345		)	(3,345		)
Balance at May 31, 2019	120,350	(7,860	)	(24,264	)	$	120,350	$	775,693		$	1,981,795		$	(9,565	)	$	(85,246	)	$	(587,817	)	$	2,195,210

Three Months Ended May 31, 2019 and 2018
Number of Shares

Common
Stock

Grantor
Stock
Ownership
Trust

Treasury
Stock
Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss
Grantor Stock
Ownership Trust
Treasury Stock Total Stockholders’ Equity
Balance at February 28, 2019 119,258
(7,860 ) (24,264 ) $ 119,258
$ 755,341
$ 1,936,523
$ (9,565 ) $ (85,246 ) $ (587,814 ) $ 2,128,497
Net income —
—
—
—
—
47,461
—
—
—
47,461
Dividends on common stock —
—
—
—
—
(2,189 ) —
—
—
(2,189 )
Employee stock options/other 1,036
—
—
1,036
14,594
—
—
—
—
15,630
Stock awards 56
—
—
56
(56 ) —
—
—
—
—
Stock-based compensation —
—
—
—
5,814
—
—
—
—
5,814
Tax payments associated with stock-based compensation awards —
—
—
—
—
—
—
—
(3 ) (3 )
Balance at May 31, 2019 120,350
(7,860 ) (24,264 ) $ 120,350
$ 775,693
$ 1,981,795
$ (9,565 ) $ (85,246 ) $ (587,817 ) $ 2,195,210

Balance at February 28, 2018 118,214
(8,460 ) (22,248 ) $ 118,214
$ 729,439
$ 1,662,118
$ (16,924 ) $ (91,760 ) $ (548,365 ) $ 1,852,722
Net income —
—
—
—
—
57,308
—
—
—
57,308
Dividends on common stock —
—
—
—
—
(2,178 ) —
—
—
(2,178 )
Employee stock options/other 129
—
—
129
1,696
—
—
—
—
1,825
Stock awards 54
—
—
54
(54 ) —
—
—
—
—
Stock-based compensation —
—
—
—
4,966
—
—
—
—
4,966
Balance at May 31, 2018 118,397
(8,460 ) (22,248 ) $ 118,397
$ 736,047
$ 1,717,248
$ (16,924 ) $ (91,760 ) $ (548,365 ) $ 1,914,643

Six Months Ended May 31, 2019 and 2018
Number of Shares

Common
Stock

Grantor
Stock
Ownership
Trust

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, 2018 119,196
(8,157 ) (24,113 ) $ 119,196
$ 753,570
$ 1,897,168
$ (9,565 ) $ (88,472 ) $ (584,397 ) $ 2,087,500
Cumulative effect of adoption of ASC 606 —
—
—
—
—
11,610
—
—
—
11,610
Net income —
—
—
—
—
77,472
—
—
—
77,472
Dividends on common stock —
—
—
—
—
(4,455 ) —
—
—
(4,455 )
Employee stock options/other 1,098
—
—
1,098
15,364
—
—
—
—
16,462
Stock awards 56
297
(4 ) 56
(3,207 ) —
—
3,226
(75 ) —
Stock-based compensation —
—
—
—
9,966
—
—
—
—
9,966
Tax payments associated with stock-based compensation awards —
—
(147 ) —
—
—
—
—
(3,345 ) (3,345 )
Balance at May 31, 2019 120,350
(7,860 ) (24,264 ) $ 120,350
$ 775,693
$ 1,981,795
$ (9,565 ) $ (85,246 ) $ (587,817 ) $ 2,195,210

Balance at November 30, 2017 117,946
(8,898 ) (22,021 ) $ 117,946
$ 727,483
$ 1,735,695
$ (16,924 ) $ (96,509 ) $ (541,380 ) $ 1,926,311
Net loss —
—
—
—
—
(13,947 ) —
—
—
(13,947 )
Dividends on common stock —
—
—
—
—
(4,500 ) —
—
—
(4,500 )
Employee stock options/other 397
—
—
397
4,374
—
—
—
—
4,771
Stock awards 54
438
(10 ) 54
(4,605 ) —
—
4,749
(198 ) —
Stock-based compensation —
—
—
—
8,795
—
—
—
—
8,795
Tax payments associated with stock-based compensation awards —
—
(217 ) —
—
—
—
—
(6,787 ) (6,787 )
Balance at May 31, 2018 118,397
(8,460 ) (22,248 ) $ 118,397
$ 736,047
$ 1,717,248
$ (16,924 ) $ (91,760 ) $ (548,365 ) $ 1,914,643

On February ~~15, 2019,~~20, 2020, the management development and compensation committee of our board of directors approved the payout of ~~297,260~~313,246 shares of our common stock in connection with the vesting of PSUs that were granted to certain employees on October ~~8, 2015.~~6, 2016. The shares paid out under the PSUs reflected our achievement of certain performance measures that were based on cumulative earnings per share, average return on invested capital, ~~cumulative earnings per share,~~ and revenue growth relative to a peer group of high-production public homebuilding companies over the three-year period from December 1, ~~2015~~2016 through November 30, ~~2018.~~2019. Of the shares of common stock paid out, ~~147,382~~155,307 shares or ~~$3.3~~$6.2 million, were purchased by us in the ~~2019~~2020 first quarter to satisfy the recipients’ withholding taxes on the vesting of the PSUs. The shares purchased were not considered repurchases under the authorizations described below.

As of May 31, ~~2019,~~2020, we were authorized to repurchase 2,193,947 shares of our common stock under a board of directors approved share repurchase program. We did not repurchase any of our common stock under this program in the six months ended May 31, ~~2019.~~2020.

Unrelated to the share repurchase program, our board of directors authorized in 2014 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 ~~to settle~~for director elections in respect of outstanding stock appreciation rights awards granted under our Non-Employee Directors Compensation Plan. The 2014 Plan was amended in April 2016. As of May 31, ~~2019,~~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 authorization.~~directors’ authorizations.

During ~~each of~~ the three-month periods ended May 31, ~~2019~~2020 and ~~2018,~~2019, our board of directors declared, and we paid, a quarterly cash ~~dividend~~dividends on our common stock of $.090 per share and $.025 per share, ~~of common stock.~~respectively. Quarterly cash dividends declared and paid during ~~each of~~ the six-month periods ended May 31, 2020 and 2019 totaled $.180 per share and ~~2018 totaled~~ $.050 per share of common ~~stock.~~stock, respectively.


~~19.~~20.	Stock-Based Compensation

Stock Options. We estimate the grant-date fair value of stock options using the Black-Scholes option-pricing model. The following table summarizes stock option transactions for the six months ended May 31, ~~2019:~~2020:



	Options		Weighted Average Exercise Price
Options outstanding at beginning of period	4,163,481		$	13.00
Granted	—		—
Exercised	(708,372	)	11.77
Cancelled	(6,000	)	45.16
Options outstanding at end of period	3,449,109		$	13.20
Options exercisable at end of period	3,449,109		$	13.20

Options
Weighted
Average Exercise
Price
Options outstanding at beginning of period 7,237,544
$ 16.02
Granted —
—
Exercised (1,097,927 ) 14.95
Cancelled (30,000 ) 38.24
Options outstanding at end of period 6,109,617
$ 16.11
Options exercisable at end of period 5,820,743
$ 16.10

We have not granted any new stock option awards since 2016. As of May 31, ~~2019~~2020, ~~the weighted average remaining contractual life of~~ stock options outstanding and stock options exercisable each had a weighted average remaining contractual life of 4.2 years. At May 31, 2020, there was ~~3.9 years~~ ~~and~~ ~~3.7 years, respectively. Total~~0 unrecognized compensation expense related to ~~unvested~~ stock option awards ~~was nominal~~ as all of these awards were fully vested. For the three-month and six-month periods ended May 31, ~~2019~~ ~~and is expected to be recognized over a weighted average period of 0.4 years. For the three months ended~~ ~~May 31, 2019~~2020, there was 0 stock-based compensation expense ~~was nominal compared to $.2 million for the three months ended May 31, 2018.~~associated with stock options. For the ~~six months~~three-month and six-month periods ended May 31, 2019, ~~and 2018,~~ stock-based compensation expense associated with stock options ~~totaled $.1 million and $.4 million, respectively. The aggregate intrinsic values of stock~~was nominal. Stock options outstanding and stock options exercisable ~~were $66.7~~each had an aggregate intrinsic value of $68.6 million ~~and $64.1 million, respectively,~~ at May 31, ~~2019.~~2020. (The intrinsic value of a stock option is the amount by which the market value of a share of the underlying common stock exceeds the exercise price of the stock option.)

Other Stock-Based Awards. From time to time, we grant restricted stock and PSUs to various employees as a compensation benefit. We recognized total compensation expense of $~~5.8~~3.1 million and ~~$4.8~~$5.8 million for the three months ended May 31, ~~2019~~2020 and ~~2018,~~2019, respectively, related to restricted stock and PSUs. ~~We recognized total compensation expense of $9.9 million and $8.4 million for~~For the six months ended May 31, 2020 and 2019, we recognized total compensation expense of $8.1 million and ~~2018,~~$9.9 million, respectively, related to restricted stock and PSUs.


~~20.~~21.	Supplemental Disclosure to Consolidated Statements of Cash Flows

The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):



	Six Months Ended May 31,
	2020			2019
Summary of cash and cash equivalents at end of period:
Homebuilding	$	575,006		$	178,876
Financial services	1,027			888
Total	$	576,033		$	179,764
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized	$	249		$	(2,809	)
Income taxes paid	1,078			3,163
Supplemental disclosures of non-cash activities:
Reclassification of federal tax refund from deferred tax assets to receivables	$	82,617		$	—
Increase in operating lease right-of-use assets and lease liabilities due to adoption of ASC 842	31,199			—
Inventories acquired through seller financing	18,045			—
Decrease in consolidated inventories not owned	(10,414		)	(16,262		)
Increase in inventories due to distributions of land and land development from an unconsolidated joint venture	5,360			3,983
Decrease in inventories due to adoption of ASC 606	—			(35,288		)
Increase in property and equipment, net due to adoption of ASC 606	—			31,194

Six Months Ended May 31,
2019 2018
Summary of cash and cash equivalents at end of period:
Homebuilding $ 178,876
$ 669,798
Financial services 888
756
Total $ 179,764
$ 670,554
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized $ (2,809 ) $ (3,665 )
Income taxes paid 3,163
7,595
Supplemental disclosures of non-cash activities:
Decrease in inventories due to adoption of ASC 606 $ (35,288 ) $ —
Increase in property and equipment, net due to adoption of ASC 606 31,194
—
Increase (decrease) in consolidated inventories not owned (16,262 ) 17,518
Increase in inventories due to distributions of land and land development from an unconsolidated joint venture 3,983
5,113
Inventories acquired through seller financing —
36,697


~~21.~~22.	Supplemental Guarantor Information

Our obligations to pay principal, premium, if any, and interest on the senior notes and borrowings, if any, under the Credit Facility are guaranteed on a joint and several basis by certain of our subsidiaries (“Guarantor Subsidiaries”). The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by us. Pursuant to the terms of the indenture governing the senior notes and the terms of the Credit Facility, if any of the Guarantor Subsidiaries ceases to be a “significant subsidiary” as defined by Rule 1-02 of Regulation S-X using a 5% rather than a 10% threshold (provided that the assets of our non-guarantor subsidiaries do not in the aggregate exceed 10% of an adjusted measure of our consolidated total assets), it will be automatically and unconditionally released and discharged from its guaranty of the senior notes and the Credit Facility so long as all guarantees by such Guarantor Subsidiary of any other of our or our subsidiaries’ indebtedness are terminated at or prior to the time of such release. We have determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented.

The supplemental financial information for all periods presented below reflects the relevant subsidiaries that were Guarantor Subsidiaries as of May 31, ~~2019~~2020.

Condensed Consolidating Statements of Operations (in thousands)



	Three Months Ended May 31, 2020
	KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Total revenues	$	—		$	834,137		$	79,833		$	—		$	913,970
Homebuilding:
Revenues	$	—		$	834,137		$	76,143		$	—		$	910,280
Construction and land costs	—			(677,910		)	(66,543		)	—			(744,453		)
Selling, general and administrative expenses	(24,780		)	(83,470		)	(5,988		)	—			(114,238		)
Operating income (loss)	(24,780		)	72,757			3,612			—			51,589
Interest income	407			13			22			—			442
Interest expense	(29,541		)	(58		)	(1,456		)	31,055			—
Intercompany interest	79,978			(44,689		)	(4,234		)	(31,055		)	—
Equity in income of unconsolidated joint ventures	—			8,154			—			—			8,154
Homebuilding pretax income (loss)	26,064			36,177			(2,056		)	—			60,185
Financial services pretax income	—			—			7,604			—			7,604
Total pretax income	26,064			36,177			5,548			—			67,789
Income tax expense	(6,700		)	(7,800		)	(1,300		)	—			(15,800		)
Equity in net income of subsidiaries	32,625			—			—			(32,625		)	—
Net income	$	51,989		$	28,377		$	4,248		$	(32,625	)	$	51,989



	Three Months Ended May 31, 2019
	KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Total revenues	$	—		$	932,945		$	88,858		$	—		$	1,021,803
Homebuilding:
Revenues	$	—		$	932,945		$	85,726		$	—		$	1,018,671
Construction and land costs	—			(756,055		)	(87,689		)	—			(843,744		)
Selling, general and administrative expenses	(27,506		)	(97,590		)	2,268			—			(122,828		)
Operating income (loss)	(27,506		)	79,300			305			—			52,099
Interest income	395			—			44			—			439
Interest expense	(35,080		)	(134		)	(1,330		)	36,544			—
Intercompany interest	82,238			(42,578		)	(3,116		)	(36,544		)	—
Equity in loss of unconsolidated joint ventures	—			(369		)	—			—			(369		)
Homebuilding pretax income (loss)	20,047			36,219			(4,097		)	—			52,169
Financial services pretax income	—			—			4,592			—			4,592
Total pretax income	20,047			36,219			495			—			56,761
Income tax expense	(2,800		)	(3,000		)	(3,500		)	—			(9,300		)
Equity in net income of subsidiaries	30,214			—			—			(30,214		)	—
Net income (loss)	$	47,461		$	33,219		$	(3,005	)	$	(30,214	)	$	47,461

Three Months Ended May 31, 2018

KB Home
Corporate

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Consolidating
Adjustments
Total
Total revenues $ —
$ 1,026,887
$ 74,536
$ —
$ 1,101,423
Homebuilding:
Revenues $ —
$ 1,026,887
$ 71,786
$ —
$ 1,098,673
Construction and land costs —
(844,637 ) (66,607 ) —
(911,244 )
Selling, general and administrative expenses (26,815 ) (78,823 ) (7,593 ) —
(113,231 )
Operating income (loss) (26,815 ) 103,427
(2,414 ) —
74,198
Interest income 1,181
4
93
—
1,278
Interest expense (37,942 ) (634 ) (1,348 ) 39,924
—
Intercompany interest 75,277
(32,791 ) (2,562 ) (39,924 ) —
Equity in loss of unconsolidated joint ventures —
(321 ) (1 ) —
(322 )
Homebuilding pretax income (loss) 11,701
69,685
(6,232 ) —
75,154
Financial services pretax income —
—
3,154
—
3,154
Total pretax income (loss) 11,701
69,685
(3,078 ) —
78,308
Income tax expense (2,400 ) (17,700 ) (900 ) —
(21,000 )
Equity in net income of subsidiaries 48,007
—
—
(48,007 ) —
Net income (loss) $ 57,308
$ 51,985
$ (3,978 ) $ (48,007 ) $ 57,308


	Six Months Ended May 31, 2019															Six Months Ended May 31, 2020
	KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total			KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Total revenues	$	—		$	1,677,398		$	155,888		$	—		$	1,833,286		$	—		$	1,826,682		$	163,223		$	—		$	1,989,905
Homebuilding:
Revenues	$	—		$	1,677,398		$	150,061		$	—		$	1,827,459		$	—		$	1,826,682		$	155,980		$	—		$	1,982,662
Construction and land costs	—			(1,367,096		)	(147,503		)	—			(1,514,599		)	—			(1,493,468		)	(137,038		)	—			(1,630,506		)
Selling, general and administrative expenses	(52,888		)	(173,130		)	(3,404		)	—			(229,422		)	(52,430		)	(176,482		)	(11,460		)	—			(240,372		)
Operating income (loss)	(52,888		)	137,172			(846		)	—			83,438			(52,430		)	156,732			7,482			—			111,784
Interest income	1,409			—			135			—			1,544			1,291			12			74			—			1,377
Interest expense	(68,275		)	(455		)	(2,602		)	71,332			—			(59,096		)	(58		)	(2,863		)	62,017			—
Intercompany interest	160,210			(84,316		)	(4,562		)	(71,332		)	—			160,558			(90,525		)	(8,016		)	(62,017		)	—
Equity in loss of unconsolidated joint ventures	—			(775		)	—			—			(775		)
Equity in income of unconsolidated joint ventures																—			10,059			—			—			10,059
Homebuilding pretax income (loss)	40,456			51,626			(7,875		)	—			84,207			50,323			76,220			(3,323		)	—			123,220
Financial services pretax income	—			—			7,065			—			7,065			—			—			13,417			—			13,417
Total pretax income (loss)	40,456			51,626			(810		)	—			91,272
Total pretax income																50,323			76,220			10,094			—			136,637
Income tax expense	(3,500		)	(6,400		)	(3,900		)	—			(13,800		)	(9,800		)	(12,900		)	(2,200		)	—			(24,900		)
Equity in net income of subsidiaries	40,516			—			—			(40,516		)	—			71,214			—			—			(71,214		)	—
Net income (loss)	$	77,472		$	45,226		$	(4,710	)	$	(40,516	)	$	77,472
Net income																$	111,737		$	63,320		$	7,894		$	(71,214	)	$	111,737



	Six Months Ended May 31, 2019
	KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Total revenues	$	—		$	1,677,398		$	155,888		$	—		$	1,833,286
Homebuilding:
Revenues	$	—		$	1,677,398		$	150,061		$	—		$	1,827,459
Construction and land costs	—			(1,367,096		)	(147,503		)	—			(1,514,599		)
Selling, general and administrative expenses	(52,888		)	(173,130		)	(3,404		)	—			(229,422		)
Operating income (loss)	(52,888		)	137,172			(846		)	—			83,438
Interest income	1,409			—			135			—			1,544
Interest expense	(68,275		)	(455		)	(2,602		)	71,332			—
Intercompany interest	160,210			(84,316		)	(4,562		)	(71,332		)	—
Equity in loss of unconsolidated joint ventures	—			(775		)	—			—			(775		)
Homebuilding pretax income (loss)	40,456			51,626			(7,875		)	—			84,207
Financial services pretax income	—			—			7,065			—			7,065
Total pretax income (loss)	40,456			51,626			(810		)	—			91,272
Income tax expense	(3,500		)	(6,400		)	(3,900		)	—			(13,800		)
Equity in net income of subsidiaries	40,516			—			—			(40,516		)	—
Net income (loss)	$	77,472		$	45,226		$	(4,710	)	$	(40,516	)	$	77,472

Six Months Ended May 31, 2018

KB Home
Corporate

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Consolidating
Adjustments
Total
Total revenues $ —
$ 1,821,576
$ 151,470
$ —
$ 1,973,046
Homebuilding:
Revenues $ —
$ 1,821,576
$ 146,302
$ —
$ 1,967,878
Construction and land costs —
(1,508,733 ) (131,989 ) —
(1,640,722 )
Selling, general and administrative expenses (48,981 ) (145,940 ) (14,034 ) —
(208,955 )
Operating income (loss) (48,981 ) 166,903
279
—
118,201
Interest income 2,179
9
93
—
2,281
Interest expense (75,914 ) (1,323 ) (2,631 ) 79,868
—
Intercompany interest 148,123
(63,745 ) (4,510 ) (79,868 ) —
Equity in loss of unconsolidated joint ventures —
(1,166 ) (1 ) —
(1,167 )
Homebuilding pretax income (loss) 25,407
100,678
(6,770 ) —
119,315
Financial services pretax income —
—
5,038
—
5,038
Total pretax income (loss) 25,407
100,678
(1,732 ) —
124,353
Income tax expense (47,100 ) (65,800 ) (25,400 ) —
(138,300 )
Equity in net income of subsidiaries 7,746
—
—
(7,746 ) —
Net income (loss) $ (13,947 ) $ 34,878
$ (27,132 ) $ (7,746 ) $ (13,947 )

Condensed Consolidating Balance Sheets (in thousands)


	May 31, 2019											May 31, 2020
	KB Home Corporate		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Adjustments			Total		KB Home Corporate		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Assets
Homebuilding:
Cash and cash equivalents	$	94,391	$	71,436	$	13,049	$	—		$	178,876	$	480,206	$	65,410	$	29,390	$	—		$	575,006
Receivables	4,192		225,448		70,068		—			299,708		83,709		167,965		61,254		—			312,928
Inventories	—		3,496,318		284,535		—			3,780,853		—		3,273,411		334,054		—			3,607,465
Investments in unconsolidated joint ventures	—		56,446		—		—			56,446		—		57,823		—		—			57,823
Property and equipment, net	21,382		36,420		3,419		—			61,221		27,136		35,328		3,300		—			65,764
Deferred tax assets, net	78,039		296,769		49,587		—			424,395		87,382		169,356		833		—			257,571
Other assets	82,905		2,889		1,940		—			87,734		98,866		20,687		7,035		—			126,588
	280,909		4,185,726		422,598		—			4,889,233		777,299		3,789,980		435,866		—			5,003,145
Financial services	—		—		30,720		—			30,720		—		—		38,857		—			38,857
Intercompany receivables	3,802,227		—		177,745		(3,979,972		)	—		3,510,856		—		199,368		(3,710,224		)	—
Investments in subsidiaries	95,776		—		—		(95,776		)	—		129,869		—		—		(129,869		)	—
Total assets	$	4,178,912	$	4,185,726	$	631,063	$	(4,075,748	)	$	4,919,953	$	4,418,024	$	3,789,980	$	674,091	$	(3,840,093	)	$	5,042,002
Liabilities and stockholders’ equity
Homebuilding:
Accounts payable, accrued expenses and other liabilities	$	114,162	$	484,752	$	269,822	$	—		$	868,736	$	137,402	$	343,519	$	302,340	$	—		$	783,261
Notes payable	1,817,428		12,018		25,110		—			1,854,556		1,716,558		24,871		25,110		—			1,766,539
	1,931,590		496,770		294,932		—			2,723,292		1,853,960		368,390		327,450		—			2,549,800
Financial services	—		—		1,451		—			1,451		—		—		1,848		—			1,848
Intercompany payables	52,112		3,688,956		238,904		(3,979,972		)	—		73,710		3,421,590		214,924		(3,710,224		)	—
Stockholders’ equity	2,195,210		—		95,776		(95,776		)	2,195,210		2,490,354		—		129,869		(129,869		)	2,490,354
Total liabilities and stockholders’ equity	$	4,178,912	$	4,185,726	$	631,063	$	(4,075,748	)	$	4,919,953	$	4,418,024	$	3,789,980	$	674,091	$	(3,840,093	)	$	5,042,002



	November 30, 2019
	KB Home Corporate		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Assets
Homebuilding:
Cash and cash equivalents	$	357,966	$	65,434	$	30,414	$	—		$	453,814
Receivables	1,934		181,047		66,074		—			249,055
Inventories	—		3,400,307		304,295		—			3,704,602
Investments in unconsolidated joint ventures	—		57,038		—		—			57,038
Property and equipment, net	24,250		37,539		3,254		—			65,043
Deferred tax assets, net	96,301		237,877		30,315		—			364,493
Other assets	78,686		2,666		1,689		—			83,041
	559,137		3,981,908		436,041		—			4,977,086
Financial services	—		—		38,396		—			38,396
Intercompany receivables	3,624,081		—		186,022		(3,810,103		)	—
Investments in subsidiaries	115,753		—		—		(115,753		)	—
Total assets	$	4,298,971	$	3,981,908	$	660,459	$	(3,925,856	)	$	5,015,482
Liabilities and stockholders’ equity
Homebuilding:
Accounts payable, accrued expenses and other liabilities	$	139,137	$	453,929	$	288,489	$	—		$	881,555
Notes payable	1,715,748		7,889		25,110		—			1,748,747
	1,854,885		461,818		313,599		—			2,630,302
Financial services	—		—		2,058		—			2,058
Intercompany payables	60,964		3,520,090		229,049		(3,810,103		)	—
Stockholders’ equity	2,383,122		—		115,753		(115,753		)	2,383,122
Total liabilities and stockholders’ equity	$	4,298,971	$	3,981,908	$	660,459	$	(3,925,856	)	$	5,015,482

November 30, 2018

KB Home
Corporate

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Consolidating
Adjustments
Total
Assets
Homebuilding:
Cash and cash equivalents $ 429,977
$ 114,269
$ 30,113
$ —
$ 574,359
Receivables 5,135
198,465
89,230
—
292,830
Inventories —
3,314,386
268,453
—
3,582,839
Investments in unconsolidated joint ventures —
61,960
—
—
61,960
Property and equipment, net 18,450
5,523
310
—
24,283
Deferred tax assets, net 84,564
303,669
53,587
—
441,820
Other assets 77,288
4,007
1,805
—
83,100
615,414
4,002,279
443,498
—
5,061,191
Financial services —
—
12,380
—
12,380
Intercompany receivables 3,569,422
—
158,760
(3,728,182 ) —
Investments in subsidiaries 67,657
—
—
(67,657 ) —
Total assets $ 4,252,493
$ 4,002,279
$ 614,638
$ (3,795,839 ) $ 5,073,571
Liabilities and stockholders’ equity
Homebuilding:
Accounts payable, accrued expenses and other liabilities $ 126,176
$ 584,321
$ 213,816
$ —
$ 924,313
Notes payable 1,995,115
40,038
25,110
—
2,060,263
2,121,291
624,359
238,926
—
2,984,576
Financial services —
—
1,495
—
1,495
Intercompany payables 43,702
3,377,920
306,560
(3,728,182 ) —
Stockholders’ equity 2,087,500
—
67,657
(67,657 ) 2,087,500
Total liabilities and stockholders’ equity $ 4,252,493
$ 4,002,279
$ 614,638
$ (3,795,839 ) $ 5,073,571

Condensed Consolidating Statements of Cash Flows (in thousands)


	Six Months Ended May 31, 2019															Six Months Ended May 31, 2020
	KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total			KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net cash provided by (used in) operating activities	$	35,547		$	(308,291	)	$	92,410		$	—		$	(180,334	)	$	(14,150	)	$	166,394		$	2,450		$	—		$	154,694
Cash flows from investing activities:
Contributions to unconsolidated joint ventures	—			(4,245		)	—			—			(4,245		)	—			(3,586		)	—			—			(3,586		)
Return of investments in unconsolidated joint ventures	—			5,001			—			—			5,001			—			500			—			—			500
Proceeds from sale of building	—			5,804			—			—			5,804
Purchases of property and equipment, net	(3,241		)	(11,360		)	(7,663		)	—			(22,264		)	(3,111		)	(9,714		)	(2,399		)	—			(15,224		)
Intercompany	(196,595		)	—			—			196,595			—			153,647			—			—			(153,647		)	—
Net cash used in investing activities	(199,836		)	(4,800		)	(7,663		)	196,595			(15,704		)
Net cash provided by (used in) investing activities																150,536			(12,800		)	(2,399		)	(153,647		)	(18,310		)
Cash flows from financing activities:
Proceeds from issuance of debt	405,250			—			—			—			405,250
Payment of debt issuance costs	(5,209		)	—			—			—			(5,209		)
Repayment of senior notes	(630,000		)	—			—			—			(630,000		)
Borrowings under revolving credit facility	330,000			—			—			—			330,000
Repayments under revolving credit facility	(280,000		)	—			—			—			(280,000		)
Payments on mortgages and land contracts due to land sellers and other loans	—			(28,020		)	—			—			(28,020		)	—			(1,063		)	—			—			(1,063		)
Issuance of common stock under employee stock plans	16,462			—			—			—			16,462			8,404			—			—			—			8,404
Tax payments associated with stock-based compensation awards	(3,345		)	—			—			—			(3,345		)	(6,219		)	—			—			—			(6,219		)
Payments of cash dividends	(4,455		)	—			—			—			(4,455		)	(16,331		)	—			—			—			(16,331		)
Intercompany	—			298,278			(101,683		)	(196,595		)	—			—			(152,555		)	(1,092		)	153,647			—
Net cash provided by (used in) financing activities	(171,297		)	270,258			(101,683		)	(196,595		)	(199,317		)
Net decrease in cash and cash equivalents	(335,586		)	(42,833		)	(16,936		)	—			(395,355		)
Net cash used in financing activities																(14,146		)	(153,618		)	(1,092		)	153,647			(15,209		)
Net increase (decrease) in cash and cash equivalents																122,240			(24		)	(1,041		)	—			121,175
Cash and cash equivalents at beginning of period	429,977			114,269			30,873			—			575,119			357,966			65,434			31,458			—			454,858
Cash and cash equivalents at end of period	$	94,391		$	71,436		$	13,937		$	—		$	179,764		$	480,206		$	65,410		$	30,417		$	—		$	576,033



	Six Months Ended May 31, 2019
	KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net cash provided by (used in) operating activities	$	35,547		$	(308,291	)	$	92,410		$	—		$	(180,334	)
Cash flows from investing activities:
Contributions to unconsolidated joint ventures	—			(4,245		)	—			—			(4,245		)
Return of investments in unconsolidated joint ventures	—			5,001			—			—			5,001
Proceeds from sale of building	—			5,804			—			—			5,804
Purchases of property and equipment, net	(3,241		)	(11,360		)	(7,663		)	—			(22,264		)
Intercompany	(196,595		)	—			—			196,595			—
Net cash used in investing activities	(199,836		)	(4,800		)	(7,663		)	196,595			(15,704		)
Cash flows from financing activities:
Proceeds from issuance of debt	405,250			—			—			—			405,250
Payment of debt issuance costs	(5,209		)	—			—			—			(5,209		)
Repayment of senior notes	(630,000		)	—			—			—			(630,000		)
Borrowings under revolving credit facility	330,000			—			—			—			330,000
Repayments under revolving credit facility	(280,000		)	—			—			—			(280,000		)
Payments on mortgages and land contracts due to land sellers and other loans	—			(28,020		)	—			—			(28,020		)
Issuance of common stock under employee stock plans	16,462			—			—			—			16,462
Tax payments associated with stock-based compensation awards	(3,345		)	—			—			—			(3,345		)
Payments of cash dividends	(4,455		)	—			—			—			(4,455		)
Intercompany	—			298,278			(101,683		)	(196,595		)	—
Net cash provided by (used in) financing activities	(171,297		)	270,258			(101,683		)	(196,595		)	(199,317		)
Net decrease in cash and cash equivalents	(335,586		)	(42,833		)	(16,936		)	—			(395,355		)
Cash and cash equivalents at beginning of period	429,977			114,269			30,873			—			575,119
Cash and cash equivalents at end of period	$	94,391		$	71,436		$	13,937		$	—		$	179,764

Six Months Ended May 31, 2018

KB Home
Corporate

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Consolidating
Adjustments
Total
Net cash provided by (used in) operating activities $ 18,931
$ (15,092 ) $ (23,208 ) $ —
$ (19,369 )
Cash flows from investing activities:
Contributions to unconsolidated joint ventures —
(11,600 ) —
—
(11,600 )
Return of investments in unconsolidated joint ventures —
1,099
—
—
1,099
Sale (purchases) of property and equipment, net (3,102 ) (329 ) 4
—
(3,427 )
Intercompany (42,380 ) —
—
42,380
—
Net cash provided by (used in) investing activities (45,482 ) (10,830 ) 4
42,380
(13,928 )
Cash flows from financing activities:
Payments on mortgages and land contracts due to land sellers and other loans —
(9,574 ) (920 ) —
(10,494 )
Issuance of common stock under employee stock plans 4,771
—
—
—
4,771
Tax payments associated with stock-based compensation awards (6,787 ) —
—
—
(6,787 )
Payments of cash dividends (4,500 ) —
—
—
(4,500 )
Intercompany —
26,807
15,573
(42,380 ) —
Net cash provided by (used in) financing activities (6,516 ) 17,233
14,653
(42,380 ) (17,010 )
Net decrease in cash and cash equivalents (33,067 ) (8,689 ) (8,551 ) —
(50,307 )
Cash and cash equivalents at beginning of period 575,193
104,120
41,548
—
720,861
Cash and cash equivalents at end of period $ 542,126
$ 95,431
$ 32,997
$ —
$ 670,554


~~22.~~	~~Subsequent Event~~

On July 9, 2019, the parent company of Stearns, our partner in KBHS, filed a voluntary bankruptcy petition in the United States Bankruptcy Court, Southern District of New York, with Stearns included as a debtor in the case. KBHS is not included in the filing and there are no known plans for it to be included as a debtor. While the debtors are seeking authority from the court to continue Stearns’ business with respect to KBHS in the ordinary course and without interruption, the ultimate resolution of the case and the timing thereof are uncertain. We will be monitoring the status of the bankruptcy proceedings. We believe KBHS is, at present, financially and operationally able to continue to provide mortgage banking services to our homebuyers. However, the bankruptcy process could be disruptive to KBHS’ operations, which may, in turn, adversely impact the number of homes we deliver in future periods. As of the date of this filing, we are unable to estimate the effect, if any, this event may have on our consolidated financial statements.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

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):

Three Months Ended May 31, Six Months Ended May 31,
2019 2018 Variance 2019 2018 Variance
Revenues:
Homebuilding $ 1,018,671
$ 1,098,673
(7) % $ 1,827,459
$ 1,967,878
(7) %
Financial services 3,132
2,750
14
5,827
5,168
13
Total revenues $ 1,021,803
$ 1,101,423
(7) % $ 1,833,286
$ 1,973,046
(7) %
Pretax income:
Homebuilding $ 52,169
$ 75,154
(31) % $ 84,207
$ 119,315
(29) %
Financial services 4,592
3,154
46
7,065
5,038
40
Total pretax income 56,761
78,308
(28 ) 91,272
124,353
(27 )
Income tax expense (9,300 ) (21,000 ) 56
(13,800 ) (138,300 ) 90 %
Net income (loss) $ 47,461
$ 57,308
(17) % $ 77,472
$ (13,947 ) (a)
Basic earnings (loss) per share $ .54
$ .65
(17) % $ .88
$ (.16 ) (a)
Diluted earnings (loss) per share $ .51
$ .57
(11) % $ .82
$ (.16 ) (a)


~~(a)~~	~~Percentage not meaningful.~~



	Three Months Ended May 31,								Six Months Ended May 31,
	2020			2019			Variance		2020			2019			Variance
Revenues:
Homebuilding	$	910,280		$	1,018,671		(11)	%	$	1,982,662		$	1,827,459		8	%
Financial services	3,690			3,132			18		7,243			5,827			24
Total revenues	$	913,970		$	1,021,803		(11)	%	$	1,989,905		$	1,833,286		9	%
Pretax income:
Homebuilding	$	60,185		$	52,169		15	%	$	123,220		$	84,207		46	%
Financial services	7,604			4,592			66		13,417			7,065			90
Total pretax income	67,789			56,761			19		136,637			91,272			50
Income tax expense	(15,800		)	(9,300		)	(70	)	(24,900		)	(13,800		)	(80	)
Net income	$	51,989		$	47,461		10	%	$	111,737		$	77,472		44	%
Basic earnings per share	$	.57		$	.54		6	%	$	1.23		$	.88		40	%
Diluted earnings per share	$	.55		$	.51		8	%	$	1.19		$	.82		45	%

~~Fundamental~~During the 2020 first half, we, like many companies worldwide, experienced an extraordinary change in business conditions in mid-March that created a sharp difference in our results between the first and second quarters. Our 2020 first quarter was particularly strong, as we generated the highest revenues, net orders, ending backlog and ending backlog value for any first quarter since 2007 and increased our net income 99% year over year. We had positive momentum entering the 2020 second quarter with the number of homes in backlog at the beginning of the quarter (“beginning backlog”) up 26% year over year.

In mid-March 2020, however, the COVID-19 pandemic and related COVID-19 control responses in our served markets, including quarantines, “stay-at-home” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations, severely impacted housing market ~~factors were~~conditions during our second quarter and beyond. The unprecedented steep drop in employment and economic activity in March led the National Bureau of Economic Research to determine that the United States entered into, and continues to be in, a recession. In April, the national unemployment rate reached its highest level since the Great Depression, and the unemployment rates in the states where we operate surged. The extreme economic contraction from mid-March through May together with ongoing uncertainty about the virulence of COVID-19 and the availability of generally ~~healthy through~~effective therapeutics or a vaccine, as well as the ~~2019 first half, with strong employment levels, relatively high~~duration and parameters of COVID-19 control responses, created significant volatility in capital markets; disrupted secondary mortgage markets, in part due to CARES Act relief provisions for outstanding mortgage loans; weakened consumer confidence and decreased demand for new homes (including homes ordered in the first quarter) for most of our 2020 second quarter.

Beyond the significant negative economic impact, the COVID-19 control responses in our served markets substantially impacted our operations during the 2020 second quarter. With the health and well-being of our employees, customers and business partners, and their families, being a ~~limited supply~~high priority, we took decisive actions in mid-March, temporarily closing our sales centers, model homes and design studios to the public and shifting to virtual sales tools and then an appointment-only personalized home sales process in April, where permitted. We also shifted our corporate and division office functions to work remotely. With our construction operations being restricted in many jurisdictions, and completely shut down in some of them, together with the reduced availability or capacity of some municipal and private services necessary to build and deliver homes, ~~available~~we experienced home delivery delays during most of the quarter. In addition, our order pace moderated significantly, and home purchase cancellations increased considerably, largely reflecting our proactive efforts to assure a backlog of qualified homebuyers amid the pandemic-induced economic downturn that affected homebuyers’ employment status or created uncertainty for ~~sale. However,~~them about that status and their ability to purchase their home, as well as disruptions in the availability of mortgage loans or in the performance of lenders, among other

factors. Many of the home purchase cancellations were on homes that had not yet been started, though about 20% were scheduled for delivery during the quarter. Among the markets with the largest impact to our ~~results for the 2019~~ second quarter ~~including with respect to our homes delivered, revenues, pretax income~~net orders were the Inland Empire and ~~ending backlog, were impacted by our lower overall average community count~~Bay Area in California; Las Vegas, Nevada; Houston, Texas; and Orlando, Florida.

Very late in the ~~prior year~~second quarter, conditions started to improve in conjunction with state and ~~lower net sales in~~local governments relaxing their COVID-19 control responses, including slightly better employment and consumer confidence levels. In the latter part of ~~2018, which reflected restrained buyer demand primarily due~~May, with restrictions easing in many of our served markets, we began to ~~rising mortgage interest rates and affordability concerns. With improved market conditions during~~take steps to effectively resume nearly all of our ~~2019 second quarter,~~operations, including ~~strengthening buyer demand for~~more broadly opening our sales centers, model homes and ~~generally lower mortgage interest rates,~~design studios to the public, while also expanding construction and warranty service activities to the ~~year-over-year growth in~~extent permitted by local authorities. We also launched significant enhancements to our ~~average community count, net orders~~website, including upgraded home search tools. Our reopening process is further described below under “Outlook.”

Given the tremendous challenges we faced, and ~~net order value for~~continue to face, with the ~~2019~~COVID-19 outbreak, including adapting to the various COVID-19 control responses and rapid economic downturn and related ongoing uncertainty about the near- and medium-term business environments, during the 2020 second quarter, we ~~believe~~proceeded in a carefully targeted manner with land acquisition and land development, and focused on generating cash inflows from our business and preserving cash and liquidity by curtailing overhead expenditures, partly through workforce realignment and reductions that we expect will yield annualized savings of approximately $40 million allocated between construction and land costs and selling, general and administrative expenses. As a result, we recorded severance charges of $6.7 million within our selling, general and administrative expenses for the three months ended May 31, 2020.

The above-described impacts from the COVID-19 pandemic and the volatile economic, business and financial market conditions resulting therefrom, are expected to continue to negatively affect the housing market and our consolidated financial statements in the 2020 third and fourth quarters. Although we are ~~well positioned to generate year-over-year revenue growth~~uncertain of the potential full magnitude or duration of the business and economic impacts, we could experience material declines in our net orders, homes delivered, average selling prices, revenues, cash flow and/or profitability in the ~~2019 second half.~~remainder of 2020 compared to the corresponding prior-year periods. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided below under Part II, Item 1A – Risk Factors. Though our operations have not been directly affected as of the date of this report, we are also monitoring potential impacts from weeks of widespread protests and civil unrest that started at the end of May related to efforts to institute law enforcement and other social and political reforms.

~~Within our homebuilding operations,~~Financial and Operational Highlights. Reflecting the extremely difficult business environment described above, housing revenues for the ~~2019~~2020 second quarter ~~declined 7% year over year~~decreased 11% from the year-earlier quarter due to ~~$1.02 billion, as an 8%~~a 10% decline in the number of homes delivered to 2,499 and a slight decrease in the overall average selling price ~~of homes delivered was partly offset by a 2% increase in the number of homes delivered. For the quarter ended May 31, 2019, we delivered 2,768 homes at an overall average selling price of $367,700.~~to $364,100. Homebuilding operating income for the ~~current quarter decreased 30%~~three months ended May 31, 2020 was down slightly year over year to ~~$52.1 million, and,~~$51.6 million. At the same time, homebuilding operating income as a percentage of related revenues ~~declined 170~~improved 60 basis points to ~~5.1%~~5.7%. Excluding inventory-related charges of $4.4 million and the above-mentioned severance charges of $6.7 million in the current quarter and $4.3 million of inventory-related charges in the year-earlier quarter, this metric improved 140 basis points to 6.9%. Our housing gross profits for the quarter decreased compared to the year-earlier period, mainly due to ~~the~~ lower ~~overall average selling price of homes delivered, partially~~housing revenues, partly offset by a ~~10-basis~~100-basis point ~~increase~~improvement in our housing gross profit margin to ~~17.2%~~18.2%.

The ~~slight~~year-over-year increase in our housing gross profit margin primarily reflected ~~accounting changes resulting from our adoption~~a shift in the mix of ~~ASC 606, effective December 1, 2018,~~homes delivered and lower relative amortization of previously capitalized ~~interest. These factors were~~interest, partly offset by pricing pressure on our net orders in the 2018 fourth quarter and 2019 first quarter due to weaker market conditions during those periods, the impact of certain West Coast homebuilding reporting segment communities with relatively high average selling prices and housing gross profit margins having closed out in previous quarters, and reduced operating leverage due to lower housing ~~revenues and higher fixed community-level expenses supporting community count growth in the 2019 first half.~~revenues. Our selling, general and administrative expense ratio increased ~~170~~50 basis points to ~~12.1%~~12.6% of housing revenues, ~~also reflecting our adoption of ASC 606, as well as increased marketing expenses~~primarily due to ~~support new community openings, reduced~~the above-mentioned severance charges and decreased operating leverage ~~on fixed costs due to~~from lower housing revenues, inpartly offset by reduced expenses for certain employee compensation plans. Excluding the current quarter severance charges, selling general and ~~the impact~~administrative expenses as a percentage of legal recoveries and favorable legal settlements in the prior-year quarter. Further information regarding the accounting impacts resulting from our adoption of ASC 606 is provided in Note 1 – Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements in this report.housing revenues were 11.8%.

Reflecting the continued effective execution of our three-year Returns-Focused Growth Plan, which is centered around enhancing asset efficiency, reducing leverage and improving returns, we invested $782.8 million in land and land development during the 2019 first half and repaid the entire $230.0 million in aggregate principal amount of our 1.375% Convertible Senior Notes due 2019 at their February 1, 2019 maturity.

In addition, on February 20, 2019, we completed concurrent public offerings of $300.0 million in aggregate principal amount of 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. 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.

Our financial leverage, as measured by the ratio of debt to capital, improved to 45.8% at May 31, 2019, compared to 49.7% at November 30, 2018 and 55.1% at May 31, 2018. Our ratio of net debt to capital (a calculation that is described below under “Non-GAAP Financial Measures”) at May 31, 2019 was 43.3%, compared to 41.6% at November 30, 2018.

The following table presents information concerning our net orders, cancellation rates, ending backlog and community count for the three-month and six-month periods ended May 31, ~~2019~~2020 and ~~2018~~2019 (dollars in thousands):


	Three Months Ended May 31,						Six Months Ended May 31,						Three Months Ended May 31,						Six Months Ended May 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Net orders	4,064			3,532			6,739			6,316			1,758			4,064			5,253			6,739
Net order value (a)	$	1,532,688		$	1,361,970		$	2,554,775		$	2,535,062		$	688,444		$	1,532,688		$	2,071,098		$	2,554,775
Cancellation rates (b)	15		%	18		%	17		%	19		%	43		%	15		%	27		%	17		%
Ending backlog — homes	5,927			5,787			5,927			5,787			5,080			5,927			5,080			5,927
Ending backlog — value	$	2,173,173		$	2,236,885		$	2,173,173		$	2,236,885		$	1,903,017		$	2,173,173		$	1,903,017		$	2,173,173
Ending community count	255			210			255			210			244			255			244			255
Average community count	252			215			248			218			247			252			248			248


(a)	Net order value represents the potential future housing revenues associated with net orders generated during athe 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 rates represent 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. ~~For~~Our second quarter has typically been our strongest quarter for net orders. However, the COVID-19 pandemic and associated COVID-19 control responses in our served markets negatively affected our gross orders, which decreased 36% year over year, and elevated our cancellation rate. As a result, for the three months ended May 31, ~~2019,~~2020, net orders from our homebuilding operations ~~increased 15%~~fell 57% from the year-earlier ~~period due~~period. Reflecting the progression of COVID-19 pandemic-related impacts, our gross orders for March and April 2020 decreased 4% and 59%, respectively, as compared to ~~a 17% expansion~~the corresponding months of 2019. We experienced steady improvement in our ~~overall average community count, partly offset~~order trends beginning in May, which was further fueled by ~~a slight~~welcoming walk-in traffic to our communities. For May 2020, the year-over-year decrease in ~~monthly~~gross orders moderated to 42%, reflecting the easing of the COVID-19 control responses in our served markets and our gradual resumption of more normalized operations in the latter part of the month. Our 2020 net orders ~~per community~~were down 10% in March, 107% in April and 55% in May, each as compared to ~~5.4 from 5.5. The value of our 2019 second quarter net orders increased 13% from~~ the corresponding year-earlier ~~quarter as a result of the growth in net orders, partly offset by a 2% decrease in the overall average selling price of those orders.~~ period.

The year-over-year increase in ~~overall net order value reflected increases in all four of~~ our homebuilding reporting segments, ranging from 8% in our West Coast segment to 21% in our Southwest segment. The year-over-year rise in net order value in our West Coast segment reflected an 18% increase in net orders stemming from the segment’s higher average community count, partly offset by an 8% decrease in the average selling price of those orders. In our Southwest segment, the year-over-year improvement in net order value reflected 20% growth in net orders as a result of the segment’s higher average community count and a slight increase in the average selling price of those orders. Our cancellation rate as a percentage of gross orders for the three months ended May 31, ~~2019 decreased~~2020 reflected monthly cancellation rates for March, April and May of 20%, 114% and 34%, respectively.

The value of our net orders for the three months ended May 31, 2020 was down 55% from the year-earlier period as a result of the decrease in net orders, partly offset by an increase in the overall average selling price of those orders. For the 2020 second quarter, our monthly net orders per community decreased to 2.4 from 5.4 in the 2019 second quarter.

While our year-over-year net order comparison continued to improve subsequent to the end of the quarter, as noted below under “Outlook,” the year-over-year decrease in our 2020 second quarter net orders is expected to reduce our year-over-year deliveries and revenues for the 2020 third and fourth quarters and full year.

Backlog. The number of homes in our backlog at May 31, ~~2019 increased 2%~~2020 decreased 14% from May 31, ~~2018.~~2019, mainly due to lower gross order levels and elevated cancellation rates during the 2020 second quarter as our beginning backlog was up 26% year over year. The potential future housing revenues in our backlog at May 31, ~~2019~~2020 declined 3%12% from the prior-year period, reflecting the lower number of homes in our backlog, partly offset by a ~~5% decrease~~2% increase in the overall average selling price of homes in backlog, partly offset by the higher number of homes in our backlog. The decline in our backlog value mainly reflected a year-over-year decrease in our West Coast homebuilding reporting segment resulting from a lower average selling price within the segment, partly offset by an increase in the number of homes in backlog from our Southeast segment. Backlog value in each of our Southwest and Central segments at May 31, 2019 was nearly flat with the respective year-earlier levels. The decrease in our overall backlog value was also a result of the 14% year-over-year decrease in value we had at the beginning of our 2019 fiscal year, which primarily reflected our lower overall average community count for 2018, along with thethose homes.

~~impact from certain West Coast segment communities with relatively high average selling prices having closed out in previous quarters.~~

Community Count. We use the term “community count” to refer to the number of communities with at least five homes/lots left to sell at the end of a reporting period. Our average community count for the ~~2019~~2020 second quarter ~~grew 17%~~declined 2% from the year-earlier period, ~~with increases~~reflecting decreases of 12% in ~~all four of~~ our Southwest homebuilding reporting ~~segments.~~segment, 4% in our Central segment and 8% in our Southeast segment, partly offset by an increase of 12% in our West Coast segment. Our ending community count ~~rose 21% year over year, with increases in all four of our homebuilding reporting segments, ranging~~was down 4% from 6%the prior-year quarter. The year-over-year decreases in our ~~Central segment to 39% in each of our West Coast and Southwest segments. The year-over-year increases in both our~~overall average and ending community counts ~~reflect~~primarily reflected a decline in the number of active communities that were previously classified as land held for future development, our moderated investments in land development in the 2020 second quarter, and ~~land development we have made over~~delays in community openings due to the ~~past several quarters.~~COVID-19 pandemic.

HOMEBUILDING

The following table presents a summary of certain financial and operational data for our homebuilding operations (dollars in thousands, except average selling price):


	Three Months Ended May 31,						Six Months Ended May 31,						Three Months Ended May 31,						Six Months Ended May 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Revenues:
Housing	$	1,017,799		$	1,091,768		$	1,815,970		$	1,958,308		$	909,978		$	1,017,799		$	1,981,788		$	1,815,970
Land	872			6,905			11,489			9,570			302			872			874			11,489
Total	1,018,671			1,098,673			1,827,459			1,967,878			910,280			1,018,671			1,982,662			1,827,459
Costs and expenses:
Construction and land costs
Housing	(843,071		)	(905,055		)	(1,504,399		)	(1,632,135		)	(744,151		)	(843,071		)	(1,629,632		)	(1,504,399		)
Land	(673		)	(6,189		)	(10,200		)	(8,587		)	(302		)	(673		)	(874		)	(10,200		)
Total	(843,744		)	(911,244		)	(1,514,599		)	(1,640,722		)	(744,453		)	(843,744		)	(1,630,506		)	(1,514,599		)
Selling, general and administrative expenses	(122,828		)	(113,231		)	(229,422		)	(208,955		)	(114,238		)	(122,828		)	(240,372		)	(229,422		)
Total	(966,572		)	(1,024,475		)	(1,744,021		)	(1,849,677		)	(858,691		)	(966,572		)	(1,870,878		)	(1,744,021		)
Operating income	$	52,099		$	74,198		$	83,438		$	118,201		$	51,589		$	52,099		$	111,784		$	83,438
Homes delivered	2,768			2,717			4,920			4,940			2,499			2,768			5,251			4,920
Average selling price	$	367,700		$	401,800		$	369,100		$	396,400		$	364,100		$	367,700		$	377,400		$	369,100
Housing gross profit margin as a percentage of housing revenues	17.2		%	17.1		%	17.2		%	16.7		%	18.2		%	17.2		%	17.8		%	17.2		%
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues	17.6		%	17.7		%	17.6		%	17.2		%	18.7		%	17.6		%	18.3		%	17.6		%
Adjusted housing gross profit margin as a percentage of housing revenues	21.3		%	22.2		%	21.3		%	21.9		%	21.9		%	21.3		%	21.5		%	21.3		%
Selling, general and administrative expenses as a percentage of housing revenues	12.1		%	10.4		%	12.6		%	10.7		%	12.6		%	12.1		%	12.1		%	12.6		%
Operating income as a percentage of homebuilding revenues	5.1		%	6.8		%	4.6		%	6.0		%	5.7		%	5.1		%	5.6		%	4.6		%

For reporting purposes, we organize our homebuilding operations into four segments — West Coast, Southwest, Central and Southeast. As of May 31, ~~2019~~2020, our homebuilding reporting segments consisted of ongoing operations located in the following ~~states:~~states to the extent permitted by applicable public health orders as part of their respective COVID-19 control responses: West Coast — California and Washington; Southwest — Arizona and Nevada; Central — Colorado and Texas; and Southeast — Florida and North Carolina. The following tables present 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):



	Three Months Ended May 31,
	Homes Delivered		Net Orders		Cancellation Rates
Segment	2020	2019	2020	2019	2020		2019
West Coast	585	680	555	1,141	37	%	14	%
Southwest	552	566	305	768	50		10
Central	955	1,067	719	1,498	36		17
Southeast	407	455	179	657	61		19
Total	2,499	2,768	1,758	4,064	43	%	15	%


														Three Months Ended May 31,
														Net Order Value						Average Community Count
Segment														2020		2019		Variance		2020		2019			Variance
West Coast														$	324,936	$	664,431	(51)	%	75		67			12	%
Southwest														99,464		241,729		(59	)	37		42			(12	)
Central														212,445		438,302		(52	)	90		94			(4	)
Southeast														51,599		188,226		(73	)	45		49			(8	)
Total														$	688,444	$	1,532,688	(55)	%	247		252			(2)	%


	Three Months Ended May 31,													Six Months Ended May 31,
	Homes Delivered				Net Orders				Cancellation Rates					Homes Delivered				Net Orders				Cancellation Rates
Segment	2019		2018		2019		2018		2019			2018		2020		2019		2020		2019		2020			2019
West Coast	680		738		1,141		969		14		%	16	%	1,379		1,177		1,534		1,840		23		%	17	%
Southwest	566		588		768		642		10			16		1,155		1,049		1,070		1,301		27			12
Central	1,067		1,008		1,498		1,347		17			22		1,923		1,891		1,936		2,424		25			20
Southeast	455		383		657		574		19			16		794		803		713		1,174		36			19
Total	2,768		2,717		4,064		3,532		15		%	18	%	5,251		4,920		5,253		6,739		27		%	17	%

	Net Order Value						Average Community Count							Net Order Value						Average Community Count
Segment	2019		2018		Variance		2019		2018			Variance		2020		2019		Variance		2020		2019			Variance
West Coast	$	664,431	$	614,863	8	%	67		52			29	%	$	923,352	$	1,084,892	(15)	%	75		64			17	%
Southwest	241,729		200,259		21		42		33			27		356,684		412,568		(14	)	38		40			(5	)
Central	438,302		380,672		15		94		90			4		585,926		722,568		(19	)	89		94			(5	)
Southeast	188,226		166,176		13		49		40			23		205,136		334,747		(39	)	46		50			(8	)
Total	$	1,532,688	$	1,361,970	13	%	252		215			17	%	$	2,071,098	$	2,554,775	(19)	%	248		248			—	%

	Six Months Ended May 31,													May 31,
	Homes Delivered				Net Orders				Cancellation Rates					Backlog – Homes						Backlog – Value
Segment	2019		2018		2019		2018		2019			2018		2020		2019		Variance		2020		2019			Variance
West Coast	1,177		1,330		1,840		1,776		17		%	14	%	1,198		1,378		(13)	%	$	705,357	$	806,651		(13)	%
Southwest	1,049		1,088		1,301		1,210		12			16		1,153		1,178		(2	)	380,454		372,699			2
Central	1,891		1,829		2,424		2,343		20			24		2,001		2,247		(11	)	609,156		669,037			(9	)
Southeast	803		693		1,174		987		19			19		728		1,124		(35	)	208,050		324,786			(36	)
Total	4,920		4,940		6,739		6,316		17		%	19	%	5,080		5,927		(14)	%	$	1,903,017	$	2,173,173		(12)	%

	Net Order Value						Average Community Count
Segment	2019		2018		Variance		2019		2018			Variance
West Coast	$	1,084,892	$	1,195,285	(9)	%	64		52			23	%
Southwest	412,568		377,201		9		40		34			18
Central	722,568		680,600		6		94		92			2
Southeast	334,747		281,976		19		50		40			25
Total	$	2,554,775	$	2,535,062	1	%	248		218			14	%

	May 31,
	Backlog – Homes						Backlog – Value
Segment	2019		2018		Variance		2019		2018			Variance
West Coast	1,378		1,328		4	%	$	806,651	$	918,188		(12)	%
Southwest	1,178		1,210		(3	)	372,699		371,902			—
Central	2,247		2,296		(2	)	669,037		673,461			(1	)
Southeast	1,124		953		18		324,786		273,334			19
Total	5,927		5,787		2	%	$	2,173,173	$	2,236,885		(3)	%

Revenues. Homebuilding revenues for the three months ended May 31, ~~2019 declined 7%~~2020 decreased 11% from the year-earlier period ~~to $1.02 billion~~primarily due to a ~~decrease~~decline in ~~both~~ housing ~~and land sale~~ revenues.

Housing revenues for the three months ended May 31, ~~2019 decreased 7%~~2020 declined 11% year over year, ~~to $1.02 billion, as~~reflecting a ~~decline~~10% decrease in the number of homes delivered and a slight decrease in the overall average selling price of ~~homes delivered was partially offset by an increase in~~those homes. While the number of homes ~~delivered. We~~in our beginning backlog was up 26% compared to the year-earlier period, we delivered ~~2,768~~fewer homes in the ~~2019 second~~ quarter ~~up 2% from~~due to the ~~year-earlier quarter. The overall average selling price of homes delivered decreased 8% to $367,700, reflecting a shift~~COVID-19 pandemic and associated COVID-19 control responses, which resulted in ~~the geographic mix of homes delivered, with fewer homes delivered from our West Coast~~increased home purchase cancellations and Southwest homebuilding reporting segments. In addition, the average selling price of homes delivered in our West Coast segment declined 15% year over year, reflecting the impact from certain communities with relatively high average selling prices having closed out in previous quarters, and a community mix shift toward homes delivered in lower-priced inland markets.delayed deliveries, as discussed above under “Overview.”

Land sale revenues ~~totaled $.9 million~~ for the ~~three months~~quarter ended May 31, ~~2019 and $6.9~~2020 totaled $.3 million, ~~for~~compared to $.9 million in the ~~three months ended May 31, 2018.~~year-earlier quarter. 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.

Homebuilding revenues for the six months ended May 31, ~~2019 decreased 7% from the year-earlier period~~2020, which included our strong 2020 first quarter performance, grew 9% year over year to ~~$1.83~~$1.98 billion, reflecting ~~a decline~~an increase in housing revenues, ~~which was~~ partly offset by ~~an increase~~a decrease in land sale revenues. Housing revenues for the six months ended May 31, ~~2019 declined 7% year over year to $1.82 billion due to~~2020 grew as a result of a 7% ~~decrease~~increase in the number of homes delivered and a 2% rise in the overall average selling price ~~of homes delivered~~ to ~~$369,100 as the number of homes delivered was relatively flat at 4,920.~~$377,400.

Land sale revenues totaled $.9 million for the six months ended May 31, 2020 and $11.5 million for the six months ended May 31, 2019, ~~and $9.6 million for the six months ended May 31, 2018,~~ reflecting the factors discussed above with respect to our ~~2019~~2020 second quarter land sale revenues.

Operating Income. Our homebuilding operating income ~~decreased 30% year over year to $52.1 million~~ for the three months ended May 31, ~~2019.~~2020 was essentially flat compared to the year-earlier period. Homebuilding operating income for the ~~2019~~2020 second quarter included total inventory-related charges of $4.4 million, which were comprised of land option contract abandonment charges primarily related to one land option contract in Texas, and severance charges of $6.7 million. The severance charges were associated with workforce reductions made during the quarter that we expect will yield annualized savings of approximately $40 million allocated between construction and land costs and selling, general and administrative expenses. In the 2019 second quarter, homebuilding operating income included total inventory-related charges of $4.3 ~~million, compared to $6.5 million in the corresponding 2018 quarter.~~million. As a percentage of homebuilding revenues, our homebuilding operating income for the three months ended May 31, ~~2019 declined 170~~2020 increased 60 basis points year over year to ~~5.1%~~5.7%. Excluding inventory-related charges in both periods and severance charges in the current period, our homebuilding operating income margin ~~was~~improved 140 basis points to 6.9% for the 2020 second quarter compared to 5.5% for the ~~three months ended May 31, 2019 and 7.3% for the three months ended May 31, 2018.~~year-earlier quarter.

For the six months ended May 31, ~~2019,~~2020, our homebuilding operating income ~~of $83.4 million declined 29%~~increased 34% from the prior-year ~~period.~~period, largely reflecting the operating income we generated in the 2020 first quarter. Homebuilding operating income for the ~~2019~~2020 first half included total inventory-related charges of ~~$7.9~~$10.1 million, compared to ~~$11.5~~$7.9 million of such charges in the corresponding ~~2018~~2019 period. As a percentage of homebuilding revenues, our homebuilding operating income for the six months ended May 31, ~~2019 decreased 140~~2020 improved 100 basis points year over year to ~~4.6%~~5.6%. Excluding inventory-related charges for both periods and the above-mentioned severance charges in the 2020 period, our homebuilding operating income margin was 6.5% for the six months ended May 31, 2020 and 5.0% for the six months ended May 31, ~~2019 and 6.6% for the six months ended May 31, 2018.~~2019.

The year-over-year ~~decreases~~change in our homebuilding operating income for the ~~three-month and six-month periods~~three months ended May 31, ~~2019 primarily~~2020 largely reflected lower housing gross profits, offset by lower selling, general and administrative expenses. For the six months ended May 31, 2020, the year-over-year growth in our homebuilding operating income was primarily due to an increase in housing gross profits, partly offset by higher selling, general and administrative expenses.

Housing gross profits of ~~$174.7~~$165.8 million for the three months ended May 31, ~~2019~~2020 declined 6%5% from ~~$186.7~~$174.7 million for the year-earlier period, reflecting a decrease in housing revenues, ~~that was~~ partly offset by ~~a higher~~an increase in our housing gross profit margin. Our housing gross profit margin for the ~~2019~~2020 second quarter ~~increased 10~~rose 100 basis points year over year to ~~17.2%. The improvement in our housing gross profit margin reflected~~18.2%, mainly due to the favorable impacts of lower construction and land costs (approximately 100 basis points) primarily reflecting a shift in the mix of homes delivered, and lower amortization of previously capitalized interest as a percentage of housing revenues ~~resulting from a reduction in interest incurred~~ (approximately ~~80 basis points), our adoption of ASC 606 (approximately 80 basis points), favorable warranty adjustments (approximately 40 basis points) and a decrease in inventory-related charges (approximately 20~~50 basis points). These ~~favorable impacts~~items were partly offset by ~~higher construction and land costs (approximately 150 basis points),~~ reduced operating leverage ~~on fixed costs~~ due to lower housing revenues ~~and higher fixed community-level expenses supporting community count growth in the 2019 first half~~ (approximately 3050 basis points), and an increase in sales incentives as a result of pricing pressure on our net orders in the 2018 fourth quarter and 2019 first quarter due to weaker market conditions during those periods (approximately 30 basis points). Our housing gross profit margin for the 2019 second quarter was negatively impacted in part by certain West Coast homebuilding reporting segment communities with relatively high average selling prices and housing gross profit margins having closed out in previous quarters.

We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs. Interest incurred ~~decreased to $36.5~~totaled $31.1 million for the three months ended May 31, ~~2019~~2020, decreasing from ~~$39.9~~$36.5 million for the year-earlier period, ~~largely~~mainly due to our lower average debt level. All interest incurred during the three-month periods ended May 31, ~~2019~~2020 and ~~2018~~2019 was capitalized, asdue to the average amount of our inventory qualifying for interest capitalization ~~was higher than~~exceeding our average debt level for each period. As a result, we had no interest expense for these periods.

Interest amortized to construction and land costs associated with housing operations was ~~$37.7~~$28.7 million and ~~$49.3~~$37.7 million for the three-month periods ended May 31, ~~2019~~2020 and ~~2018,~~2019, respectively. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was ~~3.7%~~3.2% and ~~4.5%~~3.7% for the three months ended May 31, ~~2019~~2020 and ~~2018,~~2019, respectively.

Excluding the amortization of previously capitalized interest associated with housing operations and the above-mentioned inventory-related charges infor the three months ended May 31, ~~2019~~2020 and ~~2018,~~2019, our adjusted housing gross profit margin ~~declined 90~~increased 60 basis points from the year-earlier quarter to ~~21.3%~~21.9%. 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 the ~~2019~~2020 second quarter ~~rose to $122.8 million~~decreased 7% from ~~$113.2 million for~~ the year-earlier quarter, mainly ~~reflecting increased marketing~~due to the lower volume of homes delivered and reduced expenses ~~to support new community openings, our adoption~~associated with certain employee compensation plans, partly offset

by severance charges of ~~ASC 606, and the impact of legal recoveries and favorable legal settlements in the prior-year quarter.~~$6.7 million. As a percentage of housing revenues, our selling, general and administrative expenses increased ~~170~~50 basis points, largely as a result of decreased operating leverage due to ~~12.1%, primarily reflecting~~lower housing revenues as compared to the ~~year-over-year increase in~~year-earlier quarter. Excluding the current period severance charges, selling, general and administrative expenses ~~and reduced operating leverage on fixed costs due to lower housing~~as a percentage of revenues infor the ~~2019~~2020 second quarter ~~as compared to~~improved by 30 basis points from the year-earlier ~~quarter.~~

~~Land sale profits totaled $.2 million for the three months ended May 31, 2019, compared~~quarter to ~~$.7 million for the year-earlier period.~~11.8%.

Our housing gross profits of ~~$311.6~~$352.2 million for the six months ended May 31, ~~2019 decreased~~2020 increased from ~~$326.2~~$311.6 million for the year-earlier period. Housing gross profits for the ~~2019~~2020 first half included ~~$7.9~~$10.1 million of inventory-related charges, compared to ~~$11.5~~$7.9 million of such charges in the year-earlier period. Our housing gross profit margin of ~~17.2%~~17.8% for the six months ended May 31, ~~2019~~2020 increased 5060 basis points year over year, primarily ~~reflecting the factors discussed above with respect~~due to ~~our 2019 second quarter~~lower amortization of previously capitalized interest as a percentage of housing ~~gross profit margin.~~revenues.

For the six months ended May 31, ~~2019,~~2020, interest incurred decreased to ~~$71.3~~$62.0 million from ~~$79.9~~$71.3 million for the year-earlier period, ~~largely~~primarily due to our lower average debt level. All interest incurred during the six-month periods ended May 31, ~~2019~~2020 and ~~2018~~2019 was capitalized as the average amount of our inventory qualifying for interest capitalization was higher than our average debt level for the period.

Interest amortized to construction and land costs associated with housing operations was ~~$67.7 million and $90.7~~$63.3 million for the ~~six-month periods~~six months ended May 31, ~~2019~~2020 and ~~2018, respectively.~~$67.7 million for the six months ended May 31, 2019. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was ~~3.7%~~3.2% and ~~4.7%~~3.7% for the six months ended May 31, ~~2019~~2020 and ~~2018,~~2019, respectively.

Excluding the amortization of previously capitalized interest associated with housing operations and the above-mentioned inventory-related charges in the six months ended May 31, ~~2019~~2020 and ~~2018,~~2019, our adjusted housing gross profit margin ~~declined 60~~increased 20 basis points from the year-earlier period to ~~21.3%~~21.5%.

Selling, general and administrative expenses for the ~~2019~~2020 first half ~~rose~~increased to ~~$229.4~~$240.4 million from ~~$209.0~~$229.4 million for the year-earlier ~~period.~~period, mainly due to the above-mentioned severance charges recorded in the 2020 second quarter and the higher volume of homes delivered in the first half of the year. As a percentage of housing revenues, selling, general and administrative expenses ~~increased 190~~improved 50 basis points from the prior-year period to ~~12.6%. The year-over-year increase for the six-month period ended May 31, 2019 was~~12.1%, largely as a result of increased operating leverage due to higher housing revenues as compared to the ~~reasons discussed above for the 2019 second quarter.~~year-earlier period.

Land ~~sale profits totaled $1.3 million~~sales generated break-even results for the six months ended May 31, ~~2019,~~2020, compared to ~~$1.0~~profits of $1.3 million for the year-earlier period.

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 May 31, 2019 within five years. The following table presents as of May 31, 2019, 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

$ % $ % $ % $ % Total
Inventories $ 1,936.8
51 % $ 1,535.2
41 % $ 278.6
7 % $ 30.3
1 % $ 3,780.9

The inventory balances in the 0-2 years and 3-5 years categories were located in all of our homebuilding reporting segments, though mostly in our West Coast and Central segments. These categories collectively represented 92% of our total inventories at May 31, 2019, compared to 91% at November 30, 2018. 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 $308.9 million at May 31, 2019, compared to $309.7 million at November 30, 2018. 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 inventories, 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 increase 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 May 31, 2019 is recoverable. Our considerations in making this determination include the factors and trends incorporated into our inventory 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 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, 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.

Interest Income. Interest income, which is generated from short-term investments, ~~totaled~~was $.4 million for each of the ~~three months~~three-month periods ended May 31, ~~2019~~2020 and ~~$1.3 million for the three months ended May 31, 2018.~~2019. For the six-month periods ended May 31, ~~2019~~2020 and ~~2018,~~2019, our interest income totaled ~~$1.5~~$1.4 million and ~~$2.3~~$1.5 million, respectively. 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.

Equity in ~~Loss~~Income (Loss) of Unconsolidated Joint Ventures. Our equity in income of unconsolidated joint ventures was $8.2 million for the three months ended May 31, 2020, compared to equity in loss of unconsolidated joint ventures ~~was~~of $.4 million for the three months ended May 31, ~~2019, compared to $.3 million for the three months ended May 31, 2018.~~2019. For the six months ended May 31, ~~2019,~~2020, our equity in ~~loss~~income of unconsolidated joint ventures was ~~$.8~~$10.1 million, compared to ~~$1.2~~equity in loss unconsolidated joint ventures of $.8 million for the corresponding ~~2018~~2019 period. The improved results in both periods of 2020 primarily reflected 53 homes and 73 homes delivered from an unconsolidated joint venture in California during the three months and six months ended May 31, 2020, respectively, compared to no homes delivered from unconsolidated joint ventures in the corresponding 2019 periods.

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.

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~~neither of which ~~are~~is calculated in accordance with 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):


	Three Months Ended May 31,						Six Months Ended May 31,						Three Months Ended May 31,						Six Months Ended May 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Housing revenues	$	1,017,799		$	1,091,768		$	1,815,970		$	1,958,308		$	909,978		$	1,017,799		$	1,981,788		$	1,815,970
Housing construction and land costs	(843,071		)	(905,055		)	(1,504,399		)	(1,632,135		)	(744,151		)	(843,071		)	(1,629,632		)	(1,504,399		)
Housing gross profits	174,728			186,713			311,571			326,173			165,827			174,728			352,156			311,571
Add: Inventory-related charges (a)	4,337			6,526			7,892			11,511			4,379			4,337			10,051			7,892
Housing gross profits excluding inventory-related charges	179,065			193,239			319,463			337,684			170,206			179,065			362,207			319,463
Add: Amortization of previously capitalized interest (b)	37,716			49,348			67,702			90,717			28,746			37,716			63,321			67,702
Adjusted housing gross profits	$	216,781		$	242,587		$	387,165		$	428,401		$	198,952		$	216,781		$	425,528		$	387,165
Housing gross profit margin as a percentage of housing revenues	17.2		%	17.1		%	17.2		%	16.7		%	18.2		%	17.2		%	17.8		%	17.2		%
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues	17.6		%	17.7		%	17.6		%	17.2		%	18.7		%	17.6		%	18.3		%	17.6		%
Adjusted housing gross profit margin as a percentage of housing revenues	21.3		%	22.2		%	21.3		%	21.9		%	21.9		%	21.3		%	21.5		%	21.3		%


(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 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 (loss), diluted earnings (loss) per share and effective tax rate calculated in accordance with GAAP to the non-GAAP financial measures of our adjusted income tax expense, adjusted net income, adjusted diluted earnings per share and adjusted effective tax rate, respectively (in thousands, except per share amounts and percentages):

Six Months Ended May 31,
2019 2018
As Reported As Reported TCJA Adjustment As Adjusted
Total pretax income $ 91,272
$ 124,353
$ —
$ 124,353
Income tax expense (a) (13,800 ) (138,300 ) 111,200
(27,100 )
Net income (loss) $ 77,472
$ (13,947 ) $ 111,200
$ 97,253
Diluted earnings (loss) per share $ .82
$ (.16 ) $ .97
Weighted average shares outstanding — diluted 94,635
87,370
101,283
Effective tax rate (a) 15.1 % 111.2 % 21.8 %

~~(a)~~

For the six months ended May 31, 2019, income tax expense and the related effective tax rate primarily reflected the favorable impacts of $4.3 million of federal energy tax credits that we earned from building energy-efficient homes, a $3.3 million reversal of a deferred tax asset valuation allowance and $2.9 million of excess tax benefits related to stock-based compensation. For the six months ended May 31, 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 $4.2 million of federal energy tax credits and $2.4 million of excess tax benefits related to stock-based compensation.

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 $111.2 million recorded in the 2018 first quarter from our reported income tax expense, net loss, diluted loss 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 reduction in the federal corporate income tax rate from 35% to 21%, effective January 1, 2018, under the TCJA. The most directly comparable GAAP financial measures are our income tax expense, net income (loss), diluted earnings (loss) per share and effective tax rate. We believe 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.

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):


	May 31, 2019			November 30, 2018			May 31, 2020			November 30, 2019
Notes payable	$	1,854,556		$	2,060,263		$	1,766,539		$	1,748,747
Stockholders’ equity	2,195,210			2,087,500			2,490,354			2,383,122
Total capital	$	4,049,766		$	4,147,763		$	4,256,893		$	4,131,869
Ratio of debt to capital	45.8		%	49.7		%	41.5		%	42.3		%

Notes payable	$	1,854,556		$	2,060,263		$	1,766,539		$	1,748,747
Less: Cash and cash equivalents	(178,876		)	(574,359		)	(575,006		)	(453,814		)
Net debt	1,675,680			1,485,904			1,191,533			1,294,933
Stockholders’ equity	2,195,210			2,087,500			2,490,354			2,383,122
Total capital	$	3,870,890		$	3,573,404		$	3,681,887		$	3,678,055
Ratio of net debt to capital	43.3		%	41.6		%	32.4		%	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 ~~for~~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 ~~loss~~income (loss) of unconsolidated joint ventures and/or interest income and expense.

The financial results for each of our homebuilding reporting segments for the three months and six months ended May 31, 2020 were negatively affected by the impacts from the COVID-19 pandemic, as discussed above under “Overview.” In each of our homebuilding reporting segments, we had lower net orders and delivered fewer homes in the 2020 second quarter compared to the year-earlier quarter. In addition, compared to the 2020 first quarter, net orders decreased in each of our homebuilding reporting segments and we delivered a reduced volume of homes in three of our four segments.

West Coast. The following table presents financial information related to our West Coast segment for the periods indicated (dollars in thousands, except average selling price):


	Three Months Ended May 31,								Six Months Ended May 31,								Three Months Ended May 31,								Six Months Ended May 31,
	2019			2018			Variance		2019			2018			Variance		2020			2019			Variance		2020			2019			Variance
Revenues	$	391,264		$	496,740		(21	) %	$	697,074		$	883,392		(21	) %	$	331,882		$	391,264		(15	) %	$	816,379		$	697,074		17	%
Construction and land costs	(335,105		)	(414,253		)	19		(594,118		)	(742,013		)	20		(282,454		)	(335,105		)	16		(699,111		)	(594,118		)	(18	)
Selling, general and administrative expenses	(31,182		)	(30,335		)	(3	)	(59,903		)	(57,332		)	(4	)	(29,919		)	(31,182		)	4		(65,773		)	(59,903		)	(10	)
Operating income	$	24,977		$	52,152		(52	) %	$	43,053		$	84,047		(49	) %	$	19,509		$	24,977		(22	) %	$	51,495		$	43,053		20	%

Homes delivered	680			738			(8	) %	1,177			1,330			(12	) %	585			680			(14	) %	1,379			1,177			17	%
Average selling price	$	574,800		$	673,100		(15	) %	$	588,600		$	664,100		(11	) %	$	567,200		$	574,800		(1	) %	$	591,900		$	588,600		1	%
Housing gross profit margin	14.4		%	16.6		%	(220	)bps	14.9		%	16.0		%	(110	)bps	14.9		%	14.4		%	50	bps	14.4		%	14.9		%	(50	)bps

This segment’s revenues for the three months and six months ended May 31, ~~2019~~2020 and ~~the six months ended May 31, 2018~~2019 were generated from both housing operations and land sales. ~~Revenues for the three months ended May 31, 2018 were generated solely from housing operations.~~ Housing revenues for the ~~2019~~2020 second quarter declined ~~21%~~15% year over year to $331.8 million from $390.9 million, ~~from $496.7 million for~~reflecting a lower number of homes delivered and a slight decrease in the ~~year-earlier quarter.~~ average selling price of those homes.

For the six months ended May 31, ~~2019,~~2020, housing revenues ~~decreased 22%~~increased 18% to ~~$692.8~~$816.3 million from ~~$883.2~~$692.8 million for the ~~corresponding 2018 period. The year-over-year decline in housing revenues for the three months and six months ended May 31, 2019 reflected decreases in both the~~year-earlier period due to a higher number of homes delivered and a slight increase in the average selling price of those homes. The decrease in the number of homes delivered was primarily due to the lower number of homes in backlog at the beginning of each period, compared to the corresponding year-earlier periods, which resulted from the lower average community count and softer market conditions amid consumer affordability concerns that impacted net orders in the 2018 second half. The decline in the average selling price of homes delivered was due to a product and geographic mix shift, particularly the impact from certain communities with relatively high average selling prices having closed out in previous quarters. Land sale revenues totaled $.4 million for the three months ended May 31, 2019. For the six months ended May 31, 2019 and 2018, land sale revenues totaled $4.3 million and $.2 million, respectively.

Operating income for the three months ended May 31, ~~2019 decreased by $27.2 million, or 52%,~~2020 declined from the year-earlier period, ~~primarily~~ reflecting a ~~decline~~decrease in housing gross profits, partly offset by lower selling, general and administrative expenses. The year-over-year decrease in housing gross profits reflected lower housing revenues, partially offset by an increase in the housing gross profit margin. The improvement in the housing gross profit margin was primarily driven by decreases in both inventory-related charges and amortization of previously capitalized interest as a percentage of housing revenues, partly offset by reduced operating leverage due to lower housing revenues. Inventory-related charges totaled $.7 million in the 2020 second quarter, compared to $3.8 million in the year-earlier quarter. Selling, general and administrative expenses as a percentage of housing revenues for the 2020 second quarter increased from the year-earlier quarter largely due to reduced operating leverage as a result of lower housing revenues.

For the six months ended May 31, 2020, operating income grew 20% from the year-earlier period reflecting an increase in housing gross profits, partly offset by an increase in selling, general and administrative expenses. ~~Housing~~The year-over-year growth in housing gross profits ~~declined due to a decrease~~reflected an increase in housing revenues ~~and~~that was partially offset by a ~~220-basis point reduction~~decrease in the housing gross profit margin. The ~~decrease~~decline in the housing gross profit margin ~~mainly reflected~~was primarily due to an increase in construction and land costs as a percentage of housing revenues ~~an increase in the number~~mainly as a result of a mix shift of homes delivered, from reactivated communities, which typically have lower margins, an increase in sales incentives and decreased operating leverage on fixed costs due to lower housing revenues. These cost increases were partly offset by lower inventory-related charges and amortization of previously capitalized interest accounting changes resulting from our adoption of ASC 606, favorable warranty adjustments and a decrease in inventory-related charges to $3.8 million, compared to $6.4 million in the year-earlier quarter. The increase in construction and land costs as a percentage of housing revenues, ~~also reflected the impact of certain communities with relatively high average selling prices~~ and housing gross profit margins having closed out in previous quarters. Selling, general and administrative expenses for the three months ended May 31, 2019 rose from the year-earlier period, primarily as a result of our adoption of ASC 606 and increased marketing expenses to support new community openings, partly offset by lower variable expenses associated with reduced housing revenues, and the impact of legal recoveries and favorable legal settlements in the prior-year quarter.

~~For the six months ended May 31, 2019,~~improved operating income declined 49% from the year-earlier period, reflecting a decrease in housing gross profits and an increase in selling, general and administrative expenses. The decrease in housing gross profits reflected declines in housing revenues and a 110-basis point decrease in the housing gross profit margin. The year-over-year decline in the housing gross profit margin was primarilyleverage due to ~~the reasons described above with respect to the 2019 second quarter.~~higher housing revenues. Inventory-related charges impacting the housing gross profit margin totaled ~~$7.1~~$5.1 million and ~~$11.3~~$7.1 million for the six-month periods ended May 31, 2020 and 2019, ~~and 2018,~~ respectively. ~~Land sales generated break-even results for the 2019 first half, compared to profits of~~

~~$.2 million for the year-earlier period.~~ Selling, general and administrative expenses as a percentage of housing revenues for the ~~2019~~2020 first half ~~increased~~improved from the ~~year-earlier~~corresponding 2019 period, primarily due to ~~the reasons described above with respect to the three months ended May 31, 2019.~~increased operating leverage as a result of higher housing revenues.

Southwest. The following table presents financial information related to our Southwest segment for the periods indicated (dollars in thousands, except average selling price):


	Three Months Ended May 31,								Six Months Ended May 31,								Three Months Ended May 31,								Six Months Ended May 31,
	2019			2018			Variance		2019			2018			Variance		2020			2019			Variance		2020			2019			Variance
Revenues	$	184,827		$	180,917		2	%	$	342,483		$	332,816		3	%	$	175,251		$	184,827		(5	) %	$	366,569		$	342,483		7	%
Construction and land costs	(140,592		)	(146,408		)	4		(261,810		)	(271,016		)	3		(133,742		)	(140,592		)	5		(276,641		)	(261,810		)	(6	)
Selling, general and administrative expenses	(16,059		)	(13,881		)	(16	)	(30,179		)	(25,655		)	(18	)	(16,463		)	(16,059		)	(3	)	(32,632		)	(30,179		)	(8	)
Operating income	$	28,176		$	20,628		37	%	$	50,494		$	36,145		40	%	$	25,046		$	28,176		(11	) %	$	57,296		$	50,494		13	%

Homes delivered	566			588			(4	) %	1,049			1,088			(4	) %	552			566			(2	) %	1,155			1,049			10	%
Average selling price	$	326,500		$	307,700		6	%	$	326,500		$	305,900		7	%	$	317,100		$	326,500		(3	) %	$	316,700		$	326,500		(3	) %
Housing gross profit margin	23.9		%	19.1		%	480	bps	23.6		%	18.6		%	500	bps	23.7		%	23.9		%	(20	)bps	24.6		%	23.6		%	100	bps

This segment’s revenues for the three-month and six-month periods ended May 31, 2020 were from both housing operations and land sales. For the three months and six months ended May 31, 2019, revenues were generated solely from housing operations. Housing revenues for the three months ended May 31, 2020 decreased 5% year over year to $175.0 million due to decreases in both the number of homes delivered and the average selling price of those homes. For the six months ended May 31, 2020, housing revenues increased 7% year over year to $365.8 million, reflecting an increase in the number of homes delivered, partially offset by a decrease in the average selling price of those homes. The year-over-year decrease in the average selling price for the three months and six months ended May 31, 2019 and 2018 were generated solely from housing operations. Housing revenues for each 2019 period increased from the corresponding year-earlier periods, reflecting an increase in the average selling price that2020 was ~~partly offset by a decrease in the number of homes delivered. The average selling prices for the three months and six months ended May 31, 2019 increased from the corresponding year-earlier periods~~ primarily due to a product and geographic mix ~~shift and generally favorable market conditions. The year-over-year decreases in the number~~shifts of homes delivered primarily reflected the lower number of homes in backlog at the beginning of each period, which primarily resulted from the lower average community count for 2018, and was attributable to our Arizona operations.delivered.

Operating income for the three months ended May 31, 2020 decreased from the corresponding 2019 period due to lower housing gross profits and higher selling, general and administrative expenses. The year-over-year decrease in housing gross profits primarily reflected lower housing revenues as this segment’s housing gross profit margin was nearly even with the year-earlier period. The housing gross profit margin for the three months ended May 31, 2020 reflected an increase in construction and land costs as a percentage of housing revenues, reduced operating leverage due to lower housing revenues, and warranty adjustments that favorably impacted the 2019 second quarter, mostly offset by the lower relative amortization of previously capitalized interest. Selling, general and administrative expenses as a percentage of housing revenues for the 2020 second quarter increased from the corresponding ~~2018~~2019 quarter, mainly as a result of reduced operating leverage due to lower housing revenues.

For the six months ended May 31, 2020, operating income increased from the corresponding 2019 period due to higher housing gross profits, partly offset by higher selling, general and administrative expenses. ~~The increase in housing~~Housing gross profits ~~primarily reflected~~for the 2020 first half increased from the year-earlier period mainly due to higher housing revenues and and a ~~480-basis point increase in the~~higher housing gross profit margin. The increase in the housing gross profit margin largely reflected a greater proportion of homes delivered from newer, higher-margin communities, a decrease in construction and land costs as a percentage of housing revenues, lower amortization of previously capitalized interest, favorable warranty adjustments and our adoption of ASC 606. Inventory-related charges impacting the housing gross profit margin totaled $.2 million for the three months ended May 31, 2019, compared to no such charges in the year-earlier period. Selling, general and administrative expenses for the 2019 second quarter increased from the corresponding 2018 quarter, mainly as a result of our adoption of ASC 606 and increased marketing expenses to support new community openings.

Operating income for the six months ended May 31, 2019 increased 40% from the corresponding 2018 period due to higher housing gross profits, partly offset by higher selling, general and administrative expenses. The year-over-year increase in housing gross profits mainly reflected a 500-basis point increase in the housing gross profit margin. The increase

improvement in the housing gross profit margin was primarily due to lower relative amortization of previously capitalized interest, partly offset by warranty adjustments that favorably impacted the reasons described above with respect to the three months ended May 31, 2019. Inventory-related charges impacting the housing gross profit margin totaled $.3 million for the six months ended May 31, 2019. There were no inventory-related charges in the six months ended May 31, 2018.2019 first half. Selling, general and administrative expenses as a percentage of housing revenues for the ~~2019~~2020 first half ~~increased from~~were essentially even with the corresponding ~~2018~~2019 period ~~primarily due to the reasons described above with respect to the three months ended May 31, 2019,~~ as ~~well~~increased marketing costs were largely offset by increased operating leverage as ~~legal recoveries that favorably impacted the 2018 first half.~~a result of higher housing revenues.

Central. The following table presents financial information related to our Central segment for the periods indicated (dollars in thousands, except average selling price):

Three Months Ended May 31, Six Months Ended May 31,
2019 2018 Variance 2019 2018 Variance
Revenues $ 307,080
$ 313,806
(2 ) % $ 548,672
$ 557,987
(2 ) %
Construction and land costs (248,342 ) (256,168 ) 3
(446,446 ) (457,302 ) 2
Selling, general and administrative expenses (31,539 ) (28,563 ) (10 ) (56,444 ) (52,517 ) (7 )
Operating income $ 27,199
$ 29,075
(6 ) % $ 45,782
$ 48,168
(5 ) %


	Three Months Ended May 31,								Six Months Ended May 31,								Three Months Ended May 31,								Six Months Ended May 31,
	2019			2018			Variance		2019			2018			Variance		2020			2019			Variance		2020			2019			Variance
Revenues																	$	284,193		$	307,080		(7	) %	$	567,706		$	548,672		3	%
Construction and land costs																	(227,291		)	(248,342		)	8		(456,414		)	(446,446		)	(2	)
Selling, general and administrative expenses																	(30,018		)	(31,539		)	5		(61,730		)	(56,444		)	(9	)
Operating income																	$	26,884		$	27,199		(1	) %	$	49,562		$	45,782		8	%

Homes delivered	1,067			1,008			6	%	1,891			1,829			3	%	955			1,067			(10	) %	1,923			1,891			2	%
Average selling price	$	287,400		$	304,500		(6	) %	$	286,300		$	300,100		(5	) %	$	297,600		$	287,400		4	%	$	295,200		$	286,300		3	%
Housing gross profit margin	19.1		%	18.5		%	60	bps	18.6		%	18.2		%	40	bps	20.0		%	19.1		%	90	bps	19.6		%	18.6		%	100	bps

This segment’s revenues for the three months and six months ended May 31, ~~2019~~2020 were generated solely from housing operations. Revenues for the three-month and ~~2018~~six-month periods ended May 31, 2019 were generated from both housing operations and land sales. Housing revenues for the ~~2019~~2020 second quarter ~~totaled~~declined 7% from $306.6 million ~~and were essentially flat with~~for the year-earlier quarter, ~~as an increase~~reflecting a decrease in the number of homes delivered, ~~was~~partly offset by ~~a decrease in~~an increase the average selling price of those homes. For the ~~2019 first half,~~six months ended May 31, 2020, housing revenues ~~decreased slightly to~~increased 5% year over year from $541.5 million, ~~from $548.8 million for~~reflecting increases in both the ~~year-earlier period, primarily reflecting a decrease in~~number of homes delivered and the average selling price of ~~homes delivered, which was largely offset by a 3% increase~~those homes. The year-over-year increases in the ~~number of homes delivered. The~~ average selling ~~price decreased in both the~~prices for three-month and six-month periods ended May 31, ~~2019~~2020 were due to ~~a shift~~shifts in the product and geographic mix ~~and a lower proportion~~ of deliveries from our Colorado operations, which generally have a higher average selling price. Land sale revenues totaled $.5 million for the three months ended May 31, 2019, compared to $6.9 million for the year-earlier period. For the six months ended May 31, 2019 and 2018, land sale revenues totaled $7.2 million and $9.2 million, respectively.homes delivered.

Operating income for the three months ended May 31, ~~2019~~2020 decreased ~~$1.9 million~~slightly from the year-earlier period, mainly due to ~~higher~~a decline in housing gross profits, partly offset by lower selling, general and administrative expenses. ~~Housing~~The year-over-year decrease in housing gross profits ~~increased primarily due to expansion~~reflected a decline in housing revenues, partially offset by an increase in the housing gross profit margin. The housing gross profit margin ~~improved primarily as a result of our adoption of ASC 606~~increase mainly resulted from decreases in both construction and ~~lower~~land costs and amortization of previously capitalized interest as a percentage of housing revenues, partly offset by ~~a slight~~an increase in ~~fixed community-level expenses supporting community count growth.~~inventory-related charges and reduced operating leverage due to lower housing revenues. Inventory-related charges impacting the housing gross profit margin ~~totaled $.1 million for each of the three-month periods ended May 31, 2019 and 2018. Land sales generated profits of $.2 million and $.7 million~~ for the three months ended May 31, 2020 and 2019 were $3.5 million and ~~2018,~~$.1 million, respectively. Selling, general and administrative expenses as a percentage of housing revenues for the ~~2019~~2020 second quarter increased from the year-earlier quarter, ~~mainly~~primarily as a result of ~~our adoption of ASC 606.~~decreased operating leverage due to lower housing revenues.

For the six months ended May 31, ~~2019,~~2020, operating income ~~decreased 5%~~increased 8% from the year-earlier period mainly due to an increase in housing gross profits, partly offset by higher selling, general and administrative ~~expenses,~~expenses. The housing gross profit margin increased primarily due to decreases in both construction and land costs and amortization of previously capitalized interest as a percentage of housing revenues, partly offset by an increase in ~~housing gross profits. Housing gross profits and the housing gross profit margin each increased for the respective reasons described above for the three months ended May 31, 2019.~~inventory-related charges. Inventory-related charges impacting the housing gross profit margin for the six months ended May 31, 2020 and 2019 ~~and 2018~~ were ~~$.4~~$4.4 million and ~~$.2~~$.4 million, respectively. Land sales generated profits of $1.3 million for the six months ended May 31, ~~2019, compared to $.8 million for the year-earlier period.~~2019. Selling, general and administrative expenses as a percentage of revenues for the ~~2019~~2020 first half increased from the corresponding ~~2018~~2019 period, ~~primarily~~reflecting higher overhead costs, partly offset by increased operating leverage due to ~~the reasons described above with respect to the three months ended May 31, 2019.~~higher housing revenues.

Southeast. The following table presents financial information related to our Southeast segment for the periods indicated (dollars in thousands, except average selling price):


	Three Months Ended May 31,								Six Months Ended May 31,								Three Months Ended May 31,								Six Months Ended May 31,
	2019			2018			Variance		2019			2018			Variance		2020			2019			Variance		2020			2019			Variance
Revenues	$	135,500		$	107,210		26	%	$	239,230		$	193,683		24	%	$	118,954		$	135,500		(12	) %	$	232,008		$	239,230		(3	) %
Construction and land costs	(117,860		)	(92,820		)	(27	)	(208,638		)	(167,142		)	(25	)	(99,311		)	(117,860		)	16		(194,921		)	(208,638		)	7
Selling, general and administrative expenses	(17,051		)	(13,602		)	(25	)	(30,548		)	(24,433		)	(25	)	(13,013		)	(17,051		)	24		(27,827		)	(30,548		)	9
Operating income	$	589		$	788		(25	) %	$	44		$	2,108		(98	) %	$	6,630		$	589		(a)		$	9,260		$	44		(a)

Homes delivered	455			383			19	%	803			693			16	%	407			455			(11	) %	794			803			(1	) %
Average selling price	$	297,800		$	279,900		6	%	$	297,900		$	279,200		7	%	$	292,300		$	297,800		(2	) %	$	292,100		$	297,900		(2	) %
Housing gross profit margin	13.0		%	13.4		%	(40	)bps	12.8		%	13.7		%	(90	)bps	16.5		%	13.0		%	350	bps	16.0		%	12.8		%	320	bps


(a)	Percentage not meaningful.

This segment’s revenues for the three-month period ended May 31, 2020 and the three months and six months ended May 31, 2019 ~~and the three months ended May 31, 2018~~ were generated solely from housing operations. Revenues for the six months ended May 31, ~~2018~~2020 were generated from ~~both~~ housing operations and nominal land sales. ~~Housing~~The year-over-year decline in housing revenues for the three months and six months ended May 31, ~~2019 rose 26% year over year from $107.2 million for the 2018 second quarter, reflecting increases~~2020 reflected decreases in both the number of homes delivered and the average selling price of those ~~homes, largely attributable to our Florida operations.~~homes. The ~~growth in the number of homes delivered was primarily~~

due to the 21% increase in the number of homes in backlog at the beginning of the 2019 second quarter as compared to the year-earlier quarter and an increase in homes delivered from newer communities. The increaseyear-over-year decrease in the average selling price for the three months and six months ended May 31, 2020 was mainly due to a ~~greater~~lower proportion of homes delivered from higher-priced communities. ~~Land sale revenues for the six months ended May 31, 2018 totaled $.2 million.~~

Operating income ~~of $.6 million~~ for the three months ended May 31, ~~2019 decreased 25% compared to~~2020 increased from the year-earlier period ~~mainly~~ due to ~~an increase in~~higher housing gross profits and lower selling, general and administrative ~~expenses, partly offset by an~~expenses. The year-over-year increase in housing gross ~~profits. Housing gross~~ profits ~~increased from the prior-year period as a decline~~reflected an increase in the housing gross profit margin, ~~was more than~~partly offset by ~~an increase~~a decline in housing revenues. The housing gross profit margin ~~decreased mainly as a result of higher~~increased primarily due to lower construction and land costs as a percentage of housing revenues and ~~an increase in sales incentives, partly offset by~~ lower relative amortization of previously capitalized interest, ~~our adoption of ASC 606 and improved~~partly offset by reduced operating leverage ~~on fixed costs as a result of higher~~due to lower housing revenues. ~~Inventory-related charges impacting the housing gross profit margin totaled $.2 million for the three months ended May 31, 2019, compared to no such charges in the year-earlier period.~~ Selling, general and administrative expenses ~~increased in~~as a percentage of housing revenues for the ~~2019~~2020 second quarter improved from the year-earlier period, primarily reflecting legal recoveries, partly offset by decreased operating leverage as a result of ~~our adoption of ASC 606 as well as increased variable expenses associated with higher~~lower housing ~~revenues and the recent expansion of our Jacksonville, Florida operations.~~revenues.

For the six months ended May 31, ~~2019,~~2020, operating income ~~declined~~grew from the prior-year period, ~~as an increase in~~reflecting higher housing gross profits and lower selling, general and administrative ~~expenses was partly offset by an increase in housing gross profits.~~expenses. Housing gross profits ~~increased~~ and the housing gross profit margin ~~decreased~~increased for the respective reasons described above for the three months ended May 31, ~~2019. Land sales generated nominal income for the six months ended May 31, 2018.~~2020. Selling, general and administrative expenses ~~increased~~as a percentage of housing revenues improved in the ~~2019~~2020 first half from the year-earlier period primarily for the reasons described above with respect to the three months ended May 31, ~~2019 and favorable legal settlements in the prior-year period.~~2020.

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):


	Three Months Ended May 31,						Six Months Ended May 31,						Three Months Ended May 31,						Six Months Ended May 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Revenues	$	3,132		$	2,750		$	5,827		$	5,168		$	3,690		$	3,132		$	7,243		$	5,827
Expenses	(1,040		)	(957		)	(2,064		)	(1,910		)	(883		)	(1,040		)	(1,845		)	(2,064		)
Equity in income of unconsolidated joint ventures	2,500			1,361			3,302			1,780			4,797			2,500			8,019			3,302
Pretax income	$	4,592		$	3,154		$	7,065		$	5,038		$	7,604		$	4,592		$	13,417		$	7,065

Total originations:
Loans	1,679			1,290			2,888			2,293			1,715			1,679			3,479			2,888
Principal	$	480,806		$	355,643		$	820,070		$	628,948		$	543,005		$	480,806		$	1,101,542		$	820,070
Percentage of homebuyers using KBHS	69		%	52		%	67		%	51		%	76		%	69		%	74		%	67		%
Average FICO score	718			719			718			719			720			718			721			718

Loans sold:
Loans sold to Stearns	1,396			1,098			2,557			2,137
Principal	$	397,293		$	301,824		$	730,646		$	597,522
Loans sold to third parties	230			75			474			213
Principal	$	61,183		$	17,626		$	123,539		$	54,716



	Three Months Ended May 31,				Six Months Ended May 31,
	2020		2019		2020		2019
Loans sold:
Loans sold to Stearns	1,760		1,396		4,049		2,557
Principal	$	558,656	$	397,293	$	1,258,693	$	730,646
Loans sold to third parties	121		230		193		474
Principal	$	38,704	$	61,183	$	62,003	$	123,539

Revenues. Financial services revenues for the three months ended May 31, 2019 rose to $3.1 million from $2.8 million for the year-earlier period. For the six months ended May 31, 2019, financial services revenue increased to $5.8 million from $5.2 million for the corresponding 2018 period. The year-over-year revenue growth for the three-month and six-month periods ended May 31, ~~2019 reflected~~2020 grew from the corresponding year-earlier periods due to increases in both title services revenues and insurance commissions.

Expenses. General and administrative expenses ~~totaled $1.0 million~~ for ~~each of~~ the three-month and six-month periods ended May 31, ~~2019 and 2018. For~~2020 decreased slightly from the ~~six months ended May 31, 2019 and 2018, general and administrative expenses totaled $2.1 million and $1.9 million, respectively.~~corresponding periods of 2019.

Equity in Income of Unconsolidated Joint Ventures. The equity in income of unconsolidated joint ventures increased ~~to $2.5 million for~~on a year-over-year basis in the ~~three months~~three-month period ended May 31, ~~2019 from $1.4 million for~~2020 due to a rise in the ~~three months~~percentage of homebuyers using KBHS, partly offset by a 10% decline in the number of homes we delivered. For the six-month period ended May 31, ~~2018. For~~2020, the ~~six months ended May 31, 2019,~~year-over-year increase reflected 7% growth in the ~~equity in income~~number of ~~unconsolidated joint ventures rose to $3.3 million from $1.8 million for the year-earlier period. The year-over-year improvements in both the three-month~~homes delivered and ~~six-month periods ended May 31, 2019 were primarily due to the~~a substantial increase in the percentage of homebuyers using KBHS.

INCOME TAXES

Income Tax Expense. Our income tax expense and effective tax rates were as follows (dollars in thousands):


	Three Months Ended May 31,						Six Months Ended May 31,						Three Months Ended May 31,						Six Months Ended May 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Income tax expense	$	9,300		$	21,000		$	13,800		$	138,300		$	15,800		$	9,300		$	24,900		$	13,800
Effective tax rate	16.4		%	26.8		%	15.1		%	111.2		%	23.3		%	16.4		%	18.2		%	15.1		%

Our income tax expense and effective tax rate for the three months ended May 31, ~~2019 primarily reflected~~2020 included the favorable ~~impacts~~effect of $3.0 million of federal energy tax credits that we earned from building energy-efficient homes, partially offset by $1.0 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). For the three months ended May 31, 2019, our income tax expense and effective tax rate included the favorable effects of $4.3 million of federal energy tax credits and $.9 million of excess tax benefits related to stock-based compensation, partly offset by $.8 million of non-deductible executive compensation expense.

Our income tax expense and effective tax rate for the six months ended May 31, 2020 included the favorable effects of $7.0 million of federal energy tax credits that we earned from building energy-efficient homes and ~~$.9~~$5.6 million of excess tax benefits related to stock-based ~~compensation.~~compensation, partially offset by $2.0 million of non-deductible executive compensation expense. For the six months ended May 31, 2019, our income tax expense and effective tax rate ~~primarily reflected~~included the favorable ~~impacts~~effects of $4.3 million of federal energy tax credits, a $3.3 million reversal of a deferred tax asset valuation allowance related to refundable alternative minimum tax credits and $2.9 million of excess tax benefits related to stock-based ~~compensation.~~

~~Our income tax expense and effective tax rate for the three months ended May 31, 2018 included the favorable net impact of $.2~~compensation, partly offset by $1.2 million of federal energy tax credits and $.2 million of excess tax benefits related to stock-based compensation. For the six months ended May 31, 2018, our income tax expense and effective tax rate included a non-cash charge of $111.2 million for TCJA-related impacts, as discussed in Note 13 – Income Taxes in the Notes to Consolidated Financial Statements in this report; the favorable net impact of federal energy tax credits of $4.2 million; and excess tax benefits of $2.4 million related to stock-based compensation. non-deductible executive compensation expense.

~~Excluding the above-mentioned charge of $111.2 million,~~2017. This extension is expected to benefit our ~~adjusted~~ income tax expense and adjusted effective tax rate for the six months ended May 31, 2018 were $27.1 million and 21.8%, respectively. The calculations of our adjusted income tax expense and adjusted effective tax rate are described above under “Non-GAAP Financial Measures.”

At May 31, 2019 and November 30, 2018, we had deferred tax assets of $444.7 million and $465.4 million, respectively, that were partly offset by valuation allowances of $20.3 million and $23.6 million, respectively. During the six months ended May 31, 2019, we reversed the $3.3 million federal deferred tax asset valuation allowance establishedprovision in the 2018 first quarter 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. The deferred tax asset valuation allowances as of May 31, 2019 and November 30, 2018 were primarily related to certain state NOLs that had not met the “more likely than not” realization standard at those dates.future periods.

Further information regarding our income taxes is provided in Note 1314 – 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;

~~public issuances of our common stock;~~

~~public issuances of debt securities;~~

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 acquisition and land development;

home construction;

operating expenses;

principal and interest payments on notes payable; and

repayments of borrowings under the Credit Facility.

In response to the economic disruption and uncertainty resulting from the COVID-19 pandemic, as described above under “Overview,” in the 2020 second quarter, we proceeded in a carefully targeted manner with investments in land and land development, worked with land sellers to delay the acquisition of land, and activated more targeted development phases of land we own to align with expected slower sales and construction paces. These actions are expected to reduce the growth or, as in the 2020 second quarter, cause a decline in our lot count and the volume of homes delivered in the 2020 third quarter and future periods.

Our investments in land and land development decreased 7%19% to $633.5 million for the six months ended May 31, 2020, compared to $782.8 million for the ~~six months endedMay 31, 2019, compared to~~ ~~$843.7 million~~ ~~for the corresponding 2018~~prior-year period. Approximately 41% of our total investments in the six months ended May 31, 2020 and 2019 related to land ~~acquisition, compared to approximately 50% in the year-earlier period.~~acquisition. While we made strategic investments in land and land development in each of our homebuilding reporting segments during the first six months of 2020 and 2019, approximately 50% and ~~2018, approximately~~ 51% ~~and 60%~~, respectively, of these investments for each period 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 the remainder of 2019 and beyond.

The following table presents the number of lots ~~and the carrying value of inventory~~ 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):


	May 31, 2019			November 30, 2018			Variance				May 31, 2020			November 30, 2019			Variance
Segment	Lots	$		Lots	$		Lots		$		Lots	$		Lots	$		Lots		$
West Coast	13,146	$	1,838,823	12,680	$	1,727,993	466		$	110,830	14,001	$	1,711,558	15,186	$	1,795,088	(1,185	)	$	(83,530	)
Southwest	9,188	636,802		9,815	598,374		(627	)	38,428		11,069	664,273		11,191	629,811		(122	)	34,462
Central	23,128	897,052		22,237	865,184		891		31,868		23,742	851,347		25,871	889,179		(2,129	)	(37,832		)
Southeast	9,290	408,176		8,895	391,288		395		16,888		11,668	380,287		12,662	390,524		(994	)	(10,237		)
Total	54,752	$	3,780,853	53,627	$	3,582,839	1,125		$	198,014	60,480	$	3,607,465	64,910	$	3,704,602	(4,430	)	$	(97,137	)

The carrying value of ~~the~~ lots we owned or controlled under land option contracts and other similar contracts at May 31, ~~2019 increased~~2020 decreased 3% from November 30, ~~2018 primarily due to~~2019. Over the ~~investments in land and land development we made during the six months ended May 31, 2019, and an increase in the number of homes under construction. Overall,~~same period, the number of lots ~~we controlled~~decreased 7% mainly due to a lower number of lots under land option contracts and other similar contracts with refundable deposits, reflecting ordinary course fluctuations in the number of such contracts. The number of lots in inventory as of May 31, 2020 included 6,988 lots under contract where the associated deposits were refundable at our discretion, compared to 9,212 of such lots at November 30, 2019. Our land under contract as a percentage of total lots was ~~27%~~38% at May 31, ~~2019~~2020 and ~~26%~~41% at November 30, ~~2018.~~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.

Liquidity. The table below summarizes our total cash and cash equivalents, and total liquidity (in thousands):


	May 31, 2019			November 30, 2018			May 31, 2020			November 30, 2019
Total cash and cash equivalents	$	178,876		$	574,359		$	575,006		$	453,814
Credit Facility commitment	500,000			500,000			800,000			800,000
Borrowings outstanding under the Credit Facility	(50,000		)	—			—			—
Letters of credit outstanding under the Credit Facility	(31,547		)	(28,010		)	(12,429		)	(18,884		)
Credit Facility availability	418,453			471,990			787,571			781,116
Total liquidity	$	597,329		$	1,046,349		$	1,362,577		$	1,234,930

~~Our~~The majority of our cash equivalents at May 31, ~~2019~~2020 and November 30, ~~2018~~2019 were invested in interest-bearing bank deposit accounts.

Capital Resources. Our notes payable consisted of the following (in thousands):

May 31,
2019 November 30,
2018 Variance
Credit Facility $ 50,000
$ —
$ 50,000
Mortgages and land contracts due to land sellers and other loans 12,018
40,038
(28,020 )
Senior notes 1,792,538
1,790,437
2,101
Convertible senior notes —
229,788
(229,788 )
Total $ 1,854,556
$ 2,060,263
$ (205,707 )

~~The change in our notes payable balance at May 31, 2019 compared to November 30, 2018 primarily reflected our completion of the following financing activities in 2019:~~

~~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, pursuant to the 2017 Shelf Registration, we completed concurrent public offerings of $300.0 million in aggregate principal amount of 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. Net proceeds from these offerings totaled $400.0 million, after deducting the underwriting discount and our expenses relating to the offering.

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.

~~We had $50.0 million of cash borrowings outstanding under the Credit Facility at May 31, 2019.~~

~~We repaid $28.0 million of mortgages and land contracts due to land sellers and other loans during the six months ended May 31, 2019.~~

~~Further information regarding our notes payable is provided in Note 14 – Notes Payable in the Notes to Consolidated Financial Statements in this report.~~



	May 31, 2020		November 30, 2019		Variance
Mortgages and land contracts due to land sellers and other loans	$	24,871	$	7,889	$	16,982
Senior notes	1,741,668		1,740,858		810
Total	$	1,766,539	$	1,748,747	$	17,792

Our financial leverage, as measured by the ratio of debt to capital, was ~~45.8%~~41.5% at May 31, ~~2019,~~2020, compared to ~~49.7%~~42.3% at November 30, ~~2018.~~2019. Our ratio of net debt to capital (a calculation that is described above under “Non-GAAP Financial Measures”) at May 31, ~~2019~~2020 was ~~43.3%~~32.4%, compared to ~~41.6%~~35.2% at November 30, ~~2018.~~2019. Our next scheduled maturity is on December 15, 2021, when $450.0 million in aggregate principal amount of our 7.00% senior notes become due.

LOC ~~Facilities~~Facility. We had ~~$2.1~~$33.5 million and $15.8 million of letters of credit outstanding under the LOC ~~Facilities~~Facility at May 31, ~~2019~~2020 and ~~no letters of credit outstanding under the LOC Facilities at~~ November 30, ~~2018.~~2019, respectively. Further information regarding our LOC ~~Facilities~~Facility is provided in Note 1415 – Notes Payable in the Notes to Consolidated Financial Statements in this report.

Unsecured Revolving Credit Facility. We have ~~a $500.0~~an $800.0 million Credit Facility that will mature on ~~July 27, 2021.~~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 May 31, ~~2019,~~2020, we had ~~$50.0 million of~~no cash borrowings and ~~$31.5~~$12.4 million of letters of credit outstanding under the Credit Facility. Therefore, as of May 31, ~~2019,~~2020, we had ~~$418.5~~$787.6 million available for cash borrowings under the Credit Facility, with up to ~~$218.5~~$237.6 million of that amount available for the issuance of additional letters of credit. The Credit Facility is further described in Note 1415 – Notes Payable in the Notes to Consolidated Financial Statements in this report.

There have been no changes to the terms of the Credit Facility during the six months ended May 31, ~~2019~~2020 from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended November 30, ~~2018.~~2019.

The covenants and other requirements under the Credit Facility represent the most restrictive covenants 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 May 31, ~~2019~~2020:

Financial Covenants and Other Requirements

Covenant Requirement

Actual

Covenant Requirement

Actual

Consolidated tangible net worth

$1.50 billion

$2.20 billion

$1.70 billion

$2.49 billion

Leverage Ratio

.650

.458

.650

.416

Interest Coverage Ratio (a)

1.500

3.998

1.500

4.506

Minimum liquidity (a)

$137.6 million

$128.9 million

$132.0 million

$575.0 million

Investments in joint ventures and non-guarantor subsidiaries

$543.9 million

$152.2 million

$602.9 million

$187.7 million

Borrowing base in excess of borrowing base indebtedness (as defined)

n/a

$910.6 million

n/a

$1.34 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 May 31, 2020, we met both the Interest Coverage Ratio and the minimum liquidity requirements.

Our obligations to pay principal, premium, if any, and interest under our senior notes and borrowings, if any, under the Credit Facility are guaranteed on a joint and several basis by the Guarantor Subsidiaries. The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by us. We may also cause other subsidiaries of ours to become Guarantor Subsidiaries if we believe it to be in our or the relevant subsidiary’s best interests. Condensed consolidating financial information for our subsidiaries considered to be Guarantor Subsidiaries is provided in Note 2122 – Supplemental Guarantor Information in the Notes to Consolidated Financial Statements in this report.

As of May 31, ~~2019,~~2020, 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 dividends (other than common stock dividends) 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 May 31, ~~2019,~~2020, we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of ~~$12.0~~$24.9 million, secured primarily by the underlying property, which had an aggregate carrying value of ~~$138.2~~$52.1 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.

Consolidated Cash Flows. The following table presents a summary of net cash ~~used in~~provided by (used in) our operating, investing and financing activities (in thousands):


	Six Months Ended May 31,						Six Months Ended May 31,
	2019			2018			2020			2019
Net cash used in:
Net cash provided by (used in):
Operating activities	$	(180,334	)	$	(19,369	)	$	154,694		$	(180,334	)
Investing activities	(15,704		)	(13,928		)	(18,310		)	(15,704		)
Financing activities	(199,317		)	(17,010		)	(15,209		)	(199,317		)
Net decrease in cash and cash equivalents	$	(395,355	)	$	(50,307	)
Net increase (decrease) in cash and cash equivalents							$	121,175		$	(395,355	)

Operating Activities. ~~Operating activities used net cash of $180.3 million in the six months ended May 31, 2019 and $19.4 million in the six months ended May 31, 2018.~~ Generally, our net operating cash flows fluctuate primarily based on changes in our inventories and our profitability.

Our net cash ~~used~~provided by operating activities for the six months ended May 31, 2020 primarily reflected net income of $111.7 million, a $100.1 million decrease in inventories and a $19.3 million decrease in receivables, partly offset by a net decrease in accounts payable, accrued expenses and other liabilities of $117.3 million. In the six months ended May 31, 2019, ~~primarily~~our net cash used by operating activities mainly reflected net cash of $253.5 million used for investments in inventories, a net decrease in accounts payable, accrued expenses and other liabilities of $41.4 million and a net increase in receivables of $5.4 million, partly offset by net income of $77.5 million.

Investing Activities. In the six months ended May 31, ~~2018,~~2020, our uses of cash included $15.2 million for net purchases of property and equipment and $3.6 million for contributions to unconsolidated joint ventures. These uses of cash ~~used by operating activities mainly reflected net cash of $152.8 million used for investments in inventories and a net~~

~~increase in receivables of $31.2 million, partly~~were partially offset by a ~~net increase~~$.5 million return of investments in accounts payable, accrued expenses and other liabilities of $18.4 million and our net loss of $13.9 million adjusted for various non-cash items, including a net decrease of $137.7 million in our deferred tax assets.

~~Investing Activities. Investing activities used net cash of $15.7 million in the six months ended May 31, 2019 and $13.9 million in the year-earlier period.~~unconsolidated joint ventures. In the six months ended May 31, 2019, ~~our uses of~~the net cash ~~included~~used for investing activities reflected $22.3 million for net purchases of property and equipment and $4.2 million for contributions to unconsolidated joint ventures. These uses of cash were partially 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. The year-over-year change in net cash used in financing activities was mainly due to the financing transactions we completed in the 2019 first half, including our concurrent public offerings of senior notes and our repayment of certain senior notes. In the six months ended May 31, ~~2018, the~~2020, net cash was used for ~~investing activities reflected $11.6~~dividend payments on our common stock of $16.3 million, ~~for contributions~~tax payments associated with stock-based compensation awards of $6.2 million, and payments on mortgages and land contracts due to ~~unconsolidated joint ventures~~land sellers and ~~$3.4 million for net purchases~~other loans of ~~property and equipment, which were~~$1.1 million. The cash used was partially offset by ~~a $1.1~~$8.4 million ~~return~~ of ~~investments in unconsolidated joint ventures.~~

~~Financing Activities. Financing activities used net cash~~issuances of $199.3 million in the six months ended May 31, 2019 and $17.0 million in the six months ended May 31, 2018. The year-over-year change was mainly due to our repayment of the 1.375% Convertible Senior Notes due 2019 and 4.75% Senior Notes due 2019, partly offset by proceeds from our concurrent public offerings of senior notes.common stock under employee stock plans. In the six months ended May 31, 2019, net cash was used for ~~our~~the repayment of $630.0 million in aggregate principal amount of 1.375% Convertible Senior Notes due 2019 and 4.75% ~~Senior Notes~~senior notes due 2019, payments on mortgages and land contracts due to land sellers and other loans of $28.0 million, tax payments associated with stock-based compensation awards of $3.3 million, and dividend payments on our common stock of $4.5 million. The cash used was partially offset by cash provided by our concurrent public offerings of $300.0 million in aggregate principal amount of 6.875% ~~Senior Notes~~senior notes due 2027 and an additional $100.0 million in aggregate principal amount of our existing series of 7.625% ~~Senior Notes~~senior notes due 2023, $50.0 million of net borrowings under the Credit Facility and $16.5 million of issuances of common stock under employee stock plans. In

During the ~~six months~~three-month periods ended May 31, ~~2018, cash was used for payments on mortgages~~2020 and land contracts due to land sellers and other loans of $10.5 million, tax payments associated with stock-based compensation awards of $6.8 million, and dividend payments on our common stock of $4.5 million. The cash used was partly offset by $4.8 million of issuances of common stock under employee stock plans.

~~During the three months ended May 31,~~ 2019, ~~and 2018,~~ our board of directors declared, and we paid, a quarterly cash ~~dividend~~dividends on our common stock of $.090 per share and $.025 per share, ~~of common stock.~~respectively. Quarterly cash dividends declared and paid on our common stock during ~~each of~~ the ~~six months~~six-month periods ended May 31, 2020 and 2019 totaled $.180 per share and ~~2018 totaled~~ $.050 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.

WeWhile the unprecedented public health and governmental efforts to contain the spread of COVID-19 have created significant uncertainty as to general economic and housing market conditions for the remainder of 2020 and beyond, as of the date of this report, we believe we have adequate capital resources and sufficient access to ~~the credit and capital markets and~~ external financing sources to satisfy our current and reasonably anticipated ~~long-term~~ requirements for funds to ~~acquire assets and land, to use and/or develop acquired assets and land, to construct homes, to finance~~conduct our ~~financial services~~ operations and to meet other needs in the ordinary course of our business. ~~In addition to acquiring and/or developing land that meets~~We have had no cash borrowings under the Credit Facility in our ~~investment return standards, in~~2020 fiscal year through the date of this report. For the remainder of ~~2019,~~2020, we ~~may~~expect to use or redeploy our cash resources or cash borrowings under the Credit Facility to support ~~other~~our business ~~purposes that are aligned with our primary strategic growth goals. We~~within the context of prevailing market conditions, which, given the ongoing uncertainty surrounding the COVID-19 pandemic, could rapidly and materially deteriorate or otherwise change. During this time, we may also ~~arrange or~~ engage in capital markets, bank loan, project debt or other financial ~~transactions. These~~ transactions, ~~may include repurchases from time to time~~including the repurchase of ~~our outstanding common stock. They may also include repurchases from time to time of our outstanding senior notes~~debt or ~~other debt through redemptions, tender offers, exchange offers, private exchanges, open market~~equity securities or ~~private purchases or other means, as well as~~ potential new issuances of debt or equity ~~or senior or convertible senior notes or other debt through public offerings, private placements or other arrangements to raise or access additional capital~~securities to support our ~~current land and land development investment targets, to complete strategic transactions and for other~~ business ~~purposes and/or to effect repurchases or additional redemptions of our outstanding senior notes or other debt.~~needs. The amounts involved in these transactions, if any, may be material. AsIn 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 ~~Facilities,~~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. ~~Our~~However, with the uncertainty surrounding COVID-19, our ability to engage in such transactions ~~however,~~ 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 ~~current~~liquidity, leverage ~~ratios,~~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 ~~success or costs of any such transactions.~~potential impacts from the COVID-19 pandemic on our capital resources and liquidity is provided below under Part II, Item 1A – Risk Factors.

Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments

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. ~~Our unconsolidated joint ventures had total combined assets of~~ ~~$149.1 million~~ at ~~May 31, 2019~~ ~~and~~ ~~$150.2 million~~ atAt November 30, ~~2018. Our investments in unconsolidated joint ventures totaled~~ ~~$56.4 million~~ at ~~May 31, 2019~~ ~~and $62.0 million at November 30, 2018. At May 31,~~ 2019, one of our unconsolidated joint ventures had outstanding secured debt totaling ~~$28.0~~$40.7 million under a construction loan agreement with a third-party lender to finance its land development ~~activities,~~

~~with the~~activities. The outstanding debt was secured by the underlying property and related project assets and was non-recourse to us. ~~At November 30, 2018, this unconsolidated joint venture had~~All of the outstanding ~~debt totaling $18.0 million. The~~ secured debt ~~is scheduled to mature~~was repaid in ~~February~~ 2020. None of our ~~other~~ unconsolidated joint ventures had outstanding debt at May 31, 2019 or November 30, 2018. While we and our partner in the unconsolidated joint venture that has the outstanding construction loan agreement at May 31, 2019 provide certain guarantees and indemnities to the lender, we do not have a guaranty or any other obligation to repay or to support the value of the collateral underlying the outstanding secured debt. We do not believe that our existing exposure under our guaranty and indemnity obligations related to the outstanding secured debt is material to our consolidated financial statements. As discussed in Note 8 – Variable Interest Entities in the Notes to Consolidated Financial Statements in this report, we determined that one of our joint ventures at May 31, 2019 and November 30, 2018 was a VIE, but we were not the primary beneficiary of this VIE. All of our joint ventures were unconsolidated and accounted for under the equity method because we did not have a controlling financial interest.2020.

We are committed to purchase all 17 unconsolidated joint venture lots controlled under land option and other similar contracts at May 31, 2019 from one of our unconsolidated joint ventures. The purchase will be made in quarterly takedowns over the next year for an aggregate purchase price of approximately $8.0 million under agreements that we entered into with the joint venture in 2016.

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. At ~~May 31, 2019, we had total cash deposits of~~ ~~$48.6 million~~ ~~to purchase land having an aggregate purchase price of~~ ~~$1.38 billion. At November 30, 2018, we had total deposits of $53.8 million to purchase land having an aggregate purchase price of $1.37 billion.~~ 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 ~~controlled~~had under ~~our~~ land option contracts and other

similar contracts at May 31, ~~2019~~2020, we estimate the remaining purchase price to be paid during each year ending November 30 would be as follows: ~~2019 – $535.7 million;~~ 2020 – ~~$403.6~~$546.7 million; 2021 – ~~$229.0~~$417.9 million; 2022 – ~~$45.8~~$99.8 million; 2023 – ~~$34.8~~$53.4 million; 2024 – $39.6 million; and thereafter – ~~$79.6~~$48.4 million.

~~In addition to the cash deposits, our exposure to loss related to our land option contracts and other similar contracts consisted of pre-acquisition costs of~~ ~~$46.6 million~~ at ~~May 31, 2019~~ ~~and~~ ~~$46.9 million~~ ~~at November 30, 2018. These pre-acquisition costs and cash deposits were included in inventories in our consolidated balance sheets.~~

~~We determined that as of~~ ~~May 31, 2019~~ and November 30, 2018 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 also evaluated our land option contracts and other similar contracts for financing arrangements and, as a result of our evaluations, increased inventories, with a corresponding increase to accrued expenses and other liabilities, in our consolidated balance sheets by ~~$5.5 million~~ at ~~May 31, 2019~~ ~~and $21.8 million at November 30, 2018, as further discussed in Note 8 – Variable Interest Entities in the Notes to Consolidated Financial Statements in this report.~~

Contractual Obligations. Due to our repayment of the entire $230.0 million in aggregate principal amount of our 1.375% Convertible Senior Notes due 2019 upon maturity; our completion of concurrent public offerings of $300.0 million in aggregate principal amount of 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; and 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, all of which are further described in Note 14 – Notes Payable in the Notes to Consolidated Financial Statements in this report, our contractual obligations as of May 31, 2019 have changed materially from those reported in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended November 30, 2018. The following table sets forth our future cash requirements related to the contractual obligations of our long-term debt and interest as of May 31, 2019 (in millions):

Total 2019 2020-2021 2022-2023 Thereafter
Contractual obligations:
Long-term debt $ 1,812.0
$ 12.0
$ 350.0
$ 1,150.0
$ 300.0
Interest 505.1
81.3
227.5
123.3
73.0
Total $ 2,317.1
$ 93.3
$ 577.5
$ 1,273.3
$ 373.0

There have been no ~~other~~ significant changes in our contractual obligations from those reported in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended November 30, ~~2018.~~2019.

Critical Accounting Policies

The preparation of our consolidated financial statements requires the use of judgment in the application of accounting policies and estimates of uncertain matters. Except for accounting policies related to our adoption of ASC 606, as described in Note 1 – Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements in this report, thereThere have been no significant changes to our critical accounting policies and estimates during the six months ended May 31, ~~2019~~2020 from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended November 30, ~~2018.~~2019.

Recent Accounting Pronouncements

Recent accounting pronouncements are discussed in Note 1 – Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements in this report.

Outlook

~~For~~Over the past several weeks, conditions have started to improve in conjunction with state and local governments relaxing “stay-at-home” and similar public health mandates that were implemented in response to the COVID-19 pandemic. With restrictions easing in many of our served markets, we, in the latter part of May, began the process of more broadly opening our sales centers, model homes and design studios to the public, while also expanding construction and warranty service activities to the extent permitted by local authorities. In June, certain of our division offices began to reopen to employees. During the reopening process, we instituted several safety protocols, such as distancing and personal protective equipment requirements, enhanced premises cleaning, personal hygiene measures and wellness checks, all in accordance with applicable public health orders and advice. The increased ongoing investment in these appropriate steps is intended to help protect the health of customers, employees and business partners, and their families. Due to the variation in laws and restrictions, the timing and manner of our reopening process has varied from market to market.

We are encouraged by our ability to effectively resume nearly all of our operations and the recent improvements in our gross orders, net orders and cancellation rate, which we believe are indicators of underlying strength in the overall housing market and our served markets. Subsequent to the end of the second quarter, our business continued to rebound measurably, with gross orders and net orders increasing on a year-over-year basis. Gross orders for the first five weeks of the 2020 third quarter increased 10% year over year to 1,678 while net orders rose 11% to 1,349. Our cancellation rate for this period also returned closer to a more normalized level of 20%, nearly even with the year-earlier period. Our year-over-year order and cancellation rate improvements for the first five weeks of the 2020 third quarter are not necessarily indicative of the results to be expected for the full quarter due to various factors. These factors include, among other things, the strong order growth we generated in the remainder of the year-ago third quarter, which will create increasingly difficult weekly comparisons for the balance of the current third quarter; fewer anticipated community openings relative to the 2019 ~~we intend~~third quarter; a projected year-over-year decline in our average community count in the low single digits percentage range; and continued uncertainty surrounding the economic and housing market environments due to the impacts of the ongoing COVID-19 pandemic and the related COVID-19 control responses, as further discussed below under Part II, Item 1A – Risk Factors.

As the economy and housing markets continue to ~~execute on our Returns-Focused Growth Plan, which is described~~recover from the severe impacts of the pandemic and related COVID-19 control responses, we expect employment, consumer confidence and other fundamental business factors to also improve. However, the speed, trajectory and strength of any such recovery remains highly uncertain, and could be slowed or reversed by a number of factors, including a possible widespread resurgence in COVID-19 infections in the ~~“Business” section~~second half of ~~our Annual Report on Form 10-K~~2020 without the availability of generally effective therapeutics or a vaccine for the ~~year ended November 30, 2018. We believe that doing so~~disease. Given this uncertainty, we will ~~enable us~~continue to ~~generate cash flows that we can deploy~~proceed in a carefully targeted manner with land acquisition and land development, and to ~~support~~focus on generating cash inflows from our business and ~~enhance our return on invested capital, as well as manage our debt, with the principal aim of driving long-term stockholder value.~~preserving cash and liquidity by further curtailing overhead expenditures. Our present ~~2019~~2020 outlook is as follows:

~~2019~~

2020 Third Quarter:

We expect to generate housing revenues in the range of ~~$1.10 billion~~$820.0 million to ~~$1.18 billion,~~$880.0 million, compared to ~~$1.22~~$1.15 billion in the year-earlier quarter, and anticipate our average selling price to be in the range of $395,000 to $400,000, representing ~~a decrease~~an increase in the range of 2%4% to 3%5% compared to the year-earlier period.

We expect our housing gross profit margin to be in the range of ~~17.9%~~18.8% to ~~18.5%~~19.4%, assuming no inventory-related ~~charges.~~charges, compared to 18.9% for the corresponding 2019 quarter.

We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of ~~11.3%~~12.7% to ~~11.9%~~13.3%. The 2019 third quarter ratio was 11.1%.

We expect our homebuilding operating income margin, excluding inventory-related charges, to range from ~~6.4%~~5.7% to ~~7.0%.~~6.5%, compared to 7.8% for the prior year quarter.

We expect an effective tax rate ~~excluding potential impacts related to stock-based compensation and/or tax credits,~~ of approximately ~~26%~~24%.

~~We expect a diluted weighted average share count of approximately 92.5 million.~~

We expect our average community count to ~~be up approximately 15% to 18%~~decline in the low single digits percentage range from the ~~2018~~2019 third quarter.

~~2019~~ Full Year:

We expect our housing revenues to be in the range of ~~$4.45~~$3.75 billion to ~~$4.60~~$3.95 billion, compared to ~~$4.52~~$4.51 billion in ~~2018,~~2019, and anticipate our average selling price to be in the range of $385,000 to ~~$390,000,~~$395,000, representing ~~a decrease~~an increase in the range of 2%1% to 4% compared to ~~2018.~~2019.

We expect our housing gross profit margin to be in the range of ~~17.9%~~18.6% to ~~18.5%~~19.2%, assuming no inventory-related ~~charges.~~charges, versus 18.7% for 2019.

We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of 11.8% to 12.4%, excluding the severance charges recorded in the second quarter, compared to 11.0% ~~to 11.6%.~~

in the prior year.

We expect our homebuilding operating income margin, assuming no inventory-related charges and excluding ~~inventory-related~~the above-mentioned severance charges, to range from ~~6.7%~~6.4% to ~~7.3%.~~

~~We expect a diluted weighted average share count of approximately 93.5 million.~~7.2%, compared to 7.7% for 2019.

We expect our average community count to be up approximately ~~10% to 15%~~flat compared to ~~2018.~~2019.

We have had no cash borrowings under the Credit Facility in our 2020 fiscal year through the date of this report. For the remainder of 2020, we expect to use or redeploy our ~~debt~~cash resources and any cash borrowings under the Credit Facility to ~~capital ratio to be within our targeted range of 35% to 45%.~~

We believe we are well positioned for 2019 due to, among other things, our 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, in the latter part of 2018, the homebuilding industry andsupport our business ~~saw a tempering~~within the context of ~~homebuyer demand largely driven by several years~~prevailing market conditions, which could rapidly change. During this time, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the repurchase of ~~home price appreciation coupled with rising mortgage interest rates. In turn, the decrease~~debt or equity securities or potential new issuances of debt or equity securities to support our business needs. The amounts involved in ~~demand has increased new home and resale inventories.~~these transactions, if any, may be material. In addition, the industry is experiencing labor constraints and volatile raw material prices, exacerbated by U.S. trade policies, including the imposition of tariffs and duties on homebuilding materials and products. If these demand, inventory and cost trends continue for an extended period beyond the 2019 third quarter, or worsen during 2019, our ~~business would 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~~the public health, political and regulatory environment ~~(particularly~~(including 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;~~conditions, generally and during the current recession;

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;

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;

our compliance with the terms of the Credit Facility;

~~volatility in the market price of our common stock;~~


•	volatility in the market price of our common stock;

weak or declining consumer confidence, either generally or specifically with respect to purchasing homes;

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, and financial markets’ and businesses’ reactions to that failure;

government actions, policies, programs and regulations directed at or affecting the housing market (including the ~~TCJA, the Dodd-Frank~~CARES Act relief provisions for outstanding mortgage loans, 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 to ~~the TCJA;~~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, including revenue recognition (ASC 606) and lease~~ 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 andhigher-income consumers;~~

~~our ability to generate orders andconvert our backlog of orders to home deliveries and revenues, particularly in key markets in California;~~


•	consumer interest in our new home communities and products, particularly from first-time homebuyers andhigher-income consumers;


•	our ability to generate orders andconvert our backlog of orders to home deliveries and revenues, particularly in key markets in California;

our ability to successfully implement our ~~Returns-Focused Growth Plan~~business strategies and achieve ~~the~~any associated ~~revenue, margin, profitability, cash flow, community reactivation, land sales, business growth, asset efficiency, return on invested capital, return on equity, debt to capital ratio and other~~ financial and operational targets and objectives;

income tax expense volatility ~~related to~~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;

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;

a continuation of widespread protests and civil unrest related to efforts to institute law enforcement and other social and political reforms, and the impacts of implementing or failing to implement any such reforms; and

other events outside of our control.

Please see our Annual Report on Form 10-K for the year ended November 30, ~~2018~~2019 and other filings with the SEC for a further discussion of these and other risks and uncertainties applicable to our business.


Item 3.	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,There have been no material 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~~market 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 table presents 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 May 31, 2019 (dollars in thousands):

Fiscal Year of Expected Maturity Fixed Rate Debt
Weighted Average
Effective Interest Rate
2020 $ 350,000
8.5 %
2021 —
—
2022 800,000
7.4
2023 350,000
7.5
Thereafter 300,000
7.1
Total $ 1,800,000
7.6 %
Fair value at May 31, 2019 $ 1,908,625

since November 30, 2019. For additional information regarding our market risk, refer to the “Quantitative and Qualitative Disclosures About Market Risk” section of our Annual Report on Form 10-K for the year ended November 30, ~~2018.~~2019.


Item 4.	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 our 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 May 31, ~~2019~~2020.

There were no changes in our internal control over financial reporting during the quarter ended May 31, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

For a discussion of our legal proceedings, see Note 1718 – Legal Matters in the Notes to Consolidated Financial Statements in this report.


Item 1A.	Risk Factors

~~There~~Except as set forth below, as of the date of this report, there have been no material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the year ended November 30, ~~2018.~~2019.

Our business could be materially and adversely disrupted by an epidemic or pandemic (such as the present outbreak and worldwide spread of COVID-19), or similar public threat, or fear of such an event, and the control response measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it.

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.

On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures. On March 13, 2020, the United States declared a national emergency concerning the outbreak, and several states and municipalities have declared public health emergencies. Along with these declarations, there have been extraordinary and wide-ranging actions taken by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world, including quarantines, “stay-at-home” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.

In response to these steps, in mid-March, 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, which in each case has varied by market depending on the scope of the restrictions local authorities have established. These appropriate measures have tempered our sales pace and delayed home deliveries in the latter part of March and through the date of this report.

While conditions started to improve in late May as state and local governments in our served markets began relaxing the public health restrictions described above and we began to gradually take steps to effectively resume nearly all of our operations, including reopening our sales centers, model homes and design studios to the general public and expanding construction and warranty service activities to the extent permitted by local authorities, we are uncertain of the potential full magnitude or duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, which include, among other things, a recession, high unemployment levels, and significant volatility in financial markets and a decrease in the value of equity securities, including our common stock. In addition, 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, 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 an increase in COVID-19 cases, and some of the relaxed COVID-19 control responses have been re-instituted.

Our business could also be negatively impacted over the medium-to-longer term if the disruptions related to COVID-19 decrease consumer confidence generally or with respect to purchasing a home; cause civil unrest, similar to what arose at the end of May related to efforts to institute law enforcement and other social and political reforms and which may also affect our business in the short and/or medium-to-longer term; precipitate a prolonged economic downturn and/or an extended rise in unemployment or tempering of wage growth, any of which would lower demand for our products as occurred in our 2020 second quarter; impair our ability to sell and build homes in a typical manner, as occurred in our 2020 second quarter, or at all; generate revenues and cash flows, and/or access the Credit Facility or the capital or lending markets (or significantly increase the costs of doing so), as may be necessary to sustain our business; increase the costs or decrease the supply of building materials or the availability of subcontractors, employees and other talent, including as a result of infections or medically necessary or recommended self-quarantining, which we have experienced to a limited extent in a few locations, or governmental mandates to direct production activities to support public health efforts; and/or 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. The inherent uncertainty surrounding COVID-19, due in part to rapidly changing governmental directives, public health challenges and progress, and market

reactions thereto, also makes it more challenging for our management to estimate the future performance of our business and develop strategies to generate growth.

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 the third quarter 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In ~~January 2016,~~May 2018, our board of directors authorized us to repurchase a total of up to ~~10,000,000~~4,000,000 shares of our outstanding common stock. As of November 30, ~~2016,~~2019, we had repurchased 8,373,000 shares of our common stock pursuant to this authorization, at a total cost of $85.9 million. On May 14, 2018 our board of directors reaffirmed the remainder of the 2016 authorization and approved and authorized the repurchase of 2,373,000 additional shares of our outstanding common stock, for a total of up to 4,000,0002,193,947 shares authorized for repurchase. ~~As of November 30, 2018, we had repurchased 1,806,053 shares of our common stock pursuant to this authorization, at a total cost of $35.0 million.~~ During the three months ended May 31, ~~2019,~~2020, no shares were repurchased pursuant to this authorization.

Item 6. Exhibits



Exhibits


31.1		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.

31.2		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.

32.1		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.

32.2		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.

~~101~~101.INS		~~The following materials from KB Home’s Quarterly Report on Form 10-Q for~~XBRL Instance Document - the ~~quarter ended May 31, 2019, formatted~~instance document does not appear in ~~eXtensible Business Reporting Language (XBRL): (a) Consolidated Statements of Operations for~~ the ~~three months~~Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (embedded within the Inline XBRL document and six months ended May 31, 2019 and 2018, (b) Consolidated Balance Sheets as of May 31, 2019 and November 30, 2018, (c) Consolidated Statements of Cash Flows for the six months ended May 31, 2019 and 2018, and (d) Notes to Consolidated Financial Statements.included in Exhibit 101).

SIGNATURES

Pursuant to the requirements 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.



	KB HOME Registrant



Dated	July 9, ~~2019~~2020	By:	/s/ JEFF J. KAMINSKI
			Jeff J. Kaminski Executive Vice President and Chief Financial Officer (Principal Financial Officer)



Dated	July 9, ~~2019~~2020	By:	/s/ WILLIAM R. HOLLINGER
			William R. Hollinger Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)

6056



Balance Sheet	Balance at November 30, 2018		Adjustments due to ASC 606			Balance at December 1, 2018
Assets
Homebuilding:
Inventories	$	3,582,839	$	(35,288	)	$	3,547,551
Deferred tax assets, net	441,820		(4,024		)	437,796
Property and equipment, net	24,283		31,194			55,477
Financial services	12,380		19,728			32,108
Stockholders’ equity:
Retained earnings	1,897,168		11,610			1,908,778



	Three Months Ended May 31, 2019									Six Months Ended May 31, 2019
Statement of Operations	As Reported			Amounts without the Adoption of ASC 606			Effect of Change Higher/(Lower)			As Reported			Amounts without the Adoption of ASC 606			Effect of Change Higher/(Lower)
Homebuilding:
Revenues	$	1,018,671		$	1,017,934		$	737		$	1,827,459		$	1,826,089		$	1,370
Construction and land costs	(843,744		)	(850,855		)	(7,111		)	(1,514,599		)	(1,526,970		)	(12,371		)
Selling, general and administrative expenses	(122,828		)	(114,638		)	8,190			(229,422		)	(213,919		)	15,503
Operating income	52,099			52,441			(342		)	83,438			85,200			(1,762		)
Financial services:
Revenues	3,132			3,025			107			5,827			5,615			212
Total pretax income	56,761			56,996			(235		)	91,272			92,822			(1,550		)
Income tax expense	(9,300		)	(9,400		)	(100		)	(13,800		)	(14,200		)	(400		)
Net income	47,461			47,596			(135		)	77,472			78,622			(1,150		)
Diluted earnings per share	.51			.52			(.01		)	.82			.83			(.01		)



	As of May 31, 2019
Balance Sheet	As Reported		Amounts without the Adoption of ASC 606		Effect of Change Higher/(Lower)
Assets
Homebuilding:
Inventories	$	3,780,853	$	3,824,765	$	(43,912	)
Deferred tax assets, net	424,395		428,019		(3,624		)
Property and equipment, net	61,221		23,165		38,056
Financial services	30,720		10,780		19,940
Stockholders’ equity:
Retained earnings	1,981,795		1,971,335		10,460



Inventory impairment charges:
West Coast	$	3,441	$	5,993	$	6,637	$	10,692
Southwest	—		—		—		—
Central	—		—		—		—
Southeast	—		—		—		—
Total	$	3,441	$	5,993	$	6,637	$	10,692

Land option contract abandonment charges:
West Coast	$	391	$	388	$	446	$	596
Southwest	223		—		282		—
Central	121		145		366		223
Southeast	161		—		161		—
Total	$	896	$	533	$	1,255	$	819



	May 31, 2019		November 30, 2018
Inventories:
Homes under construction
West Coast	$	690,525	$	514,099
Southwest	184,154		173,036
Central	313,181		312,366
Southeast	152,523		125,651
Subtotal	1,340,383		1,125,152



Assets:
West Coast	$	2,045,818	$	1,880,516
Southwest	678,270		631,509
Central	1,030,839		1,017,490
Southeast	448,302		463,224
Corporate and other	686,004		1,068,452
Total	$	4,889,233	$	5,061,191



	May 31, 2019		November 30, 2018
Number of investments in unconsolidated joint ventures	6		6
Investments in unconsolidated joint ventures	$	56,446	$	61,960
Number of unconsolidated joint venture lots controlled under land option contracts and other similar contracts	17		36



	May 31, 2019		November 30, 2018
Cash surrender value of corporate-owned life insurance contracts	$	75,010	$	73,721
Prepaid expenses and other	12,724		9,379
Total	$	87,734	$	83,100



	May 31, 2019		November 30, 2018
Self-insurance and other litigation liabilities	$	272,851	$	283,651
Employee compensation and related benefits	116,882		148,549
Warranty liability	83,030		82,490
Accrued interest payable	33,989		31,180
Customer deposits	24,088		19,491
Inventory-related obligations (a)	21,840		40,892
Real estate and business taxes	8,212		16,639
Other	44,924		43,376
Total	$	605,816	$	666,268



	May 31, 2019		November 30, 2018
Unsecured revolving credit facility	$	50,000	$	—
Mortgages and land contracts due to land sellers and other loans	12,018		40,038
4.75% Senior notes due May 15, 2019	—		399,483
8.00% Senior notes due March 15, 2020	348,617		347,790
7.00% Senior notes due December 15, 2021	447,754		447,359
7.50% Senior notes due September 15, 2022	347,994		347,731
7.625% Senior notes due May 15, 2023	351,973		248,074
6.875% Senior notes due June 15, 2027	296,200		—
1.375% Convertible senior notes due February 1, 2019	—		229,788
Total	$	1,854,556	$	2,060,263



	Three Months Ended May 31, 2018
	KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Total revenues	$	—		$	1,026,887		$	74,536		$	—		$	1,101,423
Homebuilding:
Revenues	$	—		$	1,026,887		$	71,786		$	—		$	1,098,673
Construction and land costs	—			(844,637		)	(66,607		)	—			(911,244		)
Selling, general and administrative expenses	(26,815		)	(78,823		)	(7,593		)	—			(113,231		)
Operating income (loss)	(26,815		)	103,427			(2,414		)	—			74,198
Interest income	1,181			4			93			—			1,278
Interest expense	(37,942		)	(634		)	(1,348		)	39,924			—
Intercompany interest	75,277			(32,791		)	(2,562		)	(39,924		)	—
Equity in loss of unconsolidated joint ventures	—			(321		)	(1		)	—			(322		)
Homebuilding pretax income (loss)	11,701			69,685			(6,232		)	—			75,154
Financial services pretax income	—			—			3,154			—			3,154
Total pretax income (loss)	11,701			69,685			(3,078		)	—			78,308
Income tax expense	(2,400		)	(17,700		)	(900		)	—			(21,000		)
Equity in net income of subsidiaries	48,007			—			—			(48,007		)	—
Net income (loss)	$	57,308		$	51,985		$	(3,978	)	$	(48,007	)	$	57,308



	Six Months Ended May 31, 2018
	KB Home Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Total revenues	$	—		$	1,821,576		$	151,470		$	—		$	1,973,046
Homebuilding:
Revenues	$	—		$	1,821,576		$	146,302		$	—		$	1,967,878
Construction and land costs	—			(1,508,733		)	(131,989		)	—			(1,640,722		)
Selling, general and administrative expenses	(48,981		)	(145,940		)	(14,034		)	—			(208,955		)
Operating income (loss)	(48,981		)	166,903			279			—			118,201
Interest income	2,179			9			93			—			2,281
Interest expense	(75,914		)	(1,323		)	(2,631		)	79,868			—
Intercompany interest	148,123			(63,745		)	(4,510		)	(79,868		)	—
Equity in loss of unconsolidated joint ventures	—			(1,166		)	(1		)	—			(1,167		)
Homebuilding pretax income (loss)	25,407			100,678			(6,770		)	—			119,315
Financial services pretax income	—			—			5,038			—			5,038
Total pretax income (loss)	25,407			100,678			(1,732		)	—			124,353
Income tax expense	(47,100		)	(65,800		)	(25,400		)	—			(138,300		)
Equity in net income of subsidiaries	7,746			—			—			(7,746		)	—
Net income (loss)	$	(13,947	)	$	34,878		$	(27,132	)	$	(7,746	)	$	(13,947	)



	0-2 years				3-5 years				6-10 years				Greater than 10 years
	$		%		$		%		$		%		$		%		Total
Inventories	$	1,936.8	51	%	$	1,535.2	41	%	$	278.6	7	%	$	30.3	1	%	$	3,780.9



	Total		2019		2020-2021		2022-2023		Thereafter
Contractual obligations:
Long-term debt	$	1,812.0	$	12.0	$	350.0	$	1,150.0	$	300.0
Interest	505.1		81.3		227.5		123.3		73.0
Total	$	2,317.1	$	93.3	$	577.5	$	1,273.3	$	373.0



Fiscal Year of Expected Maturity	Fixed Rate Debt		Weighted Average Effective Interest Rate
2020	$	350,000	8.5	%
2021	—		—
2022	800,000		7.4
2023	350,000		7.5
Thereafter	300,000		7.1
Total	$	1,800,000	7.6	%
Fair value at May 31, 2019	$	1,908,625