Edgar Filing: KB HOME

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended November 30, 2018

☐ 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 or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10990 Wilshire Boulevard, Los Angeles, California 90024

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (310) 231-4000

Securities Registered Pursuant to Section 12(b) of the Act:



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

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

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



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The aggregate market value of the voting common stock held by non-affiliates of the registrant on May 31, 2018 was $2,532,566,398, including 8,460,265 shares held by the registrant’s grantor stock ownership trust and excluding 22,247,984 shares held in treasury.

There were 86,925,192 shares of the registrant’s common stock, par value $1.00 per share, outstanding on December 31, 2018. The registrant’s grantor stock ownership trust held an additional 8,157,235 shares of the registrant’s common stock on that date.

Documents Incorporated by Reference

Portions of the registrant’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders (incorporated into Part III).

KB HOME

FORM 10-K

FOR THE YEAR ENDED NOVEMBER 30, 2018

TABLE OF CONTENTS



		Page Number
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	20
Item 2.	Properties	20
Item 3.	Legal Proceedings	20
Item 4.	Mine Safety Disclosures	20
Executive Officers of the Registrant		20

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 8.	Financial Statements and Supplementary Data	53
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	103
Item 9A.	Controls and Procedures	103
Item 9B.	Other Information	104

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	104
Item 11.	Executive Compensation	105
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	105
Item 13.	Certain Relationships and Related Transactions, and Director Independence	105
Item 14.	Principal Accounting Fees and Services	105

PART IV
Item 15.	Exhibits, Financial Statement Schedules	106
Item 16.	Form 10-K Summary	110
Signatures		111

PART I


Item 1.	BUSINESS

General

KB Home is one of the largest and most recognized homebuilding companies in the U.S. We have been building homes for over 60 years, with more than 600,000 homes delivered since our founding in 1957. We build a variety of new homes designed primarily for first-time and first move-up, as well as second move-up and active adult homebuyers, including attached and detached single-family residential homes, townhomes and condominiums. We offer homes in development communities, at urban in-fill locations and as part of mixed-use projects. Our homebuilding operations represent the majority of our business, accounting for 99.7% of our total revenues in 2018. Our financial services operations, which accounted for the remaining .3% of our total revenues in 2018, offer various insurance products to our homebuyers in the markets where we build homes and provide title services in certain of those markets. Our financial services operations also provide mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers indirectly through KBHS Home Loans, LLC (“KBHS”), an unconsolidated joint venture we formed with Stearns Lending, LLC (“Stearns”).

Unless the context indicates otherwise, the terms “we,” “our” and “us” used in this report refer to KB Home, a Delaware corporation, and its predecessors and subsidiaries. Also, as used in this report, “home” is a single-family residence, whether it is a single-family home or other type of residential property; “community” is a single development in which new homes are constructed as part of an integrated plan; and “community count” is the number of communities we have open for sales with at least five homes/lots left to sell.

The following charts present homes delivered, homebuilding revenues, homebuilding operating income and pretax income for the years ended November 30, 2016, 2017 and 2018:

Markets

Reflecting the geographic reach of our homebuilding business, we have ongoing operations in the eight states and 38 major markets presented below. We also operate in various submarkets within these major markets. From time to time, we refer to these markets and submarkets collectively as our “served markets.” For reporting purposes, we organize our homebuilding operations into four segments — West Coast, Southwest, Central and Southeast.



Segment	States	Major Market(s)

West Coast	California	Contra Costa County, Fresno, Los Angeles, Modesto, Oakland, Orange County, Riverside, Sacramento, Salinas, San Bernardino, San Diego, San Francisco, San Jose, Santa Rosa-Petaluma, Stockton, Vallejo, Ventura and Yuba City
	Washington	Seattle
Southwest	Arizona	Phoenix and Tucson
	Nevada	Las Vegas
Central	Colorado	Denver and Loveland
	Texas	Austin, Dallas, Fort Worth, Houston and San Antonio
Southeast	Florida	Daytona Beach, Jacksonville, Lakeland, Orlando, Punta Gorda, Sarasota, Sebastian-Vero Beach and Tampa
	North Carolina	Raleigh

Segment Operating Information. The following table presents certain operating information for our homebuilding reporting segments for the years ended November 30, 2018, 2017 and 2016 (dollars in millions, except average selling price):



	Years Ended November 30,
	2018			2017			2016
West Coast:
Homes delivered	3,152			3,387			2,825
Percentage of total homes delivered	28		%	31		%	29		%
Average selling price	$	661,500		$	644,900		$	579,900
Homebuilding revenues (a)	$	2,085.3		$	2,186.4		$	1,638.1
Southwest:
Homes delivered	2,301			1,837			1,559
Percentage of total homes delivered	20		%	17		%	16		%
Average selling price	$	307,300		$	290,200		$	287,000
Homebuilding revenues (a)	$	707.1		$	533.1		$	447.5
Central:
Homes delivered	4,113			4,136			3,744
Percentage of total homes delivered	36		%	38		%	38		%
Average selling price	$	297,400		$	284,800		$	270,100
Homebuilding revenues (a)	$	1,239.3		$	1,188.8		$	1,018.5
Southeast:
Homes delivered	1,751			1,549			1,701
Percentage of total homes delivered	16		%	14		%	17		%
Average selling price	$	286,600		$	284,100		$	281,400
Homebuilding revenues (a)	$	502.1		$	448.0		$	478.9
Total:
Homes delivered	11,317			10,909			9,829
Average selling price	$	399,200		$	397,400		$	363,800
Homebuilding revenues (a)	$	4,533.8		$	4,356.3		$	3,582.9


(a)	Homebuilding revenues include revenues from housing and, if applicable, land sales.

Additional financial and operational information related to our homebuilding reporting segments, including revenues, operating income (loss), pretax income (loss), inventories and assets, is provided below in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report.

Unconsolidated Joint Ventures. The above table does not include homes delivered or revenues from unconsolidated joint ventures in which we participate. These unconsolidated joint ventures acquire and develop land in various markets where our homebuilding operations are located and, in some cases, build and deliver homes on the land developed.

Business Strategy

Since 2016, we have implemented a Returns-Focused Growth Plan that is designed to generate higher revenues and improvement in our homebuilding operating income margin, return on invested capital, return on equity and leverage ratio, and to achieve certain financial targets for these metrics in 2019. The plan’s main components are (1) executing our core business strategy, (2) improving our asset efficiency and (3) monetizing our significant deferred tax assets.

Executing Our Core Business Strategy. Our core business strategy, which we call KB2020, is to expand our scale primarily within our current geographic footprint to achieve a top-five position in each of our served markets (based on homes delivered). KB2020 is a systematic, fact-based and process-driven approach to homebuilding that is grounded in gaining a detailed understanding of consumers’ location and product preferences and product price-to-value perceptions. As used in this report and elsewhere, the term “product” encompasses a home’s floor plan design and interior/exterior style, amenities, functions and features.

KB2020 consists of the following key principles with respect to customers, land, products and operations:

•

Customers. With our customer-first, Built-to-Order™ homebuying process, we provide each of our homebuyers with a highly personalized experience where they can make a wide range of structural and design choices for their future new home. Our community teams of sales representatives, design consultants and other personnel partner closely with each homebuyer through each major step in the design, construction and closing of their KB home. We believe this highly interactive process that enables our homebuyers to design a home with the particular features and amenities they want based on how they live and what they value, at an affordable price, enhances customer satisfaction and gives us a meaningful competitive advantage over other homebuilders and resale homes.

•

Land. We seek to manage our working capital and reduce our operating risks by primarily acquiring entitled land parcels at reasonable prices within attractive submarkets as identified by our market research activities. We typically focus on metropolitan areas with favorable long-term economic and population growth prospects that we believe have the potential to sustain a minimum of 800 homes delivered per year, and target land parcels that meet our investment return standards. Identified consumer preferences and home sales activity largely direct where our land acquisition teams search for available land. In 2018, we refined our approach to land acquisition to focus on investments that provide a one- to two-year supply of land or lots per community, and individual assets that are generally between 50 to 200 lots in size. Our primary focus continues to be our existing geographic footprint, encompassing markets we identified for their long-term economic and demographic growth potential. We leverage the relationships we have with land owners, developers and brokers to find and acquire land parcels, and use our experience in working with municipalities to efficiently obtain development approvals.

•

Products. We offer our customers a base product with a standardized set of functions and features that is generally priced to be affordable for the local area’s median household income level. As noted above, our Built-to-Order approach provides customers the opportunity to select their lot location within a community, floor plan, elevation and structural options, and to personalize their homes with numerous interior design options and upgrades in our design studios. Our design studios, generally centrally located within our served markets, are a key component of our Built-to-Order process, and the mix of design options and upgrades they offer are primarily based on the preferences identified by our market survey and purchase frequency data. We utilize a centralized internal architectural group that designs homes to meet or exceed customers’ price-to-value expectations while being as efficient as possible to construct. To enhance the simplicity and efficiency of our products and processes, our architectural group has streamlined our product series and developed a core series of high-frequency, flexible floor plans and elevations that we can offer across many of our served markets. Our plan series allows us to more effectively shift with local demand and developable land attributes, helps us to better understand the cost to build our products and enables us to compare and implement best practices across divisions and communities. We also incorporate energy-efficient features into our product designs to help lower our homebuyers’ total cost of homeownership and reduce our homes’ impact on the environment, as further discussed below.

•

Operations. In addition to differentiating us from other high-production homebuilders, our Built-to-Order process helps drive low-cost production. We generally commence construction of a home only after we have a signed purchase contract with a homebuyer and have obtained preliminary credit approval or other evidence of the homebuyer’s financial ability to purchase the home, and seek to build a backlog of sold homes. By maintaining a substantial backlog, along with centralized scheduling and standardized reporting processes, we have established a disciplined and scalable operational platform that helps us sustain an even-flow production of pre-sold homes. This reduces our inventory risk, promotes construction efficiencies and enhances our relationships with independent subcontractors and other business partners, and provides us with greater visibility and predictability on future deliveries as we grow.

There may be market-driven circumstances where we believe it is necessary or appropriate to temporarily deviate from certain of the above principles. These deviations may include starting construction on a small number of homes in a community before corresponding purchase contracts are signed with homebuyers to more quickly meet customer delivery expectations and generate revenues; or acquiring land parcels in peripheral neighborhoods of a core metropolitan area that otherwise fit our growth strategy and meet our investment return standards. In addition, other circumstances could arise in the future that may lead us to make specific short-term shifts from these principles.

Improving Our Asset Efficiency. We have had an ongoing focus on, and will continue our efforts in 2019 toward, improving our asset efficiency, including, among other things, calibrating home sales rates and selling prices at each of our communities to enhance their profitability; controlling our direct construction costs within our communities; improving inventory turns; structuring land acquisitions to minimize upfront costs, as further discussed below under “Community Development and Land Inventory Management”; reactivating communities that have been held for future development; selling non-core assets; and deploying excess cash flow from operations to help fuel additional revenue growth and/or reduce debt.

We have made considerable progress in reactivating communities over the past several years and plan to reactivate additional communities in 2019. As of November 30, 2018, our land held for future development or sale represented 7% of our total inventories, down from 11% at November 30, 2017 and down from its peak of 43% at November 30, 2011. Our objective is to reduce our land held for future development or sale, through reactivations and land sales, to less than 4% of our total inventory by the end of our 2019 fiscal year.

While reactivations and land sales can have a negative impact on our homebuilding operating income margin, they are generally accretive to earnings and returns, and generate cash that we can redeploy for investments in land that are expected to generate a higher return and grow our business. Such growth should enable us to leverage greater operating efficiencies that are expected to accompany a larger scale.

Monetizing Our Significant Deferred Tax Assets. By increasing our scale and further improving our asset efficiency, the anticipated associated revenue and pretax income growth will enable us to accelerate the utilization of our deferred tax assets, which totaled $441.8 million at November 30, 2018. We believe we can realize substantial tax cash savings through 2019 and beyond, and intend to productively deploy the cash to invest in our business and/or reduce debt.

Key Financial Targets. The 2019 financial targets under our Returns-Focused Growth Plan are as follows:


•	Housing revenues greater than $5.0 billion.


•	Homebuilding operating income margin, excluding inventory-related charges, of 8.0% to 9.0%.


•	Return on invested capital in excess of 10.0%.


•	Return on equity of 10.0% to 15.0%.


•	Net debt to capital ratio of 35% to 45%.

Our progress towards achieving our Returns-Focused Growth Plan objectives is further discussed below under Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report.

Promotional Marketing Strategy. Building on our heritage of prioritizing our homebuyers’ interests and needs by offering them a distinct combination of affordability, choice and personalization among high-production homebuilders, in 2018 we launched a modern new logo and visual identity and adopted the tagline Built on Relationships® to reinforce the customer-centric philosophy of our longstanding operating model and the importance of other key relationships – with suppliers, trade contractors, land sellers and municipalities – to the success of our business.

Our intense customer focus drives, among other things, how and where we acquire land for our new home communities; the design and selection of our products; our investments in, and choice of suppliers of, advanced materials, systems, equipment and technologies intended to enhance the performance and resource efficiency of our homes; and our community development and home construction methods and processes, as described in this report. In addition, we aim to present our homebuyers with a simple path to owning their unique new home with the assistance of our community team members who partner closely with each homebuyer through each major step in the design, construction and closing of their home. We believe our approach sets us apart from most other homebuilders and from resale homes, and is particularly well suited for the current and future generations of first-time buyers – historically our core customer demographic.

Homebuyer Profile. We focus on bracketing within a range around the median household income in a submarket in order to position our product and pricing to be attainable for the largest demand segments of that submarket. Across our portfolio, we offer an array of products, from smaller, higher density homes, with lower price points typically suited for first-time homebuyers, to larger homes in premium locations with additional amenities, with higher price points that generally attract a first or second move-up homebuyer. We also offer a variety of single-story floorplans that typically appeal to an active adult homebuyer age 55 and over, as well as multi-story floorplans that attract a wide range of homebuyers. Approximately 75% of our annual deliveries for more than a decade have been to first-time and first move-up homebuyers; in 2018, it was 74% of our deliveries, as shown in the chart below:

To help elevate the KB Home brand in the marketplace, particularly for the growing number of millennial homebuyers, our promotional marketing efforts increasingly involve digital marketing, including interactive Internet-based applications, social media outlets and other evolving communication technologies.

Customer Service. Our on-site construction supervisors perform regular pre-closing quality checks and our sales representatives maintain regular contact with our homebuyers during the home construction process in an effort to ensure our homes meet our standards and our homebuyers’ expectations. We also have employees who are responsible for responding to homebuyers’ post-closing needs, including warranty claims. Information about our limited warranty program is provided in Note 15 – Commitments and Contingencies in the Notes to Consolidated Financial Statements in this report.

Operational Structure. We operate our homebuilding business through divisions with experienced management teams who have in-depth local knowledge of their particular served markets, which helps us acquire land in preferred locations; develop communities with products that meet local demand; and understand local regulatory environments. Our division management teams exercise considerable autonomy in identifying land acquisition opportunities; developing land and communities; implementing product, marketing and sales strategies; and controlling costs. To help maintain consistent execution within the organization, our division management teams and other employees are continuously trained on KB2020 principles and are evaluated, in part, based on their achievement of relevant operational objectives.

Our corporate management and support personnel develop and oversee the implementation of company-wide strategic initiatives, our overall operational policies and internal control standards, and perform various centralized functions, including architecture; purchasing and national contracts; treasury and cash management; land acquisition approval; risk and litigation management; accounting and financial reporting; internal audit and compliance activities; information technology systems; marketing; and investor and media relations. Corporate management is responsible for, among other things, evaluating and selecting the geographic markets in which we operate, consistent with our overall business strategy; allocating capital resources to markets for land acquisition and development activities; making major personnel decisions related to employee compensation and benefits; and monitoring the financial and operational performance of our divisions. Our corporate management also facilitates the sharing and implementation of best practices companywide.

Community Development and Land Inventory Management

Developable land for the production of homes is a core resource for our business. Based on our current strategic plans, we seek to own or control land sufficient to meet our forecasted production goals for the next three to five years. In 2019, we intend to continue to invest in and develop land positions within attractive submarkets and selectively acquire or control additional land that meets our investment return standards. However, we may decide to sell certain land interests or monetize land previously held for future development as part of our Returns-Focused Growth Plan, or for other reasons.

Our community development process generally consists of four phases: land acquisition, land development into finished lots for a community (if necessary), home construction and delivery of completed homes to homebuyers. Historically, our community development process has typically ranged from six to 24 months in our West Coast homebuilding reporting segment, with a somewhat shorter duration in our other homebuilding reporting segments. The development process in our West Coast homebuilding reporting segment is typically longer than in our other segments due to the municipal and regulatory requirements that are generally more stringent in California. Our community development process varies based on, among other things, the extent and speed of

required government approvals and utility service activations, the overall size of a particular community, the scope of necessary site preparation activities, the type of product(s) that will be offered, weather conditions, time of year, promotional marketing results, the availability of construction resources, consumer demand, local and general economic and housing market conditions, and other factors.

Although they vary significantly in size and complexity, our single-family residential home communities typically consist of 50 to 200 lots ranging in size from 1,500 to 11,000 square feet. In our communities, we typically offer three to 15 home design choices. We also generally build one to three model homes at each community so that prospective homebuyers can preview the various products available. Depending on the community, we may offer premium lots containing more square footage, better views and/or location benefits. Some of our communities consist of multiple-story structures that encompass several attached condominium-style units.

Land Acquisition and Land Development. We continuously evaluate land acquisition opportunities against our investment return standards, while also balancing competing needs for financial strength, liquidity and land inventory for future growth. When we acquire land, we generally focus on parcels with lots that are entitled for residential construction and are either physically developed to start home construction (referred to as “finished lots”) or partially finished. However, depending on market conditions and available opportunities, we may acquire undeveloped and/or unentitled land. We may also invest in land that requires us to repurpose and re-entitle the property for residential use, such as in-fill developments. We expect that the overall balance of undeveloped, unentitled, entitled, partially finished and finished lots in our inventory will vary over time, and in implementing our strategic growth initiatives, we may acquire a greater proportion of undeveloped or unentitled land in the future if and as the availability of reasonably priced land with finished or partially finished lots diminishes.

We generally structure our land acquisition and land development activities to minimize, or to defer the timing of, expenditures in order to reduce both the market risks associated with holding land and our working capital and financial commitments, including interest and other carrying costs. We typically use contracts that, in exchange for a small initial option payment or earnest money deposit, give us an option or similar right to acquire land at a future date, usually at a pre-determined price and pending our satisfaction with the feasibility of developing and selling homes on the land and/or an underlying land seller’s completion of certain obligations, such as securing entitlements, developing infrastructure or finishing lots. We refer to land subject to such option or similar contractual rights as being “controlled.” Our decision to exercise a particular land option or similar right is based on the results of our due diligence and continued market viability analysis after entering into such a contract. Information related to our land option contracts and other similar contracts is provided in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report.

The following table presents the number of inventory lots we owned, in various stages of development, or controlled under land option contracts or other similar contracts by homebuilding reporting segment as of November 30, 2018 and 2017:



	Homes Under Construction and Land Under Development		Land Held for Future Development or Sale		Land Under Option		Total Land Owned or Under Option
	2018	2017	2018	2017	2018	2017	2018	2017
West Coast	8,671	6,056	1,291	1,982	2,718	3,305	12,680	11,343
Southwest	7,730	7,329	435	922	1,650	834	9,815	9,085
Central	14,821	11,849	105	889	7,311	6,323	22,237	19,061
Southeast	4,377	3,571	2,052	2,346	2,466	965	8,895	6,882
Total	35,599	28,805	3,883	6,139	14,145	11,427	53,627	46,371

The following charts present the percentage of inventory lots we owned or controlled under land option contracts or other similar contracts by homebuilding reporting segment and the percentage of total lots we owned and controlled under option as of November 30, 2018:

Home Construction and Deliveries. Following the acquisition of land and, if necessary, the development of the land into finished lots, we typically begin constructing model homes and marketing homes for sale. To minimize the costs and risks of unsold homes in production, we generally commence construction of a home only after we have a signed purchase contract with a homebuyer and have obtained preliminary credit approval or other evidence of the homebuyer’s financial ability to purchase the home. However, cancellations of home purchase contracts prior to the delivery of the underlying homes, the construction of attached products with some unsold units, or specific strategic considerations will result in our having unsold completed or partially completed homes in our inventory. Our construction cycle time from home sale to delivery is typically five to six months.

We act as the general contractor for the majority of our communities, and engage outside general contractors in all other instances. We, or the outside general contractors we engage, contract with a variety of independent subcontractors, who are typically locally based, to perform all land development and home construction work through their own employees or subcontractors. We do not self-perform any land development or home construction work. These independent subcontractors also supply some of the building materials required for such production activities. Our contracts with these independent subcontractors require that they comply with all laws applicable to their work, including wage and safety laws, meet performance standards, and follow local building codes and permits.

Raw Materials. Outside of land, the principal raw materials used in our production process are concrete and forest products. Other primary materials used in home construction include drywall, and plumbing and electrical items. We source all of our building materials from third parties. We attempt to enhance the efficiency of our operations by using, where practical, standardized materials that are commercially available on competitive terms from a variety of outside sources. In addition, we have national and regional purchasing programs for certain building materials, appliances, fixtures and other items that allow us to benefit from large-quantity purchase discounts and, where available, participate in outside manufacturer or supplier rebate programs. When possible, we arrange for bulk purchases of these products at favorable prices from such manufacturers and suppliers. Although our purchasing strategies have helped us in negotiating favorable prices for raw materials, in recent years we have encountered higher prices for certain raw materials.

Backlog

Our “backlog” consists of homes that are under a purchase contract but have not yet been delivered to a homebuyer. Ending backlog represents the number of homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) generated during the current period minus the number of homes delivered during the current period. Our backlog at any given time will be affected by cancellations, homes delivered and our community count. Our cancellation rates and the factors affecting such rates are further discussed below in both Item 1A – Risk Factors and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report.

The following charts present our ending backlog (number of homes and value) by homebuilding reporting segment as of November 30, 2017 and 2018:

Employees

At December 31, 2018 and 2017, we had approximately 2,005 and 1,915 full-time employees, respectively. None of our employees are represented by a collective bargaining agreement.

Competition, Seasonality, Delivery Mix and Other Factors

Competition. The homebuilding industry and housing market are highly competitive with respect to selling homes; contracting for construction services, such as carpentry, roofing, electrical and plumbing; and acquiring attractive developable land, though the intensity of competition can vary and fluctuate between and within individual markets and submarkets. We compete for homebuyers, construction resources and desirable land against numerous homebuilders, ranging from regional and national firms to small local enterprises. As to homebuyers, we primarily compete with other homebuilders on the basis of selling price, community location and amenities, availability of financing options, home designs, reputation, home construction cycle time, and the design options and upgrades that can be included in a home. In some cases, this competition occurs within larger residential development projects containing separate sections designed, planned and developed by other homebuilders. We also compete for homebuyers against housing alternatives to new homes, including resale homes, apartments, single-family rentals and other rental housing. In markets experiencing heavy construction activity, including areas recovering from wildfires, hurricanes or other significant natural disasters, there can be severe craft and skilled trade shortages that limit independent subcontractors’ ability to supply construction services to us, which in turn tends to drive up our costs and/or extend our production schedules. Elevated construction activity has also contributed to measurable increases in the amount of time to obtain governmental approvals or utility service activations; and, combined with tariffs, duties and/or trade restrictions recently imposed or increased by the U.S. and other governments, the cost of certain building materials, such as steel, lumber, drywall and concrete. Since 2013, we also have seen higher prices for desirable land amid heightened competition with homebuilders and other developers and investors (both domestic and international), particularly in the land-constrained areas where we operate. We expect these upward cost trends to continue in 2019, if and as housing market activity grows and there is greater competition for these resources.

Seasonality. Our performance is affected by seasonal demand trends for housing. Traditionally, there has been more consumer demand for home purchases and we tend to generate more net orders in the spring and early summer months (corresponding to most of our second quarter and part of our third quarter) than at other times of the year. This “selling season” demand results in

our delivering more homes and generating higher revenues from late summer through the fall months (corresponding to part of our third quarter and all of our fourth quarter), as illustrated in the following table:



	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Net Orders
2018	25	%	32	%	25	%	18	%
2017	24	%	31	%	24	%	21	%
2016	22	%	32	%	24	%	22	%

Homes Delivered
2018	20	%	24	%	26	%	30	%
2017	20	%	24	%	25	%	31	%
2016	20	%	24	%	25	%	31	%

Housing Revenues
2018	19	%	24	%	27	%	30	%
2017	19	%	23	%	26	%	32	%
2016	19	%	23	%	25	%	33	%

Delivery Mix and Other Factors. In addition to the overall volume of homes we sell and deliver, our results in a given period are significantly affected by the geographic mix of markets and submarkets in which we operate; the number and characteristics of the communities we have open for sales in those markets and submarkets; and the products we sell from those communities during the period. While there are some similarities, there are differences within and between our served markets in terms of the quantity, size and nature of the communities we operate and the products we offer to consumers. These differences reflect, among other things, local homebuyer preferences; household demographics (e.g., large families or working professionals; income levels); geographic context (e.g., urban or suburban; availability of reasonably priced finished lots; development constraints; residential density); and the shifts that can occur in these factors over time. These factors in each of our served markets will affect the costs we incur and the time it takes to locate, acquire rights to and develop land, open communities for sales, and market and build homes; the size of our homes; our selling prices (including the contribution from homebuyers’ purchases of design options and upgrades); the pace at which we sell and deliver homes and close out communities; and our housing gross profits and housing gross profit margins. Therefore, our results in any given period will fluctuate compared to other periods based on the proportion of homes delivered from areas with higher or lower selling prices and on the corresponding land and overhead costs incurred to generate those deliveries, as well as from our overall community count.

Financing

Our operations have historically been funded by internally generated cash flows, public equity and debt issuances, land option contracts and other similar contracts, land seller financing, and performance bonds and letters of credit. We also have the ability to borrow funds under our unsecured revolving credit facility with various banks (“Credit Facility”). Depending on market conditions and available opportunities, we may obtain project financing, or secure external financing with community or other inventory assets that we own or control. By “project financing,” we mean loans that are specifically obtained for, or secured by, particular communities or other inventory assets. We may also arrange or engage in bank loan, project debt or other financial transactions and/or expand the capacity of the Credit Facility or our cash-collateralized letter of credit facility with a financial institution (the “LOC Facility”) or enter into additional such facilities.

Environmental Compliance Matters and Sustainability

As part of our due diligence process for land acquisitions, we often use third-party environmental consultants to investigate potential environmental risks, and we require disclosures, representations and warranties from land sellers regarding environmental risks. We may, from time to time, acquire property that requires us to incur environmental clean-up costs after conducting appropriate due diligence, including, but not limited to, using detailed investigations performed by environmental consultants. In such instances, we take steps prior to our acquisition of the land to gain reasonable assurance as to the precise scope of work required and the costs associated with removal, site restoration and/or monitoring. To the extent contamination or other environmental issues have occurred in the past, we will attempt to recover restoration costs from third parties, such as the generators of hazardous waste, land sellers or others in the prior chain of title and/or their insurers. Based on these practices, we anticipate that it is unlikely that environmental clean-up costs will have a material effect on our consolidated financial statements. However, despite these efforts, there can be no assurance that we will avoid material liabilities relating to the existence or removal of toxic wastes, site restoration, monitoring or other environmental matters affecting properties currently or previously owned or controlled by us, and no estimate of any potential liabilities can be made. We have not been notified by any governmental agency of any claim that any of the properties owned or formerly owned by us are identified by the U.S. Environmental Protection Agency (or similar state or local agency) as being a “Superfund” (or similar state or local) clean-up site requiring remediation, which could have a material effect on our future consolidated financial statements. Costs associated with the use of environmental consultants are not material to our consolidated financial statements.

We have made a dedicated effort to further differentiate ourselves from other homebuilders and resale homes through our ongoing commitment to become a leading national company in environmental sustainability. We continually seek out and utilize innovative technologies and systems to further improve the energy and water efficiency of our homes, as well as engage in campaigns and other educational efforts, sometimes together with other companies, organizations and groups, to increase consumer awareness of the importance and impact of sustainability in selecting a home and the products within a home. Under our commitment to sustainability, we, among other things:


•	build energy- and water-efficient new homes. We built our 115,000th ENERGY STAR® certified home in 2018;


•	developed a KB Home Energy Performance Guide®, or EPG®, that informs our homebuyers of the relative energy efficiency and the related estimated monthly energy costs of each of our homes as designed, compared to typical new and existing homes;

•

include in our product offerings advanced home automation technologies, components and systems that can increase convenience for our homebuyers. For instance, in 2018, we partnered with Google® to offer KB Smart Home System-enabled homes in certain communities, which allows homeowners to control the functionality of their smart KB homes with advanced connectivity and integrated technology features; and


•	created and continue to add more net-zero energy and zero freshwater design options, under a program called Double ZeroHouse™ 3.0, that are available in select markets.

For several years, we have been recognized by the U.S. Environmental Protection Agency for our sustainability achievements, and have earned awards under all of the agency’s programs aimed at homebuilders: ENERGY STAR, which sets energy efficiency standards; WaterSense®, which establishes water efficiency standards; and Indoor airPLUS®, which focuses on indoor air quality. In 2018, we received the ENERGY STAR Partner of the Year — Sustained Excellence Award for the eighth consecutive year, and the WaterSense Sustained Excellence Award for water efficiency for the fourth consecutive year.

More information about our sustainability commitment can be found in our annual sustainability reports, which we have published on our website since 2008. We intend to continue to research, evaluate and utilize new or improved products and construction and business practices consistent with our commitment and believe our sustainability initiatives can help put us in a better position, compared to resale homes and homebuilders with less-developed programs, to comply with evolving local, state and federal rules and regulations intended to protect natural resources and to address climate change and similar environmental concerns.

Access to Our Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, beneficial ownership reports on Forms 3, 4 and 5 and proxy statements, as well as all amendments to those reports are available free of charge through our investor relations website at investor.kbhome.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). We will also provide these reports in electronic or paper format free of charge upon request made to our investor relations department at investorrelations@kbhome.com or at our principal executive offices. We intend for our investor relations website to be the primary location where investors and the general public can obtain announcements regarding, and can learn more about, our financial and operational performance, business plans and prospects, our board of directors, our senior executive management team, and our corporate governance policies, including our articles of incorporation, by-laws, corporate governance principles, board committee charters, and ethics policy. We may from time to time choose to disclose or post important information about our business on or through our investor relations website, and/or through other electronic channels, including social media outlets, such as Facebook® (Facebook.com/KBHome) and Twitter® (Twitter.com/KBHome), and other evolving communication technologies. The content available on or through our primary website at www.kbhome.com, our investor relations website, including our sustainability reports, or social media outlets and other evolving communication technologies is not incorporated by reference in this report or in any other filing we make with the SEC, and our references to such content are intended to be inactive textual or oral references only. Our SEC filings are also available to the public over the Internet at the SEC’s website at www.sec.gov.


Item 1A.	RISK FACTORS

The following important economic and market, strategic, operational, and legal and regulatory risk factors could adversely impact our business. These factors could cause our actual results to differ materially from the forward-looking and other statements that (a) we make in registration statements, periodic reports (including this report) and other filings with the SEC and from time to time in our news releases, annual reports and other written reports or communications, (b) we post on or make available through our websites and/or through other electronic channels, and (c) our personnel and representatives make orally from time to time.

Economic and Market Risks

Soft or negative economic or housing market conditions generally or in our served markets may materially and adversely affect our business and consolidated financial statements.

As in 2018, we expect future home sales activity and selling price appreciation (or depreciation) to vary in strength between markets and within submarkets based to a substantial degree on their specific economic and housing environments, which may also reflect national, state and/or regional factors. These variations may be significant and unfavorable, and could be more pronounced and/or prolonged in our served markets due to changes in conditions that are outside of our control, including, but not limited to, the following:

•

Employment levels and job and wage growth, particularly for individuals and households who make up our core first-time and first move-up homebuyer demographic groups. If the recent upward trends in employment and income levels for these demographic groups weaken or reverse, a corresponding reduction in demand for homes could negatively impact our business, and the impact may be greater for us than for homebuilders that target more-experienced and/or higher-income homebuyers.


•	Negative population growth, household formations or other demographic changes that can impair demand for housing.

•

Diminished consumer confidence in general or specifically with respect to purchasing homes, or lack of consumer interest in purchasing a home compared to other housing alternatives due to location preferences, perceived affordability constraints or otherwise. Principally in the 2018 fourth quarter, we saw consumers pause on purchasing homes largely due to affordability concerns stemming from rising mortgage interest rates and steady home price appreciation over the past several years, which negatively impacted our net order comparison for the period. We can provide no assurance as to the duration of this pause or the degree to which demand may further soften in 2019, or that consumers will resume purchasing our homes in 2019 and beyond at the rates they did in recent prior years and the 2018 first half.


•	Inflation, which could result in our production costs increasing at a rate or to a level that we cannot recover through the selling prices of our homes. Inflation may also cause increases in mortgage loan interest rates, and in the interest rates we may need to accept to obtain external financing for our business.


•	Shortages or rising prices of building materials and construction services, including independent contractor or outside supplier capacity constraints and the impact of governmental tariffs, duties and/or trade restrictions imposed or increased on building materials or household products, manufacturing defects resulting in recalls of materials, changes in

immigration laws and trends in labor migration. These conditions could increase our costs and/or extend our construction and home delivery schedules, and we may be unable to raise the selling prices of our homes to cover the impact of such cost increases and/or delays.

•

Seasonality, which, as discussed above in the “Competition, Seasonality, Delivery Mix and Other Factors” section in Item 1 – Business in this report, generally results in fluctuations in our quarterly operating results, with a significant proportion of our homes delivered and revenues generated in our third and fourth fiscal quarters. While this pattern reflects when consumers have generally preferred to buy homes, we can provide no assurance that this historical seasonality will occur in 2019 or beyond, if at all.


•	Civil unrest and acts of terrorism, and government responses to such acts, as well as inclement weather, wildfires, natural disasters, and other environmental conditions can delay the delivery of our homes and/or increase our costs.

Additional headwinds may come from the present failure of lawmakers to agree on a budget or appropriation legislation to fund the federal government’s operations, and financial markets’ and businesses’ reactions to that failure, which could impair economic growth and demand for housing.

If economic or housing conditions become more challenging generally or in our served markets, due to the factors listed above, whether individually or collectively, or otherwise, or home sales or selling prices do not continue to advance at the same pace as in recent years or decline, there would likely be a corresponding adverse effect on our business and our consolidated financial statements, including, but not limited to, our net orders, the number of homes we deliver, our average selling prices, the revenues we generate, our housing gross profit margins and our ability to operate profitably, and the effect may be material. In addition, adjustments to federal government economic, trade, taxation and spending laws, policies or programs by the current administration and U.S. Congress may negatively impact the financial markets, consumer spending and/or the housing market, and, in turn, materially and adversely affect our operating results and consolidated financial statements.

Tight mortgage lending standards and/or interest rate increases could adversely affect the availability or affordability of mortgage loans for potential buyers of our homes and thereby reduce our net orders, homes delivered and revenues.

We depend on third-party lenders, including Stearns, our joint venture partner in KBHS, to provide mortgage loans to our homebuyers who need such financing to purchase our homes, and our dependence on such lenders is greater than for other homebuilders that operate a captive mortgage lender. Homebuyers’ ability to obtain financing largely depends on prevailing mortgage loan interest rates, the credit standards that mortgage lenders use and the availability of mortgage loan programs provided by federal government agencies (such as Federal Housing Administration (“FHA”)- or Veterans Administration-insured mortgage loans), or government-sponsored enterprises (such as the Federal National Mortgage Association (also known as “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (also known as “Freddie Mac”)), which have been a critical source of liquidity for the mortgage finance industry and an important factor in marketing and selling many of our homes. As a result of the labor market strengthening and the economy expanding at a solid rate since 2016, as well as Federal Reserve interest rate increases in 2018 and other factors, mortgage interest rates have risen. As discussed above, the higher mortgage interest rates had a negative impact on our net order comparison for the 2018 fourth quarter. If mortgage interest rates increase further, credit standards are tightened and/or the federal government reduces or terminates its mortgage loan programs (including due to an extended failure of lawmakers to agree on a budget or appropriation legislation to fund relevant operations or programs), the affordability of and demand for homes, including our homes, would likely be adversely impacted, and the impact could be material to our business and consolidated financial statements.

The mortgage banking operations of KBHS are heavily regulated and subject to rules and regulations promulgated by a number of governmental and quasi-governmental agencies. If there is a finding that Stearns, which provides management oversight of KBHS’s operations, or KBHS materially violated any applicable rules or regulations, or mortgage investors seek to have KBHS buy back mortgage loans or compensate them for losses incurred on mortgage loans KBHS has sold based on claims that it breached its limited representations or warranties, KBHS could face significant liabilities, which could exceed its reserves and cause us to recognize additional losses with respect to our equity interest in KBHS.

The poor performance of third-party mortgage lenders could lead to cancellations and a lower backlog of orders, or delay our delivery of homes and recognition of revenues from those homes.

Our homebuyers may obtain mortgage financing for their home purchases from any lender of their choice. However, we can provide no assurance as to third-party lenders’, including Stearns’, ability or willingness to complete, in a timely fashion or at all, the mortgage loan originations they start for our homebuyers. Such lenders’ inability or unwillingness may result in mortgage loan funding issues that delay deliveries of our homes and/or cause cancellations, which could in the aggregate have a material adverse effect on our business and our consolidated financial statements. In addition, if such third-party lenders, including Stearns, mishandle our homebuyers’ personal financial information, including due to a data security breach of their systems, the negative

impacts on our homebuyers, or negative publicity arising from any such incidents, could create, among other things, associated exposure to us with respect to claims for damages, regulatory penalties and/or reputational harm, and such exposure could be material and adverse to our business and consolidated financial statements.

The homebuilding industry and housing market are very competitive, and competitive conditions could adversely affect our business and consolidated financial statements.

We face significant competition in our business from other homebuilders, some of which have recently grown larger through mergers and acquisitions, sellers of existing homes, and other participants in the overall housing industry, including landlords and other rental housing operators. These competitive conditions can result in, among other things, our selling and delivering fewer homes; our reducing the selling prices of our homes and/or offering or increasing sales incentives; our being unable to acquire desirable land that meets our investment return standards; and our being unable to obtain construction resources at acceptable prices or when needed to meet our production schedules. These competitive conditions could have a material adverse effect on our business and consolidated financial statements by decreasing our revenues and housing gross profit margins; impairing our ability to successfully implement our current strategies, initiatives or actions; increasing our costs; and/or diminishing growth in our business.

Strategic Risks

Our ability to execute on our primary strategies is inherently uncertain, and we may be unable to achieve our goals.

We can provide no assurance that our strategies, and any related initiatives or actions, will be successful, that they will generate growth, earnings or returns at any particular level or within any particular time frame, or that we will achieve in 2019 or beyond positive operational or financial results or results in any particular metric or measure equal to or better than our 2018 performance, or perform in any period as well as other homebuilders. We also cannot provide any assurance that we will be able to maintain our strategies, and any related initiatives or actions, in 2019 and, due to unexpectedly favorable or unfavorable market conditions or other factors, we may determine that we need to adjust, refine or abandon all or portions of our strategies, initiatives or actions, though we cannot guarantee that any such changes will be successful. The failure of any one or more of our present strategies, or any related initiatives or actions, or the failure of any adjustments that we may pursue or implement, would likely have an adverse effect on our ability to increase the value and profitability of our business; on our ability to operate our business in the ordinary course; on our overall liquidity; and on our consolidated financial statements, and the effect in each case could be material.

The success of our present strategies depends on the availability of developable land that meets our investment return standards.

The availability of developable land, particularly finished and partially finished lots, meeting our investment return standards depends on several factors, including, among other things, land availability in general, geographical/topographical/governmental constraints, land sellers’ business relationships and competition for desirable property. As discussed above in the “Competition, Seasonality, Delivery Mix and Other Factors” section in Item 1 – Business in this report, since 2013 we have experienced heightened competition with homebuilders and other developers and investors for land, which, in addition to geographic, topographic and regulatory limitations, has caused the availability of desirable land in high-demand submarkets to become more constrained and costly. In some instances, these other homebuilders, developers and investors (both domestic and international) have greater financial resources than us and/or use less stringent underwriting standards that enable them to bid more for land.

Should suitable land become less available to us, our ability to increase our community count would be negatively affected and the number of homes we deliver could be reduced. In addition, as noted above, the cost of attractive land could increase and adversely impact our housing gross profit margins and our ability to maintain ownership or control of a sufficient supply of land to meet our production goals. A lack of available suitable land could also affect the success of our current strategies, and related initiatives, including our ability to grow our scale and share in our served markets; to expand our community count; to maintain or increase our revenues; to reduce our debt; and to maintain or improve our profitability in 2019 and beyond, and could have a material adverse effect on our business and consolidated financial statements.

Our business is concentrated in certain geographic markets and declines in one or more of our key served markets could materially affect our business and consolidated financial statements.

Home sales activity and selling prices in some of our key served markets have varied from time to time for market-specific and other reasons, including adverse weather, high levels of foreclosures, short sales and sales of lender-owned homes, and lack of affordability or economic contraction. If home sales activity or selling prices decline in one or more of our key served markets, including California, Florida, Nevada or Texas, our costs may not decline at all or at the same rate and, as a result, our consolidated financial statements may be materially and adversely affected.

Adverse conditions in California, which makes up nearly all of our West Coast homebuilding reporting segment, would have a particularly significant effect as our average selling price in this segment is the highest among all of our homebuilding reporting segments, a large percentage of our housing revenues is generated from this segment, and a significant proportion of our investments in land and land development have been made, and in 2019 are expected to be made, in that state. In addition, some of the areas we serve in California have recently experienced extreme or exceptional drought conditions, and although the governor lifted an emergency drought declaration in 2017, urban water use reporting requirements and prohibitions on wasteful water practices are still in effect. We can offer no assurance as to the conservation measures, including impact fees or penalties, that might be imposed by local water agencies/suppliers if such conditions recur that could limit, impair or delay our ability to sell and deliver homes; increase our production costs; or decrease the value of land we own or control, which may result in inventory impairment or land option contract abandonment charges, or both. These impacts, individually or collectively, could adversely affect our overall business and consolidated financial statements, and the effect could be material. Moreover, as California is one of the most highly regulated and litigious states in the country, our potential exposure to losses and expenses due to new laws, regulations or litigation may be greater than for other homebuilders with a less significant California presence.

Operational Risks

We may have difficulty in obtaining additional financing and/or may be restricted in accessing external capital, and to the extent we can access external financing, it may increase our capital costs or result in stockholder dilution.

Our homebuilding operations and our present strategies require significant amounts of cash and/or the availability of external financing. We have historically supported our operations with internally generated cash flows, public equity and debt issuances, land option contracts and other similar contracts and land seller financing. In addition, we have entered into the Credit Facility and the LOC Facility and obtained performance bonds for certain ordinary course aspects of our operations. While we believe we can meet our forecasted capital and operating requirements from our cash resources, expected future cash flows from our operations and anticipated available external financing sources, we can provide no assurance that we will be able to do so at all or without incurring substantially higher costs.

Capital market conditions in 2019 and beyond may significantly limit our ability to obtain additional external financing and/or maintain or, if necessary or appropriate, expand the Credit Facility’s or the LOC Facility’s capacity, or enter into additional or similar such facilities, or obtain performance bonds, in each case on acceptable terms or at all. Volatility in the securities markets could impede our access to such markets or increase the dilution our stockholders would experience if we believe it is necessary or appropriate to issue additional equity securities. As of the date of this report, our credit rating by Standard and Poor’s Financial Services is BB-, with a stable outlook; Moody’s Investor Services is B1, with a positive outlook; and Fitch Ratings is BB-, with a stable outlook. Downgrades of our credit rating by any of these firms may also make it more difficult and costly for us to access external financing sources. The adverse effects of these conditions or events could be material to our business and our consolidated financial statements.

Failure to comply with the covenants and other requirements imposed by the Credit Facility and the instruments governing our indebtedness could restrict future borrowing. Under certain circumstances, our obligations to repay our indebtedness may be accelerated and we may be unable to do so.

Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants. If we fail to comply with the covenants and other requirements imposed by the Credit Facility and the other instruments governing our indebtedness, the participating financial institutions and/or investors could terminate the Credit Facility, cause borrowings under the Credit Facility, if any, or the outstanding principal and unpaid interest under our senior notes, if applicable, to become immediately due and payable and/or could demand that we compensate them for waiving instances of noncompliance. In addition, a default under the Credit Facility or under any series of our senior notes could in certain cases accelerate the maturity of all of our senior notes and restrict borrowings under the Credit Facility, as well as result in penalties and additional fees.

If any such covenant noncompliance or default occurs, it would likely have a material adverse impact on our liquidity, on our ability to operate our business in the ordinary course and on our consolidated financial statements. In addition, we may need to curtail our investment activities and other uses of cash to maintain compliance with the covenants and other requirements under the Credit Facility and the other instruments governing our indebtedness, which could impair our ability to achieve our strategic growth goals.

As described in Note 13 – Notes Payable in the Notes to Consolidated Financial Statements in this report, if a change of control or if a fundamental change were to occur prior to the stated maturity date of our senior notes, we may be required to offer to purchase certain of our senior notes, plus accrued interest and unpaid interest, if any. In such circumstances, if we are unable to generate sufficient cash flows from our operations, we may need to refinance and/or restructure with our lenders or other creditors all or a portion of our outstanding debt obligations on or before their maturity, which we may not be able to do on favorable terms or at all, or raise capital through equity or convertible security issuances that could significantly dilute existing stockholders’

interests, and the impact of such circumstances on our liquidity and consolidated financial statements would be material and adverse.

We have a substantial amount of indebtedness in relation to our tangible net worth and cash balance, which may restrict our ability to meet our operational and strategic growth goals.

The amount of our debt overall and relative to our total stockholders’ equity and cash balance could have important consequences. For example, it could limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service obligations or other business needs; limit our ability to maintain compliance with the Credit Facility’s financial covenants, or to renew or expand the capacity of the Credit Facility; require us to dedicate a substantial portion of our cash flows from our operations to the payment of our debt service obligations and reduce our ability to use our cash flows for other purposes; impact our flexibility in planning for, or reacting to, changes in our business; limit our ability to successfully implement our current strategies, initiatives or actions, in part due to competition from others with greater available liquidity; place us at a competitive disadvantage because we have more debt than some of our competitors; and make us more vulnerable in the event of a downturn in our business or in general economic or housing market conditions.

Our ability to meet our debt service and other obligations necessary to operate our business in the ordinary course will depend on our future performance. As of the date of this report, our next scheduled maturity of senior notes is on February 1, 2019 with respect to $230.0 million in aggregate principal amount of our 1.375% convertible senior notes due 2019 (“1.375% Convertible Senior Notes due 2019”), though any holder of these notes may convert all or any portion of its notes at any time prior to the close of business on the business day immediately preceding the maturity date into shares of our common stock at an initial conversion rate corresponding to a price per share of approximately $27.37. We also have $400.0 million in aggregate principal amount of our 4.75% senior notes due 2019 (“4.75% Senior Notes due 2019”) that mature on May 15, 2019.

Reduced home sales may impair our ability to recoup development costs or force us to absorb additional costs.

Depending on the stage of development a land parcel is in when acquired, we may incur expenditures for developing land into a community, such as entitling and finishing lots and installing roads, sewers, water systems and other utilities; taxes and other levies related to ownership of the land; constructing model homes; and promotional marketing and overhead expenses to prepare the community to open for home sales. If the rate at which we sell and deliver homes slows or falls, or if our opening of communities for home sales is delayed due to adjustments in our investment strategy, protracted governmental approval processes or utility service activations, diminished consumer interest in purchasing homes generally or in our products, or other reasons, we may incur additional costs, which would adversely affect our housing gross profit margins, and it will take a longer period of time for us to recover our costs.

The value of the land and housing inventory we own or control may fall significantly.

The value of the land and housing inventory we currently own or control depends on market conditions, including estimates of future demand for, and the revenues that can be generated from, this inventory. The value of our inventory can vary considerably because there is often a significant amount of time between our acquiring control or taking ownership of land and the delivery of homes on that land, particularly undeveloped and/or unentitled land. If, in 2019, the present economic or housing environment weakens, if particular markets or submarkets experience challenging or unfavorable changes in prevailing business conditions, including an increase in inflation, if we are unable to sell our land held for sale at its current estimated fair value, or if we elect to revise our strategy relating to certain land positions, we may need to record charges against our earnings for inventory impairments or land option contract abandonments, or both. We may also decide to sell certain land at a loss and record a corresponding charge. In addition, we may record charges against our earnings in connection with activating or selling certain land held for future development in connection with our current strategic initiatives. Any such charges could have a material adverse effect on our consolidated financial statements.

Homebuilding is subject to warranty and liability claims in the ordinary course of business that can be significant.

In the ordinary course of our homebuilding business, we are subject to home warranty and other construction defect claims. We rely upon independent subcontractors to perform actual construction of our homes and, in some cases, to select and obtain building materials. We maintain, and require the majority of our independent subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. We self-insure a portion of our overall risk through the use of a captive insurance subsidiary. We also maintain certain other insurance policies. However, the coverage offered by and the availability of general liability insurance for construction defects are currently limited and costly, and, in our case, have relatively high self-insured retentions that limit coverage significantly.

Because of the uncertainties inherent to these matters, including our ability to obtain recoveries for home warranty or other construction defect claims from responsible independent contractors and/or their or our insurers, our recorded warranty and other

liabilities may not be adequate to address all of our expenditures associated with such claims in the future, and any such inadequacies could negatively affect our consolidated financial statements, including from potentially recording charges to adjust our warranty liability. Home warranty and other construction defect issues may also generate negative publicity in various media outlets, including social media, websites, Internet blogs and newsletters, that could be detrimental to our reputation and adversely affect our efforts to sell homes.

We can provide no assurance that in 2019 we will not face additional home warranty and other construction defect claims and/or incur additional related repair and other costs, or experience negative publicity/reputational harm or be successful in obtaining any recoveries of related repair and other costs, and that any of these items — if they occur, or with respect to recoveries of related repair and other costs, fail to occur — could, individually or collectively, have a material and adverse impact on our business and consolidated financial statements.

We may not realize our significant deferred income tax assets. In addition, our net operating loss carryforwards could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.

At November 30, 2018, we had deferred tax assets of $441.8 million, net of a $23.6 million valuation allowance. Our ability to realize our deferred tax assets is based on the extent to which we generate future taxable income and on prevailing corporate income tax rates, and we cannot provide any assurance as to when and to what extent we will generate sufficient future taxable income to realize our deferred tax assets, whether in whole or in any part. In December 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, reducing the federal corporate income tax rate from 35% to 21%. As a result, we recorded a non-cash charge of $112.5 million to our provision for income taxes in 2018 primarily due to the accounting re-measurement of our deferred tax assets based on the lower income tax rate. While we believe the TCJA will not impact the ability of our deferred tax assets to reduce the amount of cash federal income taxes payable in 2019 and beyond, any future lowering of corporate income tax rates, and/or adjustment in the treatment of deferred tax assets, could impact the realization as well as the value of our deferred tax assets in our consolidated balance sheets, and these impacts could be material and adverse. Further, we have filed our tax returns based on certain filing positions we believe are appropriate. Should the applicable taxing authorities disagree with these positions, we may owe additional taxes.

The benefits of our deferred tax assets, including our net operating losses (“NOLs”), 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”). We currently believe that an ownership change has not occurred. However, if an ownership change were to occur, the annual limit Section 382 may impose on the amount of NOLs we could use to reduce our taxable income could result in a material amount of our NOLs expiring unused. This would significantly impair the value of our net deferred tax assets and, as a result, have a material negative impact on our consolidated financial statements.

Our ability to attract and retain talent is critical to the success of our business and a failure to do so may materially and adversely affect our performance.

Our directors, officers and employees are important resources, and we see attracting and retaining a dedicated and talented team and board members as crucial to our success. If we are unable to continue to attract and retain qualified employees, or, alternatively, if we are required or believe it is appropriate to reduce our overhead expenses through significant personnel reductions or adjustments to compensation and benefits, our performance, our ability to achieve our strategic growth goals, our business and our consolidated financial statements could be materially and adversely affected. Similar negative impacts on our business and our consolidated financial statements could result from our failure to comply with legal and regulatory requirements applicable to our workforce.

Information technology failures and data security breaches could harm our business.

We use information technology and other computer resources to carry out important operational activities and to maintain our business records. As part of our normal business activities, we collect and store certain personal identifying and confidential information relating to our homebuyers, employees, vendors and suppliers, and maintain operational and financial information related to our business. We may share some of this confidential information with our vendors, such as escrow companies and related title services enterprises, who partner with us to support certain aspects of our business.

We have implemented systems and processes intended to address ongoing and evolving cybersecurity risks, secure our information technology, applications and computer systems, and prevent unauthorized access to or loss of sensitive, confidential and personal data. We also provide regular personnel awareness training of potential cybersecurity threats, including the use of newsletters and internal phishing assessments, to help ensure employees remain diligent in identifying potential risks. In addition, we have deployed monitoring capabilities to support early detection, internal and external escalation, and effective responses to potential anomalies. Many of our information technology and other computer resources are provided to us and/or maintained on

our behalf by third-party service providers pursuant to agreements that specify to varying degrees certain security and service level standards.

We rely upon our third-party service providers to maintain effective cybersecurity measures to keep our information secure. We also rely on Stearns and other outside mortgage lenders to maintain effective cyber and other security measures to keep secure the information they collect about our homebuyers in providing them with mortgage banking services. Although we and our service providers employ what we believe are adequate security, disaster recovery and other preventative and corrective measures, our security measures, taken as a whole, may not be sufficient for all possible situations and may be vulnerable to, among other things, hacking, employee error, system error, and faulty password management. In addition, our ability to conduct our business may be impaired if these resources, including our websites or e-mail system, are compromised, degraded, damaged or fail, whether due to a virus or other harmful circumstance, intentional penetration or disruption of our information technology resources by a third party, natural disaster, hardware or software corruption or failure or error or poor product or vendor/developer selection (including a failure of security controls incorporated into or applied to such hardware or software), telecommunications system failure, service provider error or failure, intentional or unintentional personnel actions (including the failure to follow our security protocols), or lost connectivity to our networked resources.

A significant and extended disruption could damage our reputation and cause us to lose customers, orders, deliveries of homes and revenues; result in the unintended and/or unauthorized public disclosure or the misappropriation of proprietary, personal identifying and confidential information; and require us to incur significant expenses to address and remediate or otherwise resolve these kinds of issues. The release of confidential information may also lead to litigation or other proceedings against us by affected individuals, business partners and/or regulators, and the outcome of such proceedings, which could include losses, penalties, fines, injunctions, expenses and charges recorded against our earnings and cause us reputational harm, could have a material and adverse effect on our business and consolidated financial statements. Depending on its nature, a data security breach may result in the unauthorized use or loss of our assets or financial resources, and such unauthorized use(s) or loss(es), which could be significant, may not be detected for some period of time. In addition, the costs of maintaining adequate protection against data security threats, based on considerations of their evolution, increasing sophistication, pervasiveness and frequency and/or government-mandated standards or obligations regarding protective efforts, could be material to our consolidated financial statements in a particular period or over various periods.

Legal and Regulatory Risks

Tax law changes could make home ownership more expensive or less attractive.

Prior to the TCJA’s enactment, significant expenses of owning a home, including mortgage loan interest costs and real estate taxes, generally were deductible expenses for the purpose of calculating an individual’s or household’s federal, and in some cases state, taxable income, subject to various limitations. The TCJA established new limits on the federal tax deductions individual taxpayers may take on mortgage loan interest payments and on state and local taxes, including real estate taxes. The TCJA also raised the standard deduction. These changes could reduce the perceived affordability of homeownership, and therefore the demand for homes, and/or have a moderating impact on home sales prices in areas with relatively high housing prices and/or high state and local income taxes and real estate taxes, including in certain of our served markets in California. As a result, some communities in our California operations could experience lower net orders and/or a tempering of average sales prices in future periods. In addition, if the federal government further changes, or a state government changes, its income tax laws by eliminating or substantially reducing the income tax benefits associated with homeownership, the after-tax cost of owning a home could measurably increase. Any increases in personal income tax rates and/or tax deduction limits or restrictions enacted at the federal or state levels, including those enacted under the TCJA, could adversely impact demand for and/or selling prices of new homes, including our homes, and the effect on our consolidated financial statements could be adverse and material.

Recent and potential changes in U.S. trade policies and retaliatory responses from other countries may significantly increase the costs or limit supplies of building materials and products used in our homes.

The federal government has recently imposed new or increased tariffs or duties on an array of imported materials and goods that are used in connection with the construction and delivery of our homes, including steel, aluminum, lumber, solar panels and washing machines, raising our costs for these items (or products made with them), and has threatened to impose further tariffs, duties and/or trade restrictions on imports. Foreign governments, including China and Canada, and trading blocs, such as the European Union, have responded by imposing or increasing tariffs, duties and/or trade restrictions on U.S. goods, and are reportedly considering other measures. These trading conflicts and related escalating governmental actions that result in additional tariffs, duties and/or trade restrictions could increase our construction costs further, cause disruptions or shortages in our supply chains and/or negatively impact the U.S., regional or local economies, and, individually or in the aggregate, materially and adversely affect our business and our consolidated financial statements.

We could be responsible for employment-related liabilities with respect to our subcontractors’ employees.

Independent subcontractors perform all land development and home construction work at our communities. Although we do not have the ability to control what these independent subcontractors pay their own employees, or their own subcontractors, or the work rules they impose on such personnel, federal and state governmental agencies, including the U.S. National Labor Relations Board, have sought, and may in the future seek, to hold contracting parties like us responsible for subcontractors’ violations of wage and hour laws, or workers’ compensation, collective bargaining and/or other employment-related obligations related to subcontractors’ workforces. Pursuant to a recently effective California law, we could be responsible for the wages, fringe benefits, or other benefit payments or contributions, including interest, that a subcontractor owes to or on behalf of its employees under contracts we enter into with subcontractors on or after January 1, 2018. In addition, California also generally requires workers employed on public works projects to be paid the applicable prevailing wage, as determined by the Department of Industrial Relations. Governmental agency determinations or attempts by others to make us responsible for subcontractors’ labor practices or obligations, whether under “joint employer” theories, specific state laws or regulations, such as under the California Labor Code, or otherwise, could create substantial adverse exposure for us in situations that are not within our control and could be material to our consolidated financial statements.

We are subject to substantial legal and regulatory requirements regarding the development of land, the homebuilding process and the protection of the environment, which can cause us to suffer production delays and incur costs associated with compliance, and/or prohibit or restrict homebuilding activity in some regions or areas. Our business is also subject to a number of local, state and federal laws, statutes, ordinances, rules, policies and other legal and regulatory requirements. The impact of such requirements or our failure to comply with such requirements, individually or collectively, could be adverse and material to our consolidated financial statements.

Our homebuilding business is heavily regulated and subject to a significant amount of local, state and federal regulation including, among other things, zoning, building designs, worksite health and safety and home construction methods, as well as governmental taxes, fees and levies on the acquisition and development of land. These regulations often provide broad discretion to government authorities that oversee these matters, which can result in unanticipated delays, restrictions, penalties for non-compliance and/or increases in the cost of a development project in particular markets. We can provide no assurance that these regulations will not be interpreted or revised in ways that will require us to change our present strategies or operations, incur significant compliance costs or record charges against our earnings, have a negative impact on our reputation or our relationships with relevant agencies or government authorities, and/or restrict the manner in which we conduct our activities. Any such actions or events, and associated costs and charges, could adversely and materially affect our consolidated financial statements. Also, there have been significant cuts to government departments, subsidies, programs and public employee staffing levels (including due to an extended failure of lawmakers to agree on a budget or appropriation legislation to fund relevant operations or programs), limiting economic growth and/or resulting in significant delays and/or higher costs in obtaining required inspections, permits or approvals with respect to the development of our communities. These actions or events could adversely affect our ability to generate orders and revenues and/or to maintain or increase our housing gross profit margins, and the impact could be material and adverse to our consolidated financial statements.

In addition, we are subject to a variety of local, state and federal laws, statutes, ordinances, rules and regulations concerning the environment and climate change, especially in the state of California. These requirements and/or evolving interpretations thereof, may cause production delays, may cause us to incur substantial costs, and can prohibit or restrict homebuilding activity in certain areas; any of which could also reduce the value of the affected inventory and require us to record significant impairment charges. Environmental and climate change laws may also impose liability for the costs of removal or remediation of hazardous or toxic substances whether or not the developer or owner of the property knew of, or was responsible for, the presence of those substances. The actual or potential presence of those substances on or near our properties may prevent us from selling our homes and we may also be liable, under applicable laws and regulations or lawsuits brought by private parties, for hazardous or toxic substances on land that we have sold in the past.

We are also involved in legal, arbitral or regulatory proceedings or investigations incidental to our business, the outcome or settlement of which could result in claims, losses, monetary damage awards, penalties, or other direct or indirect payments recorded against our earnings, or injunctions, consent decrees or other voluntary or involuntary restrictions or adjustments to our business operations or practices. Any such adverse results could be beyond our expectations, insurance coverages and/or accruals at particular points in time and material to our business and consolidated financial statements. Unfavorable litigation, arbitral or administrative outcomes, as well as unfavorable investor, analyst or news reports related to our industry, company, personnel or operations, may also generate negative publicity in various media outlets, including social media, websites, Internet blogs and newsletters, that could be detrimental to our reputation or stock price, and adversely affect our efforts to sell homes.


Item 1B.	UNRESOLVED STAFF COMMENTS

None.


Item 2.	PROPERTIES

We lease our corporate headquarters in Los Angeles, California. Our homebuilding division offices and our design studios are located in leased space in the markets where we conduct business.

We believe that such properties, including the equipment located therein, are suitable and adequate to meet the needs of our businesses.


Item 3.	LEGAL PROCEEDINGS

Our legal proceedings are discussed in Note 16 – Legal Matters in the Notes to Consolidated Financial Statements in this report.


Item 4.	MINE SAFETY DISCLOSURES

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table presents certain information regarding our executive officers as of December 31, 2018:



Name	Age	Present Position	Year Assumed Present Position	Years at KB Home	Other Positions and Other Business Experience within the Last Five Years	From – To

Jeffrey T. Mezger	63	Chairman, President and Chief Executive Officer (a)	2016	25	President and Chief Executive Officer (a)	2006-2016
Jeff J. Kaminski	57	Executive Vice President and Chief Financial Officer	2010	8
Matthew W. Mandino	54	Executive Vice President and Chief Operating Officer	2018	7	Regional President, Southwest Division President, Colorado	2016-2018 2011-2016
Albert Z. Praw	70	Executive Vice President, Real Estate and Business Development	2011	22
Brian J. Woram	58	Executive Vice President and General Counsel	2010	8
William R. Hollinger	60	Senior Vice President and Chief Accounting Officer	2007	31
Thomas F. Norton	48	Senior Vice President, Human Resources	2009	10


(a)	Mr. Mezger has served as a director since 2006. He was elected Chairman of our board of directors in August 2016.

There is no family relationship between any of our executive officers or between any of our executive officers and any of our directors.

PART II


Item 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the New York Stock Exchange under the ticker symbol “KBH.” As of December 31, 2018, there were 571 holders of record of our common stock.

Information regarding the shares of our common stock that may be issued under our equity compensation plans is provided below in Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters in this report.

The following table summarizes our purchases of our own equity securities during the three months ended November 30, 2018:



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
September 1-30	—	$	—	—	4,000,000
October 1-31	—	—		—	4,000,000
November 1-30	1,891,404	19.42		1,806,053	2,193,947
Total	1,891,404	$	19.42	1,806,053

As we publicly reported, on January 12, 2016, our board of directors authorized us to repurchase a total of up to 10,000,000 shares of our outstanding common stock. As of November 30, 2016, we had repurchased 8,373,000 shares of our common stock pursuant to this authorization, at a total cost of $85.9 million. On May 14, 2018 our board of directors reaffirmed the remainder of the 2016 authorization and approved and authorized the repurchase of 2,373,000 additional shares of our outstanding common stock, for a total of up to 4,000,000 shares authorized for repurchase. In 2018, we repurchased 1,806,053 shares of our common stock pursuant to this authorization, at a total cost of $35.0 million.

The shares purchased during the three months ended November 30, 2018 also included 85,351 of previously issued shares delivered to us by employees to satisfy withholding taxes on the vesting of restricted stock awards. These transactions are not considered repurchases under the board of directors’ authorization.

Stock Performance Graph

The following graph compares the five-year cumulative total return of KB Home common stock, the S&P 500 Index and the Dow Jones US Home Construction Index for the periods ended November 30:

Comparison of Five-Year Cumulative Total Return

Among KB Home, S&P 500 Index and

Dow Jones US Home Construction Index



	2013		2014		2015		2016		2017		2018
KB Home	$	100	$	101	$	81	$	92	$	184	$	124
S&P 500 Index	100		117		120		130		159		169
Dow Jones US Home Construction Index	100		120		136		120		215		153

The above graph is based on the KB Home common stock and index prices calculated as of the last trading day before December 1 of the year-end periods presented. The closing price of KB Home common stock on the New York Stock Exchange was $21.11 per share on November 30, 2018 and $31.36 per share on November 30, 2017. The performance of our common stock as presented above reflects past performance only and is not indicative of future performance. Total return assumes $100 invested at market close on November 30, 2013 in KB Home common stock, the S&P 500 Index and the Dow Jones US Home Construction Index, including reinvestment of dividends.


Item 6.	SELECTED FINANCIAL DATA

The data in this table should be read in conjunction with Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 – Financial Statements and Supplementary Data in this report.

KB HOME

SELECTED FINANCIAL DATA

(Dollars In Thousands, Except Per Share Amounts and Average Selling Price)



	Years Ended November 30,
	2018		2017		2016		2015		2014
Statement of Operations Data:
Revenues:
Homebuilding	$	4,533,795	$	4,356,265	$	3,582,943	$	3,020,987	$	2,389,643
Financial services	13,207		12,264		11,703		11,043		11,306
Total	$	4,547,002	$	4,368,529	$	3,594,646	$	3,032,030	$	2,400,949
Operating income:
Homebuilding	$	345,721	$	283,403	$	152,401	$	138,621	$	115,969
Financial services	9,363		8,834		7,886		7,332		7,860
Total	$	355,084	$	292,237	$	160,287	$	145,953	$	123,829
Pretax income	$	367,965	$	289,995	$	149,315	$	127,043	$	94,949
Net income (a)	170,365		180,595		105,615		84,643		918,349
Earnings per share:
Basic	$	1.93	$	2.09	$	1.23	$	.92	$	10.26
Diluted	1.71		1.85		1.12		.85		9.25
Cash dividends declared per share	.10		.10		.10		.10		.10
Balance Sheet Data:
Assets:
Homebuilding	$	5,061,191	$	5,029,158	$	5,121,125	$	5,072,877	$	4,846,083
Financial services	12,380		12,357		10,499		14,028		10,486
Total	$	5,073,571	$	5,041,515	$	5,131,624	$	5,086,905	$	4,856,569
Notes payable	$	2,060,263	$	2,324,845	$	2,640,149	$	2,601,754	$	2,550,622
Stockholders’ equity	2,087,500		1,926,311		1,723,145		1,690,834		1,595,910
Stockholders’ equity per share	24.01		22.13		20.25		18.32		17.36
Homebuilding Data:
Homes delivered	11,317		10,909		9,829		8,196		7,215
Average selling price	$	399,200	$	397,400	$	363,800	$	354,800	$	328,400
Net orders	11,014		10,900		10,283		9,253		7,567
Unit backlog	4,108		4,411		4,420		3,966		2,909
Average community count	223		233		238		244		200


(a)	Net income for the year ended November 30, 2018 included a non-cash charge of $112.5 million to income tax expense for TCJA-related impacts. Net income for the year ended November 30, 2014 included the favorable impact of an $825.2 million deferred tax asset valuation allowance reversal.


Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Overview. Revenues are generated from our homebuilding and financial services operations. The following table presents a summary of our consolidated results of operations (dollars in thousands, except per share amounts):



	Years Ended November 30,									Variance
	2018			2017			2016			2018 vs 2017		2017 vs 2016
Revenues:
Homebuilding	$	4,533,795		$	4,356,265		$	3,582,943		4	%	22	%
Financial services	13,207			12,264			11,703			8		5
Total	$	4,547,002		$	4,368,529		$	3,594,646		4	%	22	%
Pretax income:
Homebuilding	$	351,301		$	276,927		$	144,849		27	%	91	%
Financial services	16,664			13,068			4,466			28		193
Total	367,965			289,995			149,315			27		94
Income tax expense	(197,600		)	(109,400		)	(43,700		)	(81	)	(150	)
Net income	$	170,365		$	180,595		$	105,615		(6	)%	71	%
Earnings per share:
Basic	$	1.93		$	2.09		$	1.23		(8	)%	70	%
Diluted	$	1.71		$	1.85		$	1.12		(8	)%	65	%

Housing market conditions were generally favorable in 2018, reflecting strong employment gains, high levels of consumer confidence and a limited supply of homes available for sale. However, affordability concerns, driven by several years of home price appreciation coupled with rising mortgage interest rates, emerged and tempered buyer demand in the latter half of the year, primarily in the fourth quarter. With our continued execution on our long-standing, customer-centric operating strategy and our Returns-Focused Growth Plan, which are described in Item 1 – Business in this report, we produced solid revenue growth and expanded our housing gross profit margin compared to 2017.

Within our homebuilding operations, housing revenues increased 4% year over year to $4.52 billion, as the number of homes we delivered grew 4% to 11,317 and the overall average selling price of those homes increased slightly to $399,200, primarily due to a shift in geographic mix. Homebuilding operating income for 2018 increased 22% year over year to $345.7 million and, as a percentage of homebuilding revenues, improved 110 basis points to 7.6%. Our housing gross profits for 2018 grew 11% from 2017 mainly due to the higher housing revenues and a 120 basis point increase in our housing gross profit margin to 17.5%. The expansion of our housing gross profit margin primarily reflected our community-specific action plans to enhance their performance and a greater proportion of homes delivered from higher-margin communities, partly offset by increases in land, trade labor and material costs. Our selling, general and administrative expense ratio for 2018 remained unchanged at 9.8%. Our net income and diluted earnings per share, which were down 6% and 8%, respectively, year over year, included a non-cash charge of $112.5 million for TCJA-related impacts, as discussed in Note 12 – Income Taxes in the Notes to Consolidated Financial Statements in this report.

During 2018, we delivered steady improvement in our financial and operational performance, including enhancing our profitability, strengthening our balance sheet, improving our cash flow, generating higher returns, and reducing our leverage ratio. In addition, with the substantial cash flow we generated, we repaid $300.0 million of senior notes upon their maturity.

Progress on Returns-Focused Growth Plan Targets. Since first implementing our Returns-Focused Growth Plan, we have made significant progress toward achieving our 2019 financial targets. The following table presents these targets for 2019 and our actual results for each of the years ended November 30, 2018, 2017 and 2016 (dollars in thousands):



		Years Ended November 30,
Returns-Focused Growth Plan Financial Targets	2019 Targets	2018			2017			2016
Housing revenues	> $5.0 billion	$	4,517,244		$	4,335,205		$	3,575,548
Homebuilding operating income margin, excluding inventory-related charges	8% to 9%	8.3		%	7.1		%	5.7		%
Return on invested capital (a)	> 10%	10.4		%	7.4		%	5.2		%
Return on equity (a)	10.0% to 15.0%	14.4		%	10.0		%	6.3		%
Net debt to capital ratio (b)	35.0% to 45.0%	41.6		%	45.4		%	54.3		%


(a)	The 2018 ratio excludes the impact from the above-described TCJA-related charge.


(b)	In the 2018 fourth quarter, we lowered our net debt to capital ratio target to a range of 35% to 45% from the original 2019 target range of 40% to 50%.

Our housing revenues of $4.52 billion for the year ended November 30, 2018 approached the $5.0 billion target, and several other metrics for the year, including homebuilding operating income margin (excluding inventory-related charges), and return on invested capital and return on equity (each excluding the TCJA-related charge), and net debt to capital ratio, met the targets we established for 2019. Growing our housing revenues while expanding our homebuilding operating income margin (excluding inventory-related charges) and improving asset efficiency under our Returns-Focused Growth Plan produced meaningful improvement in our returns in 2018 and 2017. In addition, we generated significant cash flow, fueling our ability to invest $3.40 billion in land and land development, repay nearly $600 million of senior notes, and repurchase $35.0 million of our common stock since we launched our Returns-Focused Growth Plan two years ago.

While we believe we are well positioned to make additional progress on our 2019 targets under our Returns-Focused Growth Plan, as mentioned above and further discussed below under “Outlook,” in the latter part of 2018, the homebuilding industry and our business experienced various headwinds that could negatively impact our performance and our ability to achieve some or all of these 2019 targets.

Net Orders, Backlog and Community Count. The following table presents information concerning our net orders, cancellation rates, ending backlog, and community count for the years ended November 30, 2018 and 2017 (dollars in thousands):



	Years Ended November 30,
	2018			2017
Net orders	11,014			10,900
Net order value (a)	$	4,291,481		$	4,476,247
Cancellation rates (b)	22		%	24		%
Ending backlog — homes	4,108			4,411
Ending backlog — value	$	1,434,368		$	1,660,131
Ending community count	240			224
Average community count	223			233


(a)	Net order value represents the potential future housing revenues associated with net orders generated during a period, as well as homebuyer selections of lot and product premiums and design studio options and upgrades for homes in backlog during the same period.


(b)	Cancellation rates represent the total number of contracts for new homes cancelled during a period divided by the total (gross) orders for new homes generated during the same period.

Net Orders. In 2018, net orders from our homebuilding operations increased 1% from 2017, reflecting a 5% increase in monthly net orders per community to 4.1, partly offset by a 4% decrease in our overall average community count. The combination of nearly flat net orders and a lower overall average selling price resulted in the value of our 2018 net orders decreasing 4% from 2017. The year-over-year decline in the overall net order value reflected a 16% decrease in our West Coast homebuilding reporting segment due to an 11% decline in the segment’s net orders and a 6% decline in the average selling price of those orders. Our other

three homebuilding reporting segments posted year-over-year increases in net order value, particularly our Southeast homebuilding reporting segment, where net order value increased 30% from the previous year, reflecting 24% growth in net orders and a 5% increase in the average selling price of those orders. The increase in net orders from our Southeast homebuilding reporting segment was primarily due to the increase in the average community count for that segment, as further discussed below under “Community Count.” Our cancellation rate for 2018 showed improvement compared to the previous year.

Backlog. The number of homes in our backlog at November 30, 2018 decreased 7% from the previous year. The potential future housing revenues in our backlog at November 30, 2018 declined 14% year over year, reflecting fewer homes in our backlog and a 7% decrease in the average selling price of those homes. The lower backlog value reflected year-over-year decreases of 32% in our West Coast homebuilding reporting segment, 10% in our Central homebuilding reporting segment and 8% in our Southwest homebuilding reporting segment. These declines were partly offset by a 24% increase in our Southeast homebuilding reporting segment. Substantially all of the homes in our backlog at November 30, 2018 are expected to be delivered during the year ending November 30, 2019.

Community Count. Our average community count for 2018 declined 4% on a year-over-year basis, as decreases in our West Coast, Southwest and Central homebuilding reporting segments of 11%, 13%, and 2%, respectively, were partly offset by an increase of 10% in our Southeast homebuilding reporting segment. Our ending community count for 2018 increased 7% from 2017 due to increases of 14%, 3% and 24% in our West Coast, Southwest and Southeast homebuilding reporting segments, respectively, that were partly offset by a decrease of 2% in our Central homebuilding reporting segment. The higher ending community count reflected community openings in 2018 that resulted from our investments in land and land development, as well as the significant expansion of our Jacksonville, Florida operations in the 2018 third quarter through the acquisition of approximately 2,100 owned or controlled lots from a regional homebuilder.

We invested $1.89 billion in land and land development in 2018 to support home delivery and revenue growth in 2019 and beyond, as we continue to work on expanding the scale of our business primarily within our existing geographic footprint as part of our core business strategy. In 2017, such investments totaled $1.52 billion. Approximately 50% of our total investment in 2018 related to land acquisitions, compared to approximately 48% in 2017.

HOMEBUILDING

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



	Years Ended November 30,
	2018			2017			2016
Revenues:
Housing	$	4,517,244		$	4,335,205		$	3,575,548
Land	16,551			21,060			7,395
Total	4,533,795			4,356,265			3,582,943
Costs and expenses:
Construction and land costs
Housing	(3,728,917		)	(3,627,732		)	(2,997,073		)
Land	(15,003		)	(18,736		)	(44,028		)
Total	(3,743,920		)	(3,646,468		)	(3,041,101		)
Selling, general and administrative expenses	(444,154		)	(426,394		)	(389,441		)
Total	(4,188,074		)	(4,072,862		)	(3,430,542		)
Operating income	$	345,721		$	283,403		$	152,401
Homes delivered	11,317			10,909			9,829
Average selling price	$	399,200		$	397,400		$	363,800
Housing gross profit margin as a percentage of housing revenues	17.5		%	16.3		%	16.2		%
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues	18.1		%	16.9		%	16.6		%
Adjusted housing gross profit margin as a percentage of housing revenues	22.5		%	21.8		%	21.1		%
Selling, general and administrative expense ratio	9.8		%	9.8		%	10.9		%
Operating income as a percentage of homebuilding revenues	7.6		%	6.5		%	4.3		%

The following tables present homes delivered, net orders, cancellation rates as a percentage of gross orders, net order value, average community count, and ending backlog (number of homes and value) by homebuilding reporting segment (dollars in thousands):



	Years Ended November 30,
	Homes Delivered		Net Orders		Cancellation Rates
Segment	2018	2017	2018	2017	2018		2017
West Coast	3,152	3,387	2,985	3,356	20	%	17	%
Southwest	2,301	1,837	2,139	2,121	17		22
Central	4,113	4,136	4,045	3,939	27		31
Southeast	1,751	1,549	1,845	1,484	21		24
Total	11,317	10,909	11,014	10,900	22	%	24	%



	Years Ended November 30,
	Net Order Value						Average Community Count
Segment	2018		2017		Variance		2018		2017		Variance
West Coast	$	1,893,597	$	2,263,443	(16	)%	54		61		(11	)%
Southwest	682,172		632,747		8		34		39		(13	)
Central	1,169,397		1,160,378		1		91		93		(2	)
Southeast	546,315		419,679		30		44		40		10
Total	$	4,291,481	$	4,476,247	(4	)%	223		233		(4	)%


	November 30,
	Backlog – Homes						Backlog – Value
Segment	2018		2017		Variance		2018		2017		Variance
West Coast	715		882		(19	)%	$	414,564	$	606,109	(32	)%
Southwest	926		1,088		(15	)	302,614		327,517		(8	)
Central	1,714		1,782		(4	)	487,921		541,684		(10	)
Southeast	753		659		14		229,269		184,821		24
Total	4,108		4,411		(7	)%	$	1,434,368	$	1,660,131	(14	)%

Revenues. Homebuilding revenues totaled $4.53 billion in 2018, up 4% from 2017, which had increased 22% from 2016. The year-over-year growth in 2018 reflected an increase in housing revenues that was partly offset by a decrease in land sale revenues. In 2017, homebuilding revenues grew from the previous year driven by increases in both housing and land sale revenues.

Housing revenues in 2018 rose 4% from the previous year, reflecting a 4% increase in the number of homes delivered as the overall average selling price of those homes remained relatively flat. In 2017, housing revenues grew 21% from 2016 due to an 11% increase in the number of homes delivered and a 9% increase in the overall average selling price of those homes. We delivered a total of 11,317 homes in 2018, up from 10,909 in 2017. This year-over-year increase primarily reflected a 1% rise in our net orders during the current year as our backlog at the beginning of the year was essentially even with the previous year. In 2017, the number of homes delivered grew from 9,829 in 2016 mainly as a result of the 11% higher backlog of homes we had at the beginning of 2017 and a 6% increase in our net orders during that year.

The overall average selling price of our homes delivered rose slightly to $399,200 in 2018 from $397,400 in 2017, which had increased from $363,800 in 2016. The year-over-year increases in our overall average selling price in 2018 and 2017 reflected our strategic focus on positioning our new home communities in attractive, land-constrained locations that feature higher-income homebuyers; higher median home selling prices; our actions to balance sales pace and selling prices within our communities to optimize revenues and profits; and generally favorable market conditions. In 2018, the modest increase in our overall average selling price reflected a shift in geographic mix during the 2018 second half, with a lower proportion of homes delivered from our West Coast homebuilding reporting segment, which has generally higher average selling prices than our other homebuilding reporting segments. In 2017, the increase in our overall average selling price was due to shifts in product and geographic mix.

Land sale revenues totaled $16.6 million in 2018, $21.1 million in 2017 and $7.4 million in 2016. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, our business strategy, the strength and number of developers and other land buyers in particular markets at given points in time, the availability of opportunities to sell land at acceptable prices and prevailing market conditions. The year-over-year increase in land sale revenues in 2017 was partly due to our focus on improving our asset efficiency as part of our Returns-Focused Growth Plan.

Operating Income. Our homebuilding operating income increased 22% to $345.7 million in 2018 compared to $283.4 million in 2017, which had increased 86% from $152.4 million in 2016. As a percentage of homebuilding revenues, homebuilding operating income was 7.6% in 2018, 6.5% in 2017 and 4.3% in 2016. The year-over-year growth in homebuilding operating income for 2018 primarily reflected an increase in housing gross profits that was partly offset by an increase in selling, general and administrative expenses. Our homebuilding operating income included total inventory-related charges of $29.0 million in 2018, compared to $25.2 million in the year-earlier period. Excluding inventory-related charges, our homebuilding operating income as a percentage of homebuilding revenues was 8.3% in 2018 and 7.1% in 2017. In 2017, the year-over-year increase in our homebuilding operating income reflected an increase in housing gross profits and improved land sale results that were partly offset by an increase in selling, general and administrative expenses.

In 2018, housing gross profits rose by $80.9 million, or 11%, to $788.3 million from $707.5 million in 2017, which had increased by $129.0 million, or 22%, from $578.5 million in the previous year. The year-over-year increases in 2018 and 2017 reflected the higher volume of homes delivered and an increase in the housing gross profit margin in each of those years. Housing gross profits for 2018 and 2017 included the respective inventory-related charges described above. In 2016, such charges totaled $16.2 million.

Our housing gross profit margin for 2018 improved to 17.5%, up 120 basis points from the previous year, primarily due to lower construction and land costs, net of increases in trade labor and material costs (approximately 110 basis points), and a decrease in the amortization of previously capitalized interest (approximately 50 basis points), partly offset by reduced operating leverage on fixed costs as a result of an increase in expenses to support new community openings that will drive our community expansion in 2019 (approximately 20 basis points) and an increase in sales incentives (approximately 20 basis points). In 2017, the housing gross profit margin improved by 10 basis points as compared to 16.2% in 2016, primarily due to lower construction and land costs (approximately 40 basis points), improved operating leverage on fixed costs as a result of our higher volume of homes delivered and corresponding higher housing revenues (approximately 20 basis points) and a decrease in sales incentives (approximately 10 basis points), partly offset by increases in both the amortization of previously capitalized interest (approximately 40 basis points) and inventory-related charges (approximately 20 basis points).

Excluding the amortization of previously capitalized interest associated with housing operations of $197.9 million, $210.5 million and $160.6 million in 2018, 2017 and 2016, respectively, and the above-mentioned inventory-related charges in the applicable periods, our adjusted housing gross profit margin increased 70 basis points to 22.5% in 2018 from 21.8% in 2017, which had increased 70 basis points from 21.1% in 2016. The calculation of adjusted housing gross profit margin, which we believe provides a clearer measure of the performance of our business, is described below under “Non-GAAP Financial Measures.”

Land sales generated profits of $1.5 million in 2018 and $2.3 million in 2017, compared to losses of $36.6 million in 2016. The land sale loss in 2016 included inventory impairment charges of $36.7 million, most of which were associated with our decision to monetize certain non-strategic land parcels through land sales as part of our Returns-Focused Growth Plan. In 2016, we also recorded inventory impairment charges associated with the wind down of our operations in the Metro Washington, D.C. market and the sales of our last remaining land parcels in the Rio Grande Valley area of Texas.

As discussed in Note 7 – Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report, we recognized total inventory impairment charges (including those associated with the above-mentioned 2016 land sales) of $26.1 million in 2018, $20.6 million in 2017 and $49.6 million in 2016, and land option contract abandonment charges of $2.9 million in 2018, $4.6 million in 2017 and $3.2 million in 2016.

Selling, general and administrative expenses rose to $444.2 million in 2018 from $426.4 million in 2017, which had increased from $389.4 million in 2016. The year-over-year increases in selling, general and administrative expenses in 2018 and 2017 mainly reflected higher variable expenses associated with increases in the volume of homes delivered and corresponding housing revenues, as well as higher marketing expenses to support new community openings in 2018 and 2019. As a percentage of housing revenues, selling, general and administrative expenses were 9.8% in 2018 and 2017, and 10.9% in 2016. The percentages in both 2018 and 2017 were lower as compared to 2016 largely due to improved operating leverage on fixed costs from the increased volume of homes delivered and corresponding higher housing revenues in each of those years and our ongoing efforts to contain our overhead costs to the extent possible.

Interest Income. Interest income, which is generated from short-term investments, totaled $3.5 million in 2018, $1.2 million in 2017 and $.5 million in 2016. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and fluctuations in interest rates.

Interest Expense. Interest expense results principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs. All interest incurred during 2018 was capitalized as the average amount of our inventory qualifying for interest capitalization was higher than our average debt level for the period. As a result, we had no interest expense for 2018.

For the years ended November 30, 2017 and 2016, the average amount of our inventory qualifying for interest capitalization was lower than our average debt level. As a result, a portion of the interest we incurred for those periods was reflected as interest expense. In 2017, the amount of inventory qualifying for interest capitalization in relation to our debt level increased as compared to 2016, primarily due to our substantial investments in land and land development as well as the activation of land previously held for future development. Additionally, our debt level decreased significantly in 2017 primarily due to the repayment of senior notes during that year. For 2017, our interest expense, net of amounts capitalized, totaled $6.3 million, which had increased from $5.9 million in 2016. Our interest expense in 2017 included a charge of $5.7 million for the early extinguishment of debt associated with our optional redemption of $100.0 million in aggregate principal amount of our 9.10% senior notes due 2017 (“9.10% Senior Notes due 2017”). The redemption, which was completed on January 13, 2017 using internally generated cash, was a step toward

reducing our debt as part of our Returns-Focused Growth Plan. Excluding the charge for the early extinguishment of debt, our interest expense in 2017 decreased from 2016 due to a slight decline in interest incurred and an increase in the percentage of interest capitalized, with nearly all of our interest capitalized in 2017, compared to 97% in 2016.

Interest incurred declined 16% to $149.7 million in 2018, which had decreased 4% to $177.2 million in 2017 from $185.5 million in 2016. Interest incurred in 2018 decreased from the previous year due to our lower average debt level. The lower average debt level in 2018 primarily reflected the repayment of $300.0 million in aggregate principal amount of our 7 1/4% senior notes due 2018 (“7 1/4% Senior Notes due 2018”) at their maturity using internally generated cash. Interest incurred in 2017 decreased from the previous year due to our lower average debt level, partly offset by the above-mentioned charge for the early extinguishment of debt. The lower average debt level in 2017 primarily reflected the above-mentioned optional redemption of $100.0 million in aggregate principal amount of the 9.10% Senior Notes due 2017 and our repayment of the remaining $165.0 million in aggregate principal amount of the notes at their maturity on September 15, 2017 using internally generated funds. The amount of interest incurred generally fluctuates based on the average amount of debt outstanding for the period and/or the interest rate on that debt. We capitalized $149.7 million, $170.9 million and $179.6 million of the interest incurred in 2018, 2017 and 2016, respectively.

Interest amortized to construction and land costs associated with housing operations totaled $197.9 million in 2018, $210.5 million in 2017 and $160.6 million in 2016. The year-over-year decrease in interest amortized in 2018 mainly reflected the reduction in our interest incurred and the growth in our active inventory, which enabled us to allocate the lower level of interest over a larger population of owned lots. The increase in interest amortized in 2017 compared to 2016 reflected year-over-year increases in both the number of homes delivered and the overall construction and land costs attributable to those homes. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 4.4% for 2018, 4.9% for 2017 and 4.5% for 2016. Interest amortized to construction and land costs in 2018, 2017 and 2016 included $4.8 million, $4.9 million and $.7 million, respectively, of amortization of previously capitalized interest related to land sales that occurred during those years.

Equity in Income (Loss) of Unconsolidated Joint Ventures. Our equity in income of unconsolidated joint ventures totaled $2.1 million in 2018, compared to equity in loss of unconsolidated joint ventures of $1.4 million in 2017 and $2.2 million in 2016. Further information regarding our investments in unconsolidated joint ventures is provided in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report.

Non-GAAP Financial Measures

This report contains information about our adjusted housing gross profit margin, adjusted income tax expense, adjusted net income, adjusted diluted earnings per share, adjusted effective tax rate, and ratio of net debt to capital, none of which are calculated in accordance with generally accepted accounting principles (“GAAP”). We believe these non-GAAP financial measures are relevant and useful to investors in understanding our operations and the leverage employed in our operations, and may be helpful in comparing us with other companies in the homebuilding industry to the extent they provide similar information. However, because they are not calculated in accordance with GAAP, these non-GAAP financial measures may not be completely comparable to other companies in the homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, these non-GAAP financial measures should be used to supplement their respective most directly comparable GAAP financial measures in order to provide a greater understanding of the factors and trends affecting our operations.

Adjusted Housing Gross Profit Margin. The following table reconciles our housing gross profit margin calculated in accordance with GAAP to the non-GAAP financial measure of our adjusted housing gross profit margin (dollars in thousands):



	Years Ended November 30,
	2018			2017			2016
Housing revenues	$	4,517,244		$	4,335,205		$	3,575,548
Housing construction and land costs	(3,728,917		)	(3,627,732		)	(2,997,073		)
Housing gross profits	788,327			707,473			578,475
Add: Inventory-related charges (a)	28,994			25,232			16,152
Housing gross profits excluding inventory-related charges	817,321			732,705			594,627
Add: Amortization of previously capitalized interest (b)	197,936			210,538			160,633
Adjusted housing gross profits	$	1,015,257		$	943,243		$	755,260
Housing gross profit margin as a percentage of housing revenues	17.5		%	16.3		%	16.2		%
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues	18.1		%	16.9		%	16.6		%
Adjusted housing gross profit margin as a percentage of housing revenues	22.5		%	21.8		%	21.1		%


(a)	Represents inventory impairment and land option contract abandonment charges associated with housing operations.


(b)	Represents the amortization of previously capitalized interest associated with housing operations.

Adjusted housing gross profit margin is a non-GAAP financial measure, which we calculate by dividing housing revenues less housing construction and land costs excluding (1) housing inventory impairment and land option contract abandonment charges (as applicable) recorded during a given period and (2) amortization of previously capitalized interest associated with housing operations, by housing revenues. The most directly comparable GAAP financial measure is housing gross profit margin. We believe adjusted housing gross profit margin is a relevant and useful financial measure to investors in evaluating our performance as it measures the gross profits we generated specifically on the homes delivered during a given period. This non-GAAP financial measure isolates the impact that the housing inventory impairment and land option contract abandonment charges, and the amortization of previously capitalized interest associated with housing operations, have on housing gross profit margins, and allows investors to make comparisons with our competitors that adjust housing gross profit margins in a similar manner. We also believe investors will find adjusted housing gross profit margin relevant and useful because it represents a profitability measure that may be compared to a prior period without regard to variability of housing inventory impairment and land option contract abandonment charges, and amortization of previously capitalized interest associated with housing operations. This financial measure assists us in making strategic decisions regarding community location and product mix, product pricing and construction pace.

Adjusted Income Tax Expense, Adjusted Net Income, Adjusted Diluted Earnings Per Share and Adjusted Effective Tax Rate. The following table reconciles our income tax expense, net income, diluted earnings per share and effective tax rate calculated in accordance with GAAP to the non-GAAP financial measures of adjusted income tax expense, adjusted net income, adjusted diluted earnings per share and adjusted effective tax rate, respectively (in thousands, except per share amounts):



	Years ended November 30,
	2018								2017			2016
	As Reported			TCJA Adjustment		As Adjusted			As Reported			As Reported
Total pretax income	$	367,965		$	—	$	367,965		$	289,995		$	149,315
Income tax expense (a)	(197,600		)	112,500		(85,100		)	(109,400		)	(43,700		)
Net income	$	170,365		$	112,500	$	282,865		$	180,595		$	105,615
Diluted earnings per share	$	1.71				$	2.82		$	1.85		$	1.12
Weighted average shares outstanding — diluted	101,059					101,059			98,316			96,278
Effective tax rate (a)	53.7		%			23.1		%	37.7		%	29.3		%

(a)

For the year ended November 30, 2018, income tax expense and adjusted income tax expense, as well as the related effective tax rate and adjusted effective tax rate, included the favorable impacts of the reduction in the federal corporate income tax rate from 35% to 21%, effective January 1, 2018, $10.7 million of federal energy tax credits we earned from building energy efficient homes, a $2.1 million net benefit from a reduction in our deferred tax asset valuation allowance, and $1.0 million of excess tax benefits from stock-based compensation as a result of our adoption of Accounting Standards Update No. 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), effective December 1, 2017. For the years ended November 30, 2017 and 2016, income tax expense and the effective tax rate included the favorable impact of $4.9 million and $15.2 million, respectively, of federal energy tax credits.

Our adjusted income tax expense, adjusted net income, adjusted diluted earnings per share and adjusted effective tax rate are non-GAAP financial measures, which we calculate by excluding a non-cash charge of $112.5 million recorded in 2018 from our reported income tax expense, net income, diluted earnings per share and effective tax rate, respectively. This charge was primarily due to our accounting re-measurement of our deferred tax assets based on the above-noted reduction in the federal corporate income tax rate under the TCJA. The most directly comparable GAAP financial measures are our income tax expense, net income, diluted earnings per share and effective tax rate. We believe that these non-GAAP measures are meaningful to investors as they allow for an evaluation of our operating results without the impact of the TCJA-related charge.

Ratio of Net Debt to Capital. The following table reconciles our ratio of debt to capital calculated in accordance with GAAP to the non-GAAP financial measure of our ratio of net debt to capital (dollars in thousands):



	November 30,
	2018			2017
Notes payable	$	2,060,263		$	2,324,845
Stockholders’ equity	2,087,500			1,926,311
Total capital	$	4,147,763		$	4,251,156
Ratio of debt to capital	49.7		%	54.7		%

Notes payable	$	2,060,263		$	2,324,845
Less: Cash and cash equivalents	(574,359		)	(720,630		)
Net debt	1,485,904			1,604,215
Stockholders’ equity	2,087,500			1,926,311
Total capital	$	3,573,404		$	3,530,526
Ratio of net debt to capital	41.6		%	45.4		%

The ratio of net debt to capital is a non-GAAP financial measure, which we calculate by dividing notes payable, net of homebuilding cash and cash equivalents, by capital (notes payable, net of homebuilding cash and cash equivalents, plus stockholders’ equity). The most directly comparable GAAP financial measure is the ratio of debt to capital. We believe the ratio of net debt to capital is a relevant and useful financial measure to investors in understanding the degree of leverage employed in our operations.

HOMEBUILDING REPORTING SEGMENTS

Below is a discussion of the financial results of each of our homebuilding reporting segments. Further information regarding these segments, including their pretax income (loss), is included in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report. The difference between each homebuilding reporting segment’s operating income (loss) and pretax income (loss) is generally due to the equity in income (loss) of unconsolidated joint ventures, which is also presented in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report, and/or interest income and expense.

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



	Years Ended November 30,									Variance
	2018			2017			2016			2018 vs 2017		2017 vs 2016
Revenues	$	2,085,328		$	2,186,411		$	1,638,078		(5)	%	33	%
Construction and land costs	(1,720,776		)	(1,835,504		)	(1,386,270		)	6		(32	)
Selling, general and administrative expenses	(123,254		)	(131,182		)	(100,425		)	6		(31	)
Operating income	$	241,298		$	219,725		$	151,383		10	%	45	%

Homes delivered	3,152			3,387			2,825			(7)	%	20	%
Average selling price	$	661,500		$	644,900		$	579,900		3	%	11	%
Housing gross profit margin	17.5		%	16.0		%	15.4		%	150	bps	60	bps

This segment’s revenues in 2018 and 2017 were generated from both housing operations and land sales. In 2016, this segment’s revenues were generated entirely from housing operations. Housing revenues of $2.09 billion in 2018 decreased 5% from $2.18 billion in 2017, which had increased from $1.64 billion in 2016. The year-over-year decline in housing revenues in 2018 was due to a decrease in the number of homes delivered, partially offset by an increase in the average selling price of those homes. The decline in the number of homes delivered was due to the lower number of homes in backlog at the beginning of 2018 and a lower volume of net orders during 2018 that was primarily attributable to our Northern California operations. The increase in the average selling price for 2018, compared to 2017, was due to a shift in product and geographic mix, our actions to balance home sales pace and selling prices within our communities to enhance their performance, and generally favorable market conditions. In 2017, housing revenues increased 33% from 2016, reflecting increases in both the number of homes delivered and the average selling price of those homes. The increase in the number of homes delivered primarily reflected the higher number of homes in backlog at the beginning of 2017 and a higher volume of net orders during 2017, and was attributable to both our Northern California and Southern California operations. The average selling price of homes delivered during 2017 rose from the previous year due to a shift in product and geographic mix and generally rising home prices. Land sale revenues, which totaled $.2 million in 2018 and $2.2 million in 2017, consisted of contingent consideration (profit participation revenues).

In 2018, this segment’s operating income increased by $21.6 million, or 10%, from the previous year, primarily reflecting growth in housing gross profits that was partly offset by lower land sale profits. The increase in housing gross profits primarily reflected a 150 basis point improvement in the housing gross profit margin, partly offset by a decrease in the number of homes delivered. The year-over-year growth in the housing gross profit margin mainly reflected the impact of our community-specific action plans, including strategic selling price increases calibrated with demand, a shift in product and geographic mix, with a higher proportion of homes delivered from newer, higher-margin communities, and a decrease in construction and land costs as a percentage of housing revenues, which were partly offset by an increase in land, trade labor and material costs. Inventory-related charges impacting the housing gross profit margin totaled $20.4 million in 2018, compared to $16.7 million in 2017. Land sales produced profits of $.2 million and $2.1 million in 2018 and 2017, respectively, primarily reflecting the above-mentioned contingent consideration realized during each year. Selling, general and administrative expenses for 2018 declined from the previous year, primarily due to lower variable expenses associated with the decreased volume of homes delivered and corresponding lower housing revenues, as well as legal recoveries and favorable legal settlements during the current year.

In 2017, this segment’s operating income increased by $68.3 million, or 45%, from 2016, primarily reflecting growth in housing gross profits that was partly offset by an increase in selling, general and administrative expenses. Housing gross profits increased as a result of the higher volume of homes delivered and an increase in the housing gross profit margin. The year-over-year growth in the housing gross profit margin was mainly due to improved operating leverage from the increased volume of homes delivered and corresponding higher housing revenues and a shift in product and geographic mix, partly offset by higher construction and land costs, and an increase in the amortization of previously capitalized interest that was mainly due to longer-term development and/or extended construction time frames for certain communities. Inventory-related charges impacting the housing gross profit margin totaled $16.7 million in 2017, compared to $8.4 million in 2016, and were primarily associated with communities previously held for future development that were reactivated during 2017. Land sales produced profits of $2.1 million in 2017, primarily reflecting the above-mentioned contingent consideration realized during the year. In 2016, this segment recognized land sale losses of $.6 million. Selling, general and administrative expenses for 2017 rose from the previous year, primarily due to higher variable expenses associated with the increased volume of homes delivered and corresponding higher housing revenues.

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



	Years Ended November 30,									Variance
	2018			2017			2016			2018 vs 2017		2017 vs 2016
Revenues	$	707,075		$	533,052		$	447,473		33	%	19	%
Construction and land costs	(568,194		)	(445,451		)	(371,509		)	(28	)	(20	)
Selling, general and administrative expenses	(50,897		)	(42,329		)	(35,786		)	(20	)	(18	)
Operating income	$	87,984		$	45,272		$	40,178		94	%	13	%

Homes delivered	2,301			1,837			1,559			25	%	18	%
Average selling price	$	307,300		$	290,200		$	287,000		6	%	1	%
Housing gross profit margin	19.6		%	16.4		%	17.4		%	320	bps	(100	)bps

In 2018, 2017 and 2016, this segment’s revenues were generated solely from housing operations. Housing revenues increased 33% in 2018 and 19% in 2017, each as compared to the corresponding previous year, reflecting substantial growth in the number of homes delivered and a higher average selling price of those homes. The year-over-year increases in the number of homes delivered both in 2018 and 2017 primarily reflected the higher backlog level at the beginning of each year as compared to the corresponding previous year, and was attributable to both our Arizona and Nevada operations. In 2018, the average selling price rose from 2017, primarily due to a shift in product and geographic mix and generally favorable market conditions.

This segment’s operating income in 2018 nearly doubled, increasing $42.7 million from 2017 due to higher housing gross profits, partly offset by higher selling, general and administrative expenses. The year-over-year increase in housing gross profits reflected a higher number of homes delivered and a 320 basis point increase in the housing gross profit margin. The increase in the housing gross profit margin was largely due to a higher proportion of homes delivered from newer, higher-margin communities and reflected a decrease in construction and land costs as a percentage of housing revenues. Inventory-related charges impacting the housing gross profit margin totaled $.4 million in 2018, compared to $3.4 million in 2017. Selling, general and administrative expenses for 2018 increased from 2017, mainly due to higher variable expenses associated with the increased volume of homes delivered and corresponding higher housing revenues, partially offset by legal recoveries and favorable legal settlements.

In 2017, this segment’s operating income increased $5.1 million from 2016, reflecting higher housing gross profits, partly offset by higher selling, general and administrative expenses. The increase in housing gross profits reflected a higher number of homes delivered, partly offset by a year-over-year decline in the housing gross profit margin. The decrease in the housing gross profit margin reflected higher construction and land costs and a shift in product mix of homes delivered. Housing gross profits in 2017 included $3.4 million of inventory impairment charges, compared to $1.5 million of inventory impairment and land option contract abandonment charges in 2016. Land sale losses of $1.9 million in 2016 reflected inventory impairment charges related to land held for sale. Selling, general and administrative expenses for 2017 rose from the year-earlier period, mainly due to higher variable expenses associated with the increased volume of homes delivered and corresponding higher housing revenues.

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



	Years Ended November 30,									Variance
	2018			2017			2016			2018 vs 2017		2017 vs 2016
Revenues	$	1,239,305		$	1,188,839		$	1,018,535		4	%	17	%
Construction and land costs	(1,010,674		)	(963,202		)	(830,368		)	(5	)	(16	)
Selling, general and administrative expenses	(111,028		)	(109,385		)	(102,300		)	(2	)	(7	)
Operating income	$	117,603		$	116,252		$	85,867		1	%	35	%

Homes delivered	4,113			4,136			3,744			(1	) %	10	%
Average selling price	$	297,400		$	284,800		$	270,100		4	%	5	%
Housing gross profit margin	18.6		%	19.2		%	19.6		%	(60	)bps	(40	)bps

In 2018, 2017 and 2016, revenues for this segment were generated from both housing operations and land sales. Housing revenues in 2018 rose 4% to $1.22 billion from $1.18 billion in 2017, primarily reflecting an increase in the average selling price of homes delivered, while the number of homes delivered was essentially flat. In 2017, housing revenues increased 16% from $1.01 billion in 2016 due to increases in both the number of homes delivered and the average selling prices of those homes. The year-over-year growth in the number of homes delivered in 2017 was attributable to both our Colorado and Texas operations. The year-over-year increases in the average selling prices for both 2018 and 2017 were mainly due to a greater proportion of homes delivered from higher-priced communities, a shift in product mix and generally favorable market conditions. Land sale revenues totaled $16.1 million in 2018, $11.0 million in 2017 and $7.3 million in 2016.

In 2018, this segment’s operating income increased $1.4 million from 2017, mainly due to an increase in housing gross profits and improved land sale results that were partly offset by an increase in selling, general and administrative expenses. Housing gross profits increased due to a higher average selling price, partly offset by a decline in the housing gross profit margin. The housing gross profit margin declined from the previous year primarily due to an increase in construction and land costs as a percentage of housing revenues as a result of higher land, trade labor and material costs, higher inventory-related charges, and a shift in product mix of homes delivered. Inventory-related charges impacting the housing gross profit margin totaled $2.6 million for 2018 and $.8 million for 2017. Land sales generated profits of $1.3 million in 2018, compared to losses of $.1 million in 2017. Selling, general and administrative expenses for 2018 increased from the prior year, primarily due to higher variable expenses associated with the increased housing revenues.

This segment’s operating income in 2017 increased $30.4 million from 2016, mainly due to growth in housing gross profits and a decrease in land sale losses, partly offset by an increase in selling, general and administrative expenses. The increase in housing gross profits reflected an increase in the number of homes delivered, partly offset by a lower housing gross profit margin. The housing gross profit margin declined from 2016 largely due to higher construction and land costs and a shift in product mix of homes delivered. Inventory-related charges impacting the housing gross profit margin totaled $.8 million for 2017 and $.5 million for 2016. Land sale losses totaled $.1 million in 2017, compared to $10.5 million in 2016.

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



	Years Ended November 30,									Variance
	2018			2017			2016			2018 vs 2017		2017 vs 2016
Revenues	$	502,087		$	447,963		$	478,857		12	%	(6)	%
Construction and land costs	(437,522		)	(396,026		)	(446,539		)	(10	)	11
Selling, general and administrative expenses	(56,940		)	(52,378		)	(58,361		)	(9	)	10
Operating income (loss)	$	7,625		$	(441	)	$	(26,043	)	(a)		98	%

Homes delivered	1,751			1,549			1,701			13	%	(9)	%
Average selling price	$	286,600		$	284,100		$	281,400		1	%	1	%
Housing gross profit margin	12.9		%	11.7		%	11.7		%	120	bps	—


(a)	Percentage not meaningful

This segment’s revenues in 2018, 2017 and 2016 were comprised of revenues from both housing operations and land sales. Housing revenues in 2018 increased 14% to $501.9 million from $440.1 million in 2017, which declined 8% from $478.7 million in 2016. The year-over-year increase in housing revenues in 2018 reflected increases in both the number of homes delivered and the average selling price of those homes, and was attributable to our Florida operations. In 2017, the year-over year decline in housing revenues was due to a decrease in the number of homes delivered largely due to the wind down of our former Metro Washington, D.C. operations, partly offset by a slight increase in the average selling price of those homes. The 2017 average selling price increased slightly from the previous year primarily due to a greater proportion of homes delivered from higher-priced communities, a shift in product mix and generally rising home prices. This segment generated land sale revenues of $.2 million, $7.9 million and $.1 million in 2018, 2017 and 2016, respectively.

This segment’s operating income in 2018 improved by $8.1 million from an operating loss in 2017 due to an increase in housing gross profits, partly offset by an increase in selling, general and administrative expenses. The year-over-year increase in housing gross profits reflected an increase in the number of homes delivered and a 120 basis point improvement in the housing gross profit margin. The housing gross profit margin improved primarily due to a decrease in overall construction and land costs as a percentage of housing revenues, partly offset by higher inventory-related charges. In 2018, inventory-related charges impacting

the housing gross profit margin totaled $5.6 million, compared to $4.2 million in 2017. Land sales generated minimal profits in 2018, compared to profits of $.3 million in 2017. Selling, general and administrative expenses for 2018 increased from the previous year, primarily due to higher marketing costs from opening a greater number of new communities in the current year, the recent expansion of our Jacksonville, Florida operations and an increase in legal accruals. In addition, the prior-year included favorable legal recoveries.

This segment’s operating results in 2017 improved by $25.6 million from 2016, mainly due to improved land sale results and a decrease in selling, general and administrative expenses, partly offset by a decline in housing gross profits. The year-over-year decline in housing gross profits reflected a decrease in the number of homes delivered, as this segment’s housing gross profit margin remained even with 2016. The housing gross profit margin reflected a decrease in inventory-related charges that was offset by reduced operating leverage on fixed costs from the lower volume of homes delivered. In 2017, inventory-related charges impacting the housing gross profit margin totaled $4.2 million, compared to $5.8 million in 2016. Land sales generated profits of $.3 million in 2017, compared to losses of $23.6 million in 2016 which reflected inventory impairment charges associated with land held for sale, including two land parcels in the Metro Washington, D.C. market. Selling, general and administrative expenses for 2017 decreased from the previous year, primarily due to lower overhead costs as a result of our cost containment efforts, the wind down of our former Metro Washington, D.C. operations in 2016 and the lower volume of homes delivered.

FINANCIAL SERVICES REPORTING SEGMENT

The following table presents a summary of selected financial and operational data for our financial services reporting segment (dollars in thousands):



	Years Ended November 30,
	2018			2017			2016
Revenues	$	13,207		$	12,264		$	11,703
Expenses	(3,844		)	(3,430		)	(3,817		)
Equity in income (loss) of unconsolidated joint ventures	7,301			4,234			(3,420		)
Pretax income	$	16,664		$	13,068		$	4,466

Total originations (a):
Loans	5,659			2,485			3,320
Principal	$	1,578,037		$	688,763		$	847,905
Percentage of homebuyers using KBHS/HCM	56		%	25		%	37		%
Average FICO score	718			719