UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

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 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.

PART I.    FINANCIAL INFORMATION

(In Thousands, Except Per Share Amounts – Unaudited)

(In Thousands – Unaudited)

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly our consolidated financial position as of February 28,August 31, 2021, the results of our consolidated operations for the three months and nine months ended February 28,August 31, 2021 and February 29, 2020, and our consolidated cash flows for the threenine months ended February 28,August 31, 2021 and February 29, 2020. The results of our consolidated operations for the three months and nine months ended February 28,August 31, 2021 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, 2020 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, 2020, 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.

We have identified 5 operating reporting segments, comprised of 4 homebuilding reporting segments and 1 financial services reporting segment. As of February 28,August 31, 2021, our homebuilding reporting segments conducted ongoing operations in the following states to the extent permitted by applicable public health orders as part of their respective 2019 coronavirus disease (“COVID-19”) control responses:states:

Our homebuilding reporting segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to first-time, first move-up and active adult homebuyers. Our homebuilding operations generate most of their revenues from the delivery of completed homes to homebuyers. They also earn revenues from the sale of land.

Our financial services reporting segment offers property and casualty insurance and, in certain instances, earthquake, flood and personal property insurance to our homebuyers in the same markets as our homebuilding reporting segments, and provides title services in the majority of our markets located within our Southwest, Central and Southeast homebuilding reporting segments. 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. On March 1, 2021, Guaranteed Rate, Inc. (“Guaranteed Rate”) acquired Stearns’ parent company. There have been no significant changes with respect to Stearns or its operations since the transaction was completed. The financial services reporting segment is separately reported in our consolidated financial statements.

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):

We compute earnings per share using the two-class method, which is an allocation of earnings between the holders of common stock and a company’s participating security holders. Our outstanding nonvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities at February 28,August 31, 2021 or February 29, 2020.

For the three monthsthree-month and nine-month periods ended February 28,August 31, 2021 and February 29, 2020, 0no outstanding stock options were excluded from the diluted earnings per share calculations. Contingently issuable shares associated with outstanding performance-based restricted stock units (each, a “PSU”) were not included in the basic earnings per share calculations for the periods presented as the applicable vesting conditions had not been satisfied.

Receivables consisted of the following (in thousands):

Land under development included land held for future development and land held for sale of $51.9$64.5 million and $.6$2.6 million, respectively, at February 28,August 31, 2021 and $74.0 million and $1.3 million, respectively, at November 30, 2020.

Interest is capitalized to inventories while the related communities or land parcels are being actively developed and until homes are completed or the land is available for immediate sale. Capitalized interest is amortized to construction and land costs as the related inventories are delivered to homebuyers or land buyers (as applicable). In the case of land held for future development and land held for sale, applicable interest is expensed as incurred.

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.

We evaluated 84 and 11 communities or land parcels for recoverability as of February 28,August 31, 2021 and November 30, 2020, respectively. The carrying values of those communities or land parcels evaluated as of February 28,August 31, 2021 and November 30, 2020 were $96.1$31.4 million and $123.4 million, respectively. In addition, we evaluated land held for future development for recoverability as of February 28,August 31, 2021 and November 30, 2020.

Based on the results of our evaluations, we recognized inventory impairment charges$6.3 million and $6.5 million of $3.6 million for the three months ended February 28, 2021 and $5.1 million for the three months ended February 29, 2020. Theinventory impairment charges for the three months ended February 28,August 31, 2021 and February 29, 2020, respectively. For the nine months ended August 31, 2021 and 2020, we recognized inventory impairment charges of $9.9 million and $11.6 million, respectively. The inventory impairment charges for the three-month and nine-month periods 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:

As of February 28,August 31, 2021, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $100.7$98.0 million, representing 1412 communities and various other land parcels. As of November 30, 2020, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $113.1 million, representing 16 communities and various other land parcels.

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 $.4 million for the three months ended February 28,August 31, 2021 and $.6$1.3 million for the nine months ended August 31, 2021. For the three months and nine months ended February 29, 2020.August 31, 2020, we recognized land option contract abandonment charges of $.4 million and $5.4 million, respectively.

Due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, and in our estimations of the remaining operating lives of our inventory assets and the realization of our inventory balances, particularly as to land held for future development, it is possible that actual results could differ substantially from those estimated.

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 1 of our joint ventures at February 28,August 31, 2021 and November 30, 2020 was a VIE, but we were not the primary beneficiary of the VIE. Therefore, all of our joint ventures at February 28,August 31, 2021 and November 30, 2020 were unconsolidated and accounted for under the equity method because we did not have a controlling financial interest.

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 $35.4$39.6 million at February 28,August 31, 2021 and $31.1 million at November 30, 2020. 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). 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 $17.6$23.4 million at February 28,August 31, 2021 and $19.4 million at November 30, 2020.

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.

As of both February 28,August 31, 2021 and November 30, 2020, we had investments in 6 and 5 unconsolidated joint ventures.ventures, respectively. The following table presents combined condensed information from the statements of operations offor our unconsolidated joint ventures (in thousands):

The lower combined revenues and incomeconstruction and land costs for the three months and nine months ended February 28,August 31, 2021, as compared to the corresponding year-earlier period,periods, mainly reflected a decrease in the number of homes delivered from an unconsolidated joint venture in California. This unconsolidated joint venture, which delivered its last home in the 2021 second quarter, had no deliveries in the three months ended August 31, 2021 and 10 deliveries in the nine months ended August 31, 2021, compared to 17 and 90 homes delivered in the corresponding year-earlier periods, respectively.

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

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

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 in accordance with Accounting Standards Codification Topic 842, “Leases” (“ASC 842”). 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 February 28,August 31, 2021 was comprised of operating leases where we are the lessee, primarily real estate leases for our corporate offices, 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.

The following table presents our lease right-of-use assets, lease liabilities and the weighted-averageweighted average remaining lease term and weighted-averageweighted average discount rate (incremental borrowing rate) used in calculating the lease liabilities (dollars in thousands):

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

As of February 28,August 31, 2021, the future minimum lease payments required under our leases are as follows (in thousands):

Our income tax expense and effective tax rate for the three months ended February 28,August 31, 2021 reflectedincluded the favorable impactsimpact of $3.5 million of excess tax benefits related to stock-based compensation and $2.7$21.5 million of federal energy tax credits that we earned from building energy-efficient homes, partially offset by $1.4$2.5 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). Our income tax expense and effective tax rate for the three months ended February 29,August 31, 2020 reflectedincluded the favorable impactsimpact of $5.6 million of excess tax benefits related to stock-based compensation and $4.0$3.1 million of federal energy tax credits we earned from building energy-efficient homes, partly offset by $1.0$1.2 million of non-deductible executive compensation expense.

Our income tax expense and effective tax rate for the nine months ended August 31, 2021 reflected the favorable impacts of $39.0 million of federal energy tax credits we earned from building energy-efficient homes and $3.9 million of excess tax benefits related to stock-based compensation, partially offset by $5.8 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). For the nine months ended August 31, 2020, our income tax expense and effective tax rate included the favorable impacts of $10.1 million of federal energy tax credits we earned from building energy-efficient homes and $5.6 million of excess tax benefits related to stock-based compensation, partly offset by $3.2 million of non-deductible executive compensation expense.

The federal energy tax credits for the three months and nine months ended February 28,August 31, 2021 resulted from legislation enacted in December 2020 whichand earlier periods. The legislation enacted in December 2020, among other things, extended the availability of a business tax credit for building new energy-efficient homes through December 31, 2021. Prior to this legislation, the tax credit expired on December 31, 2020. 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-192019 coronavirus disease (“COVID-19”) pandemic. Among other things, the CARES Act accelerated the timetable for alternative minimum tax (“AMT”) credit refunds. As a result, in the 2020 second quarter, we filed a superseding 2019 federal income tax return claiming a refund of $39.3 million of AMT credits and reclassified this amount from deferred tax assets to receivables. We received this AMT credit refund in the 2021 first quarter.

The CARES Act also provided an Employee Retention Credit (“ERC”), which is a refundable payroll tax credit that encouraged businesses to keep employees on the payroll during the COVID-19 pandemic. Eligible employers could qualify for up to $5,000 of credit for each employee based on certain wages paid after March 12, 2020 and before January 1, 2021. Based on our evaluation of this provision and the significant pandemic-related impacts on our operations in 2020, we recognized an ERC of $4.3 million as an offset to payroll tax expenses within selling general and administrative expenses in our consolidated statements of operations upon filing for the refund in the 2021 first quarter.

In June 2020, California enacted tax legislation that approved the suspension of California net operating loss deductions for tax years 2020, 2021 and 2022. The suspension of California net operating loss deductions did not have an impact on our income tax expense for the three months or nine months ended February 28,August 31, 2021.

Our deferred tax assets of $233.1$213.1 million as of February 28,August 31, 2021 and $249.1 million as of November 30, 2020 were both partly offset by valuation allowances of $18.3 million and $18.0 million.million, respectively. The deferred tax asset valuation allowances as of February 28,August 31, 2021 and November 30, 2020 were primarily related to certain state net operating losses that

had not met the “more likely than not” realization standard at those dates. As a result of an adjustment to our state net operating losses, we increased the valuation allowance by $.3 million in the 2021 third quarter. Based on the evaluation of our deferred tax assets as of February 28,August 31, 2021, we determined that most of our deferred tax assets would be realized. Therefore, 0other than the slight increase mentioned above, no adjustments to our deferred tax valuation allowance were needed for the threenine months ended February 28,August 31, 2021.

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

The carrying amounts of our senior notes listed above are net of unamortized debt issuance costs and premiums, which totaled $7.1$10.7 million at February 28,August 31, 2021 and $7.5 million at November 30, 2020.

obtain letters of credit from time to time in the ordinary course of operating our business. Under the LOC Facility, which expires on February 13, 2022, we may issue up to $50.0 million of letters of credit. As of February 28,August 31, 2021 and November 30, 2020, we had letters of credit outstanding under the LOC Facility of $41.0$35.0 million and $29.7 million, respectively.

All of the senior notes outstanding at February 28,August 31, 2021 and November 30, 2020 represent senior unsecured obligations that are guaranteed by certain of our subsidiaries and rank equally in right of payment with all of our and our guarantor subsidiaries’ existing unsecured and unsubordinated indebtedness. All of our senior notes were issued in underwritten public offerings. 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, our senior notes contain certain limitations related to mergers, consolidations, and sales of assets.

As of February 28,August 31, 2021, principal payments on senior notes, mortgages and land contracts due to land sellers and other loans are due during each year ending November 30 as follows: 2021 – $1.1 million; 2022 – $801.1$531.3 million; 2023 – $351.2 million; 2024 – $.7 million; 2025 – $0; and thereafter – $600.0$990.0 million.

Fair value measurements of assets and liabilities are categorized based on the following hierarchy:

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 value and estimated fair value of our financial instruments, except those for which the carrying values approximate fair values (in thousands):