|
|
|
|
Item 1.
|
Financial Statements
|
KB HOME
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts – Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Total revenues
|
|
$
|
913,970
|
|
|
$
|
1,021,803
|
|
|
$
|
1,989,905
|
|
|
$
|
1,833,286
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
910,280
|
|
|
$
|
1,018,671
|
|
|
$
|
1,982,662
|
|
|
$
|
1,827,459
|
|
|
Construction and land costs
|
|
(744,453
|
)
|
|
(843,744
|
)
|
|
(1,630,506
|
)
|
|
(1,514,599
|
)
|
|
Selling, general and administrative expenses
|
|
(114,238
|
)
|
|
(122,828
|
)
|
|
(240,372
|
)
|
|
(229,422
|
)
|
|
Operating income
|
|
51,589
|
|
|
52,099
|
|
|
111,784
|
|
|
83,438
|
|
|
Interest income
|
|
442
|
|
|
439
|
|
|
1,377
|
|
|
1,544
|
|
|
Equity in income (loss) of unconsolidated joint ventures
|
|
8,154
|
|
|
(369
|
)
|
|
10,059
|
|
|
(775
|
)
|
|
Homebuilding pretax income
|
|
60,185
|
|
|
52,169
|
|
|
123,220
|
|
|
84,207
|
|
|
Financial services:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
3,690
|
|
|
3,132
|
|
|
7,243
|
|
|
5,827
|
|
|
Expenses
|
|
(883
|
)
|
|
(1,040
|
)
|
|
(1,845
|
)
|
|
(2,064
|
)
|
|
Equity in income of unconsolidated joint ventures
|
|
4,797
|
|
|
2,500
|
|
|
8,019
|
|
|
3,302
|
|
|
Financial services pretax income
|
|
7,604
|
|
|
4,592
|
|
|
13,417
|
|
|
7,065
|
|
|
Total pretax income
|
|
67,789
|
|
|
56,761
|
|
|
136,637
|
|
|
91,272
|
|
|
Income tax expense
|
|
(15,800
|
)
|
|
(9,300
|
)
|
|
(24,900
|
)
|
|
(13,800
|
)
|
|
Net income
|
|
$
|
51,989
|
|
|
$
|
47,461
|
|
|
$
|
111,737
|
|
|
$
|
77,472
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.57
|
|
|
$
|
.54
|
|
|
$
|
1.23
|
|
|
$
|
.88
|
|
|
Diluted
|
|
$
|
.55
|
|
|
$
|
.51
|
|
|
$
|
1.19
|
|
|
$
|
.82
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
90,493
|
|
|
87,641
|
|
|
90,169
|
|
|
87,310
|
|
|
Diluted
|
|
93,472
|
|
|
92,366
|
|
|
93,628
|
|
|
94,635
|
|
See accompanying notes.
KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands – Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
November 30,
2019
|
|
Assets
|
|
|
|
|
Homebuilding:
|
|
|
|
|
Cash and cash equivalents
|
$
|
575,006
|
|
|
$
|
453,814
|
|
|
Receivables
|
312,928
|
|
|
249,055
|
|
|
Inventories
|
3,607,465
|
|
|
3,704,602
|
|
|
Investments in unconsolidated joint ventures
|
57,823
|
|
|
57,038
|
|
|
Property and equipment, net
|
65,764
|
|
|
65,043
|
|
|
Deferred tax assets, net
|
257,571
|
|
|
364,493
|
|
|
Other assets
|
126,588
|
|
|
83,041
|
|
|
|
5,003,145
|
|
|
4,977,086
|
|
|
Financial services
|
38,857
|
|
|
38,396
|
|
|
Total assets
|
$
|
5,042,002
|
|
|
$
|
5,015,482
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
Homebuilding:
|
|
|
|
|
Accounts payable
|
$
|
180,868
|
|
|
$
|
262,772
|
|
|
Accrued expenses and other liabilities
|
602,393
|
|
|
618,783
|
|
|
Notes payable
|
1,766,539
|
|
|
1,748,747
|
|
|
|
2,549,800
|
|
|
2,630,302
|
|
|
Financial services
|
1,848
|
|
|
2,058
|
|
|
Stockholders’ equity:
|
|
|
|
|
Common stock
|
122,370
|
|
|
121,593
|
|
|
Paid-in capital
|
806,700
|
|
|
793,954
|
|
|
Retained earnings
|
2,255,742
|
|
|
2,157,183
|
|
|
Accumulated other comprehensive loss
|
(17,149
|
)
|
|
(15,506
|
)
|
|
Grantor stock ownership trust, at cost
|
(79,359
|
)
|
|
(82,758
|
)
|
|
Treasury stock, at cost
|
(597,950
|
)
|
|
(591,344
|
)
|
|
Total stockholders’ equity
|
2,490,354
|
|
|
2,383,122
|
|
|
Total liabilities and stockholders’ equity
|
$
|
5,042,002
|
|
|
$
|
5,015,482
|
|
See accompanying notes.
KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands – Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
Net income
|
$
|
111,737
|
|
|
$
|
77,472
|
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
Equity in income of unconsolidated joint ventures
|
(18,078
|
)
|
|
(2,527
|
)
|
|
Distributions of earnings from unconsolidated joint ventures
|
15,150
|
|
|
3,550
|
|
|
Amortization of discounts, premiums and issuance costs
|
1,234
|
|
|
2,597
|
|
|
Depreciation and amortization
|
14,510
|
|
|
12,780
|
|
|
Deferred income taxes
|
23,800
|
|
|
13,401
|
|
|
Stock-based compensation
|
8,131
|
|
|
9,966
|
|
|
Inventory impairments and land option contract abandonments
|
10,051
|
|
|
7,892
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
Receivables
|
19,286
|
|
|
(5,408
|
)
|
|
Inventories
|
100,077
|
|
|
(253,473
|
)
|
|
Accounts payable, accrued expenses and other liabilities
|
(117,274
|
)
|
|
(41,440
|
)
|
|
Other, net
|
(13,930
|
)
|
|
(5,144
|
)
|
|
Net cash provided by (used in) operating activities
|
154,694
|
|
|
(180,334
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
Contributions to unconsolidated joint ventures
|
(3,586
|
)
|
|
(4,245
|
)
|
|
Return of investments in unconsolidated joint ventures
|
500
|
|
|
5,001
|
|
|
Proceeds from sale of building
|
—
|
|
|
5,804
|
|
|
Purchases of property and equipment, net
|
(15,224
|
)
|
|
(22,264
|
)
|
|
Net cash used in investing activities
|
(18,310
|
)
|
|
(15,704
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
Proceeds from issuance of debt
|
—
|
|
|
405,250
|
|
|
Payment of debt issuance costs
|
—
|
|
|
(5,209
|
)
|
|
Repayment of senior notes
|
—
|
|
|
(630,000
|
)
|
|
Borrowings under revolving credit facility
|
—
|
|
|
330,000
|
|
|
Repayments under revolving credit facility
|
—
|
|
|
(280,000
|
)
|
|
Payments on mortgages and land contracts due to land sellers and other loans
|
(1,063
|
)
|
|
(28,020
|
)
|
|
Issuance of common stock under employee stock plans
|
8,404
|
|
|
16,462
|
|
|
Tax payments associated with stock-based compensation awards
|
(6,219
|
)
|
|
(3,345
|
)
|
|
Payments of cash dividends
|
(16,331
|
)
|
|
(4,455
|
)
|
|
Net cash used in financing activities
|
(15,209
|
)
|
|
(199,317
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
121,175
|
|
|
(395,355
|
)
|
|
Cash and cash equivalents at beginning of period
|
454,858
|
|
|
575,119
|
|
|
Cash and cash equivalents at end of period
|
$
|
576,033
|
|
|
$
|
179,764
|
|
See accompanying notes.
KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
1.
|
Basis of Presentation and Significant Accounting Policies
|
Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted.
In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly our consolidated financial position as of May 31, 2020, the results of our consolidated operations for the three months and six months ended May 31, 2020 and 2019, and our consolidated cash flows for the six months ended May 31, 2020 and 2019. The results of our consolidated operations for the three months and six months ended May 31, 2020 are not necessarily indicative of the results to be expected for the full year due to seasonal variations in operating results and other factors. The consolidated balance sheet at November 30, 2019 has been taken from the audited consolidated financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended November 30, 2019, which are contained in our Annual Report on Form 10-K for that period.
Unless the context indicates otherwise, the terms “we,” “our,” and “us” used in this report refer to KB Home, a Delaware corporation, and its subsidiaries.
Impact of COVID-19 Pandemic on Consolidated Financial Statements. The outbreak of the 2019 coronavirus disease (“COVID-19”), which was declared a global pandemic by the World Health Organization on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread (“COVID-19 control responses”) severely impacted the global and national economies, the housing market and our business during the 2020 second quarter. With the health and well-being of our employees, customers and business partners, and their families, being a high priority, we temporarily closed our sales centers, model homes and design studios to the public in mid-March and shifted to virtual sales tools and then an appointment-only personalized home sales process in April, where permitted. Our construction operations were also restricted in many jurisdictions, and together with the reduced availability or capacity of some municipal and private services necessary to build and deliver homes, we experienced home delivery delays during most of the quarter. In addition, our order pace moderated significantly and home purchase cancellations increased considerably. In the latter part of May, conditions started to improve in conjunction with state and local governments relaxing their COVID-19 control responses, and we began the process of more broadly opening our communities to the public while also expanding construction and warranty service activities to the extent permitted by local authorities. Following a low point in April 2020, we experienced steady and significant improvements in our order trends and cancellation rate beginning in May, which have extended through the date of this report. Given the prolonged, and ongoing, COVID-19-related impacts, we focused on generating cash inflows from our business and preserving cash and liquidity by proceeding in a carefully targeted manner with land acquisition and land development and curtailing overhead expenditures, partly through workforce realignment and reductions. As a result, we recorded severance charges of $6.7 million within our selling, general and administrative expenses for the 2020 second quarter. Our consolidated financial statements and the notes thereto in this report reflect the foregoing course of unprecedented events and the actions we took during the 2020 second quarter.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates, particularly given the significant social and economic disruptions and uncertainties associated with the ongoing COVID-19 pandemic and the COVID-19 control responses, and such differences may be material.
Cash and Cash Equivalents. We consider all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents. Our cash equivalents totaled $404.5 million at May 31, 2020 and $302.5 million at November 30, 2019. At May 31, 2020 and November 30, 2019, the majority of our cash and cash equivalents was invested in interest-bearing bank deposit accounts.
Comprehensive Income. Our comprehensive income was $52.0 million for the three months ended May 31, 2020 and $47.5 million for the three months ended May 31, 2019. For the six months ended May 31, 2020 and 2019, our comprehensive income was $111.7 million and $77.5 million, respectively. Our comprehensive income for each of the three-month and six-month periods ended May 31, 2020 and 2019 was equal to our net income for the respective periods.
Adoption of New Accounting Pronouncements. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires leases with original lease terms of more than 12 months to be recorded on the balance sheet. On December 1, 2019, we adopted ASU 2016-02 and its related amendments (collectively, “ASC 842”) using the modified retrospective method. Results for reporting periods beginning December 1, 2019 and after are presented under ASC 842, while results for prior reporting periods have not been adjusted and continue to be presented under the accounting guidance in effect for those periods. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carry forward our original assessment of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. We also elected the practical expedient that allows lessees the option to account for lease and non-lease components together as a single component for all classes of underlying assets. The adoption of ASC 842 resulted in our recording lease right-of-use assets and lease liabilities of $31.2 million on our consolidated balance sheet as of December 1, 2019. Lease right-of-use assets are classified within other assets on our consolidated balance sheet, and lease liabilities are classified within accrued expenses and other liabilities. At the December 1, 2019 adoption date, we also recorded a cumulative effect adjustment to increase beginning retained earnings by $1.5 million, net of tax, to recognize a previously deferred gain on our sale and leaseback of an office building in 2019. The adoption of ASC 842 did not materially impact our consolidated statements of operations or consolidated cash flows. Further information regarding our leases is provided in Note 13 – Leases.
In February 2018, the FASB issued Accounting Standards Update No. 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act (“TCJA”), and requires certain disclosures about stranded tax effects. We adopted ASU 2018-02 effective December 1, 2019 and elected to reclassify the income tax effects of the TCJA from accumulated other comprehensive loss to retained earnings, which resulted in an increase of $1.6 million to both retained earnings and accumulated other comprehensive loss, with no impact on total stockholders’ equity. Amounts for prior reporting periods have not been adjusted and continue to be presented under the accounting guidance in effect for those periods.
Recent Accounting Pronouncements Not Yet Adopted. In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes the impairment model for most financial assets and certain other instruments from an incurred loss approach to a new expected credit loss methodology. ASU 2016-13 is effective for us beginning December 1, 2020, with early adoption permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification Topic 740, “Income Taxes” (“ASC 740”), and clarifies certain aspects of ASC 740 to promote consistency among reporting entities. ASU 2019-12 is effective for us beginning December 1, 2021, with early adoption permitted. Most amendments within ASU 2019-12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
We have identified five operating reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment. As of May 31, 2020, our homebuilding reporting segments conducted ongoing operations in the following states to the extent permitted by applicable public health orders as part of their respective COVID-19 control responses:
West Coast: California and Washington
Southwest: Arizona and Nevada
Central: Colorado and Texas
Southeast: Florida and North Carolina
Our homebuilding reporting segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to first-time, first move-up and active adult homebuyers. Our homebuilding operations generate most of their revenues from the delivery of completed homes to homebuyers. They also earn revenues from the sale of land.
Our financial services reporting segment offers property and casualty insurance and, in certain instances, earthquake, flood and personal property insurance to our homebuyers in the same markets as our homebuilding reporting segments, and provides title services in the majority of our markets located within our Southwest, Central and Southeast homebuilding reporting segments. Our financial services reporting segment earns revenues primarily from insurance commissions and from the provision of title services.
We offer mortgage banking services, including residential consumer mortgage loan (“mortgage loan”) originations, to our homebuyers indirectly through KBHS Home Loans, LLC (“KBHS”), an unconsolidated joint venture we formed with Stearns Ventures, LLC (“Stearns”). We and Stearns each have a 50.0% ownership interest, with Stearns providing management oversight of KBHS’ operations. The financial services reporting segment is separately reported in our consolidated financial statements.
Our reporting segments follow the same accounting policies used for our consolidated financial statements. The results of each reporting segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented, nor are they indicative of the results to be expected in future periods.
The following tables present financial information relating to our homebuilding reporting segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
West Coast
|
$
|
331,882
|
|
|
$
|
391,264
|
|
|
$
|
816,379
|
|
|
$
|
697,074
|
|
|
Southwest
|
175,251
|
|
|
184,827
|
|
|
366,569
|
|
|
342,483
|
|
|
Central
|
284,193
|
|
|
307,080
|
|
|
567,706
|
|
|
548,672
|
|
|
Southeast
|
118,954
|
|
|
135,500
|
|
|
232,008
|
|
|
239,230
|
|
|
Total
|
$
|
910,280
|
|
|
$
|
1,018,671
|
|
|
$
|
1,982,662
|
|
|
$
|
1,827,459
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss):
|
|
|
|
|
|
|
|
|
West Coast
|
$
|
27,820
|
|
|
$
|
24,789
|
|
|
$
|
61,849
|
|
|
$
|
42,705
|
|
|
Southwest
|
24,891
|
|
|
27,995
|
|
|
57,003
|
|
|
50,067
|
|
|
Central
|
26,896
|
|
|
27,199
|
|
|
49,574
|
|
|
45,782
|
|
|
Southeast
|
6,629
|
|
|
589
|
|
|
9,259
|
|
|
44
|
|
|
Corporate and other
|
(26,051
|
)
|
|
(28,403
|
)
|
|
(54,465
|
)
|
|
(54,391
|
)
|
|
Total
|
$
|
60,185
|
|
|
$
|
52,169
|
|
|
$
|
123,220
|
|
|
$
|
84,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Inventory impairment and land option contract abandonment charges:
|
|
|
|
|
|
|
|
|
West Coast
|
$
|
672
|
|
|
$
|
3,832
|
|
|
$
|
5,064
|
|
|
$
|
7,083
|
|
|
Southwest
|
—
|
|
|
223
|
|
|
171
|
|
|
282
|
|
|
Central
|
3,452
|
|
|
121
|
|
|
4,436
|
|
|
366
|
|
|
Southeast
|
255
|
|
|
161
|
|
|
380
|
|
|
161
|
|
|
Total
|
$
|
4,379
|
|
|
$
|
4,337
|
|
|
$
|
10,051
|
|
|
$
|
7,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
November 30,
2019
|
|
Assets:
|
|
|
|
|
West Coast
|
$
|
1,854,154
|
|
|
$
|
1,925,192
|
|
|
Southwest
|
714,672
|
|
|
674,310
|
|
|
Central
|
994,038
|
|
|
1,035,563
|
|
|
Southeast
|
421,385
|
|
|
441,451
|
|
|
Corporate and other
|
1,018,896
|
|
|
900,570
|
|
|
Total
|
$
|
5,003,145
|
|
|
$
|
4,977,086
|
|
The following tables present financial information relating to our financial services reporting segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenues
|
|
|
|
|
|
|
|
|
Insurance commissions
|
$
|
2,030
|
|
|
$
|
1,646
|
|
|
$
|
3,983
|
|
|
$
|
3,118
|
|
|
Title services
|
1,660
|
|
|
1,486
|
|
|
3,260
|
|
|
2,703
|
|
|
Interest income
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
Total
|
3,690
|
|
|
3,132
|
|
|
7,243
|
|
|
5,827
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
(883
|
)
|
|
(1,040
|
)
|
|
(1,845
|
)
|
|
(2,064
|
)
|
|
Operating income
|
2,807
|
|
|
2,092
|
|
|
5,398
|
|
|
3,763
|
|
|
Equity in income of unconsolidated joint ventures
|
4,797
|
|
|
2,500
|
|
|
8,019
|
|
|
3,302
|
|
|
Pretax income
|
$
|
7,604
|
|
|
$
|
4,592
|
|
|
$
|
13,417
|
|
|
$
|
7,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
November 30,
2019
|
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,027
|
|
|
$
|
1,044
|
|
|
Receivables
|
1,690
|
|
|
2,232
|
|
|
Investments in unconsolidated joint ventures
|
14,243
|
|
|
14,374
|
|
|
Other assets (a)
|
21,897
|
|
|
20,746
|
|
|
Total assets
|
$
|
38,857
|
|
|
$
|
38,396
|
|
|
Liabilities
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
1,848
|
|
|
$
|
2,058
|
|
|
Total liabilities
|
$
|
1,848
|
|
|
$
|
2,058
|
|
|
|
|
|
(a)
|
Other assets at May 31, 2020 and November 30, 2019 included $21.5 million and $20.6 million, respectively, of contract assets for estimated future renewal commissions related to then-existing insurance policies.
|
Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
51,989
|
|
|
$
|
47,461
|
|
|
$
|
111,737
|
|
|
$
|
77,472
|
|
|
Less: Distributed earnings allocated to nonvested restricted stock
|
|
(43
|
)
|
|
(14
|
)
|
|
(87
|
)
|
|
(27
|
)
|
|
Less: Undistributed earnings allocated to nonvested restricted stock
|
|
(231
|
)
|
|
(280
|
)
|
|
(511
|
)
|
|
(456
|
)
|
|
Numerator for basic earnings per share
|
|
51,715
|
|
|
47,167
|
|
|
111,139
|
|
|
76,989
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Interest expense and amortization of debt issuance costs associated with convertible senior notes, net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
541
|
|
|
Add: Undistributed earnings allocated to nonvested restricted stock
|
|
231
|
|
|
280
|
|
|
511
|
|
|
456
|
|
|
Less: Undistributed earnings reallocated to nonvested restricted stock
|
|
(223
|
)
|
|
(265
|
)
|
|
(492
|
)
|
|
(421
|
)
|
|
Numerator for diluted earnings per share
|
|
$
|
51,723
|
|
|
$
|
47,182
|
|
|
$
|
111,158
|
|
|
$
|
77,565
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic
|
|
90,493
|
|
|
87,641
|
|
|
90,169
|
|
|
87,310
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Share-based payments
|
|
2,979
|
|
|
4,725
|
|
|
3,459
|
|
|
4,463
|
|
|
Convertible senior notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,862
|
|
|
Weighted average shares outstanding — diluted
|
|
93,472
|
|
|
92,366
|
|
|
93,628
|
|
|
94,635
|
|
|
Basic earnings per share
|
|
$
|
.57
|
|
|
$
|
.54
|
|
|
$
|
1.23
|
|
|
$
|
.88
|
|
|
Diluted earnings per share
|
|
$
|
.55
|
|
|
$
|
.51
|
|
|
$
|
1.19
|
|
|
$
|
.82
|
|
We compute earnings per share using the two-class method, which is an allocation of earnings between the holders of common stock and a company’s participating security holders. Our outstanding nonvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. We had no other participating securities at May 31, 2020 or 2019.
For the three-month and six-month periods ended May 31, 2020, no outstanding stock options were excluded from the diluted earnings per share calculation. For the three-month and six-month periods ended May 31, 2019, outstanding stock options to purchase .8 million shares of our common stock were excluded from the diluted earnings per share calculation because the effect of their inclusion would be antidilutive. The diluted earnings per share calculation for the six months ended May 31, 2019 included the dilutive effect of the $230.0 million in aggregate principal amount of our 1.375% convertible senior notes due 2019 (“1.375% Convertible Senior Notes due 2019”) based on the number of days they were outstanding during the period. We repaid these notes at their February 1, 2019 maturity.
Contingently issuable shares associated with outstanding performance-based restricted stock units (each, a “PSU”) were not included in the basic earnings per share calculations for the periods presented as the applicable vesting conditions had not been satisfied.
Receivables consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
November 30,
2019
|
|
Due from utility companies, improvement districts and municipalities
|
$
|
122,633
|
|
|
$
|
128,047
|
|
|
Income taxes receivable
|
83,599
|
|
|
—
|
|
|
Recoveries related to self-insurance and other legal claims
|
67,142
|
|
|
80,729
|
|
|
Refundable deposits and bonds
|
10,665
|
|
|
10,925
|
|
|
Other
|
36,608
|
|
|
37,846
|
|
|
Subtotal
|
320,647
|
|
|
257,547
|
|
|
Allowance for doubtful accounts
|
(7,719
|
)
|
|
(8,492
|
)
|
|
Total
|
$
|
312,928
|
|
|
$
|
249,055
|
|
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
November 30,
2019
|
|
Homes completed or under construction
|
$
|
1,199,381
|
|
|
$
|
1,340,412
|
|
|
Land under development
|
2,255,342
|
|
|
2,213,713
|
|
|
Land held for future development or sale (a)
|
152,742
|
|
|
150,477
|
|
|
Total
|
$
|
3,607,465
|
|
|
$
|
3,704,602
|
|
(a) Land held for sale totaled $21.4 million at May 31, 2020 and $19.3 million at November 30, 2019.
Interest is capitalized to inventories while the related communities or land parcels are being actively developed and until homes are completed or the land is available for immediate sale. Capitalized interest is amortized to construction and land costs as the related inventories are delivered to homebuyers or land buyers (as applicable). For land held for future development or sale, applicable interest is expensed as incurred.
Our interest costs were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Capitalized interest at beginning of period
|
$
|
192,125
|
|
|
$
|
213,370
|
|
|
$
|
195,738
|
|
|
$
|
209,129
|
|
|
Interest incurred
|
31,055
|
|
|
36,544
|
|
|
62,017
|
|
|
71,332
|
|
|
Interest amortized to construction and land costs (a)
|
(28,746
|
)
|
|
(37,754
|
)
|
|
(63,321
|
)
|
|
(68,301
|
)
|
|
Capitalized interest at end of period (b)
|
$
|
194,434
|
|
|
$
|
212,160
|
|
|
$
|
194,434
|
|
|
$
|
212,160
|
|
|
|
|
|
(a)
|
Interest amortized to construction and land costs for the three months and six months ended May 31, 2019 included a nominal amount and $.6 million, respectively, related to land sales during the periods. There was no such interest amortized for the three months and six months ended May 31, 2020.
|
|
|
|
|
(b)
|
Capitalized interest amounts reflect the gross amount of capitalized interest, as inventory impairment charges recognized, if any, are not generally allocated to specific components of inventory.
|
|
|
|
|
7.
|
Inventory Impairments and Land Option Contract Abandonments
|
Each community or land parcel in our owned inventory is assessed on a quarterly basis to determine if indicators of potential impairment exist. We record an inventory impairment charge on a community or land parcel that is active or held for future development when indicators of potential impairment exist and the carrying value of the real estate asset is greater than the undiscounted future net cash flows the asset is expected to generate. These real estate assets are written down to fair value, which is primarily determined based on the estimated future net cash flows discounted for inherent risk associated with each such asset, or other valuation techniques. We record an inventory impairment charge on land held for sale when the carrying value of a land parcel is greater than its fair value. These real estate assets are written down to fair value, less associated costs to sell. The estimated fair values of such assets are generally based on bona fide letters of intent from outside parties, executed sales contracts, broker quotes or similar information.
When an indicator of potential impairment is identified for a community or land parcel, we test the asset for recoverability by comparing the carrying value of the asset to the undiscounted future net cash flows expected to be generated by the asset. The undiscounted future net cash flows are impacted by then-current conditions and trends in the market in which the asset is located as well as factors known to us at the time the cash flows are calculated. These factors may include recent trends in our orders, backlog, cancellation rates and volume of homes delivered, as well as our expectations related to the following: product offerings; market supply and demand, including estimated average selling prices and related price appreciation; and land development, home construction and overhead costs to be incurred and related cost inflation. With respect to the three months ended May 31, 2020, these expectations considered that beginning in mid-March and throughout the remainder of the 2020 second quarter, the COVID-19 pandemic and related COVID-19 control responses in our served markets caused a significant contraction in economic activity and adversely affected our ability to conduct normal operations, as described in Note 1 – Basis of Presentation and Significant Accounting Policies, as well as reductions in our net orders, backlog levels and homes delivered in the quarter. Our impairment assessments also considered that our average selling price of homes delivered in the 2020 second quarter was nearly even with the year-earlier quarter, and our housing gross profit margin for the period improved significantly, with sales incentives as a percentage of housing revenues remaining flat year over year. Moreover, the average selling price of our net orders generated during the 2020 second quarter increased modestly from the year-earlier period, and in conjunction with our ability to begin to effectively resume nearly all of our operations, our net orders rose steadily in May from the low levels in April, although below year-earlier levels. Taken together, and notwithstanding the significant disruptions associated with the COVID-19 pandemic during the 2020 second quarter, our inventory assessments as of May 31, 2020 determined that market conditions for each of our assets in inventory where impairment indicators were identified were expected to be sufficiently stable, with a tempered overall net order pace and a steady average selling price for the remainder of 2020 and into 2021 relative to the performance in recent quarters, to support such assets’ recoverability. Our inventory is assessed for potential impairment on a quarterly basis, and the assumptions used are reviewed and adjusted, as necessary, to reflect the market conditions and trends and our expectations at the time each assessment is performed.
We evaluated 18 and 24 communities or land parcels for recoverability during the six months ended May 31, 2020 and 2019, respectively, including certain communities or land parcels previously held for future development that were reactivated as part of our ongoing efforts to improve asset efficiency. The carrying values of the communities or land parcels evaluated were $148.3 million at May 31, 2020 and $164.0 million at May 31, 2019. Some of the communities or land parcels evaluated
during the six months ended May 31, 2020 and 2019 were evaluated in more than one quarterly period. Communities or land parcels evaluated for recoverability in more than one quarterly period were counted only once for each six-month period.
Based on the results of our evaluations, we recognized no inventory impairment charges for the three months ended May 31, 2020 and $5.1 million of inventory impairment charges for the six months ended May 31, 2020. For the three months and six months ended May 31, 2019, we recognized inventory impairment charges of $3.4 million and $6.6 million, respectively. The impairment charges for the six-month period ended May 31, 2020 and the three-month and six-month periods ended May 31, 2019 reflected our decisions to make changes in our operational strategies aimed at more quickly monetizing our investment in certain communities by accelerating the overall pace for selling, building and delivering homes therein, including communities on land previously held for future development.
The following table summarizes significant quantitative unobservable inputs we utilized in our fair value measurements with respect to the impaired communities written down to fair value during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
Unobservable Input (a)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Average selling price
|
|
$-
|
|
$315,000 - $398,500
|
|
$302,700 - $915,500
|
|
$315,000 - $1,045,400
|
|
Deliveries per month
|
|
-
|
|
4
|
|
1 - 4
|
|
1 - 4
|
|
Discount rate
|
|
-
|
|
17%
|
|
17% - 18%
|
|
17%
|
|
|
|
|
(a)
|
The ranges of inputs used in each period primarily reflect differences between the housing markets where each impacted community is located, rather than fluctuations in prevailing market conditions.
|
As of May 31, 2020, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $89.7 million, representing 16 communities and various other land parcels. As of November 30, 2019, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $115.6 million, representing 19 communities and various other land parcels.
Our inventory controlled under land option contracts and other similar contracts is assessed on a quarterly basis to determine whether it continues to meet our investment return standards. When a decision is made not to exercise certain land option contracts and other similar contracts due to market conditions and/or changes in our marketing strategy, we write off the related inventory costs, including non-refundable deposits and unrecoverable pre-acquisition costs. Based on the results of our assessments, we recognized land option contract abandonment charges of $4.4 million for the three months ended May 31, 2020 and $4.9 million for the six months ended May 31, 2020. For the three-month and six-month periods ended May 31, 2019, we recognized land option contract abandonment charges of $.9 million and $1.3 million, respectively.
If conditions in our served markets are or are expected to be adversely affected for a prolonged period due to the COVID-19 control responses or otherwise, we may determine through our community and land parcel evaluations in future quarters that we need to take impairment charges, and such charges could be material. In addition, due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, particularly as to land held for future development, it is possible that actual results could differ substantially from those estimated.
|
|
|
|
8.
|
Variable Interest Entities
|
Unconsolidated Joint Ventures. We participate in joint ventures from time to time that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. Our investments in these joint ventures may create a variable interest in a variable interest entity (“VIE”), depending on the contractual terms of the arrangement. We analyze our joint ventures under the variable interest model to determine whether they are VIEs and, if so, whether we are the primary beneficiary. Based on our analyses, we determined that one of our joint ventures at May 31, 2020 and November 30, 2019 was a VIE, but we were not the primary beneficiary of the VIE. Therefore, all of our joint ventures at May 31, 2020 and November 30, 2019 were unconsolidated and accounted for under the equity method because we did not have a controlling financial interest.
Land Option Contracts and Other Similar Contracts. In the ordinary course of our business, we enter into land option contracts and other similar contracts with third parties and unconsolidated entities to acquire rights to land for the construction of homes. Under these contracts, we typically make a specified option payment or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. We analyze each of our land option contracts and other similar contracts under the variable interest model to determine whether the land seller is a VIE and, if so, whether we are the primary
beneficiary. Although we do not have legal title to the underlying land, we are required to consolidate a VIE if we are the primary beneficiary. As a result of our analyses, we determined that as of May 31, 2020 and November 30, 2019, we were not the primary beneficiary of any VIEs from which we have acquired rights to land under land option contracts and other similar contracts. We perform ongoing reassessments of whether we are the primary beneficiary of a VIE.
The following table presents a summary of our interests in land option contracts and other similar contracts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2020
|
|
November 30, 2019
|
|
|
Cash
Deposits
|
|
Aggregate
Purchase Price
|
|
Cash
Deposits
|
|
Aggregate
Purchase Price
|
|
Unconsolidated VIEs
|
$
|
29,467
|
|
|
$
|
761,329
|
|
|
$
|
34,595
|
|
|
$
|
823,427
|
|
|
Other land option contracts and other similar contracts
|
29,772
|
|
|
503,739
|
|
|
40,591
|
|
|
600,092
|
|
|
Total
|
$
|
59,239
|
|
|
$
|
1,265,068
|
|
|
$
|
75,186
|
|
|
$
|
1,423,519
|
|
In addition to the cash deposits presented in the table above, our exposure to loss related to our land option contracts and other similar contracts with third parties and unconsolidated entities consisted of pre-acquisition costs of $33.3 million at May 31, 2020 and $32.8 million at November 30, 2019. These pre-acquisition costs and cash deposits were included in inventories in our consolidated balance sheets.
For land option contracts and other similar contracts where the land seller entity is not required to be consolidated under the variable interest model, we consider whether such contracts should be accounted for as financing arrangements. Land option contracts and other similar contracts that may be considered financing arrangements include those we enter into with third-party land financiers or developers in conjunction with such third parties acquiring a specific land parcel(s) on our behalf, at our direction, and those with other landowners where we or our designee make improvements to the optioned land parcel(s) during the applicable option period. For these land option contracts and other similar contracts, we record the remaining purchase price of the associated land parcel(s) in inventories in our consolidated balance sheets with a corresponding financing obligation if we determine that we are effectively compelled to exercise the option to purchase the land parcel(s). As a result of our evaluations of land option contracts and other similar contracts for financing arrangements, we recorded inventories in our consolidated balance sheets, with a corresponding increase to accrued expenses and other liabilities, of $1.8 million at May 31, 2020 and $12.2 million at November 30, 2019.
|
|
|
|
9.
|
Investments in Unconsolidated Joint Ventures
|
We have investments in unconsolidated joint ventures that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. We and our unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis, according to our respective equity interests. The obligations to make capital contributions are governed by each such unconsolidated joint venture’s respective operating agreement and related governing documents.
The following table presents combined condensed information from the statements of operations of our unconsolidated joint ventures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenues
|
$
|
66,873
|
|
|
$
|
3,786
|
|
|
$
|
94,420
|
|
|
$
|
15,978
|
|
|
Construction and land costs
|
(46,725
|
)
|
|
(3,798
|
)
|
|
(68,268
|
)
|
|
(16,018
|
)
|
|
Other expense, net
|
(3,742
|
)
|
|
(610
|
)
|
|
(5,849
|
)
|
|
(1,238
|
)
|
|
Income (loss)
|
$
|
16,406
|
|
|
$
|
(622
|
)
|
|
$
|
20,303
|
|
|
$
|
(1,278
|
)
|
The higher combined revenues and income for the three months and six months ended May 31, 2020, as compared to the year-earlier periods, mainly reflected homes delivered from an unconsolidated joint venture in California. In the three months and six months ended May 31, 2019, our unconsolidated joint ventures did not deliver any homes.
The following table presents combined condensed balance sheet information for our unconsolidated joint ventures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
November 30,
2019
|
|
Assets
|
|
|
|
|
Cash
|
$
|
41,932
|
|
|
$
|
23,965
|
|
|
Inventories
|
85,830
|
|
|
139,536
|
|
|
Other assets
|
658
|
|
|
792
|
|
|
Total assets
|
$
|
128,420
|
|
|
$
|
164,293
|
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
Accounts payable and other liabilities
|
$
|
13,817
|
|
|
$
|
13,282
|
|
|
Notes payable (a)
|
—
|
|
|
40,672
|
|
|
Equity
|
114,603
|
|
|
110,339
|
|
|
Total liabilities and equity
|
$
|
128,420
|
|
|
$
|
164,293
|
|
|
|
|
|
(a)
|
As of both May 31, 2020 and November 30, 2019, we had investments in five unconsolidated joint ventures. At November 30, 2019, one of our unconsolidated joint ventures had a construction loan agreement with a third-party lender to finance its land development activities. The outstanding debt was secured by the underlying property and related project assets and was non-recourse to us. All of the outstanding secured debt was repaid in April 2020. None of our unconsolidated joint ventures had outstanding debt at May 31, 2020.
|
|
|
|
|
10.
|
Property and Equipment, Net
|
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
November 30,
2019
|
|
Computer software and equipment
|
|
$
|
30,137
|
|
|
$
|
27,091
|
|
|
Model furnishings and sales office improvements
|
|
82,401
|
|
|
82,117
|
|
|
Leasehold improvements, office furniture and equipment
|
|
17,366
|
|
|
16,173
|
|
|
Subtotal
|
|
129,904
|
|
|
125,381
|
|
|
Less accumulated depreciation
|
|
(64,140
|
)
|
|
(60,338
|
)
|
|
Total
|
|
$
|
65,764
|
|
|
$
|
65,043
|
|
Other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
November 30,
2019
|
|
Cash surrender value and benefit receivable from corporate-owned life insurance contracts
|
$
|
73,458
|
|
|
$
|
73,849
|
|
|
Lease right-of-use assets
|
32,087
|
|
|
—
|
|
|
Prepaid expenses
|
18,219
|
|
|
5,944
|
|
|
Debt issuance costs associated with unsecured revolving credit facility, net
|
2,824
|
|
|
3,248
|
|
|
Total
|
$
|
126,588
|
|
|
$
|
83,041
|
|
|
|
|
|
12.
|
Accrued Expenses and Other Liabilities
|
Accrued expenses and other liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
November 30,
2019
|
|
Self-insurance and other legal liabilities
|
$
|
224,784
|
|
|
$
|
229,483
|
|
|
Employee compensation and related benefits
|
122,426
|
|
|
163,646
|
|
|
Warranty liability
|
92,844
|
|
|
88,839
|
|
|
Lease liabilities
|
33,549
|
|
|
—
|
|
|
Accrued interest payable
|
32,258
|
|
|
32,507
|
|
|
Customer deposits
|
30,283
|
|
|
22,382
|
|
|
Inventory-related obligations (a)
|
15,231
|
|
|
26,264
|
|
|
Real estate and business taxes
|
10,004
|
|
|
14,872
|
|
|
Other
|
41,014
|
|
|
40,790
|
|
|
Total
|
$
|
602,393
|
|
|
$
|
618,783
|
|
|
|
|
|
(a)
|
Represents liabilities for financing arrangements discussed in Note 8 – Variable Interest Entities, as well as liabilities for fixed or determinable amounts associated with tax increment financing entity (“TIFE”) assessments. As homes are delivered, our obligation to pay the remaining TIFE assessments associated with each underlying lot is transferred to the homebuyer. As such, these assessment obligations will be paid by us only to the extent we do not deliver homes on applicable lots before the related TIFE obligations mature.
|
We lease certain property and equipment for use in our operations. We recognize lease expense for these leases generally on a straight-line basis over the lease term and combine lease and non-lease components for all leases. Lease right-of-use assets and lease liabilities are recorded on our consolidated balance sheets for leases with an expected term at the commencement date of more than 12 months. Some of our leases include one or more renewal options, the exercise of which is generally at our discretion. Such options are excluded from the expected term of the lease unless we determine it is reasonably certain the option will be exercised. Lease liabilities are equal to the present value of the remaining lease payments while the amount of lease right-of-use assets is based on the lease liabilities, subject to adjustment, such as for lease incentives. Our leases do not provide a readily determinable implicit interest rate; therefore, we estimate our incremental borrowing rate to calculate the present value of remaining lease payments. In determining our incremental borrowing rate, we considered the lease term, market interest rates, current interest rates on our senior notes and the effects of collateralization. Our lease population at May 31, 2020 was comprised of operating leases where we are the lessee, primarily real estate leases for our corporate office, division offices and design studios, as well as certain equipment leases. Our lease agreements do not contain any residual value guarantees or material restrictive covenants.
Lease expense is included in selling, general and administrative expenses in our consolidated statements of operations and includes costs for leases with terms of more than 12 months as well as short-term leases with terms of 12 months or less. For the three months ended May 31, 2020, our total lease expense was $4.4 million, which included short-term lease costs of $1.4 million. For the six months ended May 31, 2020, our total lease expense was $9.4 million, which included short-term lease costs of $3.5 million. Variable lease costs and external sublease income for the three-month and six-month periods ended May 31, 2020 were immaterial.
The following table presents our lease right-of-use assets and lease liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
Lease right-of-use assets (a)
|
|
|
$
|
32,413
|
|
|
Lease liabilities (b)
|
|
|
33,905
|
|
|
|
|
|
(a)
|
Represents lease right-of-use assets of $32.1 million within our homebuilding operations and $.3 million within our financial services operations.
|
|
|
|
|
(b)
|
Represents lease liabilities of $33.5 million within our homebuilding operations and $.4 million within our financial services operations.
|
The following table presents additional information about our leases (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31, 2020
|
|
Six Months Ended
May 31, 2020
|
|
Lease right-of-use assets obtained in exchange for new lease liabilities
|
$
|
2,428
|
|
|
$
|
6,068
|
|
|
Non-cash operating lease expense
|
—
|
|
|
—
|
|
|
Cash payments on lease liabilities
|
2,894
|
|
|
5,637
|
|
|
Weighted-average remaining lease term
|
4.8 years
|
|
|
4.8 years
|
|
|
Weighted-average discount rate (incremental borrowing rate)
|
5.1
|
%
|
|
5.1
|
%
|
As of May 31, 2020, the future minimum lease payments required under our leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ending November 30,
|
|
|
|
|
2020
|
|
|
$
|
5,272
|
|
|
2021
|
|
|
9,070
|
|
|
2022
|
|
|
7,787
|
|
|
2023
|
|
|
5,789
|
|
|
2024
|
|
|
4,502
|
|
|
Thereafter
|
|
|
6,035
|
|
|
Total lease payments
|
|
|
38,455
|
|
|
Less: Interest
|
|
|
(4,550
|
)
|
|
Present value of lease liabilities
|
|
|
$
|
33,905
|
|
Income Tax Expense. Our income tax expense and effective tax rates were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Income tax expense
|
$
|
15,800
|
|
|
$
|
9,300
|
|
|
$
|
24,900
|
|
|
$
|
13,800
|
|
|
Effective tax rate
|
23.3
|
%
|
|
16.4
|
%
|
|
18.2
|
%
|
|
15.1
|
%
|
Our income tax expense and effective tax rate for the three months ended May 31, 2020 included the favorable effect of $3.0 million of federal energy tax credits that we earned from building energy-efficient homes, partially offset by $1.0 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). For the three months ended May 31, 2019, our income tax expense and effective tax rate included the favorable effects of $4.3 million of federal energy tax credits and $.9 million of excess tax benefits related to stock-based compensation, partly offset by $.8 million of non-deductible executive compensation expense.
Our income tax expense and effective tax rate for the six months ended May 31, 2020 included the favorable effects of $7.0 million of federal energy tax credits that we earned from building energy-efficient homes and $5.6 million of excess tax benefits related to stock-based compensation, partially offset by $2.0 million of non-deductible executive compensation expense. For the six months ended May 31, 2019, our income tax expense and effective tax rate included the favorable effects of $4.3 million of federal energy tax credits, a $3.3 million reversal of a deferred tax asset valuation allowance related to refundable alternative minimum tax (“AMT”) credits and $2.9 million of excess tax benefits related to stock-based compensation, partly offset by $1.2 million of non-deductible executive compensation expense.
The federal energy tax credits for the three months and six months ended May 31, 2020 resulted from legislation enacted in December 2019, which among other things, extended the availability of a business tax credit for building new energy-efficient homes through December 31, 2020. Prior to this legislation, the tax credit expired on December 31, 2017. This extension is expected to benefit our income tax provision in future periods.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to provide economic and other relief as a result of the COVID-19 pandemic. Among other things, the CARES Act provides various income and payroll tax provisions that we do not expect to have a material impact on our income tax expense or effective tax rate for 2020. The CARES Act also accelerated the timetable for AMT credit refunds. As a result, in the 2020 second quarter, we filed a superseding 2019 federal income tax return claiming an additional refund of $39.3 million of AMT credits and reclassified this amount from deferred tax assets to receivables. These credits were in addition to the $43.3 million of AMT tax credits we reclassified from deferred tax assets to receivables in the 2020 first quarter when we filed a preliminary 2019 federal income tax return.
Deferred Tax Asset Valuation Allowance. We evaluate our deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available positive and negative evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, our historical operating results, our expectation of future profitability, the duration of the applicable statutory carryforward periods, and conditions in the housing market and the broader economy. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible. The value of our deferred tax assets depends on applicable income tax rates.
Our deferred tax assets of $276.8 million as of May 31, 2020 and $383.7 million as of November 30, 2019 were both partly offset by valuation allowances of $19.2 million. Our deferred tax assets as of May 31, 2020 reflected the above-mentioned AMT credit reclassifications totaling $82.6 million from deferred tax assets to receivables in the 2020 first and second quarters. The deferred tax asset valuation allowances as of May 31, 2020 and November 30, 2019 were primarily related to certain state net operating losses that had not met the “more likely than not” realization standard at those dates. Based on the evaluation of our deferred tax assets as of May 31, 2020, we determined that most of our deferred tax assets would be realized. Therefore, no adjustments to our deferred tax valuation allowance were needed for the six months ended May 31, 2020.
We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to our deferred tax assets. The accounting for deferred tax assets is based upon estimates of future results. Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated financial statements. Changes in existing federal and state tax laws and corporate income tax rates could also affect actual tax results and the realization of deferred tax assets over time.
Unrecognized Tax Benefits. As of May 31, 2020 and November 30, 2019, we had no gross unrecognized tax benefits. The fiscal years ending 2016 and later remain open to federal examinations, while 2015 and later remain open to state examinations.
Notes payable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
November 30,
2019
|
|
Mortgages and land contracts due to land sellers and other loans
|
$
|
24,871
|
|
|
$
|
7,889
|
|
|
7.00% Senior notes due December 15, 2021
|
448,589
|
|
|
448,164
|
|
|
7.50% Senior notes due September 15, 2022
|
348,551
|
|
|
348,267
|
|
|
7.625% Senior notes due May 15, 2023
|
351,517
|
|
|
351,748
|
|
|
6.875% Senior notes due June 15, 2027
|
296,565
|
|
|
296,379
|
|
|
4.80% Senior notes due November 15, 2029
|
296,446
|
|
|
296,300
|
|
|
Total
|
$
|
1,766,539
|
|
|
$
|
1,748,747
|
|
The carrying amounts of our senior notes listed above are net of unamortized debt issuance costs, premiums and discounts, which totaled $8.3 million at May 31, 2020 and $9.1 million at November 30, 2019.
Unsecured Revolving Credit Facility. We have an $800.0 million unsecured revolving credit facility with various banks (“Credit Facility”) that will mature on October 7, 2023. The Credit Facility contains an uncommitted accordion feature under which its aggregate principal amount of available loans can be increased to a maximum of $1.00 billion under certain conditions, including obtaining additional bank commitments. The Credit Facility also contains a sublimit of $250.0 million for the issuance of letters of credit. Interest on amounts borrowed under the Credit Facility is payable at least quarterly in arrears at a rate based on either a Eurodollar or a base rate, plus a spread that depends on our consolidated leverage ratio (“Leverage Ratio”), as defined under the Credit Facility. The Credit Facility also requires the payment of a commitment fee at a per annum rate ranging from .20% to .35% of the unused commitment, based on our Leverage Ratio. Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants relating to our consolidated tangible net worth, Leverage Ratio, and either a consolidated interest coverage ratio (“Interest Coverage Ratio”) or minimum level of liquidity, each as defined therein. The amount of the Credit Facility available for cash borrowings or the issuance of letters of credit depends on the total cash borrowings and letters of credit outstanding under the Credit Facility and the maximum available amount under the terms of the Credit Facility. As of May 31, 2020, we had no cash borrowings and $12.4 million of letters of credit outstanding under the Credit Facility. Therefore, as of May 31, 2020, we had $787.6 million available for cash borrowings under the Credit Facility, with up to $237.6 million of that amount available for the issuance of letters of credit.
Letter of Credit Facility. We have an unsecured letter of credit agreement with a financial institution (“LOC Facility”). Under the LOC Facility, which expires on February 13, 2022, we may issue up to $50.0 million of letters of credit. We maintain the LOC Facility to obtain letters of credit from time to time in the ordinary course of operating our business. As of May 31, 2020, we had $33.5 million of letters of credit outstanding under the LOC Facility. We had $15.8 million letters of credit outstanding under the LOC Facility as of November 30, 2019.
Mortgages and Land Contracts Due to Land Sellers and Other Loans. As of May 31, 2020, inventories having a carrying value of $52.1 million were pledged to collateralize mortgages and land contracts due to land sellers and other loans.
Senior Notes. All of the senior notes outstanding at May 31, 2020 and November 30, 2019 represent senior unsecured obligations that are guaranteed by certain of our subsidiaries and rank equally in right of payment with all of our and our guarantor subsidiaries’ existing unsecured and unsubordinated indebtedness. Interest on each of these senior notes is payable semi-annually.
The indenture governing our senior notes does not contain any financial covenants. Subject to specified exceptions, the indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale and leaseback transactions involving property above a certain specified value. In addition, the indenture contains certain limitations related to mergers, consolidations, and sales of assets.
As of May 31, 2020, we were in compliance with the applicable terms of all our covenants and other requirements under the Credit Facility, the senior notes, the indenture, and the mortgages and land contracts due to land sellers and other loans. Our ability to access the Credit Facility for cash borrowings and letters of credit and our ability to secure future debt financing depend, in part, on our ability to remain in such compliance.
As of May 31, 2020, principal payments on senior notes, mortgages and land contracts due to land sellers and other loans are due during each year ending November 30 as follows: 2020 – $6.8 million; 2021 – $18.0 million; 2022 – $800.0 million; 2023 – $350.0 million; 2024 – $0; and thereafter – $600.0 million.
|
|
|
|
16.
|
Fair Value Disclosures
|
Fair value measurements of assets and liabilities are categorized based on the following hierarchy:
|
|
|
|
|
|
|
Level 1
|
|
Fair value determined based on quoted prices in active markets for identical assets or liabilities.
|
|
Level 2
|
|
Fair value determined using significant observable inputs, such as quoted prices for similar assets or liabilities or quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data, by correlation or other means.
|
|
Level 3
|
|
Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques.
|
Fair value measurements are used for inventories on a nonrecurring basis when events and circumstances indicate that their carrying value is not recoverable. The following table presents the fair value hierarchy and our assets measured at fair value on a nonrecurring basis for the six months ended May 31, 2020 and the year ended November 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2020
|
|
November 30, 2019
|
|
Description
|
|
Fair Value Hierarchy
|
|
Pre-Impairment Value
|
|
Inventory Impairment Charges
|
|
Fair Value (a)
|
|
Pre-Impairment Value
|
|
Inventory Impairment Charges
|
|
Fair Value (a)
|
|
Inventories
|
|
Level 3
|
|
$
|
14,394
|
|
|
$
|
(5,105
|
)
|
|
$
|
9,289
|
|
|
$
|
41,160
|
|
|
$
|
(14,031
|
)
|
|
$
|
27,129
|
|
|
|
|
|
(a)
|
Amounts represent the aggregate fair value for real estate assets impacted by inventory impairment charges during the applicable period as of the date that the fair value measurements were made. The carrying value for these real estate assets may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date.
|
The fair values for inventories that were determined using Level 3 inputs were based on the estimated future net cash flows discounted for inherent risk associated with each underlying asset.
The following table presents the fair value hierarchy, carrying value and estimated fair value of our financial instruments, except those for which the carrying values approximate fair values (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2020
|
|
November 30, 2019
|
|
Description
|
|
Fair Value
Hierarchy
|
|
Carrying
Value (a)
|
|
Estimated
Fair Value
|
|
Carrying
Value (a)
|
|
Estimated
Fair Value
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes
|
|
Level 2
|
|
$
|
1,741,668
|
|
|
$
|
1,862,750
|
|
|
$
|
1,740,858
|
|
|
$
|
1,921,563
|
|
|
|
|
|
(a)
|
The carrying values for the senior notes include unamortized debt issuance costs. Debt issuance costs are not factored into the estimated fair values of these notes.
|
The fair values of our senior notes are generally estimated based on quoted market prices for these instruments.
The carrying values reported for cash and cash equivalents, and mortgages and land contracts due to land sellers and other loans approximate fair values. The carrying value of corporate-owned life insurance is based on the cash surrender value of the policies and, accordingly, approximates fair value.
|
|
|
|
17.
|
Commitments and Contingencies
|
Commitments and contingencies include typical obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business.
Warranty. We provide a limited warranty on all of our homes. The specific terms and conditions of our limited warranty program vary depending upon the markets in which we do business. We generally provide a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and certain other building systems each varying from two years to five years based on geographic market and state law, and a warranty of one year for other components of the home. Our limited warranty program is ordinarily how we respond to and account for homeowners’ requests to local division offices seeking repairs of certain conditions or defects, including claims where we could have liability under applicable state statutes or tort law for a defective condition in or damages to a home. Our warranty liability covers our costs of repairs associated with homeowner claims made under our limited warranty program. These claims are generally made directly by a homeowner and involve their individual home.
We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience. Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our accrued warranty liability, which is included in accrued expenses and other liabilities in our consolidated balance sheets, and adjust the amount as necessary based on our assessment. Our assessment includes the review of our actual warranty costs incurred to identify trends and changes in our warranty claims
experience, and considers our home construction quality and customer service initiatives and outside events. While we believe the warranty liability currently reflected in our consolidated balance sheets to be adequate, unanticipated changes or developments in the legal environment, local weather, land or environmental conditions, quality of materials or methods used in the construction of homes or customer service practices and/or our warranty claims experience could have a significant impact on our actual warranty costs in future periods and such amounts could differ significantly from our current estimates.
The changes in our warranty liability were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Balance at beginning of period
|
$
|
90,213
|
|
|
$
|
84,191
|
|
|
$
|
88,839
|
|
|
$
|
82,490
|
|
|
Warranties issued
|
7,271
|
|
|
8,139
|
|
|
15,634
|
|
|
14,433
|
|
|
Payments
|
(4,640
|
)
|
|
(6,500
|
)
|
|
(11,629
|
)
|
|
(11,093
|
)
|
|
Adjustments
|
—
|
|
|
(2,800
|
)
|
|
—
|
|
|
(2,800
|
)
|
|
Balance at end of period
|
$
|
92,844
|
|
|
$
|
83,030
|
|
|
$
|
92,844
|
|
|
$
|
83,030
|
|
Guarantees. In the normal course of our business, we issue certain representations, warranties and guarantees related to our home sales and land sales. Based on historical experience, we do not believe any potential liability with respect to these representations, warranties or guarantees would be material to our consolidated financial statements.
Self-Insurance. We maintain, and require the majority of our independent subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. We also maintain certain other insurance policies. In Arizona, California, Colorado and Nevada, our subcontractors’ general liability insurance primarily takes the form of a wrap-up policy under a program where eligible independent subcontractors are enrolled as insureds on each community. Enrolled subcontractors contribute toward the cost of the insurance and agree to pay a contractual amount in the future if there is a claim related to their work. To the extent provided under the wrap-up program, we absorb the enrolled subcontractors’ general liability associated with the work performed on our homes within the applicable community as part of our overall general liability insurance and our self-insurance.
We self-insure a portion of our overall risk through the use of a captive insurance subsidiary, which provides coverage for our exposure to construction defect, bodily injury and property damage claims and related litigation or regulatory actions, up to certain limits. Our self-insurance liability generally covers the costs of settlements and/or repairs, if any, as well as our costs to defend and resolve the following types of claims:
|
|
|
|
•
|
Construction defect: Construction defect claims, which represent the largest component of our self-insurance liability, typically originate through a legal or regulatory process rather than directly by a homeowner and involve the alleged occurrence of a condition affecting two or more homes within the same community, or they involve a common area or homeowners association property within a community. These claims typically involve higher costs to resolve than individual homeowner warranty claims, and the rate of claims is highly variable.
|
|
|
|
|
•
|
Bodily injury: Bodily injury claims typically involve individuals (other than our employees) who claim they were injured while on our property or as a result of our operations.
|
|
|
|
|
•
|
Property damage: Property damage claims generally involve claims by third parties for alleged damage to real or personal property as a result of our operations. Such claims may occasionally include those made against us by owners of property located near our communities.
|
Our self-insurance liability at each reporting date represents the estimated costs of reported claims, claims incurred but not yet reported, and claim adjustment expenses. The amount of our self-insurance liability is based on an analysis performed by a third-party actuary that uses our historical claim and expense data, as well as industry data to estimate these overall costs. Key assumptions used in developing these estimates include claim frequencies, severities and resolution patterns, which can occur over an extended period of time. These estimates are subject to variability due to the length of time between the delivery of a home to a homebuyer and when a construction defect claim is made, and the ultimate resolution of such claim; uncertainties regarding such claims relative to our markets and the types of product we build; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree of judgment involved and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated. In addition, changes in the frequency and severity of
reported claims and the estimates to resolve claims can impact the trends and assumptions used in the actuarial analysis, which could be material to our consolidated financial statements. Though state regulations vary, construction defect claims are reported and resolved over a long period of time, which can extend for 10 years or more. As a result, the majority of the estimated self-insurance liability based on the actuarial analysis relates to claims incurred but not yet reported. Therefore, adjustments related to individual existing claims generally do not significantly impact the overall estimated liability. Adjustments to our liabilities related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs.
Our self-insurance liability is presented on a gross basis for all periods without consideration of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any. Estimated probable insurance and other recoveries of $47.9 million and $50.6 million are included in receivables in our consolidated balance sheets at May 31, 2020 and November 30, 2019, respectively. These self-insurance recoveries are principally based on actuarially determined amounts and depend on various factors, including, among other things, the above-described claim cost estimates, our insurance policy coverage limits for the applicable policy year(s), historical third-party recovery rates, insurance industry practices, the regulatory environment and legal precedent, and are subject to a high degree of variability from period to period. Because of the inherent uncertainty and variability in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated.
The changes in our self-insurance liability were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Balance at beginning of period
|
$
|
181,481
|
|
|
$
|
177,862
|
|
|
$
|
177,765
|
|
|
$
|
176,841
|
|
|
Self-insurance expense (a)
|
1,343
|
|
|
4,295
|
|
|
5,977
|
|
|
8,042
|
|
|
Payments (b)
|
(4,743
|
)
|
|
(11,179
|
)
|
|
(5,661
|
)
|
|
(13,905
|
)
|
|
Balance at end of period
|
$
|
178,081
|
|
|
$
|
170,978
|
|
|
$
|
178,081
|
|
|
$
|
170,978
|
|
|
|
|
|
(a)
|
These expenses are included in selling, general and administrative expenses and are largely offset by contributions from subcontractors participating in the wrap-up policy.
|
|
|
|
|
(b)
|
Includes net changes in estimated probable insurance and other recoveries, which are recorded in receivables, to present our self-insurance liability on a gross basis.
|
For most of our claims, there is no interaction between our warranty liability and self-insurance liability. Typically, if a matter is identified at its outset as either a warranty or self-insurance claim, it remains as such through its resolution. However, there can be instances of interaction between the liabilities, such as where individual homeowners in a community separately request warranty repairs to their homes to address a similar condition or issue and subsequently join together to initiate, or potentially initiate, a legal process with respect to that condition or issue and/or the repair work we have undertaken. In these instances, the claims and related repair work generally are initially covered by our warranty liability, and the costs associated with resolving the legal matter (including any additional repair work) are covered by our self-insurance liability.
The payments we make in connection with claims and related repair work, whether covered within our warranty liability and/or our self-insurance liability, may be recovered from our insurers to the extent such payments exceed the self-insured retentions or deductibles under our general liability insurance policies. Also, in certain instances, in the course of resolving a claim, we pay amounts in advance of and/or on behalf of a subcontractor(s) or their insurer(s) and believe we will be reimbursed for such payments. Estimates of all such amounts, if any, are recorded as receivables in our consolidated balance sheets when any such recovery is considered probable.
Florida Chapter 558 Actions (Individual and Homeowner Association Claims). We and certain of our subcontractors have received a growing number of claims from attorneys on behalf of individual owners of our homes and/or homeowners’ associations that allege, pursuant to Chapter 558 of the Florida Statutes, various construction defects, with most relating to stucco and water-intrusion issues. The claims primarily involve homes in our Jacksonville, Orlando, and Tampa operations. Under Chapter 558, homeowners must serve written notice of a construction defect(s) and provide the served construction and/or design contractor(s) with an opportunity to respond to the noticed issue(s) before they can file a lawsuit. Although we have resolved many of these claims without litigation, and a number of others have been resolved with applicable subcontractors or their insurers covering the related costs, as of May 31, 2020, we had approximately 503 outstanding noticed claims, and some are scheduled for trial over the next few quarters and beyond. In addition, some of our subcontractors’ insurers in some of these cases have informed us of their inability to continue to pay claims-related costs. At May 31, 2020, we had an accrual
for our estimated probable loss for these matters and a receivable for estimated probable insurance recoveries. While it is reasonably possible that our loss could exceed the amount accrued and our recoveries could be less than the amount recorded, at this time, we are unable to estimate the total amount of the loss in excess of the accrued amount and/or associated with a shortfall in the recoveries that is reasonably possible.
Townhome Community Construction Defect Claims. In the 2016 fourth quarter, we received claims from a homeowners association alleging there were construction defects, primarily involving roofing and stucco issues, at a completed townhome community in Northern California totaling approximately $25.0 million. We, along with our outside consultants, have continued to investigate these allegations and we currently expect it may take additional quarters to fully evaluate them. At May 31, 2020, we had an accrual for our estimated probable loss in this matter and a receivable for estimated probable insurance recoveries that reflected the status of our investigation to such date. At this stage of our investigation into these allegations, it is reasonably possible that our loss could exceed the amount accrued by an estimated range of $0 to $8.0 million. Our investigation will also involve identifying potentially responsible parties, including insurers, to pay for or perform any necessary repairs. We are in discussions with the homeowners association regarding the claims and their resolution.
Performance Bonds and Letters of Credit. We are often required to provide to various municipalities and other government agencies performance bonds and/or letters of credit to secure the completion of our projects and/or in support of obligations to build community improvements such as roads, sewers, water systems and other utilities, and to support similar development activities by certain of our unconsolidated joint ventures. At May 31, 2020, we had $789.6 million of performance bonds and $45.9 million of letters of credit outstanding. At November 30, 2019, we had $793.9 million of performance bonds and $34.7 million of letters of credit outstanding. If any such performance bonds or letters of credit are called, we would be obligated to reimburse the issuer of the performance bond or letter of credit. We do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the underlying performance is completed. The expiration dates of some letters of credit issued in connection with community improvements coincide with the expected completion dates of the related projects or obligations. Most letters of credit, however, are issued with an initial term of one year and are typically extended on a year-to-year basis until the related performance obligations are completed.
Land Option Contracts and Other Similar Contracts. In the ordinary course of our business, we enter into land option contracts and other similar contracts to acquire rights to land for the construction of homes. At May 31, 2020, we had total cash deposits of $59.2 million to purchase land having an aggregate purchase price of $1.27 billion. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance.
We are involved in litigation and regulatory proceedings incidental to our business that are in various procedural stages. We believe that the accruals we have recorded for probable and reasonably estimable losses with respect to these proceedings are adequate and that, as of May 31, 2020, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the estimated amounts already recognized or disclosed in our consolidated financial statements. We evaluate our accruals for litigation and regulatory proceedings at least quarterly and, as appropriate, adjust them to reflect (a) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments; (b) the advice and analyses of counsel; and (c) the assumptions and judgment of management. Similar factors and considerations are used in establishing new accruals for proceedings as to which losses have become probable and reasonably estimable at the time an evaluation is made. Our accruals for litigation and regulatory proceedings are presented on a gross basis without consideration of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any. Estimates of recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any, are recorded as receivables when such recoveries are considered probable. Based on our experience, we believe that the amounts that may be claimed or alleged against us in these proceedings are not a meaningful indicator of our potential liability. The outcome of any of these proceedings, including the defense and other litigation-related costs and expenses we may incur, however, is inherently uncertain and could differ significantly from the estimate reflected in a related accrual, if made. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a related accrual or if an accrual had not been made, could be material to our consolidated financial statements.
A summary of changes in stockholders’ equity is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2020 and 2019
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Grantor
Stock
Ownership
Trust
|
|
Treasury
Stock
|
|
Common Stock
|
|
Paid-in Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Grantor Stock
Ownership Trust
|
|
Treasury Stock
|
|
Total Stockholders’ Equity
|
|
Balance at February 29, 2020
|
122,291
|
|
|
(7,317
|
)
|
|
(24,526
|
)
|
|
$
|
122,291
|
|
|
$
|
803,420
|
|
|
$
|
2,211,851
|
|
|
$
|
(17,149
|
)
|
|
$
|
(79,359
|
)
|
|
$
|
(597,950
|
)
|
|
$
|
2,443,104
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
51,989
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
51,989
|
|
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,098
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,098
|
)
|
|
Employee stock options/other
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
167
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
178
|
|
|
Stock awards
|
68
|
|
|
—
|
|
|
—
|
|
|
68
|
|
|
(68
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,181
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,181
|
|
|
Balance at May 31, 2020
|
122,370
|
|
|
(7,317
|
)
|
|
(24,526
|
)
|
|
$
|
122,370
|
|
|
$
|
806,700
|
|
|
$
|
2,255,742
|
|
|
$
|
(17,149
|
)
|
|
$
|
(79,359
|
)
|
|
$
|
(597,950
|
)
|
|
$
|
2,490,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2019
|
119,258
|
|
|
(7,860
|
)
|
|
(24,264
|
)
|
|
$
|
119,258
|
|
|
$
|
755,341
|
|
|
$
|
1,936,523
|
|
|
$
|
(9,565
|
)
|
|
$
|
(85,246
|
)
|
|
$
|
(587,814
|
)
|
|
$
|
2,128,497
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47,461
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47,461
|
|
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,189
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,189
|
)
|
|
Employee stock options/other
|
1,036
|
|
|
—
|
|
|
—
|
|
|
1,036
|
|
|
14,594
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,630
|
|
|
Stock awards
|
56
|
|
|
—
|
|
|
—
|
|
|
56
|
|
|
(56
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,814
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,814
|
|
|
Tax payments associated with stock-based compensation awards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
Balance at May 31, 2019
|
120,350
|
|
|
(7,860
|
)
|
|
(24,264
|
)
|
|
$
|
120,350
|
|
|
$
|
775,693
|
|
|
$
|
1,981,795
|
|
|
$
|
(9,565
|
)
|
|
$
|
(85,246
|
)
|
|
$
|
(587,817
|
)
|
|
$
|
2,195,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, 2020 and 2019
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Grantor
Stock
Ownership
Trust
|
|
Treasury
Stock
|
|
Common Stock
|
|
Paid-in Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Grantor Stock
Ownership Trust
|
|
Treasury Stock
|
|
Total Stockholders’ Equity
|
|
Balance at November 30, 2019
|
121,593
|
|
|
(7,631
|
)
|
|
(24,356
|
)
|
|
$
|
121,593
|
|
|
$
|
793,954
|
|
|
$
|
2,157,183
|
|
|
$
|
(15,506
|
)
|
|
$
|
(82,758
|
)
|
|
$
|
(591,344
|
)
|
|
$
|
2,383,122
|
|
|
Cumulative effect of adoption of ASC 842
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,510
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,510
|
|
|
Reclassification of stranded tax effects (ASU 2018-02)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,643
|
|
|
(1,643
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
111,737
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
111,737
|
|
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,331
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,331
|
)
|
|
Employee stock options/other
|
709
|
|
|
—
|
|
|
—
|
|
|
709
|
|
|
7,695
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,404
|
|
|
Stock awards
|
68
|
|
|
314
|
|
|
(15
|
)
|
|
68
|
|
|
(3,080
|
)
|
|
—
|
|
|
—
|
|
|
3,399
|
|
|
(387
|
)
|
|
—
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,131
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,131
|
|
|
Tax payments associated with stock-based compensation awards
|
—
|
|
|
—
|
|
|
(155
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,219
|
)
|
|
(6,219
|
)
|
|
Balance at May 31, 2020
|
122,370
|
|
|
(7,317
|
)
|
|
(24,526
|
)
|
|
$
|
122,370
|
|
|
$
|
806,700
|
|
|
$
|
2,255,742
|
|
|
$
|
(17,149
|
)
|
|
$
|
(79,359
|
)
|
|
$
|
(597,950
|
)
|
|
$
|
2,490,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2018
|
119,196
|
|
|
(8,157
|
)
|
|
(24,113
|
)
|
|
$
|
119,196
|
|
|
$
|
753,570
|
|
|
$
|
1,897,168
|
|
|
$
|
(9,565
|
)
|
|
$
|
(88,472
|
)
|
|
$
|
(584,397
|
)
|
|
$
|
2,087,500
|
|
|
Cumulative effect of adoption of ASC 606
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,610
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,610
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
77,472
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
77,472
|
|
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,455
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,455
|
)
|
|
Employee stock options/other
|
1,098
|
|
|
—
|
|
|
—
|
|
|
1,098
|
|
|
15,364
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,462
|
|
|
Stock awards
|
56
|
|
|
297
|
|
|
(4
|
)
|
|
56
|
|
|
(3,207
|
)
|
|
—
|
|
|
—
|
|
|
3,226
|
|
|
(75
|
)
|
|
—
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,966
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,966
|
|
|
Tax payments associated with stock-based compensation awards
|
—
|
|
|
—
|
|
|
(147
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,345
|
)
|
|
(3,345
|
)
|
|
Balance at May 31, 2019
|
120,350
|
|
|
(7,860
|
)
|
|
(24,264
|
)
|
|
$
|
120,350
|
|
|
$
|
775,693
|
|
|
$
|
1,981,795
|
|
|
$
|
(9,565
|
)
|
|
$
|
(85,246
|
)
|
|
$
|
(587,817
|
)
|
|
$
|
2,195,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 20, 2020, the management development and compensation committee of our board of directors approved the payout of 313,246 shares of our common stock in connection with the vesting of PSUs that were granted to certain employees on October 6, 2016. The shares paid out under the PSUs reflected our achievement of certain performance measures that were based on cumulative earnings per share, average return on invested capital, and revenue growth relative to a peer group of high-production public homebuilding companies over the three-year period from December 1, 2016 through November 30, 2019. Of the shares of common stock paid out, 155,307 shares or $6.2 million, were purchased by us in the 2020 first quarter to satisfy the recipients’ withholding taxes on the vesting of the PSUs. The shares purchased were not considered repurchases under the authorizations described below.
As of May 31, 2020, we were authorized to repurchase 2,193,947 shares of our common stock under a board of directors approved share repurchase program. We did not repurchase any of our common stock under this program in the six months ended May 31, 2020.
Unrelated to the share repurchase program, our board of directors authorized in 2014 the repurchase of not more than 680,000 shares of our outstanding common stock, and also authorized potential future grants of up to 680,000 stock payment awards under the KB Home 2014 Equity Incentive Plan (“2014 Plan”), in each case solely as necessary for director elections in respect of outstanding stock appreciation rights awards granted under our Non-Employee Directors Compensation Plan. The 2014 Plan was amended in April 2016. As of May 31, 2020, we have not repurchased any shares and no stock payment awards have been granted under the 2014 Plan, as amended, pursuant to the respective board of directors’ authorizations.
During the three-month periods ended May 31, 2020 and 2019, our board of directors declared, and we paid, quarterly cash dividends on our common stock of $.090 per share and $.025 per share, respectively. Quarterly cash dividends declared and paid during the six-month periods ended May 31, 2020 and 2019 totaled $.180 per share and $.050 per share of common stock, respectively.
|
|
|
|
20.
|
Stock-Based Compensation
|
Stock Options. We estimate the grant-date fair value of stock options using the Black-Scholes option-pricing model. The following table summarizes stock option transactions for the six months ended May 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average Exercise
Price
|
|
Options outstanding at beginning of period
|
4,163,481
|
|
|
$
|
13.00
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Exercised
|
(708,372
|
)
|
|
11.77
|
|
|
Cancelled
|
(6,000
|
)
|
|
45.16
|
|
|
Options outstanding at end of period
|
3,449,109
|
|
|
$
|
13.20
|
|
|
Options exercisable at end of period
|
3,449,109
|
|
|
$
|
13.20
|
|
We have not granted any new stock option awards since 2016. As of May 31, 2020, stock options outstanding and stock options exercisable each had a weighted average remaining contractual life of 4.2 years. At May 31, 2020, there was no unrecognized compensation expense related to stock option awards as all of these awards were fully vested. For the three-month and six-month periods ended May 31, 2020, there was no stock-based compensation expense associated with stock options. For the three-month and six-month periods ended May 31, 2019, stock-based compensation expense associated with stock options was nominal. Stock options outstanding and stock options exercisable each had an aggregate intrinsic value of $68.6 million at May 31, 2020. (The intrinsic value of a stock option is the amount by which the market value of a share of the underlying common stock exceeds the exercise price of the stock option.)
Other Stock-Based Awards. From time to time, we grant restricted stock and PSUs to various employees as a compensation benefit. We recognized total compensation expense of $3.1 million and $5.8 million for the three months ended May 31, 2020 and 2019, respectively, related to restricted stock and PSUs. For the six months ended May 31, 2020 and 2019, we recognized total compensation expense of $8.1 million and $9.9 million, respectively, related to restricted stock and PSUs.
|
|
|
|
21.
|
Supplemental Disclosure to Consolidated Statements of Cash Flows
|
The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
Summary of cash and cash equivalents at end of period:
|
|
|
|
|
Homebuilding
|
$
|
575,006
|
|
|
$
|
178,876
|
|
|
Financial services
|
1,027
|
|
|
888
|
|
|
Total
|
$
|
576,033
|
|
|
$
|
179,764
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
Interest paid, net of amounts capitalized
|
$
|
249
|
|
|
$
|
(2,809
|
)
|
|
Income taxes paid
|
1,078
|
|
|
3,163
|
|
|
Supplemental disclosures of non-cash activities:
|
|
|
|
|
Reclassification of federal tax refund from deferred tax assets to receivables
|
$
|
82,617
|
|
|
$
|
—
|
|
|
Increase in operating lease right-of-use assets and lease liabilities due to adoption of ASC 842
|
31,199
|
|
|
—
|
|
|
Inventories acquired through seller financing
|
18,045
|
|
|
—
|
|
|
Decrease in consolidated inventories not owned
|
(10,414
|
)
|
|
(16,262
|
)
|
|
Increase in inventories due to distributions of land and land development from an unconsolidated joint venture
|
5,360
|
|
|
3,983
|
|
|
Decrease in inventories due to adoption of ASC 606
|
—
|
|
|
(35,288
|
)
|
|
Increase in property and equipment, net due to adoption of ASC 606
|
—
|
|
|
31,194
|
|
|
|
|
|
22.
|
Supplemental Guarantor Information
|
Our obligations to pay principal, premium, if any, and interest on the senior notes and borrowings, if any, under the Credit Facility are guaranteed on a joint and several basis by certain of our subsidiaries (“Guarantor Subsidiaries”). The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by us. Pursuant to the terms of the indenture governing the senior notes and the terms of the Credit Facility, if any of the Guarantor Subsidiaries ceases to be a “significant subsidiary” as defined by Rule 1-02 of Regulation S-X using a 5% rather than a 10% threshold (provided that the assets of our non-guarantor subsidiaries do not in the aggregate exceed 10% of an adjusted measure of our consolidated total assets), it will be automatically and unconditionally released and discharged from its guaranty of the senior notes and the Credit Facility so long as all guarantees by such Guarantor Subsidiary of any other of our or our subsidiaries’ indebtedness are terminated at or prior to the time of such release. We have determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented.
The supplemental financial information for all periods presented below reflects the relevant subsidiaries that were Guarantor Subsidiaries as of May 31, 2020.
Condensed Consolidating Statements of Operations (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2020
|
|
|
KB Home
Corporate
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
Total revenues
|
$
|
—
|
|
|
$
|
834,137
|
|
|
$
|
79,833
|
|
|
$
|
—
|
|
|
$
|
913,970
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
—
|
|
|
$
|
834,137
|
|
|
$
|
76,143
|
|
|
$
|
—
|
|
|
$
|
910,280
|
|
|
Construction and land costs
|
—
|
|
|
(677,910
|
)
|
|
(66,543
|
)
|
|
—
|
|
|
(744,453
|
)
|
|
Selling, general and administrative expenses
|
(24,780
|
)
|
|
(83,470
|
)
|
|
(5,988
|
)
|
|
—
|
|
|
(114,238
|
)
|
|
Operating income (loss)
|
(24,780
|
)
|
|
72,757
|
|
|
3,612
|
|
|
—
|
|
|
51,589
|
|
|
Interest income
|
407
|
|
|
13
|
|
|
22
|
|
|
—
|
|
|
442
|
|
|
Interest expense
|
(29,541
|
)
|
|
(58
|
)
|
|
(1,456
|
)
|
|
31,055
|
|
|
—
|
|
|
Intercompany interest
|
79,978
|
|
|
(44,689
|
)
|
|
(4,234
|
)
|
|
(31,055
|
)
|
|
—
|
|
|
Equity in income of unconsolidated joint ventures
|
—
|
|
|
8,154
|
|
|
—
|
|
|
—
|
|
|
8,154
|
|
|
Homebuilding pretax income (loss)
|
26,064
|
|
|
36,177
|
|
|
(2,056
|
)
|
|
—
|
|
|
60,185
|
|
|
Financial services pretax income
|
—
|
|
|
—
|
|
|
7,604
|
|
|
—
|
|
|
7,604
|
|
|
Total pretax income
|
26,064
|
|
|
36,177
|
|
|
5,548
|
|
|
—
|
|
|
67,789
|
|
|
Income tax expense
|
(6,700
|
)
|
|
(7,800
|
)
|
|
(1,300
|
)
|
|
—
|
|
|
(15,800
|
)
|
|
Equity in net income of subsidiaries
|
32,625
|
|
|
—
|
|
|
—
|
|
|
(32,625
|
)
|
|
—
|
|
|
Net income
|
$
|
51,989
|
|
|
$
|
28,377
|
|
|
$
|
4,248
|
|
|
$
|
(32,625
|
)
|
|
$
|
51,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2019
|
|
|
KB Home
Corporate
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
Total revenues
|
$
|
—
|
|
|
$
|
932,945
|
|
|
$
|
88,858
|
|
|
$
|
—
|
|
|
$
|
1,021,803
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
—
|
|
|
$
|
932,945
|
|
|
$
|
85,726
|
|
|
$
|
—
|
|
|
$
|
1,018,671
|
|
|
Construction and land costs
|
—
|
|
|
(756,055
|
)
|
|
(87,689
|
)
|
|
—
|
|
|
(843,744
|
)
|
|
Selling, general and administrative expenses
|
(27,506
|
)
|
|
(97,590
|
)
|
|
2,268
|
|
|
—
|
|
|
(122,828
|
)
|
|
Operating income (loss)
|
(27,506
|
)
|
|
79,300
|
|
|
305
|
|
|
—
|
|
|
52,099
|
|
|
Interest income
|
395
|
|
|
—
|
|
|
44
|
|
|
—
|
|
|
439
|
|
|
Interest expense
|
(35,080
|
)
|
|
(134
|
)
|
|
(1,330
|
)
|
|
36,544
|
|
|
—
|
|
|
Intercompany interest
|
82,238
|
|
|
(42,578
|
)
|
|
(3,116
|
)
|
|
(36,544
|
)
|
|
—
|
|
|
Equity in loss of unconsolidated joint ventures
|
—
|
|
|
(369
|
)
|
|
—
|
|
|
—
|
|
|
(369
|
)
|
|
Homebuilding pretax income (loss)
|
20,047
|
|
|
36,219
|
|
|
(4,097
|
)
|
|
—
|
|
|
52,169
|
|
|
Financial services pretax income
|
—
|
|
|
—
|
|
|
4,592
|
|
|
—
|
|
|
4,592
|
|
|
Total pretax income
|
20,047
|
|
|
36,219
|
|
|
495
|
|
|
—
|
|
|
56,761
|
|
|
Income tax expense
|
(2,800
|
)
|
|
(3,000
|
)
|
|
(3,500
|
)
|
|
—
|
|
|
(9,300
|
)
|
|
Equity in net income of subsidiaries
|
30,214
|
|
|
—
|
|
|
—
|
|
|
(30,214
|
)
|
|
—
|
|
|
Net income (loss)
|
$
|
47,461
|
|
|
$
|
33,219
|
|
|
$
|
(3,005
|
)
|
|
$
|
(30,214
|
)
|
|
$
|
47,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, 2020
|
|
|
KB Home
Corporate
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
Total revenues
|
$
|
—
|
|
|
$
|
1,826,682
|
|
|
$
|
163,223
|
|
|
$
|
—
|
|
|
$
|
1,989,905
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
—
|
|
|
$
|
1,826,682
|
|
|
$
|
155,980
|
|
|
$
|
—
|
|
|
$
|
1,982,662
|
|
|
Construction and land costs
|
—
|
|
|
(1,493,468
|
)
|
|
(137,038
|
)
|
|
—
|
|
|
(1,630,506
|
)
|
|
Selling, general and administrative expenses
|
(52,430
|
)
|
|
(176,482
|
)
|
|
(11,460
|
)
|
|
—
|
|
|
(240,372
|
)
|
|
Operating income (loss)
|
(52,430
|
)
|
|
156,732
|
|
|
7,482
|
|
|
—
|
|
|
111,784
|
|
|
Interest income
|
1,291
|
|
|
12
|
|
|
74
|
|
|
—
|
|
|
1,377
|
|
|
Interest expense
|
(59,096
|
)
|
|
(58
|
)
|
|
(2,863
|
)
|
|
62,017
|
|
|
—
|
|
|
Intercompany interest
|
160,558
|
|
|
(90,525
|
)
|
|
(8,016
|
)
|
|
(62,017
|
)
|
|
—
|
|
|
Equity in income of unconsolidated joint ventures
|
—
|
|
|
10,059
|
|
|
—
|
|
|
—
|
|
|
10,059
|
|
|
Homebuilding pretax income (loss)
|
50,323
|
|
|
76,220
|
|
|
(3,323
|
)
|
|
—
|
|
|
123,220
|
|
|
Financial services pretax income
|
—
|
|
|
—
|
|
|
13,417
|
|
|
—
|
|
|
13,417
|
|
|
Total pretax income
|
50,323
|
|
|
76,220
|
|
|
10,094
|
|
|
—
|
|
|
136,637
|
|
|
Income tax expense
|
(9,800
|
)
|
|
(12,900
|
)
|
|
(2,200
|
)
|
|
—
|
|
|
(24,900
|
)
|
|
Equity in net income of subsidiaries
|
71,214
|
|
|
—
|
|
|
—
|
|
|
(71,214
|
)
|
|
—
|
|
|
Net income
|
$
|
111,737
|
|
|
$
|
63,320
|
|
|
$
|
7,894
|
|
|
$
|
(71,214
|
)
|
|
$
|
111,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, 2019
|
|
|
KB Home
Corporate
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
Total revenues
|
$
|
—
|
|
|
$
|
1,677,398
|
|
|
$
|
155,888
|
|
|
$
|
—
|
|
|
$
|
1,833,286
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
—
|
|
|
$
|
1,677,398
|
|
|
$
|
150,061
|
|
|
$
|
—
|
|
|
$
|
1,827,459
|
|
|
Construction and land costs
|
—
|
|
|
(1,367,096
|
)
|
|
(147,503
|
)
|
|
—
|
|
|
(1,514,599
|
)
|
|
Selling, general and administrative expenses
|
(52,888
|
)
|
|
(173,130
|
)
|
|
(3,404
|
)
|
|
—
|
|
|
(229,422
|
)
|
|
Operating income (loss)
|
(52,888
|
)
|
|
137,172
|
|
|
(846
|
)
|
|
—
|
|
|
83,438
|
|
|
Interest income
|
1,409
|
|
|
—
|
|
|
135
|
|
|
—
|
|
|
1,544
|
|
|
Interest expense
|
(68,275
|
)
|
|
(455
|
)
|
|
(2,602
|
)
|
|
71,332
|
|
|
—
|
|
|
Intercompany interest
|
160,210
|
|
|
(84,316
|
)
|
|
(4,562
|
)
|
|
(71,332
|
)
|
|
—
|
|
|
Equity in loss of unconsolidated joint ventures
|
—
|
|
|
(775
|
)
|
|
—
|
|
|
—
|
|
|
(775
|
)
|
|
Homebuilding pretax income (loss)
|
40,456
|
|
|
51,626
|
|
|
(7,875
|
)
|
|
—
|
|
|
84,207
|
|
|
Financial services pretax income
|
—
|
|
|
—
|
|
|
7,065
|
|
|
—
|
|
|
7,065
|
|
|
Total pretax income (loss)
|
40,456
|
|
|
51,626
|
|
|
(810
|
)
|
|
—
|
|
|
91,272
|
|
|
Income tax expense
|
(3,500
|
)
|
|
(6,400
|
)
|
|
(3,900
|
)
|
|
—
|
|
|
(13,800
|
)
|
|
Equity in net income of subsidiaries
|
40,516
|
|
|
—
|
|
|
—
|
|
|
(40,516
|
)
|
|
—
|
|
|
Net income (loss)
|
$
|
77,472
|
|
|
$
|
45,226
|
|
|
$
|
(4,710
|
)
|
|
$
|
(40,516
|
)
|
|
$
|
77,472
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheets (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2020
|
|
|
KB Home
Corporate
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
480,206
|
|
|
$
|
65,410
|
|
|
$
|
29,390
|
|
|
$
|
—
|
|
|
$
|
575,006
|
|
|
Receivables
|
83,709
|
|
|
167,965
|
|
|
61,254
|
|
|
—
|
|
|
312,928
|
|
|
Inventories
|
—
|
|
|
3,273,411
|
|
|
334,054
|
|
|
—
|
|
|
3,607,465
|
|
|
Investments in unconsolidated joint ventures
|
—
|
|
|
57,823
|
|
|
—
|
|
|
—
|
|
|
57,823
|
|
|
Property and equipment, net
|
27,136
|
|
|
35,328
|
|
|
3,300
|
|
|
—
|
|
|
65,764
|
|
|
Deferred tax assets, net
|
87,382
|
|
|
169,356
|
|
|
833
|
|
|
—
|
|
|
257,571
|
|
|
Other assets
|
98,866
|
|
|
20,687
|
|
|
7,035
|
|
|
—
|
|
|
126,588
|
|
|
|
777,299
|
|
|
3,789,980
|
|
|
435,866
|
|
|
—
|
|
|
5,003,145
|
|
|
Financial services
|
—
|
|
|
—
|
|
|
38,857
|
|
|
—
|
|
|
38,857
|
|
|
Intercompany receivables
|
3,510,856
|
|
|
—
|
|
|
199,368
|
|
|
(3,710,224
|
)
|
|
—
|
|
|
Investments in subsidiaries
|
129,869
|
|
|
—
|
|
|
—
|
|
|
(129,869
|
)
|
|
—
|
|
|
Total assets
|
$
|
4,418,024
|
|
|
$
|
3,789,980
|
|
|
$
|
674,091
|
|
|
$
|
(3,840,093
|
)
|
|
$
|
5,042,002
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities
|
$
|
137,402
|
|
|
$
|
343,519
|
|
|
$
|
302,340
|
|
|
$
|
—
|
|
|
$
|
783,261
|
|
|
Notes payable
|
1,716,558
|
|
|
24,871
|
|
|
25,110
|
|
|
—
|
|
|
1,766,539
|
|
|
|
1,853,960
|
|
|
368,390
|
|
|
327,450
|
|
|
—
|
|
|
2,549,800
|
|
|
Financial services
|
—
|
|
|
—
|
|
|
1,848
|
|
|
—
|
|
|
1,848
|
|
|
Intercompany payables
|
73,710
|
|
|
3,421,590
|
|
|
214,924
|
|
|
(3,710,224
|
)
|
|
—
|
|
|
Stockholders’ equity
|
2,490,354
|
|
|
—
|
|
|
129,869
|
|
|
(129,869
|
)
|
|
2,490,354
|
|
|
Total liabilities and stockholders’ equity
|
$
|
4,418,024
|
|
|
$
|
3,789,980
|
|
|
$
|
674,091
|
|
|
$
|
(3,840,093
|
)
|
|
$
|
5,042,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2019
|
|
|
KB Home
Corporate
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
357,966
|
|
|
$
|
65,434
|
|
|
$
|
30,414
|
|
|
$
|
—
|
|
|
$
|
453,814
|
|
|
Receivables
|
1,934
|
|
|
181,047
|
|
|
66,074
|
|
|
—
|
|
|
249,055
|
|
|
Inventories
|
—
|
|
|
3,400,307
|
|
|
304,295
|
|
|
—
|
|
|
3,704,602
|
|
|
Investments in unconsolidated joint ventures
|
—
|
|
|
57,038
|
|
|
—
|
|
|
—
|
|
|
57,038
|
|
|
Property and equipment, net
|
24,250
|
|
|
37,539
|
|
|
3,254
|
|
|
—
|
|
|
65,043
|
|
|
Deferred tax assets, net
|
96,301
|
|
|
237,877
|
|
|
30,315
|
|
|
—
|
|
|
364,493
|
|
|
Other assets
|
78,686
|
|
|
2,666
|
|
|
1,689
|
|
|
—
|
|
|
83,041
|
|
|
|
559,137
|
|
|
3,981,908
|
|
|
436,041
|
|
|
—
|
|
|
4,977,086
|
|
|
Financial services
|
—
|
|
|
—
|
|
|
38,396
|
|
|
—
|
|
|
38,396
|
|
|
Intercompany receivables
|
3,624,081
|
|
|
—
|
|
|
186,022
|
|
|
(3,810,103
|
)
|
|
—
|
|
|
Investments in subsidiaries
|
115,753
|
|
|
—
|
|
|
—
|
|
|
(115,753
|
)
|
|
—
|
|
|
Total assets
|
$
|
4,298,971
|
|
|
$
|
3,981,908
|
|
|
$
|
660,459
|
|
|
$
|
(3,925,856
|
)
|
|
$
|
5,015,482
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities
|
$
|
139,137
|
|
|
$
|
453,929
|
|
|
$
|
288,489
|
|
|
$
|
—
|
|
|
$
|
881,555
|
|
|
Notes payable
|
1,715,748
|
|
|
7,889
|
|
|
25,110
|
|
|
—
|
|
|
1,748,747
|
|
|
|
1,854,885
|
|
|
461,818
|
|
|
313,599
|
|
|
—
|
|
|
2,630,302
|
|
|
Financial services
|
—
|
|
|
—
|
|
|
2,058
|
|
|
—
|
|
|
2,058
|
|
|
Intercompany payables
|
60,964
|
|
|
3,520,090
|
|
|
229,049
|
|
|
(3,810,103
|
)
|
|
—
|
|
|
Stockholders’ equity
|
2,383,122
|
|
|
—
|
|
|
115,753
|
|
|
(115,753
|
)
|
|
2,383,122
|
|
|
Total liabilities and stockholders’ equity
|
$
|
4,298,971
|
|
|
$
|
3,981,908
|
|
|
$
|
660,459
|
|
|
$
|
(3,925,856
|
)
|
|
$
|
5,015,482
|
|
Condensed Consolidating Statements of Cash Flows (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, 2020
|
|
|
KB Home
Corporate
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
Net cash provided by (used in) operating activities
|
$
|
(14,150
|
)
|
|
$
|
166,394
|
|
|
$
|
2,450
|
|
|
$
|
—
|
|
|
$
|
154,694
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Contributions to unconsolidated joint ventures
|
—
|
|
|
(3,586
|
)
|
|
—
|
|
|
—
|
|
|
(3,586
|
)
|
|
Return of investments in unconsolidated joint ventures
|
—
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
500
|
|
|
Purchases of property and equipment, net
|
(3,111
|
)
|
|
(9,714
|
)
|
|
(2,399
|
)
|
|
—
|
|
|
(15,224
|
)
|
|
Intercompany
|
153,647
|
|
|
—
|
|
|
—
|
|
|
(153,647
|
)
|
|
—
|
|
|
Net cash provided by (used in) investing activities
|
150,536
|
|
|
(12,800
|
)
|
|
(2,399
|
)
|
|
(153,647
|
)
|
|
(18,310
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Payments on mortgages and land contracts due to land sellers and other loans
|
—
|
|
|
(1,063
|
)
|
|
—
|
|
|
—
|
|
|
(1,063
|
)
|
|
Issuance of common stock under employee stock plans
|
8,404
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,404
|
|
|
Tax payments associated with stock-based compensation awards
|
(6,219
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,219
|
)
|
|
Payments of cash dividends
|
(16,331
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,331
|
)
|
|
Intercompany
|
—
|
|
|
(152,555
|
)
|
|
(1,092
|
)
|
|
153,647
|
|
|
—
|
|
|
Net cash used in financing activities
|
(14,146
|
)
|
|
(153,618
|
)
|
|
(1,092
|
)
|
|
153,647
|
|
|
(15,209
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
122,240
|
|
|
(24
|
)
|
|
(1,041
|
)
|
|
—
|
|
|
121,175
|
|
|
Cash and cash equivalents at beginning of period
|
357,966
|
|
|
65,434
|
|
|
31,458
|
|
|
—
|
|
|
454,858
|
|
|
Cash and cash equivalents at end of period
|
$
|
480,206
|
|
|
$
|
65,410
|
|
|
$
|
30,417
|
|
|
$
|
—
|
|
|
$
|
576,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, 2019
|
|
|
KB Home
Corporate
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Total
|
|
Net cash provided by (used in) operating activities
|
$
|
35,547
|
|
|
$
|
(308,291
|
)
|
|
$
|
92,410
|
|
|
$
|
—
|
|
|
$
|
(180,334
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Contributions to unconsolidated joint ventures
|
—
|
|
|
(4,245
|
)
|
|
—
|
|
|
—
|
|
|
(4,245
|
)
|
|
Return of investments in unconsolidated joint ventures
|
—
|
|
|
5,001
|
|
|
—
|
|
|
—
|
|
|
5,001
|
|
|
Proceeds from sale of building
|
—
|
|
|
5,804
|
|
|
—
|
|
|
—
|
|
|
5,804
|
|
|
Purchases of property and equipment, net
|
(3,241
|
)
|
|
(11,360
|
)
|
|
(7,663
|
)
|
|
—
|
|
|
(22,264
|
)
|
|
Intercompany
|
(196,595
|
)
|
|
—
|
|
|
—
|
|
|
196,595
|
|
|
—
|
|
|
Net cash used in investing activities
|
(199,836
|
)
|
|
(4,800
|
)
|
|
(7,663
|
)
|
|
196,595
|
|
|
(15,704
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
405,250
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
405,250
|
|
|
Payment of debt issuance costs
|
(5,209
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,209
|
)
|
|
Repayment of senior notes
|
(630,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(630,000
|
)
|
|
Borrowings under revolving credit facility
|
330,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
330,000
|
|
|
Repayments under revolving credit facility
|
(280,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(280,000
|
)
|
|
Payments on mortgages and land contracts due to land sellers and other loans
|
—
|
|
|
(28,020
|
)
|
|
—
|
|
|
—
|
|
|
(28,020
|
)
|
|
Issuance of common stock under employee stock plans
|
16,462
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,462
|
|
|
Tax payments associated with stock-based compensation awards
|
(3,345
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,345
|
)
|
|
Payments of cash dividends
|
(4,455
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,455
|
)
|
|
Intercompany
|
—
|
|
|
298,278
|
|
|
(101,683
|
)
|
|
(196,595
|
)
|
|
—
|
|
|
Net cash provided by (used in) financing activities
|
(171,297
|
)
|
|
270,258
|
|
|
(101,683
|
)
|
|
(196,595
|
)
|
|
(199,317
|
)
|
|
Net decrease in cash and cash equivalents
|
(335,586
|
)
|
|
(42,833
|
)
|
|
(16,936
|
)
|
|
—
|
|
|
(395,355
|
)
|
|
Cash and cash equivalents at beginning of period
|
429,977
|
|
|
114,269
|
|
|
30,873
|
|
|
—
|
|
|
575,119
|
|
|
Cash and cash equivalents at end of period
|
$
|
94,391
|
|
|
$
|
71,436
|
|
|
$
|
13,937
|
|
|
$
|
—
|
|
|
$
|
179,764
|
|
|
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Results of Operations
OVERVIEW
Revenues are generated from our homebuilding and financial services operations. The following table presents a summary of our consolidated results of operations (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
Variance
|
|
2020
|
|
2019
|
|
Variance
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
$
|
910,280
|
|
|
$
|
1,018,671
|
|
|
(11)
|
%
|
|
$
|
1,982,662
|
|
|
$
|
1,827,459
|
|
|
8
|
%
|
|
Financial services
|
3,690
|
|
|
3,132
|
|
|
18
|
|
|
7,243
|
|
|
5,827
|
|
|
24
|
|
|
Total revenues
|
$
|
913,970
|
|
|
$
|
1,021,803
|
|
|
(11)
|
%
|
|
$
|
1,989,905
|
|
|
$
|
1,833,286
|
|
|
9
|
%
|
|
Pretax income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
$
|
60,185
|
|
|
$
|
52,169
|
|
|
15
|
%
|
|
$
|
123,220
|
|
|
$
|
84,207
|
|
|
46
|
%
|
|
Financial services
|
7,604
|
|
|
4,592
|
|
|
66
|
|
|
13,417
|
|
|
7,065
|
|
|
90
|
|
|
Total pretax income
|
67,789
|
|
|
56,761
|
|
|
19
|
|
|
136,637
|
|
|
91,272
|
|
|
50
|
|
|
Income tax expense
|
(15,800
|
)
|
|
(9,300
|
)
|
|
(70
|
)
|
|
(24,900
|
)
|
|
(13,800
|
)
|
|
(80
|
)
|
|
Net income
|
$
|
51,989
|
|
|
$
|
47,461
|
|
|
10
|
%
|
|
$
|
111,737
|
|
|
$
|
77,472
|
|
|
44
|
%
|
|
Basic earnings per share
|
$
|
.57
|
|
|
$
|
.54
|
|
|
6
|
%
|
|
$
|
1.23
|
|
|
$
|
.88
|
|
|
40
|
%
|
|
Diluted earnings per share
|
$
|
.55
|
|
|
$
|
.51
|
|
|
8
|
%
|
|
$
|
1.19
|
|
|
$
|
.82
|
|
|
45
|
%
|
During the 2020 first half, we, like many companies worldwide, experienced an extraordinary change in business conditions in mid-March that created a sharp difference in our results between the first and second quarters. Our 2020 first quarter was particularly strong, as we generated the highest revenues, net orders, ending backlog and ending backlog value for any first quarter since 2007 and increased our net income 99% year over year. We had positive momentum entering the 2020 second quarter with the number of homes in backlog at the beginning of the quarter (“beginning backlog”) up 26% year over year.
In mid-March 2020, however, the COVID-19 pandemic and related COVID-19 control responses in our served markets, including quarantines, “stay-at-home” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations, severely impacted housing market conditions during our second quarter and beyond. The unprecedented steep drop in employment and economic activity in March led the National Bureau of Economic Research to determine that the United States entered into, and continues to be in, a recession. In April, the national unemployment rate reached its highest level since the Great Depression, and the unemployment rates in the states where we operate surged. The extreme economic contraction from mid-March through May together with ongoing uncertainty about the virulence of COVID-19 and the availability of generally effective therapeutics or a vaccine, as well as the duration and parameters of COVID-19 control responses, created significant volatility in capital markets; disrupted secondary mortgage markets, in part due to CARES Act relief provisions for outstanding mortgage loans; weakened consumer confidence and decreased demand for new homes (including homes ordered in the first quarter) for most of our 2020 second quarter.
Beyond the significant negative economic impact, the COVID-19 control responses in our served markets substantially impacted our operations during the 2020 second quarter. With the health and well-being of our employees, customers and business partners, and their families, being a high priority, we took decisive actions in mid-March, temporarily closing our sales centers, model homes and design studios to the public and shifting to virtual sales tools and then an appointment-only personalized home sales process in April, where permitted. We also shifted our corporate and division office functions to work remotely. With our construction operations being restricted in many jurisdictions, and completely shut down in some of them, together with the reduced availability or capacity of some municipal and private services necessary to build and deliver homes, we experienced home delivery delays during most of the quarter. In addition, our order pace moderated significantly, and home purchase cancellations increased considerably, largely reflecting our proactive efforts to assure a backlog of qualified homebuyers amid the pandemic-induced economic downturn that affected homebuyers’ employment status or created uncertainty for them about that status and their ability to purchase their home, as well as disruptions in the availability of mortgage loans or in the performance of lenders, among other
factors. Many of the home purchase cancellations were on homes that had not yet been started, though about 20% were scheduled for delivery during the quarter. Among the markets with the largest impact to our second quarter net orders were the Inland Empire and Bay Area in California; Las Vegas, Nevada; Houston, Texas; and Orlando, Florida.
Very late in the second quarter, conditions started to improve in conjunction with state and local governments relaxing their COVID-19 control responses, including slightly better employment and consumer confidence levels. In the latter part of May, with restrictions easing in many of our served markets, we began to take steps to effectively resume nearly all of our operations, including more broadly opening our sales centers, model homes and design studios to the public, while also expanding construction and warranty service activities to the extent permitted by local authorities. We also launched significant enhancements to our website, including upgraded home search tools. Our reopening process is further described below under “Outlook.”
Given the tremendous challenges we faced, and continue to face, with the COVID-19 outbreak, including adapting to the various COVID-19 control responses and rapid economic downturn and related ongoing uncertainty about the near- and medium-term business environments, during the 2020 second quarter, we proceeded in a carefully targeted manner with land acquisition and land development, and focused on generating cash inflows from our business and preserving cash and liquidity by curtailing overhead expenditures, partly through workforce realignment and reductions that we expect will yield annualized savings of approximately $40 million allocated between construction and land costs and selling, general and administrative expenses. As a result, we recorded severance charges of $6.7 million within our selling, general and administrative expenses for the three months ended May 31, 2020.
The above-described impacts from the COVID-19 pandemic and the volatile economic, business and financial market conditions resulting therefrom, are expected to continue to negatively affect the housing market and our consolidated financial statements in the 2020 third and fourth quarters. Although we are uncertain of the potential full magnitude or duration of the business and economic impacts, we could experience material declines in our net orders, homes delivered, average selling prices, revenues, cash flow and/or profitability in the remainder of 2020 compared to the corresponding prior-year periods. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided below under Part II, Item 1A – Risk Factors. Though our operations have not been directly affected as of the date of this report, we are also monitoring potential impacts from weeks of widespread protests and civil unrest that started at the end of May related to efforts to institute law enforcement and other social and political reforms.
Financial and Operational Highlights. Reflecting the extremely difficult business environment described above, housing revenues for the 2020 second quarter decreased 11% from the year-earlier quarter due to a 10% decline in the number of homes delivered to 2,499 and a slight decrease in the overall average selling price to $364,100. Homebuilding operating income for the three months ended May 31, 2020 was down slightly year over year to $51.6 million. At the same time, homebuilding operating income as a percentage of related revenues improved 60 basis points to 5.7%. Excluding inventory-related charges of $4.4 million and the above-mentioned severance charges of $6.7 million in the current quarter and $4.3 million of inventory-related charges in the year-earlier quarter, this metric improved 140 basis points to 6.9%. Our housing gross profits for the quarter decreased compared to the year-earlier period, mainly due to lower housing revenues, partly offset by a 100-basis point improvement in our housing gross profit margin to 18.2%.
The year-over-year increase in our housing gross profit margin primarily reflected a shift in the mix of homes delivered and lower relative amortization of previously capitalized interest, partly offset by reduced operating leverage due to lower housing revenues. Our selling, general and administrative expense ratio increased 50 basis points to 12.6% of housing revenues, primarily due to the above-mentioned severance charges and decreased operating leverage from lower housing revenues, partly offset by reduced expenses for certain employee compensation plans. Excluding the current quarter severance charges, selling general and administrative expenses as a percentage of housing revenues were 11.8%.
The following table presents information concerning our net orders, cancellation rates, ending backlog and community count for the three-month and six-month periods ended May 31, 2020 and 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net orders
|
|
1,758
|
|
|
4,064
|
|
|
5,253
|
|
|
6,739
|
|
|
Net order value (a)
|
|
$
|
688,444
|
|
|
$
|
1,532,688
|
|
|
$
|
2,071,098
|
|
|
$
|
2,554,775
|
|
|
Cancellation rates (b)
|
|
43
|
%
|
|
15
|
%
|
|
27
|
%
|
|
17
|
%
|
|
Ending backlog — homes
|
|
5,080
|
|
|
5,927
|
|
|
5,080
|
|
|
5,927
|
|
|
Ending backlog — value
|
|
$
|
1,903,017
|
|
|
$
|
2,173,173
|
|
|
$
|
1,903,017
|
|
|
$
|
2,173,173
|
|
|
Ending community count
|
|
244
|
|
|
255
|
|
|
244
|
|
|
255
|
|
|
Average community count
|
|
247
|
|
|
252
|
|
|
248
|
|
|
248
|
|
|
|
|
|
(a)
|
Net order value represents the potential future housing revenues associated with net orders generated during the period, as well as homebuyer selections of lot and product premiums and design studio options and upgrades for homes in backlog during the same period.
|
|
|
|
|
(b)
|
Cancellation rates represent the total number of contracts for new homes cancelled during a period divided by the total (gross) orders for new homes generated during the same period.
|
Net Orders. Our second quarter has typically been our strongest quarter for net orders. However, the COVID-19 pandemic and associated COVID-19 control responses in our served markets negatively affected our gross orders, which decreased 36% year over year, and elevated our cancellation rate. As a result, for the three months ended May 31, 2020, net orders from our homebuilding operations fell 57% from the year-earlier period. Reflecting the progression of COVID-19 pandemic-related impacts, our gross orders for March and April 2020 decreased 4% and 59%, respectively, as compared to the corresponding months of 2019. We experienced steady improvement in our order trends beginning in May, which was further fueled by welcoming walk-in traffic to our communities. For May 2020, the year-over-year decrease in gross orders moderated to 42%, reflecting the easing of the COVID-19 control responses in our served markets and our gradual resumption of more normalized operations in the latter part of the month. Our 2020 net orders were down 10% in March, 107% in April and 55% in May, each as compared to the corresponding year-earlier period.
The year-over-year increase in our cancellation rate as a percentage of gross orders for the three months ended May 31, 2020 reflected monthly cancellation rates for March, April and May of 20%, 114% and 34%, respectively.
The value of our net orders for the three months ended May 31, 2020 was down 55% from the year-earlier period as a result of the decrease in net orders, partly offset by an increase in the overall average selling price of those orders. For the 2020 second quarter, our monthly net orders per community decreased to 2.4 from 5.4 in the 2019 second quarter.
While our year-over-year net order comparison continued to improve subsequent to the end of the quarter, as noted below under “Outlook,” the year-over-year decrease in our 2020 second quarter net orders is expected to reduce our year-over-year deliveries and revenues for the 2020 third and fourth quarters and full year.
Backlog. The number of homes in our backlog at May 31, 2020 decreased 14% from May 31, 2019, mainly due to lower gross order levels and elevated cancellation rates during the 2020 second quarter as our beginning backlog was up 26% year over year. The potential future housing revenues in our backlog at May 31, 2020 declined 12% from the prior-year period, reflecting the lower number of homes in our backlog, partly offset by a 2% increase in the overall average selling price of those homes.
Community Count. We use the term “community count” to refer to the number of communities with at least five homes/lots left to sell at the end of a reporting period. Our average community count for the 2020 second quarter declined 2% from the year-earlier period, reflecting decreases of 12% in our Southwest homebuilding reporting segment, 4% in our Central segment and 8% in our Southeast segment, partly offset by an increase of 12% in our West Coast segment. Our ending community count was down 4% from the prior-year quarter. The year-over-year decreases in our overall average and ending community counts primarily reflected a decline in the number of active communities that were previously classified as land held for future development, our moderated investments in land development in the 2020 second quarter, and delays in community openings due to the COVID-19 pandemic.
HOMEBUILDING
The following table presents a summary of certain financial and operational data for our homebuilding operations (dollars in thousands, except average selling price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Housing
|
$
|
909,978
|
|
|
$
|
1,017,799
|
|
|
$
|
1,981,788
|
|
|
$
|
1,815,970
|
|
|
Land
|
302
|
|
|
872
|
|
|
874
|
|
|
11,489
|
|
|
Total
|
910,280
|
|
|
1,018,671
|
|
|
1,982,662
|
|
|
1,827,459
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Construction and land costs
|
|
|
|
|
|
|
|
|
Housing
|
(744,151
|
)
|
|
(843,071
|
)
|
|
(1,629,632
|
)
|
|
(1,504,399
|
)
|
|
Land
|
(302
|
)
|
|
(673
|
)
|
|
(874
|
)
|
|
(10,200
|
)
|
|
Total
|
(744,453
|
)
|
|
(843,744
|
)
|
|
(1,630,506
|
)
|
|
(1,514,599
|
)
|
|
Selling, general and administrative expenses
|
(114,238
|
)
|
|
(122,828
|
)
|
|
(240,372
|
)
|
|
(229,422
|
)
|
|
Total
|
(858,691
|
)
|
|
(966,572
|
)
|
|
(1,870,878
|
)
|
|
(1,744,021
|
)
|
|
Operating income
|
$
|
51,589
|
|
|
$
|
52,099
|
|
|
$
|
111,784
|
|
|
$
|
83,438
|
|
|
Homes delivered
|
2,499
|
|
|
2,768
|
|
|
5,251
|
|
|
4,920
|
|
|
Average selling price
|
$
|
364,100
|
|
|
$
|
367,700
|
|
|
$
|
377,400
|
|
|
$
|
369,100
|
|
|
Housing gross profit margin as a percentage of housing revenues
|
18.2
|
%
|
|
17.2
|
%
|
|
17.8
|
%
|
|
17.2
|
%
|
|
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues
|
18.7
|
%
|
|
17.6
|
%
|
|
18.3
|
%
|
|
17.6
|
%
|
|
Adjusted housing gross profit margin as a percentage of housing revenues
|
21.9
|
%
|
|
21.3
|
%
|
|
21.5
|
%
|
|
21.3
|
%
|
|
Selling, general and administrative expenses as a percentage of housing revenues
|
12.6
|
%
|
|
12.1
|
%
|
|
12.1
|
%
|
|
12.6
|
%
|
|
Operating income as a percentage of homebuilding revenues
|
5.7
|
%
|
|
5.1
|
%
|
|
5.6
|
%
|
|
4.6
|
%
|
For reporting purposes, we organize our homebuilding operations into four segments — West Coast, Southwest, Central and Southeast. As of May 31, 2020, our homebuilding reporting segments consisted of ongoing operations located in the following states to the extent permitted by applicable public health orders as part of their respective COVID-19 control responses: West Coast — California and Washington; Southwest — Arizona and Nevada; Central — Colorado and Texas; and Southeast — Florida and North Carolina. The following tables present homes delivered, net orders, cancellation rates as a percentage of gross orders, net order value, average community count and ending backlog (number of homes and value) by homebuilding reporting segment (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
|
Homes Delivered
|
|
Net Orders
|
|
Cancellation Rates
|
|
Segment
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
West Coast
|
|
585
|
|
|
680
|
|
|
555
|
|
|
1,141
|
|
|
37
|
%
|
|
14
|
%
|
|
Southwest
|
|
552
|
|
|
566
|
|
|
305
|
|
|
768
|
|
|
50
|
|
|
10
|
|
|
Central
|
|
955
|
|
|
1,067
|
|
|
719
|
|
|
1,498
|
|
|
36
|
|
|
17
|
|
|
Southeast
|
|
407
|
|
|
455
|
|
|
179
|
|
|
657
|
|
|
61
|
|
|
19
|
|
|
Total
|
|
2,499
|
|
|
2,768
|
|
|
1,758
|
|
|
4,064
|
|
|
43
|
%
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
|
Net Order Value
|
|
Average Community Count
|
|
Segment
|
|
2020
|
|
2019
|
|
Variance
|
|
2020
|
|
2019
|
|
Variance
|
|
West Coast
|
|
$
|
324,936
|
|
|
$
|
664,431
|
|
|
(51)
|
%
|
|
75
|
|
|
67
|
|
|
12
|
%
|
|
Southwest
|
|
99,464
|
|
|
241,729
|
|
|
(59
|
)
|
|
37
|
|
|
42
|
|
|
(12
|
)
|
|
Central
|
|
212,445
|
|
|
438,302
|
|
|
(52
|
)
|
|
90
|
|
|
94
|
|
|
(4
|
)
|
|
Southeast
|
|
51,599
|
|
|
188,226
|
|
|
(73
|
)
|
|
45
|
|
|
49
|
|
|
(8
|
)
|
|
Total
|
|
$
|
688,444
|
|
|
$
|
1,532,688
|
|
|
(55)
|
%
|
|
247
|
|
|
252
|
|
|
(2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31,
|
|
|
|
Homes Delivered
|
|
Net Orders
|
|
Cancellation Rates
|
|
Segment
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
West Coast
|
|
1,379
|
|
|
1,177
|
|
|
1,534
|
|
|
1,840
|
|
|
23
|
%
|
|
17
|
%
|
|
Southwest
|
|
1,155
|
|
|
1,049
|
|
|
1,070
|
|
|
1,301
|
|
|
27
|
|
|
12
|
|
|
Central
|
|
1,923
|
|
|
1,891
|
|
|
1,936
|
|
|
2,424
|
|
|
25
|
|
|
20
|
|
|
Southeast
|
|
794
|
|
|
803
|
|
|
713
|
|
|
1,174
|
|
|
36
|
|
|
19
|
|
|
Total
|
|
5,251
|
|
|
4,920
|
|
|
5,253
|
|
|
6,739
|
|
|
27
|
%
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Order Value
|
|
Average Community Count
|
|
Segment
|
|
2020
|
|
2019
|
|
Variance
|
|
2020
|
|
2019
|
|
Variance
|
|
West Coast
|
|
$
|
923,352
|
|
|
$
|
1,084,892
|
|
|
(15)
|
%
|
|
75
|
|
|
64
|
|
|
17
|
%
|
|
Southwest
|
|
356,684
|
|
|
412,568
|
|
|
(14
|
)
|
|
38
|
|
|
40
|
|
|
(5
|
)
|
|
Central
|
|
585,926
|
|
|
722,568
|
|
|
(19
|
)
|
|
89
|
|
|
94
|
|
|
(5
|
)
|
|
Southeast
|
|
205,136
|
|
|
334,747
|
|
|
(39
|
)
|
|
46
|
|
|
50
|
|
|
(8
|
)
|
|
Total
|
|
$
|
2,071,098
|
|
|
$
|
2,554,775
|
|
|
(19)
|
%
|
|
248
|
|
|
248
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
Backlog – Homes
|
|
Backlog – Value
|
|
Segment
|
|
2020
|
|
2019
|
|
Variance
|
|
2020
|
|
2019
|
|
Variance
|
|
West Coast
|
|
1,198
|
|
|
1,378
|
|
|
(13)
|
%
|
|
$
|
705,357
|
|
|
$
|
806,651
|
|
|
(13)
|
%
|
|
Southwest
|
|
1,153
|
|
|
1,178
|
|
|
(2
|
)
|
|
380,454
|
|
|
372,699
|
|
|
2
|
|
|
Central
|
|
2,001
|
|
|
2,247
|
|
|
(11
|
)
|
|
609,156
|
|
|
669,037
|
|
|
(9
|
)
|
|
Southeast
|
|
728
|
|
|
1,124
|
|
|
(35
|
)
|
|
208,050
|
|
|
324,786
|
|
|
(36
|
)
|
|
Total
|
|
5,080
|
|
|
5,927
|
|
|
(14)
|
%
|
|
$
|
1,903,017
|
|
|
$
|
2,173,173
|
|
|
(12)
|
%
|
Revenues. Homebuilding revenues for the three months ended May 31, 2020 decreased 11% from the year-earlier period primarily due to a decline in housing revenues.
Housing revenues for the three months ended May 31, 2020 declined 11% year over year, reflecting a 10% decrease in the number of homes delivered and a slight decrease in the overall average selling price of those homes. While the number of homes in our beginning backlog was up 26% compared to the year-earlier period, we delivered fewer homes in the quarter due to the COVID-19 pandemic and associated COVID-19 control responses, which resulted in increased home purchase cancellations and delayed deliveries, as discussed above under “Overview.”
Land sale revenues for the quarter ended May 31, 2020 totaled $.3 million, compared to $.9 million in the year-earlier quarter. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, our business strategy, the strength and number of developers and other land buyers in
particular markets at given points in time, the availability of opportunities to sell land at acceptable prices and prevailing market conditions.
Homebuilding revenues for the six months ended May 31, 2020, which included our strong 2020 first quarter performance, grew 9% year over year to $1.98 billion, reflecting an increase in housing revenues, partly offset by a decrease in land sale revenues. Housing revenues for the six months ended May 31, 2020 grew as a result of a 7% increase in the number of homes delivered and a 2% rise in the overall average selling price to $377,400.
Land sale revenues totaled $.9 million for the six months ended May 31, 2020 and $11.5 million for the six months ended May 31, 2019, reflecting the factors discussed above with respect to our 2020 second quarter land sale revenues.
Operating Income. Our homebuilding operating income for the three months ended May 31, 2020 was essentially flat compared to the year-earlier period. Homebuilding operating income for the 2020 second quarter included total inventory-related charges of $4.4 million, which were comprised of land option contract abandonment charges primarily related to one land option contract in Texas, and severance charges of $6.7 million. The severance charges were associated with workforce reductions made during the quarter that we expect will yield annualized savings of approximately $40 million allocated between construction and land costs and selling, general and administrative expenses. In the 2019 second quarter, homebuilding operating income included total inventory-related charges of $4.3 million. As a percentage of homebuilding revenues, our homebuilding operating income for the three months ended May 31, 2020 increased 60 basis points year over year to 5.7%. Excluding inventory-related charges in both periods and severance charges in the current period, our homebuilding operating income margin improved 140 basis points to 6.9% for the 2020 second quarter compared to 5.5% for the year-earlier quarter.
For the six months ended May 31, 2020, our homebuilding operating income increased 34% from the prior-year period, largely reflecting the operating income we generated in the 2020 first quarter. Homebuilding operating income for the 2020 first half included total inventory-related charges of $10.1 million, compared to $7.9 million of such charges in the corresponding 2019 period. As a percentage of homebuilding revenues, our homebuilding operating income for the six months ended May 31, 2020 improved 100 basis points year over year to 5.6%. Excluding inventory-related charges for both periods and the above-mentioned severance charges in the 2020 period, our homebuilding operating income margin was 6.5% for the six months ended May 31, 2020 and 5.0% for the six months ended May 31, 2019.
The year-over-year change in our homebuilding operating income for the three months ended May 31, 2020 largely reflected lower housing gross profits, offset by lower selling, general and administrative expenses. For the six months ended May 31, 2020, the year-over-year growth in our homebuilding operating income was primarily due to an increase in housing gross profits, partly offset by higher selling, general and administrative expenses.
Housing gross profits of $165.8 million for the three months ended May 31, 2020 declined 5% from $174.7 million for the year-earlier period, reflecting a decrease in housing revenues, partly offset by an increase in our housing gross profit margin. Our housing gross profit margin for the 2020 second quarter rose 100 basis points year over year to 18.2%, mainly due to the favorable impacts of lower construction and land costs (approximately 100 basis points) primarily reflecting a shift in the mix of homes delivered, and lower amortization of previously capitalized interest as a percentage of housing revenues (approximately 50 basis points). These items were partly offset by reduced operating leverage due to lower housing revenues (approximately 50 basis points).
We incur interest principally from our borrowings to finance land acquisitions, land development, home construction and other operating and capital needs. Interest incurred totaled $31.1 million for the three months ended May 31, 2020, decreasing from $36.5 million for the year-earlier period, mainly due to our lower average debt level. All interest incurred during the three-month periods ended May 31, 2020 and 2019 was capitalized, due to the average amount of our inventory qualifying for interest capitalization exceeding our average debt level for each period. As a result, we had no interest expense for these periods.
Interest amortized to construction and land costs associated with housing operations was $28.7 million and $37.7 million for the three-month periods ended May 31, 2020 and 2019, respectively. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 3.2% and 3.7% for the three months ended May 31, 2020 and 2019, respectively.
Excluding the amortization of previously capitalized interest associated with housing operations and the above-mentioned inventory-related charges for the three months ended May 31, 2020 and 2019, our adjusted housing gross profit margin increased 60 basis points from the year-earlier quarter to 21.9%. The calculation of adjusted housing gross profit margin, which we believe provides a clearer measure of the performance of our business, is described below under “Non-GAAP Financial Measures.”
Selling, general and administrative expenses for the 2020 second quarter decreased 7% from the year-earlier quarter, mainly due to the lower volume of homes delivered and reduced expenses associated with certain employee compensation plans, partly offset
by severance charges of $6.7 million. As a percentage of housing revenues, our selling, general and administrative expenses increased 50 basis points, largely as a result of decreased operating leverage due to lower housing revenues as compared to the year-earlier quarter. Excluding the current period severance charges, selling, general and administrative expenses as a percentage of revenues for the 2020 second quarter improved by 30 basis points from the year-earlier quarter to 11.8%.
Our housing gross profits of $352.2 million for the six months ended May 31, 2020 increased from $311.6 million for the year-earlier period. Housing gross profits for the 2020 first half included $10.1 million of inventory-related charges, compared to $7.9 million of such charges in the year-earlier period. Our housing gross profit margin of 17.8% for the six months ended May 31, 2020 increased 60 basis points year over year, primarily due to lower amortization of previously capitalized interest as a percentage of housing revenues.
For the six months ended May 31, 2020, interest incurred decreased to $62.0 million from $71.3 million for the year-earlier period, primarily due to our lower average debt level. All interest incurred during the six-month periods ended May 31, 2020 and 2019 was capitalized as the average amount of our inventory qualifying for interest capitalization was higher than our average debt level for the period.
Interest amortized to construction and land costs associated with housing operations was $63.3 million for the six months ended May 31, 2020 and $67.7 million for the six months ended May 31, 2019. As a percentage of housing revenues, the amortization of previously capitalized interest associated with housing operations was 3.2% and 3.7% for the six months ended May 31, 2020 and 2019, respectively.
Excluding the amortization of previously capitalized interest associated with housing operations and the above-mentioned inventory-related charges in the six months ended May 31, 2020 and 2019, our adjusted housing gross profit margin increased 20 basis points from the year-earlier period to 21.5%.
Selling, general and administrative expenses for the 2020 first half increased to $240.4 million from $229.4 million for the year-earlier period, mainly due to the above-mentioned severance charges recorded in the 2020 second quarter and the higher volume of homes delivered in the first half of the year. As a percentage of housing revenues, selling, general and administrative expenses improved 50 basis points from the prior-year period to 12.1%, largely as a result of increased operating leverage due to higher housing revenues as compared to the year-earlier period.
Land sales generated break-even results for the six months ended May 31, 2020, compared to profits of $1.3 million for the year-earlier period.
Interest Income. Interest income, which is generated from short-term investments, was $.4 million for each of the three-month periods ended May 31, 2020 and 2019. For the six-month periods ended May 31, 2020 and 2019, our interest income totaled $1.4 million and $1.5 million, respectively. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and fluctuations in interest rates.
Equity in Income (Loss) of Unconsolidated Joint Ventures. Our equity in income of unconsolidated joint ventures was $8.2 million for the three months ended May 31, 2020, compared to equity in loss of unconsolidated joint ventures of $.4 million for the three months ended May 31, 2019. For the six months ended May 31, 2020, our equity in income of unconsolidated joint ventures was $10.1 million, compared to equity in loss unconsolidated joint ventures of $.8 million for the corresponding 2019 period. The improved results in both periods of 2020 primarily reflected 53 homes and 73 homes delivered from an unconsolidated joint venture in California during the three months and six months ended May 31, 2020, respectively, compared to no homes delivered from unconsolidated joint ventures in the corresponding 2019 periods.
Further information regarding our investments in unconsolidated joint ventures is provided in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report.
NON-GAAP FINANCIAL MEASURES
This report contains information about our adjusted housing gross profit margin and ratio of net debt to capital, neither of which is calculated in accordance with GAAP. We believe these non-GAAP financial measures are relevant and useful to investors in understanding our operations and the leverage employed in our operations, and may be helpful in comparing us with other companies in the homebuilding industry to the extent they provide similar information. However, because they are not calculated in accordance with GAAP, these non-GAAP financial measures may not be completely comparable to other companies in the homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, these non-GAAP financial measures should be used to supplement their respective most directly comparable GAAP financial measures in order to provide a greater understanding of the factors and trends affecting our operations.
Adjusted Housing Gross Profit Margin. The following table reconciles our housing gross profit margin calculated in accordance with GAAP to the non-GAAP financial measure of our adjusted housing gross profit margin (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Housing revenues
|
$
|
909,978
|
|
|
$
|
1,017,799
|
|
|
$
|
1,981,788
|
|
|
$
|
1,815,970
|
|
|
Housing construction and land costs
|
(744,151
|
)
|
|
(843,071
|
)
|
|
(1,629,632
|
)
|
|
(1,504,399
|
)
|
|
Housing gross profits
|
165,827
|
|
|
174,728
|
|
|
352,156
|
|
|
311,571
|
|
|
Add: Inventory-related charges (a)
|
4,379
|
|
|
4,337
|
|
|
10,051
|
|
|
7,892
|
|
|
Housing gross profits excluding inventory-related charges
|
170,206
|
|
|
179,065
|
|
|
362,207
|
|
|
319,463
|
|
|
Add: Amortization of previously capitalized interest (b)
|
28,746
|
|
|
37,716
|
|
|
63,321
|
|
|
67,702
|
|
|
Adjusted housing gross profits
|
$
|
198,952
|
|
|
$
|
216,781
|
|
|
$
|
425,528
|
|
|
$
|
387,165
|
|
|
Housing gross profit margin as a percentage of housing revenues
|
18.2
|
%
|
|
17.2
|
%
|
|
17.8
|
%
|
|
17.2
|
%
|
|
Housing gross profit margin excluding inventory-related charges as a percentage of housing revenues
|
18.7
|
%
|
|
17.6
|
%
|
|
18.3
|
%
|
|
17.6
|
%
|
|
Adjusted housing gross profit margin as a percentage of housing revenues
|
21.9
|
%
|
|
21.3
|
%
|
|
21.5
|
%
|
|
21.3
|
%
|
|
|
|
|
(a)
|
Represents inventory impairment and land option contract abandonment charges associated with housing operations.
|
|
|
|
|
(b)
|
Represents the amortization of previously capitalized interest associated with housing operations.
|
Adjusted housing gross profit margin is a non-GAAP financial measure, which we calculate by dividing housing revenues less housing construction and land costs excluding (1) housing inventory impairment and land option contract abandonment charges (as applicable) recorded during a given period and (2) amortization of previously capitalized interest associated with housing operations, by housing revenues. The most directly comparable GAAP financial measure is housing gross profit margin. We believe adjusted housing gross profit margin is a relevant and useful financial measure to investors in evaluating our performance as it measures the gross profits we generated specifically on the homes delivered during a given period. This non-GAAP financial measure isolates the impact that the housing inventory impairment and land option contract abandonment charges, and the amortization of previously capitalized interest associated with housing operations, have on housing gross profit margins, and allows investors to make comparisons with our competitors that adjust housing gross profit margins in a similar manner. We also believe investors will find adjusted housing gross profit margin relevant and useful because it represents a profitability measure that may be compared to a prior period without regard to variability of housing inventory impairment and land option contract abandonment charges, and amortization of previously capitalized interest associated with housing operations. This financial measure assists us in making strategic decisions regarding community location and product mix, product pricing and construction pace.
Ratio of Net Debt to Capital. The following table reconciles our ratio of debt to capital calculated in accordance with GAAP to the non-GAAP financial measure of our ratio of net debt to capital (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
November 30,
2019
|
|
Notes payable
|
$
|
1,766,539
|
|
|
$
|
1,748,747
|
|
|
Stockholders’ equity
|
2,490,354
|
|
|
2,383,122
|
|
|
Total capital
|
$
|
4,256,893
|
|
|
$
|
4,131,869
|
|
|
Ratio of debt to capital
|
41.5
|
%
|
|
42.3
|
%
|
|
|
|
|
|
|
Notes payable
|
$
|
1,766,539
|
|
|
$
|
1,748,747
|
|
|
Less: Cash and cash equivalents
|
(575,006
|
)
|
|
(453,814
|
)
|
|
Net debt
|
1,191,533
|
|
|
1,294,933
|
|
|
Stockholders’ equity
|
2,490,354
|
|
|
2,383,122
|
|
|
Total capital
|
$
|
3,681,887
|
|
|
$
|
3,678,055
|
|
|
Ratio of net debt to capital
|
32.4
|
%
|
|
35.2
|
%
|
The ratio of net debt to capital is a non-GAAP financial measure, which we calculate by dividing notes payable, net of homebuilding cash and cash equivalents, by capital (notes payable, net of homebuilding cash and cash equivalents, plus stockholders’ equity). The most directly comparable GAAP financial measure is the ratio of debt to capital. We believe the ratio of net debt to capital is a relevant and useful financial measure to investors in understanding the degree of leverage employed in our operations.
HOMEBUILDING REPORTING SEGMENTS
Below is a discussion of the financial results of each of our homebuilding reporting segments. Further information regarding these segments, including their pretax income (loss), is included in Note 2 – Segment Information in the Notes to Consolidated Financial Statements in this report. The difference between each homebuilding reporting segment’s operating income (loss) and pretax income (loss) is generally due to the equity in income (loss) of unconsolidated joint ventures and/or interest income and expense.
The financial results for each of our homebuilding reporting segments for the three months and six months ended May 31, 2020 were negatively affected by the impacts from the COVID-19 pandemic, as discussed above under “Overview.” In each of our homebuilding reporting segments, we had lower net orders and delivered fewer homes in the 2020 second quarter compared to the year-earlier quarter. In addition, compared to the 2020 first quarter, net orders decreased in each of our homebuilding reporting segments and we delivered a reduced volume of homes in three of our four segments.
West Coast. The following table presents financial information related to our West Coast segment for the periods indicated (dollars in thousands, except average selling price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
Variance
|
|
2020
|
|
2019
|
|
Variance
|
|
Revenues
|
$
|
331,882
|
|
|
$
|
391,264
|
|
|
(15
|
) %
|
|
$
|
816,379
|
|
|
$
|
697,074
|
|
|
17
|
%
|
|
Construction and land costs
|
(282,454
|
)
|
|
(335,105
|
)
|
|
16
|
|
|
(699,111
|
)
|
|
(594,118
|
)
|
|
(18
|
)
|
|
Selling, general and administrative expenses
|
(29,919
|
)
|
|
(31,182
|
)
|
|
4
|
|
|
(65,773
|
)
|
|
(59,903
|
)
|
|
(10
|
)
|
|
Operating income
|
$
|
19,509
|
|
|
$
|
24,977
|
|
|
(22
|
) %
|
|
$
|
51,495
|
|
|
$
|
43,053
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes delivered
|
585
|
|
|
680
|
|
|
(14
|
) %
|
|
1,379
|
|
|
1,177
|
|
|
17
|
%
|
|
Average selling price
|
$
|
567,200
|
|
|
$
|
574,800
|
|
|
(1
|
) %
|
|
$
|
591,900
|
|
|
$
|
588,600
|
|
|
1
|
%
|
|
Housing gross profit margin
|
14.9
|
%
|
|
14.4
|
%
|
|
50
|
bps
|
|
14.4
|
%
|
|
14.9
|
%
|
|
(50
|
)bps
|
This segment’s revenues for the three months and six months ended May 31, 2020 and 2019 were generated from both housing operations and land sales. Housing revenues for the 2020 second quarter declined 15% year over year to $331.8 million from $390.9 million, reflecting a lower number of homes delivered and a slight decrease in the average selling price of those homes.
For the six months ended May 31, 2020, housing revenues increased 18% to $816.3 million from $692.8 million for the year-earlier period due to a higher number of homes delivered and a slight increase in the average selling price of those homes.
Operating income for the three months ended May 31, 2020 declined from the year-earlier period, reflecting a decrease in housing gross profits, partly offset by lower selling, general and administrative expenses. The year-over-year decrease in housing gross profits reflected lower housing revenues, partially offset by an increase in the housing gross profit margin. The improvement in the housing gross profit margin was primarily driven by decreases in both inventory-related charges and amortization of previously capitalized interest as a percentage of housing revenues, partly offset by reduced operating leverage due to lower housing revenues. Inventory-related charges totaled $.7 million in the 2020 second quarter, compared to $3.8 million in the year-earlier quarter. Selling, general and administrative expenses as a percentage of housing revenues for the 2020 second quarter increased from the year-earlier quarter largely due to reduced operating leverage as a result of lower housing revenues.
For the six months ended May 31, 2020, operating income grew 20% from the year-earlier period reflecting an increase in housing gross profits, partly offset by an increase in selling, general and administrative expenses. The year-over-year growth in housing gross profits reflected an increase in housing revenues that was partially offset by a decrease in the housing gross profit margin. The decline in the housing gross profit margin was primarily due to an increase in construction and land costs as a percentage of housing revenues mainly as a result of a mix shift of homes delivered, partly offset by lower inventory-related charges and amortization of previously capitalized interest as a percentage of housing revenues, and improved operating leverage due to higher housing revenues. Inventory-related charges impacting the housing gross profit margin totaled $5.1 million and $7.1 million for the six-month periods ended May 31, 2020 and 2019, respectively. Selling, general and administrative expenses as a percentage of housing revenues for the 2020 first half improved from the corresponding 2019 period, primarily due to increased operating leverage as a result of higher housing revenues.
Southwest. The following table presents financial information related to our Southwest segment for the periods indicated (dollars in thousands, except average selling price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
Variance
|
|
2020
|
|
2019
|
|
Variance
|
|
Revenues
|
$
|
175,251
|
|
|
$
|
184,827
|
|
|
(5
|
) %
|
|
$
|
366,569
|
|
|
$
|
342,483
|
|
|
7
|
%
|
|
Construction and land costs
|
(133,742
|
)
|
|
(140,592
|
)
|
|
5
|
|
|
(276,641
|
)
|
|
(261,810
|
)
|
|
(6
|
)
|
|
Selling, general and administrative expenses
|
(16,463
|
)
|
|
(16,059
|
)
|
|
(3
|
)
|
|
(32,632
|
)
|
|
(30,179
|
)
|
|
(8
|
)
|
|
Operating income
|
$
|
25,046
|
|
|
$
|
28,176
|
|
|
(11
|
) %
|
|
$
|
57,296
|
|
|
$
|
50,494
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes delivered
|
552
|
|
|
566
|
|
|
(2
|
) %
|
|
1,155
|
|
|
1,049
|
|
|
10
|
%
|
|
Average selling price
|
$
|
317,100
|
|
|
$
|
326,500
|
|
|
(3
|
) %
|
|
$
|
316,700
|
|
|
$
|
326,500
|
|
|
(3
|
) %
|
|
Housing gross profit margin
|
23.7
|
%
|
|
23.9
|
%
|
|
(20
|
)bps
|
|
24.6
|
%
|
|
23.6
|
%
|
|
100
|
bps
|
This segment’s revenues for the three-month and six-month periods ended May 31, 2020 were from both housing operations and land sales. For the three months and six months ended May 31, 2019, revenues were generated solely from housing operations. Housing revenues for the three months ended May 31, 2020 decreased 5% year over year to $175.0 million due to decreases in both the number of homes delivered and the average selling price of those homes. For the six months ended May 31, 2020, housing revenues increased 7% year over year to $365.8 million, reflecting an increase in the number of homes delivered, partially offset by a decrease in the average selling price of those homes. The year-over-year decrease in the average selling price for the three months and six months ended May 31, 2020 was primarily due to product and geographic mix shifts of homes delivered.
Operating income for the three months ended May 31, 2020 decreased from the corresponding 2019 period due to lower housing gross profits and higher selling, general and administrative expenses. The year-over-year decrease in housing gross profits primarily reflected lower housing revenues as this segment’s housing gross profit margin was nearly even with the year-earlier period. The housing gross profit margin for the three months ended May 31, 2020 reflected an increase in construction and land costs as a percentage of housing revenues, reduced operating leverage due to lower housing revenues, and warranty adjustments that favorably impacted the 2019 second quarter, mostly offset by the lower relative amortization of previously capitalized interest. Selling, general and administrative expenses as a percentage of housing revenues for the 2020 second quarter increased from the corresponding 2019 quarter, mainly as a result of reduced operating leverage due to lower housing revenues.
For the six months ended May 31, 2020, operating income increased from the corresponding 2019 period due to higher housing gross profits, partly offset by higher selling, general and administrative expenses. Housing gross profits for the 2020 first half increased from the year-earlier period mainly due to higher housing revenues and and a higher housing gross profit margin. The
improvement in the housing gross profit margin was primarily due to lower relative amortization of previously capitalized interest, partly offset by warranty adjustments that favorably impacted the 2019 first half. Selling, general and administrative expenses as a percentage of housing revenues for the 2020 first half were essentially even with the corresponding 2019 period as increased marketing costs were largely offset by increased operating leverage as a result of higher housing revenues.
Central. The following table presents financial information related to our Central segment for the periods indicated (dollars in thousands, except average selling price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
Variance
|
|
2020
|
|
2019
|
|
Variance
|
|
Revenues
|
$
|
284,193
|
|
|
$
|
307,080
|
|
|
(7
|
) %
|
|
$
|
567,706
|
|
|
$
|
548,672
|
|
|
3
|
%
|
|
Construction and land costs
|
(227,291
|
)
|
|
(248,342
|
)
|
|
8
|
|
|
(456,414
|
)
|
|
(446,446
|
)
|
|
(2
|
)
|
|
Selling, general and administrative expenses
|
(30,018
|
)
|
|
(31,539
|
)
|
|
5
|
|
|
(61,730
|
)
|
|
(56,444
|
)
|
|
(9
|
)
|
|
Operating income
|
$
|
26,884
|
|
|
$
|
27,199
|
|
|
(1
|
) %
|
|
$
|
49,562
|
|
|
$
|
45,782
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes delivered
|
955
|
|
|
1,067
|
|
|
(10
|
) %
|
|
1,923
|
|
|
1,891
|
|
|
2
|
%
|
|
Average selling price
|
$
|
297,600
|
|
|
$
|
287,400
|
|
|
4
|
%
|
|
$
|
295,200
|
|
|
$
|
286,300
|
|
|
3
|
%
|
|
Housing gross profit margin
|
20.0
|
%
|
|
19.1
|
%
|
|
90
|
bps
|
|
19.6
|
%
|
|
18.6
|
%
|
|
100
|
bps
|
This segment’s revenues for the three months and six months ended May 31, 2020 were generated solely from housing operations. Revenues for the three-month and six-month periods ended May 31, 2019 were generated from both housing operations and land sales. Housing revenues for the 2020 second quarter declined 7% from $306.6 million for the year-earlier quarter, reflecting a decrease in the number of homes delivered, partly offset by an increase the average selling price of those homes. For the six months ended May 31, 2020, housing revenues increased 5% year over year from $541.5 million, reflecting increases in both the number of homes delivered and the average selling price of those homes. The year-over-year increases in the average selling prices for three-month and six-month periods ended May 31, 2020 were due to shifts in the product and geographic mix of homes delivered.
Operating income for the three months ended May 31, 2020 decreased slightly from the year-earlier period, mainly due to a decline in housing gross profits, partly offset by lower selling, general and administrative expenses. The year-over-year decrease in housing gross profits reflected a decline in housing revenues, partially offset by an increase in the housing gross profit margin. The housing gross profit margin increase mainly resulted from decreases in both construction and land costs and amortization of previously capitalized interest as a percentage of housing revenues, partly offset by an increase in inventory-related charges and reduced operating leverage due to lower housing revenues. Inventory-related charges impacting the housing gross profit margin for the three months ended May 31, 2020 and 2019 were $3.5 million and $.1 million, respectively. Selling, general and administrative expenses as a percentage of housing revenues for the 2020 second quarter increased from the year-earlier quarter, primarily as a result of decreased operating leverage due to lower housing revenues.
For the six months ended May 31, 2020, operating income increased 8% from the year-earlier period mainly due to an increase in housing gross profits, partly offset by higher selling, general and administrative expenses. The housing gross profit margin increased primarily due to decreases in both construction and land costs and amortization of previously capitalized interest as a percentage of housing revenues, partly offset by an increase in inventory-related charges. Inventory-related charges impacting the housing gross profit margin for the six months ended May 31, 2020 and 2019 were $4.4 million and $.4 million, respectively. Land sales generated profits of $1.3 million for the six months ended May 31, 2019. Selling, general and administrative expenses as a percentage of revenues for the 2020 first half increased from the corresponding 2019 period, reflecting higher overhead costs, partly offset by increased operating leverage due to higher housing revenues.
Southeast. The following table presents financial information related to our Southeast segment for the periods indicated (dollars in thousands, except average selling price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
Variance
|
|
2020
|
|
2019
|
|
Variance
|
|
Revenues
|
$
|
118,954
|
|
|
$
|
135,500
|
|
|
(12
|
) %
|
|
$
|
232,008
|
|
|
$
|
239,230
|
|
|
(3
|
) %
|
|
Construction and land costs
|
(99,311
|
)
|
|
(117,860
|
)
|
|
16
|
|
|
(194,921
|
)
|
|
(208,638
|
)
|
|
7
|
|
|
Selling, general and administrative expenses
|
(13,013
|
)
|
|
(17,051
|
)
|
|
24
|
|
|
(27,827
|
)
|
|
(30,548
|
)
|
|
9
|
|
|
Operating income
|
$
|
6,630
|
|
|
$
|
589
|
|
|
(a)
|
|
|
$
|
9,260
|
|
|
$
|
44
|
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes delivered
|
407
|
|
|
455
|
|
|
(11
|
) %
|
|
794
|
|
|
803
|
|
|
(1
|
) %
|
|
Average selling price
|
$
|
292,300
|
|
|
$
|
297,800
|
|
|
(2
|
) %
|
|
$
|
292,100
|
|
|
$
|
297,900
|
|
|
(2
|
) %
|
|
Housing gross profit margin
|
16.5
|
%
|
|
13.0
|
%
|
|
350
|
bps
|
|
16.0
|
%
|
|
12.8
|
%
|
|
320
|
bps
|
|
|
|
|
(a)
|
Percentage not meaningful.
|
This segment’s revenues for the three-month period ended May 31, 2020 and the three months and six months ended May 31, 2019 were generated solely from housing operations. Revenues for the six months ended May 31, 2020 were generated from housing operations and nominal land sales. The year-over-year decline in housing revenues for the three months and six months ended May 31, 2020 reflected decreases in both the number of homes delivered and the average selling price of those homes. The year-over-year decrease in the average selling price for the three months and six months ended May 31, 2020 was mainly due to a lower proportion of homes delivered from higher-priced communities.
Operating income for the three months ended May 31, 2020 increased from the year-earlier period due to higher housing gross profits and lower selling, general and administrative expenses. The year-over-year increase in housing gross profits reflected an increase in the housing gross profit margin, partly offset by a decline in housing revenues. The housing gross profit margin increased primarily due to lower construction and land costs as a percentage of housing revenues and lower relative amortization of previously capitalized interest, partly offset by reduced operating leverage due to lower housing revenues. Selling, general and administrative expenses as a percentage of housing revenues for the 2020 second quarter improved from the year-earlier period, primarily reflecting legal recoveries, partly offset by decreased operating leverage as a result of lower housing revenues.
For the six months ended May 31, 2020, operating income grew from the prior-year period, reflecting higher housing gross profits and lower selling, general and administrative expenses. Housing gross profits and the housing gross profit margin increased for the respective reasons described above for the three months ended May 31, 2020. Selling, general and administrative expenses as a percentage of housing revenues improved in the 2020 first half from the year-earlier period primarily for the reasons described above with respect to the three months ended May 31, 2020.
FINANCIAL SERVICES REPORTING SEGMENT
The following table presents a summary of selected financial and operational data for our financial services reporting segment (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenues
|
$
|
3,690
|
|
|
$
|
3,132
|
|
|
$
|
7,243
|
|
|
$
|
5,827
|
|
|
Expenses
|
(883
|
)
|
|
(1,040
|
)
|
|
(1,845
|
)
|
|
(2,064
|
)
|
|
Equity in income of unconsolidated joint ventures
|
4,797
|
|
|
2,500
|
|
|
8,019
|
|
|
3,302
|
|
|
Pretax income
|
$
|
7,604
|
|
|
$
|
4,592
|
|
|
$
|
13,417
|
|
|
$
|
7,065
|
|
|
|
|
|
|
|
|
|
|
|
Total originations:
|
|
|
|
|
|
|
|
|
Loans
|
1,715
|
|
|
1,679
|
|
|
3,479
|
|
|
2,888
|
|
|
Principal
|
$
|
543,005
|
|
|
$
|
480,806
|
|
|
$
|
1,101,542
|
|
|
$
|
820,070
|
|
|
Percentage of homebuyers using KBHS
|
76
|
%
|
|
69
|
%
|
|
74
|
%
|
|
67
|
%
|
|
Average FICO score
|
720
|
|
|
718
|
|
|
721
|
|
|
718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Loans sold:
|
|
|
|
|
|
|
|
|
Loans sold to Stearns
|
1,760
|
|
|
1,396
|
|
|
4,049
|
|
|
2,557
|
|
|
Principal
|
$
|
558,656
|
|
|
$
|
397,293
|
|
|
$
|
1,258,693
|
|
|
$
|
730,646
|
|
|
Loans sold to third parties
|
121
|
|
|
230
|
|
|
193
|
|
|
474
|
|
|
Principal
|
$
|
38,704
|
|
|
$
|
61,183
|
|
|
$
|
62,003
|
|
|
$
|
123,539
|
|
Revenues. Financial services revenues for the three-month and six-month periods ended May 31, 2020 grew from the corresponding year-earlier periods due to increases in both title services revenues and insurance commissions.
Expenses. General and administrative expenses for the three-month and six-month periods ended May 31, 2020 decreased slightly from the corresponding periods of 2019.
Equity in Income of Unconsolidated Joint Ventures. The equity in income of unconsolidated joint ventures increased on a year-over-year basis in the three-month period ended May 31, 2020 due to a rise in the percentage of homebuyers using KBHS, partly offset by a 10% decline in the number of homes we delivered. For the six-month period ended May 31, 2020, the year-over-year increase reflected 7% growth in the number of homes delivered and a substantial increase in the percentage of homebuyers using KBHS.
INCOME TAXES
Income Tax Expense. Our income tax expense and effective tax rates were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Income tax expense
|
$
|
15,800
|
|
|
$
|
9,300
|
|
|
$
|
24,900
|
|
|
$
|
13,800
|
|
|
Effective tax rate
|
23.3
|
%
|
|
16.4
|
%
|
|
18.2
|
%
|
|
15.1
|
%
|
Our income tax expense and effective tax rate for the three months ended May 31, 2020 included the favorable effect of $3.0 million of federal energy tax credits that we earned from building energy-efficient homes, partially offset by $1.0 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). For the three months ended May 31, 2019, our income tax expense and effective tax rate included the favorable effects of $4.3 million of federal energy tax credits and $.9 million of excess tax benefits related to stock-based compensation, partly offset by $.8 million of non-deductible executive compensation expense.
Our income tax expense and effective tax rate for the six months ended May 31, 2020 included the favorable effects of $7.0 million of federal energy tax credits that we earned from building energy-efficient homes and $5.6 million of excess tax benefits related to stock-based compensation, partially offset by $2.0 million of non-deductible executive compensation expense. For the six months ended May 31, 2019, our income tax expense and effective tax rate included the favorable effects of $4.3 million of federal energy tax credits, a $3.3 million reversal of a deferred tax asset valuation allowance related to refundable alternative minimum tax credits and $2.9 million of excess tax benefits related to stock-based compensation, partly offset by $1.2 million of non-deductible executive compensation expense.
The federal energy tax credits for the three months and six months ended May 31, 2020 resulted from legislation enacted in December 2019, which among other things, extended the availability of a business tax credit for building new energy-efficient homes through December 31, 2020. Prior to this legislation, the tax credit expired on December 31, 2017. This extension is expected to benefit our income tax provision in future periods.
Further information regarding our income taxes is provided in Note 14 – Income Taxes in the Notes to Consolidated Financial Statements in this report.
Liquidity and Capital Resources
Overview. We have funded our homebuilding and financial services activities over the last several years with:
|
|
|
|
•
|
internally generated cash flows;
|
|
|
|
|
•
|
public issuances of debt securities;
|
|
|
|
|
•
|
borrowings under the Credit Facility;
|
|
|
|
|
•
|
land option contracts and other similar contracts and seller notes;
|
|
|
|
|
•
|
public issuances of our common stock; and
|
|
|
|
|
•
|
letters of credit and performance bonds.
|
We manage our use of cash in the operation of our business to support the execution of our primary strategic goals. Over the past several years, we have primarily used cash for:
|
|
|
|
•
|
land acquisition and land development;
|
|
|
|
|
•
|
principal and interest payments on notes payable; and
|
|
|
|
|
•
|
repayments of borrowings under the Credit Facility.
|
In response to the economic disruption and uncertainty resulting from the COVID-19 pandemic, as described above under “Overview,” in the 2020 second quarter, we proceeded in a carefully targeted manner with investments in land and land development, worked with land sellers to delay the acquisition of land, and activated more targeted development phases of land we own to align with expected slower sales and construction paces. These actions are expected to reduce the growth or, as in the 2020 second quarter, cause a decline in our lot count and the volume of homes delivered in the 2020 third quarter and future periods.
Our investments in land and land development decreased 19% to $633.5 million for the six months ended May 31, 2020, compared to $782.8 million for the prior-year period. Approximately 41% of our total investments in the six months ended May 31, 2020 and 2019 related to land acquisition. While we made strategic investments in land and land development in each of our homebuilding reporting segments during the first six months of 2020 and 2019, approximately 50% and 51%, respectively, of these investments for each period were made in our West Coast homebuilding reporting segment.
The following table presents the number of lots we owned or controlled under land option contracts and other similar contracts and the carrying value of inventory by homebuilding reporting segment (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2020
|
|
November 30, 2019
|
|
Variance
|
|
Segment
|
|
Lots
|
|
$
|
|
Lots
|
|
$
|
|
Lots
|
|
$
|
|
West Coast
|
|
14,001
|
|
|
$
|
1,711,558
|
|
|
15,186
|
|
|
$
|
1,795,088
|
|
|
(1,185
|
)
|
|
$
|
(83,530
|
)
|
|
Southwest
|
|
11,069
|
|
|
664,273
|
|
|
11,191
|
|
|
629,811
|
|
|
(122
|
)
|
|
34,462
|
|
|
Central
|
|
23,742
|
|
|
851,347
|
|
|
25,871
|
|
|
889,179
|
|
|
(2,129
|
)
|
|
(37,832
|
)
|
|
Southeast
|
|
11,668
|
|
|
380,287
|
|
|
12,662
|
|
|
390,524
|
|
|
(994
|
)
|
|
(10,237
|
)
|
|
Total
|
|
60,480
|
|
|
$
|
3,607,465
|
|
|
64,910
|
|
|
$
|
3,704,602
|
|
|
(4,430
|
)
|
|
$
|
(97,137
|
)
|
The carrying value of lots we owned or controlled under land option contracts and other similar contracts at May 31, 2020 decreased 3% from November 30, 2019. Over the same period, the number of lots decreased 7% mainly due to a lower number of lots under land option contracts and other similar contracts with refundable deposits, reflecting ordinary course fluctuations in the number of such contracts. The number of lots in inventory as of May 31, 2020 included 6,988 lots under contract where the associated deposits were refundable at our discretion, compared to 9,212 of such lots at November 30, 2019. Our land under contract as a percentage of total lots was 38% at May 31, 2020 and 41% at November 30, 2019. Generally, this percentage fluctuates with our decisions to control (or abandon) lots under land option contracts and other similar contracts or to purchase (or sell owned) lots based on available opportunities and our investment return standards.
Liquidity. The table below summarizes our total cash and cash equivalents, and total liquidity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
November 30,
2019
|
|
Total cash and cash equivalents
|
|
$
|
575,006
|
|
|
$
|
453,814
|
|
|
Credit Facility commitment
|
|
800,000
|
|
|
800,000
|
|
|
Borrowings outstanding under the Credit Facility
|
|
—
|
|
|
—
|
|
|
Letters of credit outstanding under the Credit Facility
|
|
(12,429
|
)
|
|
(18,884
|
)
|
|
Credit Facility availability
|
|
787,571
|
|
|
781,116
|
|
|
Total liquidity
|
|
$
|
1,362,577
|
|
|
$
|
1,234,930
|
|
The majority of our cash equivalents at May 31, 2020 and November 30, 2019 were invested in interest-bearing bank deposit accounts.
Capital Resources. Our notes payable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2020
|
|
November 30,
2019
|
|
Variance
|
|
Mortgages and land contracts due to land sellers and other loans
|
$
|
24,871
|
|
|
$
|
7,889
|
|
|
$
|
16,982
|
|
|
Senior notes
|
1,741,668
|
|
|
1,740,858
|
|
|
810
|
|
|
Total
|
$
|
1,766,539
|
|
|
$
|
1,748,747
|
|
|
$
|
17,792
|
|
Our financial leverage, as measured by the ratio of debt to capital, was 41.5% at May 31, 2020, compared to 42.3% at November 30, 2019. Our ratio of net debt to capital (a calculation that is described above under “Non-GAAP Financial Measures”) at May 31, 2020 was 32.4%, compared to 35.2% at November 30, 2019. Our next scheduled maturity is on December 15, 2021, when $450.0 million in aggregate principal amount of our 7.00% senior notes become due.
LOC Facility. We had $33.5 million and $15.8 million of letters of credit outstanding under the LOC Facility at May 31, 2020 and November 30, 2019, respectively. Further information regarding our LOC Facility is provided in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report.
Unsecured Revolving Credit Facility. We have an $800.0 million Credit Facility that will mature on October 7, 2023. The amount of the Credit Facility available for cash borrowings and the issuance of letters of credit depends on the total cash borrowings and letters of credit outstanding under the Credit Facility and the maximum available amount under the terms of the Credit Facility. As of May 31, 2020, we had no cash borrowings and $12.4 million of letters of credit outstanding under the Credit Facility. Therefore, as of May 31, 2020, we had $787.6 million available for cash borrowings under the Credit Facility, with up to $237.6 million of that amount available for the issuance of additional letters of credit. The Credit Facility is further described in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report.
There have been no changes to the terms of the Credit Facility during the six months ended May 31, 2020 from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended November 30, 2019.
The covenants and other requirements under the Credit Facility represent the most restrictive covenants that we are subject to with respect to our notes payable. The following table summarizes the financial covenants and other requirements under the Credit Facility, and our actual levels or ratios (as applicable) with respect to those covenants and other requirements, in each case as of May 31, 2020:
|
|
|
|
|
|
|
|
|
|
Financial Covenants and Other Requirements
|
|
Covenant Requirement
|
|
Actual
|
|
Consolidated tangible net worth
|
|
>
|
$1.70 billion
|
|
$2.49 billion
|
|
Leverage Ratio
|
|
<
|
.650
|
|
.416
|
|
Interest Coverage Ratio (a)
|
|
>
|
1.500
|
|
4.506
|
|
Minimum liquidity (a)
|
|
>
|
$132.0 million
|
|
$575.0 million
|
|
Investments in joint ventures and non-guarantor subsidiaries
|
|
<
|
$602.9 million
|
|
$187.7 million
|
|
Borrowing base in excess of borrowing base indebtedness (as defined)
|
|
|
n/a
|
|
$1.34 billion
|
|
|
|
|
(a)
|
Under the terms of the Credit Facility, we are required to maintain either a minimum Interest Coverage Ratio or a minimum level of liquidity, but not both. As of May 31, 2020, we met both the Interest Coverage Ratio and the minimum liquidity requirements.
|
The indenture governing our senior notes does not contain any financial covenants. Subject to specified exceptions, the indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale and leaseback transactions involving property above a certain specified value. In addition, the indenture contains certain limitations related to mergers, consolidations, and sales of assets.
Our obligations to pay principal, premium, if any, and interest under our senior notes and borrowings, if any, under the Credit Facility are guaranteed on a joint and several basis by the Guarantor Subsidiaries. The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by us. We may also cause other subsidiaries of ours to become Guarantor Subsidiaries if we believe it to be in our or the relevant subsidiary’s best interests. Condensed consolidating financial information for our subsidiaries considered to be Guarantor Subsidiaries is provided in Note 22 – Supplemental Guarantor Information in the Notes to Consolidated Financial Statements in this report.
As of May 31, 2020, we were in compliance with the applicable terms of all our covenants and other requirements under the Credit Facility, the senior notes, the indenture, and the mortgages and land contracts due to land sellers and other loans. Our ability to access the Credit Facility for cash borrowings and letters of credit and our ability to secure future debt financing depend, in part, on our ability to remain in such compliance. There are no agreements that restrict our payment of dividends other than the Credit Facility, which would restrict our payment of dividends (other than common stock dividends) if a default under the Credit Facility exists at the time of any such payment, or if any such payment would result in such a default (other than dividends paid within 60 days after declaration, if there was no default at the time of declaration).
Depending on available terms, we finance certain land acquisitions with purchase-money financing from land sellers or with other forms of financing from third parties. At May 31, 2020, we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of $24.9 million, secured primarily by the underlying property, which had an aggregate carrying value of $52.1 million.
Credit Ratings. Our credit ratings are periodically reviewed by rating agencies. In January 2020, Standard and Poor’s Financial Services upgraded our credit rating to BB from BB-, and changed the rating outlook to stable from positive.
Consolidated Cash Flows. The following table presents a summary of net cash provided by (used in) our operating, investing and financing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
Net cash provided by (used in):
|
|
|
|
|
Operating activities
|
$
|
154,694
|
|
|
$
|
(180,334
|
)
|
|
Investing activities
|
(18,310
|
)
|
|
(15,704
|
)
|
|
Financing activities
|
(15,209
|
)
|
|
(199,317
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
$
|
121,175
|
|
|
$
|
(395,355
|
)
|
Operating Activities. Generally, our net operating cash flows fluctuate primarily based on changes in our inventories and our profitability. Our net cash provided by operating activities for the six months ended May 31, 2020 primarily reflected net income of $111.7 million, a $100.1 million decrease in inventories and a $19.3 million decrease in receivables, partly offset by a net decrease in accounts payable, accrued expenses and other liabilities of $117.3 million. In the six months ended May 31, 2019, our net cash used by operating activities mainly reflected net cash of $253.5 million used for investments in inventories, a net decrease in accounts payable, accrued expenses and other liabilities of $41.4 million and a net increase in receivables of $5.4 million, partly offset by net income of $77.5 million.
Investing Activities. In the six months ended May 31, 2020, our uses of cash included $15.2 million for net purchases of property and equipment and $3.6 million for contributions to unconsolidated joint ventures. These uses of cash were partially offset by a $.5 million return of investments in unconsolidated joint ventures. In the six months ended May 31, 2019, the net cash used for investing activities reflected $22.3 million for net purchases of property and equipment and $4.2 million for contributions to unconsolidated joint ventures. These uses of cash were partially offset by $5.8 million of proceeds from the sale of a building and a $5.0 million return of investments in unconsolidated joint ventures.
Financing Activities. The year-over-year change in net cash used in financing activities was mainly due to the financing transactions we completed in the 2019 first half, including our concurrent public offerings of senior notes and our repayment of certain senior notes. In the six months ended May 31, 2020, net cash was used for dividend payments on our common stock of $16.3 million, tax payments associated with stock-based compensation awards of $6.2 million, and payments on mortgages and land contracts due to land sellers and other loans of $1.1 million. The cash used was partially offset by $8.4 million of issuances of common stock under employee stock plans. In the six months ended May 31, 2019, net cash was used for the repayment of $630.0 million in aggregate principal amount of 1.375% Convertible Senior Notes due 2019 and 4.75% senior notes due 2019, payments on mortgages and land contracts due to land sellers and other loans of $28.0 million, tax payments associated with stock-based compensation awards of $3.3 million, and dividend payments on our common stock of $4.5 million. The cash used was partially offset by cash provided by our concurrent public offerings of $300.0 million in aggregate principal amount of 6.875% senior notes due 2027 and an additional $100.0 million in aggregate principal amount of our existing series of 7.625% senior notes due 2023, $50.0 million of net borrowings under the Credit Facility and $16.5 million of issuances of common stock under employee stock plans.
During the three-month periods ended May 31, 2020 and 2019, our board of directors declared, and we paid, quarterly cash dividends on our common stock of $.090 per share and $.025 per share, respectively. Quarterly cash dividends declared and paid on our common stock during the six-month periods ended May 31, 2020 and 2019 totaled $.180 per share and $.050 per share, respectively. The declaration and payment of future cash dividends on our common stock, whether at current levels or at all, are at the discretion of our board of directors and depend upon, among other things, our expected future earnings, cash flows, capital requirements, access to external financing, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions.
While the unprecedented public health and governmental efforts to contain the spread of COVID-19 have created significant uncertainty as to general economic and housing market conditions for the remainder of 2020 and beyond, as of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business. We have had no cash borrowings under the Credit Facility in our 2020 fiscal year through the date of this report. For the remainder of 2020, we expect to use or redeploy our cash resources or cash borrowings under the Credit Facility to support our business within the context of prevailing market conditions, which, given the ongoing uncertainty surrounding the COVID-19 pandemic, could rapidly and materially deteriorate or otherwise change. During this time, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the repurchase of debt or equity securities or potential new issuances of debt or equity securities to support our business needs. The amounts involved in these transactions, if any, may be material. In addition, as necessary or desirable, we may adjust or amend the terms of and/or expand the capacity of the Credit Facility or the LOC Facility, or enter into additional letter of credit facilities, or other similar facility arrangements, in each case with the same or other financial institutions, or allow any such facilities to mature or expire. However, with the uncertainty surrounding COVID-19, our ability to engage in such transactions may be constrained by volatile or tight economic, capital, credit and/or financial market conditions, as well as moderated investor and/or lender interest or capacity and/or our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions. Further discussion of the potential impacts from the COVID-19 pandemic on our capital resources and liquidity is provided below under Part II, Item 1A – Risk Factors.
Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments
Unconsolidated Joint Ventures. As discussed in Note 9 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements in this report, we have investments in unconsolidated joint ventures in various markets where our homebuilding operations are located. At November 30, 2019, one of our unconsolidated joint ventures had outstanding secured debt totaling $40.7 million under a construction loan agreement with a third-party lender to finance its land development activities. The outstanding debt was secured by the underlying property and related project assets and was non-recourse to us. All of the outstanding secured debt was repaid in 2020. None of our unconsolidated joint ventures had outstanding debt at May 31, 2020.
Land Option Contracts and Other Similar Contracts. As discussed in Note 8 – Variable Interest Entities in the Notes to Consolidated Financial Statements in this report, in the ordinary course of our business, we enter into land option contracts and other similar contracts with third parties and unconsolidated entities to acquire rights to land for the construction of homes. Our land option contracts and other similar contracts generally do not contain provisions requiring our specific performance. Our decision to exercise a particular land option contract or other similar contract depends on the results of our due diligence reviews and ongoing market and project feasibility analysis that we conduct after entering into such a contract. In some cases, our decision to exercise a land option contract or other similar contract may be conditioned on the land seller obtaining necessary entitlements, such as zoning rights and environmental and development approvals, and/or physically developing the underlying land by a pre-determined date. We typically have the ability not to exercise our rights to the underlying land for any reason and forfeit our deposits without further penalty or obligation to the sellers. If we were to acquire all of the land we had under land option contracts and other
similar contracts at May 31, 2020, we estimate the remaining purchase price to be paid during each year ending November 30 would be as follows: 2020 – $546.7 million; 2021 – $417.9 million; 2022 – $99.8 million; 2023 – $53.4 million; 2024 – $39.6 million; and thereafter – $48.4 million.
Contractual Obligations. There have been no significant changes in our contractual obligations from those reported in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended November 30, 2019.
Critical Accounting Policies
The preparation of our consolidated financial statements requires the use of judgment in the application of accounting policies and estimates of uncertain matters. There have been no significant changes to our critical accounting policies and estimates during the six months ended May 31, 2020 from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended November 30, 2019.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 – Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements in this report.
Outlook
Over the past several weeks, conditions have started to improve in conjunction with state and local governments relaxing “stay-at-home” and similar public health mandates that were implemented in response to the COVID-19 pandemic. With restrictions easing in many of our served markets, we, in the latter part of May, began the process of more broadly opening our sales centers, model homes and design studios to the public, while also expanding construction and warranty service activities to the extent permitted by local authorities. In June, certain of our division offices began to reopen to employees. During the reopening process, we instituted several safety protocols, such as distancing and personal protective equipment requirements, enhanced premises cleaning, personal hygiene measures and wellness checks, all in accordance with applicable public health orders and advice. The increased ongoing investment in these appropriate steps is intended to help protect the health of customers, employees and business partners, and their families. Due to the variation in laws and restrictions, the timing and manner of our reopening process has varied from market to market.
We are encouraged by our ability to effectively resume nearly all of our operations and the recent improvements in our gross orders, net orders and cancellation rate, which we believe are indicators of underlying strength in the overall housing market and our served markets. Subsequent to the end of the second quarter, our business continued to rebound measurably, with gross orders and net orders increasing on a year-over-year basis. Gross orders for the first five weeks of the 2020 third quarter increased 10% year over year to 1,678 while net orders rose 11% to 1,349. Our cancellation rate for this period also returned closer to a more normalized level of 20%, nearly even with the year-earlier period. Our year-over-year order and cancellation rate improvements for the first five weeks of the 2020 third quarter are not necessarily indicative of the results to be expected for the full quarter due to various factors. These factors include, among other things, the strong order growth we generated in the remainder of the year-ago third quarter, which will create increasingly difficult weekly comparisons for the balance of the current third quarter; fewer anticipated community openings relative to the 2019 third quarter; a projected year-over-year decline in our average community count in the low single digits percentage range; and continued uncertainty surrounding the economic and housing market environments due to the impacts of the ongoing COVID-19 pandemic and the related COVID-19 control responses, as further discussed below under Part II, Item 1A – Risk Factors.
As the economy and housing markets continue to recover from the severe impacts of the pandemic and related COVID-19 control responses, we expect employment, consumer confidence and other fundamental business factors to also improve. However, the speed, trajectory and strength of any such recovery remains highly uncertain, and could be slowed or reversed by a number of factors, including a possible widespread resurgence in COVID-19 infections in the second half of 2020 without the availability of generally effective therapeutics or a vaccine for the disease. Given this uncertainty, we will continue to proceed in a carefully targeted manner with land acquisition and land development, and to focus on generating cash inflows from our business and preserving cash and liquidity by further curtailing overhead expenditures. Our present 2020 outlook is as follows:
2020 Third Quarter
|
|
|
|
•
|
We expect to generate housing revenues in the range of $820.0 million to $880.0 million, compared to $1.15 billion in the year-earlier quarter, and anticipate our average selling price to be in the range of $395,000 to $400,000, representing an increase in the range of 4% to 5% compared to the year-earlier period.
|
|
|
|
|
•
|
We expect our housing gross profit margin to be in the range of 18.8% to 19.4%, assuming no inventory-related charges, compared to 18.9% for the corresponding 2019 quarter.
|
|
|
|
|
•
|
We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of 12.7% to 13.3%. The 2019 third quarter ratio was 11.1%.
|
|
|
|
|
•
|
We expect our homebuilding operating income margin, excluding inventory-related charges, to range from 5.7% to 6.5%, compared to 7.8% for the prior year quarter.
|
|
|
|
|
•
|
We expect an effective tax rate of approximately 24%.
|
|
|
|
|
•
|
We expect our average community count to decline in the low single digits percentage range from the 2019 third quarter.
|
Full Year
|
|
|
|
•
|
We expect our housing revenues to be in the range of $3.75 billion to $3.95 billion, compared to $4.51 billion in 2019, and anticipate our average selling price to be in the range of $385,000 to $395,000, representing an increase in the range of 1% to 4% compared to 2019.
|
|
|
|
|
•
|
We expect our housing gross profit margin to be in the range of 18.6% to 19.2%, assuming no inventory-related charges, versus 18.7% for 2019.
|
|
|
|
|
•
|
We expect our selling, general and administrative expenses as a percentage of housing revenues to be in the range of 11.8% to 12.4%, excluding the severance charges recorded in the second quarter, compared to 11.0% in the prior year.
|
|
|
|
|
•
|
We expect our homebuilding operating income margin, assuming no inventory-related charges and excluding the above-mentioned severance charges, to range from 6.4% to 7.2%, compared to 7.7% for 2019.
|
|
|
|
|
•
|
We expect our average community count to be approximately flat compared to 2019.
|
We have had no cash borrowings under the Credit Facility in our 2020 fiscal year through the date of this report. For the remainder of 2020, we expect to use or redeploy our cash resources and any cash borrowings under the Credit Facility to support our business within the context of prevailing market conditions, which could rapidly change. During this time, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the repurchase of debt or equity securities or potential new issuances of debt or equity securities to support our business needs. The amounts involved in these transactions, if any, may be material. In addition, our future performance and the strategies we implement (and adjust or refine as necessary or appropriate) will depend significantly on prevailing economic and capital, credit and financial market conditions and on the public health, political and regulatory environment (including in regards to housing and mortgage loan financing policies), among other factors.
Forward-Looking Statements
Investors are cautioned that certain statements contained in this report, as well as some statements by us in periodic press releases and other public disclosures and some oral statements by us to securities analysts, stockholders and others during presentations, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “hope,” and similar expressions constitute forward-looking statements. In addition, any statements that we may make or provide concerning future financial or operating performance (including without limitation future revenues, community count, homes delivered, net orders, selling prices, sales pace per new community, expenses, expense ratios, housing gross profits, housing gross profit margins, earnings or earnings per share, or growth or growth rates), future market conditions, future interest rates, and other economic conditions, ongoing business strategies or prospects, future dividends and changes in dividend levels, the value of our backlog (including amounts that we expect to realize upon delivery of homes included in our backlog and the timing of those deliveries), the value of our net orders, potential future asset acquisitions and the impact of completed acquisitions, future share issuances or repurchases, future debt issuances, repurchases or redemptions and other possible future actions are also forward-looking statements as defined by the Act. Forward-looking statements are based on our current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our operations, economic and market factors, and the homebuilding industry, among other things. These statements are not guarantees of future performance, and we have no specific policy or intention to update these statements. In addition, forward-looking and other statements in this report and in other public or oral disclosures that express or contain opinions, views or assumptions about market or economic conditions; the success, performance, effectiveness and/or relative positioning
of our strategies, initiatives or operational activities; and other matters, may be based in whole or in part on general observations of our management, limited or anecdotal evidence and/or business or industry experience without in-depth or any particular empirical investigation, inquiry or analysis.
Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The most important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, the following:
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general economic, employment and business conditions, generally and during the current recession;
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population growth, household formations and demographic trends;
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conditions in the capital, credit and financial markets;
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our ability to access external financing sources and raise capital through the issuance of common stock, debt or other securities, and/or project financing, on favorable terms;
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the execution of any share repurchases pursuant to our board of directors’ authorization;
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material and trade costs and availability;
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changes in interest rates;
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our debt level, including our ratio of debt to capital, and our ability to adjust our debt level and maturity schedule;
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our compliance with the terms of the Credit Facility;
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volatility in the market price of our common stock;
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weak or declining consumer confidence, either generally or specifically with respect to purchasing homes;
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competition from other sellers of new and resale homes;
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weather events, significant natural disasters and other climate and environmental factors;
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any failure of lawmakers to agree on a budget or appropriation legislation to fund the federal government’s operations, and financial markets’ and businesses’ reactions to that failure;
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government actions, policies, programs and regulations directed at or affecting the housing market (including the CARES Act relief provisions for outstanding mortgage loans, tax benefits associated with purchasing and owning a home, and the standards, fees and size limits applicable to the purchase or insuring of mortgage loans by government-sponsored enterprises and government agencies), the homebuilding industry, or construction activities;
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changes in existing tax laws or enacted corporate income tax rates, including those resulting from regulatory guidance and interpretations issued with respect to thereto;
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changes in U.S. trade policies, including the imposition of tariffs and duties on homebuilding materials and products, and related trade disputes with and retaliatory measures taken by other countries;
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the adoption of new or amended financial accounting standards and the guidance and/or interpretations with respect thereto;
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the availability and cost of land in desirable areas and our ability to timely develop acquired land parcels and open new home communities;
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our warranty claims experience with respect to homes previously delivered and actual warranty costs incurred;
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costs and/or charges arising from regulatory compliance requirements or from legal, arbitral or regulatory proceedings, investigations, claims or settlements, including unfavorable outcomes in any such matters resulting in actual or potential monetary damage awards, penalties, fines or other direct or indirect payments, or injunctions, consent decrees or other voluntary or involuntary restrictions or adjustments to our business operations or practices that are beyond our current expectations and/or accruals;
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our ability to use/realize the net deferred tax assets we have generated;
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our ability to successfully implement our current and planned strategies and initiatives related to our product, geographic and market positioning, gaining share and scale in our served markets and in entering into new markets;
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our operational and investment concentration in markets in California;
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consumer interest in our new home communities and products, particularly from first-time homebuyers and higher-income consumers;
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our ability to generate orders and convert our backlog of orders to home deliveries and revenues, particularly in key markets in California;
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our ability to successfully implement our business strategies and achieve any associated financial and operational targets and objectives;
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income tax expense volatility associated with stock-based compensation;
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the ability of our homebuyers to obtain residential mortgage loans and mortgage banking services;
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the performance of mortgage lenders to our homebuyers;
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the performance of KBHS;
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information technology failures and data security breaches;
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an epidemic or pandemic (such as the outbreak and worldwide spread of COVID-19), and the control response measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, which may (as with COVID-19) precipitate or exacerbate one or more of the above-mentioned and/or other risks, and significantly disrupt or prevent us from operating our business in the ordinary course for an extended period;
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a continuation of widespread protests and civil unrest related to efforts to institute law enforcement and other social and political reforms, and the impacts of implementing or failing to implement any such reforms; and
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other events outside of our control.
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Please see our Annual Report on Form 10-K for the year ended November 30, 2019 and other filings with the SEC for a further discussion of these and other risks and uncertainties applicable to our business.
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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There have been no material changes in our market risk since November 30, 2019. For additional information regarding our market risk, refer to the “Quantitative and Qualitative Disclosures About Market Risk” section of our Annual Report on Form 10-K for the year ended November 30, 2019.