10-Q 1 kbh-20220531.htm 10-Q kbh-20220531
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
 
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended May 31, 2022.
or
    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)
Delaware95-3666267
(State of incorporation)(IRS employer identification number)
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
(Address, including zip code, and telephone number of principal executive offices) 
Securities registered pursuant to section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange
on which registered
Common Stock (par value $1.00 per share)KBHNew York Stock Exchange
Rights to Purchase Series A Participating Cumulative Preferred StockNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerAccelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No  
There were 87,165,722 shares of the registrant’s common stock, par value $1.00 per share, outstanding on May 31, 2022. The registrant’s grantor stock ownership trust held an additional 6,705,247 shares of the registrant’s common stock on that date.



KB HOME
FORM 10-Q
INDEX
 

2


PART I.    FINANCIAL INFORMATION
Item 1.Financial Statements

KB HOME
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts – Unaudited)
 

 Three Months Ended May 31,Six Months Ended May 31,
 2022202120222021
Total revenues$1,720,062 $1,440,892 $3,118,851 $2,582,630 
Homebuilding:
Revenues$1,714,826 $1,436,035 $3,108,980 $2,574,043 
Construction and land costs(1,281,752)(1,128,018)(2,363,864)(2,029,927)
Selling, general and administrative expenses(168,614)(145,115)(311,094)(267,120)
Operating income 264,460 162,902 434,022 276,996 
Interest income39 241 75 894 
Equity in income (loss) of unconsolidated joint ventures(310)(127)(287)177 
Homebuilding pretax income 264,189 163,016 433,810 278,067 
Financial services:
Revenues5,236 4,857 9,871 8,587 
Expenses(1,362)(1,253)(2,709)(2,453)
Equity in income of unconsolidated joint ventures14,807 7,044 19,955 13,014 
Financial services pretax income18,681 10,648 27,117 19,148 
Total pretax income 282,870 173,664 460,927 297,215 
Income tax expense(72,200)(30,300)(116,000)(56,800)
Net income $210,670 $143,364 $344,927 $240,415 
Earnings per share:
Basic$2.39 $1.55 $3.90 $2.60 
Diluted$2.32 $1.50 $3.79 $2.52 
Weighted average shares outstanding:
Basic87,858 92,087 88,069 91,904 
Diluted90,316 95,379 90,690 95,143 
See accompanying notes.
3


KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands – Unaudited)
 

May 31,
2022
November 30,
2021
Assets
Homebuilding:
Cash and cash equivalents
$244,186 $290,764 
Receivables
315,017 304,191 
Inventories
5,557,649 4,802,829 
Investments in unconsolidated joint ventures
44,857 36,088 
Property and equipment, net
82,902 76,313 
Deferred tax assets, net
165,878 177,378 
Other assets
111,222 104,153 
6,521,711 5,791,716 
Financial services57,766 44,202 
Total assets$6,579,477 $5,835,918 
Liabilities and stockholders’ equity
Homebuilding:
Accounts payable
$480,441 $371,826 
Accrued expenses and other liabilities
719,491 756,905 
Notes payable
2,085,275 1,685,027 
3,285,207 2,813,758 
Financial services3,275 2,685 
Stockholders’ equity:
Common stock
100,711 100,711 
Paid-in capital
834,883 848,620 
Retained earnings
2,697,149 2,379,364 
Accumulated other comprehensive loss
(19,119)(19,119)
Grantor stock ownership trust, at cost
(72,718)(72,718)
Treasury stock, at cost
(249,911)(217,383)
Total stockholders’ equity
3,290,995 3,019,475 
Total liabilities and stockholders’ equity$6,579,477 $5,835,918 
See accompanying notes.
4


KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands – Unaudited) 
 Six Months Ended May 31,
 20222021
Cash flows from operating activities:
Net income
$344,927 $240,415 
Adjustments to reconcile net income to net cash used in operating activities:
Equity in income of unconsolidated joint ventures
(19,668)(13,191)
Distributions of earnings from unconsolidated joint ventures
9,295 11,981 
Amortization of debt issuance costs and premiums1,137 1,296 
Depreciation and amortization
15,534 14,496 
Deferred income taxes
11,500 31,700 
Stock-based compensation
15,888 13,654 
Inventory impairments and land option contract abandonments
907 4,521 
Changes in assets and liabilities:
Receivables
(11,112)1,682 
Inventories
(764,225)(379,923)
Accounts payable, accrued expenses and other liabilities
84,259 44,847 
Other, net
(3,254)10,455 
Net cash used in operating activities(314,812)(18,067)
Cash flows from investing activities:
Contributions to unconsolidated joint ventures
(16,376)(6,300)
Return of investments in unconsolidated joint ventures
1,255 2,518 
Purchases of property and equipment, net
(22,122)(18,286)
Net cash used in investing activities(37,243)(22,068)
Cash flows from financing activities:
Borrowings under revolving credit facility
1,075,000  
Repayments under revolving credit facility
(675,000) 
Issuance costs for unsecured revolving credit facility
(3,805) 
Payments on mortgages and land contracts due to land sellers and other loans
(400)(600)
Issuance of common stock under employee stock plans
 3,506 
Stock repurchases(50,000) 
Tax payments associated with stock-based compensation awards
(12,153)(8,456)
Payments of cash dividends
(27,142)(27,797)
Net cash provided by (used in) financing activities306,500 (33,347)
Net decrease in cash and cash equivalents(45,555)(73,482)
Cash and cash equivalents at beginning of period292,136 682,529 
Cash and cash equivalents at end of period$246,581 $609,047 
See accompanying notes.
5




KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.    Basis of Presentation and Significant Accounting Policies
Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended November 30, 2021, which are contained in our Annual Report on Form 10-K for that period. The consolidated balance sheet at November 30, 2021 has been taken from the audited consolidated financial statements as of that date. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation of our results for the interim periods presented. The results of our consolidated operations for the three months and six months ended May 31, 2022 are not necessarily indicative of the results to be expected for the full year due to seasonal variations in operating results and other factors.
Unless the context indicates otherwise, the terms “we,” “our,” and “us” used in this report refer to KB Home, a Delaware corporation, and its subsidiaries.
Impact of COVID-19 Pandemic on Consolidated Financial Statements. The 2019 coronavirus disease (“COVID-19”) pandemic and related responses by public health and governmental authorities to contain and combat the outbreak and spread (“COVID-19 control responses”) have adversely affected many economic sectors, significantly disrupted the global supply chain and fueled producer price and consumer inflation. Our business continued to be impacted by these issues during the three months and six months ended May 31, 2022. We experienced, among other things, ongoing construction services availability constraints, supply chain bottlenecks and rising and volatile raw and other building material prices amid uneven availability, including for lumber. In addition, we encountered delays related to state and municipal construction permitting, inspection and utility processes. All these factors, to varying degrees, extended our construction cycle times, delayed home deliveries and community openings and raised our costs in the 2022 first half. These factors could also negatively impact our growth, margins and financial results in future periods, as could additional significant COVID-19-related disruptions, if they emerge.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents. We consider all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents. Our cash equivalents totaled $15.5 million at May 31, 2022 and $15.4 million at November 30, 2021. At May 31, 2022 and November 30, 2021, the majority of our cash and cash equivalents was invested in interest-bearing bank deposit accounts.
Comprehensive Income. Our comprehensive income was $210.7 million for the three months ended May 31, 2022 and $143.4 million for the three months ended May 31, 2021. For the six months ended May 31, 2022 and 2021, our comprehensive income was $344.9 million and $240.4 million, respectively. Our comprehensive income for each of the three-month and six-month periods ended May 31, 2022 and 2021 was equal to our net income for the respective periods.
Adoption of New Accounting Pronouncement. In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification Topic 740, “Income Taxes” (“ASC 740”), and clarifies certain aspects of ASC 740 to promote consistency among reporting entities.  Our adoption of ASU 2019-12, effective December 1, 2021, did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted. In March 2020, the FASB issued Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued because of reference rate reform. The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022. In January 2021, the FASB issued Accounting Standards Update No. 2021-01, “Reference Rate Reform (Topic 848): Scope” (“ASU 2021-01”), which
6


clarified the scope and application of the original guidance. We plan to adopt ASU 2020-04 and ASU 2021-01 when LIBOR is discontinued. We are currently evaluating the potential impact of adopting this guidance, but do not expect it to have a material impact on our consolidated financial statements.
2.Segment Information
We have identified five operating reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment. As of May 31, 2022, our homebuilding reporting segments conducted ongoing operations in the following states:
West Coast:California, Idaho and Washington
Southwest:Arizona and Nevada
Central:Colorado and Texas
Southeast:Florida and North Carolina
Our homebuilding reporting segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to first-time, first move-up and active adult homebuyers. Our homebuilding operations generate most of their revenues from the delivery of completed homes to homebuyers. They also earn revenues from the sale of land.
Our financial services reporting segment offers property and casualty insurance and, in certain instances, earthquake, flood and personal property insurance to our homebuyers in the same markets as our homebuilding reporting segments, and provides title services in the majority of our markets located within our Southwest, Central and Southeast homebuilding reporting segments. Our financial services reporting segment earns revenues primarily from insurance commissions and from the provision of title services.
We offer mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers indirectly through KBHS Home Loans, LLC (“KBHS”), our unconsolidated joint venture with GR Alliance Ventures, LLC (“GR Alliance”). We and GR Alliance each have a 50.0% ownership interest, with GR Alliance providing management oversight of KBHS’ operations.
Our reporting segments follow the same accounting policies used for our consolidated financial statements. The results of each reporting segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented, nor are they indicative of the results to be expected in future periods.
The following tables present financial information relating to our homebuilding reporting segments (in thousands):
 Three Months Ended May 31,Six Months Ended May 31,
 2022202120222021
Revenues:
West Coast$761,217 $625,690 $1,420,091 $1,140,206 
Southwest290,924 258,061 500,691 445,746 
Central433,046 390,555 788,368 700,263 
Southeast229,639 161,729 399,830 287,828 
Total
$1,714,826 $1,436,035 $3,108,980 $2,574,043 
Pretax income (loss):
West Coast$137,518 $76,630 $247,552 $135,261 
Southwest64,635 48,909 100,540 81,964 
Central66,200 56,283 104,316 97,275 
Southeast39,059 18,861 59,325 30,976 
Corporate and other (43,223)(37,667)(77,923)(67,409)
Total $264,189 $163,016 $433,810 $278,067 
7


 Three Months Ended May 31,Six Months Ended May 31,
 2022202120222021
Inventory impairment and land option contract abandonment charges:
West Coast$157 $117 $157 $3,918 
Southwest55 165 164 293 
Central520 70 586 70 
Southeast 105  240 
Total$732 $457 $907 $4,521 
May 31,
2022
November 30,
2021
Assets:
West Coast$2,749,595 $2,520,374 
Southwest1,057,421 938,300 
Central1,383,349 1,168,242 
Southeast848,379 684,752 
Corporate and other482,967 480,048 
Total $6,521,711 $5,791,716 
3.    Financial Services
The following tables present financial information relating to our financial services reporting segment (in thousands):
 Three Months Ended May 31,Six Months Ended May 31,
 2022202120222021
Revenues
Insurance commissions$2,596 $2,432 $5,114 $4,280 
Title services2,637 2,425 4,738 4,307 
Other3  19  
Total5,236 4,857 9,871 8,587 
Expenses
General and administrative(1,362)(1,253)(2,709)(2,453)
Operating income3,874 3,604 7,162 6,134 
Equity in income of unconsolidated joint ventures
14,807 7,044 19,955 13,014 
Pretax income$18,681 $10,648 $27,117 $19,148 
8


May 31,
2022
November 30,
2021
Assets
Cash and cash equivalents$2,395 $1,372 
Receivables 2,452 2,166 
Investments in unconsolidated joint ventures 27,222 16,317 
Other assets (a)25,697 24,347 
Total assets$57,766 $44,202 
Liabilities
Accounts payable and accrued expenses$3,275 $2,685 
Total liabilities$3,275 $2,685 
(a)Other assets at May 31, 2022 and November 30, 2021 included $25.5 million and $24.1 million, respectively, of contract assets for estimated future renewal commissions.
4.    Earnings Per Share
Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):
Three Months Ended May 31,Six Months Ended May 31,
 2022202120222021
Numerator:
Net income $210,670 $143,364 $344,927 $240,415 
Less: Distributed earnings allocated to nonvested restricted stock(64)(63)(129)(126)
Less: Undistributed earnings allocated to nonvested restricted stock(957)(587)(1,539)(968)
Numerator for basic earnings per share209,649 142,714 343,259 239,321 
Effect of dilutive securities:
Add: Undistributed earnings allocated to nonvested restricted stock957 587 1,539 968 
Less: Undistributed earnings reallocated to nonvested restricted stock(931)(567)(1,495)(935)
Numerator for diluted earnings per share$209,675 $142,734 $343,303 $239,354 
Denominator:
Weighted average shares outstanding — basic87,858 92,087 88,069 91,904 
Effect of dilutive securities:
Share-based payments2,458 3,292 2,621 3,239 
Weighted average shares outstanding — diluted90,316 95,379 90,690 95,143 
Basic earnings per share$2.39 $1.55 $3.90 $2.60 
Diluted earnings per share$2.32 $1.50 $3.79 $2.52 
We compute earnings per share using the two-class method, which is an allocation of earnings between the holders of common stock and a company’s participating security holders. Our outstanding nonvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities at May 31, 2022 or 2021.
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For the three-month and six-month periods ended May 31, 2022 and 2021, no outstanding stock options were excluded from the diluted earnings per share calculations. Contingently issuable shares associated with outstanding performance-based restricted stock units (each, a “PSU”) were not included in the basic earnings per share calculations for the periods presented as the applicable vesting conditions had not been satisfied.
5.    Receivables
Receivables consisted of the following (in thousands):
 May 31,
2022
November 30,
2021
Due from utility companies, improvement districts and municipalities $175,676 $151,284 
Recoveries related to self-insurance and other legal claims 72,815 95,063 
Refundable deposits and bonds15,940 13,681 
Other 55,757 49,359 
Subtotal
320,188 309,387 
Allowance for doubtful accounts(5,171)(5,196)
Total
$315,017 $304,191 
6.    Inventories
Inventories consisted of the following (in thousands):
May 31,
2022
November 30,
2021
Homes completed or under construction$2,650,644 $2,103,038 
Land under development2,907,005 2,699,791 
Total$5,557,649 $4,802,829 
Land under development at May 31, 2022 and November 30, 2021 included land held for future development or sale of $54.8 million and $45.2 million, respectively.
Interest is capitalized to inventories while the related communities or land parcels are being actively developed and until homes are completed or the land is available for immediate sale. Capitalized interest is amortized to construction and land costs as the related inventories are delivered to homebuyers or land buyers (as applicable). In the case of land held for future development and land held for sale, applicable interest is expensed as incurred.
Our interest costs were as follows (in thousands):
 Three Months Ended May 31,Six Months Ended May 31,
 2022202120222021
Capitalized interest at beginning of period$159,649 $188,555 $161,119 $190,113 
Interest incurred 29,021 31,110 57,324 62,202 
Interest amortized to construction and land costs (a)
(34,005)(39,600)(63,778)(72,250)
Capitalized interest at end of period$154,665 $180,065 $154,665 $180,065 
(a)For the six months ended May 31, 2021, interest amortized to construction and land costs included a nominal amount related to land sales during the period.
7.    Inventory Impairments and Land Option Contract Abandonments
Each community or land parcel in our owned inventory is assessed on a quarterly basis to determine if indicators of potential impairment exist. We record an inventory impairment charge on a community or land parcel that is active or held for future development when indicators of potential impairment exist and the carrying value of the real estate asset is
10


greater than the undiscounted future net cash flows the asset is expected to generate. These real estate assets are written down to fair value, which is primarily determined based on the estimated future net cash flows discounted for inherent risk associated with each such asset, or other valuation techniques. We record an inventory impairment charge on land held for sale when the carrying value of a land parcel is greater than its fair value. These real estate assets are written down to fair value, less associated costs to sell. The estimated fair values of such assets are generally based on bona fide letters of intent from outside parties, executed sales contracts, broker quotes or similar information.
As of May 31, 2022 and November 30, 2021, no active communities or land parcels with indicators of potential impairment were identified. As a result, no active communities or land parcels were evaluated for recoverability as of these dates. We evaluated land held for future development for recoverability as of both May 31, 2022 and November 30, 2021.
Based on the results of our evaluations, we recognized no inventory impairment charges for the three months or six months ended May 31, 2022 or the three months ended May 31, 2021. For the six months ended May 31, 2021, we recognized inventory impairment charges of $3.6 million that reflected our decisions to make changes in our operational strategies aimed at more quickly monetizing our investment in certain communities by accelerating the overall pace for selling, building and delivering homes therein, including communities on land previously held for future development.
The following table summarizes significant quantitative unobservable inputs we utilized in our fair value measurements with respect to the impaired communities written down to fair value:
Three Months Ended May 31,Six Months Ended May 31,
Unobservable Input 2022202120222021
Average selling price
$
$
$
$471,000
Deliveries per month
5
Discount rate
%
%
%
19%
As of May 31, 2022, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $81.7 million, representing seven communities and various other land parcels. As of November 30, 2021, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $87.7 million, representing 11 communities and various other land parcels.
Our inventory controlled under land option contracts and other similar contracts is assessed on a quarterly basis to determine whether it continues to meet our investment return standards. When a decision is made not to exercise certain land option contracts and other similar contracts due to market conditions and/or changes in our marketing strategy, we write off the related inventory costs, including non-refundable deposits and unrecoverable pre-acquisition costs. Based on the results of our assessments, we recognized land option contract abandonment charges of $.7 million for the three months ended May 31, 2022 and $.9 million for the six months ended May 31, 2022. For the three months and six months ended May 31, 2021, we recognized land option contract abandonment charges of $.5 million and $.9 million, respectively.
Due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, and in our estimations of the remaining operating lives of our inventory assets and the realization of our inventory balances, particularly as to land held for future development, it is possible that actual results could differ substantially from those estimated.
8.    Variable Interest Entities
Unconsolidated Joint Ventures. We participate in joint ventures from time to time that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. Our investments in these joint ventures may create a variable interest in a variable interest entity (“VIE”), depending on the contractual terms of the arrangement. We analyze our joint ventures under the variable interest model to determine whether they are VIEs and, if so, whether we are the primary beneficiary. Based on our analyses, we determined that one of our joint ventures at May 31, 2022 and November 30, 2021 was a VIE, but we were not the primary beneficiary of the VIE. Therefore, all of our joint ventures at May 31, 2022 and November 30, 2021 were unconsolidated and accounted for under the equity method because we did not have a controlling financial interest.
Land Option Contracts and Other Similar Contracts. In the ordinary course of our business, we enter into land option contracts and other similar contracts with third parties and unconsolidated entities to acquire rights to land for the construction of homes. Under these contracts, we typically make a specified option payment or earnest money deposit in
11


consideration for the right to purchase land in the future, usually at a predetermined price. We analyze each of our land option contracts and other similar contracts under the variable interest model to determine whether the land seller is a VIE and, if so, whether we are the primary beneficiary. Although we do not have legal title to the underlying land, we are required to consolidate a VIE if we are the primary beneficiary. As a result of our analyses, we determined that as of May 31, 2022 and November 30, 2021, we were not the primary beneficiary of any VIEs from which we have acquired rights to land under land option contracts and other similar contracts. We perform ongoing reassessments of whether we are the primary beneficiary of a VIE.
The following table presents a summary of our interests in land option contracts and other similar contracts (in thousands):
May 31, 2022November 30, 2021
Cash
Deposits
Aggregate
Purchase Price
Cash
Deposits
Aggregate
Purchase Price
Unconsolidated VIEs$31,674 $982,198 $38,333 $1,093,669 
Other land option contracts and other similar contracts
42,167 881,648 36,176 766,182 
Total
$73,841 $1,863,846 $74,509 $1,859,851 
In addition to the cash deposits presented in the table above, our exposure to loss related to our land option contracts and other similar contracts with third parties and unconsolidated entities consisted of pre-acquisition costs of $44.0 million at May 31, 2022 and $38.1 million at November 30, 2021. These pre-acquisition costs and cash deposits were included in inventories in our consolidated balance sheets.
For land option contracts and other similar contracts where the land seller entity is not required to be consolidated under the variable interest model, we consider whether such contracts should be accounted for as financing arrangements. Land option contracts and other similar contracts that may be considered financing arrangements include those we enter into with third-party land financiers or developers in conjunction with such third parties acquiring a specific land parcel(s) on our behalf, at our direction, and those with other landowners where we or our designee make improvements to the optioned land parcel(s) during the applicable option period. For these land option contracts and other similar contracts, we record the remaining purchase price of the associated land parcel(s) in inventories in our consolidated balance sheets with a corresponding financing obligation if we determine that we are effectively compelled to exercise the option to purchase the land parcel(s). As a result of our evaluations of land option contracts and other similar contracts for financing arrangements, we recorded inventories in our consolidated balance sheets, with a corresponding increase to accrued expenses and other liabilities, of $13.0 million at May 31, 2022 and $26.5 million at November 30, 2021.
9.    Investments in Unconsolidated Joint Ventures
Homebuilding. We have investments in unconsolidated joint ventures that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. We and our unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis, according to our respective equity interests. The obligations to make capital contributions are governed by each such unconsolidated joint venture’s respective operating agreement and related governing documents.
As of both May 31, 2022 and November 30, 2021, we had investments in six homebuilding unconsolidated joint ventures. The following table presents combined condensed information from the statements of operations for our homebuilding unconsolidated joint ventures (in thousands):
 Three Months Ended May 31,Six Months Ended May 31,
 2022202120222021
Revenues$1,108 $3,148 $3,958 $12,839 
Construction and land costs(772)(2,819)(3,071)(10,944)
Other expense, net(918)(530)(1,348)(1,409)
Income (loss)$(582)$(201)$(461)$486 

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The following table presents combined condensed balance sheet information for our homebuilding unconsolidated joint ventures (in thousands):
May 31,
2022
November 30,
2021
Assets
Cash and cash equivalents$18,884 $15,731 
Receivables
894 795 
Inventories
105,734 64,034 
Other assets
726 50 
Total assets$126,238 $80,610 
Liabilities and equity
Accounts payable and other liabilities$11,871 $12,285 
Notes payable (a)
29,114  
Equity85,253 68,325 
Total liabilities and equity$126,238 $80,610 
(a)    As of May 31, 2022, one of our unconsolidated joint ventures had borrowings outstanding under a revolving line of credit it entered into with a third-party lender in April 2022 to finance its land acquisition, development and construction activities. Borrowings under this line of credit, which has a maximum commitment of $62.0 million, are secured by the underlying property and related project assets. The line of credit is scheduled to mature on April 19, 2026, unless extended or terminated pursuant to its applicable terms. None of our other unconsolidated joint ventures had outstanding debt at May 31, 2022 or November 30, 2021.
We provide certain guarantees and indemnities to the lender in connection with the above-described revolving line of credit for one of our unconsolidated joint ventures, including a guaranty of interest and carry costs; a guaranty to complete the construction of phases of the improvements for the project as such phases are commenced; a guaranty against losses suffered due to certain bad acts or failures to act by the unconsolidated joint venture or its partners; and an indemnity from environmental issues. Except to the extent related to the foregoing guarantees and indemnities, we do not have a guaranty or any other obligation to repay borrowings under the line of credit or to support the value of the underlying collateral. However, various financial and non-financial covenants apply under the line of credit and with respect to the related guaranty and indemnity obligations, and a failure to comply with such covenants could result in a default and cause the lender to seek to enforce such guaranty and indemnity obligations. As of the date of this report, we were in compliance with the relevant covenants. We do not believe that our existing exposure under our guaranty and indemnity obligations related to outstanding borrowings under the line of credit is material to our consolidated financial statements.
Financial Services. The following table presents combined condensed information from the statements of operations for our financial services unconsolidated joint ventures, primarily comprised of KBHS (in thousands):
 Three Months Ended May 31,Six Months Ended May 31,
 2022202120222021
Revenues$50,224 $34,298 $80,200 $65,370 
Expenses(20,607)(20,240)(40,287)(39,373)
Income$29,617 $14,058 $39,913 $25,997 
Revenues are primarily generated from fees earned on mortgage loan originations, interest earned for the period loans are held by KBHS, and gains on the sales of mortgage loans held for sale. Gains on the sales of mortgage loans held for sale include the realized and unrealized gains and losses associated with changes in the fair value of such loans and any related derivative financial instruments.
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The following table presents combined condensed balance sheet information for our financial services unconsolidated joint ventures, primarily comprised of KBHS (in thousands):
May 31,
2022
November 30,
2021
Assets
Cash and cash equivalents$18,867 $23,916 
Mortgage loans held for sale189,255 234,669 
Other assets68,493 46,218 
Total assets$276,615 $304,803 
Liabilities and equity
Accounts payable and other liabilities$18,680 $18,375 
Funding facilities203,486 253,791 
Equity54,449 32,637 
Total liabilities and equity$276,615 $304,803 
Mortgage loans held for sale. Originated mortgage loans expected to be sold into the secondary market in the foreseeable future are reported as mortgage loans held for sale and carried in KBHS’ balance sheets at fair value, with changes in fair value recognized within revenues in KBHS’ statements of operations.
Interest Rate Lock Commitments (“IRLCs”). KBHS enters into IRLCs in connection with originating certain mortgage loans held for sale, at specified interest rates and within a specified period of time, with customers who have applied for a mortgage loan and meet certain credit and underwriting criteria. KBHS accounts for IRLCs as free-standing derivatives and does not designate any for hedge accounting. As a result, IRLCs are recognized in KBHS’ balance sheets at fair value, and gains or losses resulting from changes in fair value are recognized within revenues in KBHS’ statements of operations. The fair value of IRLCs is based on market prices, which includes an estimate of the fair value of the associated mortgage servicing rights, adjusted for estimated costs to originate the underlying mortgage loans as well as the probability that the mortgage loans will fund within the terms of the IRLCs. The fair value of IRLCs included in other assets in KBHS’ balance sheets was $42.9 million at May 31, 2022 and $9.5 million at November 30, 2021. The change in fair value of IRLCs, which was reported in revenues, totaled $25.8 million and $33.4 million for the three months and six months ended May 31, 2022, respectively, and $1.9 million and $2.6 million for the three months and six months ended May 31, 2021, respectively.
KBHS manages the interest rate and price risk associated with its outstanding IRLCs by entering into best efforts forward sale commitments under which mortgage loans locked with a borrower are simultaneously committed to a secondary market investor at a fixed price, subject to the underlying mortgage loans being funded. These best efforts forward sale commitments do not meet the definition of derivative financial instruments and are therefore not recorded in KBHS’ balance sheets. If the mortgage loans underlying the IRLCs do not fund, KBHS has no obligation to fulfill the secondary market investor commitments.
Funding facilities. KBHS maintains warehouse line of credit and master repurchase agreements with various financial institutions to fund its originated mortgage loans, with its mortgage loans held for sale pledged as collateral under these agreements. The agreements contain covenants which include certain financial requirements, including maintenance of minimum tangible net worth, minimum liquid assets, maximum debt to net worth ratio and positive net income, as defined in the agreements. KBHS was in compliance with these covenants as of May 31, 2022. KBHS intends to renew these agreements when they expire at various dates in 2022 and 2023. The warehouse line of credit and master repurchase agreements are not guaranteed by us or any of the subsidiaries that guarantee our homebuilding notes payable (“Guarantor Subsidiaries”).
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10.Other Assets
Other assets consisted of the following (in thousands):
May 31,
2022
November 30,
2021
Cash surrender value of corporate-owned life insurance contracts$64,449 $68,748 
Lease right-of-use assets25,000 27,508 
Prepaid expenses16,904 6,344 
Debt issuance costs associated with unsecured revolving credit facility, net4,869 1,553 
Total$111,222 $104,153 
11.Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
May 31,
2022
November 30,
2021
Self-insurance and other legal liabilities$228,419 $239,129 
Employee compensation and related benefits160,753 192,549 
Warranty liability99,207 96,153 
Customer deposits91,903 71,032 
Lease liabilities26,908 29,279 
Accrued interest payable24,791 24,554 
Inventory-related obligations (a)21,142 36,146 
Federal and state taxes payable15,224 8,290 
Real estate and business taxes12,929 17,563 
Other38,215 42,210 
Total$719,491 $756,905 
(a)Represents liabilities for financing arrangements discussed in Note 8 – Variable Interest Entities, as well as liabilities for fixed or determinable amounts associated with tax increment financing entity (“TIFE”) assessments. As homes are delivered, our obligation to pay the remaining TIFE assessments associated with each underlying lot is transferred to the homebuyer. As such, these assessment obligations will be paid by us only to the extent we do not deliver homes on applicable lots before the related TIFE obligations mature.
12.Leases
We lease certain property and equipment for use in our operations. We recognize lease expense for these leases generally on a straight-line basis over the lease term and combine lease and non-lease components for all leases. Lease right-of-use assets and lease liabilities are recorded in our consolidated balance sheets for leases with an expected term at the commencement date of more than 12 months. Lease expense is included in selling, general and administrative expenses in our consolidated statements of operations and includes costs for leases with terms of more than 12 months as well as short-term leases with terms of 12 months or less. Our total lease expense for the three-month periods ended May 31, 2022 and 2021 was $4.9 million and $4.3 million, respectively, and included short-term lease costs of $1.8 million and $1.2 million, respectively. For the six months ended May 31, 2022 and 2021, our total lease expense was $9.2 million and $8.6 million, respectively, and included short-term lease costs of $3.0 million and $2.5 million, respectively. Variable lease costs and external sublease income for the three-month and six-month periods ended May 31, 2022 and 2021 were immaterial.
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The following table presents our lease right-of-use assets and lease liabilities (in thousands):
May 31,
2022
November 30,
2021
Lease right-of-use assets (a)$25,140 $27,693 
Lease liabilities (b)27,060 29,481 
(a)Represents lease right-of-use assets within our homebuilding operations and financial services operations of $25.0 million and $.1 million, respectively, at May 31, 2022, and $27.5 million and $.2 million, respectively, at November 30, 2021.
(b)Represents lease liabilities within our homebuilding operations and financial services operations of $26.9 million and $.2 million, respectively, at May 31, 2022, and $29.3 million and $.2 million, respectively, at November 30, 2021.
13.Income Taxes
Income Tax Expense. Our income tax expense and effective tax rates were as follows (dollars in thousands):
 Three Months Ended May 31,Six Months Ended May 31,
 2022202120222021
Income tax expense $72,200 $30,300 $116,000 $56,800 
Effective tax rate
25.5 %17.4 %25.2 %19.1 %
Our income tax expense and effective tax rate for the three months ended May 31, 2022 included the favorable impact of $.6 million of federal tax credits we earned primarily from building energy-efficient homes, which was more than offset by $2.2 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). Our income tax expense and effective tax rate for the three months ended May 31, 2021 reflected the favorable impacts of $14.8 million of federal tax credits we earned from building energy-efficient homes and $.4 million of excess tax benefits related to stock-based compensation, partly offset by $1.9 million of non-deductible executive compensation expense.
For the six months ended May 31, 2022, our income tax expense and effective tax rate included the favorable impacts of $2.2 million of excess tax benefits related to stock-based compensation and $.8 million of federal tax credits we earned primarily from building energy-efficient homes, which were more than offset by $3.9 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). Our income tax expense and effective tax rate for the six months ended May 31, 2021 reflected the favorable impacts of $17.5 million of federal tax credits we earned primarily from building energy-efficient homes and $3.9 million of excess tax benefits related to stock-based compensation, partly offset by $3.3 million of non-deductible executive compensation expense.
The federal energy tax credits for the three-month and six-month periods ended May 31, 2022 and 2021 resulted from legislation enacted in December 2020 and earlier periods. The federal tax credit for building new energy-efficient homes expired for homes delivered after December 31, 2021.
The Coronavirus Aid, Relief, and Economic Security Act, enacted on March 27, 2020, provided an Employee Retention Credit (“ERC”), which is a refundable payroll tax credit that encouraged businesses to keep employees on the payroll during the COVID-19 pandemic. Eligible employers could qualify for up to $5,000 of credit for each employee based on certain wages paid after March 12, 2020 and before January 1, 2021. Based on our evaluation of this provision and the significant pandemic-related impacts on our operations in 2020, we recognized an ERC of $4.3 million as an offset to payroll tax expenses within selling, general and administrative expenses in our consolidated statements of operations upon filing for the refund in the 2021 first quarter. We received the refund in the 2021 fourth quarter.
In June 2020, California enacted tax legislation that approved the suspension of California net operating loss (“NOL”) deductions for tax years 2020, 2021 and 2022. On February 9, 2022, California enacted legislation restoring the NOL deduction for tax years beginning on or after January 1, 2022, which would be effective for our 2023 fiscal year. Although the suspension of California NOL deductions did not have an impact on our income tax expense for the three months or six months ended May 31, 2022, it contributed to the year-over-year increase in the amount of taxes we paid in these periods.
Deferred Tax Asset Valuation Allowance. We evaluate our deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available positive and negative evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among
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other factors, our historical operating results, our expectation of future profitability, the duration of the applicable statutory carryforward periods, and conditions in the housing market and the broader economy. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible. The value of our deferred tax assets depends on applicable income tax rates.
Our deferred tax assets of $183.3 million as of May 31, 2022 and $194.8 million as of November 30, 2021 were each partly offset by a valuation allowance of $17.4 million. The deferred tax asset valuation allowances as of May 31, 2022 and November 30, 2021 were primarily related to certain state NOLs that had not met the “more likely than not” realization standard at those dates. Based on the evaluation of our deferred tax assets as of May 31, 2022, we determined that most of our deferred tax assets would be realized. Therefore, no adjustments to our deferred tax valuation allowance were needed for the six months ended May 31, 2022.
We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to our deferred tax assets. The accounting for deferred tax assets is based upon estimates of future results. Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated financial statements. Changes in existing federal and state tax laws and corporate income tax rates could also affect actual tax results and the realization of deferred tax assets over time.