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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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DEAR FELLOW
STOCKHOLDER

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While our approach was conservative, closing our sales centers during the busiest time of the year — the industry’s Spring selling season — and reopening more slowly than some other homebuilders, we believe it was the right path. We took aggressive action in the interest of safety, while continuing to effectively run our business and prioritize cash preservation and liquidity, which we believe helped us successfully navigate the early months of the pandemic.

In May, as restrictions began to ease within many of our served markets, consumer optimism in those markets grew and our orders began to rebound significantly, steadily rising as the month progressed. Ultimately, what followed in the second half of the year, continuing into 2021, has been some of the strongest housing market demand that I have seen in my 40-year career as a homebuilder. The industry had already been poised for this, with Millennials, the nation’s largest adult population, in their prime household formation years, together with an underproduction of new homes over the last decade and a favorable mortgage interest rate environment. The pandemic played a significant role in propelling demand for homeownership and all the financial, health, safety, and emotional security it offers.

As a result, we had a strong finish to 2020 and believe we are well-positioned for an outstanding year in 2021. I want to thank our employees for their perseverance in taking care of our customers during a very fluid year, and their contributions to the solid results we produced. As to the details of our 2020 performance, we generated total revenues of $4.2 billion and diluted earnings per share of $3.13, an increase of 10% year over year. The net order momentum that we experienced throughout the second half of the year drove our 2020 ending backlog value up by over 60% year over year to $3.0 billion, its highest level in 15 years. We continued to reinvest in our Company and, despite pausing most land acquisition and development activity at the onset of the pandemic, we spent $1.7 billion to acquire and develop land in 2020, slightly higher than the previous year. We ended the year with a solid position that provides us with the lots needed to support the substantial rise in delivery volume anticipated for 2021, as well as all the lots we expect to need for further delivery growth in 2022. In addition to investing in future growth, we maintained our focus on increasing stockholder returns. We implemented another substantial increase in our quarterly cash dividend in our 2020 fourth quarter, marking the second consecutive year we have meaningfully raised our dividend, which is now six times its level from two years ago. We returned $38 million of our cash to stockholders in 2020, nearly double the prior year’s level.

We take a balanced approach to utilizing the substantial cash flow that our business generates, with the objective of expanding our scale while increasing returns. With our return on equity rising approximately 600 basis points over the past five years, we have produced an annualized total stockholder return of more than 20% during that timeframe, well above our primary industry benchmark and the broader market, and among the highest in our peer group.

BUILDING FOR THE FUTURE

Along with the healthy and profitable growth of our Company, a key priority for us is continuing to improve the satisfaction of our customers. For us, fulfilling our customers’ needs is one of the best ways we can continue to enhance our brand, as our objective is to be the most customer-obsessed homebuilder in the world. A home is the largest and most meaningful purchase most of us make in our lifetimes, and we strive to make the homebuying experience an exceptional one. I am very proud of our accomplishments relative to this objective, particularly in achieving the highest customer satisfaction ratings in our history in 2020, at a time when we were managing through the challenges posed by the pandemic. We are also the highest-ranked national homebuilder on TrustBuilder^®, a third-party, industry-specific homeowner review site, earning 4.6 out of 5 stars, and achieving or tying for the top ranking in nearly every one of our markets.

Our commitment to sustainability is one more significant way we are investing for the future and creating longer-term value. When we began this journey nearly 15 years ago, sustainability was considered a luxury in homebuilding. We saw an opportunity to help protect the environment while reducing the overall cost of long-term homeownership for our customers through lower utility bills. We became the first national homebuilder to build 100% ENERGY STAR^® certified new homes, and we have delivered nearly 150,000 ENERGY STAR certified new homes to date, more than any other national homebuilder. Our sustainably designed homes are estimated to have cumulatively saved our homeowners approximately $780 million in utility bills and lowered carbon emissions by approximately 5 billion pounds, the equivalent of removing nearly 490,000 cars from the road for one year.

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During 2020, we were honored to be recognized once again by the U.S. Environmental Protection Agency with the following awards, each of which represented another year of unprecedented achievement for a national homebuilder:

In addition to energy efficiency, we also advanced our efforts in the area of renewable energy, achieving the milestone of delivering over 11,000 solar-powered homes to our customers in the past 15 years, producing an estimated total of 428 million kilowatt hours of electrical power. KB Home has been a leader in solar homebuilding and was one of the first national builders to offer it .

We have substantially expanded our view of sustainability beyond energy efficiency to encompass water conservation, waste reduction and healthier indoor environments. This last point has proven to be particularly relevant in the midst of the pandemic. Our homes include high-performance ventilation systems that regularly introduce fresh outdoor air, and, in our Design Studios, we offer options, from anti-microbial door handles to touchless faucets, that reduce the spread of germs. In 2020, we announced a groundbreaking healthy home research project in partnership with the Well Living Lab, which was founded as a collaboration between Delos^® and the Mayo Clinic. It is the first lab to exclusively focus on researching how indoor environments can improve human health and well-being.

Last year also marked a year of enhanced transparency about the “social” aspect of our sustainability program. We have had long-established standards and practices to guide how we conduct ourselves as a company and in relation to our employees and business partners. In 2020, we publicly articulated some of our guiding principles, publishing a Human Rights statement, a Supplier Code of Conduct, and a policy on Responsible Marketing practices. We also reviewed and updated our Ethics Policy, as we do each year, and conducted Company-wide training on this policy, which all of our employees are required to complete annually.

As a result of our leadership in ESG, we were pleased to be the only national builder to receive two distinct honors. The first was from Newsweek^®, in being named to its 2021 list of America’s Most Responsible Companies for demonstrating leading environmental, social and governance practices. We were also selected by Forbes^® for its 2021 list of America’s Best Midsize Employers. We are a people-driven business and this recognition, which is based on employee feedback about working at KB Home and the likelihood of recommending us as an employer, is very gratifying to our team.

Our 14th Annual Sustainability Report, the longest-running publication of its kind for a national homebuilder, is slated for publication in conjunction with Earth Day 2021. We encourage you to review our report and learn more about our consistent, long-term approach and vision for building for the future.

IN CLOSING

We are off to a strong start in 2021, amid a backdrop of continuing robust market conditions. We are poised for a tremendous year as we resume our growth into a larger, more profitable company, which will help drive expansion of our return on equity to an expected 17%. While we are mindful that we remain in a pandemic, with the potential to disrupt our business, we are confident in the strength of our position, which is the best it has been in over a decade. We have an experienced, dedicated team, solid balance sheet, a healthy lot position, the cash flow to invest in community count expansion and maintain a higher quarterly cash dividend, and a business model that generates high customer satisfaction and has demonstrated appeal to homebuyers.

Our team at KB Home is committed to managing our business to drive long-term stockholder value, and along with our Board of Directors, we sincerely thank you for your investment and continued support.

 

 

 

Sincerely,

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TABLE OF CONTENTS

 

 

 

 

 

 

 

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2021 ANNUAL MEETING SUMMARY

Your Board is furnishing this Proxy Statement and a proxy/voting instruction form or Notice of Internet Availability to you to solicit your proxy for KB Home’s 2021 Annual Meeting of Stockholders (“Annual Meeting”). We anticipate these proxy materials will be made available on or about February 26, 2021. A brief summary of information about the Annual Meeting is presented below. Please review the more detailed information in this Proxy Statement before voting.

ANNUAL MEETING INFORMATION

 

MEETING AGENDA

 

PARTICIPATING IN THE ANNUAL MEETING WEBCAST

Online access to the Annual Meeting webcast at www.meetingcenter.io/216002295 will open at approximately 8:45 a.m., Pacific Time, on April 8, 2021. To access the meeting, vote and ask questions, you will need to have a valid control number from our transfer agent, Computershare and use the password: KBH2021. Holders of record will receive their control number on the notice or proxy card Computershare distributes to them.

If you are a beneficial holder, meaning an intermediate broker or financial institution holds your shares, you must register with Computershare no later than 5:00 p.m., Eastern Time, on April 5, 2021 to participate in the Annual Meeting. To register, please provide Computershare with proof of your KB Home stockholdings, known as a legal proxy, obtained from your intermediary, along with your name and email address. Submit these items to Computershare via email at legalproxy@computershare.com (use KB Home Legal Proxy in the subject line); or by mail to: Computershare, KB Home Legal Proxy, P.O. Box 43001; Providence, RI 02940-3001. Computershare will send an email confirmation of your registration.

Beneficial holders who cannot obtain a legal proxy can attend the Annual Meeting as a guest, though without the ability to vote or ask questions, at the Internet address and with the password noted above.

Questions may be submitted before or during the Annual Meeting. To submit a question in advance, visit www.meetingcenter.io/216002295 before 8:59 p.m., Pacific Time, on April 7, 2021 and enter a valid control number. As many stockholder questions will be answered as time permits. However, we may not respond to questions that are not pertinent to meeting matters or our business. Single responses to a group of substantially similar questions may be provided to avoid repetition. We ask that attendees please help us keep the proceedings orderly and follow the Annual Meeting rules of conduct.

 

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SPOTLIGHT ON SUSTAINABILITY

A key component of our focus on long-term value creation is our commitment to sustainability, which we see as encompassing our environmental, social and governance (“ESG”) practices highlighted on the next few pages. This commitment flows from our core Built on Relationships^® business philosophy. Before we build a home, we seek to build a personal connection through close partnerships with our buyers, offering a compelling, simple and personalized process distinguished by phenomenal customer service. We also endeavor to create and maintain other key relationships for our operations, including with the communities we develop, suppliers, trade contractors, land sellers and team members. While financial returns are our top priority, we believe our distinctive and deeply rooted purpose-driven, people-centric approach to doing business has been the foundation of our success over the 60+ years we have been delivering homes to and serving our customers and their communities. We strive to make the communities we develop better places to live, work and play, and encourage our teams to get involved at a local level. This includes their participation in our KB Cares program, which supports several charitable activities.

ENVIRONMENTAL AND SOCIAL PRACTICES

We are proud of our nearly 15 years of leadership within the homebuilding industry in constructing communities of sustainable homes. Over their multi-decade use, our homes are designed to meaningfully conserve natural resources and reduce greenhouse gas emissions associated with day-to-day living activities compared to typical new and resale homes. We believe this is the most effective way we can make a positive contribution to the global effort to address climate change. In recent years, we have expanded our sustainability portfolio to include enhancing our homes’ indoor air environment. We also maintain a human capital strategy that supports a diverse and inclusive workforce with equal opportunity and programs for training and career advancement, strong benefits, incentives, and health, safety and wellness initiatives. Our annual sustainability reports, which we have published for 13 years, contain more information about our programs, goals and achievements.

Select attributes of our approach to sustainability, which our Board oversees as part of our overall business strategy, are summarized below.

 

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CORPORATE GOVERNANCE OVERVIEW

As strong corporate governance is a key factor in driving long-term stockholder value, the Board has implemented a robust governance framework and leading practices to oversee the management of our business, as highlighted below and discussed in other sections of this Proxy Statement*. Further below, we detail how the Board’s approach to corporate governance aligns with the principles of the Investor Stewardship Group, which is a coalition of some of the world’s largest investors and asset managers, including several of our top stockholders.

INVESTOR STEWARDSHIP GROUP PRINCIPLES ALIGNMENT

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BOARD AND COMMITTEE GOVERNANCE STRUCTURE

BOARD LEADERSHIP

Jeffrey T. Mezger, our CEO, has served as Chairman of the Board since 2016. The non-employee directors of the Board have elected Mr. Mezger as Chairman based on his fundamental understanding of our business model, effective operational leadership and capable service as a director since 2006, and their belief that combining the roles of Chairman and CEO enhances our ability to achieve our long-term growth goals. Board governance is balanced with a strong Lead Independent Director position, which is designed to maintain the Board’s firm independent oversight. Melissa Lora has served as Lead Independent Director since 2016. In addition, all committees are led by and composed solely of independent directors.

 

 

BOARD COMMITTEE PROFILES*

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BOARD ROLE IN RISK OVERSIGHT

The Board oversees our management’s plans, policies and processes for identifying, assessing and addressing business-related risks while advancing our strategic growth goals. To monitor COVID-19’s initial impact on our business, directors held bi-monthly conference calls with management from early April through July 2020, which included presentations and discussion on the evolving risk environment for our operations and financial position. The Board has also delegated certain risk oversight responsibilities to its committees, as described below. At each Board meeting, the chair of each committee reports on the risks their committee has discussed with management, as well as their committee’s other activities.

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BOARD EXPERIENCE AND SKILLS

We have a balanced and well-diversified Board composed of actively engaged directors possessing skill sets in a range of sectors relevant to our business, as summarized in the charts below. In addition, our directors have executive management or other experience that enables them to effectively contribute business acumen, strategic insight, risk management sensibility, financial comprehension, informed counsel and practical knowledge across the operating dimensions of our enterprise. Below is a summary of some of the Board’s attributes.

 

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DIRECTOR COMPENSATION

Directors, other than Mr. Mezger, who is not paid for his Board service, are compensated as described below. We also pay directors’ travel-related expenses for Board meetings and Board activities. Our director compensation program is shown in the table below.

NON-EMPLOYEE DIRECTOR COMPENSATION*

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DIRECTOR COMPENSATION DURING FISCAL YEAR 2020

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ELECTION OF DIRECTORS

The Board will present as nominees at the Annual Meeting, and recommends our stockholders elect to the Board, each of the individuals named below for a one-year term ending at the election of directors at our 2022 annual meeting. Each nominee has consented to being nominated and agreed to serve as a director if elected. Other than Ms. Kozlak, who was elected to the Board in January 2021, and Messrs. Collins and Eltife, who were each elected to the Board in October 2020, each nominee is standing for re-election.

Should any of the nominees become unable to serve as a director prior to the Annual Meeting, the named proxies, unless otherwise directed, may vote for the election of another person as the Board may recommend. If the Board’s nominees are elected at the Annual Meeting, the Board will have 12 directors.

 

 

DIRECTOR SUCCESSION AND REFRESHMENT

Although there are no term limits for directors, a director must retire from the Board as of the first annual meeting following their 75th birthday. With several long-standing directors approaching this retirement age over the next few years, the Board proactively developed and implemented in 2020 and early 2021 aspects of a plan to refresh its membership. It elected three new, highly qualified directors — Ms. Kozlak and Messrs. Collins and Eltife — who enhance its diversity and range of skills and expertise. In addition, at his suggestion to enable the Board to elect Ms. Kozlak, and to facilitate an orderly succession process where it can continue to benefit from his insight and experience from 20 years of service as a director, the Board appointed Mr. Jastrow in January 2021 to the newly created position of Director Emeritus for a one-year term. Mr. Jastrow resigned as a director in conjunction with this appointment and therefore will not be standing for election at the Annual Meeting.

 

MAJORITY VOTING STANDARD

Our Corporate Governance Principles provide that a director nominee who fails to win election to the Board in an uncontested election is expected to tender his or her resignation from the Board (or to have previously submitted a conditional tender). An “uncontested election” is one in which there is no director nominee that has been nominated by a stockholder in accordance with our By-Laws. This election is an uncontested election. If an incumbent director fails to receive the required vote for election in an uncontested election, the Nominating Committee will act promptly to determine whether to accept the director’s resignation and will submit its recommendation for the Board’s consideration. The Board expects the director whose resignation is under consideration to abstain from participating in any decision on that resignation. The Nominating Committee and the Board may consider any relevant factors in deciding whether to accept a director’s resignation.

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OWNERSHIP OF KB HOME SECURITIES

The table below shows the amount and nature of our non-employee directors’ and NEOs’ respective beneficial ownership of our common stock as of February 16, 2021. Except as otherwise indicated below, the beneficial ownership is direct and each owner has sole voting and investment power with respect to the reported securities holdings.

 

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The following table shows the beneficial ownership of each stockholder known to us to beneficially own more than five percent of our common stock. Except for the Grantor Stock Ownership Trust (“GSOT”) , the below information (including footnotes) is based solely on the stockholders’ respective Schedule 13G or Schedule 13G/A filings with the SEC and reflect their respective determinations of their and/or their respective affiliates’ and subsidiaries’ ownership as of December 31, 2020. Some percentage ownership figures below have been rounded.

 

STOCK OWNERSHIP REQUIREMENTS

Our non-employee directors and senior executives are subject to stock ownership requirements to better align their interests with those of our stockholders. Our Corporate Governance Principles require each of our non-employee directors to own at least five times the Board retainer (which currently equates to $500,000) in value of our common stock or common stock equivalents by the fifth anniversary of joining the Board. The executive stock ownership policy requires designated senior executives, including our NEOs, to own a certain number of shares within a specified period. The policy is discussed under “Equity Stock Ownership Policy.” Each of our non-employee directors and NEOs is in compliance with their respective policy requirements.

 

DELINQUENT SECTION 16(a) REPORTS

Under Section 16 of the Exchange Act of 1934, as amended, our directors, executive officers and any persons holding more than 10% of our common stock are required to report to the SEC initial ownership of our common stock and any subsequent changes in ownership. The SEC has established specific filing due dates, and we are required to disclose any failure to file required ownership reports by these dates. Based solely upon a review of forms filed with the SEC and the written representations of such persons, we are aware of no late Section 16(a) filings other than a late Form 4 filed by Matthew W. Mandino reporting the disposition of shares to us to cover tax withholding obligations arising from the vesting of a restricted stock award in October 2020 due to our administrative oversight.

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COMPENSATION DISCUSSION AND ANALYSIS

FINANCIAL PERFORMANCE AND COMPENSATION HIGHLIGHTS

The COVID-19 pandemic and related governmental control measures severely disrupted global and national economies, the U.S. housing market and our business during our 2020 second quarter. With the easing to varying degrees of restrictive public health orders in our served markets beginning in May, our net orders began to rebound significantly following a low point in April as housing demand fueled by the combination of historically low mortgage interest rates, a limited supply of resale inventory and consumers’ increasing desire to own a single-family home drove our third- and fourth-quarter net orders to 15-year highs. Though this sharp rise in net orders in the second half of 2020 generated a substantial expansion in backlog, and positioned us for considerable top-line and bottom-line growth in 2021, our deliveries and revenues for our full 2020 fiscal year reflected the negative effects from the early stages of the pandemic.

 

Though the COVID-19 pandemic had a negative impact on our business, we made no changes to our executive compensation programs in 2020 due to the pandemic. Specifically:

 

ANNUAL ACHIEVEMENTS

Even with the challenges we faced in 2020, we increased our quarterly cash dividend more than 66% and had another year of strong performance, including the following (comparisons are to the prior year):

Over the 2018 – 2020 period, we significantly improved our business in a number of areas, including the following:

 

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TOTAL STOCKHOLDER RETURN

For the five-year period concluding in 2020, we achieved exceptional total stockholder return (“TSR”) results (including reinvestment of dividends), ranking at the 88th percentile of our peer group and exceeding the returns of the S&P 500 Index and the Dow Jones US Home Construction Index.

 

 

 

 

Our five-year TSR results placed us second in our peer group, and our three-year annualized TSR ranks at the median of our peer group. With the volatility that we faced during 2020, and in the context of our business and its typical investment, development and product delivery cycle, we consider these longer-term measurement periods of TSR as generally more indicative of our performance than shorter measurement periods.

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PAY FOR PERFORMANCE — 2020 FISCAL YEAR CEO COMPENSATION

 

The following table compares our CEO’s total direct compensation for 2020 and 2019, which increased approximately 3.6% year over year:

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LISTENING TO OUR STOCKHOLDERS

In 2020, we continued our longstanding practice of reaching out to our stockholders, including all of our 25 largest stockholders, and we directly engaged with holders representing over 50% of our outstanding shares ahead of our 2020 annual meeting. We conducted additional post-meeting proactive outreach in the fall and winter to approximately one-third of our 25 largest stockholders, and we engaged in telephonic meetings with several of them to discuss our approach to dealing with the challenges of the COVID-19 pandemic as well as our practices and their views regarding compensation, sustainability and governance matters. In our conversations, stockholders expressed general support for our compensation and ESG programs and policies and provided feedback that we have incorporated or are considering incorporating into our programs or public disclosures. We value our stockholders’ opinions, and in part based on discussions with them, the Compensation Committee over the past few years established tighter change in control vesting provisions in our equity award agreements and adopted an executive officer incentive compensation claw-back policy. In evaluating our executive compensation programs during 2020, the Compensation Committee considered the strong support stockholders have expressed through our annual NEO compensation advisory votes over the past few years for our approach to executive compensation, including a 92% level of support at our 2020 annual meeting. As a result, for 2020, the Compensation Committee decided to retain the core components of our executive compensation programs and to apply the same general principles and philosophy as in the prior fiscal year in its executive compensation decisions.

 

COMPENSATION GOVERNANCE

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PAY PROGRAM OVERVIEW

The table sets forth the components of, and rationale for, each element of our executive compensation program.

 

As outlined above, we place a significant emphasis on at-risk, performance-based pay. As shown below, in 2020, our CEO received over 90% of his total direct compensation in performance-based and/or at-risk vehicles. For our other NEOs, such vehicles, on average, approximated 80% of their total direct compensation.

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NEO COMPENSATION COMPONENTS

BASE SALARIES 

The Compensation Committee annually reviews and approves the base salaries of our CEO and our other NEOs. The Compensation Committee approves NEO base salaries after considering several factors, including an NEO’s experience, specific responsibilities, capabilities, individual performance and expected future contributions; our current and expected financial and operational results; and market pay levels and trends to ensure competitiveness. During 2020, the Compensation Committee elected to hold base salaries flat with their 2019 levels for all NEOs.

 

2020 ANNUAL INCENTIVES

 

Our annual incentive program is structured to drive performance within a single fiscal year period. As with our 2016 – 2019 programs, the 2020 program’s formula-driven funding would be determined based on two components: (a) total adjusted pretax income (“API”) performance relative to threshold and target goals set relative to then-expected market and business conditions in 2020; and (b) API performance relative to an asset efficiency measure. API is our total pretax income excluding certain compensation expense and certain inventory-related charges.

We view API as a comprehensive short-term measure of our senior officers’ performance, as it reflects their ability to generate profits by growing revenues, managing expenses and controlling fixed costs. The combination of the API and asset efficiency measures was designed to motivate our senior officers to generate profitable growth in alignment with our strategic goals.

The 2020 target payout opportunities were set at 150% of base salary for our CEO, 120% for our Chief Operating Officer and 100% for the remainder of our NEOs. As outlined in the Grants of Plan-Based Awards During Fiscal Year 2020 table, maximum payouts were limited to a multiple of target. The target and maximum annual incentive opportunities were designed to generate payout levels that, if achieved, would appropriately reward strong performance for 2020, and together with base salary and long-term incentives, provide competitive total direct compensation.

 

2020 ANNUAL INCENTIVE PROGRAM COMPONENT DETERMINATIONS

With our 2020 API performance, our NEOs became eligible to receive annual incentive payouts under the 2020 program.

API Performance Relative to Goals Component

The Compensation Committee set an API performance target of $440.0 million, an increase of 14% over our 2019 target API performance goal of $385.0 million, and approximately 4% over our 2019 actual API performance. The 2020 performance target was determined prior to the declaration of the COVID-19 global pandemic and was based on then current and expected housing market conditions. Despite incredible volatility during 2020, we achieved API of $442.7 million, a 4% increase from our actual 2019 API result of $424.3 million. Although our actual 2020 API exceeded the target performance level, payouts were limited under this component of the program to each NEO’s individual target amount.

As explained above and shown in the table below, this performance led to strictly formula-based payouts of 100% of target to our NEOs under the API performance component.

 

2020 API PERFORMANCE LEVELS AND PAYOUT SUMMARY

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Our NEOs could earn annual incentive payouts above their respective individual target payout levels (but limited to each such officer’s respective maximum payout level) only if and to the extent our API performance exceeded a minimum asset efficiency objective, as described below.

API Performance Relative to Asset Efficiency Component

Under this component, two and one quarter percent of each dollar of API over our minimum asset efficiency objective, and three and one quarter percent of each dollar of API above the level of 110% of that target, funded an additional annual incentive pool to be allocated among the participating officers. The Compensation Committee set the 2020 minimum asset efficiency objective at a one percent return on inventory for 2020, which was approximately $38.0 million, a 4.3% increase over our 2019 objective for this measure ($36.4 million). With the difference between our API and the minimum asset efficiency objective equal to about $404.7 million, the asset efficiency performance pool was funded at a total level of approximately $9.1 million.

The Compensation Committee determined the allocation of the asset efficiency performance pool based on pre-established potential payout ranges (0% — 60% for our CEO; 0% — 15% for our other NEOs) that took into consideration each officer’s 2020 annual incentive payout opportunities at threshold, target and maximum levels; historical relative annual incentive payouts by functional role; and competitive market pay information. In determining allocations of the pool to our NEOs, the Compensation Committee also considered each NEO’s individual performance contributions, which, other than for our CEO, were informed by our CEO’s assessment of their performance, and established a corresponding individual performance factor (“IPF”) within the above-described ranges. The Compensation Committee determined our CEO’s award by also considering the CEO’s leadership of our strategy and his significant contribution to our performance in 2020. The table below summarizes our NEOs’ individual performance contributions.

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2020 ANNUAL INCENTIVE PROGRAM PAYOUT LEVELS AND ACTUAL PAYOUTS^(a)

 

2021 ANNUAL INCENTIVE PROGRAM

The 2021 annual incentive program will be similar to our 2020 program, including a formula-driven funding structure determined by API and asset efficiency performance measures. The pre-established 2021 annual incentive program’s API target performance goal is higher than our 2020 actual result and is based on expected market and business conditions for the current year. In addition, the asset efficiency objective will be increased for 2021.

 

LONG-TERM INCENTIVES

In October 2020, for the fourth consecutive year, the Compensation Committee approved long-term incentive awards to our NEOs consisting solely of PSUs to reinforce the alignment of pay with our performance and stockholder value creation. The target values of these awards were set at the same values as the October 2019 awards, and were again based on peer group and market data analysis. In order to maintain commensurate pay arrangements intended to reward strong long-term performance and help retain key talent, the following awards were made to our NEOs:

 

NEO LONG-TERM INCENTIVES GRANTED IN 2020

 

 

 

PERFORMANCE-BASED RESTRICTED STOCK UNITS

We have granted PSUs to our executive officers each year since 2012. As with prior PSU grants, the PSUs granted in 2020 are designed to focus our executive officers on achieving important long-term financial objectives over a three-year period. The 2020 PSU measures described below are a combination of absolute and relative metrics that should generate positive outcomes for our business, and, if achieved, are expected to be strong drivers of stockholder value creation.

 

 

The 2020 PSU amounts shown in the table above reflect a target award of shares of our common stock and their grant date fair value. Each 2020 PSU entitles a recipient to a grant of 0% to 200% of his target award depending on our performance relative to the above-noted performance measures over the three-year period of December 1, 2020 to November 30, 2023. The AEPS and AROIC measures’ performance will be determined on a tax-effected basis that excludes only pre-specified categories of compensation expense; certain inventory-related charges; and other extraordinary items approved by the Compensation Committee. Upon vesting, each 2020 PSU recipient is

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entitled to receive a proportionate amount of credited cash dividends that are paid in respect of one share of our common stock with a record date between the grant date and the date the Compensation Committee determines the applicable performance achievements, if any. Except for death, disability or certain retirement circumstances, a recipient will forfeit any rights to a 2020 PSU payout if the recipient terminates service before the date the Compensation Committee determines the applicable performance achievements. The following tables present our goals with respect to the 2017 – 2020 PSU performance measures. As shown below, the goals for both the AEPS and AROIC measures have increased year over year at both target and maximum performance level, reflecting the consistent improvement in our performance in the prior-year periods and stockholder feedback. Specifically, comparing the respective corresponding 2018 – 2020 PSUs target goals to those for the 2017 PSUs, the AEPS measure is up 60%, 71% and 76%, and the AROIC measure is 100, 220 and 290 basis points higher. Due to the continuing uncertainty from the COVID-19 pandemic at the time 2020 PSU goals were determined, the Compensation Committee established threshold goals for both AEPS and AROIC that were lower than the threshold goals for the same measures under the 2019 PSUs along with lower threshold payout levels than those prior-year PSUs.

 

The relative revenue growth performance ranking scale shown below applies only to the 2017 PSU grants.

For our 2018, 2019 and 2020 PSU grants, we adopted a percentile rank approach to determine the target award multiplier for the relative revenue growth measure as outlined in the table below. Payouts for performance between the levels shown below are determined by straight-line interpolation.

 

 

As with our annual incentive program, the Compensation Committee intends the threshold performance levels outlined above to be reasonably achievable, yet uncertain to be met under expected market and business conditions at the time of grant. Target performance levels are designed to require significant management effort to achieve, and maximum performance levels are designed to be measurably more difficult to achieve than target

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performance levels. Each of these performance levels directly scale to threshold, target and maximum payout opportunities. As vesting for the PSUs granted in 2018 – 2020 will not be determined until after their respective performance periods end, we cannot predict the extent to which any shares under these awards will ultimately vest.

2017 PSU AWARDS

The PSUs granted to our executive officers in 2017 entitled recipients to a grant of 0% to 200% of a target award of shares of our common stock based on our AEPS performance, AROIC performance, and relative revenue growth performance (with the respective rankings and multipliers as shown in the above table) over the three-year period of December 1, 2017 to November 30, 2020. The applicable AEPS and AROIC performance measures and goals are set forth below.

 

 

2017 PSU AWARD DETERMINATIONS

 

 

The cumulative AEPS performance result for the 2017 PSUs exceeded the challenging $6.19 maximum goal level set at the time of grant and reflected our emphasis on and success at growing our diluted earnings per share by 69% during the performance period even amid a volatile housing market during 2020. Strong, consistent profitability and cumulative net income of approximately $735 million, as well as our substantial reduction of nearly $578 million in notes payable over this period, contributed to a significant increase in our adjusted return on invested capital, exceeding our maximum goal for this measure. The relative revenue ranking for the 2017 PSUs reflected our revenue performance over the applicable period, and placed us 11th within the peer group. Our ranking in the above table reflects our position at the end of the performance period among the applicable peer group, consistent with the 2017 PSUs’ terms and based on the relative revenue growth performance rank-to-target award multiplier table. All of these outcomes were uncertain at the time the 2017 PSUs were granted, and the Compensation Committee determined that they required significant management effort to achieve and sustain through the entirety of the performance period.

On February 18, 2021, the Compensation Committee certified the performance we achieved for the period ended November 30, 2020 and approved share grants with respect to the 2017 PSUs as set forth in the table below. Mr. Mandino was not a participant in the 2017 PSU program because he was not an eligible executive officer at the time the 2017 PSUs were granted.

 

2017 PSU AWARDS

 

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EXECUTIVE COMPENSATION DECISION-MAKING PROCESS AND POLICIES

Pursuant to its charter, the Compensation Committee oversees the decision-making process for our executive compensation and benefits policies and programs. In making executive compensation decisions, the Compensation Committee considers a variety of factors and data, most importantly our performance and individual executives’ performance, and the totality of compensation that may be paid. Among the data the Compensation Committee considers are financial and operational performance metrics for us, including comparisons to prior years’ performance and our current business plans and to our peer group; surveys and forecasts of comparative general industry and peer group compensation and benefits practices; and, at least annually, management-prepared tally sheets for senior executives with up to six years of compensation data.

 

ROLE OF OUR MANAGEMENT AND COMPENSATION CONSULTANTS

Our CEO, senior human resources and legal department executives, and FWC provide information and recommendations to assist the Compensation Committee’s decision-making, and also advise on compliance and disclosure requirements. FWC, which the Compensation Committee directly retains, attends Compensation Committee meetings as needed. To maintain its independence and avoid any conflicts of interest, FWC may not work directly for our management unless the Compensation Committee pre-approves the work, including fees. During 2020, FWC did not provide any services that would have required such pre-approval. Based on its consideration of factors under New York Stock Exchange (“NYSE”) listing standards, the Compensation Committee determined that FWC’s work did not raise any conflicts of interest, and therefore considered FWC to be independent.

 

PEER GROUP

Our peer group is composed solely of U.S. public companies that, like us, are engaged in high production homebuilding as their primary business. We compete with all of these companies for both homebuyers and management talent. The competition with these companies for human resources reflects our, and their, need to attract and retain high caliber management and other personnel with strong high production homebuilding expertise and experience to execute business activities nationally as well as in specific local markets. Therefore, a principal focus in designing our compensation and benefits programs is to meet this critical competitive need. The Compensation Committee, in consultation with FWC and our management, periodically reviews and considers changes to our peer group. The Compensation Committee principally considers the competitive factors described above, as well as relative total revenues and market capitalization among the peer group companies. The Compensation Committee, which considers the composition of our peer group at least annually, last adjusted the group’s members, which are shown below, during 2016. As of their most recently filed proxy statements before the date of this Proxy Statement, each member of our peer group included us in its own peer group.

 

 

OUR PEER GROUP

 

As of December 31, 2020, the reported total revenues (on a trailing 12-month basis) of the companies in our peer group were within a range of approximately 0.5 to 5.4 times our total revenues, and our total revenues of $4.18 billion placed us in the middle-third of the peer group. Also, as of December 31, 2020, the market capitalization of our peer group was within a range of approximately 0.1 to 8.3 times our market capitalization, and our market capitalization of $3.04 billion was approximately 6% below the median of the peer group of $3.24 billion.

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EQUITY STOCK OWNERSHIP POLICY

Our longstanding executive stock ownership policy is intended to encourage, and has encouraged, our executives to increase their ownership of our common stock over time and to align their interests with our stockholders’ interests. Under the policy, designated senior executives are expected to achieve specific levels of common stock ownership within five years of joining us or being promoted to a position with a higher ownership guideline and, once achieved, maintain such ownership throughout their employment with us. The targeted common stock ownership levels for our NEOs are as follows:

 

Common stock ownership includes shares directly owned by the NEO, and shares are valued at the greater of the most recent closing price on a valuation date and the closing price on the date shares are acquired. Designated executives are required to hold all vested net (after-tax) shares of time-vesting and performance-vesting restricted stock and up to 100% of net shares acquired through stock option exercises until their applicable stock ownership guideline is met, absent a hardship or other qualified exception. Each of our NEOs is in compliance with the requirements of the policy.

 

PROHIBITION ON HEDGING/PLEDGING OF OUR SECURITIES

To further align their interests with those of our stockholders, our employees and non-employee directors cannot engage in short sales of our securities and cannot buy or sell puts, calls or any other financial instruments that are designed to hedge or offset decreases or increases in the value of our securities (including derivatives, prepaid variable forward contracts, equity swaps, collars and exchange funds). They also cannot hold our securities in a margin account or otherwise pledge our securities as collateral for any loan.

 

EQUITY-BASED AWARD GRANT POLICY

 

Our equity-based award grant policy governs the timing and establishes certain internal controls over the grant of equity-based awards, including stock options, restricted stock and PSUs. The policy requires that the Compensation Committee (or the Board) approve all grants of equity-based awards and their terms, and does not permit delegation of this authority to our management. Per the policy, the exercise or grant price of any relevant equity-based award cannot be less than the closing price of our common stock on the grant date.

 

CLAW-BACK POLICY

 

The Board adopted a policy in 2018 to recoup compensation if our financial statements must be restated due to an executive officer’s intentional misconduct or grossly negligent conduct. Under the policy, the Board (or a designated committee) can, to the extent permitted by applicable law (including California law), require an officer to reimburse or forfeit to us the excess bonus or incentive compensation (whether cash- or equity-based) such officer received during the three fiscal years preceding the year the restatement is determined to be required relative to an applicable restated performance measure or target. In addition, our CEO must repay certain bonus and incentive- or equity-based compensation he receives if we are required to restate our financial statements as a result of his misconduct consistent with Section 304 of the Sarbanes-Oxley Act of 2002. We will also recoup incentive-based compensation from our NEOs to the extent required under the Dodd-Frank Act and any rules issued under that Act.

 

TAX IMPLICATIONS OF OUR EXECUTIVE COMPENSATION PROGRAM

In past years, we have generally designed our incentive compensation plans in order to maintain federal tax deductibility for executive compensation under Section 162(m) of the Internal Revenue Code (“Code”), and the Compensation Committee considered the potential Section 162(m) impact when approving the compensation paid to our NEOs. Prior to the Tax Cuts and Jobs Act of 2017 (“TCJA”), Section 162(m) generally disallowed a tax deduction for compensation over $1.0 million paid to certain executive officers unless it qualified as performance-based compensation. The TCJA effectively repealed the exemption for performance-based

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compensation with respect to tax years beginning after December 31, 2017, other than for arrangements in place on November 2, 2017 that are not later modified in any material respect. As such, with respect to our 2020 fiscal year, we will not be able to deduct compensation above $1.0 million awarded to certain of our executive officers. While we intend for our PSU grants made prior to November 2, 2017 to qualify for deductibility under Section 162(m), we cannot guarantee that any compensation intended to be deductible under Section 162(m) will qualify as such. In addition, the Compensation Committee will approve compensation that may not be deductible under Section 162(m) where it believes it is in our and our stockholders’ best interests to do so.

 

INDEMNIFICATION AGREEMENTS

 

We have entered into agreements with each NEO and certain other senior executives that provide them with indemnification and advancement of expenses to supplement what our Certificate of Incorporation and insurance policies provide, subject to certain limitations.

 

SEVERANCE, CHANGE IN CONTROL AND POST-TERMINATION ARRANGEMENTS

SEVERANCE ARRANGEMENTS

Mr. Mezger’s Employment Agreement and our Executive Severance Plan, in which all of our NEOs participate, provide certain severance benefits, as discussed under “Potential Payments Upon Termination of Employment or Change in Control.” In considering our stockholders’ approval of an advisory proposal, in 2008 we adopted a policy under which we will obtain stockholder approval before paying severance benefits to an executive officer under a future severance arrangement in excess of 2.99 times the sum of the executive officer’s then-current base salary and target bonus. Future severance arrangements do not include arrangements existing when we adopted the policy or that we assume or acquire unless, in each case, any such arrangement is changed in a manner that materially increases its severance benefits.

 

CHANGE IN CONTROL ARRANGEMENTS

Since 2001, we have maintained without modification the terms of a Change in Control Severance Plan (“CIC Plan”) that provides participants with certain benefits, as discussed under “Potential Payments Upon Termination of Employment or Change in Control.” The CIC Plan is intended to enable and encourage our management to focus its attention on obtaining the best possible result for our stockholders in a change in control, to promote management continuity, and to provide income protection if there is an involuntary loss of employment. All unvested employee equity awards require double-trigger vesting in a change in control.

 

DEATH BENEFITS

Our Death Benefit Only Plan, in which Messrs. Mezger and Praw participate, provides a $1.0 million death benefit to a participant’s designated beneficiary (plus an additional tax restoration amount sufficient to pay taxes on the benefit and the additional amount). We closed the plan to new participants beginning in 2006. Since then, only term life insurance, with a $750,000 benefit level, has been made available to incoming eligible executives, including Messrs. Kaminski, Mandino and Woram. We also maintain a $400,000 life insurance death benefit for designated beneficiaries of Mr. Mezger.

 

OTHER BENEFITS

 

The majority of our health and welfare benefits are made available to all full-time employees, including our NEOs. During 2020, as in prior years, our NEOs were eligible to participate in a supplemental plan that reimburses them for qualified out-of-pocket expenses that exceed amounts payable under our standard medical, dental and vision plans. Certain of our NEOs, and other employees, also participate in our unfunded nonqualified Deferred Compensation Plan (“DCP”), which is described below. These market-competitive benefits are offered to attract and retain key executive talent.

 

RETIREMENT PROGRAMS

 

The 401(k) Plan, a qualified defined contribution plan, is the only post-employment benefit program we offer to all full-time employees. We provide a dollar-for-dollar match of 401(k) Plan and DCP contributions up to an aggregate of 6% of a participant’s base salary. Matching contributions generally vest after five years of service.

The DCP allows participants to make pretax contributions of up to 75% of their base salary and 75% of their annual incentive compensation, and to select from one or more investment options in which their deferred compensation is deemed to be invested. As we do not provide a guaranteed rate of return under the DCP, a participant’s credited earnings depend on their investment elections. Deferred amounts together with any credited investment returns

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under the DCP are paid out to participants in a lump sum or in installments, commencing either at a participant-specified date during employment or upon termination of employment, subject to certain limitations. NEO deferrals under the DCP are shown in the Non-Qualified Deferred Compensation During Fiscal Year 2020 table.

We also maintain a supplemental non-qualified, unfunded retirement plan (“Retirement Plan”) for certain executives, including Mr. Mezger, whose participation is shown in the Pension Benefits During Fiscal Year 2020 table. The Retirement Plan, closed to new participants since 2004 with no additional benefit accruals to participants (other than the same cost-of-living adjustments applied to federal social security benefits), provides each participant with specific annual payments for 20 years that begin upon the later of reaching age 55, the tenth anniversary of a participation commencement date or the termination of employment with us. Mr. Mezger’s original annual benefit amount under the Retirement Plan was $450,000. The change in our CEO’s pension value shown in the Summary Compensation Table for 2020 is a required reporting item and represents only the actuarial increase in our CEO’s Retirement Plan benefits based on interest rate fluctuations. It does not reflect any new plan benefits, cash or other compensation granted to or received by our CEO in 2020.

 

MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE REPORT

The Management Development and Compensation Committee of the Board of Directors has reviewed and discussed the above “Compensation Discussion and Analysis” with KB Home management. Based on this review and discussion, the Management Development and Compensation Committee recommended to the Board of Directors that the “Compensation Discussion and Analysis” be included in this Proxy Statement.

Management Development and Compensation Committee

Melissa Lora, Chair
Timothy W. Finchem
Robert L. Johnson
Jodeen A. Kozlak
James C. Weaver

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EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

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GRANTS OF PLAN-BASED AWARDS DURING FISCAL YEAR 2020

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2020

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OPTION EXERCISES AND STOCK VESTED DURING FISCAL YEAR 2020

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PENSION BENEFITS DURING FISCAL YEAR 2020

 

NON-QUALIFIED DEFERRED COMPENSATION DURING FISCAL YEAR 2020

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CEO PAY RATIO

For our fiscal year ended November 30, 2020, our last completed fiscal year:

In determining the ratio, we used W-2 compensation for all employees, other than Mr. Mezger, paid in the 12-month period ended November 30, 2020. As of that date, we had approximately 1,752 full-time and part-time employees, excluding four employees on extended leaves of absence who did not work during the period.

Because the SEC’s rules governing the identification of the median compensated employee and the pay ratio calculation based on that compensation allow companies to use a variety of methodologies, to apply certain exclusions and to make estimates and assumptions for their particular circumstances, the pay ratio reported by other companies — including those in our peer group — may not be comparable to the foregoing pay ratio. For instance, other companies have different employee populations and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios.

 

POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT OR CHANGE IN CONTROL

Based on the terms of certain of our employee benefit plans — primarily our Executive Severance Plan and our CIC Plan — our NEOs are entitled to certain payments and other benefits if their employment is terminated under certain circumstances and/or if we experience a change in control.

Mr. Mezger is also entitled to certain payments and other benefits in such circumstances under the terms of his Employment Agreement. Per Section 409A of the Code, certain payments to our NEOs would not commence for six months following a termination of employment.

TERMINATION OF EMPLOYMENT

If we terminate Mr. Mezger without cause or he resigns for good reason (each as defined in his Employment Agreement), or if we terminate any of the other NEOs without cause (as defined in the Executive Severance Plan), each is entitled to receive a cash severance payment equal to a multiple of base salary and average bonus. For Mr. Mezger, the severance amount is 2.0 times the sum of his annual salary plus average annual bonus earned for the prior three years, with the total payment capped at $6.0 million. Under certain circumstances, Mr. Mezger would also receive a prorated bonus for the year in which his employment terminates. For Messrs. Kaminski, Mandino, Praw and Woram, the severance amount is 2.0 times the sum of their respective annual base salary in effect at the time of termination and average bonus. The applicable average bonus is the lesser of (a) the average of the annual cash bonuses, if any, paid to them for the three most recent completed fiscal years prior to termination; or (b) 3.0 times their annual base salary. In addition to a severance payment, each NEO is entitled to a continuation of health coverage for up to two years. In each case, the foregoing benefits are subject to an affected NEO’s executing a release and post-termination non-solicitation (for two years), non-disparagement and confidentiality obligations.

For equity awards granted to Mr. Mezger on and after the effective date of his Employment Agreement, he is entitled to (a) two years of additional service credited to compute equity vesting plus full vesting for any equity issued to him in lieu of cash bonuses; (b) the earlier of 36 months and the original term duration of each equity grant to exercise any such outstanding equity; and (c) performance shares paid as if the performance period closed on the termination date if the performance period would otherwise close in the next 24 months. Outstanding equity awards granted to Mr. Mezger before the effective date of the Employment Agreement are governed by their respective terms and conditions with respect to his termination of employment.

CHANGE IN CONTROL

If Mr. Mezger’s employment is terminated without cause or he resigns for good reason in connection with a change in control (generally, per his Employment Agreement, during the period starting three months before and ending 12 months after a change in control), he is entitled to (a) a severance payment as described above, except the

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applicable multiple is 3.0 times rather than 2.0 times and the total payment is capped at $12.0 million; and under certain circumstances, a prorated bonus for the year in which his employment terminates; (b) a continuation of health coverage for up to two years; (c) full vesting and lump sum cash payment of deferred compensation, retirement or other employee benefits per the relevant arrangements, provided that lump sum payments subject to Section 409A of the Code are permitted only as provided by the specific terms of those arrangements; and (d) an additional amount to compensate for any excise taxes under Section 280G of the Code (“Section 280G”). Mr. Mezger’s change in control benefits are subject to the same conditions described under “Termination of Employment”.

If a change of control occurs, each of our other NEOs is entitled to receive, subject to executing a release and if in the 18-month period following a change in control his employment is terminated other than for cause or disability, or he terminates his employment for good reason (in each case, as defined in the CIC Plan), a severance benefit of 2.0 times the sum of his average base salary and average actual annual cash bonus for the three fiscal years prior to the year in which the change in control occurs. While Mr. Mezger is a participant in the CIC Plan, he is entitled only to CIC Plan benefits that do not duplicate his Employment Agreement benefits in a change in control, and his total severance benefit under the CIC Plan is capped at $12.0 million.

Per the terms of each recipient’s award agreement, the vesting of our NEOs’ outstanding equity awards will not accelerate upon a change in control unless the recipient is terminated without cause or resigns for good reason within 18 months of the change in control event. Generally, if such a termination occurs (a) within one year of the award’s performance period, the recipient will receive a target payout of the award; (b) after the first year of the award’s performance period, the recipient will receive a payout of the award determined using prorated calculations of the applicable performance measures; and (c) before the award’s performance period begins, the recipient will receive no payout of the award.

In addition, under the CIC Plan, only Mr. Mezger and five other senior executives can potentially receive an additional tax restoration amount to compensate for any excise taxes imposed on them under Section 280G and for any taxes on the additional amount. Pursuant to a Board policy, since April 7, 2011, we have not extended this tax restoration benefit to any other officer or employee, including all the other NEOs, even though they are CIC Plan participants.

OTHER CHANGE IN CONTROL AND EMPLOYMENT TERMINATION PROVISIONS

The individual award agreements governing outstanding restricted stock awards provide for accelerated vesting upon the recipient’s death or disability. The individual award agreements governing outstanding PSU awards provide for pro-rata vesting if the recipient retires under certain circumstances, and for accelerated vesting upon the recipient’s death or disability; provided that payout, if any, is delayed until the performance period is completed. In addition, different provisions govern the time a recipient has to exercise a common stock option after termination of employment, depending on the reason for termination. For example, the exercise period may be limited to five days if a termination is for cause; while for retirement, death or disability, the exercise period may be the common stock option’s original term. For these purposes, the relevant terms are defined under the applicable agreement.

Our DCP provides for full vesting of benefits if there is a change in control or disability, as those terms are defined under the plan, or death. Our Retirement Plan provides that a participant will immediately receive a lump sum payment of the actuarial value (as specified under the Retirement Plan) of the participant’s plan benefits if there is a change in control or death. Our Death Benefit Only Plan provides for (a) distribution of an insurance contract to a participant sufficient to pay the death benefit (if the participant dies before age 100); and (b) an additional tax restoration amount sufficient to pay specified taxes caused thereby, if there is a change in control as defined in the plan. We also maintain term life insurance policies that pay benefits to the beneficiaries of certain of our NEOs upon their deaths as described under “Death Benefits.”

The tables below show payments our NEOs may receive assuming various employment termination and change in control scenarios occurred on November 30, 2020; accordingly, equity awards are valued using the closing price of our common stock on that date, which was $35.20. The amounts shown do not include the value of unexercised stock options reported in the Outstanding Equity Awards at Fiscal Year-End 2020 table, accrued Retirement Plan and DCP amounts reported in the Pension Benefits During Fiscal Year 2020 table and the Non-Qualified Deferred Compensation During Fiscal Year 2020 table (and associated footnotes), respectively, term life insurance benefits or generally available employee benefits. In none of the change in control scenarios below would our NEOs receive a tax restoration benefit under the CIC Plan, nor would our CEO receive a tax restoration benefit under his Employment Agreement.

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POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT OR CHANGE IN CONTROL

POST-EMPLOYMENT PAYMENTS — MR. MEZGER

POST-EMPLOYMENT PAYMENTS — MR. KAMINSKI

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POST-EMPLOYMENT PAYMENTS — MR. MANDINO

 

POST-EMPLOYMENT PAYMENTS — MR. PRAW

 

POST-EMPLOYMENT PAYMENTS — MR. WORAM

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ADVISORY VOTE TO APPROVE NAMED EXECUTIVE OFFICER COMPENSATION

Pursuant to Section 14A of the Securities Exchange Act of 1934, we are seeking an advisory vote from our stockholders on the following resolution to approve our NEOs’ 2020 fiscal year compensation:

RESOLVED, that the stockholders of KB Home approve, on an advisory basis, the compensation paid to its named executive officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, compensation tables and the related narrative discussion set forth in this Proxy Statement.

We believe that our CEO’s and our other NEOs’ 2020 fiscal year compensation was well-aligned with our performance and stockholders’ interests, as detailed under “Compensation Discussion and Analysis,” and as shown below. We also believe that the design and implementation of our executive compensation programs reflect our longstanding significant outreach to our stockholders. In turn, our stockholders have generally expressed strong support through our annual NEO compensation advisory votes, including a 92% level of support in 2020 for our approach to linking executive compensation to our strategic and operational goals as well as to stockholder value creation.

We intend to offer this non-binding Say-on-Pay vote at each of our annual meetings. We and the Board welcome our stockholders’ views on our NEOs’ compensation and, as in past years, will carefully consider the outcome of this advisory vote consistent with the best interests of all stockholders. As an advisory vote, it is not intended to have any use or effect for or on behalf of KB Home or its stockholders outside of this Annual Meeting except as permitted by the Board.

 

 

 

PAY FOR PERFORMANCE — 2020 FISCAL YEAR CEO COMPENSATION

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APPROVE THE AMENDED RIGHTS AGREEMENT

We have significant deferred tax assets comprised primarily of net operating loss carryforwards (“NOLs”), temporary book-to-tax differences and tax credits. Under applicable law, we can use our NOLs, tax credits and deferred tax assets to offset our future income tax liability. However, this benefit could be significantly impaired if we experience an “ownership change,” as discussed below. To help protect against an “ownership change,” our stockholders approved a Rights Agreement at our 2009 Annual Meeting, and approved our Amended and Restated Rights Agreement at our 2018 Annual Meeting with a term expiring on April 30, 2021. Because we expect to have substantial deferred tax assets beyond April 30, 2021, the Board approved, subject to stockholder approval, an Amended Rights Agreement (with substantively the same terms) effective as of this Annual Meeting and continuing until April 30, 2024. Therefore, we are seeking stockholder approval of the Amended Rights Agreement.

 

BACKGROUND

During the housing downturn that generally began in mid-2006, we generated significant NOLs and other deferred tax assets. NOLs generated during those years can be used to offset income tax on our future taxable income for up to 20 years after the tax year in which the loss occurred. Applicable state tax laws are similar, though the allowed carryforward period for some states may be shorter than 20 years.

At November 30, 2020, we had deferred tax assets of approximately $231.1 million (net of an $18.0 million valuation allowance), constituting 4.3% of our total assets. Depending on their applicable statutory period, state NOL carryforwards of $80.0 million, if not utilized, will begin to expire between 2021 and 2040. In addition, we had $70.8 million of certain tax credits that, if not utilized, will begin to expire in 2034 through 2040.

In our 2020 fiscal year, we produced approximately $364.0 million of pretax income, and utilized approximately $133.0 million of deferred tax assets to offset income tax obligations. As of November 30, 2020, we could offset approximately $900.0 million of pretax income in future periods before 2040 with our deferred tax assets.

Given their ability to potentially offset income tax liability on this amount of income, we consider our NOLs and other deferred tax assets to be very valuable. However, the benefits of our NOLs and tax credits could be reduced or eliminated, and our use of our NOLs and tax credits could be substantially delayed or negated, if we experience an “ownership change,” as determined under Section 382 of the Code. A Section 382 “ownership change” occurs if a stockholder or a group of stockholders who are deemed to own at least 5% of our common stock (each, a “5-percent stockholder”) increase or decrease their ownership percentage by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. If an “ownership change” occurs, Section 382 would impose an annual limit on the amount of our NOLs we can use to offset income tax equal to the product of the total value of our outstanding equity immediately prior to the “ownership change” (reduced by certain items specified in Section 382) and the federal long-term tax-exempt interest rate in effect for the month of the “ownership change.” A number of special rules apply to calculating this annual limit that are beyond the scope of this discussion. We believe that if an “ownership change” were to occur, in addition to potentially increasing the cash taxes we would need to pay in the near term following such an “ownership change,” the annual limitations Section 382 imposes could result in a material amount of our NOLs expiring unused, and/or delaying our ability to use them, thereby significantly reducing their value. While the complexity of Section 382’s provisions and the limited knowledge any public company has about the ownership of its publicly traded stock make it difficult to determine whether an “ownership change” has occurred, we currently believe that no “ownership change” has occurred.

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PROTECTING OUR DEFERRED TAX ASSETS

In order to help protect against the risk of a Section 382 “ownership change,” in 2009, the Board recommended, and our stockholders approved, both the adoption of a protective amendment to our certificate of incorporation (now Article Ninth in our Restated Certificate of Incorporation), which is designed to block transfers of our common stock that could result in an “ownership change,” and the Rights Agreement. In 2018, the Board recommended, and our stockholders approved, the Amended and Restated Rights Agreement. We believe these measures have together been effective in preventing an “ownership change” from occurring, and the Board plans to keep Article Ninth in effect. However, neither measure offers a complete solution, and an “ownership change” may occur even with Article Ninth’s provisions and the Rights Agreement in place. There are limitations on the enforceability of Article Ninth that may allow an “ownership change” to occur, and the Rights Agreement may deter, but ultimately cannot block, transfers of our common stock that might result in an “ownership change.” Because of their individual limitations, the Board believes that both measures are needed to help prevent an “ownership change” that could reduce or eliminate the significant long-term potential benefits of our NOLs, and substantially delay or negate our use of our NOLs. Accordingly, the Board strongly recommends that stockholders approve the Amended Rights Agreement to keep such protections in place for up to an additional three years.

 

DESCRIPTION OF THE AMENDED RIGHTS AGREEMENT

We are seeking approval of the Amended Rights Agreement. Except for the applicable expiration date, where April 30, 2024 would replace April 30, 2021, as noted below, and conforming date changes in certain other sections of the document, the Amended Rights Agreement’s terms are substantively the same as those of our current Amended and Restated Rights Agreement. The following description of the Amended Rights Agreement is qualified in its entirety by reference to the text thereof, which can be found at the accompanying Annex 3. The discussion below is only a summary.

General. The Amended Rights Agreement is intended to act as a deterrent to any person or group acquiring 4.9% or more of our outstanding common stock (an “Acquiring Person”) without the approval of the Board. Stockholders who owned 4.9% or more of our common stock as of the close of business on March 5, 2009 will not trigger the Amended Rights Agreement so long as they do not (i) acquire any additional shares of our common stock or (ii) fall under 4.9% ownership of our common stock and then re-acquire 4.9% or more of our common stock. The Amended Rights Agreement does not exempt any acquisitions of our common stock after March 5, 2009 by such persons. Any rights held by an Acquiring Person are void and may not be exercised. The Board may, in its sole discretion, exempt any person or group from being deemed an Acquiring Person, and since the Rights Agreement was approved by our stockholders in 2009, the Board has granted exemptions to certain stockholders whose holdings of our common stock were deemed not to jeopardize or endanger the availability to KB Home of any tax benefits arising from its deferred tax assets so long as each such stockholder complied with certain restrictions regarding its ownership of our common stock. If such stockholders adhere to their respective ownership restrictions, their ownership of more than 4.9% of our common stock will not trigger the Amended Rights Agreement while it is in effect.

The Rights. The Board authorized the issuance of one right per each outstanding share of our common stock payable to our stockholders of record as of the close of business on March 5, 2009. Subject to the terms, provisions and conditions of the Amended Rights Agreement, if these rights become exercisable, each right would initially represent the right to purchase from us one one-hundredth of a share of our Series A Participating Cumulative Preferred Stock for a purchase price of $85.00 (“Purchase Price”). If issued, each fractional share of preferred stock would generally give its holder approximately the same dividend, voting and liquidation rights as does one share of our common stock. However, prior to exercise, a right does not give its holder any rights as a stockholder, including without limitation any dividend, voting or liquidation rights.

Exercisability. The rights will not be exercisable until the earlier of (i) ten calendar days after a public announcement by us that a person or group has become an Acquiring Person and (ii) ten business days after the commencement of a tender or exchange offer by a person or group if upon consummation of the offer the person or group would beneficially own 4.9% or more of our outstanding common stock. In this Proxy Statement, we refer to the date on which the rights become exercisable as the “Distribution Date.” Until the Distribution Date, common stock certificates and/or book-entry shares will evidence the rights and may contain a notation to that effect. Any transfer of shares of our common stock prior to the Distribution Date will constitute a transfer of the associated rights. After the Distribution Date, the rights may be transferred other than in connection with the transfer of the underlying shares of

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our common stock. If there is an Acquiring Person on the Distribution Date or a person or group becomes an Acquiring Person after the Distribution Date, each holder of a right, other than rights that are or were beneficially owned by an Acquiring Person, which will be void, will thereafter have the right to receive upon exercise of a right and payment of the Purchase Price, that number of shares of our common stock having essentially a market value of two times the Purchase Price.

Exchange. After the later of the Distribution Date and the time we publicly announce that an Acquiring Person has become such, the Board may exchange the rights, other than rights that are or were beneficially owned by an Acquiring Person, which will be void, in whole or in part, at an exchange ratio of one share of common stock per right, subject to adjustment.

Redemption. At any time prior to the later of the Distribution Date and the time we publicly announce that an Acquiring Person becomes such, the Board may redeem all the then-outstanding rights in whole, but not in part, at a price of $0.001 per right, subject to adjustment (“Redemption Price”). The redemption will be effective immediately upon the Board action, unless the action provides that such redemption will be effective at a subsequent time or upon the occurrence or nonoccurrence of one or more specified events, in which case the redemption will be effective in accordance with the provisions of the action. Immediately upon the effectiveness of the redemption of the rights, the right to exercise the rights will terminate and the only right of the holders of rights will be to receive the Redemption Price, with interest thereon.

Anti-Dilution Provisions. The Purchase Price of the preferred shares, the number of preferred shares issuable and the number of outstanding rights are subject to adjustment to prevent dilution that may occur as a result of certain events, including among others, a stock dividend, a stock split or a reclassification of the preferred shares or common stock. No adjustments to the Purchase Price of less than 1% will be made.

Amendments. Prior to the time the rights cease to be redeemable, the Board may amend or supplement the Amended Rights Agreement without the consent of the holders of the rights. From and after the time the rights cease to be redeemable, the Board may amend or supplement the Amended Rights Agreement only to cure an ambiguity, to correct or supplement inconsistent provisions, to alter time period provisions, or to make any other changes to the Amended Rights Agreement, but only to the extent that those changes do not impair or adversely affect any rights holder as such (other than an Acquiring Person), and no amendment may cause the rights to become redeemable or amendable other than in accordance with this sentence.

Expiration. If approved by stockholders, as recommended, the rights governed by the Amended Rights Agreement will expire on the earliest of (i) the close of business on April 30, 2024, (ii) the time at which the rights are redeemed, (iii) the time at which the rights are exchanged, (iv) the time at which the Board determines that Article Ninth is no longer necessary, and (v) the close of business on the first day of a taxable year for us to which the Board determines that no tax benefits may be carried forward.

If stockholders do not approve the Amended Rights Agreement, the Rights Agreement’s provisions would not change and its expiration date would remain the close of business on April 30, 2021, unless the Board takes action prior to such time to extend the term of the Rights Agreement.

 

CERTAIN CONSIDERATIONS REGARDING THE AMENDED RIGHTS AGREEMENT

The Board believes that approving the Amended Rights Agreement to protect the tax benefits of our NOLs and other deferred tax assets as described above is in our and our stockholders’ best interests. However, we cannot eliminate the possibility that an “ownership change” will occur even if the term extension is approved. Please consider the points below in voting on this item.

The Internal Revenue Service (“IRS”) could challenge the amount of our remaining tax credits or claim we experienced an “ownership change,” which could reduce the amount of our tax credits that we can use or eliminate our ability to use them altogether.  The IRS has not audited or otherwise validated the amount of our remaining tax credits. Therefore, we cannot assure you that the IRS will not claim that we experienced an “ownership change” and attempt to reduce or eliminate the benefit of our remaining tax credits even if Article Ninth and the Amended Rights Agreement are in place through to April 30, 2024.

Continued Risk of “Ownership Change.”  Although Article Ninth and the Amended Rights Agreement are intended to reduce the likelihood of an “ownership change,” we cannot assure you that they would prevent all transfers of our common stock that could result in such an “ownership change.” In particular, absent a court determination, we cannot assure you that Article Ninth’s restrictions on acquisition of our common stock will be enforceable against all our stockholders, and they may be subject to challenge on equitable grounds.

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Delaware Law and Other Factors Potentially Affecting Business Combinations. Stockholders should be aware that we are subject to Section 203 of the Delaware General Corporation Law, which provides, in general, that a transaction constituting a “business combination” within the meaning of Section 203 involving a person owning 15% or more of our outstanding voting stock (referred to as an “interested stockholder”), cannot be completed for a period of three years after the date on which the person became an interested stockholder unless (i) the Board approved either the business combination or the transaction that resulted in the person becoming an interested stockholder prior to such business combination or transaction, (ii) upon consummation of the transaction that resulted in the person becoming an interested stockholder, that person owned at least 85% of our outstanding voting stock (excluding shares owned by persons who are both directors and officers of KB Home and shares owned by certain of our employee benefit plans), or (iii) the business combination was approved by the Board and by the affirmative vote of the holders of at least 66-2/3% of our outstanding voting stock not owned by the interested stockholder. In addition, our Restated Certificate of Incorporation and our Amended and Restated By-laws contain the following provisions that may be deemed to have a potential “anti-takeover” effect:

While Article Ninth and the Amended Rights Agreement are intended to preserve the long-term value of our NOLs, each could be deemed to have an “anti-takeover” effect because, among other things, Article Ninth is designed to restrict the ability of a person, entity or group to accumulate more than 5% of our common stock and the ability of persons, entities or groups now owning more than 5% of our common stock from acquiring additional shares of our common stock without the approval of the Board to waive the provisions of Article Ninth and the Amended Rights Agreement in its business judgment. Although the Amended Rights Agreement is not intended to prevent a takeover, because an Acquiring Person may be diluted upon the occurrence of a triggering event, it does have a potential anti-takeover effect. Accordingly, the overall effects of Article Ninth and the Amended Rights Agreement may be to render more difficult, or discourage, a merger, tender offer, proxy contest or assumption of control by a substantial holder of our securities. Maintaining the protections of Article Ninth and proposing the approval of the Amended Rights Agreement are not part of a plan by us to adopt a series of anti-takeover measures, and we do not presently intend to propose or adopt any other anti-takeover measures.

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RATIFY ERNST & YOUNG LLP’S APPOINTMENT AS INDEPENDENT AUDITOR

In January 2021, after considering Ernst & Young LLP’s performance in 2020 and audit efficiencies gained from its 30 years of service as our Independent Auditor, the Audit Committee appointed Ernst & Young LLP as our independent registered public accounting firm to audit our consolidated financial statements for our fiscal year ending November 30, 2021. The Audit Committee believes this appointment is in our and our stockholders’ best interests. We are seeking stockholder ratification of this appointment.

 

Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting, be available to respond to appropriate questions and, if they desire, make a statement. If Ernst & Young LLP’s appointment is not ratified, the Audit Committee will consider whether to retain Ernst & Young LLP, but still may retain the firm. Even if the appointment is ratified, the Audit Committee, in its discretion, may change the appointment of our independent registered public accounting firm at any time during the year if it determines it would be in our and our stockholders’ best interests to do so.

 

INDEPENDENT AUDITOR SERVICES AND FEES

Below are the services provided by Ernst & Young LLP and related fees in each of our last two fiscal years. In 2020 and 2019, Ernst & Young LLP’s audit fees included an annual consolidated financial statement audit, audits of our financial services subsidiary, and an audit of our internal control over financial reporting. Audit-related fees in both years included 401(k) Plan audits and access to certain accounting resources.

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AUDIT COMMITTEE REPORT

The Audit Committee acts under a written charter. Under its charter, the Audit Committee assists the Board in fulfilling the Board’s oversight responsibilities relating to, among other things, KB Home’s corporate accounting and reporting practices, including the quality and integrity of its financial statements and reports, and its internal control over financial reporting and disclosure controls and procedures. All Audit Committee members are independent and determined to be “audit committee financial experts” under SEC rules.

In its role, the Audit Committee, among other activities:

Management is primarily responsible for KB Home’s financial statements, financial reporting process and the adequacy of internal control over financial reporting. The Independent Auditor is responsible for performing an independent audit of KB Home’s financial statements and internal control over financial reporting. The Independent Auditor is also responsible for expressing an opinion on the conformity of KB Home’s audited financial statements to generally accepted accounting principles used in the United States and the adequacy of KB Home’s internal control over financial reporting.

Per its charter, the Audit Committee is responsible for the appointment (with consideration given to stockholder ratification), compensation, engagement terms (including fees), retention (or termination) and oversight of the Independent Auditor’s work. The Audit Committee also:

In this context, the Audit Committee reviewed and discussed with management and Ernst & Young LLP KB Home’s audited financial statements. It also discussed with Ernst & Young LLP the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board and the SEC.

In addition, the Audit Committee received the disclosures and letter from Ernst & Young LLP required by the Public Company Accounting Oversight Board concerning its independence and discussed the firm’s independence from KB Home and KB Home’s management.

In reliance on the reviews, reports, activities and discussions referred to above, the Audit Committee recommended to the Board, and the Board approved, that the audited financial statements be included in KB Home’s Annual Report on Form 10-K for the fiscal year ended November 30, 2020 for filing with the SEC.

The Audit Committee respectfully submits this report.

Dr. Thomas W. Gilligan, Chair
Arthur R. Collins
Dorene C. Dominguez
Kevin P. Eltife
Dr. Stuart A. Gabriel
Melissa Lora
James C. Weaver
Michael M. Wood

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ANNUAL MEETING VOTING MATTERS AND OTHER INFORMATION

Holders of record of the 91,726,408 shares of our common stock that were outstanding and entitled to vote as of the close of business on the record date of February 5, 2021 are entitled to one vote for each share held. The GSOT trustee will vote the 7,124,317 shares of our common stock that the GSOT held on the record date based on the instructions received from eligible employees who hold unexercised common stock options under our employee equity compensation plans, as discussed under “Ownership of KB Home Securities.” Therefore, a total of 98,850,725 shares are entitled to vote at the Annual Meeting.

For stockholders to take action at the Annual Meeting, the holders of a majority of the shares of our common stock outstanding on the record date must be present or represented at the meeting. Abstentions and “broker non-votes” are counted for this purpose. A “broker non-vote” occurs when a broker or financial institution does not receive instructions from a beneficial holder and does not have the discretionary authority to vote on an item of business, which will apply for all Annual Meeting matters other than ratifying the appointment of our Independent Auditor. Therefore, if you are a beneficial owner, you must instruct your broker or financial institution on how you want your shares to be voted on the other items of business in order for your shares to be counted for those items.

 

VOTING YOUR SHARES

Stockholders can vote via the Internet, telephone or mail or in person at the Annual Meeting, as described under “Voting Procedures.” There are no dissenters’ rights or rights of appraisal as to any item to be acted upon at the Annual Meeting. There is no right to cumulative voting.

The named proxies for the Annual Meeting — Jeffrey T. Mezger and Brian J. Woram (or their duly authorized designees) — will follow submitted proxy voting instructions. They will vote as the Board recommends as to any such submitted instructions that do not direct how to vote on any item and will vote on any other matters properly presented at the Annual Meeting in their discretion, including upon any motion to adjourn or postpone all or any portion of the Annual Meeting. We have engaged our transfer agent, Computershare, to count the votes and to act as an independent inspector of election. William A. (Tony) Richelieu, our Corporate Secretary, will also act as an inspector of election.

 

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VOTING PROCEDURES

 

PROXY SOLICITATION COSTS

We will pay the cost to solicit proxies for the Annual Meeting. In addition to this Proxy Statement, our officers, directors and other employees may solicit proxies personally, in writing or by telephone, facsimile, email or other means for no additional compensation. We will, if requested, reimburse banks, brokers and other custodians, nominees and certain fiduciaries for their reasonable expenses in providing proxy materials to their principals. We have hired Georgeson LLC, a professional soliciting organization, to assist us in soliciting proxies and distributing proxy materials for a fee of $9,500, plus reimbursement of out-of-pocket expenses.

 

INTERNET AVAILABILITY OF PROXY MATERIALS

The proxy materials for the Annual Meeting are being made available primarily via the Internet at www.kbhome.com/investor/proxy in order to speed their delivery to our stockholders, to contain costs and to reduce the impact on the environment. In addition, beginning February 26, 2021, we mailed the Notice of Internet Availability to stockholders, which provides instructions on how to access and view the proxy materials, and to vote via the Internet or telephone. To request a printed copy of our proxy materials, follow the instructions on the notice. Stockholders who previously elected to receive proxy materials electronically will continue to receive them and a notice by e-mail, unless we are told otherwise. Please note that you cannot vote your shares by marking and returning a notice.

 

STOCKHOLDER PROPOSALS FOR OUR 2022 ANNUAL MEETING OF STOCKHOLDERS

To be included in the proxy statement and form of proxy for our 2022 annual meeting, we must receive any proposal of a stockholder intended to be presented at that meeting no later than October 29, 2021. Further, per our By-Laws, the Board-designated proxies for that meeting will use their discretionary voting authority with respect to any proposal presented at the meeting by a stockholder who does not provide us with written notice of the proposal between December 19, 2021 and January 8, 2022.

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ANNEX 1: CORPORATE GOVERNANCE PROCESSES AND PROCEDURES

This Annex provides additional information about KB Home’s corporate governance.

 

DIRECTOR INDEPENDENCE DETERMINATIONS

We believe that a substantial majority of our directors should be independent. To be independent, the Board must affirmatively determine that a director does not have any direct or indirect material commercial or charitable relationship with us based on all relevant facts and circumstances. The Board makes independence determinations from information supplied by directors, director nominees and other sources, the Nominating Committee’s prior review and recommendation, and certain categorical standards contained in our Corporate Governance Principles that are consistent with NYSE listing standards.

The Board determined that all directors who served in 2020 and all director nominees are independent, other than Mr. Mezger. In making its independence determinations, the Board found that Ms. Dominguez’s independence was not impaired by, and she did not have a direct or indirect material interest in, one of our division office’s leasing a few copiers from CIT Group, where she serves as a non-employee director.

The Board also determined that each Compensation Committee member is a “non-employee director” under SEC rules and an “outside director” under Section 162(m) of the Code.

 

RELATED PARTY TRANSACTIONS

The Nominating Committee reviews any transactions, arrangements or relationships in which we participate and in which a director, director nominee, executive officer or beneficial owner of five percent or more of our common stock (or, in each case, an immediate family member) had or will have a direct or indirect material interest (a “Related Party Transaction”). Covered individuals and stockholders are expected to inform our Corporate Secretary of any Related Party Transactions, and we collect information from our directors, director nominees and executive officers so that we can review our records for any such transactions.

Per the policies and procedures set forth in its Charter, the Nominating Committee will approve or ratify a Related Party Transaction if, based on a review of all material facts and feasible alternatives, it deems the transaction to be in our and our stockholders’ best interests. In addition, specified categories of transactions set forth in the Nominating Committee’s Charter are deemed pre-approved/ratified, including those in which the total amount involved is less than or equal to $120,000; and those that would not (a) need to be reported under federal securities laws, (b) be deemed to impair a director’s independence or (c) be deemed to be a conflict of interest.

 

DIRECTOR QUALIFICATIONS AND NOMINATIONS

The Nominating Committee evaluates and recommends individuals for election to the Board at regular or special meetings and at any point during the year, taking into consideration, among other factors, the attributes listed in our Corporate Governance Principles and diversity as described under “Board Experience and Skills.” There is no formal policy as to how diversity is applied, and an individual’s background and experience, while important, do not necessarily outweigh any other factors. Individuals may be nominated by current directors, and the Nominating Committee has retained professional search firms from time to time to assist with director recruitment.

Current directors recommended Messrs. Collins and Eltife and Ms. Kozlak as candidates prior to their respective elections to the Board in 2020 and 2021. Security holders may propose director nominees by following the procedures set forth in our By-Laws, which require, among other things, timely advance written notice to our Corporate Secretary of any potential nominee that contains specified information about the nominee and the nominating security holder. Director nominees proposed by security holders are considered in the same manner as any other potential nominees.

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BOARD EVALUATION PROCESS

In October 2020, the Board and each committee conducted an annual evaluation of their respective performance as part of their regular fourth quarter meetings. Their discussions were guided by a set of subjects the Nominating Committee approved in July 2020. The subjects included, among others, Board/committee structure, composition, diversity, skills, meeting processes, interaction with management, and the performance of the Board Chairman/committee chair and the Lead Independent Director. Each committee reported on the results of its own assessment to the Board.

 

AUDIT FEE PRE-APPROVAL POLICY; AUDIT COMMITTEE DESIGNATION

The Audit Committee has established a policy that requires it to pre-approve all services our Independent Auditor provides to us, including audit, audit-related, tax and other permitted non-audit services. In certain circumstances under the policy, our chief accounting officer (or a functional equivalent) can authorize the firm to perform services, and the Audit Committee Chair can pre-approve services up to a specific per-engagement fee limit. The Chair must report to the Audit Committee any such pre-approvals granted. The Audit Committee approved all services Ernst & Young LLP provided in 2020 and 2019 and the corresponding fees (as shown in the table under “Independent Auditor Services and Fees”) in accordance with this policy. The Audit Committee is a separately designated standing audit committee as defined in Section 3(a)(58)(A) of the Securities and Exchange Act of 1934.

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ANNEX 2: RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

 

This Proxy Statement contains information regarding Adjusted Pretax Income, Adjusted Net Income and Adjusted Earnings Per Share, all of which are financial measures that are not calculated in accordance with GAAP. We believe these non-GAAP financial measures are relevant and useful for purposes of this Proxy Statement to understand our 2020 fiscal year performance generally and in relation to the annual incentive payouts the Compensation Committee approved for our NEOs, as described under “2020 Annual Incentives,” and how the 2017 PSU performance measures of AEPS and AROIC were determined, as described under “Long-Term Incentives.” However, because Adjusted Pretax Income, Adjusted Net Income and Adjusted Earnings Per Share are not calculated in accordance with GAAP, these 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 measures prescribed by GAAP. Also, we do not necessarily use these specific financial measures to make business decisions or in other investor communications about our results of operations. Rather, these financial measures should be used to supplement the most directly comparable GAAP financial measures in order to provide a greater understanding of our performance solely with respect to the 2020 fiscal year annual incentives and 2017 PSU payouts to our NEOs.

The table below reconciles our total pretax income calculated in accordance with GAAP to the non-GAAP measure of Adjusted Pretax Income used in the computation of the 2020 fiscal year annual incentives (in thousands):

 

 

Adjusted Pretax Income is a non-GAAP financial measure, which is calculated as our total pretax income excluding incentive and variable compensation expense and inventory-related charges related to land purchased or optioned prior to January 1, 2008. For Adjusted Pretax Income, the most directly comparable GAAP financial measure is pretax income.

The tables below reconcile our net income and diluted earnings per share calculated in accordance with GAAP to the non-GAAP measures of Adjusted Net Income and Adjusted Earnings Per Share used in the computation of the AEPS and AROIC performance measures for the 2017 PSU payouts to our NEOs ($ in thousands, except per share amounts):

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Adjusted Net Income is a non-GAAP financial measure, which is calculated as our net income excluding inventory-related charges related to land purchased or optioned prior to January 1, 2008, variable compensation expense, and the applicable income tax impact of these items for the period. Adjusted Net Income also excludes the impact of the TCJA-related charge for the re-measurement of our deferred tax assets in 2018. AEPS is calculated based on Adjusted Net Income. AROIC is calculated as Adjusted Net Income divided by average invested capital (average notes payable and stockholders’ equity for the beginning and end of the applicable year). For Adjusted Net Income and AEPS, the most directly comparable GAAP financial measures are net income and diluted earnings per share, respectively.

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ANNEX 3: FIRST AMENDMENT TO AMENDED AND RESTATED RIGHTS AGREEMENT

 

The full text of the AMENDED AND RESTATED RIGHTS AGREEMENT, other than as amended below, is available at Exhibit 4.1 to our Amended Registration Statement on Form 8-A/A filed with the SEC on April 13, 2018.

 

This FIRST AMENDMENT TO AMENDED AND RESTATED RIGHTS AGREEMENT (“First Amendment”) effective as of April 8, 2021, is made and entered into by and between KB Home, a Delaware corporation (“Company”), and Computershare Inc., a Delaware corporation, as rights agent (“Rights Agent”). All capitalized terms used herein and not otherwise defined herein shall have the meaning(s) ascribed to them in that certain Amended and Restated Rights Agreement, dated effective as of April 12, 2018, made by and between the Company and the Rights Agent (“Rights Agreement”).

RECITALS

WHEREAS, the Company and the Rights Agent are parties to the Rights Agreement; and

WHEREAS, pursuant to Section 27 of the Rights Agreement, the Company and the Rights Agent desire to amend the Rights Agreement as set forth in this First Amendment.

AGREEMENT

NOW, THEREFORE, in consideration of the promises and the mutual agreements herein set forth, the parties hereto hereby agree as follows:

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This regulatory filing also includes additional resources:
lkbh2021_def14a.pdf