Edgar Filing: KB HOME

KBH - 08.31.2014 - 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended August 31, 2014.


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

For the transition period from [ ] to [ ].

Commission File No. 001-09195

KB HOME

(Exact name of registrant as specified in its charter)



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

10990 Wilshire Boulevard

Los Angeles, California 90024

(310) 231-4000

(Address and telephone number of principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	o
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of August 31, 2014.

There were 91,806,488 shares of the registrant’s common stock, par value $1.00 per share, outstanding on August 31, 2014. The registrant’s grantor stock ownership trust held an additional 10,501,844 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 - Nine Months and Three Months Ended August 31, 2014 and 2013	3

Consolidated Balance Sheets - August 31, 2014 and November 30, 2013	4

Consolidated Statements of Cash Flows - Nine Months Ended August 31, 2014 and 2013	5

Notes to Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3. Quantitative and Qualitative Disclosures About Market Risk	65

Item 4. Controls and Procedures	65

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	65

Item 1A. Risk Factors	66

Item 6. Exhibits	67

SIGNATURES	68

INDEX OF EXHIBITS	69

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

KB HOME

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts – Unaudited)



	Nine Months Ended August 31,						Three Months Ended August 31,
	2014			2013			2014			2013
Total revenues	$	1,604,908		$	1,478,599		$	589,214		$	548,974
Homebuilding:
Revenues	$	1,596,894		$	1,470,404		$	586,231		$	545,800
Construction and land costs	(1,305,258		)	(1,232,644		)	(479,424		)	(446,381		)
Selling, general and administrative expenses	(205,715		)	(192,652		)	(72,897		)	(63,456		)
Operating income	85,921			45,108			33,910			35,963
Interest income	393			629			110			193
Interest expense	(26,289		)	(41,073		)	(6,455		)	(11,326		)
Equity in income (loss) of unconsolidated joint ventures	1,161			(1,658		)	(751		)	(656		)
Homebuilding pretax income	61,186			3,006			26,814			24,174
Financial services:
Revenues	8,014			8,195			2,983			3,174
Expenses	(2,563		)	(2,235		)	(859		)	(764		)
Equity in income (loss) of unconsolidated joint ventures	(289		)	1,081			(277		)	(6		)
Financial services pretax income	5,162			7,041			1,847			2,404
Total pretax income	66,348			10,047			28,661			26,578
Income tax benefit (expense)	(800		)	1,800			(300		)	700
Net income	$	65,548		$	11,847		$	28,361		$	27,278
Earnings per share:
Basic	$	.74		$	.14		$	.31		$	.32
Diluted	$	.68		$	.14		$	.28		$	.30
Weighted average shares outstanding:
Basic	88,389			82,261			91,793			83,714
Diluted	98,614			84,289			102,070			94,047
Cash dividends declared per common share	$	.0750		$	.0750		$	.0250		$	.0250

See accompanying notes.

KB HOME

CONSOLIDATED BALANCE SHEETS

(In Thousands – Unaudited)



	August 31, 2014			November 30, 2013
Assets
Homebuilding:
Cash and cash equivalents	$	297,058		$	530,095
Restricted cash	32,456			41,906
Receivables	117,425			75,749
Inventories	3,240,320			2,298,577
Investments in unconsolidated joint ventures	73,607			130,192
Other assets	118,162			107,076
	3,879,028			3,183,595
Financial services	8,363			10,040
Total assets	$	3,887,391		$	3,193,635

Liabilities and stockholders’ equity
Homebuilding:
Accounts payable	$	167,983		$	148,282
Accrued expenses and other liabilities	392,239			356,176
Mortgages and notes payable	2,580,800			2,150,498
	3,141,022			2,654,956
Financial services	1,802			2,593
Common stock	115,375			115,296
Paid-in capital	665,840			788,893
Retained earnings	540,755			481,889
Accumulated other comprehensive loss	(17,516		)	(17,516		)
Grantor stock ownership trust, at cost	(113,911		)	(113,911		)
Treasury stock, at cost	(445,976		)	(718,565		)
Total stockholders’ equity	744,567			536,086
Total liabilities and stockholders’ equity	$	3,887,391		$	3,193,635

See accompanying notes.

KB HOME

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands – Unaudited)



	Nine Months Ended August 31,
	2014			2013
Cash flows from operating activities:
Net income	$	65,548		$	11,847
Adjustments to reconcile net income to net cash used in operating activities:
Equity in (income) loss of unconsolidated joint ventures	(872		)	577
Distributions of earnings from unconsolidated joint ventures	—			1,638
Amortization of discounts and issuance costs	5,246			3,811
Depreciation and amortization	1,677			1,405
Stock-based compensation	5,959			3,596
Inventory impairments and land option contract abandonments	5,211			284
Changes in assets and liabilities:
Receivables	(27,754		)	(7,001		)
Inventories	(784,457		)	(491,002		)
Accounts payable, accrued expenses and other liabilities	20,388			72,315
Other, net	(7,608		)	1,071
Net cash used in operating activities	(716,662		)	(401,459		)
Cash flows from investing activities:
Contributions to unconsolidated joint ventures	(34,034		)	(10,056		)
Proceeds from sale of investment in unconsolidated joint venture	10,110			—
Purchases of property and equipment, net	(4,158		)	(1,359		)
Net cash used in investing activities	(28,082		)	(11,415		)
Cash flows from financing activities:
Change in restricted cash	9,450			731
Proceeds from issuance of debt	400,000			230,000
Payment of debt issuance costs	(5,448		)	(10,086		)
Payments on mortgages and land contracts due to land sellers and other loans	(23,292		)	(44,405		)
Proceeds from issuance of common stock, net	137,045			109,503
Issuance of common stock under employee stock plans	202			2,147
Payments of cash dividends	(6,682		)	(6,272		)
Stock repurchases	(46		)	(7,967		)
Net cash provided by financing activities	511,229			273,651
Net decrease in cash and cash equivalents	(233,515		)	(139,223		)
Cash and cash equivalents at beginning of period	532,523			525,688
Cash and cash equivalents at end of period	$	299,008		$	386,465

See accompanying notes.

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KB HOME

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	Basis of Presentation and Significant Accounting Policies

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

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly our consolidated financial position as of August 31, 2014, the results of our consolidated operations for the three months and nine months ended August 31, 2014 and 2013, and our consolidated cash flows for the nine months ended August 31, 2014 and 2013. The results of our consolidated operations for the three months and nine months ended August 31, 2014 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, 2013 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, 2013, which are contained in our Annual Report on Form 10-K for that period.

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

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make informed estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

Cash and Cash Equivalents and Restricted Cash. 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 $196.2 million at August 31, 2014 and $436.2 million at November 30, 2013. The majority of our cash and cash equivalents were invested in money market funds and interest-bearing bank deposit accounts.

Restricted cash at August 31, 2014 and November 30, 2013 consisted of cash deposited with various financial institutions that was required as collateral for our cash-collateralized letter of credit facilities (the “LOC Facilities”).

Comprehensive Income. Our comprehensive income was $28.4 million for the three months ended August 31, 2014 and $65.5 million for the nine months ended August 31, 2014. Our comprehensive income was $27.3 million for the three months ended August 31, 2013 and $11.8 million for the nine months ended August 31, 2013. Our comprehensive income for each of the three-month and nine-month periods ended August 31, 2014 and 2013 was equal to our net income for the same periods.

Recent Accounting Pronouncements. In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2013-11”), which states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. We believe the adoption of this guidance will not have a material impact on our consolidated financial statements.

In April 2014, the FASB issued Accounting Standards Update No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), which raises the threshold for a disposal to qualify as a discontinued operation

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	Basis of Presentation and Significant Accounting Policies (continued)

and requires new disclosures of both discontinued operations and certain other disposals that do not meet the new definition of a discontinued operation. It also allows an entity to present a discontinued operation even when it has continuing cash flows and significant continuing involvement with the disposed component. The amendments in ASU 2014-08 are effective prospectively for disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We believe the adoption of this guidance will not have a material effect on our consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification Topic No. 605, “Revenue Recognition,” most industry-specific guidance throughout the industry topics of the accounting standards codification, and some cost guidance related to construction-type and production-type contracts. ASU 2014-09 is effective for public entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In June 2014, the FASB issued Accounting Standards Update No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures” (“ASU 2014-11”), which requires repurchase-to-maturity transactions to be accounted for as secured borrowings, eliminates existing accounting guidance for repurchase financing arrangements, and expands disclosure requirements related to certain transfers of financial assets. ASU 2014-11 is effective for public entities for the first interim or annual period beginning after December 15, 2014. Early adoption is not permitted. We believe the adoption of this guidance will not have a material effect on our consolidated financial statements.

In June 2014, the FASB issued Accounting Standards Update No. 2014-12, “Compensation — Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification Topic No. 718, “Compensation — Stock Compensation” (“ASC 718”), as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. We believe the adoption of this guidance will not have a material effect on our consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. We believe the adoption of this guidance will not have a material effect on our consolidated financial statements.

Reclassifications. Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to the 2014 presentation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


2.	Segment Information

As of August 31, 2014, we had identified five operating reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment, within our consolidated operations in accordance with Accounting Standards Codification Topic No. 280, “Segment Reporting.” As of August 31, 2014, our homebuilding reporting segments conducted ongoing operations in the following states:

West Coast: California

Southwest: Arizona and Nevada

Central: Colorado, New Mexico and Texas

Southeast: Florida, Maryland, North Carolina and Virginia

Our homebuilding reporting segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to first-time, move-up and active adult homebuyers.

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

Our financial services reporting segment offers property and casualty insurance and, in certain instances, earthquake, flood and personal property insurance to our homebuyers in the same markets as our homebuilding reporting segments, and provides title services in the majority of our markets within our Central and Southeast homebuilding reporting segments. Prior to July 21, 2014, this segment also earned revenues pursuant to the terms of a marketing services agreement with Nationstar Mortgage LLC (“Nationstar”), which was our preferred mortgage lender that offered mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers who elected to use the lender. Our homebuyers may select any lender of their choice to obtain mortgage financing for the purchase of their home.

In 2013, we entered into an agreement with Nationstar to form Home Community Mortgage, LLC (“HCM”). We have a 49.9% ownership interest and Nationstar has a 50.1% ownership interest in HCM. On July 21, 2014, HCM began offering an array of mortgage banking services, including mortgage loan originations, to our homebuyers, with Nationstar providing management oversight of HCM’s operations. Nationstar continued as our preferred mortgage lender until HCM’s operational launch. HCM is accounted for as an unconsolidated joint venture within our financial services reporting segment.

Corporate and other is a non-operating segment that develops and implements company-wide strategic initiatives and provides support to our homebuilding reporting segments by centralizing certain administrative functions, such as promotional marketing, legal, purchasing administration, architecture, accounting, treasury, insurance and risk management, information technology and human resources, to benefit from economies of scale. Corporate and other includes general and administrative expenses related to operating our corporate headquarters. A portion of the expenses incurred by Corporate and other is allocated to the homebuilding reporting segments.

Our segments follow the same accounting policies used for our consolidated financial statements. The results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented, nor are they indicative of the results to be expected in future periods.

The following tables present financial information relating to our segments (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


2.	Segment Information (continued)



	Nine Months Ended August 31,						Three Months Ended August 31,
	2014			2013			2014			2013
Revenues:
West Coast	$	707,532		$	746,232		$	265,491		$	266,638
Southwest	144,597			126,515			50,101			47,437
Central	477,518			381,342			179,972			154,545
Southeast	267,247			216,315			90,667			77,180
Total homebuilding revenues	1,596,894			1,470,404			586,231			545,800
Financial services	8,014			8,195			2,983			3,174
Total	$	1,604,908		$	1,478,599		$	589,214		$	548,974

Pretax income (loss):
West Coast	$	93,599		$	75,469		$	39,270		$	37,607
Southwest	7,599			2,026			2,543			1,185
Central	24,806			11,569			11,514			9,085
Southeast	(9,881		)	(35,012		)	(7,965		)	(9,920		)
Corporate and other	(54,937		)	(51,046		)	(18,548		)	(13,783		)
Total homebuilding pretax income	61,186			3,006			26,814			24,174
Financial services	5,162			7,041			1,847			2,404
Total	$	66,348		$	10,047		$	28,661		$	26,578



Equity in income (loss) of unconsolidated joint ventures:
West Coast	$	(146	)	$	(109	)	$	(88	)	$	(36	)
Southwest	(1,984		)	(1,919		)	(663		)	(755		)
Central	—			—			—			—
Southeast	3,291			370			—			135
Total	$	1,161		$	(1,658	)	$	(751	)	$	(656	)



Inventory impairment charges:
West Coast	$	—	$	—	$	—	$	—
Southwest	—		—		—		—
Central	—		—		—		—
Southeast	3,408		—		3,408		—
Total	$	3,408	$	—	$	3,408	$	—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


2.	Segment Information (continued)



	Nine Months Ended August 31,				Three Months Ended August 31,
	2014		2013		2014		2013
Land option contract abandonments:
West Coast	$	554	$	284	$	451	$	—
Southwest	—		—		—		—
Central	995		—		562		—
Southeast	254		—		—		—
Total	$	1,803	$	284	$	1,013	$	—



	August 31, 2014		November 30, 2013
Inventories:
Homes under construction
West Coast	$	564,945	$	275,516
Southwest	55,003		39,661
Central	213,011		157,572
Southeast	149,646		113,690
Subtotal	982,605		586,439

Land under development
West Coast	744,570		560,032
Southwest	332,056		106,654
Central	340,340		238,311
Southeast	224,035		161,919
Subtotal	1,641,001		1,066,916

Land held for future development
West Coast	332,000		308,636
Southwest	129,394		157,924
Central	24,357		15,193
Southeast	130,963		163,469
Subtotal	616,714		645,222
Total	$	3,240,320	$	2,298,577

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


2.	Segment Information (continued)



	August 31, 2014		November 30, 2013
Investments in unconsolidated joint ventures:
West Coast	$	54,673	$	40,246
Southwest	16,433		80,877
Central	—		—
Southeast	2,501		9,069
Total	$	73,607	$	130,192

Assets:
West Coast	$	1,755,721	$	1,230,761
Southwest	554,082		402,443
Central	656,333		465,547
Southeast	536,251		456,965
Corporate and other	376,641		627,879
Total homebuilding assets	3,879,028		3,183,595
Financial services	8,363		10,040
Total	$	3,887,391	$	3,193,635


3.	Financial Services

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



	Nine Months Ended August 31,						Three Months Ended August 31,
	2014			2013			2014			2013
Revenues
Insurance commissions	$	4,364		$	4,677		$	1,832		$	1,887
Title services	2,503			2,165			904			836
Marketing services fees	1,147			1,350			247			450
Interest income	—			3			—			1
Total	8,014			8,195			2,983			3,174
Expenses
General and administrative	(2,563		)	(2,235		)	(859		)	(764		)
Operating income	5,451			5,960			2,124			2,410
Equity in income (loss) of unconsolidated joint ventures (a)	(289		)	1,081			(277		)	(6		)
Pretax income	$	5,162		$	7,041		$	1,847		$	2,404

(a)

Equity in loss of unconsolidated joint ventures for the three months and nine months ended August 31, 2014 primarily related to HCM. Equity in income of unconsolidated joint ventures for the nine months ended August 31, 2013 related to the wind down of KBA Mortgage, LLC (“KBA Mortgage”), our unconsolidated mortgage banking joint venture with a subsidiary of Bank of America, N.A., which ceased offering mortgage banking services in 2011.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


3.	Financial Services (continued)



	August 31, 2014		November 30, 2013
Assets
Cash and cash equivalents	$	1,950	$	2,428
Receivables	956		2,084
Investments in unconsolidated joint ventures	5,180		5,490
Other assets	277		38
Total assets	$	8,363	$	10,040
Liabilities
Accounts payable and accrued expenses	$	1,802	$	2,593
Total liabilities	$	1,802	$	2,593


4.	Earnings Per Share

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



	Nine Months Ended August 31,						Three Months Ended August 31,
	2014			2013			2014			2013
Numerator:
Net income	$	65,548		$	11,847		$	28,361		$	27,278
Less: Distributed earnings allocated to nonvested restricted stock	(18		)	(18		)	(6		)	(6		)
Less: Undistributed earnings allocated to nonvested restricted stock	(159		)	(16		)	(73		)	(73		)
Numerator for basic earnings per share	65,371			11,813			28,282			27,199
Effect of dilutive securities:
Interest expense and amortization of debt issuance costs associated with convertible senior notes, net of taxes	2,000			—			667			667
Add: Undistributed earnings allocated to nonvested restricted stock	159			16			73			73
Less: Undistributed earnings reallocated to nonvested restricted stock	(142		)	(14		)	(66		)	(65		)
Numerator for diluted earnings per share	$	67,388		$	11,815		$	28,956		$	27,874
Denominator:
Weighted average shares outstanding — basic	88,389			82,261			91,793			83,714
Effect of dilutive securities:
Share-based payments	1,823			2,028			1,875			1,931
Convertible senior notes	8,402			—			8,402			8,402
Weighted average shares outstanding — diluted	98,614			84,289			102,070			94,047
Basic earnings per share	$	.74		$	.14		$	.31		$	.32
Diluted earnings per share	$	.68		$	.14		$	.28		$	.30

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4.	Earnings Per Share (continued)

We compute earnings per share using the two-class method in accordance with Accounting Standards Codification Topic No. 260, “Earnings Per Share.” The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. Our outstanding nonvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities at August 31, 2014 or 2013.

In the first quarter of 2013, we issued $230.0 million in aggregate principal amount of 1.375% convertible senior notes due 2019 (the “1.375% Convertible Senior Notes due 2019”), which are initially convertible into shares of our common stock at a conversion rate of 36.5297 shares for each $1,000 principal amount of the notes. The impact of the 1.375% Convertible Senior Notes due 2019 was excluded from the diluted earnings per share calculation for the nine months ended August 31, 2013 because the effect would have been antidilutive.

Outstanding stock options to purchase 5.2 million shares of common stock were excluded from the diluted earnings per share calculation for the three-month and nine-month periods ended August 31, 2014 and 2013 because the effect of their inclusion would be antidilutive. Contingently issuable shares associated with outstanding performance-based restricted stock units (each a “PSU”) were not included in the earnings per share calculations for the three-month and nine-month periods ended August 31, 2014 and 2013 as the vesting conditions had not been satisfied.


5.	Inventories

Inventories consisted of the following (in thousands):



	August 31, 2014		November 30, 2013
Homes under construction	$	982,605	$	586,439
Land under development	1,641,001		1,066,916
Land held for future development	616,714		645,222
Total	$	3,240,320	$	2,298,577

Interest is capitalized to inventories while the related communities are being actively developed and until homes are completed. Capitalized interest is amortized to construction and land costs as the related inventories are delivered to homebuyers. Interest and real estate taxes are not capitalized on land held for future development.

Our interest costs are as follows (in thousands):



	Nine Months Ended August 31,						Three Months Ended August 31,
	2014			2013			2014			2013
Capitalized interest at beginning of period	$	216,681		$	217,684		$	241,583		$	215,577
Interest incurred	127,041			102,256			44,603			34,345
Interest expensed	(26,289		)	(41,073		)	(6,455		)	(11,326		)
Interest amortized to construction and land costs	(59,471		)	(62,943		)	(21,769		)	(22,672		)
Capitalized interest at end of period (a)	$	257,962		$	215,924		$	257,962		$	215,924


(a)	Capitalized interest amounts presented in the table reflect the gross amount of capitalized interest, as inventory impairment charges recognized, if any, are not generally allocated to specific components of inventory.


6.	Inventory Impairments and Land Option Contract Abandonments

Each community or land parcel in our owned inventory is assessed on a quarterly basis to determine if indicators of potential impairment exist. In accordance with Accounting Standards Codification Topic No. 360, “Property, Plant, and

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6.	Inventory Impairments and Land Option Contract Abandonments (continued)

Equipment” (“ASC 360”), we record an inventory impairment charge when indicators of potential impairment exist and the carrying value of a real estate asset is greater than the undiscounted future net cash flows the asset is expected to generate. These real estate assets are written down to fair value, which is primarily based on the estimated future net cash flows discounted for inherent risk associated with each such asset. We evaluated 20 and 16 communities or land parcels for recoverability during the three months ended August 31, 2014 and 2013, respectively. We evaluated 42 and 54 communities or land parcels for recoverability during the nine months ended August 31, 2014 and 2013, respectively. Some of the communities or land parcels evaluated during the nine months ended August 31, 2014 and 2013 were evaluated in more than one quarterly period.

Based on the results of our evaluations, we recognized $3.4 million of inventory impairment charges for the three months and nine months ended August 31, 2014 associated with a planned future sale of our last remaining land parcel in Atlanta, Georgia, a former market where we do not have ongoing operations. We decided to change our strategy with regard to this land parcel in the third quarter of 2014 and monetize this property through a land sale, rather than build and sell homes on the parcel as we had previously intended. This land sale is expected to close in the 2014 fourth quarter. We had no inventory impairment charges in the three months and nine months ended August 31, 2013.

As of August 31, 2014, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $292.0 million, representing 34 communities and various other land parcels. As of November 30, 2013, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $293.1 million, representing 42 communities and various other land parcels.

Our inventory controlled under land option contracts and other similar contracts is assessed on a quarterly basis to determine whether it continues to meet our internal investment and marketing standards. When a decision is made not to exercise certain land option contracts and other similar contracts due to market conditions and/or changes in our strategy, we write off the related inventory costs, including non-refundable deposits and unrecoverable pre-acquisition costs. Based on the results of our assessments, we recognized $1.0 million of land option contract abandonment charges corresponding to 624 lots for the three months ended August 31, 2014, and $1.8 million of such charges corresponding to 1,306 lots for the nine months ended August 31, 2014. We had no land option contract abandonment charges for the three months ended August 31, 2013 and $.3 million of such charges corresponding to 82 lots for the nine months ended August 31, 2013. We sometimes abandon land option contracts and other similar contracts when we have incurred costs of less than $100,000; such costs and the corresponding lots, which totaled 7,018 lots for the nine months ended August 31, 2014 and 4,681 lots for the nine months ended August 31, 2013, are not included in the amounts above.

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, we estimate our inventory assets’ remaining operating lives under current and expected future market conditions to range generally from one year to in excess of 10 years. Based on current market conditions and anticipated home delivery timelines, we expect to realize, on an overall basis, the majority of our current inventory balance within five years.

Due to the judgment and assumptions applied in the estimation process with respect to inventory impairments, land option contract abandonments, the remaining operating lives of our inventory assets and the realization of our inventory balances, it is possible that actual results could differ substantially from those estimated.


7.	Variable Interest Entities

We participate in joint ventures from time to time that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. Our investments in these joint ventures may create a variable interest in a variable interest entity (“VIE”), depending on the contractual terms of the arrangement. We analyze our joint ventures in accordance with Accounting Standards Codification Topic No. 810, “Consolidation” (“ASC 810”), to determine whether they are VIEs and, if so, whether we are the primary beneficiary. None of our joint ventures at August 31, 2014 and November 30, 2013 were determined under the provisions of ASC 810 to be VIEs. All of our joint ventures were unconsolidated and accounted for under the equity method because we did not have a controlling financial interest.

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7. Variable Interest Entities (continued)

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. The use of such land option contracts and other similar contracts to control land generally allows us to reduce the market risks associated with direct land ownership and development, and to reduce our capital and financial commitments, including interest and other carrying costs. Under such contracts, we typically pay a specified option or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price.

We analyze each of our land option contracts and other similar contracts under the provisions of ASC 810 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, ASC 810 requires us to consolidate a VIE if we are the primary beneficiary. In determining whether we are the primary beneficiary, we consider, among other things, whether we have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Such activities would include, among other things, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. As a result of our analyses, we determined that as of August 31, 2014 and November 30, 2013 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. In accordance with ASC 810, 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):



	August 31, 2014				November 30, 2013
	Cash Deposits		Aggregate Purchase Price		Cash Deposits		Aggregate Purchase Price
Unconsolidated VIEs	$	11,966	$	452,258	$	11,063	$	616,000
Other land option contracts and other similar contracts	28,499		451,871		30,502		535,496
Total	$	40,465	$	904,129	$	41,565	$	1,151,496

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 $50.1 million at August 31, 2014 and $31.0 million at November 30, 2013. These pre-acquisition costs and cash deposits were included in inventories in our consolidated balance sheets. We also had outstanding letters of credit of $.1 million at both August 31, 2014 and November 30, 2013 in lieu of cash deposits under certain land option contracts and other similar contracts.

We also evaluate our land option contracts and other similar contracts for financing arrangements in accordance with Accounting Standards Codification Topic No. 470, “Debt” (“ASC 470”), 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 $4.0 million at August 31, 2014 and $8.9 million at November 30, 2013.


8.	Investments in Unconsolidated Joint Ventures

We have investments in unconsolidated joint ventures that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. We and our unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis, equal to our respective equity interests. The obligations to make capital contributions are governed by each such unconsolidated joint venture’s respective operating agreement and related governing documents.

We share in the profits and losses of these unconsolidated joint ventures generally in accordance with our respective equity interests. In some instances, we recognize profits and losses related to our investment in an unconsolidated joint venture that differ from our equity interest in the unconsolidated joint venture. This may arise from impairments that we recognize related to our investment that differ from the impairments the unconsolidated joint venture recognizes with respect to the unconsolidated joint venture’s assets; differences between our basis in assets we have transferred to the unconsolidated joint venture and the unconsolidated joint venture’s basis in those assets; our deferral of the unconsolidated joint venture earnings from land sales made to our homebuilding operations; or other items. With respect to our investments in unconsolidated joint

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8.	Investments in Unconsolidated Joint Ventures (continued)

ventures, our equity in income (loss) of unconsolidated joint ventures included no impairment charges for the three-month and nine-month periods ended August 31, 2014 and 2013.

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



	Nine Months Ended August 31,						Three Months Ended August 31,
	2014			2013			2014			2013
Revenues	$	6,118		$	11,908		$	—		$	5,552
Construction and land costs	(3,523		)	(7,391		)	—			(3,463		)
Other expense, net	(3,088		)	(3,074		)	(1,050		)	(1,183		)
Income (loss)	$	(493	)	$	1,443		$	(1,050	)	$	906

The revenues and construction and land costs for the nine months ended August 31, 2014 and the three months and nine months ended August 31, 2013 were solely related to the sale of land by one of our unconsolidated joint ventures.

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



	August 31, 2014		November 30, 2013
Assets
Cash	$	22,040	$	18,752
Receivables	4,872		4,902
Inventories	148,899		381,195
Other assets	149		1,183
Total assets	$	175,960	$	406,032
Liabilities and equity
Accounts payable and other liabilities	$	11,973	$	85,386
Equity	163,987		320,646
Total liabilities and equity	$	175,960	$	406,032

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



	August 31, 2014		November 30, 2013
Number of investments in unconsolidated joint ventures	7		9
Investments in unconsolidated joint ventures	$	73,607	$	130,192
Number of unconsolidated joint venture lots controlled under land option contracts and other similar contracts	678		5,367

As of August 31, 2014, the combined assets of our unconsolidated joint ventures and the number of unconsolidated joint venture lots controlled under land option contracts and other similar contracts each decreased from November 30, 2013, largely due to distributions of $81.7 million of land and land development we received from Inspirada Builders, LLC (“Inspirada”),

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8.	Investments in Unconsolidated Joint Ventures (continued)

an unconsolidated joint venture near Las Vegas, Nevada, during the nine months ended August 31, 2014. In addition, we sold our interest in an unconsolidated joint venture in Maryland for $10.1 million, which resulted in a gain of $3.2 million in the first quarter of 2014 that was included in equity in income (loss) of unconsolidated joint ventures in our consolidated statement of operations for the nine months ended August 31, 2014. The decrease in the combined assets of our unconsolidated joint ventures also reflected the transfer of a $33.2 million inventory-related obligation to us in connection with the distribution of land we received from Inspirada, as discussed in Note 10. Accrued Expenses and Other Liabilities. This transfer also contributed to the decrease in the combined accounts payable and other liabilities of our unconsolidated joint ventures during the nine months ended August 31, 2014. None of our unconsolidated joint ventures had outstanding debt at August 31, 2014 or November 30, 2013.

The decrease in our investments in unconsolidated joint ventures at August 31, 2014 compared to November 30, 2013 reflected the above-mentioned transactions, partly offset by capital contributions we made to several of our unconsolidated joint ventures.


9.	Other Assets

Other assets consisted of the following (in thousands):



	August 31, 2014		November 30, 2013
Cash surrender value of insurance contracts	$	70,763	$	68,534
Debt issuance costs	28,601		27,366
Property and equipment, net	10,936		8,460
Prepaid expenses	7,862		2,716
Total	$	118,162	$	107,076


10.	Accrued Expenses and Other Liabilities

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



	August 31, 2014		November 30, 2013
Employee compensation and related benefits	$	100,033	$	99,332
Self-insurance and other litigation liabilities	91,326		99,612
Accrued interest payable	71,539		45,562
Inventory-related obligations (a)	53,708		29,517
Warranty liability	42,396		48,704
Real estate and business taxes	10,639		8,131
Other	22,598		25,318
Total	$	392,239	$	356,176

(a)

The inventory-related obligations at August 31, 2014 included a $33.2 million liability we recorded for fixed or determinable amounts associated with tax increment financing entities (“TIFE”) in connection with the distribution of land we received from Inspirada during the first quarter of 2014. As homes are delivered, the obligation to pay the remaining TIFE assessments associated with each underlying lot is transferred to the homebuyer. As such, these assessment obligations will be paid by us only to the extent we do not deliver homes to homebuyers on the applicable lots before the related TIFE obligations mature.

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11.	Income Taxes

Income Tax Benefit (Expense). We recognized income tax expense of $.3 million for the three months ended August 31, 2014 and an income tax benefit of $.7 million for the three months ended August 31, 2013. For the nine months ended August 31, 2014, we recognized income tax expense of $.8 million, compared to an income tax benefit of $1.8 million for the nine months ended August 31, 2013. The income tax benefit for the three months ended August 31, 2013 reflected the recognition of unrecognized tax benefits associated with the expiration of a state statute of limitations. The income tax benefit for the nine months ended August 31, 2013 primarily reflected the resolution of a state tax audit in the second quarter of 2013, which resulted in a refund receivable of $1.4 million, as well as the recognition of unrecognized tax benefits of $.9 million. Due to the effects of the deferred tax asset valuation allowance, our effective tax rates for the three-month and nine-month periods ended August 31, 2014 and 2013 are not meaningful items as our income tax amounts are not directly correlated to the amount of our pretax income for those periods.

Deferred Tax Asset Valuation Allowance. In accordance with Accounting Standards Codification Topic No. 740, “Income Taxes” (“ASC 740”), we evaluate our deferred tax assets quarterly to determine if adjustments to the valuation allowance are required. ASC 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available positive and negative evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income. The value of our deferred tax assets will depend on applicable income tax rates. During the three months and nine months ended August 31, 2014, we reduced our deferred tax asset valuation allowance by $11.6 million and $27.0 million, respectively, to account for adjustments to our deferred tax assets associated with the pretax income generated during those periods. Our deferred tax asset valuation allowance remained unchanged during the three months ended August 31, 2013. During the nine months ended August 31, 2013, we reduced our deferred tax asset valuation allowance by $.4 million to account for adjustments to our deferred tax assets associated with the vesting of equity-based awards in that period.

One of the primary pieces of negative evidence that we have considered in evaluating the need for a valuation allowance has been our three-year cumulative loss position, which was largely the result of our pretax losses in 2012 and 2011. As a result of generating pretax income for the year ended November 30, 2013 and for the nine months ended August 31, 2014, we emerged from our three-year cumulative loss position in the 2014 third quarter with a three-year cumulative income position of $37.1 million as of August 31, 2014. Additionally, in the third quarter of 2014, we reported our fifth consecutive quarter of pretax income and experienced year-over-year increases in our revenues, housing gross profit margin, net orders and backlog. If these trends in our business continue, together with favorable conditions in housing markets and for the homebuilding industry, and we are profitable on a sustained basis, we believe that there could be sufficient positive evidence to support reducing a large portion of our valuation allowance in the fourth quarter of 2014.

We had no net deferred tax assets at August 31, 2014 or November 30, 2013 as we maintained a full valuation allowance against our deferred tax assets. The deferred tax asset valuation allowance decreased to $832.4 million at August 31, 2014 from $859.4 million at November 30, 2013, reflecting the $27.0 million valuation allowance adjustment recorded during the nine months ended August 31, 2014.

Unrecognized Tax Benefits. At both August 31, 2014 and November 30, 2013, our gross unrecognized tax benefits (including interest and penalties) totaled $.3 million, all of which, if recognized, would affect our effective tax rate. We anticipate that these gross unrecognized tax benefits will decrease by an amount ranging from $.1 million to $.3 million during the 12 months from this reporting date due to various state tax filings associated with the resolution of a federal tax audit. Our fiscal years ending 2010 and later are open to federal examinations. Due to differing statutes of limitation and the status of current audits, certain of our fiscal years ending 2009 and later are open to state examinations.

The benefits of our net operating losses (“NOL”), built-in losses and tax credits would be reduced or potentially eliminated if we experienced an “ownership change” under Internal Revenue Code Section 382 (“Section 382”). Based on our analysis performed as of August 31, 2014, we do not believe we have experienced an ownership change as defined by Section 382, and, therefore, the NOL, built-in losses and tax credits we have generated should not be subject to a Section 382 limitation as of this reporting date.

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12.	Mortgages and Notes Payable

Mortgages and notes payable consisted of the following (in thousands):



	August 31, 2014		November 30, 2013
Mortgages and land contracts due to land sellers and other loans	$	42,884	$	13,615
6 1/4% Senior notes due June 15, 2015	199,884		199,864
9.10% Senior notes due September 15, 2017	262,553		262,048
7 1/4% Senior notes due June 15, 2018	299,366		299,261
4.75% Senior notes due May 15, 2019	400,000		—
8.00% Senior notes due March 15, 2020	346,113		345,710
7.00% Senior notes due December 15, 2021	450,000		450,000
7.50% Senior notes due September 15, 2022	350,000		350,000
1.375% Convertible senior notes due February 1, 2019	230,000		230,000
Total	$	2,580,800	$	2,150,498

Unsecured Revolving Credit Facility. We have a $200.0 million unsecured revolving credit facility with a syndicate of financial institutions (as amended, the “Credit Facility”) that will mature on March 12, 2016. The Credit Facility contains an uncommitted accordion feature under which its aggregate principal amount can be increased to up to $300.0 million under certain conditions and the availability of additional bank commitments, as well as a sublimit of $100.0 million for the issuance of letters of credit, which may be utilized in combination with or to replace the LOC Facilities. Interest on amounts borrowed under the Credit Facility is payable quarterly in arrears at a rate based on either the London Interbank Offered Rate or a base rate, plus a spread that depends on our debt rating and consolidated leverage ratio (“Leverage Ratio”), as defined under the Credit Facility. The Credit Facility also requires the payment of a commitment fee ranging from .50% to .75% of the unused commitment, based on our debt rating and Leverage Ratio. Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants relating to our consolidated tangible net worth, Leverage Ratio, and either an interest coverage ratio or a minimum level of liquidity, each as defined therein. The amount of the Credit Facility available for cash borrowings 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 August 31, 2014, we had no cash borrowings or letters of credit outstanding under the Credit Facility and we had $200.0 million available for cash borrowings, with up to $100.0 million of that amount available for the issuance of letters of credit.

LOC Facilities. We maintain the LOC Facilities with various financial institutions to obtain letters of credit in the ordinary course of operating our business. As of August 31, 2014 and November 30, 2013, we had $31.9 million and $41.5 million, respectively, of letters of credit outstanding under the LOC Facilities. The LOC Facilities require us to deposit and maintain cash with the issuing financial institutions as collateral for our letters of credit outstanding. We may maintain, revise or, if necessary or desirable, enter into additional or expanded letter of credit facilities, or other similar facility arrangements, with the same or other financial institutions.

Mortgages and Land Contracts Due to Land Sellers and Other Loans. As of August 31, 2014, inventories having a carrying value of $125.1 million were pledged to collateralize mortgages and land contracts due to land sellers and other loans totaling $42.9 million.

Shelf Registration. On July 18, 2014, we filed an automatically effective universal shelf registration statement (the “2014 Shelf Registration”) with the SEC. The 2014 Shelf Registration registers the offering of debt and equity securities that we may issue from time to time in amounts to be determined. The 2014 Shelf Registration replaced our previously effective shelf registration statement filed with the SEC on September 20, 2011 (the “2011 Shelf Registration”).

Senior Notes. On March 25, 2014, pursuant to the 2011 Shelf Registration, we completed the underwritten public issuance of the 4.75% senior notes due 2019 (the “4.75% Senior Notes due 2019”) at 100% of the $400.0 million in aggregate principal amount of these notes. We used the $394.6 million in net proceeds from the issuance of the 4.75% Senior Notes due 2019

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12.	Mortgages and Notes Payable (continued)

together with the net proceeds from a concurrent underwritten public offering of our common stock, which is discussed in Note 16. Stockholders’ Equity, for general corporate purposes, including without limitation land acquisition and land development.

All of our senior notes outstanding at August 31, 2014 and November 30, 2013 represent senior unsecured obligations and rank equally in right of payment with all of our existing and future indebtedness. Interest on each of these senior notes is payable semi-annually. At our option, these notes may be redeemed, in whole at any time or from time to time in part, at a redemption price equal to the greater of (a) 100% of the principal amount of the notes being redeemed and (b) the sum of the present values of the remaining scheduled payments of principal and interest on the notes being redeemed discounted to the redemption date at a defined rate, plus, in each case, accrued and unpaid interest on the notes being redeemed to the applicable redemption date.

Convertible Senior Notes. On January 29, 2013 and February 4, 2013, pursuant to the 2011 Shelf Registration, we issued in an underwritten public offering the 1.375% Convertible Senior Notes due 2019 at 100% of the $230.0 million in aggregate principal amount of these notes. The issuance on February 4, 2013 was made pursuant to the exercise of an option granted to the underwriters to purchase such notes to cover over-allotments. Interest on the 1.375% Convertible Senior Notes due 2019, which represent senior unsecured obligations of ours and rank equally in right of payment with all of our other senior unsecured indebtedness, is payable semi-annually in arrears on February 1 and August 1. We will also pay interest on November 1, 2018. The 1.375% Convertible Senior Notes due 2019 will mature on February 1, 2019, unless converted earlier by the holders, at their option, or redeemed by us, or purchased by us at the option of the holders following the occurrence of a fundamental change, as defined in the instruments governing the 1.375% Convertible Senior Notes due 2019.

At any time prior to the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their 1.375% Convertible Senior Notes due 2019. The 1.375% Convertible Senior Notes due 2019 are initially convertible into shares of our common stock at a conversion rate of 36.5297 shares for each $1,000 principal amount of the notes, which represents an initial conversion price of approximately $27.37 per share. This initial conversion rate equates to 8,401,831 shares of our common stock. The conversion rate is subject to adjustment upon the occurrence of certain events, including: subdivisions and combinations of our common stock; the issuance of stock dividends, or certain rights, options or warrants, capital stock, indebtedness, assets or cash dividends to all or substantially all holders of our common stock; and certain tender or exchange offers by us. The conversion rate will not, however, be adjusted for other events, such as a third party tender or exchange offer or an issuance of common stock for cash or an acquisition, that may adversely affect the trading price of the notes or our common stock. On conversion, holders of the 1.375% Convertible Senior Notes due 2019 will not be entitled to receive cash in lieu of shares of our common stock, except for cash in lieu of fractional shares.

We may not redeem the 1.375% Convertible Senior Notes due 2019 prior to November 6, 2018. On or after November 6, 2018, and prior to the stated maturity date, we may at our option redeem all or part of the 1.375% Convertible Senior Notes due 2019 for a cash price equal to 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest to, but not including, the redemption date. If a fundamental change, as defined in the instruments governing the 1.375% Convertible Senior Notes due 2019, occurs prior to the stated maturity date, the holders may require us to purchase for cash all or any portion of their 1.375% Convertible Senior Notes due 2019 at 100% of the principal amount of the notes, plus accrued and unpaid interest to, but not including, the fundamental change purchase date.

We used the $222.7 million in net proceeds from the issuance of the 1.375% Convertible Senior Notes due 2019 together with the net proceeds from a concurrent underwritten public offering of our common stock, which is described in Note 16. Stockholders’ Equity, for general corporate purposes, including without limitation land acquisition and land development.

The indenture governing the senior notes and the 1.375% Convertible Senior Notes due 2019 does not contain any financial covenants. Subject to specified exceptions, the indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale-leaseback transactions involving property or assets above a certain specified value. In addition, the 1.375% Convertible Senior Notes due 2019 and all of the senior notes (with the exception of the 6 1/4% senior notes due 2015 and the 7 1/4% senior notes due 2018) contain certain limitations related to mergers, consolidations, and sales of assets.

As of August 31, 2014, we were in compliance with the applicable terms of all our covenants under the Credit Facility, the senior notes, the 1.375% Convertible Senior Notes due 2019, the indenture, and the mortgages and land contracts due to land

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12.	Mortgages and Notes Payable (continued)

sellers and other loans. Our ability to access the Credit Facility for cash borrowings and letters of credit and our ability to secure future debt financing depend, in part, on our ability to remain in such compliance.

Principal payments on the senior notes, the 1.375% Convertible Senior Notes due 2019, the mortgages and land contracts due to land sellers and other loans are due as follows: 2014 – $10.3 million; 2015 – $218.4 million; 2016 – $14.1 million; 2017 – $262.6 million; 2018 – $299.4 million; and thereafter – $1.78 billion.


13.	Fair Value Disclosures

Accounting Standards Codification Topic No. 820, “Fair Value Measurement,” provides a framework for measuring the fair value of assets and liabilities under GAAP, and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows:



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 the carrying value is not recoverable. The following table presents the fair value hierarchy and our assets measured at fair value on a nonrecurring basis for the nine months ended August 31, 2014 and the year ended November 30, 2013 (in thousands):



	Fair Value
Description	Hierarchy	August 31, 2014		November 30, 2013
Inventories (a)	Level 2	$	6,421	$	—
Inventories (a)	Level 3	—		1,143
Total		$	6,421	$	1,143


(a)	Amounts represent the aggregate fair value for communities or land parcels where we recognized inventory impairment charges during the period, as of the date that the fair value measurements were made. The carrying value for these communities or land parcels may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date.

During the nine months ended August 31, 2014, inventories with a carrying value of $9.8 million were written down to their fair value of $6.4 million, resulting in inventory impairment charges of $3.4 million. The inventory impairment charges were associated with a planned future sale of our last remaining land parcel in Atlanta, Georgia, a former market where we do not have ongoing operations. During the year ended November 30, 2013, inventories with a carrying value of $1.5 million were written down to their fair value of $1.1 million, resulting in inventory impairment charges of $.4 million.

The fair values for inventories that were determined using Level 2 inputs were based on an executed contract. The fair values for inventories that were determined using Level 3 inputs were primarily based on the estimated future net cash flows discounted for inherent risk associated with each underlying asset.

Our financial instruments consist of cash and cash equivalents, restricted cash, senior notes, the 1.375% Convertible Senior Notes due 2019, and mortgages and land contracts due to land sellers and other loans. Fair value measurements of financial

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13.	Fair Value Disclosures (continued)

instruments are determined by various market data and other valuation techniques as appropriate. When available, we use quoted market prices in active markets to determine fair value.

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



		August 31, 2014				November 30, 2013
	Fair Value Hierarchy	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Liabilities:
Senior notes	Level 2	$	2,307,916	$	2,503,228	$	1,906,883	$	2,069,325
Convertible senior notes	Level 2	230,000		228,850		230,000		224,825

The fair values of our senior notes and the 1.375% Convertible Senior Notes due 2019 are generally estimated based on quoted market prices for these instruments. The carrying values reported for cash and cash equivalents, restricted cash, and mortgages and land contracts due to land sellers and other loans approximate fair values.


14.	Commitments and Contingencies

Commitments and contingencies include typical obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business.

Warranty. We provide a limited warranty on all of our homes. The specific terms and conditions of our limited warranty program vary depending upon the markets in which we do business. We generally provide a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and certain other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home. Our limited warranty program is ordinarily how we respond to and account for homeowners’ requests to local division offices seeking repairs, including claims where we could have liability under applicable state statutes or tort law for a defective condition in or damages to a home.

We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience. Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our accrued warranty liability, which is included in accrued expenses and other liabilities in our consolidated balance sheets, and adjust the amount as necessary based on our assessment. Our assessment includes the review of our actual warranty costs incurred to identify trends and changes in our warranty claims experience, and considers our home construction quality, customer service initiatives and outside events. While we believe the warranty liability reflected in our consolidated balance sheets to be adequate, unanticipated changes or developments in the legal environment, local weather, land or environmental conditions, quality of materials or methods used in the construction of homes or customer service practices could have a significant impact on our actual warranty costs in future periods and such amounts could differ from our current estimates.

The changes in our warranty liability are as follows (in thousands):

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	Nine Months Ended August 31,						Three Months Ended August 31,
	2014			2013			2014			2013
Balance at beginning of period	$	48,704		$	47,822		$	40,937		$	53,475
Warranties issued	12,332			10,052			4,546			3,733
Payments	(30,795		)	(30,867		)	(10,633		)	(12,654		)
Adjustments (a)	12,155			23,478			7,546			5,931
Balance at end of period	$	42,396		$	50,485		$	42,396		$	50,485

(a)

As discussed below, adjustments for the three months and nine months ended August 31, 2014 were primarily comprised of a reclassification of estimated minimum probable recoveries to receivables and a reclassification to establish a separate accrual for a water intrusion-related inquiry. These items had no impact on our consolidated statements of operations. Adjustments for the three months and nine months ended August 31, 2013 reflected net warranty charges associated with water intrusion-related issues in central and southwest Florida.

Central and Southwest Florida Claims. Our overall warranty liability at August 31, 2014 included $14.7 million for estimated remaining repair costs associated with 363 homes in central and southwest Florida that have been identified as having water intrusion-related issues and estimated repair costs associated with similarly affected homes in central and southwest Florida that we believe are likely to be identified in the future. Our overall warranty liability at November 30, 2013 included $28.9 million for estimated remaining repair costs associated with 710 identified affected homes and estimated repair costs associated with similarly affected homes then-believed likely to be identified in the future. The decrease in the liability for such estimated repair costs during the nine months ended August 31, 2014 reflected payments made during the period to repair affected homes and a lower number of identified affected homes with unresolved repairs at August 31, 2014, compared to November 30, 2013. The $14.7 million included in our overall warranty liability as of August 31, 2014 encompasses what we believe is the probable overall cost of the repair effort remaining before insurance and other recoveries. However, our actual costs to fully resolve repairs on affected homes could differ from the overall costs we have estimated.

During the nine months ended August 31, 2014, repairs were resolved on 483 identified affected homes and we identified 136 additional affected homes, most of which were in one attached-home community. For these purposes, we consider repairs for identified affected homes to be resolved when all repairs are completed and all repair costs are fully paid.

During the three months ended August 31, 2014 and 2013, we paid $7.2 million and $10.0 million, respectively, to repair identified affected homes. During the nine months ended August 31, 2014 and 2013, we paid $21.3 million and $21.4 million, respectively. Since first identifying affected homes in late 2012, we have identified a total of 1,600 affected homes requiring more than minor repairs and resolved repairs on 1,237 of those homes through August 31, 2014. As of August 31, 2014, we had paid $58.0 million of the total costs of $72.7 million that we have estimated for the overall repair effort. Approximately 64% of the total estimated repair costs as of August 31, 2014 related to three attached-home communities. We anticipate resolving repairs on homes affected by the water intrusion-related issues by mid-2015.

As of August 31, 2014, based on our assessment of the water intrusion-related issues, we believe it is probable that we will recover a portion of our repair costs associated with affected homes from various sources, including our insurers, and subcontractors involved with the original construction of the homes and their insurers. During the three months ended August 31, 2014, we collected $.5 million of recoveries. As of August 31, 2014, our estimated minimum probable recoveries totaled $27.0 million, of which $14.7 million was included in our overall warranty liability and the remainder was included in receivables. As of November 30, 2013, the estimated minimum probable recoveries, all of which were included in our warranty liability, totaled $19.4 million. Our assessment of the water intrusion-related issues, including the process of determining potentially responsible parties and our efforts to obtain recoveries, is ongoing, and as a result, our estimate of minimum probable recoveries may change as additional information is obtained.

Overall Warranty Liability Assessment. In assessing our overall warranty liability at a reporting date, we evaluate the costs for warranty-related items on a combined basis for all of our previously delivered homes that are under our limited warranty, which would include homes in central and southwest Florida that have been or may in the future be identified as having water intrusion-related issues. Based on our assessment of our overall warranty liability as of August 31, 2014, we recorded an

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14.	Commitments and Contingencies (continued)

adjustment to reflect an increase in our estimated remaining repair costs for identified affected homes during the 2014 third quarter. We also recorded an adjustment to increase our estimated minimum probable recoveries during the three months ended August 31, 2014 based on our updated estimate of repair costs on identified affected homes. These items had no net impact on our consolidated statements of operations for the three months ended August 31, 2014. In addition, due to payments we have made for repair costs on identified affected homes and an increase to the estimated minimum probable recoveries recorded during the third quarter of 2014, the estimated minimum probable recoveries as of August 31, 2014 exceeded the estimated remaining repair costs in our warranty liability associated with these water intrusion-related issues. Therefore, we reclassified $7.2 million of estimated minimum probable recoveries, that were in excess of the $14.7 million estimated remaining repair costs associated with water intrusion-related issues, to a receivable during the three months ended August 31, 2014.

For the nine months ended August 31, 2014, we recorded adjustments to increase our warranty liability mainly to reflect additional affected homes identified at one attached-home community and our updated estimate of remaining repair costs, with a corresponding charge to construction and land costs in our consolidated statement of operations. We also recorded adjustments to increase our estimated minimum probable recoveries during the nine months ended August 31, 2014 based on our updated estimate of repair costs on identified affected homes. These items had no net impact on our consolidated statements of operations for the nine months ended August 31, 2014. In addition, due to payments we have made for repair costs on identified affected homes and an increase to the estimated minimum probable recoveries recorded during the nine months ended August 31, 2014, the estimated minimum probable recoveries exceeded the estimated remaining repair costs in our warranty liability associated with these water intrusion-related issues. Therefore, during the second and third quarters of 2014, we reclassified a total of $12.8 million of estimated minimum probable recoveries, that were in excess of the then-estimated remaining repair costs associated with water intrusion-related issues, to a receivable.

During the three months ended August 31, 2013, based on our assessment of our overall warranty liability, we recorded an adjustment to increase our overall warranty liability by $5.9 million with a corresponding charge to construction and land costs in our consolidated statement of operations. This adjustment reflected our then-current estimate of remaining repair costs associated with homes in central and southwest Florida that had been identified as having water intrusion-related issues and our estimate of repair costs associated with similarly affected homes in central and southwest Florida then-believed likely to be identified in the future, net of an increase in estimated minimum probable recoveries of such repair costs. Prior to the three months ended May 31, 2013, we were unable to estimate the repair costs associated with affected homes in central and southwest Florida that were likely to be identified in the future. For the nine months ended August 31, 2013, we recorded adjustments to increase our warranty liability by $23.5 million with a corresponding charge to construction and land costs in our consolidated statement of operations. These adjustments were comprised of increases in our estimated warranty costs, net of estimated minimum probable recoveries of repair costs and other adjustments.

Depending on the number of additional homes in central and southwest Florida that are identified as having water intrusion-related issues, and the actual costs we incur in future periods to repair identified homes and/or homes affected by other issues, including costs to provide certain affected homeowners with temporary housing, we may revise the amount of our estimated liability, which could result in an increase or decrease in our overall warranty liability. Based on our assessment of the water intrusion-related issues in central and southwest Florida, we believe that our warranty liability is adequate to cover the estimated probable total repair costs on these affected homes and on homes affected by other issues, though we believe it is reasonably possible that our loss in this matter could exceed the amount accrued as of August 31, 2014 by up to $6 million.

In 2013, we were notified by the Office of the Attorney General of the State of Florida (the “Attorney General’s Office”) that it was making a preliminary inquiry into the status of our communities in Florida affected by water intrusion-related issues. We are cooperating with the Attorney General’s Office inquiry and are in discussions to resolve its concerns. While the ultimate outcome of the inquiry is uncertain, based on the status of our discussions, we established an accrual for the estimated minimum probable loss with respect to this inquiry during the second quarter of 2014 and maintained the accrual as of August 31, 2014. At this stage of our discussions, we are unable to estimate the reasonably possible loss or range of loss, but do not believe the ultimate outcome will be material to our consolidated financial statements.

Guarantees. In the normal course of our business, we issue certain representations, warranties and guarantees related to our home sales and land sales that may be affected by Accounting Standards Codification Topic No. 460, “Guarantees.” Based

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14.	Commitments and Contingencies (continued)

on historical evidence, we do not believe any potential liability with respect to these representations, warranties or guarantees would be material to our consolidated financial statements.

Self-Insurance. We maintain, and require the majority of our subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. We self-insure a portion of our overall risk through the use of a captive insurance subsidiary. We also maintain certain other insurance policies. In Arizona, California, Colorado and Nevada, our subcontractors’ general liability insurance primarily takes the form of a wrap-up policy, where eligible subcontractors are enrolled as insureds on each project. Enrolled subcontractors contribute toward the cost of the insurance and agree to pay a contractual amount in the future in the event of a claim related to their work. For those enrolled subcontractors, we absorb their general liability associated with the work performed on our homes within the applicable projects as part of our overall general liability insurance and our self-insurance through our captive insurance subsidiary. We record expenses and liabilities based on the estimated costs required to cover our self-insured retention and deductible amounts under our insurance policies, and the estimated costs of potential claims and claim adjustment expenses that are above our coverage limits or that are not covered by our insurance policies. These estimated costs are based on an analysis of our historical claims and industry data, and include an estimate of claims incurred but not yet reported.

We engage a third-party actuary that uses our historical claim and expense data, as well as industry data, to estimate our liabilities related to unpaid claims, claim adjustment expenses, third-party recoveries and incurred but not yet reported claims associated with the risks that we are assuming under our self-insurance. These estimates are subject to uncertainty due to a variety of factors, the most significant being the long period of time between the delivery of a home to a homebuyer and when a structural warranty or construction defect claim is made, and the ultimate resolution of the construction defect claim. Though state regulations vary, construction defect claims are reported and resolved over a prolonged period of time, which can extend for 10 years or longer. As a result, the majority of the estimated liability relates to incurred but not yet reported claims. Because the majority of our estimated liabilities relate to incurred but not yet reported claims, adjustments related to individual existing claims generally do not significantly impact the overall estimated liability. Adjustments to our liabilities related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs.

The changes in our self-insurance liability are as follows (in thousands):



	Nine Months Ended August 31,						Three Months Ended August 31,
	2014			2013			2014			2013
Balance at beginning of period	$	92,214		$	93,349		$	90,458		$	90,630
Self-insurance expense (a)	8,761			5,490			3,108			2,083
Payments, net of recoveries (b)	(12,666		)	(6,693		)	(5,257		)	(567		)
Balance at end of period	$	88,309		$	92,146		$	88,309		$	92,146


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


(b)	Recoveries are reflected in the period we receive funds from subcontractors and/or their insurers.

The projection of losses related to these liabilities requires actuarial assumptions that are subject to variability due to uncertainties regarding construction defect claims relative to our markets and the types of product we build, insurance industry practices and legal or regulatory actions and/or interpretations, among other factors. Key assumptions used in these estimates include claim frequencies, severities and settlement patterns, which can occur over an extended period of time. In addition, changes in the frequency and severity of reported claims and the estimates to settle claims can impact the trends and assumptions used in the actuarial analysis, which could be material to our consolidated financial statements. Due to the degree of judgment required and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated, and the difference could be material to our consolidated financial statements.

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14.	Commitments and Contingencies (continued)

Performance Bonds and Letters of Credit. We are often required to provide to various municipalities and other government agencies performance bonds and/or letters of credit to secure the completion of our projects and/or in support of obligations to build community improvements such as roads, sewers, water systems and other utilities, and to support similar development activities by certain of our unconsolidated joint ventures. At August 31, 2014, we had $500.7 million of performance bonds and $31.9 million of letters of credit outstanding. At November 30, 2013, we had $410.8 million of performance bonds and $41.5 million of letters of credit outstanding. If any such performance bonds or letters of credit are called, we would be obligated to reimburse the issuer of the performance bond or letter of credit. We do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the underlying performance obligations are completed. The expiration dates of some letters of credit issued in connection with community improvements coincide with the expected completion dates of the related projects or obligations. Most letters of credit, however, are issued with an initial term of one year and are typically extended on a year-to-year basis until the related performance obligations are completed.

Land Option Contracts. In the ordinary course of business, we enter into land option contracts and other similar contracts to acquire rights to land for the construction of homes. At August 31, 2014, we had total deposits of $40.6 million, comprised of $40.5 million of cash deposits and $.1 million of letters of credit, to purchase land having an aggregate purchase price of $904.1 million. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance.


15.	Legal Matters

Nevada Development Contract Litigation. KB HOME Nevada Inc., a wholly owned subsidiary of ours (“KB Nevada”), is a defendant in a case in the Eighth Judicial District Court in Clark County, Nevada entitled Las Vegas Development Associates, LLC, Essex Real Estate Partners, LLC, et al. v. KB HOME Nevada Inc. In 2007, Las Vegas Development Associates, LLC (“LVDA”) agreed to purchase from KB Nevada approximately 83 acres of land located near Las Vegas, Nevada. LVDA subsequently assigned its rights to Essex Real Estate Partners, LLC (“Essex”). KB Nevada and Essex entered into a development agreement relating to certain major infrastructure improvements. LVDA’s and Essex’s complaint, initially filed in 2008, alleged that KB Nevada breached the development agreement, and also alleged that KB Nevada fraudulently induced them to enter into the purchase and development agreements. LVDA’s and Essex’s lenders subsequently filed related actions that were consolidated into the LVDA/Essex matter. The consolidated plaintiffs sought rescission of the agreements or, in the alternative, compensatory damages of $55 million plus unspecified punitive damages and other damages, and interest charges in excess of $41 million (the “Claimed Damages”). KB Nevada has denied the allegations, and believes it has meritorious defenses to the consolidated plaintiffs’ claims. At a November 19, 2012 hearing, the court denied all of the consolidated plaintiffs’ motions for summary judgment on their claims. In addition, the court granted several of KB Nevada’s motions for summary judgment, eliminating, among other of the consolidated plaintiffs’ claims, all claims for fraud, negligent misrepresentation, and punitive damages. With the court’s decisions, the only remaining claims against KB Nevada are for contract damages and rescission. In August 2013, the court granted motions that further narrowed the scope of the Claimed Damages. While the ultimate outcome is uncertain — we believe it is reasonably possible that the loss in this matter could range from zero to approximately $55 million plus prejudgment interest, which could be material to our consolidated financial statements — KB Nevada believes it will be successful in defending against the consolidated plaintiffs’ remaining claims and that the consolidated plaintiffs will not be awarded rescission or damages. The non-jury trial, originally set for September 2012, has been continued to October 21, 2014.

Other Matters. In addition to the specific proceeding described above, we are involved in other litigation and regulatory proceedings incidental to our business that are in various procedural stages. We believe that the accruals we have recorded for probable and reasonably estimable losses with respect to these proceedings are adequate and that, as of August 31, 2014, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the estimated amounts already recognized in our consolidated financial statements. We evaluate our accruals for litigation and regulatory proceedings at least quarterly and, as appropriate, adjust them to reflect (a) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments; (b) the advice and analyses of counsel; and (c) the assumptions and judgment of management. Similar factors and considerations are used in establishing new accruals for proceedings as to which losses have become probable and reasonably estimable at the time an evaluation is made. Based on our experience, we believe that the amounts that may be claimed or alleged against

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15.	Legal Matters (continued)

us in these proceedings are not a meaningful indicator of our potential liability. The outcome of any of these proceedings, including the defense and other litigation-related costs and expenses we may incur, however, is inherently uncertain and could differ significantly from the estimate reflected in a related accrual, if made. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a related accrual or if no accrual had been made, could be material to our consolidated financial statements.


16.	Stockholders’ Equity

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



	Nine Months Ended August 31, 2014
	Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Grantor Stock Ownership Trust			Treasury Stock			Total Stockholders’ Equity
Balance at November 30, 2013	$	115,296	$	788,893		$	481,889		$	(17,516	)	$	(113,911	)	$	(718,565	)	$	536,086
Net income	—		—			65,548			—			—			—			65,548
Dividends on common stock	—		—			(6,682		)	—			—			—			(6,682		)
Employee stock options/other	25		177			—			—			—			—			202
Conversion of liability awards to equity awards	—		6,455			—			—			—			—			6,455
Restricted stock awards	54		(54		)	—			—			—			—			—
Stock-based compensation	—		5,959			—			—			—			—			5,959
Issuance of common stock	—		(135,590		)	—			—			—			272,635			137,045
Stock repurchases	—		—			—			—			—			(46		)	(46		)
Balance at August 31, 2014	$	115,375	$	665,840		$	540,755		$	(17,516	)	$	(113,911	)	$	(445,976	)	$	744,567



	Nine Months Ended August 31, 2013
	Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Grantor Stock Ownership Trust			Treasury Stock			Total Stockholders’ Equity
Balance at November 30, 2012	$	115,178	$	888,579		$	450,292		$	(27,958	)	$	(115,149	)	$	(934,136	)	$	376,806
Net income	—		—			11,847			—			—			—			11,847
Dividends on common stock	—		—			(6,272		)	—			—			—			(6,272		)
Employee stock options/other	115		1,443			—			—			—			—			1,558
Conversion of liability awards to equity awards	—		412			—			—			—			7,934			8,346
Restricted stock awards	—		(325		)	—			—			325			—			—
Stock-based compensation	—		3,596			—			—			—			—			3,596
Issuance of common stock	—		(106,622		)	—			—			—			216,125			109,503
Grantor stock ownership trust	—		305			—			—			284			—			589
Stock repurchases	—		—			—			—			—			(7,967		)	(7,967		)
Balance at August 31, 2013	$	115,293	$	787,388		$	455,867		$	(27,958	)	$	(114,540	)	$	(718,044	)	$	498,006

On March 25, 2014 and April 8, 2014, pursuant to the 2011 Shelf Registration, we issued 6,944,445 shares and 1,041,666 shares, respectively, of our common stock, par value $1.00 per share, in an underwritten public offering at a price of $18.00 per share (the “2014 Common Stock Offering”). The issuance on April 8, 2014 was made pursuant to the exercise of an option

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granted to the underwriters to purchase such shares. We used 7,986,111 shares of treasury stock for the issuances and received net proceeds of $137.0 million after underwriting discounts, commissions and transaction expenses.

On January 29, 2013, pursuant to the 2011 Shelf Registration, we issued 6,325,000 shares of our common stock, par value $1.00 per share, in an underwritten public offering at a price of $18.25 per share (the “2013 Common Stock Offering”). We used 6,325,000 shares of treasury stock for the issuance and received net proceeds of $109.5 million after underwriting discounts, commissions and transaction expenses.

In connection with the issuance of the 1.375% Convertible Senior Notes due 2019, which is discussed in Note 12. Mortgages and Notes Payable, we established a common stock reserve account with our transfer agent to reserve the maximum number of shares of our common stock potentially deliverable upon conversion to holders of the 1.375% Convertible Senior Notes due 2019 based on the terms of the instruments governing these notes. Accordingly, the common stock reserve account had a balance of 12,602,735 shares at August 31, 2014. The maximum number of shares would potentially be deliverable to holders only in certain limited circumstances as set forth in the instruments governing the 1.375% Convertible Senior Notes due 2019.

Effective July 17, 2014, our board of directors amended the Amended and Restated KB Home Non-Employee Directors Compensation Plan (the “Director Plan”) to provide directors with a one-time opportunity to irrevocably elect to receive an equivalent value of shares of our common stock in lieu of the cash payments that are otherwise due upon the respective settlement of their outstanding and any future stock appreciation right awards (“SARs”) under the terms of the Director Plan. Concurrent with the amendment of the Director Plan, for the purpose of effecting any such SAR settlements, our board of directors authorized the repurchase of no more than 680,000 shares of our common stock, and also authorized potential future grants of up to 680,000 stock payment awards under the KB Home 2014 Equity Incentive Plan (the “2014 Plan”), in each case solely as necessary for director elections in respect of outstanding SARs. The 2014 Plan is discussed in Note 17. Stock-Based Compensation. During the 2014 third quarter, following the amendment of the Director Plan, directors made irrevocable elections to receive an aggregate of 679,815 shares of our common stock upon the respective settlement of their outstanding SARs. The directors’ elections changed only the method of settlement for the outstanding SARs and did not change any of the other terms of these awards or impact the value of these awards to the directors. As a result of the directors’ elections, the relevant outstanding SARs were effectively converted to stock-settled awards, which are accounted for as equity awards, instead of cash-settled liability awards, thereby reducing the degree of variability in the expense associated with such SARs in future quarters. As of August 31, 2014, no SARs had been settled. In addition, we had not repurchased any shares and no stock payment awards had been granted under the 2014 Plan pursuant to the respective board of directors authorizations.

During the three months ended August 31, 2013, directors were provided a one-time opportunity to elect and made irrevocable elections to receive an aggregate of 478,294 shares of our common stock in lieu of the cash payments that were otherwise due upon the respective settlement of their outstanding stock units under the terms of the Director Plan, and we repurchased through open market transactions such shares pursuant to a board authorization at an aggregate price of $7.9 million. The directors’ elections changed only the method of settlement for the outstanding stock units and did not change any of the other terms of these awards or impact the value of these awards to the directors. As a result of the directors’ elections, the relevant outstanding stock units were effectively converted to stock-settled awards, which are accounted for as equity awards, instead of cash-settled liability awards.

As of August 31, 2014, we were authorized to repurchase 4,000,000 shares of our common stock under a board-approved share repurchase program. We did not repurchase any shares of our common stock under this program in the nine months ended August 31, 2014. We have not repurchased any shares pursuant to this common stock repurchase plan for the past several years and any resumption of such stock repurchases under this program or any other program will be at the discretion of our board of directors.

During the three months ended August 31, 2014, our board of directors declared a cash dividend of $.0250 per share of common stock, which was paid on August 21, 2014 to stockholders of record on August 7, 2014. During the three months ended May 31, 2014, our board of directors declared a cash dividend of $.0250 per share of common stock, which was paid on May 15, 2014 to stockholders of record on May 1, 2014. During the three months ended February 28, 2014, our board of directors declared a cash dividend of $.0250 per share of common stock, which was paid on February 20, 2014 to stockholders of record on February 6, 2014. Cash dividends of $.0250 per share of common stock were also declared and paid during each of the quarters ended February 28, 2013, May 31, 2013 and August 31, 2013.

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(Unaudited)


17.	Stock-Based Compensation

We measure and recognize compensation expense associated with our grant of equity-based awards in accordance with ASC 718, which requires that companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements over the vesting period. Compensation expense related to equity-based awards is included in selling, general and administrative expenses in our consolidated statements of operations.

Stock Options. In accordance with ASC 718, we estimate the grant-date fair value of stock options using the Black-Scholes option-pricing model, which takes into account assumptions regarding an expected dividend yield, a risk-free interest rate, an expected volatility factor for the market price of our common stock and an expected term of the stock options. The following table summarizes stock option transactions for the nine months ended August 31, 2014:



	Options		Weighted Average Exercise Price
Options outstanding at beginning of period	10,531,938		$	21.11
Granted	—		—
Exercised	(25,000	)	8.02
Cancelled	(32,546	)	19.30
Options outstanding at end of period	10,474,392		$	21.15
Options exercisable at end of period	9,400,056		$	22.26

As of August 31, 2014, the weighted average remaining contractual life of stock options outstanding and stock options exercisable was 4.8 years and 4.4 years, respectively. There was $1.5 million of total unrecognized compensation expense related to unvested stock option awards as of August 31, 2014. For the three months ended August 31, 2014 and 2013, stock-based compensation expense associated with stock options totaled $.6 million and $.4 million, respectively. For the nine months ended August 31, 2014 and 2013, stock-based compensation expense associated with stock options totaled $1.8 million and $1.2 million, respectively. The aggregate intrinsic value of stock options outstanding was $33.1 million at August 31, 2014. The aggregate intrinsic value of stock options exercisable was $26.3 million at August 31, 2014. (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. We recognized total compensation expense of $1.7 million for the three months ended August 31, 2014 and $1.1 million for the three months ended August 31, 2013 related to restricted stock and PSUs. We recognized total compensation expense of $4.2 million for the nine months ended August 31, 2014 and $2.4 million for the nine months ended August 31, 2013 related to restricted stock and PSUs.

Approval of the KB Home 2014 Equity Incentive Plan. At our Annual Meeting of Stockholders held on April 3, 2014, our stockholders approved the 2014 Plan, authorizing, among other things, the issuance for grants of stock-based awards to our employees, non-employee directors and consultants of up to 4,800,000 shares of our common stock, plus any shares that were available for grant as of April 3, 2014 under our 2010 Equity Incentive Plan (the “2010 Plan”), and any shares subject to then-outstanding awards under the 2010 Plan that subsequently expire or are canceled, forfeited, tendered or withheld to satisfy tax withholding obligations with respect to full value awards, or settled for cash, subject to the terms of the 2014 Plan. No new awards may be made under the 2010 Plan. As a result, as of April 3, 2014, the 2014 Plan became our only active equity compensation plan. As of August 31, 2014, no grants had been made under the 2014 Plan.

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KB HOME

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


18.	Supplemental Disclosure to Consolidated Statements of Cash Flows

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



	Nine Months Ended August 31,
	2014			2013
Summary of cash and cash equivalents at end of period:
Homebuilding	$	297,058		$	383,314
Financial services	1,950			3,151
Total	$	299,008		$	386,465

Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized	$	312		$	34,902
Income taxes paid	1,537			623
Income taxes refunded	45			61

Supplemental disclosures of noncash activities:
Reclassification of warranty recoveries to receivables	$	12,794		$	—
Increase (decrease) in consolidated inventories not owned	(4,931		)	4,831
Increase in inventories due to distributions of land and land development from an unconsolidated joint venture	81,670			—
Inventories and inventory-related obligations associated with TIFE tied to distribution of land from an unconsolidated joint venture	33,197			—
Inventories acquired through seller financing	52,561			27,600